Matador Resources Company — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone Q4 filing; selected unaudited Q4 results are included below. Amounts are U.S. dollars unless noted.
Business context and reporting period
Matador is an independent U.S. oil and natural gas exploration and production company focused on unconventional resources. Its core areas are the Eagle Ford in South Texas, the Wolfcamp and Bone Spring plays in the Permian Basin, and the Haynesville and Cotton Valley plays in Louisiana and East Texas. The Eagle Ford supplied 65% of 2014 production; the Permian Basin was a growing area of focus.
Financial and operating performance
| Metric | 2014 | 2013 |
|---|---|---|
| Oil and natural gas revenue | $367.7 million | $269.0 million |
| Total revenue, including derivative gains and losses | $431.0 million | $260.9 million |
| Net income attributable to Matador shareholders | $110.8 million | $45.1 million |
| Diluted earnings per share | $1.56 | $0.77 |
| Adjusted EBITDA (non-GAAP) | $262.9 million | $191.8 million |
| Cash provided by operating activities | $251.5 million | $179.5 million |
| Cash used in investing activities | $570.5 million | $366.9 million |
| Cash provided by financing activities | $321.2 million | $191.7 million |
Production was 5.87 million BOE, up 37% year over year: oil was 3.32 million barrels, up 56%, and natural gas was 15.3 Bcf, up 18%. Average daily production reached 16,082 BOE. Realized prices excluding derivatives were $87.37 per barrel of oil, down from $99.79, and $5.08 per Mcf of gas, up from $4.35. The filing does not present a single headline operating-margin measure.
Expenses included $134.7 million of depletion, depreciation and amortization, $51.4 million of lease operating costs, and $32.2 million of general and administrative costs. Lease operating expense per BOE declined to $8.75 from $9.04; production taxes and marketing rose to $5.65 per BOE from $4.89. No full-cost ceiling impairment was recorded in 2014; the comparable 2013 charge was $21.2 million.
Q4 2014: Oil and gas revenue was $93.1 million; net income attributable to shareholders was $46.6 million and diluted EPS was $0.63. Q4 included a $50.4 million unrealized derivative gain and a $10.5 million realized derivative gain. The annual derivative results included a $58.3 million unrealized gain and a $5.0 million realized gain; unrealized gains are non-cash and materially affected reported earnings.
Reserves, debt and liquidity
At year-end, proved reserves were 68.7 million BOE, up 33% from 51.7 million BOE. Proved developed reserves were 31.2 million BOE, or 45% of the total; proved undeveloped reserves were 37.5 million BOE. PV-10, a non-GAAP measure, was $1.04 billion versus $655.2 million; the GAAP standardized measure was $913.3 million versus $578.7 million. These reserve values use prescribed historical average prices and are not estimates of market value.
Year-end cash was $8.4 million. Credit Agreement borrowings were $340.0 million, plus $0.6 million of letters of credit; the borrowing base was $450 million and the effective borrowing rate was approximately 3.3%. Total assets were $1.44 billion, current liabilities $161.8 million, and shareholders’ equity $866.5 million. Capital expenditures were $610.4 million, substantially above operating cash flow, with the shortfall funded principally through borrowings and equity issuance.
Matador issued 7.5 million common shares in May 2014 and received approximately $181.3 million net proceeds. At February 27, 2015, after further borrowings and the HEYCO transaction, Credit Agreement debt was $395 million, with $54.4 million reported available; a separate approximately $12 million of HEYCO debt was assumed. The filing notes a pending borrowing-base redetermination and possible repayment or collateral requirements if borrowing capacity falls below outstanding borrowings.
Material changes and management outlook
- Production growth and drilling drove higher revenue, cash from operations, Adjusted EBITDA and reserves. Oil production and the Permian contribution expanded, while Haynesville production increased following non-operated drilling by Chesapeake.
- Oil prices fell sharply in the second half of 2014. Management reported WTI declining from about $107 per barrel in mid-June to about $53 in late December; by February 27, 2015, WTI was $49.76. Gas prices also weakened into early 2015.
- Management budgeted 2015 capital expenditures of $350 million, excluding HEYCO-related spending, down about 43% from 2014. It planned to direct approximately 70% to the Permian, 26% to the Eagle Ford and 4% to non-operated Haynesville wells; the Eagle Ford operated drilling program was to pause after Q1, with two rigs planned in the Permian thereafter. The company expected lower 2015 operating cash flow and said funding could include cash flow, credit, joint ventures, asset sales, or debt or equity issuance.
- At February 27, 2015, approximately 40% of anticipated 2015 oil production and 70% of anticipated gas production was hedged. No oil or gas hedges were in place beyond 2015. Service-provider price reductions of 15%–20% were being seen for many items, with some reductions as high as 50%; further savings were uncertain.
- The February 27, 2015 HEYCO merger, a subsequent event, added approximately 58,600 gross (18,200 net) acres in New Mexico. Consideration included cash, assumed debt, 3.3 million common shares and 150,000 Series A preferred shares, each convertible into ten common shares subject to shareholder approval. Preferred shares carry ten votes each and, if unconverted, a quarterly cash dividend of $1.80 per share beginning August 27, 2015.
- Management anticipated material full-cost ceiling impairments in 2015, potentially beginning in Q1, but could not reasonably estimate the amount. Such a charge would be non-cash but reduce reported earnings and equity. Other key risks include commodity-price volatility, reserve-estimation uncertainty, dependence on third-party transport and processing, capital access, operational and weather disruptions, and changing environmental and hydraulic-fracturing requirements.
Most important facts for investors to verify
- Whether lower commodity prices trigger material 2015 ceiling-test impairments and reduce reserve-based borrowing capacity.
- Whether the $350 million capital program can be funded while maintaining liquidity and complying with the 4.25 debt-to-EBITDA covenant; confirm the outcome of the borrowing-base redetermination.
- Whether Permian well performance, development costs, and expected production support management’s growth plans, especially as 55% of year-end proved reserves were undeveloped.
- The HEYCO integration, final acreage figures, purchase adjustments, assumed debt repayment terms, and shareholder approval and conversion of Series A preferred stock.
- The effect of 2015 hedges, including price floors and ceilings, on realized cash flows, and the company’s exposure after those hedges expire.
- Revenue and receivable concentration: three purchasers accounted for 68% of 2014 oil, gas and NGL revenue; monitor purchaser credit and infrastructure access.