Matador Resources Company — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. Matador is an independent U.S. oil and gas producer focused primarily on the Permian Basin and Eagle Ford, with additional Haynesville and Cotton Valley operations. Financial statements are unaudited.
Financial results and liquidity
- Q2 revenue: Oil and natural gas revenue was $87.8 million, down 11% from $99.1 million a year earlier. Including derivative results, total revenue was $78.1 million versus $90.9 million.
- Q2 earnings: Net loss attributable to Matador shareholders was $157.1 million, or $1.89 per diluted share, compared with net income of $18.2 million, or $0.26 per diluted share. The period included a $229.0 million non-cash full-cost ceiling impairment.
- First-half results: Oil and gas revenue was $150.3 million, down 16%; net loss attributable to shareholders was $207.3 million, or $2.65 per diluted share. Adjusted EBITDA, a non-GAAP measure, was $116.8 million, down 7% from $125.8 million.
- Cash flow and investment: First-half operating cash flow was $113.4 million, essentially unchanged from $113.5 million. Investing cash outflow was $294.0 million, including $237.0 million in oil and gas property capital expenditures; financing cash inflow was $225.8 million. Cash ended the period at $53.6 million.
- Debt and liquidity: Matador had $400 million principal amount of 6.875% senior unsecured notes due 2023 and no borrowings under its revolving credit agreement at June 30; $0.6 million of letters of credit were outstanding. The credit facility borrowing base was $375 million. The notes were reported net of issuance costs at $390.7 million on the balance sheet.
- Operating costs: Q2 lease operating expense was $6.18 per BOE, down from $8.34; DD&A was $21.39 per BOE, down from $22.66. The filing does not provide a clear conventional operating-margin figure.
Material changes versus prior comparable periods
- Production reached company records: Q2 production was 2.42 million BOE, or 26,601 BOE per day, up 73% year over year. Oil volume increased 57% and natural gas volume 93%.
- Lower commodity prices offset production growth. Q2 realized prices excluding derivatives fell to $54.37 per barrel of oil from $97.92 and to $2.78 per Mcf of natural gas from $5.69.
- Derivative gains helped reported results: Q2 realized derivative gains were $13.8 million, but unrealized derivative losses were $23.5 million. First-half figures were a $32.3 million realized gain and a $32.1 million unrealized loss.
- The company recorded $296.2 million in first-half ceiling-test impairment charges, including $229.0 million in Q2 and $67.1 million in Q1. The charge reflected lower SEC pricing assumptions and was non-cash; related deferred tax benefits partly offset its earnings impact.
- Matador completed the HEYCO merger in February, acquiring approximately 58,600 gross (18,200 net) acres in New Mexico. Consideration included cash, assumed debt, common shares and convertible preferred shares; the preferred shares converted into 1.5 million common shares in April.
- In April, Matador issued $400 million of notes and completed a 7 million-share public offering, receiving approximately $187.5 million net from the equity offering. Proceeds were used largely to repay revolving-credit and assumed HEYCO debt. The financing shifted the debt mix toward longer-term, higher-coupon unsecured notes.
Outlook, commentary and risks
- On August 4, management raised the 2015 capital expenditure budget from $350 million to $425 million, excluding HEYCO-related capital expenditures. The revised budget includes about $307 million for drilling and completion. Matador expected to fund spending with cash, operating cash flow, revolver capacity, potential joint ventures and possible asset or acreage sales.
- Matador added a third Delaware Basin rig in late July and reported operating three rigs there. It had completed planned operated Eagle Ford drilling for 2015 and expected to continue participating in non-operated Haynesville wells. First-half spending was reported as $266 million, about 63% of the revised budget.
- Management cited improved drilling efficiency and lower well costs in parts of the Delaware Basin. It also reported successful stacked-lateral testing; initial production rates are early well results, not measures of sustained production.
- At June 30, estimated proved reserves were 87.0 million BOE, up from 68.7 million at year-end 2014. Approximately 39% were proved developed. Reserve PV-10 was $942.8 million and standardized measure was $864.1 million; both are estimates, not fair market value.
- At August 4, approximately 75% of anticipated remaining-2015 oil production and 65% of natural gas production was hedged. Management warned that replacement hedges had lower floors and ceilings and expected derivative gains to be lower in 2016 than in comparable 2015 periods.
- Key risks include volatile oil and gas prices, reserve and production uncertainty, access to capital, borrowing-base redeterminations, execution and integration of HEYCO, and the ability to fund planned drilling. The filing notes that lower commodity prices could trigger additional ceiling-test impairment. A sensitivity analysis stated that lower assumed prices would have reduced the ceiling by a further $303 million, all else equal; this was not a forecast.
- Material commitments included $43.8 million of potential drilling-rig termination obligations, $22.8 million of non-operated drilling commitments expected within the next few months, and $4.5 million of remaining gas processing and transportation commitments. A Loving County gas plant was scheduled for service in Q3 2015.
- Matador disclosed a related-party joint venture with affiliates of former HEYCO owner and director George M. Yates: affiliates contributed approximately 1,900 net acres for 50% interests, and Matador agreed to contribute $14.2 million for the other 50%. Ordinary-course lawsuits were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether commodity prices, realized production, and hedge coverage support the revised $425 million capital program and expected operating cash flow.
- Future ceiling-test impairment exposure, including changes in SEC pricing assumptions, reserves, costs, and development plans.
- Production decline rates and sustained performance of Delaware Basin wells, stacked-lateral development, and newly acquired HEYCO acreage.
- Liquidity and covenant headroom under the $375 million borrowing base, alongside the cost and terms of the 6.875% notes and upcoming capital commitments.
- Progress on the gas plant, related-party joint ventures, and integration of HEYCO assets and operations.