Matador Resources Company — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; balance-sheet comparisons are to December 31, 2012. Amounts are in U.S. dollars unless noted. Matador is an independent oil and gas exploration and production company focused primarily on the Eagle Ford and Permian Basin, with additional operations in the Haynesville and Cotton Valley plays.
Financial results and operating metrics
- Q3 revenue: Oil and gas sales were $81.9 million, up 115% from $38.0 million. Including realized and unrealized derivative losses, total revenue was $71.4 million, versus $28.4 million.
- Q3 earnings: Operating income was $24.6 million, compared with an operating loss of $9.7 million; net income was $20.1 million, or $0.35 per diluted share, versus a net loss of $9.2 million, or $0.17 per share. Operating and net margins on reported total revenue were approximately 34% and 28%, respectively.
- Nine-month results: Oil and gas sales were $199.4 million, up 93%; total revenue was $192.2 million. Operating income was $37.3 million and net income was $29.7 million, compared with operating and net losses of $13.0 million and $12.1 million, respectively, in 2012. Operating and net margins on total revenue were approximately 19% and 15%.
- Production: Q3 averaged 13,482 BOE/day, up 53% year over year; oil production rose 104% to 6,703 Bbl/day. Nine-month average production rose 36% to 11,663 BOE/day. Oil represented 50% of Q3 production by volume, versus 37% a year earlier.
- Prices: Q3 realized prices, before derivative settlements, averaged $104.15/Bbl of oil and $4.71/Mcf of natural gas, versus $99.33/Bbl and $2.59/Mcf in Q3 2012.
- Cash flow and investment: Nine-month operating cash flow was $127.2 million, compared with $80.3 million. Investing cash outflow was $260.1 million, including $257.2 million of oil and gas capital expenditures; financing provided $137.1 million. Cash increased $4.2 million to $6.3 million. Operating cash flow less oil and gas capital expenditures was approximately negative $130.0 million.
- Costs and margins: Q3 lease operating expense was $6.91/BOE, down from $7.98; nine-month expense was $9.30/BOE, up from $7.49. Nine-month DD&A was $23.43/BOE, versus $22.58. Q3 total expenses were $46.7 million; nine-month expenses included a $21.2 million full-cost ceiling impairment.
- Liquidity and debt: At September 30, cash and certificates of deposit totaled $6.4 million; revolver debt was $145.0 million, with approximately $0.3 million of letters of credit, and an effective interest rate of about 4.0%. The borrowing base was $350 million and conforming borrowing base $275 million. By November 7, debt had risen to $160 million following additional borrowings.
- Balance sheet: Total assets were $795.8 million and shareholders’ equity was $552.7 million, compared with $632.0 million and $379.1 million at year-end 2012. Current assets of $43.7 million were below current liabilities of $85.9 million.
Changes versus prior comparable periods
- Revenue and profitability improved substantially, primarily from higher Eagle Ford production and stronger natural gas prices; Q3 oil prices were also higher year over year.
- Production growth followed a ramp-up in drilling. Matador added a third rig in August and shifted from a two-rig program to two Eagle Ford rigs and one Permian Basin rig.
- Q3 derivative results included a $1.2 million realized loss and a $9.3 million unrealized loss. For the nine months, derivative results were a $0.5 million realized loss and a $6.6 million unrealized loss, versus a $11.1 million realized gain and $1.1 million unrealized loss in 2012.
- Matador completed a September public offering of 9.775 million shares, receiving approximately $141.7 million net. It used $130.0 million to repay revolver borrowings and the balance primarily for working capital, while increasing capital spending plans.
- Proved reserves at September 30 were 44.2 million BOE, compared with 23.8 million BOE at December 31, 2012. The increase included approximately 100 Bcf of Haynesville proved undeveloped gas reserves restored as gas prices improved. PV-10 was $538.6 million and standardized measure was $486.1 million; both are reserve valuation measures, not estimates of market value.
Outlook, risks, contingencies and unusual items
- Capital plans: The 2013 capital expenditure budget was raised to $370 million; $253.1 million had been incurred through September 30. Preliminary 2014 capital spending was estimated at $425–$450 million. Management expected operating cash flow and available revolver capacity to fund planned spending, excluding significant acquisitions; spending may be deferred if prices, costs, financing or drilling results weaken.
- Operations: Management planned two Eagle Ford rigs and one Permian rig through the remainder of 2013 and 2014. Initial Permian exploration wells were still being evaluated, with further results expected in Q4 2013; management noted initial test wells could take longer and cost more than later development wells.
- Commodity and hedging risk: Management warned that oil, gas and NGL prices are volatile and affect revenues, cash flows, reserves and borrowing capacity. The Louisiana Light Sweet/WTI differential had narrowed, potentially reducing the historical oil-price uplift. Derivatives provide partial protection but also limit upside under collars and swaps; they are not designated for hedge accounting.
- Credit facility: The revolver matures December 2016 and is secured by substantially all oil and gas properties. Borrowing capacity depends on periodic reserve-based redeterminations; a reduction below borrowings could require additional collateral or repayment. Financial covenants include a debt-to-EBITDA ratio of 4.0 or less and, beginning June 30, 2014, a current ratio of at least 1.0. Management reported compliance at September 30.
- Commitments: At September 30, material commitments included $16.7 million for non-operated wells, $7.7 million of potential drilling-rig termination obligations, and $12.2 million of remaining minimum gas processing and transportation commitments. The five-year processing agreement includes deficiency fees if minimum throughput requirements are not met; management believed expected production would satisfy them.
- Unusual items and legal matters: No ceiling impairment was recorded in Q3, but $21.2 million was recorded in Q1 2013. A $6.7 million federal deferred-tax valuation allowance reversal affected the tax provision. The Louisiana Supreme Court reinstated a trial judgment favorable to Matador in the Peironnet lease dispute; rehearing was denied. An Eagle Ford dispute with Orca was settled, with Matador agreeing to fund 100% of costs for two wells until recovery. Management considered other lawsuits unlikely to have a material adverse effect.
- Subsequent events: In October and November, Matador acquired approximately 5,700 net acres in the Permian and Haynesville for $9.7 million. It also borrowed $15.0 million after quarter-end.
Most important facts for investors to verify
- Permian exploration results, well costs and whether the planned three-rig program delivers expected production and reserve growth.
- Whether operating cash flow can support the $370 million 2013 and $425–$450 million preliminary 2014 capital plans without materially increasing debt or issuing more equity.
- Current borrowing availability after the post-quarter borrowing, and the outcome of the next reserve-based borrowing-base review.
- Hedge volumes, price floors and ceilings, and the effect of derivative settlements and fair-value changes on realized cash flows and reported earnings.
- Reserve growth assumptions, especially restored Haynesville undeveloped gas reserves, and sensitivity of reserves and ceiling tests to commodity prices and development costs.
- Execution against processing and transportation commitments, non-operated well obligations, and any changes in legal or other contingencies.