Matador Resources Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; financial statements are unaudited. Matador is an independent U.S. oil and gas exploration and production company, focused mainly on the Eagle Ford, with activity in the Wolfcamp, Bone Spring, Haynesville and Cotton Valley plays. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Oil and gas revenue | $59.3 million | $29.2 million; up 103% |
| Total revenue, including derivative results | $54.9 million | $29.0 million |
| Net income (loss) | $(15.5) million | $3.8 million |
| Operating income (loss) | $(14.3) million | $7.1 million |
| Operating cash flow | $32.2 million | $5.1 million |
| Investing cash flow | $(84.7) million | $(52.8) million |
| Oil and gas property capital expenditures | $83.4 million | $52.0 million |
| Adjusted EBITDA (non-GAAP) | $40.7 million | $21.3 million; up 91% |
- Oil production rose 130% to 460,000 barrels; total production increased 34% to 981,000 BOE. Average daily production was 10,897 BOE, including about 5,100 barrels of oil per day.
- Average realized oil price, excluding realized derivatives, was $105.72 per barrel versus $107.57. Natural gas price was $3.41 per Mcf versus $2.40. Oil and gas revenue growth was driven chiefly by higher oil volumes.
- Derivative results included a $4.8 million unrealized loss and a $0.4 million realized gain. The unrealized loss contributed to the reported revenue and earnings decline.
- Expenses included a $21.2 million full-cost ceiling impairment, $28.2 million depletion, depreciation and amortization, and $10.9 million lease operating expense. Lease operating expense rose to $11.11 per BOE from $6.36; management attributed about $2.50 per BOE to temporary flowback equipment and related personnel during the quarter.
- Reported operating margin was approximately negative 26% and net margin approximately negative 28%, calculated using total revenue including derivative results. The filing does not report a gross margin.
- At March 31, cash was $4.7 million, current assets $37.3 million and current liabilities $72.5 million. Total assets were $650.3 million and shareholders’ equity $364.1 million. Credit Agreement borrowings were $205.0 million; the effective rate was about 3.6%. The company reported a $255 million borrowing base and about $1.3 million in letters of credit.
- Cash increased $2.6 million during the quarter, supported by $55 million of net credit-agreement borrowings. Operating cash flow was below property capital spending. At May 9, borrowings were $230 million and cash plus certificates of deposit was about $11.3 million.
Changes and business developments
- Compared with Q1 2012, oil and gas revenue more than doubled, but the company moved from a $3.8 million profit to a $15.5 million loss. The principal unusual expense was the ceiling-test impairment, which management linked primarily to low SEC reserve-case natural gas prices. The impairment was non-cash.
- Depletion and lease operating costs increased with production growth and the larger oil share of output. Interest expense rose to $1.3 million from $0.3 million as borrowings increased.
- Proved reserves were 23.6 million BOE at March 31, broadly flat with 23.8 million BOE at year-end 2012. Proved developed reserves were 59.6% of the total; proved developed oil reserves increased to 5.4 million barrels from 4.8 million.
- The borrowing base increased to $255 million in March. The company had requested an additional unscheduled redetermination by late April and expected further increases, but these were not assured.
Outlook, risks and contingencies
- Management increased its 2013 capital expenditure budget on May 8 from $310 million to $325 million. Planned allocation: $260 million for drilling and completion, $25 million for pipeline and infrastructure, and $40 million for leasehold acquisition and seismic. About 78% was planned for South Texas and 20% for Southeast New Mexico and West Texas; approximately 98% was directed to oil- and liquids-prospective opportunities. About 21% of the budget had been spent through March 31.
- Management expected operating cash flow and borrowing capacity to fund the 2013 program, subject to production, reserve additions, prices, access to capital and borrowing-base changes. It cautioned that weaker drilling results, lower commodity prices or unavailable financing could require spending reductions or other financing, potentially including dilutive equity issuance.
- Matador noted that its Q1 oil-price uplift over WTI reflected a wide Louisiana Light Sweet differential that had begun narrowing after quarter-end; similar future uplift was not assured. Commodity price volatility, natural well declines, drilling and service availability, infrastructure constraints, and reserve uncertainty were key risks.
- A firm five-year Eagle Ford gas processing and transportation agreement carried $15.2 million of remaining minimum commitments and deficiency-fee exposure if delivery fell below specified thresholds. Rig contract termination obligations were up to $4.6 million; non-operated well commitments were about $4.3 million.
- A Louisiana mineral lease dispute had a reasonably possible estimated loss range of zero to $7 million; management did not consider a loss probable. A separate dispute with Orca was resolved as to most issues, with an assignment matter still potentially subject to arbitration; a possible $8.7 million refund was described if specified conditions were met.
- The company retained a full valuation allowance of approximately $15.8 million against deferred tax assets. It recorded $46,000 of current tax provision, principally reflecting expected alternative minimum tax.
- The company stated that it was in compliance with its credit agreement at March 31. Its current-ratio covenant begins March 31, 2014; the agreement also requires debt to EBITDA of no more than 4.0. Management reported disclosure controls effective and no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether production and realized pricing sustain the sharp year-over-year growth, particularly as the Eagle Ford/WTI differential narrows.
- How subsequent ceiling tests, commodity assumptions and reserve revisions affect impairment risk, reported earnings and borrowing capacity.
- Actual capital spending, cash flow and debt utilization against the $325 million budget, including the outcome of borrowing-base redeterminations.
- Whether operating costs per BOE moderate now that temporary flowback equipment has been removed, and how new Delaware Basin activity performs.
- Developments in the Louisiana litigation and Orca assignment matter, as well as potential processing, transportation and drilling commitments.