Matador Resources Company — Q2 2017 Form 10-Q
Business context and reporting period. Independent oil and gas exploration and production company with operations concentrated in the Delaware Basin, plus Eagle Ford, Haynesville and Cotton Valley assets and midstream operations. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Key financial and operating metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Oil and gas revenue | $113.8 million | $69.3 million | $228.6 million | $113.3 million |
| Total revenue, including derivative results and third-party midstream revenue | $129.6 million | $46.1 million | $264.4 million | $90.7 million |
| Operating income (loss) | $39.0 million | $(100.6) million | $93.3 million | $(202.2) million |
| Net income (loss) attributable to Matador shareholders | $28.5 million | $(105.9) million | $72.5 million | $(213.5) million |
| Diluted earnings (loss) per share | $0.28 | $(1.15) | $0.72 | $(2.40) |
| Adjusted EBITDA attributable to Matador shareholders (non-GAAP) | $72.7 million | $38.9 million | $142.6 million | $56.1 million |
- Production: Q2 averaged 36,922 BOE/day, up 32% year over year; oil was 19,423 Bbl/day and gas 105.0 MMcf/day. Six-month production averaged 34,972 BOE/day, up 35%. Delaware Basin Q2 production rose 90% year over year to 27,622 BOE/day.
- Prices: Q2 realized oil price was $46.01/Bbl and gas price $3.40/Mcf, excluding realized derivatives. Six-month realized prices were $48.28/Bbl and $3.64/Mcf, respectively.
- Cash flow and investment: Six-month operating cash flow was $121.2 million versus $49.6 million. Investing used $383.5 million, including $328.9 million for oil and gas properties and $41.7 million for other property and equipment. Financing provided $180.8 million, including $171.5 million from the San Mateo joint venture. Cash fell $81.4 million to $131.5 million; restricted cash was $15.0 million. Operating cash flow less the stated property and equipment expenditures was approximately negative $249.5 million.
- Margins and unusual accounting effects: Q2 operating income was $39.0 million, compared with an operating loss in the prior-year quarter. Earnings include a $13.2 million unrealized derivative gain in Q2 2017, versus a $26.6 million unrealized loss in Q2 2016. No full-cost ceiling impairment was recorded in 2017; 2016 included charges of $78.2 million for Q2 and $158.6 million for the first half.
- Liquidity and debt: At June 30, cash was $131.5 million and the company had no revolver borrowings. The credit facility had a $450 million borrowing base and a $400 million elected commitment, with about $0.8 million of letters of credit outstanding. Senior notes had $575 million principal outstanding, bear 6.875% interest and mature in 2023. Total shareholders’ equity was $962.4 million.
- Reserves: Estimated proved reserves were 134.4 million BOE at June 30, up from 105.8 million at year-end 2016. Standardized Measure was $1.002 billion and PV-10 was $1.087 billion; PV-10 is non-GAAP and neither measure represents fair market value.
Material changes versus the prior comparable period
- Oil and gas revenue increased 64% in Q2 and 102% in the first half, reflecting higher production and realized commodity prices. Oil production grew 44% in Q2 and 50% in the first half; gas production grew 21% and 19%, respectively.
- Adjusted EBITDA increased to $72.7 million in Q2 and $142.6 million for the first half. Reported earnings also benefited materially from the absence of 2016 ceiling-test impairment charges and the swing in unrealized derivative results; those items make the GAAP comparison less indicative of underlying operating trends.
- Six-month lease operating expense per BOE declined to $5.02 from $5.66. DD&A per BOE declined to $11.89 from $12.75, while total DD&A expense increased with production.
- Interest expense increased, principally because average debt outstanding was higher. G&A also rose, including stock compensation, added staffing and approximately $3.5 million of San Mateo formation transaction costs for the first half.
Outlook, management commentary and risks
- Management expected to operate five Delaware Basin drilling rigs through the remainder of 2017 and direct over 90% of the estimated 2017 capital budget (excluding acreage, mineral and seismic acquisitions) to Delaware Basin drilling, completion and midstream activities. The stated budget was $456–$484 million; approximately $241 million, or 51%, had been incurred by June 30.
- The company expected to fund remaining 2017 capital needs with cash, operating cash flow and available revolver capacity, while retaining flexibility to adjust or defer spending. As of August 2, 2017, it reported hedges covering approximately 65% of anticipated remaining-2017 oil production and 70% of gas production.
- San Mateo was formed with Five Point, which owns 49%; Matador owns 51% and continues operating the contributed Delaware Basin midstream assets. Matador received a $171.5 million special distribution and may earn up to $73.5 million in performance incentives over five years. The partners committed to up to $140 million of aggregate expansion spending.
- Commodity prices, production performance, drilling results, service-cost inflation, access to capital, reserve estimates, infrastructure capacity and the execution and financing of midstream expansion could affect results. The filing cautions that actual production and cash flows may differ from forecasts and that hedging may not fully offset price changes.
- Material contractual commitments include approximately $256.4 million under 15-year San Mateo service agreements, $47.0 million remaining on Black River plant expansion contracts, $42.0 million of potential drilling-rig termination obligations and $19.7 million of non-operated well commitments. These amounts have different timing and conditions and are not all immediate payment obligations. Management considered the potential impact of ordinary-course lawsuits remote; outcomes remain uncertain.
Most important facts for investors to verify
- How much of earnings and revenue growth reflects recurring production and pricing versus unrealized derivative gains and the absence of prior-year impairment charges.
- Whether production growth, realized prices and operating costs support the 2017 capital plan and expected operating cash flow.
- Available liquidity after accounting for restricted cash, planned capital spending, San Mateo funding needs and contractual commitments.
- Progress, costs and timing of the Black River expansion, and whether San Mateo achieves the anticipated third-party volumes and performance incentives.
- Assumptions underlying proved reserves, Standardized Measure and PV-10, including commodity-price assumptions and the significant undeveloped-reserve component.