Matador Resources Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Matador explores and produces oil and natural gas, with its main focus in the Delaware Basin, and operates midstream assets through San Mateo Midstream, LLC.
Financial and operating performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Oil and natural gas revenue | $114.8 million | $43.9 million |
| Total reported revenue, including derivative gains/losses | $134.8 million | $44.6 million |
| Net income (loss) attributable to Matador shareholders | $44.0 million; $0.44 diluted EPS | $(107.7) million; $(1.26) diluted EPS |
| Adjusted EBITDA attributable to Matador shareholders (non-GAAP) | $70.0 million | $17.2 million |
| Operating cash flow | $61.3 million | $18.4 million |
| Investing cash flow | $(238.3) million | $(57.9) million |
- Production was 2.97 million BOE, or 32,999 BOE per day, up 37% year over year. Oil was 1.65 million barrels, up 58%; natural gas was 7.9 Bcf, up 17%.
- Average realized prices before derivative settlements were $50.72 per barrel of oil and $3.94 per Mcf of natural gas, versus $28.89 and $2.04, respectively, in Q1 2016.
- Reported total revenue includes a $20.6 million unrealized derivative gain; realized derivative results were a $2.2 million loss. The net derivative liability was $4.3 million at quarter-end, down from $25.0 million at year-end.
- Operating income was $54.3 million; reported operating margin was approximately 40% of total revenue, which is affected by unrealized derivative gains. No full-cost impairment was recorded, compared with an $80.5 million charge in Q1 2016.
- Cash at March 31 was $209.7 million, with an additional $14.6 million of restricted cash. Current assets were $310.0 million and current liabilities $167.3 million. Cash declined $3.2 million during the quarter.
- Debt comprised $575.0 million of 6.875% senior notes due 2023; there were no revolver borrowings and approximately $0.8 million of letters of credit. The borrowing base was increased to $450 million after quarter-end; the elected commitment remained $400 million.
- Capital expenditures were substantial: cash spending included $204.5 million for oil and gas properties and $20.9 million for other property and equipment. Operating cash flow did not cover investing outflows.
Material changes versus the prior comparable period
- Revenue and earnings improved substantially, primarily due to higher production and commodity prices and the absence of the prior-year ceiling-test impairment. The comparison is also affected by derivative mark-to-market movements.
- Delaware Basin production reached 24,535 BOE per day, 2.5 times Q1 2016 levels; the basin accounted for approximately 86% of daily oil and 60% of daily gas production.
- Matador formed San Mateo with Five Point on February 17. Matador retained 51% ownership and operational control, contributed Delaware midstream assets, and received a $171.5 million distribution; it may earn up to $73.5 million in performance incentives over five years.
- Shareholders’ equity increased to $915.5 million from $691.4 million at year-end, reflecting the joint venture transaction and quarterly earnings, among other items.
Outlook, risks and unusual items
- The 2017 capital expenditure budget was raised to $456–$484 million, excluding acreage and mineral acquisitions. Management expected $400–$420 million for drilling, completions and infrastructure and $56–$64 million for midstream; approximately 93% of the budget was intended for Delaware Basin activities. The budget includes a five-well Eagle Ford program.
- Matador operated four Delaware Basin rigs in Q1 and added a fifth in late April. It reported approximately 178,600 gross (102,300 net) Permian acres at May 3, 2017, following acquisitions costing about $121 million since January 1.
- At May 3, approximately 65% of anticipated remaining-2017 oil production and 70% of anticipated gas production was hedged. Management cautioned that commodity prices, production, service costs, drilling results, financing availability and midstream execution could affect cash flow and spending plans.
- San Mateo-related 15-year agreements carry approximately $267.3 million of minimum contractual obligations. Other disclosed commitments include $44.6 million of potential drilling-rig termination obligations and $20.8 million for non-operated wells. A Black River plant expansion contract totaled $40.9 million, with $38.9 million remaining as of May 2.
- Management retained a full valuation allowance against deferred tax assets because future realization was uncertain. Ordinary-course lawsuits were considered unlikely to have a material adverse effect, in management’s view.
- Management stated that the capital budget could be adjusted and that lower commodity prices or higher costs could lead to reduced spending. No specific production or earnings guidance was provided in the filing.
Important facts for investors to verify
- How much of reported earnings and revenue reflects non-cash derivative gains, and how do hedge settlements affect realized prices and future cash flow?
- Whether production growth and Delaware Basin well performance support the increased capital budget, while accounting for acquisition spending excluded from that budget.
- San Mateo’s performance, potential incentive payments, expansion funding and the economics and flexibility of the long-term minimum-volume agreements.
- Liquidity and borrowing capacity after the borrowing-base redetermination, including the effect of cash held in restricted subsidiaries and ongoing investment needs.
- Exposure to commodity-price declines, service-cost inflation, production declines and contractual commitments if operating plans change.