Matador Resources Co quarterly report, Q1 FY2018

Matador Resources Company — Q1 2018 Form 10-Q

Reporting period: Three months ended March 31, 2018. Unaudited consolidated results; comparisons are with Q1 2017 unless noted. Matador is an independent oil and gas producer, focused mainly on the Delaware Basin, and also operates midstream assets, primarily through San Mateo Midstream, LLC.

Financial and operating performance

Metric	Q1 2018	Q1 2017
Oil and natural gas revenue	$182.0 million	$114.8 million
Total revenue, including derivative results	$191.2 million	$134.8 million
Operating income	$73.4 million	$54.3 million
Net income attributable to Matador shareholders	$59.9 million; $0.55 per diluted share	$44.0 million; $0.44 per diluted share
Cash provided by operating activities	$136.1 million	$61.3 million
Cash used in investing activities	$220.8 million	$225.0 million
Cash provided by financing activities	$34.9 million	$173.8 million

Production was 4.1 million BOE, or 45,273 BOE per day, up 37%. Oil production rose 44% to 2.4 million barrels; natural gas production rose 28% to 10.2 Bcf. Delaware Basin output increased 51% to 37,160 BOE per day.
Average realized oil price was $62.20 per barrel, versus $50.72; including realized derivative losses, it was $60.40. Natural gas averaged $3.33 per Mcf, down from $3.94.
Revenue growth reflected higher oil prices and production. Higher costs included depletion, depreciation and amortization of $55.4 million, up 63%, and total expenses of $117.8 million, up from $80.5 million. DD&A was $13.59 per BOE versus $11.45.
Realized derivative losses were $4.3 million; unrealized derivative gains were $10.4 million, compared with $20.6 million in Q1 2017. Adjusted EBITDA attributable to Matador shareholders, a non-GAAP measure, was $117.3 million versus $70.0 million.

Balance sheet, debt and liquidity

At March 31, cash was $27.0 million and restricted cash was $25.8 million. Restricted cash, mostly held by less-than-wholly-owned subsidiaries, is restricted to their operations and capital expenditures.
Total assets were $2.276 billion; total shareholders’ equity was $1.363 billion. Current liabilities were $306.5 million and current assets were $207.0 million.
Matador had $575.0 million of 6.875% senior notes due 2023, reported at $574.1 million carrying value. It had no revolver borrowings at quarter-end and about $2.1 million of letters of credit. The borrowing base was increased to $725 million; the elected commitment remained $400 million and the facility maximum $500 million.
By May 2, 2018, Matador had borrowed $45.0 million under the revolver and had about $3.0 million of letters of credit outstanding.
First-quarter capital expenditures were $183.4 million for oil and gas properties and $37.3 million for midstream and other property and equipment. Operating cash flow did not cover investing outflows; financing included $14.7 million of San Mateo-related performance incentives and net $24.5 million of contributions from and distributions to non-controlling owners.

Changes, outlook and risks

Matador planned to operate six Delaware Basin drilling rigs throughout 2018, with a possible seventh toward year-end depending on commodity prices, costs, opportunities and liquidity. The 2018 budget was $530–$570 million for drilling, completions, facilities and infrastructure, plus $70–$90 million for midstream capital expenditures representing Matador’s 51% share of San Mateo’s expected spending.
The Black River cryogenic processing plant expansion was completed in late March, increasing designed inlet capacity by 200 MMcf per day to 260 MMcf per day. Matador also reported a strategic relationship with Plains for crude-oil gathering and transportation and crude-oil purchases.
Management reported widening West Texas oil and natural gas differentials. In early May, differentials were about negative $10 per barrel for oil and negative $1.50 per MMBtu for natural gas; management expected pressure on revenue beginning in Q2 and said the differentials could persist 12–18 months or longer. Matador had hedged about 55% of anticipated Delaware Basin oil production for the rest of 2018 against oil basis differentials, but had no natural gas basis hedges at May 2.
Commodity prices, production declines, service-cost inflation, drilling results, transportation capacity, access to capital and reserve estimates are significant uncertainties. Management said capital spending could be deferred or adjusted in response to business conditions.
Contractual cash obligations totaled approximately $1.135 billion at March 31, including $575 million of note principal, $203.9 million under non-affiliate natural gas transportation, gathering and processing agreements, and $225.6 million under San Mateo agreements. The filing also identifies drilling-rig and non-operated-well commitments. Certain transportation agreements carry fees or deficiency payments even if committed volumes are not transported or delivered.
In April, Matador entered into additional firm natural gas transportation arrangements: a short-term agreement with a minimum obligation of about $4.8 million and a 16-year agreement with a minimum obligation of about $56.8 million.
ASC 606 adoption had no material overall impact; it reduced reported oil and gas revenue and production, transportation and processing expense by $2.2 million each in Q1. The company expected to adopt the new lease standard on January 1, 2019, which it expected to increase reported assets and liabilities.
Management considered ordinary-course lawsuits unlikely to have a material adverse effect. The company retained a full valuation allowance against most deferred tax assets. Disclosure controls were reported effective at quarter-end.

Investor verification priorities

Assess whether Delaware Basin production growth and well performance support the planned 2018 capital program and its funding needs.
Track realized prices, oil and gas basis differentials, hedge coverage and the impact of transportation constraints on revenue and cash flow.
Review revolver usage, borrowing-base availability, liquidity and the substantial long-term midstream and transportation commitments, including minimum-volume and deficiency-fee exposure.
Reconcile GAAP earnings and operating cash flow with Adjusted EBITDA, including derivative effects, capital spending and contributions associated with San Mateo.