Skip to main content
Articles

Latest News and Analysis
Deals and Transactions
Track Drilling (Rigs by operator) | Completions (Frac Spreads)

Exploration & Production | Quarterly / Earnings Reports | Production | Third Quarter (3Q) Update | Forecast - Production

Matador Hints at 2015 Plans, Rig Additions in 3Q

printPrint    |   
Matador Hints at 2015 Plans, Rig Additions in 3Q

Matador Resources Company reported financial and operating results for the three and nine months ended September 30, 2014.

3Q Highlights:

  • Record average daily oil equivalent production in the quarter of 16,096 BOE, or barrels of oil equivalent, per day (consisting of 9,123 barrels of oil per day and 41.8 million cubic feet of natural gas per day), a year-over-year BOE increase of 19% from 13,482 BOE per day (consisting of 6,703 barrels of oil per day and 40.7 million cubic feet of natural gas per day) for the quarter ended September 30, 2013, and a sequential quarterly increase of 4% from 15,424 BOE per day (consisting of 8,809 barrels of oil per day and 39.7 million cubic feet of natural gas per day) produced in the second quarter of 2014.
  • Record quarterly oil production of 839,000 barrels, a year-over-year increase of 36% from 617,000 barrels of oil produced in the quarter ended September 30, 2013, and a sequential increase of 5% from 802,000 barrels of oil produced in the quarter ended June 30, 2014.
  • Natural gas production of 3.8 billion cubic feet, a year-over-year increase of 3% from 3.7 billion cubic feet produced in the quarter ended September 30, 2013, and a sequential increase of 7% from 3.6 billion cubic feet produced in the quarter ended June 30, 2014.
  • Oil and natural gas revenues of $96.6 million, a year-over-year increase of 18% from $81.9 million reported for the quarter ended September 30, 2013, and a sequential decrease of 2% from $99.1 million reported for the quarter ended June 30, 2014. The weighted average oil price realized by the Company decreased 11% from $104.15 per barrel in the third quarter of last year to $92.39 per barrel in the third quarter of this year, and decreased 6% sequentially from $97.92 per barrel realized in the second quarter of this year. The weighted average natural gas price realized by the Company increased 5% from $4.71 per Mcf in the third quarter of 2013 to $4.95 per Mcf for the third quarter ended September 30, 2014, but decreased 13% sequentially from $5.69 per Mcf realized for the second quarter ended June 30, 2014.
  • Adjusted EBITDA, or earnings before interest, taxes, depletion, depreciation, amortization and other items, of $66.8 million, a year-over-year increase of 9% from $61.5 million reported for the quarter ended September 30, 2013, and a sequential decrease of 4% from $69.5 million reported for the quarter ended June 30, 2014. The 11% decrease in the weighted average oil price realized during the third quarter of 2014, or $11.76 per barrel, compared to the third quarter of 2013 amounted to approximately $10 million less in oil revenues, and consequently, reduced Adjusted EBITDA accordingly (excluding any potential hedging impacts).

Nine Month Highlights:

  • Record average daily oil equivalent production for the nine months ended September 30, 2014 of 14,490 BOE per day (consisting of 8,432 barrels of oil per day and 36.3 million cubic feet of natural gas per day), a year-over-year BOE increase of 24% from 11,663 BOE per day (consisting of 5,584 barrels of oil per day and 36.5 million cubic feet of natural gas per day) for the nine months ended September 30, 2013.
  • Record total oil production for the nine months ended September 30, 2014 of 2,302,000 barrels of oil, a year-over-year increase of 51% from 1,524,000 barrels of oil produced in the nine months ended September 30, 2013. Oil production for the nine months ended September 30, 2014 exceeded the 2,133,000 barrels of oil produced in all of 2013.
  • Natural gas production of 9.9 billion cubic feet for the nine months ended September 30, 2014, essentially flat compared to 10.0 billion cubic feet of natural gas produced in the nine months ended September 30, 2013.
  • Record oil and natural gas revenues for the first nine months of 2014 of $274.6 million, a year-over-year increase of 38% from $199.4 million reported for the first nine months of 2013. Oil and natural gas revenues for the nine months ended September 30, 2014 also exceeded the $269.0 million in oil and natural gas revenues reported for all of 2013. The weighted average oil price realized by the Company decreased 8% from $103.34 per barrel in the first nine months of 2013 to $95.45 per barrel in the first nine months of 2014. The weighted average natural gas price realized by the Company increased 32% from $4.20 per Mcf for the nine months ended September 30, 2013 to $5.53 per Mcf for the nine months ended September 30, 2014.
  • Record Adjusted EBITDA of $192.6 million for the first nine months of 2014, a year-over-year increase of 35% from $142.9 million reported for the nine months ended September 30, 2013. Adjusted EBITDA for the nine months ended September 30, 2014 exceeded the $191.8 million reported for all of 2013. The 8% decrease in the weighted average oil price realized in the first nine months of 2014, or $7.89 per barrel, amounted to approximately $18 million less in oil revenues, and consequently, reduced Adjusted EBITDA accordingly (excluding any potential hedging impacts).

Additional Highlights:

  • Record total proved oil and natural gas reserves of 61.0 million BOE at September 30, 2014, including 21.5 million barrels of oil and 236.7 billion cubic feet of natural gas, with a PV-10 of $952.0 million (Standardized Measure of $835.1 million). These reserves estimates were prepared in accordance with the SEC’s rules for oil and natural gas reserves reporting by Matador’s engineering staff and were audited by an independent engineering firm, Netherland, Sewell & Associates, Inc. Total proved oil and natural gas reserves at September 30, 2014 increased 38% from 44.2 million BOE at September 30, 2013 and 18% from 51.7 million BOE at December 31, 2013. The PV-10 of $952.0 million calculated in accordance with the SEC’s rules at September 30, 2014 increased 77% from $538.6 million at September 30, 2013 and 45% from $655.2 million at December 31, 2013. Proved oil reserves increased 55% to 21.5 million barrels at September 30, 2014 as compared to 13.9 million barrels at September 30, 2013, and increased 32% as compared to 16.4 million barrels at December 31, 2013. The average oil and natural gas prices, respectively, used in preparing these estimates, as further adjusted for those factors affecting the oil and natural gas prices received at the wellhead, were $95.56 per barrel and $4.236 per MMBtu at September 30, 2014, compared to $93.42 per barrel and $3.670 per MMBtu at December 31, 2013 and compared to $91.69 per barrel and $3.605 per MMBtu at September 30, 2013.
  • Added approximately 27,700 gross (20,200 net) acres in the Permian Basin primarily in Loving County, Texas and Lea and Eddy Counties, New Mexico between January 1 and October 1, 2014, bringing the Company’s total acreage position in the Permian Basin to approximately 98,400 gross (65,000 net) acres.
  • In early October 2014, Matador’s average daily oil equivalent production increased to more than 20,000 BOE per day for the first time in the Company’s history as a result of initial production from new wells drilled and completed late in the third quarter and temporarily shut-in wells being returned to production. For the full month of October 2014, Matador’s average daily oil equivalent production was approximately 21,800 BOE per day, including 12,100 barrels of oil per day and 57.8 million cubic feet of natural gas per day, a 35% increase from the average daily oil equivalent production of 16,096 BOE per day reported for the third quarter of 2014.
  • Reaffirmed its 2014 guidance metrics as revised upwards on October 14, 2014, including (1) estimated capital expenditures of $570 million, (2) estimated total natural gas production of 16.0 to 17.5 billion cubic feet, (3) estimated total oil and natural gas revenues of $380 to $400 million, (4) estimated Adjusted EBITDA of $270 to $290 million and (5) estimated total oil production of 3.2 to 3.3 million barrels. Further, based on its October production results, the Company is now guiding investors to the high end of its upwardly revised oil production guidance, but is maintaining its present guidance for oil and natural gas revenues and Adjusted EBITDA for 2014 due to the recent downward trend in oil prices.

Joseph Wm. Foran, Matador’s Chairman and CEO, commented, "The Matador staff delivered another strong performance in the third quarter of 2014. Our total oil equivalent production and total oil production were record quarterly numbers for Matador. Since we achieved this growth despite having 15 to 20% of our total production capacity temporarily shut in at various times during the third quarter, the fourth quarter of this year is expected to be even better as evidenced by our October 2014 production. For the nine months ended September 30, 2014, our total oil equivalent production of 4.0 million BOE, total oil production of 2.3 million barrels, oil and natural gas revenues of $275 million and Adjusted EBITDA of $193 million were all record results for any nine-month period in our Company’s history. In the nine months ended September 30, 2014, Matador’s oil production, oil and natural gas revenues, and Adjusted EBITDA have already exceeded the respective total results for these metrics reported for the full-year 2013.

"In early October 2014, Matador’s average daily equivalent oil production increased to more than 20,000 BOE per day for the first time in Company history. For the month of October 2014, Matador’s average daily oil equivalent production was approximately 21,800 BOE per day, consisting of 12,100 barrels of oil per day and 57.8 million cubic feet of natural gas per day, a 35% increase from average daily oil equivalent production of 16,096 BOE per day reported in the third quarter of 2014. This sharp increase in production was attributable to initial production from several new wells in the Eagle Ford, Permian Basin and Haynesville, as well as from temporarily shut-in wells being returned to production. Recently, we increased our oil production guidance for 2014 from a range of 2.8 to 3.1 million barrels to a range of 3.2 to 3.3 million barrels, and as a result of this strong October production performance, we are now pleased to point investors to the high end of our oil production guidance range for 2014.

"Matador continues to be very pleased with the execution of its Eagle Ford development drilling program in South Texas, its combination of delineation and development drilling in the Permian Basin and the results of the Haynesville shale development wells in Northwest Louisiana that Chesapeake is drilling and completing on our Elm Grove properties. Each area has contributed to the recent surge in our total production. In the Eagle Ford, our downspacing efforts continue to deliver very positive results, and we expect to develop the remaining portions of our central and western Eagle Ford acreage on 40 to 50-acre spacing. Our initial wells in the Permian Basin continue to exceed our expectations. In mid-October, we were very pleased to report the results of our two most recent completions in our Wolf prospect area, the Johnson 44-02S-B53 #204H and the Arno #1H wells, both of which had 24-hour initial potential rates in excess of 1,100 BOE per day at more than 4,000 psi flowing surface pressure. In addition, our acreage position in the Permian Basin continues to grow, and as of October 1, 2014, included approximately 98,400 gross and 65,000 net acres. In the Haynesville, Chesapeake has completed and placed nine new wells on production, and each of these nine wells continues to produce between 8 and 12 million cubic feet (gross) of natural gas per day, representing a total of approximately 17 million cubic feet of natural gas per day net to Matador’s interest.

"Like others, we are mindful of the recent decline in oil prices and are considering any adjustments that may be needed to our operating plans and capital expenditures for 2015. Should oil prices remain in the $80 per barrel range or lower, we will be cautious with our spending and anticipate that our 2015 capital expenditures could be lower than or flat as compared to our 2014 capital expenditures, with the Company continuing to rely on only a modest amount of debt in a sustainable fashion to fund any outspend of capital. Even with relatively flat capital expenditures in 2015 and primary reliance on cash flows, we anticipate that the increase in our total oil equivalent production should still approach 50% in 2015, particularly as a result of the strong growth in both oil and natural gas production we anticipate in the fourth quarter of 2014 and into early 2015. Further, given our strong balance sheet and financial position, an environment of declining oil prices may also provide additional and creative opportunities to continue to grow the acreage position in our core operating areas, and particularly in the Permian Basin, at attractive prices. As always, we remain alert to economic circumstances and expect to adjust our capital expenditures as the situation requires.”

Operations Update

For Matador's detailed third quarter play updates, see below:

Matador Dishes On Eagle Ford Completion Strategy; Haynesville Costs

Matador 's Premier Bone Spring Wells Perform; IPs Detailed

Matador’s 2014 drilling activity continues to be focused on increasing oil production and reserves in South Texas in the Eagle Ford shale play, while expanding delineation and development efforts and building reserves in the Permian Basin in Southeast New Mexico and West Texas. At September 30, 2014, the Company had two contracted drilling rigs operating on its Eagle Ford acreage in South Texas and two contracted drilling rigs operating in the Permian Basin. Matador expects to add at least one additional rig in the Permian Basin at the beginning of 2015 and is working with its drilling contractor to add custom features to this rig specifically tailored to its planned drilling operations in the Permian Basin.

Periodically, Matador has released information about its wells, notably 24-hour initial potential tests. These 24-hour initial potential tests are conducted over a full 24-hour stabilized flow period on a constant choke size, typically after several days of cleanup following stimulation, and reflect the average production rates and pressures achieved during that full 24-hour period. Further, Matador has also continued to release longer-term production information from its wells, particularly in the Permian Basin, as Matador believes these longer production tests (for 90 days or more) provide more meaningful information, particularly for its high oil-cut wells where the favorable impacts of Matador’s gas lift assist operations start to become more apparent.

Acreage Acquisitions

Matador began 2014 with approximately 70,800 gross (44,800 net) acres in the Permian Basin in Southeast New Mexico and West Texas. Between January 1 and October 1, 2014, Matador acquired an additional approximately 27,700 gross (20,200 net) acres in this area, primarily in Lea and Eddy Counties, New Mexico and Loving County, Texas. Including these acreage acquisitions, at October 1, 2014, Matador’s total Permian Basin acreage position was approximately 98,400 gross (65,000 net) acres. This leasehold position includes 11,200 gross (7,200 net) acres in Loving County, Texas (including a few small tracts in Reeves and Ward Counties), 14,900 gross (10,800 net) acres in the Ranger prospect area in Lea County, New Mexico, 21,000 gross (14,800 net) acres in the Rustler Breaks prospect area in Eddy County, New Mexico, 39,000 gross (27,500 net) acres in the Twin Lakes prospect area in Lea County, New Mexico, and 4,000 gross (3,400 net) acres in Howard and Dawson Counties, Texas.

Matador has also been actively acquiring additional Eagle Ford acreage in South Texas. Between January 1 and October 1, 2014, the Company acquired approximately 3,100 gross (2,900 net) acres in South Texas prospective for the Eagle Ford shale in La Salle, Karnes and southern Atascosa Counties. The Company will drill its first wells on a portion of this newly acquired acreage in Karnes County offsetting its Danysh and Pawelek leases in the fourth quarter of 2014. This newly acquired Eagle Ford acreage has the potential to add up to 75 additional gross drilling locations to Matador’s Eagle Ford development program and is consistent with Matador’s efforts over the past several years to keep its Eagle Ford inventory evergreen by adding enough acreage to replace, at a minimum, the acreage consumed by drilling the previous year. Matador plans to maintain leasing efforts in each of its three operating areas - Permian, Eagle Ford and Haynesville - as opportunities arise throughout the remainder of 2014.

Production and Revenues

Total oil equivalent production for the third quarter of 2014 was 1.5 million BOE, a new record for Matador. Average daily oil equivalent production for the third quarter of 2014 was 16,096 BOE per day, of which 9,123 barrels per day, or 57%, was oil and 41.8 million cubic feet per day, or 43%, was natural gas. Not only was this quarterly oil equivalent production the best in the Company’s history, but total oil production for the third quarter of 2014 of 839,000 barrels and average daily oil production of 9,123 barrels per day were also record quarterly results. The Company achieved these results despite having as much as 15 to 20% of total production capacity shut in or restricted at various times during the third quarter while offsetting wells were being drilled and completed and pipeline connections were being made. For the month of October 2014, Matador’s average daily oil equivalent production was approximately 21,800 BOE per day, including 12,100 barrels of oil per day and 57.8 million cubic feet of natural gas per day, a 35% increase from the average daily oil equivalent production of 16,096 BOE per day reported for the third quarter of 2014.

Our oil and natural gas revenues increased 18% from $81.9 million for the three months ended September 30, 2013 to $96.6 million for the three months ended September 30, 2014. The weighted average oil price realized by the Company declined 11% from $104.15 per barrel in the third quarter of 2013 to $92.39 per barrel in the third quarter of 2014, resulting in a net change of $11.76 per barrel. Partially mitigating the decline in oil price, the weighted average natural gas price increased 5% from $4.71 per Mcf to $4.95 per Mcf, resulting in a net change of $0.24 per Mcf. This increase in oil and natural gas revenues included an increase in oil revenues of $13.3 million and an increase in natural gas revenues of $1.4 million for the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Oil revenues increased 21% from $64.2 million for the three months ended September 30, 2013 to $77.5 million for the three months ended September 30, 2014. This increase in oil revenues reflects the increase in oil production by 36% from 617,000 barrels of oil in the third quarter of 2013, or 6,703 barrels of oil per day, to 839,000 barrels of oil in the third quarter of 2014, or 9,123 barrels of oil per day, which more than offsets the 11% decrease in the weighted average realized oil price noted above. The 11% decrease in the weighted average realized oil price during the third quarter of 2014, a year-over-year decline of $11.76 per barrel, amounted to approximately $10 million less in oil revenues during the third quarter of 2014. The increase in oil production this year was attributable to faster drilling operations and better completions in the Eagle Ford shale, as well as better-than-expected initial production contributions from newly drilled wells in the Permian Basin.

Natural gas revenues increased 8% from $17.6 million for the three months ended September 30, 2013 to $19.1 million for the three months ended September 30, 2014. The increase in natural gas revenues resulted from a higher weighted average natural gas price of $4.95 per Mcf realized during the third quarter of 2014 as compared to $4.71 per Mcf realized during the third quarter of 2013, as well as a 3% increase in natural gas production from 3.7 billion cubic feet of natural gas in the third quarter of 2013 to 3.8 billion cubic feet of natural gas in the third quarter of 2014. This 5% increase in the weighted average realized natural gas price during the third quarter of 2014, or $0.24 per Mcf, amounted to approximately $900,000 more in natural gas revenues during the third quarter of 2014. The increase in natural gas production was primarily attributable to faster drilling operations and better completions in both South Texas and the Permian Basin, as well as initial production contributions from newly drilled non-operated wells in the Haynesville shale in Northwest Louisiana during the three months ended September 30, 2014.

Oil and oil equivalent production results for the nine months ended September 30, 2014 were also the best in Matador’s history. Average daily oil equivalent production increased 24% from 11,663 BOE per day (48% oil) during the nine months ended September 30, 2013 to 14,490 BOE per day (58% oil) during the nine months ended September 30, 2014. Oil production increased 51% from 1.5 million barrels of oil, or 5,584 barrel of oil per day, in the nine months ended September 30, 2013 to approximately 2.3 million barrels of oil, or 8,432 barrels of oil per day, during the nine months ended September 30, 2014. In fact, Matador’s oil production of 2.3 million barrels for the nine months ended September 30, 2014 has exceeded the 2.1 million barrels of oil the Company produced during the full year of 2013. Natural gas production remained essentially flat between the periods, decreasing slightly from 10.0 billion cubic feet, or 36.5 million cubic feet per day, during the first nine months of 2013, to 9.9 billion cubic feet, or 36.3 million cubic feet per day, during the first nine months of 2014. Matador’s natural gas production is expected to increase sharply in the fourth quarter of 2014 primarily as a result of additional high-rate Elm Grove Haynesville shale wells being drilled and placed on production by a subsidiary of Chesapeake Energy Corporation (“Chesapeake”).

Oil and natural gas revenues increased 38% from $199.4 million in the nine months ended September 30, 2013 to $274.6 million for the nine months ended September 30, 2014. This increase in oil and natural gas revenues included an increase in oil revenues of $62.2 million and an increase in natural gas revenues of $13.1 million for the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013. Oil and natural gas revenues of $274.6 million for the nine months ended September 30, 2014 exceeded the $269.0 million reported for the full year of 2013.

Oil revenues increased by 39% from $157.5 million in the nine months ended September 30, 2013 to $219.7 million for the nine months ended September 30, 2014. This increase reflects the increase in oil production by 51% from 1,524,000 barrels of oil, or 5,584 barrels of oil per day, in the nine months ended September 30, 2013 to 2,302,000 barrels of oil, or 8,432 barrels of oil per day, for the nine months ended September 30, 2014. The increased revenues attributable to increased production were partially offset by an 8% decline in the weighted average oil price received from $103.34 per barrel in the nine months ended September 30, 2013 to $95.45 per barrel for the nine months ended September 30, 2014. The 8% decrease in the weighted average oil price realized during the first nine months of 2014, or $7.89 per barrel, amounted to approximately $18 million less in oil revenues during the nine months ended September 30, 2014.

Natural gas revenues increased by 31% from $41.8 million reported in the nine months ended September 30, 2013 to $54.9 million for the nine months ended September 30, 2014. The increase in natural gas revenues resulted from a 32% higher weighted average natural gas price of $5.53 per Mcf realized during the nine months ended September 30, 2014 as compared to a weighted average natural gas price of $4.20 per Mcf realized during the nine months ended September 30, 2013. The 32% increase in the weighted average natural gas price realized during the first nine months of 2014, or $1.33 per Mcf, amounted to approximately $13 million in additional natural gas revenues during the nine months ended September 30, 2014.

Adjusted EBITDA

Adjusted EBITDA, a non-GAAP financial measure, increased 9% year-over-year from $61.5 million in the third quarter of 2013 to $66.8 million in the third quarter of 2014. This increase occurred despite an 11% decrease in the weighted average oil price realized ($11.76 per barrel), partially offset by a 5% increase in the weighted average natural gas price realized ($0.24 per Mcf) between the comparable periods, as noted above. Sequentially, Adjusted EBITDA decreased 4% as compared to $69.5 million reported for the second quarter of 2014, primarily due to the 6% decrease in the weighted average oil price realized from $97.92 per barrel in the second quarter of 2014 to $92.39 per barrel in the third quarter of 2014, amounting to $5.53 per barrel, and to the 13% decrease in the weighted average natural gas price realized from $5.69 per Mcf in the second quarter of 2014 to $4.95 per Mcf in the third quarter of 2014, amounting to $0.74 per Mcf. The 11% year-over-year decrease in the weighted average oil price realized during the three months ended September 30, 2014, or $11.76 per barrel, amounted to approximately $10 million less in oil revenues and, consequently, reduced Adjusted EBITDA by a corresponding amount (excluding any potential realized hedging impacts) during the third quarter of 2014.

Adjusted EBITDA increased 35% from $142.9 million for the nine months ended September 30, 2013 to $192.6 million for the nine months ended September 30, 2014. Adjusted EBITDA of $192.6 million for the nine months ended September 30, 2014 exceeded Adjusted EBITDA of $191.8 million reported for the full year of 2013. This increase in Adjusted EBITDA was primarily attributable to the 51% increase in oil production between the respective periods, but was partially offset by an 8% decrease in the weighted average oil price realized from $103.34 per barrel to $95.45 per barrel ($7.89 per barrel) between the comparable periods. This 8% decrease in the weighted average oil price realized during the first nine months of 2014, or $7.89 per barrel, amounted to approximately $18 million less in oil revenues and, consequently, reduced Adjusted EBITDA by a corresponding amount (excluding any potential realized hedging impacts) during the nine months ended September 30, 2014.

Net Income

For the quarter ended September 30, 2014, Matador reported (GAAP) net income of $29.6 million, a 47% year-over-year increase, and earnings of $0.40 per diluted common share as compared to net income of $20.1 million and earnings of $0.35 per diluted common share for the quarter ended September 30, 2013, and a sequential increase of 63% as compared to net income of $18.2 million and earnings of $0.26 per diluted common share for the quarter ended June 30, 2014. The Company’s earnings per share for the quarter ended September 30, 2014 were favorably impacted by growth in oil and natural gas production and by a non-cash unrealized gain on derivatives of $16.3 million recorded during the quarter, primarily resulting from the Company’s oil hedging activities, but were unfavorably impacted by an 11% decline in oil prices of $11.76 per barrel, partially offset by a 5% increase in natural gas prices of $0.24 per Mcf realized during the third quarter of 2014, and by 27% additional weighted average common shares outstanding as compared to the third quarter of 2013. The unrealized gain on derivatives was also primarily attributable to the decline in oil futures prices during the third quarter of 2014. The Company’s earnings per share last year for the quarter ended September 30, 2013 were favorably impacted by (1) growth in oil and natural gas production and revenues and (2) a small deferred income tax provision recorded during the quarter, but such earnings per share were unfavorably impacted by an unrealized loss on derivatives of $9.3 million recorded during the quarter, primarily resulting from the Company’s oil hedging activities. The Company had weighted average common shares outstanding of 74.0 million on a diluted basis at September 30, 2014 as compared to weighted average common shares outstanding of 58.2 million on a diluted basis at September 30, 2013.

For the nine months ended September 30, 2014, Matador reported net income of $64.2 million, a 116% year-over-year increase, and earnings of $0.92 per diluted common share as compared to net income of $29.7 million and earnings of $0.53 per diluted common share for the nine months ended September 30, 2013. The Company’s earnings per share for the nine months ended September 30, 2014 were favorably impacted by (1) growth in oil and natural gas production and revenues, (2) continuing improvements in reducing lease operating expenses and (3) a non-cash unrealized gain on derivatives of $8.0 million recorded during the nine month period, primarily from the Company’s oil hedging activities, but were unfavorably impacted by an 8% decline in oil prices of $7.89 per barrel, partially offset by a 32% increase in natural gas prices of $1.33 per Mcf realized year-over-year. The unrealized gain on derivatives was also primarily attributable to the decline in oil futures prices during the nine months ended September 30, 2014. The Company’s earnings per share for the nine months ended September 30, 2013 were favorably impacted by (1) growth in oil and natural gas production and revenues, (2) a small deferred income tax provision recorded during the period and (3) 20% fewer weighted average common shares outstanding, but such earnings per share were unfavorably impacted by an unrealized loss on derivatives of $6.6 million recorded during the period, primarily resulting from the Company’s oil hedging activities, and by a full-cost ceiling impairment of $13.7 million (impairment charge of $21.2 million and a deferred income tax credit of $7.5 million) recorded during the first quarter of 2013 that was reflected in the Company’s condensed consolidated statement of operations for the nine months ended September 30, 2013.

Financial Summary

  • Average daily oil equivalent production increased 4% from 15,424 BOE per day in the second quarter of 2014 to 16,096 BOE per day in the third quarter of 2014.
  • Oil production increased 5% from 802,000 barrels, or 8,809 barrels of oil per day, in the second quarter of 2014 to 839,000 barrels, or 9,123 barrels of oil per day, in the third quarter of 2014.
  • Natural gas production increased 7% from 3.6 billion cubic feet, or 39.7 million cubic feet of natural gas per day, in the second quarter of 2014 to 3.8 billion cubic feet, or 41.8 million cubic feet of natural gas per day, in the third quarter of 2014.
  • Oil and natural gas revenues decreased 2% from $99.1 million in the second quarter of 2014 to $96.6 million in the third quarter of 2014 due to the decline in commodity prices and despite the 5% increase in oil production and the 7% increase in natural gas production in the third quarter of 2014 as compared to the second quarter of 2014. The Company realized a weighted average oil price of $92.39 per barrel and a weighted average natural gas price of $4.95 per Mcf during the third quarter of 2014 as compared to $97.92 per barrel and $5.69 per Mcf, respectively, during the second quarter of 2014.
  • Adjusted EBITDA decreased 4% from $69.5 million in the second quarter of 2014 to $66.8 million in the third quarter of 2014 due primarily to the decline in commodity prices in the third quarter of 2014 as noted above.
  • Net income increased 63% from $18.2 million in the second quarter of 2014 to $29.6 million in the third quarter of 2014. The decline in commodity prices, and particularly in oil futures prices, resulted in a before-tax, non-cash unrealized gain on derivatives of $16.3 million in the third quarter of 2014. The increase in net income between the second and third quarters of 2014 is primarily attributable to this non-cash unrealized gain on derivatives.

Operating Expenses

Production Taxes and Marketing

Production taxes and marketing expenses increased 31% on an absolute basis, but only 10% on a unit-of-production basis, from $6.6 million (or $5.29 per BOE) for the three months ended September 30, 2013 to $8.6 million (or $5.82 per BOE) for the three months ended September 30, 2014. This increase was primarily due to the increase in oil and natural gas revenues by approximately 18% during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013, and to the additional taxes and expenses associated with the increase in oil production and associated oil revenues during the three months ended September 30, 2014 as compared to the three months ended September 30, 2013. Oil comprised 57% of the Company’s total production volume in the third quarter of 2014 as compared to 50% of total production by volume in the third quarter of 2013. Production taxes and marketing expenses increased from $15.1 million (or $4.74 per BOE) for the nine months ended September 30, 2013 to $23.7 million (or $6.00 per BOE) for the nine months ended September 30, 2014.

Lease Operating Expenses

Lease operating expenses increased 60% on an absolute basis, but only 34% on a unit-of-production basis, from $8.6 million (or $6.91 per BOE) for the three months ended September 30, 2013 to $13.7 million (or $9.25 per BOE) for the three months ended September 30, 2014, primarily due to the higher percentage of oil produced in the third quarter of 2014. Oil production was 57% of total production by volume in the third quarter of 2014 as compared to 50% of total production by volume in the third quarter of 2013. Between these respective periods, total oil and natural gas production increased 19% from approximately 1.2 million BOE to approximately 1.5 million BOE, including an increase in oil production of 36% from 617,000 barrels to 839,000 barrels. The increase in lease operating expenses was also attributable to increased costs associated with initial oil production operations in the Permian Basin. These increased costs were the result of (1) higher fixed costs associated with additional personnel required to oversee operations, (2) increased salt water disposal costs due to the higher initial volumes of water being produced by these wells as compared to wells in the Eagle Ford shale, (3) higher per barrel rates being charged for salt water disposal in the Permian Basin as compared to the Eagle Ford shale in South Texas and (4) the overall increase in oil production between the comparable periods in both areas. Lease operating expenses on a unit-of-production basis are expected to decline in the fourth quarter of 2014 as a result of economies of scale and improved operational efficiencies attributable to the growing production in the Permian Basin, as well as additional natural gas production coming on line from the Haynesville shale, which typically requires much lower operating costs to produce than Matador’s oil production in the Eagle Ford shale and the Permian Basin. For the nine months ended September 30, 2014, lease operating expenses increased 17% on an absolute basis, but decreased 6% on a unit-of-production basis, from $29.6 million (or $9.30 per BOE) for the three months ended September 30, 2013 to $34.8 million (or $8.78 per BOE) for the nine months ended September 30, 2014. The decrease in year-over-year unit-of-production operating expenses is primarily attributable to improved operational efficiencies in the Eagle Ford shale year-over-year, as well as to the 24% increase in total oil equivalent production between the comparable periods.

Depletion, depreciation and amortization

As a result of Matador’s higher oil equivalent year-over-year production volumes, depletion, depreciation and amortization expenses increased 35% on an absolute basis from $26.1 million for the three months ended September 30, 2013 to $35.1 million for the three months ended September 30, 2014. The 35% increase in total DD&A expenses was primarily attributable to the increase in total oil and natural gas production from 1.2 million BOE in the third quarter of 2013 to approximately 1.5 million BOE during the third quarter of 2014. On a unit-of-production basis, however, DD&A expenses increased only 13% from $21.06 per BOE for the three months ended September 30, 2013 to $23.73 per BOE for the three months ended September 30, 2014. The increase in DD&A expenses also reflects the higher percentage of oil production and oil reserves year-over-year. DD&A expenses increased 22% on an absolute basis from $74.6 million for the nine months ended September 30, 2013 to $91.0 million for the nine months ended September 30, 2014. Notably, on a unit-of-production basis, DD&A expenses decreased 2% from $23.43 per BOE for the nine months ended September 30, 2013 to $23.00 per BOE for the nine months ended September 30, 2014.

General and administrative

General and administrative expenses increased 50% from $5.4 million (or $4.35 per BOE) for the three months ended September 30, 2013 to $8.1 million (or $5.47 per BOE) for the three months ended September 30, 2014. The increase in G&A expenses for the three months ended September 30, 2014 was largely attributable to increased payroll expenses associated with additional personnel joining Matador between the respective periods to support Matador’s increased land, geoscience, drilling, completion and production operations. Matador has added approximately 40 employees to its staff in the last twelve months to support its current and anticipated activity levels, as well as the increasing demands of operating a public company. G&A expenses included non-cash stock-based compensation expense of $1.2 million for the three months ended September 30, 2013 and $1.0 million for the three months ended September 30, 2014. The decrease in stock-based compensation expense is primarily attributable to a decrease in the fair-value of liability-based stock options between the comparable periods. The Company’s G&A expenses increased 26% on a unit-of-production basis from $4.35 per BOE for the three months ended September 30, 2013 to $5.47 per BOE for the three months ended September 30, 2014. G&A expenses increased from $14.1 million (or $4.44 per BOE) for the nine months ended September 30, 2013 to $23.4 million (or $5.92 per BOE) for the nine months ended September 30, 2014. G&A expenses included non-cash stock-based compensation expense of $4.7 million for the nine months ended September 30, 2014 as compared to $2.8 million for the nine months ended September 30, 2013. The Company believes these equity awards have helped Matador attract, retain and incentivize its growing geological, engineering, operational, land, legal and accounting staff.