Business context and reporting period
Matador Resources Company’s Form 10-K covers the fiscal year ended December 31, 2017; it is an annual report, not a standalone Q4 filing. Matador explores for and produces oil and natural gas, primarily in the Delaware Basin, and operates midstream assets, largely through its 51%-owned San Mateo joint venture. The financial statements received an unqualified audit opinion.
Financial and operating performance
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Oil and natural gas revenue | $528.7 million | $291.2 million |
| Total revenue, including derivative results and third-party midstream services | $544.3 million | $264.4 million |
| Net income (loss) attributable to Matador shareholders | $125.9 million | $(97.4) million |
| Diluted earnings (loss) per share | $1.23 | $(1.07) |
| Net cash provided by operating activities | $299.1 million | $134.1 million |
| Net cash used in investing activities | $824.0 million | $405.6 million |
| Adjusted EBITDA attributable to Matador shareholders | $336.1 million | $157.9 million |
- Production grew 40% to 14.2 million BOE (38,936 BOE per day). Oil production rose 54% to 7.9 million barrels; natural gas production rose 25% to 38.2 Bcf. The Delaware Basin supplied 76% of total production.
- Average realized prices, before realized derivative settlements, rose to $49.28 per barrel of oil from $41.19 and $3.72 per Mcf of gas from $2.66. Lease operating expense fell to $4.74 per BOE from $5.52; DD&A rose to $12.49 per BOE from $11.99.
- Operating income was $160.8 million, versus an operating loss of $177.2 million in 2016. No full-cost ceiling impairment was recorded in 2017, compared with a $158.6 million charge in 2016.
- Operating cash flow increased, but investment spending was substantially higher. Cash and restricted cash were $96.5 million and $6.0 million, respectively, at year-end. Current assets of $257.2 million were below current liabilities of $282.6 million.
- Debt included $575.0 million principal of 6.875% senior notes due 2023; there were no revolver borrowings at year-end. The borrowing base was $525 million, but the elected commitment was $400 million; approximately $2.1 million of letters of credit were outstanding.
- Proved reserves increased 44% to 152.8 million BOE; 84% were in the Delaware Basin and about 55% were proved undeveloped. Standardized Measure was $1.26 billion and PV-10 was $1.33 billion; PV-10 is a non-GAAP measure, not fair market value.
Material changes versus comparable periods
Higher production and realized commodity prices drove the revenue and operating cash-flow improvement. Shareholder earnings also benefited from the absence of the large 2016 impairment. Comparisons with 2016 are affected by a $107.3 million gain recognized that year on the Loving County Processing System sale, as well as $41.2 million of unrealized derivative losses in 2016 versus a $9.7 million unrealized gain in 2017. Realized derivatives were a $4.3 million loss in 2017, versus a $9.3 million gain in 2016.
For Q4 2017, oil and gas revenue was $165.1 million and shareholder net income was $38.3 million, or $0.35 diluted EPS. Q4 2016 shareholder net income was $104.2 million, substantially affected by the prior-year-quarter asset-sale gain; Q4 2016 oil and gas revenue was $94.8 million.
Matador issued 8.0 million shares in October 2017, receiving approximately $208.4 million net proceeds. It formed San Mateo with Five Point in February 2017, receiving a $171.5 million distribution and retaining a 51% interest and operating role. The transactions supported acreage, midstream investment and capital flexibility, while increasing share count and introducing a non-controlling interest.
Outlook, risks and unusual items
- Management’s 2018 capital budget was $530–$570 million for drilling, completions, facilities and infrastructure, plus $70–$90 million for midstream spending representing Matador’s 51% share of San Mateo’s budget. The plan called for six Delaware Basin rigs and focused spending in that basin. Acreage acquisition spending was not included in the estimate.
- Management expected to fund the program with cash, operating cash flow, San Mateo performance incentives and revolver availability, with possible additional financing or asset transactions. Funding and activity levels remain subject to prices, operating results, costs and borrowing-base availability.
- Through January 31, 2018, Matador had earned $14.7 million of San Mateo performance incentives, payable in Q1 2018, and could earn up to a further $58.8 million over four years. The Black River plant expansion was expected to add 200 MMcf per day to existing 60 MMcf per day capacity and was projected to enter service by the end of Q1 2018.
- Commodity-price volatility, basis differentials, concentrated Delaware Basin exposure, production declines, infrastructure capacity, service-cost inflation, and reserve-estimation uncertainty are significant risks. At February 21, 2018, about 55% of estimated remaining 2018 oil production and 40% of gas production were hedged; there were no NGL hedges or oil and gas hedges beyond 2018.
- Long-term gathering, processing, transportation and disposal arrangements carry minimum-volume commitments. The filing reports approximately $432.8 million of contractual obligations under agreements with minimum-volume commitments, including San Mateo arrangements. Insufficient volumes could create deficiency fees; certain agreements also limit use of alternative providers.
- Environmental and regulatory risks include hydraulic-fracturing rules, produced-water disposal and induced seismicity, pipeline safety, emissions requirements and water availability. Management considered ordinary-course lawsuits unlikely to have a material adverse effect; no clear quantified litigation contingency is provided.
- The 2017 tax benefit included an $8.2 million current benefit associated with refundable alternative minimum tax carryforwards. The Tax Cuts and Jobs Act revaluation of deferred taxes had no net income-statement effect after the valuation allowance. The company retained a substantial valuation allowance against deferred tax assets.
Most important facts for investors to verify
- Whether Delaware Basin well productivity, realized prices and production growth support the 2018 capital plan and its expected funding.
- Actual cash availability, revolver commitment and borrowing-base terms, debt covenant headroom, and the capacity to service or refinance the $575 million notes due 2023.
- San Mateo plant-expansion timing, third-party throughput, performance-incentive payments and exposure to minimum-volume or deficiency-fee obligations.
- Reserve conversion and development pace, particularly given that about 55% of proved reserves were undeveloped and reserves values depend on SEC pricing assumptions.
- Effects of commodity-price and Waha basis movements, hedging settlements, and the reliance on a small group of purchasers.
- Lease retention and development obligations, including Delaware Basin acreage scheduled to expire in 2018 and 2019.