Matador Resources Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; comparisons are with the corresponding 2022 periods. Matador is an independent oil and gas producer, primarily operating in the Delaware Basin, with midstream operations. The filing is unaudited.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $638.1 million | $943.9 million | $1,198.4 million | $1,509.6 million |
| Net income attributable to Matador shareholders | $164.7 million | $415.7 million | $327.8 million | $622.8 million |
| Diluted EPS | $1.37 | $3.47 | $2.73 | $5.20 |
| Adjusted EBITDA attributable to Matador shareholders | $423.3 million | $663.8 million | $788.5 million | $1,125.6 million |
| Cash flow from operations | $449.0 million | $646.3 million | $788.5 million | $975.3 million |
Q2 operating income was $252.3 million, or about 39.5% of revenue, versus $595.0 million, or about 63.0%, a year earlier. Q2 net income attributable to Matador was about 25.8% of revenue, compared with 44.0% in Q2 2022. Adjusted EBITDA is a non-GAAP measure.
- Production and prices: Q2 production averaged 130,683 BOE per day, up 18% year over year; oil production rose 19% and natural gas production 17%. Realized oil price fell 34% to $73.46 per barrel; realized natural gas price fell 73% to $2.61 per Mcf.
- Cash flows and investment: First-half investing cash outflow was $2.239 billion, principally reflecting the $1.608 billion Advance acquisition and higher drilling and completion spending. Financing provided $968.7 million; cash and restricted cash fell by $481.5 million to $65.8 million, comprising $22.3 million cash and $43.5 million restricted cash.
- Debt: At June 30, total borrowings were approximately $2.259 billion: $560 million under Matador’s credit agreement, $460 million at San Mateo, $699.2 million of 2026 notes and $500 million of 2028 notes. Matador also had $45.4 million of credit-agreement letters of credit; San Mateo had $9.0 million. The company reported covenant compliance. San Mateo repaid $25 million after quarter-end through July 25.
- Liquidity: Matador’s elected revolving-credit commitment was increased to $1.25 billion, with a $2.25 billion borrowing base and $1.50 billion maximum facility. The filing does not state a single unrestricted-liquidity total; restricted cash is subject to use limitations.
- Costs and dividends: Q2 DD&A increased to $177.5 million from $120.0 million, and interest expense to $34.2 million from $18.5 million. The company declared quarterly dividends of $0.15 per share in Q1 and Q2 and declared the same amount for Q3.
Material changes versus the prior comparable period
- Lower commodity prices drove oil and natural gas revenue down 34% in Q2 and 28% for the first half, despite higher production. Net income attributable to Matador and Adjusted EBITDA also declined substantially.
- Higher production reflected, in part, the Advance Energy Partners acquisition, completed April 12, 2023 for approximately $1.61 billion cash, plus contingent consideration. Since closing, acquired production increased reported revenue by $92.1 million and net income by $40.3 million through June 30.
- Debt and interest costs rose to fund the acquisition. The company issued $500 million of 6.875% notes due 2028 and used net proceeds of approximately $487.6 million to partially repay its revolving facility. The acquisition also contributed to higher DD&A.
- Third-party midstream services revenue increased 37% in Q2 and 44% in the first half, partly due to the Pronto assets acquired in 2022. Lease operating and midstream operating costs increased, while production taxes and transportation costs fell with lower commodity revenues.
Outlook, risks and contingencies
- As of July 25, 2023, Matador lowered its 2023 drilling, completion and equipping capital budget to $1.10–$1.22 billion from $1.18–$1.32 billion, citing efficiencies, service-cost conditions and plan adjustments. Midstream capital spending remained estimated at $150–$200 million.
- Management planned to operate seven Delaware Basin rigs for the rest of 2023, after releasing the eighth rig acquired with Advance near the end of June. The filing gives no specific earnings or production guidance.
- Management said acquisition-related deductions were expected to offset projected 2023 taxable income, so it did not expect federal or New Mexico income tax payments for 2023 at that time. This is an estimate, not a guarantee.
- Commodity-price volatility, differentials and pipeline capacity, service-cost inflation, capital availability, acquisition integration, regulatory changes, federal-land permitting and produced-water disposal are material business risks. A saltwater disposal well acquired with Advance was subject to enhanced reporting and injection curtailment following seismic activity.
- Contractual commitments included approximately $586.0 million under non-affiliate transportation, gathering, processing and disposal agreements and $253.5 million under San Mateo agreements. If operations ceased in the relevant areas, potential deficiencies under non-affiliate minimum-volume commitments were estimated at about $586.0 million. These are contractual exposure estimates, not necessarily amounts currently payable.
- The company resolved EPA and New Mexico environmental allegations under a consent decree entered May 15, 2023, agreeing to pay a $1.15 million civil penalty and spend at least $1.75 million on specified environmental projects. Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether production growth and the Advance acquisition can offset lower oil and gas prices, and how acquired assets perform after integration.
- Updated debt, borrowing availability, covenant headroom and interest costs following acquisition financing and San Mateo’s subsequent repayment.
- Whether planned capital spending, rig activity and operating efficiencies remain consistent with the revised 2023 budget and cash generation.
- Commodity-price and basis exposure, including the 9.2 Bcf of natural gas basis swaps reported for the remainder of 2023, and any further hedging changes.
- Potential cash-flow effects of minimum-volume commitments, produced-water restrictions and seismicity-related curtailments.
- Final purchase-price adjustments and contingent consideration for Advance; the purchase-price allocation remained preliminary at quarter-end.