Matador Resources Company — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Matador is an independent U.S. oil and natural gas producer focused primarily on the Eagle Ford, with exploration underway in the Wolfcamp and Bone Spring plays.
Financial and operating highlights
| Metric | Q2 2013 | Six months 2013 | Comparable 2012 period |
|---|---|---|---|
| Oil and gas revenue | $58.2 million | $117.5 million | $36.1 million Q2; $65.2 million six months |
| Total revenue, including derivative gains | $66.0 million | $120.8 million | $55.9 million Q2; $84.9 million six months |
| Net income (loss) | $25.1 million | $9.6 million | $(6.7) million Q2; $(2.9) million six months |
| Operating income (loss) | $26.9 million | $12.7 million | $(10.4) million Q2; $(3.3) million six months |
| Operating margin | Approximately 41% | Approximately 10% | Calculated as operating income divided by total revenue; includes derivative effects |
| Adjusted EBITDA | $40.8 million | $81.4 million | $27.9 million Q2; $49.3 million six months |
| Average daily production | 10,582 BOE | 10,739 BOE | 8,738 BOE Q2; 8,380 BOE six months |
| Operating cash flow | Not separately stated | $83.9 million | $51.5 million six months |
- Q2 oil production averaged 4,916 barrels per day, up 57% year over year; natural gas averaged 34.0 MMcf per day. Six-month oil production averaged 5,015 barrels per day, up 88% year over year.
- Q2 oil and gas revenue rose 61%; six-month revenue rose 80%. Growth reflected higher oil volumes from Eagle Ford drilling and higher realized natural gas prices. Q2 realized oil price was $99.77/Bbl and natural gas price was $4.38/Mcf, before realized derivative effects.
- Derivative gains contributed $7.8 million to Q2 revenue ($7.5 million unrealized) and $3.3 million for the first six months. These non-cash fair-value movements can make reported earnings volatile.
- Six-month lease operating expense rose to $21.0 million from $11.0 million; expense per BOE increased to $10.82 from $7.23. DD&A rose to $48.5 million from $31.1 million.
- Six-month results included a $21.2 million non-cash full-cost ceiling impairment recorded in Q1; no impairment was recorded in Q2. Q2 2012 included a $33.2 million impairment.
- Cash was $5.1 million at June 30, versus $2.1 million at year-end 2012. Current assets were $38.8 million and current liabilities $91.7 million. Six-month capital expenditures for oil and gas properties were $174.0 million; investing cash use was $175.9 million. Operating cash flow less oil and gas property capex was approximately negative $90.1 million.
- Credit Agreement borrowings were $245.0 million at June 30, up from $150.0 million at December 31; effective interest rate was approximately 3.6%. The $280 million borrowing base and approximately $1.2 million of letters of credit left roughly $33.8 million of borrowing availability at quarter-end.
Changes, outlook and material items
- Management increased the 2013 capital expenditure budget from $310 million to $325 million, with approximately 78% allocated to South Texas and 20% to Southeast New Mexico and West Texas. About 52% of the budget had been incurred by June 30. The company expected operating cash flow and borrowing capacity to fund the balance, while noting that weaker prices, drilling results or financing access could require spending reductions or additional capital.
- Management reported Q2 production was temporarily constrained by pad operations and shut-ins: approximately 10%–12% of production capacity was shut in on average. New wells and returned production supported an approximately 6,000 Bbl/day oil exit rate at June 30; June–July averaged 6,200 Bbl/day of oil and 38.4 MMcf/day of gas.
- Proved reserves at June 30 were 38.9 million BOE, up from 23.8 million at year-end 2012. PV-10 was $522.3 million and the standardized measure was $477.6 million; these are reserve-based estimates, not fair market values. Much of the reserve increase came from 80.1 Bcf of Haynesville proved undeveloped gas reserves added as reference gas prices improved. Only 42% of total proved reserves were proved developed.
- Subsequent to quarter-end, lenders increased the borrowing base to $350 million and the conforming borrowing base to $275 million on August 7. By August 8, borrowings were $260 million. The borrowing base is subject to future redetermination and is scheduled to reduce to the conforming amount by June 30, 2014, or earlier upon qualifying senior-note issuance.
- Commodity prices, reserve estimates, production declines, drilling and completion costs, transportation capacity, and access to capital are key risks. The company hedges oil, gas and NGL exposure, but hedges may limit upside and do not eliminate price risk. It also had a five-year gas processing and transportation commitment with $13.7 million of remaining minimum commitments.
- In the Louisiana mineral lease dispute, the state Supreme Court reversed the appellate decision and reinstated the trial judgment in Matador’s favor; plaintiffs sought rehearing. Management assessed a material adverse financial impact as remote. In the Orca dispute, the parties settled: Matador agreed to fund 100% of Cowey #3H and #4H drilling, completion and equipment costs, receiving all production revenue until recovery, after which Orca participates at 25%.
Investor verification priorities
- Confirm whether the post-quarter oil production ramp was sustained and whether shut-ins or new-well timing materially affected subsequent volumes.
- Review the bridge from GAAP earnings to cash generation, particularly derivative fair-value gains, the Q1 impairment and the large capital-spending shortfall versus operating cash flow.
- Track debt, letters of credit, borrowing-base availability and redetermination terms, including the conforming-base step-down and financing needs for the 2013 budget.
- Assess reserve composition and development requirements: proved developed reserves were 42% of proved totals, with a substantial addition of Haynesville proved undeveloped gas.
- Monitor commodity differentials, hedge volumes and prices, the gas-processing commitment, and the final outcome of the Louisiana rehearing and Orca cost recovery.