Matador Resources Company — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Matador is an independent oil and natural gas producer, focused primarily on the Delaware Basin, with additional operations in the Eagle Ford, Haynesville and Cotton Valley areas and a midstream business conducted largely through San Mateo.
Financial and operating performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Oil and gas revenue | $216.3 million | $134.9 million | $607.3 million | $363.6 million |
| Total revenue, including derivatives | $207.2 million | $126.3 million | $609.7 million | $390.7 million |
| Operating income | $67.9 million | $26.5 million | $215.2 million | $119.8 million |
| Net income attributable to Matador shareholders | $17.8 million | $15.0 million | $137.5 million | $87.5 million |
| Diluted EPS | $0.15 | $0.15 | $1.21 | $0.87 |
| Operating cash flow | Not separately stated in the filing excerpt | Not separately stated | $419.3 million | $222.5 million |
- Q3 production averaged 54,625 BOE per day, up 30% year over year; oil production increased 37% and natural gas production 21%. Delaware Basin production was up 56% year over year.
- For the first nine months, production averaged 50,979 BOE per day, up 37%; oil volumes rose 44% and natural gas volumes 27%.
- Q3 realized oil price was $57.15 per barrel before realized derivatives ($58.97 including them); realized natural gas price was $3.77 per Mcf. Nine-month realized oil and natural gas prices were $60.08 per barrel and $3.50 per Mcf, respectively.
- Q3 Adjusted EBITDA attributable to Matador shareholders was $155.4 million, versus $84.8 million; nine-month Adjusted EBITDA was $410.0 million, versus $227.4 million. This is a non-GAAP measure, not a substitute for GAAP earnings or cash flow.
- Q3 total expenses were $139.3 million, including $70.5 million of depletion, depreciation and amortization. Nine-month expenses were $394.5 million, including $192.7 million of depletion, depreciation and amortization.
Cash flow, debt and liquidity
- Nine-month cash from operations of $419.3 million was substantially below investing outflows of $1.221 billion, primarily reflecting oil and gas property spending and acquisitions. Financing provided $751.7 million; cash and restricted cash declined $49.5 million to $53.0 million.
- At September 30, cash was $45.9 million and restricted cash $7.1 million. Current assets were $225.4 million against current liabilities of $326.8 million.
- At quarter-end, debt included $750 million of 5.875% senior notes due 2026 and $325 million drawn under the revolving credit agreement. The company issued the 2026 notes and redeemed its $575 million of 6.875% notes due 2023, recording a $31.2 million prepayment premium. The refinancing extended note maturities but included a material one-time charge.
- After quarter-end, Matador issued another $300 million of 2026 notes and used the proceeds to reduce revolver borrowings; at October 31, outstanding notes totaled $1.05 billion and revolver borrowings were $25 million. The October credit amendment raised the borrowing base to $850 million, elected commitment to $500 million, and extended maturity to October 2023.
- Property and equipment rose to $2.922 billion from $1.881 billion at year-end 2017, alongside substantial acquisition and development spending. Shareholders’ equity increased to $1.722 billion from $1.258 billion.
Changes, outlook and principal risks
- Revenue and operating income increased substantially versus Q3 2017, driven by higher production and oil prices. Q3 shareholder net income rose only modestly and diluted EPS was unchanged at $0.15, reflecting higher costs, derivative losses and the debt-redemption premium. Nine-month shareholder earnings rose to $137.5 million from $87.5 million.
- Matador acquired 8,400 net acres in Lea and Eddy Counties for approximately $387 million and reported approximately 222,200 gross (131,200 net) Delaware Basin acres at October 31, 2018. The May 2018 equity offering generated approximately $226.5 million net.
- Management increased its 2018 drilling-and-completions capital outlook to $645–$680 million, including the addition of a seventh rig; expected midstream capital spending remained $70–$90 million. Six rigs were planned to remain in the Delaware Basin through year-end, with the seventh initially assigned to South Texas. Capital spending remains discretionary and may be adjusted to commodity prices and operating conditions.
- Management warned that widening Delaware Basin price differentials had reduced realized prices; oil differentials exceeded $16 per barrel and natural gas differentials exceeded $1.25 per MMBtu late in Q3. Differentials could persist for 12–18 months or longer. Oil basis hedges covered about 45%–50% of anticipated Q4 Delaware production, but the company had no natural gas basis hedges for 2018 and no oil or gas basis hedges for 2019 or beyond.
- Commodity-price volatility, takeaway and fractionation capacity, service-cost inflation, production declines, drilling results, access to capital and borrowing-base availability are key risks. The filing lists $1.891 billion of contractual cash obligations, including long-term transportation, gathering, processing and San Mateo commitments. These amounts include obligations whose actual economic burden depends on volumes and contract conditions.
- Derivative instruments were a net liability of $24.7 million at September 30; Q3 included a $21.3 million unrealized derivative loss. The company reported no full-cost ceiling-test impairment for the periods presented and retained a full valuation allowance against deferred tax assets. Management considered ordinary-course litigation unlikely to have a material adverse effect.
Important facts for investors to verify
- Whether Delaware Basin oil and gas differentials and pipeline constraints improve or further weaken realized prices and cash generation.
- Whether production growth and drilling results support the expanded capital budget without increasing reliance on debt or equity financing.
- How the post-quarter $300 million note issuance and revolver repayment affect total debt, interest costs and available borrowing capacity.
- The utilization, costs and potential deficiency exposure associated with the substantial long-term transportation, gathering and processing commitments.
- How much of reported earnings and Adjusted EBITDA reflects sustainable operations versus derivative fair-value movements and the one-time $31.2 million debt-redemption premium.