Matador Resources Company — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; filed November 14, 2012. Matador explores and produces oil and natural gas, primarily in the Eagle Ford shale of South Texas and the Haynesville shale of Louisiana and East Texas.
Financial and operating results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Oil and natural gas revenue | $38.0 million | $17.4 million | $103.3 million | $52.0 million |
| Total revenue, including derivative gains/losses | $28.4 million | $21.8 million | $113.2 million | $57.8 million |
| Operating income (loss) | ($9.7 million) | $6.3 million | ($13.0 million) | ($21.0 million) |
| Net income (loss) | ($9.2 million) | $6.2 million | ($12.1 million) | ($14.2 million) |
| Net cash from operating activities | Not presented quarterly | Not presented quarterly | $80.3 million | $34.4 million |
| Adjusted EBITDA (non-GAAP) | Not presented quarterly | Not presented quarterly | $77.9 million | $37.6 million |
- Q3 average production was 8,838 BOE/day, up from 6,931; oil production rose to 3,291 barrels/day from 465, while natural gas production declined. For the nine months, production averaged 8,534 BOE/day versus 7,081.
- Nine-month oil and gas production revenue nearly doubled, led by Eagle Ford oil growth. Natural gas revenue fell as production and realized prices declined. Q3 total revenue was reduced by a $13.0 million unrealized derivative loss; realized derivative gains were $3.4 million.
- Nine-month operating cash flow increased year over year, while investing cash outflow rose to $216.9 million, including $212.7 million of oil and gas property capital expenditures. Financing cash flow was $130.5 million, reflecting IPO proceeds and additional borrowings. Cash declined by $6.1 million to $4.2 million.
- At September 30, total assets were $588.8 million, current assets $35.2 million, current liabilities $77.5 million, and shareholders’ equity $399.2 million. Credit Agreement borrowings were $106.0 million; the company reported approximately $92.9 million of additional availability and $1.1 million of letters of credit.
- DD&A was $52.8 million for the first nine months. Full-cost ceiling impairment totaled $36.8 million, including a $3.6 million Q3 charge; the impairment was non-cash and primarily related to natural gas prices. Nine-month lease operating expense rose to $17.5 million from $5.6 million.
Material changes and outlook
- The company’s Eagle Ford focus drove a near sevenfold increase in nine-month oil output and a substantial increase in oil reserves. Total proved reserves nevertheless declined to 20.9 million BOE from 27.0 million a year earlier, mainly after 97.8 Bcf of Haynesville proved undeveloped gas reserves were removed at June 30 following lower gas prices. At September 30, proved reserves comprised 8.4 million barrels of oil and 74.9 Bcf of gas; PV-10 was $363.6 million and Standardized Measure was $333.9 million.
- Matador raised its 2012 capital budget to $313.0 million, with 84% planned for Eagle Ford and about 94% for oil- and liquids-prospective opportunities. It had incurred $237.6 million through September 30 and said the program remained largely on plan. Management expected cash flows and borrowing capacity to fund the remainder of 2012 and 2013 needs; later-year spending or acquisitions may require additional financing.
- A September 2012 credit amendment increased the maximum facility to $500 million and borrowing base to $200 million; it matures in December 2016. The borrowing base is subject to redetermination and is scheduled to reduce to $165 million by December 31, 2013, or earlier upon a qualifying secondary equity offering. Management reported covenant compliance at September 30. In October and November, Matador borrowed another $29 million; as of November 14, borrowings were $135 million with about $63.9 million available.
- Management said it did not expect to drill operated natural gas wells, other than specified exploratory projects, until gas prices improved significantly. It cited commodity-price volatility, production declines, reserve uncertainty, capital access, drilling costs and pipeline/processing capacity as key risks. A five-year Eagle Ford gas transportation and processing agreement began September 1, with $17.5 million of minimum commitments and potential deficiency fees if volume thresholds are missed.
- A Louisiana lease dispute was on appeal. Matador considered a loss not probable but reasonably possible and estimated a potential loss range of zero to $6 million. A full-cost accounting impairment and a $2.4 million deferred-tax valuation allowance were also reported.
Important facts for investors to verify
- Whether Eagle Ford production growth and well economics persist as infrastructure and operating costs normalize.
- Future natural gas prices, reserve revisions, ceiling-test impairments and effects on the credit borrowing base.
- Capital spending, cash generation, borrowing availability and compliance with credit-facility terms, including the subsequent increase in debt.
- Hedge coverage and the impact of derivative mark-to-market volatility on reported revenue and earnings.
- Outcome and potential exposure from the Louisiana lease litigation, and performance against the transportation agreement’s minimum-volume commitments.