Matador Resources Company (NYSE: MTDR) — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; amounts below are in U.S. dollars. Matador is an oil and natural gas producer focused primarily on the Delaware Basin, with additional E&P operations and a midstream business conducted largely through San Mateo.
Financial performance and position
- Q2 revenue: $357.4 million, versus $62.9 million in Q2 2020. Oil and natural gas revenue was $412.1 million; reported total revenue was reduced by $85.4 million of realized and unrealized derivative losses.
- Q2 earnings: Net income attributable to Matador shareholders was $105.9 million, or $0.89 per diluted share, compared with a loss of $353.4 million, or $3.04 per diluted share, a year earlier. Adjusted EBITDA attributable to Matador shareholders, a non-GAAP measure, was $261.0 million versus $107.6 million.
- First-half results: Oil and natural gas revenue was $728.3 million; net income attributable to shareholders was $166.6 million, or $1.40 per diluted share. Adjusted EBITDA attributable to shareholders was $459.1 million.
- Production and realized prices: Q2 average production was 93,210 BOE/day, up 27% year over year; oil was 53,400 Bbl/day and natural gas 239.1 MMcf/day. Realized prices before derivatives were $64.90/Bbl for oil and $4.46/Mcf for natural gas.
- Costs: Q2 production taxes, transportation and processing were $5.17/BOE; lease operating expense was $3.39/BOE; DD&A was $10.78/BOE; and G&A was $2.88/BOE. G&A rose 66% year over year, largely due to compensation and remeasurement of cash-settled stock awards.
- Cash flow: First-half operating cash flow was $427.6 million; investing cash outflow was $251.1 million and financing cash outflow was $188.6 million. Cash and restricted cash totaled $79.2 million at June 30. Operating cash flow less investing outflow was approximately $176.5 million; this is a simple derived cash-flow measure, not company guidance.
- Debt and liquidity: At June 30, Matador reported $240.0 million under its revolving credit agreement, $1.05 billion of senior notes and a $7.5 million SBA loan. San Mateo had $352.5 million outstanding on its separate, non-recourse-to-Matador facility. Matador’s revolver commitment was $700 million and borrowing base $900 million. The filing reports current assets of $333.6 million and current liabilities of $422.6 million.
- Equity and distributions: Shareholders’ equity was $1.70 billion. The company declared quarterly dividends of $0.025 per share in Q1 and Q2 and declared the same amount for Q3.
Material changes versus the prior comparable period
- Q2 oil and natural gas revenue increased 247%, reflecting higher realized prices and production. Average oil and gas production increased 24% and 32%, respectively.
- Reported results improved from a large Q2 2020 loss, substantially because the prior-year quarter included a $324.0 million full-cost ceiling impairment. No such impairment was recorded in Q2 2021.
- Derivative results moved against the company: Q2 realized and unrealized losses totaled $85.4 million, versus a combined loss of $88.6 million in Q2 2020, which included a $44.1 million realized gain and a $132.7 million unrealized loss. First-half derivative losses were $154.8 million, versus a $58.7 million gain in first-half 2020.
- First-half operating cash flow increased from $210.4 million to $427.6 million, while investing cash outflow declined from $458.8 million to $251.1 million, mainly due to lower capital spending. Matador repaid a net $200 million on its revolver in the first half.
- San Mateo’s credit commitments increased from $375 million to $450 million in June, with a 0.50 percentage-point increase in borrowing rates. San Mateo subsequently repaid $25 million by July 27.
Outlook, risks and contingencies
- Capital plan: At July 27, 2021, full-year drilling, completion and equipping spending remained estimated at $525–$575 million. Expected midstream capital expenditures increased to $35–$45 million from $20–$30 million, primarily for new opportunities and infrastructure supporting accelerated completions. Management planned to advance 11 Voni well completions into Q4 without increasing the D/C/E budget.
- Operations: Four rigs were operating in the Delaware Basin during Q2. Management expected the Delaware Basin to remain the primary operational and capital focus for the rest of 2021 and retained flexibility to adjust rig activity.
- Commodity and hedge exposure: Management noted improving oil and gas prices but cautioned that prices remain volatile and the outlook uncertain. Oil derivatives had a $122.1 million net liability at June 30; management expected further realized oil-hedge losses in the second half if prices stayed near then-current levels. The company also warned that natural gas basis differentials could worsen and disclosed no hedges for those differentials for the remainder of 2021.
- Costs and operating risks: The company budgeted for 10% oilfield-service cost inflation in the second half; greater inflation could require a higher capital budget. Risks also include COVID-19-related demand uncertainty, weather, takeaway or fractionation constraints, production declines, and regulatory changes. New Mexico rules limit flaring and require a 98% gas capture rate by 2026; federal leasing and permitting actions could affect development on federal acreage.
- Commitments: Contractual obligations totaled $2.89 billion, including $632.5 million under third-party transportation, gathering, processing and disposal agreements and $430.0 million under agreements with San Mateo. If operations ceased in covered areas, estimated deficiencies under certain third-party minimum-volume agreements would be approximately $601.8 million. A planned 10-year gas transportation agreement would carry about $30.7 million of minimum obligations if the pipeline enters service.
- Other matters: Management said ordinary-course legal proceedings were not expected to have a material adverse effect and reported no material change in disclosed risk factors. Disclosure controls were assessed as effective; no material change in internal control was reported.
Important facts for investors to verify
- How commodity prices and the company’s hedge book affect realized cash flow, including derivative settlements and the $122.1 million derivative liability.
- Whether production, completion timing and the $525–$575 million D/C/E budget remain on plan, and whether service-cost inflation drives spending above budget.
- Availability of unrestricted cash and borrowing capacity, covenant compliance, and debt at both Matador and San Mateo; San Mateo debt is non-recourse to Matador but supports a significant operating subsidiary.
- Volume performance and potential deficiency fees under the company’s substantial third-party and San Mateo midstream commitments.
- Effects of New Mexico emissions and gas-capture rules, federal leasing and permitting policies, and any changes in takeaway or fractionation capacity.
- Adjusted EBITDA is a non-GAAP measure; compare it with GAAP earnings and operating cash flow, and review the company’s reconciliation and calculation assumptions.