Matador Resources Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unaudited consolidated financial statements. Unless otherwise noted, amounts are in millions of dollars.
Business context and operating performance
Matador is an independent U.S. oil and gas exploration and production company, focused primarily on the Eagle Ford shale in South Texas and the Haynesville shale in Louisiana and East Texas. During the first half of 2012, operations and investment shifted toward the oil-weighted Eagle Ford; management expected most near-term capital spending to support that play.
- Q2 average production was approximately 8,738 BOE/day, including 3,130 barrels of oil/day; oil production was nearly six times the year-earlier level. First-half production averaged 8,380 BOE/day, including 2,670 barrels of oil/day.
- First-half oil and natural gas production totaled 485 MBbl and 6.2 Bcf, respectively, compared with 70 MBbl and 7.4 Bcf in the first half of 2011. The oil share of production increased substantially, while natural gas volumes declined.
- Matador completed 12 gross operated Eagle Ford wells in the first half and 6 in Q2. Natural gas price weakness led the company to avoid operated Haynesville drilling and contributed to curtailments at some non-operated wells.
Financial results and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Oil and gas revenue | $36.1 | $20.9 | $65.2 | $34.6 |
| Total revenue, including derivative gains | $55.9 | $22.1 | $84.9 | $36.0 |
| Net income (loss) | $(6.7) | $7.2 | $(2.9) | $(20.4) |
| Operating cash flow | Not presented by quarter | Not presented by quarter | $51.5 | $19.5 |
| Capital expenditures for oil and gas properties | Not presented by quarter | Not presented by quarter | $134.4 | $89.6 |
| Adjusted EBITDA (non-GAAP) | Not presented by quarter | Not presented by quarter | $49.3 | $25.5 |
- Q2 operating loss was $10.4 million, including a $33.2 million full-cost ceiling impairment. First-half operating loss was $3.3 million, compared with $27.3 million in the prior-year period, which included a $35.7 million impairment.
- First-half revenue growth reflected sharply higher oil production and oil revenue, partly offset by lower natural gas production and realized gas prices. Q2 and first-half total revenue also included unrealized derivative gains of $15.1 million and $11.8 million, respectively. These noncash fair-value changes contributed to reported results and should be distinguished from production revenue and cash flows.
- First-half operating cash flow rose to $51.5 million. Investing cash outflow was $136.9 million; financing provided $84.5 million. Cash and cash equivalents were $9.4 million at June 30, down from $10.3 million at year-end 2011.
- At June 30, current assets were $44.6 million and current liabilities $64.1 million. Credit Agreement borrowings were $60.0 million, with a $125.0 million borrowing base, about $1.3 million of letters of credit and about $63.7 million of additional availability. Borrowings bore an effective rate of 3.3%; the company reported covenant compliance.
- Following its February IPO, Matador issued 12.2 million shares and received about $136.6 million net of underwriting discounts and commissions. It used $123.0 million to repay borrowings and the balance to fund capital spending. Share count increased materially.
Changes, outlook and material risks
- Management’s 2012 capital expenditure budget was $313 million, with 84% allocated to Eagle Ford and approximately 94% directed to oil- and liquids-oriented opportunities. Spending through June was approximately $146.7 million, or 47% of budget. Management said the program was broadly on plan, while infrastructure costs exceeded initial estimates and drilling/completion costs were below budget.
- Management believed cash, operating cash flow and available credit would fund 2012 requirements, but said later-year funding could require additional financing. The company was seeking an amended facility with capacity potentially up to $200 million; this was a plan, not a completed facility. Borrowings increased to $90 million by August 14 after an additional $30 million was drawn in July and August.
- Gas-price weakness reduced the June 30 proved-reserve estimate to 19.1 million BOE from 26.3 million a year earlier, principally after 97.8 Bcf of Haynesville proved undeveloped gas reserves were removed. Management warned that continued low gas prices could lead to removal of remaining Haynesville proved undeveloped reserves and further ceiling-test impairment. Proved oil reserves rose to 6.7 million barrels from 0.9 million.
- Pipeline interruptions in South Texas led to brief shut-ins or flaring of some gas. Management expected new infrastructure to ease constraints and was negotiating gathering, transportation and processing arrangements; prolonged outages could materially harm results and cash flow. Other principal risks include commodity-price volatility, reserve-estimation uncertainty, drilling and service availability, natural production declines, financing access and possible dilution.
- A Louisiana appellate court ruling on August 1, 2012 partly reversed a lower-court judgment in a mineral-lease dispute and remanded for damages. Matador intended to challenge the ruling; it said a loss was not probable but was reasonably possible, with an estimated potential loss range of zero to $6 million.
- Disclosure controls were concluded to be ineffective because of a material weakness relating to stock-compensation accounting. The company hired additional accounting staff, engaged an outside consultant and formed a disclosure committee; remediation was ongoing.
- Other subsequent events included an August acquisition of 2,873 net acres in Loving County, Texas, for about $8.6 million and a new non-operated Eagle Ford well commitment of approximately $2.4 million if drilled and completed as planned.
Most important facts for investors to verify
- Whether Eagle Ford production growth, realized oil prices and operating costs support the planned capital program and expected cash generation.
- Whether gas prices, reserve revisions and the full-cost ceiling test cause additional reserve reductions or impairment charges.
- Updated credit availability, borrowing-base determinations, covenant headroom and the status and terms of any expanded credit facility.
- Progress on South Texas gas gathering and processing capacity, and the effect of any continuing flaring, curtailments or shut-ins.
- Developments in the Louisiana lease litigation, including the damages determination and any appeal.
- Remediation of the stock-compensation accounting material weakness and the effectiveness of disclosure controls in subsequent filings.
- Actual capital spending versus the $313 million budget, including infrastructure costs, and the funding implications of subsequent borrowing and acreage acquisition.