Matador Resources Company — 2019 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Matador is an independent oil and gas producer, focused primarily on the Delaware Basin, with additional Eagle Ford, Haynesville and midstream operations. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenues | $241.7 million | $211.4 million | $415.6 million | $402.5 million |
| Operating income | $76.8 million | $74.0 million | $84.3 million | $147.4 million |
| Net income attributable to Matador shareholders | $36.8 million | $59.8 million | $19.8 million | $119.7 million |
| Diluted earnings per share | $0.31 | $0.53 | $0.17 | $1.08 |
| Adjusted EBITDA attributable to Matador shareholders (non-GAAP) | $144.1 million | $137.3 million | $268.9 million | $254.6 million |
- Q2 production was 5.6 million BOE, or 61,290 BOE per day; oil represented 60% of daily production. Oil volume rose 24% year over year and natural gas volume rose 6%.
- Q2 oil and gas revenue was $211.1 million. Higher oil volumes were partly offset by lower realized prices: oil averaged $56.51/Bbl versus $61.44; natural gas averaged $1.64/Mcf versus $3.38.
- Six-month net cash provided by operating activities was $194.5 million, down from $254.2 million. Investing activities used $394.7 million; financing provided $201.0 million. Cash and restricted cash increased $0.8 million to $84.8 million, including $60.0 million of cash and $24.8 million restricted cash.
- At June 30, total debt comprised $1.039 billion of senior notes, $205 million under Matador’s revolver and $240 million under the San Mateo facility. The notes carry a 5.875% coupon and mature in 2026. San Mateo facility borrowings are non-recourse to Matador and its wholly owned subsidiaries. Six-month interest expense was $36.0 million, versus $16.5 million.
- Current assets were $273.4 million and current liabilities $336.8 million. Matador’s revolver had a $500 million elected commitment with $205 million drawn; San Mateo’s facility commitment was increased to $325 million, with $240 million drawn. Restricted cash is subject to use restrictions.
Material changes versus the prior comparable period
- Q2 total revenue rose about 14%, while shareholder net income fell about 39%; six-month shareholder net income fell substantially. For the first half, a $39.6 million unrealized derivative loss compared with an $11.8 million unrealized gain in 2018, alongside higher DD&A, interest expense and income tax expense.
- Adjusted EBITDA increased in both periods, reflecting higher production, partly offset by weaker realized commodity prices. It is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- Third-party midstream services revenue rose to $14.4 million in Q2 from $3.4 million, while purchased natural gas sales contributed $9.0 million; neither category was as significant in the prior-year quarter.
- Delaware Basin production was 51,758 BOE/day, up 11% year over year. Matador continued operating six Delaware Basin rigs and completed 19 gross wells in the basin during Q2.
- Cash capital spending remained substantial, while first-half operating cash flow declined. The company increased borrowing under its revolver by $165 million during the first half.
Outlook, risks and unusual items
- As of July 31, 2019, Matador maintained its 2019 drilling, completion and equipping budget at $640–$680 million and expected to complete four gross (6.8 net) additional operated wells versus its original plan, within that budget. It expected to operate six Delaware Basin rigs through year-end and had no plan to add a seventh.
- Matador raised its anticipated 2019 midstream capital expenditure range to $70–$90 million from $55–$75 million, citing additional customer commitments and infrastructure needs. It reported approximately $22 million of asset-sale proceeds received in Q2 and early Q3, primarily from South Texas and Haynesville properties.
- Management cited volatile commodity prices and takeaway constraints. Delaware Basin gas sales were exposed to Waha pricing; average daily Waha gas price was negative $0.07/MMBtu in Q2, and Matador temporarily shut in certain high gas-oil-ratio wells. It expected the Gulf Coast Express pipeline to begin service in early Q4 2019, with firm transportation and sales for approximately 110,000–115,000 MMBtu/day. The company disclosed no natural-gas basis hedges for the rest of 2019 and limited oil basis hedging.
- Open commodity derivatives had a net fair-value asset of $10.3 million at June 30, down from $49.8 million at December 31; the six-month unrealized loss materially affected reported earnings. Hedges mitigate, but do not eliminate, price exposure.
- Contractual and operating commitments are significant: total contractual cash obligations were reported at $2.85 billion, including debt, leases, drilling commitments and transportation, gathering, processing and disposal agreements. Certain third-party agreements have minimum-volume deficiency fees; potential deficiencies under existing agreements were estimated at $163.4 million if operations in the relevant areas ceased. A San Mateo II processing-plant expansion had $71.8 million of remaining construction obligations expected within 12 months.
- San Mateo II, formed in February 2019, is 51% owned by Matador and 49% by Five Point Energy. Five Point committed to fund $125 million of the first $150 million of specified development capital expenditures; Matador may also earn performance incentives. These arrangements and future customer volumes remain relevant to execution and funding.
- Matador reported no necessary oil and gas property ceiling-test impairment for the periods presented. A $0.4 million inventory impairment was recorded in 2019. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were considered effective.
Investor verification priorities
- Confirm production growth, realized oil and gas prices, and the impact of Waha and other regional basis differentials on realized revenue and shut-ins.
- Review liquidity and borrowing availability, including facility commitments, letters of credit, restricted cash and San Mateo’s separate, non-recourse financing.
- Reconcile GAAP earnings with derivative gains and losses, deferred taxes, interest expense and the non-GAAP Adjusted EBITDA measure.
- Track execution and funding of the 2019 capital plan, midstream expansion, customer commitments and expected Gulf Coast Express service timing.
- Assess minimum-volume, transportation and construction commitments, including potential deficiency fees and the $2.85 billion contractual-obligations schedule.