Matador Resources Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Matador is an independent U.S. oil and natural gas exploration and production company, focused primarily on the Delaware Basin, with operations also in the Eagle Ford, Haynesville and Cotton Valley.
Financial and operating results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Oil and natural gas revenue | $43.9 million | $62.5 million |
| Total revenue, including derivative results | $44.2 million | $72.4 million |
| Operating loss | $102.1 million | $74.8 million |
| Net loss attributable to Matador shareholders | $107.7 million | $50.2 million |
| Diluted loss per share | $1.26 | $0.68 |
| Operating cash flow | $18.4 million | $93.3 million |
| Cash used in investing activities | $57.9 million | $166.1 million |
| Adjusted EBITDA (non-GAAP) | $17.2 million | $50.1 million |
Oil and gas production totaled 2.17 million BOE, or 23,846 BOE per day, up 3% year over year. Average realized prices before derivative gains were $28.89 per barrel of oil and $2.04 per Mcf of natural gas, versus $43.37 and $2.82, respectively. Realized derivative gains were $7.1 million; unrealized derivative losses were $6.8 million.
Production taxes and marketing were $7.9 million; lease operating expense was $15.5 million ($7.14 per BOE); DD&A was $28.9 million; and general and administrative expense was $13.2 million. The $80.5 million full-cost ceiling impairment was a significant noncash charge. Interest expense was $7.2 million, up from $2.1 million, mainly following issuance of 6.875% senior notes in 2015.
At March 31, cash was $118.3 million and current assets and liabilities were $173.1 million and $119.4 million, respectively. The company had $400 million principal amount of senior notes due 2023 and no revolver borrowings; the notes’ balance-sheet carrying amount was $391.6 million. The credit facility borrowing base was $375 million at quarter-end, with approximately $0.6 million of letters of credit outstanding. The borrowing base was subsequently reduced to $300 million on May 3, 2016.
Changes and business developments
- Oil and gas revenue fell 30% year over year, primarily because of lower realized commodity prices; production growth partly offset the decline. Adjusted EBITDA fell 66% and operating cash flow declined substantially.
- Delaware Basin production rose to 9,958 BOE per day, 2.8 times the prior-year level. The basin represented about 63% of daily oil production and 22% of daily gas production.
- Estimated proved reserves increased to 90.2 million BOE from 85.1 million at December 31, 2015. However, the proved-developed share was 36.6%, down from 40.0%, and lower commodity-price assumptions led to some proved undeveloped reserves being reclassified as contingent resources.
- Matador issued 7.5 million common shares in March, receiving approximately $141.5 million net. Shares issued increased materially during the quarter.
- Cash capital expenditures were approximately $101.8 million ($74.4 million for oil and gas properties and $27.4 million for other property and equipment), exceeding operating cash flow. Financing cash flow was $141.2 million, principally from the equity offering.
Outlook, risks and contingencies
Management budgeted $325 million of 2016 capital expenditures, with approximately 97% directed to the Delaware Basin, including $40 million for midstream projects. Management said spending is discretionary and may be adjusted to market conditions and available capital. The company planned no operated Eagle Ford or Haynesville drilling in 2016. A Rustler Breaks gas processing plant was scheduled to enter service in Q3 2016.
Management cited continued commodity-price uncertainty, natural production declines, drilling and development execution, operating costs, access to capital and borrowing-base availability as key risks. It expected derivative gains to be lower than in comparable 2015 periods as older, higher-price hedges expire. At May 5, about 50% of anticipated remaining-2016 oil production and 44% of anticipated gas production was hedged.
Material commitments included up to $43.2 million of drilling-rig termination obligations, $4.7 million for non-operated wells, and $8.6 million remaining under the gas plant construction contract. A 15-year gathering and processing contract carries stated aggregate minimum commitments of about $212.6 million, but Matador can reset future minimum volumes based on prior-year actual volumes; management estimated an $8.9 million deficiency payment if it ceased operations in the area and reduced commitments to zero. Management considered ordinary-course lawsuits unlikely to have a material adverse effect.
Management recorded an $80.5 million ceiling-test impairment based on trailing 12-month average prices of $42.77 per barrel of oil and $2.40 per MMBtu of gas. It disclosed that lower illustrative prices would have reduced the ceiling by a further $111.9 million, all else equal. The company had a valuation allowance against most deferred tax assets and recorded no income tax benefit in Q1 2016.
Important facts for investors to verify
- Whether subsequent commodity prices, production and reserve revisions change future ceiling-test impairment charges or borrowing-base capacity.
- Whether operating cash flow and available liquidity can support the $325 million capital budget, debt service and contractual commitments.
- Execution, cost and startup timing for the Delaware Basin drilling program and Rustler Breaks processing plant, and the expected impact on production and processing costs.
- Actual hedge coverage, realized hedge settlements and exposure as existing contracts expire.
- The extent of potential dilution from equity issuance and the effect of the borrowing-base reduction to $300 million.