Matador Resources Company — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; unaudited results. Matador is an independent oil and natural gas producer, focused primarily on the Delaware Basin, with additional operations in the Eagle Ford and Haynesville/Cotton Valley and a midstream business conducted principally through San Mateo.
Financial and operating results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenues | $203.4 million | $279.4 million | $637.9 million | $695.0 million |
| Oil and natural gas revenues | $189.1 million | $229.4 million | $505.8 million | $633.7 million |
| Operating income (loss) | ($221.1) million | $86.1 million | ($462.9) million | $170.4 million |
| Net income (loss) attributable to Matador shareholders | ($276.1) million | $44.0 million | ($503.8) million | $63.8 million |
| Adjusted EBITDA attributable to Matador shareholders (non-GAAP) | $121.0 million | $160.8 million | $369.2 million | $429.7 million |
| Average daily production | 73,000 BOE | 69,600 BOE | 72,500 BOE | 63,700 BOE |
Q3 oil production rose 6% to 3.9 million barrels and natural gas production rose 3% to 16.9 Bcf. However, average realized oil price before derivatives fell 29% to $38.67 per barrel; natural gas price increased 21% to $2.27 per Mcf. Q3 oil and natural gas revenue declined 18%. Production taxes, transportation and processing were $3.85 per BOE; lease operating expense was $3.48 per BOE; DD&A was $13.11 per BOE and G&A was $2.25 per BOE.
Major unusual item: Full-cost ceiling impairment charges were $251.2 million in Q3 and $575.2 million for the nine months, versus none in the comparable 2019 periods. The impairment reflected SEC pricing assumptions for the trailing 12 months and drove the reported losses. The company also recorded an $86.5 million valuation allowance against net deferred tax assets.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was $320.0 million, investing cash outflow was $661.2 million and financing cash inflow was $344.0 million. Cash and restricted cash ended at $67.9 million, including $41.8 million cash and $26.1 million restricted cash.
- At September 30, current assets were $237.2 million and current liabilities were $286.4 million. Total assets were $3.786 billion and shareholders’ equity was $1.578 billion.
- Debt included $1.05 billion of 5.875% senior notes due 2026, $475.0 million drawn under Matador’s revolving credit agreement, $326.4 million under San Mateo’s facility and a $7.5 million SBA loan. Matador also had $45.1 million of letters of credit; San Mateo had approximately $9.0 million.
- The October 2020 borrowing-base review affirmed Matador’s borrowing base at $900 million; the company retained a $700 million elected commitment. Matador reported compliance with its 4.00 maximum debt-to-EBITDA covenant, and San Mateo reported compliance with its facility covenants.
Changes, outlook and risks
- Compared with 2019, higher production did not offset materially lower oil prices. Q3 adjusted EBITDA fell about 25%; nine-month adjusted EBITDA fell about 14%. Nine-month operating cash flow declined from $353.1 million to $320.0 million.
- In response to the 2020 demand and price shock associated with COVID-19 and the oil supply dispute, Matador reduced its Delaware Basin operated rig count from six to three and expected to maintain three rigs through the remainder of 2020. It curtailed or shut in some production in May and June; those wells had returned to production.
- As of October 27, 2020, full-year 2020 drilling, completion and equipping capital spending was forecast at $455–$475 million; midstream capital spending was forecast at $90–$100 million. Management cited improved efficiencies and lower-than-expected well costs. It expected to fund spending with operating cash flow, cash, San Mateo performance incentives and available borrowing capacity, while retaining flexibility to reduce spending or consider asset sales.
- Management described the outlook into 2021 as highly uncertain, with oil prices expected to remain below 2019 levels. Risks include commodity-price and basis-differential volatility, COVID-19 demand effects, possible storage constraints or further production curtailments, access to capital, reserve replacement and future ceiling-test impairments. The filing estimates that specified lower trailing-average oil and gas prices could have produced approximately $375 million of additional impairment, holding other assumptions constant.
- Open commodity derivatives had an aggregate net liability of $13.2 million at September 30. The filing identifies exposure to Waha gas basis volatility and states there were no natural gas differential hedges in place. Existing oil and gas collars and swaps extend into 2022.
- Contractual cash obligations totaled approximately $3.195 billion, including debt principal and long-term transportation, gathering, processing and San Mateo commitments. Separately, if Matador ceased operations in the areas covered by certain third-party agreements, estimated deficiency payments would be approximately $536.2 million, in addition to other commitments. Management considered ordinary-course legal proceedings unlikely to have a material adverse impact.
- San Mateo II merged into San Mateo I effective October 1, 2020, after quarter-end. The Black River plant expansion was completed in September, adding 200 MMcf/day of designed inlet capacity to reach 460 MMcf/day.
Important facts for investors to verify
- How much of the reported loss reflects the non-cash ceiling impairment, and whether future commodity prices or reserve revisions could trigger additional impairments.
- Liquidity available after accounting for restricted cash, letters of credit, debt covenants and the distinction between Matador debt and San Mateo’s non-recourse facility.
- Whether the revised 2020 capital-spending plan and three-rig program can be funded from operating cash flow and available facilities under the company’s price assumptions.
- Realized oil and gas prices after derivatives, hedge coverage and settlements, and exposure to Waha and other regional price differentials.
- The economics and utilization of the expanded Black River plant, including third-party volumes, and the potential cash impact of minimum-volume and deficiency commitments.