Matador Resources Company — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Matador is an independent oil and gas producer, focused primarily on the Delaware Basin, with additional Eagle Ford, Haynesville and midstream operations. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Oil and gas revenue | $83.1 | $71.8 | $196.3 | $222.1 |
| Total revenue, including derivatives and midstream | $88.7 | $99.0 | $179.4 | $250.3 |
| Operating income (loss) | $16.9 | $(268.7) | $(185.4) | $(583.6) |
| Net income (loss) attributable to Matador | $11.9 | $(242.1) | $(201.6) | $(449.4) |
| Diluted earnings (loss) per share | $0.13 | $(2.86) | $(2.24) | $(5.58) |
| Adjusted EBITDA (non-GAAP) | $47.3 | $58.0 | $103.4 | $174.9 |
Production: Q3 production reached a company record of 29,381 BOE per day, up 12% year over year; oil was 14,960 barrels per day and natural gas 86.5 MMcf per day. Nine-month production averaged 27,091 BOE per day, up 7%. Delaware Basin production averaged 18,498 BOE per day in Q3, 2.4 times the prior-year quarter.
Prices and costs: Q3 realized oil price before derivative settlements was $42.57 per barrel versus $43.21; natural gas was $3.08 per Mcf versus $2.90. For the nine-month period, oil and gas prices fell to $38.75 per barrel and $2.43 per Mcf, from $47.36 and $2.83. Q3 lease operating expense was $5.40 per BOE and DD&A was $11.10 per BOE. Q3 operating results benefited from no ceiling-test impairment, compared with a $285.7 million charge in Q3 2015; the first nine months of 2016 included $158.6 million of impairment.
Cash flow and liquidity: Nine-month cash provided by operations was $96.5, down from $185.9. Investing cash outflow was $297.6 and financing cash inflow was $205.0; cash ended at $20.6. The balance sheet showed current assets of $81.0 and current liabilities of $151.6. At September 30, borrowings included $65.0 under the revolver and $400.0 principal of 6.875% senior notes due 2023; the revolver borrowing base was $300.0. In late October, the borrowing base was increased to $400.0; revolver borrowings were $95.0 at November 1.
Capital and reserves: Matador reported $333.5 of capital expenditures incurred through September. It raised approximately $141.5 net from a March 2016 offering of 7.5 million shares. Proved reserves were 101.6 million BOE at September 30, up from 85.1 million at year-end 2015; 40.4% were proved developed. Standardized Measure was $516.8 million, down from $529.2 million at year-end, using lower trailing 12-month average benchmark prices.
Material changes versus prior comparable periods
- Q3 oil and gas revenue rose 16% as production growth more than offset a modestly lower oil price. Nine-month oil and gas revenue fell 12%, primarily because of lower commodity prices, despite higher production.
- Q3 net income compared with a substantial year-earlier loss, principally because the 2015 quarter included a large ceiling-test impairment and higher DD&A. Nine-month net loss narrowed, but operating cash flow and Adjusted EBITDA declined.
- Realized derivative gains fell sharply: $0.9 million in Q3 versus $19.9 million, and $10.4 million for nine months versus $52.1 million. Nine-month 2016 results also included a $30.3 million unrealized derivative loss.
- Delaware Basin drilling and development drove production and reserve growth. The Black River processing plant at Rustler Breaks began operating in late August, adding company processing capacity and potential third-party midstream revenue.
Outlook, risks and contingencies
- On November 1, management raised its 2016 capital expenditure budget from $325 million to $425–$450 million, mainly for Delaware Basin acreage and mineral acquisitions, accelerated midstream projects, and potentially a fourth Delaware Basin rig. No formal earnings or production guidance is provided in the filing.
- Management expected to fund the remainder of 2016 and into 2017 with cash, operating cash flow and revolver borrowings, subject to availability. At November 1, approximately 50% of anticipated remaining-2016 oil production and 70% of natural gas production were hedged.
- Commodity-price volatility, production declines, drilling results, capital-market access, reserve estimates and gathering/transport capacity could affect cash flow, capital plans and borrowing availability. The company cautions that its expected operating cash flows depend on production, prices and existing hedges.
- Commitments included approximately $43.0 million of potential drilling-rig termination obligations, $11.2 million for non-operated wells, and $4.2 million remaining on the Rustler Breaks plant contract. Under a Loving County gathering and processing agreement, the estimated deficiency fee would be approximately $12.0 million if operations in the area ceased.
- Open commodity derivatives had a net fair-value liability of $14.0 million at September 30. Management considered ordinary-course lawsuits unlikely to have a material adverse effect. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the higher capital budget and potential fourth rig can be funded without materially increasing debt or equity issuance.
- Subsequent borrowing-base availability and revolver usage after the October redetermination, including compliance with credit-agreement terms.
- Delaware Basin production growth, realized prices, operating and transportation costs, and the Black River plant’s utilization and economics.
- Hedge volumes, settlement outcomes and derivative fair values, and the sensitivity of cash flow to commodity prices.
- Reserve changes and valuation assumptions, including the effect of commodity-price assumptions on impairment testing and reserve value.