Matador Resources Company — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. Matador is an independent U.S. oil and natural gas exploration and production company, focused primarily on the Eagle Ford shale in south Texas and the Haynesville shale in Louisiana and east Texas. Q1 activity emphasized Eagle Ford development; the company completed 6 gross operated Eagle Ford wells and participated in 12 gross non-operated Haynesville wells.
Financial and operating results
- Revenue: Oil and natural gas revenue was $29.2 million, up 113% from $13.7 million. Total revenue, including derivative results, was $29.0 million versus $13.9 million. Oil revenue rose to $21.5 million from $1.7 million; natural gas revenue fell to $7.6 million from $12.0 million.
- Production and prices: Average production increased 27% to 48.1 MMcfe/day. Oil production rose to about 2,200 Bbl/day from 210 Bbl/day, while natural gas production declined to 3.2 Bcf from 3.3 Bcf. Average oil price was $107.57/Bbl versus $89.11; natural gas price was $2.40/Mcf versus $3.65, or $3.36/Mcf including realized derivative gains.
- Profitability: Operating income was $7.1 million, compared with an operating loss of $34.5 million in Q1 2011. Net income was $3.8 million, or $0.08 per Class A share, versus a net loss of $27.6 million, or $0.65 per Class A share. The prior-year loss included a $35.7 million full-cost ceiling impairment; no impairment was recorded in Q1 2012. Q1 2012 operating margin was approximately 24.5% and net margin approximately 13.1% of total revenue.
- Costs: Lease operating expense increased to $4.6 million from $1.6 million, and LOE per Mcfe rose to $1.06 from $0.47, partly due to new-well facilities, rental test equipment and a $0.4 million workover. DD&A increased to $11.2 million from $7.1 million. G&A rose 45% to $3.8 million, reflecting increased activity and public-company costs.
- Cash flow and investment: Operating cash flow was $5.1 million, down from $12.7 million, despite higher underlying operating cash generation; working-capital movements, including increased receivables, weighed on reported cash flow. Investing cash use was $52.8 million, including $52.0 million of oil and gas property capital expenditures. Operating cash flow less property capital expenditures was approximately negative $46.8 million.
- Liquidity and debt: Cash and certificates of deposit totaled $3.1 million at March 31, down from $11.6 million at December 31, 2011. Credit Agreement borrowings were $15 million, with approximately $108.7 million available under the $125 million borrowing base; letters of credit were about $1.3 million. Borrowings carried approximately 2.0% interest. At May 15, debt had risen to $30 million following an additional April borrowing.
- Other metrics: Adjusted EBITDA, a non-GAAP measure, was $21.3 million versus $10.1 million. Proved reserves were 203.1 Bcfe, including 17% oil, compared with 154.8 Bcfe and 3% oil a year earlier; PV-10 was $329.6 million and Standardized Measure $287.4 million.
Material changes versus the prior comparable period
- The production mix shifted materially toward oil following Eagle Ford drilling: oil was about 27% of Q1 production versus 3% a year earlier. Total production increased, but natural gas volumes and realized prices declined.
- The February 2012 IPO and March over-allotment resulted in issuance of 12.2 million company shares at $12 per share and approximately $136.6 million in net proceeds after underwriting discounts. Matador used $123 million to repay credit-facility borrowings; remaining proceeds supported 2012 capital spending. Class B shares converted one-for-one to common shares.
- Property and equipment rose to $457.0 million from $399.9 million, while shareholders’ equity rose to $414.1 million from $271.5 million, substantially reflecting the equity offering and retained earnings.
- Realized derivative gains were $3.1 million, offset by $3.3 million of unrealized losses. The net fair value of open derivatives was a $6.0 million asset at quarter-end, down from $9.3 million at year-end.
Outlook, risks and unusual items
- Management budgeted $313 million of 2012 capital expenditures: $284.5 million for drilling, development and infrastructure, $24 million for leasehold acquisition and $4.5 million for other items. It expected 84% to be allocated to Eagle Ford and about 94% to opportunities prospective for oil and liquids. Spending may be adjusted to prices, financing availability, costs and drilling results.
- Management expected 2012 liquidity to be supported by cash flows and available credit, but noted that later-year and future capital needs or acquisitions could require additional financing, which may not be available. Future production, cash flow and borrowing-base growth depend in part on successful exploration.
- Low natural gas prices led Matador to avoid most operated gas drilling and contributed to curtailments at some non-operated Haynesville wells. Continued low prices could reduce proved undeveloped reserves and trigger a future non-cash ceiling impairment.
- Pipeline constraints in south Texas led to temporary shut-ins or flaring. Management expected added infrastructure to ease constraints within 60–90 days, but prolonged interruptions could materially harm results. The company also cited service availability, operating costs, rapid well declines, commodity-price volatility, and access to capital as risks.
- At March 31, potential drilling-rig termination obligations were approximately $9.8 million; non-operated well commitments were approximately $5.2 million, expected within 12 months. Management said ordinary-course lawsuits were not expected to have a material adverse effect.
- The company reported a material weakness related to stock-compensation accounting and concluded disclosure controls were not effective. It hired additional accounting personnel and engaged Protiviti to assist with internal audit and control improvements. Management reported compliance with credit-agreement terms at March 31, after receiving an extension to submit specified year-end operating information; it subsequently submitted the information before May 1.
Important facts for investors to verify
- Whether Eagle Ford drilling delivers expected production, reserves and cash flow, and whether higher LOE and development costs moderate.
- Current borrowing-base availability, covenant compliance and the impact of future redeterminations, especially if commodity prices or reserves weaken.
- Actual 2012 capital spending against the $313 million budget and the company’s ability to fund it from operating cash flow and credit availability.
- Progress in resolving south Texas pipeline constraints and any resulting shut-ins, flaring or lost production.
- Further disclosures on remediation of the stock-compensation accounting material weakness and effectiveness of controls.
- Derivative positions, realized and unrealized effects, and counterparty exposure; also, reserve sensitivity to lower natural gas prices.