Matador Resources Company — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Financial statements are unaudited. Matador is an independent oil and gas producer focused primarily on the Delaware Basin, with operations in the Eagle Ford, Haynesville and Cotton Valley plays, and midstream operations through San Mateo Midstream, LLC.
Financial and operating performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Oil and gas revenue | $134.9 million | $83.1 million | $363.6 million | $196.3 million |
| Total revenue, including derivative results | $126.3 million | $88.7 million | $390.7 million | $179.4 million |
| Operating income (loss) | $26.5 million | $16.9 million | $119.8 million | $(185.4) million |
| Net income (loss) attributable to Matador shareholders | $15.0 million | $11.9 million | $87.5 million | $(201.6) million |
| Diluted EPS | $0.15 | $0.13 | $0.87 | $(2.24) |
| Adjusted EBITDA attributable to Matador shareholders | $84.8 million | $47.3 million | $227.4 million | $103.4 million |
Q3 production was 3.86 million BOE, or 41,954 BOE/day, up 43% year over year; oil production rose 57% and natural gas production 28%. Nine-month production was 10.19 million BOE, up 37%. Q3 realized prices before realized derivatives were $46.25/Bbl for oil and $3.42/Mcf for natural gas, versus $42.57 and $3.08, respectively, a year earlier.
Q3 lease operating expense was $4.32/BOE, production taxes, transportation and processing were $4.06/BOE, and DD&A was $12.38/BOE. Nine-month figures were $4.76, $3.96 and $12.08/BOE, respectively. The filing does not present a conventional gross margin. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or operating cash flow.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $222.5 million, compared with $96.5 million in 2016. Investing cash outflow was $606.3 million, including $517.3 million for oil and gas properties and $80.6 million for other property and equipment. Financing provided $191.1 million.
- Cash fell to $20.2 million at September 30 from $212.9 million at year-end 2016; restricted cash was $10.7 million, largely associated with San Mateo and not freely available for general use.
- Debt consisted of $575 million principal amount of 6.875% senior notes due 2023; there were no revolver borrowings at quarter-end. The elected revolver commitment was $400 million against a $450 million borrowing base at September 30. After quarter-end, the borrowing base rose to $525 million; the elected commitment remained $400 million. The notes’ carrying value was $574.0 million.
- Total assets were $1.85 billion and shareholders’ equity was $992.8 million at September 30, 2017.
Changes, unusual items and business developments
- Revenue growth reflected higher production and realized commodity prices, with Delaware Basin production driving much of the increase. Q3 Delaware Basin production increased 66% year over year to 30,707 BOE/day.
- Nine-month results improved from 2016 in part because there was no repeat of the prior-year $158.6 million full-cost ceiling impairment. No impairment was recorded in the first nine months of 2017.
- Derivative accounting was volatile: Q3 included a $12.4 million unrealized loss, while nine-month results included a $21.4 million unrealized gain. Nine-month realized derivative results were a $1.2 million loss, compared with a $10.4 million gain in 2016.
- In February 2017, Matador formed San Mateo with Five Point, retaining 51% and consolidating the joint venture. Five Point contributed $176.4 million to San Mateo; approximately $171.5 million was distributed to Matador. Matador may earn up to $73.5 million in performance incentives over five years. San Mateo’s midstream expansion includes a Black River plant expansion expected in service in 2018.
- On October 10, 2017, after quarter-end, Matador issued 8.0 million shares for approximately $208.7 million before expenses. Proceeds were intended for acreage acquisitions, midstream initiatives and general corporate purposes.
- At November 6, 2017, Matador reported approximately 201,100 gross (115,700 net) Permian acres and 145.9 million BOE of estimated proved reserves at September 30, including 40.7% proved developed. The reserve estimate used trailing 12-month first-day-of-month average prices of $46.27/Bbl oil and $3.00/MMBtu gas.
Outlook, risks and commitments
- Management expects Delaware Basin development to remain the primary operating and capital focus through the remainder of 2017 and into 2018. The company increased its 2017 drilling and completion capital budget to $440–$465 million and midstream budget to $66–$74 million. These are estimates, not production or earnings guidance.
- As of November 6, approximately 55% of anticipated oil production and 65% of anticipated natural gas production for the rest of 2017 was hedged. Open contracts at September 30 included oil collars and 2018 oil basis swaps; realized results remain sensitive to market prices and contract terms.
- Material commitments at September 30 included $245.6 million under 15-year San Mateo gathering, processing and disposal agreements; $36.1 million of potential drilling-rig termination obligations; and $28.5 million for proposed non-operated wells. The San Mateo Black River expansion had $24.7 million remaining under construction contracts.
- Management cited commodity-price volatility, production declines, drilling and completion costs, access to capital, reserve uncertainty, infrastructure capacity and operational execution as risks. Service costs had begun rising with commodity prices. Litigation in the ordinary course was not expected by management to have a material adverse impact.
- The company retained a full valuation allowance against most deferred tax assets because future realization remains uncertain. Disclosure controls were reported effective; implementation and control testing for new accounting and land-administration software was ongoing.
Important facts for investors to verify
- Whether Delaware Basin production growth, well results and planned drilling activity support the higher capital budget and reserve additions.
- How much of reported earnings and revenue reflects unrealized derivative gains or losses, and the effects of hedges on future realized prices.
- Available liquidity after the October equity offering, planned acreage purchases and midstream spending, including restrictions on subsidiary cash.
- San Mateo’s minimum-volume obligations, expansion costs, third-party volumes and potential performance incentives.
- Reserve estimates and valuation measures, including price assumptions, the 40.7% proved-developed share, and the distinction between PV-10 and fair value.