Matador Resources Company — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Matador is an independent oil and natural gas producer, focused primarily on the Delaware Basin, with additional operations in the Eagle Ford and Haynesville/Cotton Valley and midstream operations through San Mateo Midstream.
Financial and operating performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Oil and natural gas revenue | $209.0 million | $113.8 million | $391.0 million | $228.6 million |
| Total revenue, including derivative effects | $211.4 million | $129.6 million | $402.5 million | $264.4 million |
| Operating income | $74.0 million | $39.0 million | $147.4 million | $93.3 million |
| Net income attributable to Matador shareholders | $59.8 million | $28.5 million | $119.7 million | $72.5 million |
| Diluted EPS | $0.53 | $0.28 | $1.08 | $0.72 |
| Adjusted EBITDA attributable to Matador shareholders (non-GAAP) | $137.3 million | $72.7 million | $254.6 million | $142.6 million |
- Q2 production averaged 52,937 BOE per day, up 43%; oil was 29,740 barrels per day and natural gas 139.2 MMcf per day. Six-month production averaged 49,126 BOE per day, up 40%.
- Q2 realized oil price before derivatives was $61.44 per barrel versus $46.01; natural gas was $3.38 per Mcf versus $3.40. Six-month realized oil was $61.80 per barrel versus $48.28; natural gas was $3.35 per Mcf versus $3.64.
- Q2 production taxes, transportation and processing were $20.1 million; lease operating expense was $25.0 million; DD&A was $66.8 million. DD&A per BOE rose to $13.87 from $12.28.
- Six-month operating cash flow was $254.2 million, compared with $121.2 million. Investing cash outflow was $493.6 million, mainly reflecting $421.6 million in oil and gas capital expenditures and $79.6 million in midstream and other property spending. Financing provided $280.4 million; cash and restricted cash increased by $41.0 million to $143.5 million.
- At June 30, cash was $122.5 million and restricted cash $21.1 million. Current assets were $320.9 million and current liabilities $263.6 million.
- Debt included $575.0 million principal of 6.875% senior notes due 2023. There were no revolver borrowings at June 30 or August 1, 2018; approximately $3.0 million of letters of credit were outstanding. The elected revolver commitment was $400 million, within a $500 million facility maximum; borrowing base was $725 million.
Material changes and developments
- Q2 oil and gas revenue rose 84%, driven by 53% higher oil production, 33% higher gas production and stronger oil prices. Delaware Basin production increased 68% year over year and represented about 92% of daily oil and 82% of daily gas production.
- Shareholder net income more than doubled in Q2. Results also reflected higher expenses and a smaller unrealized derivative gain than in Q2 2017. Realized derivative results shifted to a $2.5 million loss from a $0.6 million gain.
- On May 17, Matador issued 7 million shares, receiving approximately $226.5 million net. Proceeds were designated for Delaware Basin acreage, midstream initiatives and general corporate purposes; $45 million repaid revolver borrowings and remaining funds were invested pending use.
- Proved reserves at June 30 were 170.2 million BOE, up from 152.8 million at year-end 2017; 48.4% were proved developed. Standardized Measure was $1.61 billion and PV-10 was $1.77 billion, a non-GAAP measure.
Outlook, risks and contingencies
- As of August 1, management increased 2018 drilling and completion capital spending guidance to $620–$650 million; midstream spending guidance remained $70–$90 million, representing Matador’s 51% share of San Mateo’s estimate. Six Delaware Basin rigs were planned through year-end. A seventh rig in Q4 was under consideration, not decided, and was expected to have no production impact and only a minor capital impact.
- Management reported widening Permian price differentials. In early August, oil differentials were approximately negative $16 per barrel and natural gas differentials negative $1 per MMBtu; management expected pressure on Q3 revenue and said the differential could persist for 12–18 months or longer. About 50% of expected H2 Delaware oil production was hedged against oil basis at an average negative $1.02 per barrel; no 2018 natural gas basis hedges were in place.
- Commodity-price volatility, takeaway capacity and basis differentials, service-cost inflation, drilling results, production declines, access to capital and the ability to meet development plans are key risks. Management noted that production interruptions had not occurred as of August 1, but could adversely affect results if they arise.
- Contractual cash obligations totaled approximately $1.40 billion, including $451.1 million for non-affiliate gas transportation, gathering and processing and $222.6 million under San Mateo agreements. Other disclosed commitments included $47.2 million for non-operated wells and $32.4 million of potential drilling-rig termination obligations. Some agreements include minimum-volume or deficiency-fee provisions.
- Asset retirement obligations were $28.1 million. The company reported ordinary-course lawsuits and assessed a material adverse impact as remote. It retained a full valuation allowance against deferred tax assets. No oil and gas property ceiling-test impairment was recorded for the periods presented.
- ASC 606 adoption had no material financial statement impact. Management expected lease accounting adoption in 2019 to increase reported assets and liabilities; the amount was not yet quantified.
Most important facts for investors to verify
- Whether realized Delaware Basin oil and gas prices, particularly basis differentials and takeaway capacity, match management’s outlook for the second half.
- Progress against the increased drilling and completion budget, midstream spending plan and acreage acquisition program, and the resulting funding needs.
- Production growth, unit operating costs and DD&A per BOE as new wells are brought online.
- Hedge coverage, settlement outcomes and the effect of derivative positions on realized prices and cash flow.
- Minimum-volume commitments, deficiency-fee exposure and the timing and construction of related pipeline and midstream projects.