Matador Resources Co annual report, FY2012

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Matador Resources Company — 2012 Form 10-K

Reporting period: Fiscal year ended December 31, 2012. The filing is an annual report, with unaudited fourth-quarter results also provided. Matador is an independent U.S. oil and natural gas exploration and production company. Its principal focus shifted toward oil and liquids-rich Eagle Ford development in South Texas; it also holds natural-gas-focused Haynesville assets and exploratory acreage in the Delaware Basin and Meade Peak.

Financial and operating performance

  • Revenue: Oil and natural gas revenue was $156.0 million, up 133% from $67.0 million in 2011. Including realized derivative gains and unrealized derivative losses, total revenue was $165.2 million versus $79.2 million. Oil revenue rose to $123.7 million; natural gas revenue fell to $32.3 million.
  • Profit and unusual charges: Net loss was $33.3 million, compared with a $10.3 million loss in 2011; diluted loss per share was $0.62. Operating loss was $33.4 million. Results included $63.5 million of non-cash full-cost ceiling impairment charges, primarily associated with lower natural gas prices, and $80.5 million of depletion, depreciation and amortization.
  • Fourth quarter: Oil and natural gas revenue was $52.7 million; total revenue, including derivative results, was $51.9 million. Net loss was $21.2 million, including $26.7 million of fourth-quarter ceiling impairment. Average daily production was 10,385 BOE, including 4,630 barrels of oil.
  • Production and pricing: Full-year production averaged 9,000 BOE per day, up from 7,049; oil production rose to 1.214 million barrels from 154,000, while natural gas production declined to 12.5 Bcf from 14.5 Bcf. Oil was 37% of production and 79% of oil and gas revenue. Average realized prices excluding derivatives were $101.86 per barrel of oil and $2.59 per Mcf of gas.
  • Cash flow and investment: Operating cash flow was $124.2 million, up from $61.9 million. Investing cash outflow was $306.9 million; oil and gas capital expenditures were $300.7 million, and reported total 2012 capital expenditures were $334.6 million. Financing provided $174.5 million, including IPO proceeds and revolving-credit borrowings.
  • Liquidity and debt: Year-end cash and certificates of deposit totaled $2.3 million. Debt was $150.0 million, with a $215.0 million borrowing base and approximately $63.9 million available after letters of credit. On March 11, 2013, after year-end, the borrowing base increased to $255.0 million; at March 14, borrowings were $180.0 million and availability was approximately $73.7 million. Debt is secured by substantially all oil and gas properties and is subject to financial and other covenants.
  • Reserves and value measures: Proved reserves were 23.8 million BOE, down from 32.2 million; proved oil reserves grew 176% to 10.5 million barrels, while gas reserves fell to 80.0 Bcf. The company removed 97.8 Bcf of previously booked Haynesville proved undeveloped reserves amid low gas prices. Proved developed reserves rose to 57.8% of the total. PV-10, a non-GAAP measure, increased 70% to $423.2 million; the GAAP standardized measure was $394.6 million.
  • Margins and costs: Lease operating expense increased to $8.56 per BOE from $2.82, partly reflecting temporary flowback equipment and staffing at new wells. DD&A rose to $24.43 per BOE from $12.34. The filing does not present a single comparable operating-margin measure.

Material changes versus 2011

  • Matador’s oil-oriented Eagle Ford program materially changed its production mix: oil rose from 6% to 37% of production, while annual gas production declined approximately 14%.
  • Oil and gas capital expenditures more than doubled, and production growth drove higher operating cash flow and Adjusted EBITDA, which rose 132% to $115.9 million. Adjusted EBITDA is non-GAAP and should not be treated as net income or cash flow.
  • Despite oil-reserve growth, total proved reserves decreased because of natural-gas reserve revisions and removal of uneconomic Haynesville undeveloped reserves. The company recorded $63.5 million in ceiling impairments, versus $35.7 million in 2011.
  • The company completed its February 2012 IPO, raising approximately $133.6 million in net proceeds, and used part of the proceeds to repay $123.0 million of credit-agreement borrowings. It subsequently drew on the revolver to fund investment.

Outlook, risks and contingencies

  • Management budgeted approximately $310 million of 2013 capital expenditures, subject to market conditions, drilling results, costs and access to capital. About 82% was planned for South Texas and 16% for the Wolfcamp and Bone Spring plays; approximately 98% was targeted to oil- and liquids-prospective opportunities. Three exploratory Delaware Basin wells were planned.
  • Management expected operating cash flow and borrowing capacity to support the 2013 budget, but noted that weaker drilling results, lower oil prices or reduced reserve growth could require additional financing, reduced spending or slower growth. No assurance was given that financing would be available on acceptable terms.
  • Natural gas prices were a key constraint: Matador did not plan operated Haynesville or Cotton Valley drilling unless prices improved, costs fell or technology improved. Commodity-price volatility, reserve-estimation uncertainty, concentrated assets, decline rates and dependence on third-party operators and infrastructure remain material risks.
  • Pipeline and processing interruptions affected Eagle Ford production in 2012. A five-year firm processing and transportation agreement began in September 2012, but includes minimum-volume commitments and deficiency fees; management cautioned it might not eliminate interruptions.
  • A Louisiana mineral-lease dispute was on appeal. Management did not consider a loss probable but disclosed a reasonably possible loss range of $0 to $6 million. The company reported no outstanding material environmental remediation liabilities; environmental, hydraulic-fracturing and regulatory changes could nevertheless increase costs.
  • Management and the auditor concluded that disclosure controls and internal control over financial reporting were effective at year-end 2012. The auditor issued unqualified opinions on the financial statements and internal controls. The company did not anticipate cash dividends in the foreseeable future.

Most important facts for investors to verify

  1. Whether Eagle Ford production growth, well economics and lower reported operating costs after flowback are sustained, and whether the 2013 Delaware Basin tests succeed.
  2. How commodity prices and future reserve revisions affect the ceiling test, proved reserves, borrowing base and reported asset values; distinguish PV-10 from fair value.
  3. Whether cash generation and revolver availability can fund the capital program while maintaining covenant compliance and managing debt.
  4. Actual performance and minimum-volume obligations under the five-year processing and transportation agreement, including any production curtailments or deficiency fees.
  5. Developments in the Louisiana lease litigation and any resulting loss, as well as subsequent changes to the credit facility, hedges and capital-spending plans.