Business context and reporting period
Matador Resources Company is an independent U.S. oil and natural gas exploration and production company, focused chiefly on the Eagle Ford in South Texas and the Wolfcamp and Bone Spring plays in the Permian Basin. This unaudited Form 10-Q covers the three months ended March 31, 2014; comparisons are with Q1 2013 unless noted.
Financial and operating performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Oil and natural gas revenue | $78.9 million | $59.3 million |
| Total revenue, including derivative results | $74.0 million | $54.9 million |
| Operating income (loss) | $27.3 million | $(14.3) million |
| Net income (loss) | $16.4 million; $0.25 diluted EPS | $(15.5) million; $(0.28) diluted EPS |
| Operating / net margin, calculated on total revenue | 36.8% / 22.1% | (26.0)% / (28.2)% |
| Adjusted EBITDA, non-GAAP | $56.3 million | $40.7 million |
| Net cash from operating activities | $31.9 million | $32.2 million |
| Net cash used in investing activities | $(93.9) million | $(84.7) million |
| Oil-equivalent production | 11,904 BOE/day; 62% oil | 10,897 BOE/day |
Oil production rose 44% to 661,000 barrels, while natural gas production fell 21% to 2.5 Bcf. Oil revenue increased 31% to $63.7 million; natural gas revenue rose 43% to $15.3 million. Realized prices before derivatives were $96.34/barrel of oil versus $105.72, and $6.20/Mcf of natural gas versus $3.41. Derivatives reduced reported revenue by $4.95 million in Q1 2014, including $1.84 million of realized losses and $3.11 million of unrealized losses.
Production taxes and marketing were $6.0 million; lease operating expense was $9.4 million, or $8.73/BOE; DD&A was $24.0 million, or $22.43/BOE; and G&A was $7.2 million. The effective tax rate was 36.8%, including $8.3 million of deferred tax expense. No full-cost ceiling impairment was recorded in Q1 2014, compared with a $21.2 million charge in Q1 2013.
Balance sheet, liquidity and debt
At March 31, 2014, cash was $14.3 million and revolving credit borrowings were $270.0 million, at an effective rate of approximately 3.5%. The borrowing base was $385.0 million, with approximately $0.3 million of letters of credit; availability was subject to the agreement’s terms. Current assets of $59.0 million were below current liabilities of $132.9 million. Working capital was therefore approximately negative $73.9 million, including $94.0 million of accrued oil and gas property costs. Total assets were $1.02 billion and shareholders’ equity was $586.4 million.
Operating cash flow was nearly flat year over year despite higher earnings, as working-capital movements absorbed cash. Capital expenditures for oil and gas properties were $92.9 million in cash; the company reported $138.1 million of 2014 capital expenditures incurred through March 31. Financing provided $70.0 million of net cash, principally from additional credit-agreement borrowings. Subsequent to quarter-end, the company borrowed a further $30.0 million; borrowings were $300.0 million at May 6, 2014.
Material changes, outlook and risks
- Management increased the 2014 capital expenditure budget from $440 million to $540 million as of May 6: $444 million for drilling and completions, $16 million for pipelines and infrastructure, and $80 million for leasehold and seismic. The increase reflected additional acreage purchases and potential Chesapeake-operated Haynesville drilling not included in the original budget.
- From January 1 through May 6, Matador acquired approximately 16,100 gross Permian acres and 1,400 gross Eagle Ford acres for about $45 million. It expected another $35 million of leasehold and seismic spending for the rest of 2014.
- Management expected operating cash flow and borrowing capacity to fund the revised budget, excluding significant acquisitions, but said spending could be deferred or redirected if prices, costs, drilling results or financing conditions deteriorated. It anticipated additional borrowing-base increases, subject to lender review and proved-reserve growth.
- Q1 highlights included record quarterly oil production. Management reported that 15%–20% of production capacity had been shut in at various times for offset drilling and completion work. A Permian well awaiting pipeline connection began sales May 1; early-May natural gas production was approximately 42 MMcf/day.
- The credit agreement matures in December 2016 and requires a debt-to-EBITDA ratio of 4.25 or less. The March amendment eliminated the current-ratio covenant and reduced the borrowing rate grid by 0.25 percentage points. The borrowing base may automatically fall to its $310 million conforming level by June 30, 2015, or upon specified senior-note issuance. The company said it was in compliance at March 31.
- Commodity price volatility, natural production declines, drilling and reserve-estimation risk, transportation capacity, and access to capital could affect cash flow, spending plans and borrowing capacity. Hedges provide only partial protection; Q1 derivative fair value was a net liability of $5.9 million.
- Material commitments included $21.2 million for non-operated wells, maximum drilling-rig termination obligations of $12.9 million, and $9.2 million of remaining minimum gas processing and transportation commitments. Ordinary-course lawsuits were not expected by management to have a material adverse effect.
Most important facts to verify
- Whether production growth and new Eagle Ford and Permian wells deliver expected volumes, pricing and economics, including pipeline access.
- How the $540 million spending plan, acreage acquisitions and Haynesville participation will be financed, and the resulting debt and covenant headroom.
- Future borrowing-base redeterminations, reserve growth and the potential conforming-base reduction; confirm actual availability rather than relying on the stated borrowing base.
- Hedge volumes, floor and ceiling prices, settlements and mark-to-market movements, and exposure to commodity-price changes.
- Working-capital movements, accrued capital costs, deferred tax assumptions and sensitivity of the full-cost ceiling test to prices, reserves and development costs.