Matador Resources Company — Q3 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2019, compared with the same 2018 periods. Matador explores and produces oil and natural gas, primarily in the Delaware Basin, and operates midstream services through San Mateo joint ventures.
Financial and operating performance
- Q3 revenue: $279.4 million, up from $207.2 million. Oil and natural gas revenue was $229.4 million; third-party midstream services contributed $15.3 million, purchased natural gas sales $19.9 million, and derivative gains (realized and unrealized) $13.2 million.
- Q3 earnings: Net income attributable to Matador shareholders was $44.0 million, or $0.38 per diluted share, versus $17.8 million, or $0.15, in Q3 2018. Operating income was $86.1 million versus $67.9 million. Adjusted EBITDA attributable to Matador, a non-GAAP measure, was $160.8 million versus $155.4 million.
- Nine-month results: Revenue was $695.0 million versus $609.7 million; shareholder-attributable net income was $63.8 million, or $0.54 per diluted share, versus $137.5 million, or $1.21. Operating income was $170.4 million versus $215.2 million. Adjusted EBITDA attributable to Matador was $429.7 million versus $410.0 million.
- Production and realized prices: Q3 production averaged 69,645 BOE/day, up 28% year over year; oil volumes rose 23% and natural gas volumes 34%. Average realized oil price was $54.19/Bbl, down 5%; natural gas was $1.88/Mcf, down 50%. For nine months, average production was 63,661 BOE/day, up 25%.
- Costs and margins: Q3 DD&A was $14.44/BOE (up from $14.02); lease operating expense was $4.64/BOE (up from $4.48); G&A was $3.18/BOE (down from $3.67). The filing does not present a separately defined operating-margin measure.
- Cash flow and investment: Nine-month operating cash flow was $353.1 million, down from $419.3 million. Investing cash outflow was $639.0 million, compared with $1.221 billion in 2018; financing cash inflow was $242.7 million. Cash and restricted cash totaled $40.8 million at period-end, including $15.7 million of cash and $25.1 million restricted cash.
- Debt and liquidity: At September 30, Matador had $215.0 million drawn under its revolving credit agreement and $1.05 billion of senior notes due 2026 at 5.875%. San Mateo I, whose facility is non-recourse to Matador, had $260.0 million drawn. The Matador borrowing base was affirmed at $900 million and its elected commitment remained $500 million; San Mateo lender commitments were increased to $375 million in October. At October 29, Matador’s revolver borrowings had risen to $255 million.
Material changes versus prior periods
- Q3 production growth and stronger midstream revenue more than offset lower realized commodity prices, supporting higher quarterly earnings. The Q3 2018 comparison included a $31.2 million debt-repurchase prepayment premium; its absence also benefited the 2019 comparison.
- Nine-month shareholder earnings fell despite higher production and Adjusted EBITDA. The decline reflected higher DD&A, interest expense and deferred income tax expense, as well as a larger unrealized derivative loss. The 2018 period also included the debt-repurchase premium.
- Oil and natural gas production increased, but realized prices declined. Nine-month oil revenue rose 12%, while natural gas revenue fell 25%.
- Matador adopted the new lease accounting standard in 2019, recognizing $62.3 million of right-of-use assets and liabilities at adoption. Operating lease liabilities totaled $102.3 million at September 30.
Outlook, risks and contingencies
- Management expected to operate six Delaware Basin drilling rigs through the remainder of 2019, with Delaware Basin development the primary operational and capital focus into 2020. The company expected 7.9 more net operated well completions in 2019 than originally planned, within its original D/C/E budget.
- The 2019 D/C/E capital expenditure estimate remained $640–$680 million. Estimated 2019 midstream capital expenditures were increased to $70–$90 million from $55–$75 million, mainly to support customer demand and commitments.
- Management identified oil and gas price volatility, regional pipeline capacity and basis differentials, drilling and development execution, access to capital, regulatory changes, and midstream construction and customer-volume risks. The Gulf Coast Express pipeline entered service in late September; Matador began moving most Delaware Basin gas sales to Houston Ship Channel pricing, while noting higher transportation charges. Waha pricing remained volatile and the company had no natural gas basis hedges for the rest of 2019.
- Commodity hedges at September 30 included oil collars for Q4 2019 and 2020, natural gas collars for Q4 2019, and oil basis swaps extending through 2021. Derivatives had a $20.1 million net asset fair value; the nine-month unrealized loss was $29.7 million.
- Contractual commitments included $548.4 million for non-affiliate natural gas transportation, gathering and processing and $525.6 million under San Mateo agreements. Existing minimum-volume agreements could entail approximately $416.1 million in deficiency payments if operations ceased in covered areas. Separate potential NGL and gas transportation commitments of $132.3 million and $106.9 million depend on counterparties completing specified facilities.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. The filing reports effective disclosure controls as of September 30, 2019.
Important facts for investors to verify
- Whether production growth and Delaware Basin well economics can offset weaker oil and gas prices and higher DD&A and interest costs.
- Actual revolver availability after borrowings and letters of credit, and the effect of future borrowing-base redeterminations.
- Progress, cost and timing of San Mateo projects, including the Black River expansion and associated customer commitments.
- Exposure to basis differentials, takeaway capacity, minimum-volume deficiencies and the terms of future hedges.
- Cash generation relative to capital spending and the stated 2019 budgets; restricted cash is not freely available for general corporate use.