Matador Resources Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Matador is an independent oil and gas producer focused primarily on the Delaware Basin, with additional Eagle Ford and Haynesville/Cotton Valley operations and midstream activities through San Mateo.
Financial and operating performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $371.6 million | $173.9 million |
| Revenue from customer contracts | $224.3 million | $216.3 million |
| Operating income | $193.5 million | $7.5 million |
| Net income (loss) attributable to Matador shareholders | $125.7 million | $(16.9) million |
| Diluted EPS | $1.08 | $(0.15) |
| Adjusted EBITDA attributable to Matador shareholders | $140.6 million | $124.8 million |
| Cash provided by operating activities | $109.4 million | $59.2 million |
| Cash used in investing activities | $248.2 million | $214.9 million |
| Cash provided by financing activities | $130.5 million | $118.4 million |
- Total oil-equivalent production rose 20% to 6.5 million BOE, or 71,161 BOE per day. Oil production increased 19% to 3.7 million barrels and natural gas production rose 22% to 16.7 Bcf.
- Oil and gas sales revenue was $197.9 million, up 2%. Oil revenue increased 10% on higher volumes, while natural gas revenue declined 27%, primarily due to lower realized gas prices.
- Average realized oil price was $45.87 per barrel, or $48.81 including realized derivatives; average realized natural gas price was $1.70 per Mcf.
- Reported revenue and earnings benefited substantially from a $136.4 million unrealized derivative gain, versus a $45.7 million unrealized loss in Q1 2019. The unrealized gain is non-cash and accounted for much of the year-over-year earnings swing. Realized derivative gains were $10.9 million.
- At March 31, cash was $27.1 million and restricted cash was $29.7 million. Current assets were $356.6 million and current liabilities $359.9 million.
- Debt outstanding included $1.05 billion of senior notes, $315.0 million under Matador’s revolving credit facility and $307.5 million under San Mateo’s facility. Matador borrowed a further $30 million under its revolver between March 31 and April 29. San Mateo debt is non-recourse to Matador and its wholly owned subsidiaries.
- Cash used in investing exceeded operating cash flow by $138.8 million in the quarter; financing inflows included $79.5 million in borrowings and contributions from joint-venture/non-controlling interest owners.
Material changes versus the prior period
- Adjusted EBITDA attributable to Matador increased about 13%, principally from higher production, partly offset by lower realized commodity prices. Operating cash flow increased $50.1 million; changes in operating assets and liabilities contributed to the period comparison.
- Production growth was led by Delaware Basin development. Delaware production averaged 60,300 BOE per day, up 15% year over year.
- Midstream capital spending rose significantly, contributing to higher investing cash outflows. Q1 capital expenditures were $278.6 million, including $174.0 million for oil and gas properties and $73.4 million for midstream properties.
- Oil prices fell sharply amid COVID-19-related demand destruction and increased global supply. Matador reduced its planned 2020 drilling activity and capital budget in response.
Outlook, risks and contingencies
- Management planned to reduce operated Delaware Basin rigs from six to three by the end of Q2 2020 and expected to maintain three rigs for the remainder of the year, subject to further changes in market conditions.
- On April 29, 2020, the company reduced its 2020 drilling, completion and equipping budget from $690–$750 million to $440–$500 million. Estimated midstream capital spending remained $85–$105 million.
- In April, Matador restructured and expanded hedges. As of April 29, 2020, it reported about 10.3 million barrels hedged for April–December 2020, including approximately 7.6 million barrels of oil swaps at a weighted average price near $35 per barrel and 2.3 million barrels of collars with an average floor near $48 and ceiling near $66. It also added 2021 oil swaps and natural gas collars.
- Management described the 2020 outlook as highly uncertain. Risks included continued low commodity prices, COVID-19 effects, oil storage and takeaway constraints, volatile regional price differentials, potential production curtailments, counterparty and financing risks, and impacts on San Mateo throughput and construction.
- No full-cost ceiling impairment was recorded at March 31. Management estimated that, with other assumptions held constant, lower 12-month average prices of $42.42 per barrel of oil and $2.05 per MMBtu of gas would have resulted in an approximately $550 million pro forma impairment. The filing cautions that this scenario is illustrative, not a forecast.
- Matador reported compliance with its revolving-credit debt-to-EBITDA covenant at March 31; San Mateo was also reported in compliance with its debt and interest-coverage covenants. The Matador facility’s borrowing base was affirmed at $900 million, with a $700 million elected commitment.
- Contractual commitments include minimum-volume and transportation/gathering arrangements. The filing estimates $398.1 million of potential deficiency fees if operations ceased in the areas subject to certain agreements, in addition to other commitments. Remaining minimum obligations under San Mateo agreements were approximately $511.8 million.
- Management said ordinary-course legal proceedings were not expected to have a material adverse effect. EPA and New Mexico environmental notices allege Clean Air Act and state-plan violations; management considered a material adverse impact remote, while noting monetary sanctions could exceed $100,000.
Important facts for investors to verify
- Separate cash earnings from the large, non-cash derivative valuation gain; review realized prices, hedge volumes, terms and counterparty exposure.
- Track the pace and consequences of planned rig reductions, production curtailments, and the revised 2020 capital program against operating cash flow and liquidity.
- Assess debt levels, borrowing-base availability, covenant headroom and the additional revolver borrowing after quarter-end, while distinguishing Matador obligations from non-recourse San Mateo debt.
- Monitor oil storage, pipeline takeaway and basis differentials, and whether low prices trigger a full-cost impairment or affect reserve economics.
- Review the scale and timing of minimum-volume, transportation and midstream commitments, including potential deficiency fees and San Mateo construction obligations.