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Exploration & Production | Drilling / Well Results | Quarterly / Earnings Reports | Second Quarter (2Q) Update

Matador Sees Success at Multiple Plays in 2Q

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Matador Sees Success at Multiple Plays in 2Q

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

2Q Highlights:

  • Record average daily oil equivalent production of 15,424 BOE, or barrels of oil equivalent, per day, consisting of 8,809 Bbl of oil per day and 39.7 MMcf of natural gas per day, a year-over-year BOE increase of 46% from 10,582 BOE per day, consisting of 4,916 Bbl of oil per day and 34.0 MMcf of natural gas per day, for the quarter ended June 30, 2013, and a sequential increase of 30% from 11,904 BOE per day, consisting of 7,344 Bbl of oil per day and 27.4 MMcf of natural gas per day, for the quarter ended March 31, 2014.
  • Record quarterly oil production of 802,000 Bbl, a year-over-year increase of 79% from 447,000 Bbl produced in the quarter ended June 30, 2013, and a sequential increase of 21% from 661,000 Bbl produced in the quarter ended March 31, 2014.
  • Record oil and natural gas revenues of $99.1 million, a year-over-year increase of 70% from $58.2 million reported for the quarter ended June 30, 2013, and a sequential increase of 25% from $78.9 million reported for the quarter ended March 31, 2014.
  • Record Adjusted EBITDA, or earnings before interest, taxes, depletion, depreciation, amortization and other items, of $69.5 million, a year-over-year increase of 70% from $40.8 million reported for the quarter ended June 30, 2013, and a sequential increase of 23% from $56.3 million reported for the quarter ended March 31, 2014.

Six Month Highlights:

  • Record average daily oil equivalent production of 13,673 BOE per day, consisting of 8,080 Bbl of oil per day and 33.6 MMcf of natural gas per day, a year-over-year BOE increase of 27% from 10,739 BOE per day, consisting of 5,015 Bbl of oil per day and 34.3 MMcf of natural gas per day, for the six months ended June 30, 2013, and a sequential increase of 7% from 12,723 BOE per day, consisting of 6,658 Bbl of oil per day and 36.4 MMcf of natural gas per day, for the six months ended December 31, 2013.
  • Record total oil production of 1,463,000 Bbl, a year-over-year increase of 61% from 908,000 Bbl produced in the six months ended June 30, 2013, and a sequential increase of 19% from 1,225,000 Bbl produced in the six months ended December 31, 2013.
  • Record oil and natural gas revenues of $178.0 million, a year-over-year increase of 51% from $117.5 million reported for the six months ended June 30, 2013, and a sequential increase of 17% from $151.5 million reported for the six months endedDecember 31, 2013.
  • Record Adjusted EBITDA of $125.8 million, a year-over-year increase of 54% from$81.4 million reported for the six months ended June 30, 2013, and a sequential increase of 14% from $110.3 million reported for the six months ended December 31, 2013.

Additional Highlights:

  • Total proved oil and natural gas reserves of 57.2 million BOE at June 30, 2014, including 18.6 million Bbl of oil and 231.4 Bcf of natural gas, with a PV-10 of $826.0 million (Standardized Measure of $723.0 million). Total proved oil and natural gas reserves increased 47% from 38.9 million BOE at June 30, 2013 and 11% from 51.7 million BOE at December 31, 2013. PV-10 increased 58% from $522.3 million at June 30, 2013 and 26% from $655.2 million at December 31, 2013. Proved oil reserves increased 54% to 18.6 million Bbl at June 30, 2014, as compared to 12.1 million Bbl at June 30, 2013, and increased 14%, as compared to 16.4 million Bbl at December 31, 2013.
  • On July 30, 2014, Matador announced the results of two of its most recent wells completed, tested and placed on production in the Delaware Basin.
    • In the Wolf prospect area in Loving County, Texas, the Norton Schaub #1H well, a Wolfcamp “A” test, flowed 1,026 BOE per day, consisting of 706 Bbl of oil per day and 1,922 Mcf of natural gas per day (69% oil) at 3,000 psi flowing surface pressure on a 22/64th inch choke during a 24-hour initial potential test in mid-July.
    • In the Ranger prospect area in Lea County, New Mexico, the Pickard State 20-18-34 #1H well, a Second Bone Spring sand test, flowed 592 BOE per day, including 535 Bbl of oil per day and 340 Mcf of natural gas per day (90% oil) at 750 psi flowing surface pressure on a 22/64th inch choke during a 24-hour initial potential test in late July.
  • Added approximately 23,200 gross (17,200 net) acres in the Permian Basin primarily in Loving County, Texas and Lea and Eddy Counties, New Mexico between January 1 and August 6, 2014, bringing the Company’s total acreage position in thePermian Basin to approximately 94,000 gross (62,000 net) acres.
  • In May 2014, Matador completed a public offering of 7.5 million shares of common stock, raising net proceeds of approximately $181.3 million.
  • Reaffirmed its 2014 guidance metrics as revised upwards on May 6 and May 22, 2014, including (1) estimated capital expenditures of $570 million, (2) estimated natural gas production of 16.0 to 17.5 Bcf, (3) estimated oil and natural gas revenues of $380 to $400 million and (4) estimated Adjusted EBITDA of $270 to $290 million. Further, the Company reaffirmed its guidance to the high end of its 2014 estimated oil production range of 2.8 to 3.1 million Bbl.

Joseph Wm. Foran, Matador’s Chairman and CEO, commented, "This quarter has been an exciting and a productive one for us. The Matador staff again delivered record operating and financial results during the three and six months ended June 30, 2014. Our total oil equivalent production, oil production, oil and natural gas revenues and Adjusted EBITDA were all the best results in our Company’s history during both respective periods. During the second quarter of 2014, specifically, our average daily oil equivalent production was 15,424 BOE per day, consisting of 8,809 Bbl of oil per day and 39.7 MMcf of natural gas per day, a year-over-year BOE increase of 46% from 10,582 BOE per day during the second quarter of 2013 and a sequential increase of 30% from 11,904 BOE per day during the first quarter of 2014. Our quarterly oil production of 802,000 Bbl, averaging 8,809 Bbl of oil per day, increased 79% year-over-year, as compared to 447,000 Bbl, averaging 4,916 Bbl of oil per day, during the second quarter of 2013, and increased 21% sequentially, as compared to 661,000 Bbl, averaging 7,344 Bbl of oil per day, during the first quarter of 2014. These record production results are directly attributable not only to the continued execution of our Eagle Ford development program but also to the positive, better-than-expected results from our initial wells in the Permian Basin. Notably, these results were achieved despite having as much as 10 to 15% of our total production capacity shut in or restricted at various times during the second quarter while offsetting wells were drilled and completed and pipeline connections were being made.

"Our oil and natural gas revenues of $99.1 million for the second quarter of 2014 reflect a year-over-year increase of 70% from $58.2 million reported in the second quarter of 2013 and a 25% sequential increase from $78.9 million reported in the first quarter of 2014. In addition, we reported Adjusted EBITDA of $69.5 million for the second quarter of 2014, an increase of 70%, as compared to $40.8 million reported in the second quarter of 2013, and a 23% sequential increase from $56.3 million reported for the first quarter of 2014. This growth is also directly attributable to the growth in our oil and natural gas production.

"Our leasehold position in the Permian Basin continues to grow in size and importance as an exciting new operating area for Matador. Since January 1, we have added approximately 23,200 gross (17,200 net) acres, primarily in Loving County, Texas and Leaand Eddy Counties, New Mexico, that we believe to be prospective for the Wolfcamp and Bone Spring plays, as well as other oil and liquids-rich targets, bringing our total acreage position in the Permian Basin to approximately 94,000 gross (62,000 net) acres. The growth by prospect area is detailed elsewhere in this release. We have also acquired (or expect to acquire by the middle of August) approximately 3,100 gross (2,900 net) acres in South Texas prospective for the Eagle Ford shale in La Salle, Karnesand southern Atascosa Counties since the first of the year. This acreage has the potential to add up to 75 additional gross drilling locations to our Eagle Ford development program — more than enough to replenish our current-year drilling locations. We plan to continue our leasing and acquisition efforts in each of our operating areas — Permian, Eagle Ford and Haynesville — and anticipate we will acquire additional acreage as opportunities are identified throughout the remainder of 2014.

"We were also pleased to announce last week the 24-hour initial potential test results of two of our most recent wells completed in the Delaware Basin, both of which have been producing fewer than 30 days. In our Wolf prospect area in Loving County, Texas, the Norton Schaub #1H well, a Wolfcamp ‘A’ completion, flowed 1,026 BOE per day, consisting of 706 Bbl of oil per day and 1,922 Mcf of natural gas per day (69% oil) at 3,000 psi flowing surface pressure on a 22/64th inch choke. Along with the Dorothy White #1H well, this is our second successful test of the Wolfcamp ‘A’ in the Wolf prospect area and further validates our decision to operate one of our two Permian drilling rigs in this area for the remainder of 2014. In the Ranger prospect area in Lea County, New Mexico, the Pickard State 20-18-34 #1H well, a Second Bone Spring sand test, flowed 592 BOE per day, including 535 Bbl of oil per day and 340 Mcf of natural gas per day (90% oil) at 750 psi flowing surface pressure on a 22/64th inch choke. Although early, this well appears to be comparable to or better than the Ranger 33 State Com #1H well. It is also a pleasure to announce today that the Pickard State 20-18-34 #2H, a Wolfcamp ‘D’ test in the northern portion of the Ranger prospect area, has been completed and is flowing oil. No initial production test has been run yet as the well is still cleaning up following stimulation, but its performance to-date is encouraging.

"In addition to these three most recent wells, the first three wells Matador drilled in thePermian Basin continue to exhibit better-than-expected performance. In the Wolf prospect area, the Dorothy White #1H well, a Wolfcamp ‘A’ completion, has produced 175,000 BOE, including 115,000 Bbl of oil (66% oil), in just seven months of production and is currently producing over 500 Bbl of oil per day and 1.3 MMcf of natural gas per day at about 2,300 psi flowing surface pressure. In the Ranger prospect area, the Ranger 33 State Com #1H has produced 123,000 BOE, including 113,000 Bbl of oil (91% oil) after nine months of production and continues to produce 350 to 400 Bbl of oil per day. In the Rustler Breaks prospect area, the Rustler Breaks 12-24-27 #1H has produced 72,000 BOE in just over three months, including 32,000 Bbl of oil (45% oil) and is currently producing about 230 Bbl of oil and 1.8 MMcf of natural gas per day at 1,300 psi flowing surface pressure. These results continue to encourage us about our growing opportunity set and the overall growth potential ahead in the Permian Basin.

"Finally, in May, we successfully completed a public offering of 7.5 million shares of our common stock, raising net proceeds of approximately $181.3 million. We have used this additional capital to, among other items, increase our rig count from three to four drilling rigs, including two rigs for the development of our properties in the Eagle Ford and two rigs for the exploration and delineation of our acreage in the Permian Basin, and to continue to acquire new leasehold interests, primarily in the Permian Basin and the Eagle Ford shale. This offering put the Company in a strong financial position heading into the second half of 2014, and at August 6, 2014, we had approximately$200 million in cash and liquidity available under our revolving credit facility, along with our increasing cash flows, to finance our operations for the remainder of 2014 and into 2015. We expect this liquidity to increase with our next borrowing base redetermination in the third quarter of 2014 following the lenders’ review of our proved oil and natural gas reserves at June 30, 2014."

Operations Update

Matador’s 2014 drilling activity continues to be focused on increasing oil production and reserves in South Texas, primarily in the Eagle Ford shale play, while expanding exploration and delineation efforts in the Permian Basin in Southeast New Mexico and West Texas.

At March 31, 2014, the Company had two contracted drilling rigs operating on its Eagle Ford acreage in South Texas and one contracted drilling rig operating in the Permian Basin. In April 2014, the Company replaced the drilling rig operating in the central portion of its Eagle Ford acreage in Karnes County with a new “walking” rig. Due to a temporary contract overlap resulting from initiating drilling operations with this second “walking” rig, the Company moved the rig being replaced in the central Eagle Ford in Karnes County to Loving County, Texas in order to provide Matador with a second rig in the Permian Basin. The Company is using a portion of the proceeds from its May 2014 equity offering (described below) to keep this fourth rig operating full-time in the Permian Basin, primarily in the Wolf prospect area in Loving County, Texas. As a result, as of August 6, 2014, the Company was operating four drilling rigs — two in the Eagle Ford and two in the Permian Basin. Because of the timing of the addition of this fourth drilling rig in the Permian Basin and the Company’s projected drilling and completions schedule, Matador does not expect this rig to materially impact anticipated 2014 oil and natural gas production or anticipated 2014 oil and natural gas revenues. Rather, Matador anticipates that the addition of this second rig in the Permian Basin will start to have a material impact on operations and financial results beginning in 2015. 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.

Individual updates on the company's operations can be accessed below:

Matador Unveils Wolfcamp, Bone Spring Frac Design; Well Results

Matador Hones Eagle Ford Strategy; Talks Batch Drilling, Fracs

Matador Talks Non-Op Haynesville Well Progress

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 August 6, 2014, Matador acquired an additional 23,200 gross (17,200 net) acres in this area, primarily in Lea and Eddy Counties,New Mexico and Loving County, Texas. Including these acreage acquisitions, at August 6, 2014, Matador’s total Permian Basin acreage position is approximately 94,000 gross (62,000 net) acres. This leasehold position includes 11,200 gross (7,200 net) acres in the Loving County, Texas area (including a few small tracts in Reeves and Ward Counties), 14,600 gross (10,200 net) acres in the Ranger/Querecho Plains prospect area in Lea County, New Mexico, 18,100 gross (13,400 net) acres in the Rustler Breaks/Indian Draw prospect area in Eddy County, New Mexico, 37,700 gross (26,400 net) acres in the Twin Lakesprospect area in Lea County, New Mexico, and an additional approximately 4,000 gross (3,400 net) acres in Howard andDawson Counties, Texas. Matador has effectively doubled its leasehold position in theLoving County area since January 1, 2014, including the addition of 1,800 gross (1,700 net) acres adjacent to its Wolf prospect area, and has increased its overall position in the Permian Basin by more than one-third.

Matador has also been actively acquiring additional Eagle Ford acreage in South Texas.

Between January 1 and August 6, 2014, the Company has acquired (or expects to acquire by the middle of August) approximately 3,100 gross (2,900 net) acres in South Texas prospective for the Eagle Ford shale in La Salle, Karnes and southern AtascosaCounties. This newly acquired acreage has the potential to add up to 75 additional gross drilling locations to the Eagle Ford development program. Matador plans to maintain leasing efforts in each of its three operating areas — Permian, Eagle Ford andHaynesville — as opportunities arise throughout the remainder of 2014.

Liquidity Update

In May 2014, Matador successfully completed a public offering of 7.5 million shares of its common stock, raising net proceeds of approximately $181.3 million. The Company has used the net proceeds from this offering to fund a portion of its capital expenditures, including to operate a fourth rig in the Permian Basin throughout the remainder of 2014, allowing the Company to operate two rigs for the development of its Eagle Ford acreage and two rigs for the exploration and delineation of its Permian Basin acreage. The Company has used and expects to continue to use portions of the net proceeds from the equity offering to fund targeted acquisitions of additional acreage in thePermian Basin, as well as in the Eagle Ford shale and the Haynesville shale, for its participation in the Haynesville shale wells proposed by Chesapeake on its Elm Groveproperties in Northwest Louisiana and for other working capital needs. Pending such uses, the Company repaid $180.0 million in outstanding borrowings under its revolving credit facility in May 2014, which amounts may be reborrowed in accordance with the terms of that facility.

At June 30, 2014, the borrowing base under the Company’s revolving credit facility was$385.0 million, based on the lenders’ review of Matador’s proved oil and natural gas reserves at December 31, 2013. At June 30, 2014, Matador had cash on hand totaling approximately $14.6 million, $150.0 million of outstanding long-term borrowings and approximately $0.6 million in outstanding letters of credit. During the three months ended June 30, 2014, these borrowings bore interest at an average effective interest rate of 3.6% per annum. The Company expects to be able to access future borrowings under its revolving credit facility to fund portions of its remaining 2014 capital expenditure requirements in excess of amounts available from the Company’s operating cash flows. Subsequent to June 30, 2014, the Company borrowed an additional $45.0 million to fund a portion of its working capital requirements and to fund the acquisition of additional leasehold interests. At August 6, 2014, the Company had $195.0 million in borrowings outstanding under its revolving credit facility and approximately $0.6 million in outstanding letters of credit, and these borrowings bore interest at an effective interest rate of 2.8% per annum. The Company’s liquidity position, balance sheet and debt metrics remain strong, with a debt to projected 2014 Adjusted EBITDA ratio of less than 0.7 at August 6, 2014. The Company also anticipates receiving an increase to its borrowing base during the third quarter of 2014 following its lenders’ review of Matador’s proved oil and natural gas reserves at June 30, 2014.

Hedging Positions

From time to time, Matador uses derivative financial instruments to mitigate its exposure to commodity price risk associated with oil, natural gas and natural gas liquids prices and to protect its cash flows and borrowing capacity.

At August 6, 2014, Matador had the following hedges in place, in the form of costless collars and swaps, for the remainder of 2014.

  • Approximately 1.1 million Bbl of oil at a weighted average floor price of $88 per Bbl and a weighted average ceiling price of $99 per Bbl.
  • Approximately 4.4 Bcf of natural gas at a weighted average floor price of $3.50 per MMBtu and a weighted average ceiling price of $4.93 per MMBtu.
  • Approximately 3.2 million gallons of natural gas liquids at a weighted average price of $1.25 per gallon.

At August 6, 2014, Matador had the following hedges in place, in the form of costless collars and swaps, for 2015.

  • Approximately 1.2 million Bbl of oil at a weighted average floor price of $83 per Bbl and a weighted average ceiling price of $101 per Bbl.
  • Approximately 9.0 Bcf of natural gas at a weighted average floor price of $3.77 per MMBtu and a weighted average ceiling price of $4.79 per MMBtu.
  • Approximately 3.8 million gallons of natural gas liquids at a weighted average price of $1.02 per gallon.

2014 Guidance Affirmation

Matador reaffirms its full year 2014 guidance as revised upwards on May 6 and May 22, 2014 for (1) estimated capital expenditures of $570 million, (2) estimated total natural gas production of 16.0 to 17.5 Bcf, (3) estimated total oil and natural gas revenues of$380 to $400 million and (4) estimated Adjusted EBITDA of $270 to $290 million. Further, the Company reaffirms its guidance to the high end of its 2014 estimated oil production range of 2.8 to 3.1 million Bbl.

In reaffirming these guidance metrics, Matador cautions that its growth for the remainder of 2014 will be uneven as a result of batch drilling, timing of completion operations and planned shut-ins of certain of its producing Eagle Ford and Haynesvillewells while Matador and its non-operating partners conduct hydraulic fracturing operations on multi-well pads. In addition, as noted previously, the Company does not expect to see the first significant contributions from the Haynesville wells being drilled on its Elm Grove properties until late in the third quarter and into the fourth quarter of 2014. Further, due to the timing of the fourth drilling rig added in the Permian Basin, the addition of this rig is not expected to materially impact anticipated 2014 oil and natural gas production and revenues.

As a result of these factors, Matador anticipates that its oil equivalent production will increase about 6 to 8% during the third quarter of 2014, with oil production expected to grow somewhat more slowly and natural gas production to be up by about 10%. Matador notes that its natural gas production growth in the third and fourth quarters of 2014 will be significantly impacted by the timing of Chesapeake’s completion activities on the Haynesville wells it is currently drilling on the Company’s Elm Groveproperties in Northwest Louisiana. Matador’s natural gas production forecasts for the remainder of 2014 include its best estimates of the timing of these wells being placed on production and their initial natural gas production rates as a result of the Company’s ongoing communications and discussions with Chesapeake, but are subject to change and not within the Company’s control. For these reasons, Matador also suggests referring to its six-month sequential results as a more representative view of its ongoing growth and progress than the applicable quarter-to-quarter comparisons.

Financial Results

Production and Revenues

As noted earlier, quarterly production results for the three months ended June 30, 2014 were the best in Matador’s history. Average daily oil equivalent production increased 46% from 10,582 BOE per day (46% oil) in the second quarter of 2013 to 15,424 BOE per day (57% oil) in the second quarter of 2014, and increased 30% sequentially from 11,904 BOE per day (62% oil) in the first quarter of 2014. Oil production increased 79% from 447,000 Bbl of oil, or 4,916 Bbl of oil per day, in the second quarter of 2013, to 802,000 Bbl of oil, or 8,809 Bbl of oil per day, in the second quarter of 2014, and increased 21% sequentially from 661,000 Bbl of oil, or 7,344 Bbl of oil per day, in the first quarter of 2014. These year-over-year and sequential increases in the Company’s average daily oil equivalent production and, in particular, the Company’s average daily oil production, are primarily attributable to the success of the Company’s ongoing drilling operations in the Eagle Ford shale, but also reflect the strong initial production performance of the Company’s first horizontal wells in the Delaware portion of the Permian Basin.

Natural gas production increased 17% from 3.1 Bcf, or 34.0 MMcf per day, in the second quarter of 2013, to 3.6 Bcf, or 39.7 MMcf per day, in the second quarter of 2014, and increased 47% sequentially from 2.5 Bcf, or 27.4 MMcf per day, in the first quarter of 2014. This increase in natural gas production was attributable not only to drilling operations in South Texas and the Permian Basin, but also to initial production contributions from newly drilled non-operated wells in the Haynesville shale in Northwest Louisiana during the three months ended June 30, 2014. The Company expects its natural gas production to grow sharply beginning late in the third quarter and continuing throughout the fourth quarter of 2014, as initial natural gas production from an anticipated 19 gross (4.2 net) Haynesville shale wells either in progress or scheduled to be drilled, completed and placed on production in 2014 by an affiliate of Chesapeake Energy Corporation (“Chesapeake”) on the Company’s Elm Grove properties inNorthwest Louisiana begins to come online. Through the end of the second quarter of 2014, none of these Elm Grove wells had been completed and placed on production due to Chesapeake’s use of batch drilling operations. As a result of this drilling program and its timing, Matador anticipates that its proved developed reserves will grow substantially and that its average daily natural gas production should more than double from the first quarter of 2014 to the end of the year, with most of this growth coming in the fourth quarter.

Oil and natural gas revenues increased 70% from $58.2 million during the second quarter of 2013 to $99.1 million in the second quarter of 2014, and increased 25% sequentially from $78.9 million in the first quarter of 2014. This increase in oil and natural gas revenues included an increase in oil revenues of $33.9 million and an increase in natural gas revenues of $7.0 million between the respective year-over-year periods. Oil revenues increased 76% from $44.6 million for the three months ended June 30, 2013 to$78.5 million for the three months ended June 30, 2014. Natural gas revenues increased 52% from $13.5 million for the three months ended June 30, 2013 to $20.6 million for the three months ended June 30, 2014. The increase in oil revenues resulted primarily from the 79% increase in oil production from 447,000 Bbl of oil in the second quarter of 2013 to 802,000 Bbl of oil in the second quarter of 2014. The increase in natural gas revenues was attributable not only to the 17% increase in natural gas production from 3.1 Bcf in the second quarter of 2013 to 3.6 Bcf in the second quarter of 2014, but also to a significantly higher weighted average natural gas price of $5.69 per Mcf realized in the second quarter of 2014, as compared to $4.38 per Mcf realized in the second quarter of 2013. This increase in the weighted average natural gas price reflects both the general improvement in natural gas prices, as well as the higher percentage of liquids-rich natural gas produced during the second quarter of 2014, as compared to the second quarter of 2013. In the second quarter of 2014, approximately 54% of the Company’s natural gas production was liquids-rich natural gas, primarily from the Eagle Ford shale, as compared to 31% in the second quarter of 2013. As a two-stream reporting company, the economic value of the natural gas liquids associated with the natural gas produced by Matador is included in the natural gas revenues reported and serves as an uplift to the estimated natural gas wellhead price on those properties where the natural gas liquids are extracted and sold.

Production results from the six months ended June 30, 2014 were also the best in Matador’s history. Average daily oil equivalent production increased 27% from 10,739 BOE per day (47% oil) during the first six months of 2013 to 13,673 BOE per day (59% oil) in the first six months of 2014. Oil production increased 61% from 908,000 Bbl of oil, or 5,015 Bbl of oil per day, during the first six months of 2013, to approximately 1.46 million Bbl of oil, or 8,080 Bbl of oil per day, during the first six months of 2014, and increased 19% sequentially from 1.23 million Bbl of oil, or 6,658 Bbl of oil per day, during the six months ended December 31, 2013. It is interesting to note that during the first half of 2014, Matador produced more oil (1.46 million Bbl) than the 1.21 million Bbl of oil the Company produced in all of 2012 just two years ago, and the Company has already produced almost 70% of its 2013 total oil production of 2.13 million Bbl. These year-over-year increases in the Company’s average daily oil equivalent production and, in particular, the Company’s average daily oil production, are primarily attributable to the success of the Company’s ongoing drilling operations in the Eagle Ford shale, but also reflect the strong initial production performance of the Company’s first horizontal wells in the Delaware portion of the Permian Basin. Natural gas production remained essentially flat between the periods, going from 6.2 Bcf, or 34.3 MMcf per day, in the first six months of 2013, to 6.1 Bcf, or 33.6 MMcf per day, during the first six months of 2014.

Oil and natural gas revenues increased 51% from $117.5 million during the first six months of 2013 to $178.0 million in the first six months of 2014, and increased 17% sequentially from $151.5 million for the six months ended December 31, 2013. This increase in oil and natural gas revenues included an increase in oil revenues of $48.9 million and an increase in natural gas revenues of $11.6 million between the respective periods. Oil revenues increased 52% from $93.3 million for the six months ended June 30, 2013 to $142.2 million for the six months ended June 30, 2014. Natural gas revenues increased 48% from $24.2 million for the six months ended June 30, 2013 to $35.8 millionfor the six months ended June 30, 2014. The increase in oil revenues was primarily attributable to the 61% increase in oil production from 908,000 Bbl of oil in the six months ended June 30, 2013 to 1.46 million Bbl of oil in the six months ended June 30, 2014. The increase in natural gas revenues was primarily attributable to a significantly higher weighted average natural gas price of $5.90 per Mcf realized in the first six months of 2014, as compared to $3.89 per Mcf realized in the first six months of 2013. This increase in the weighted average natural gas price reflects both the general improvement in natural gas prices, as well as the higher percentage of liquids-rich natural gas produced during the first six months of 2014, as compared to the first six months of 2013. In the first six months of 2014, approximately 54% of the Company’s natural gas production was liquids-rich natural gas, primarily from the Eagle Ford shale, as compared to 29% in the first six months of 2013.

Adjusted EBITDA

Adjusted EBITDA, a non-GAAP financial measure, increased 70% from $40.8 million for the three months ended June 30, 2013 to $69.5 million for the three months ended June 30, 2014. Sequentially, Adjusted EBITDA increased 23%, as compared to $56.3 million reported for the first quarter of 2014.

Adjusted EBITDA increased 54% from $81.4 million for the six months ended June 30, 2013 to $125.8 million for the six months ended June 30, 2014. Sequentially, Adjusted EBITDA increased 14%, as compared to $110.3 million reported for the six months endedDecember 31, 2013.

Net Income

For the quarter ended June 30, 2014, Matador reported net income of $18.2 million and earnings of $0.26 per diluted common share, as compared to net income of $25.1 million and earnings of $0.45 per diluted common share for the quarter ended June 30, 2013, and as compared to net income of $16.4 million and earnings of $0.25 per diluted common share for the quarter ended March 31, 2014. The Company’s earnings per share for the quarter ended June 30, 2014 were favorably impacted by growth in oil and natural gas production and revenues and continuing improvements in reducing lease operating expenses, among other items, but were unfavorably impacted by a non-cash unrealized loss on derivatives of $5.2 million recorded during the quarter, primarily resulting from its hedging activities on oil. The Company’s earnings per share for the quarter ended June 30, 2013 were favorably impacted by (1) a non-cash unrealized gain on derivatives of $7.5 million, (2) no deferred income tax provision being recorded during the quarter and (3) 19% fewer weighted average common shares outstanding. The Company had weighted average common shares outstanding of 69.2 million on a diluted basis at June 30, 2014, as compared to weighted average common shares outstanding of 55.9 million on a diluted basis at June 30, 2013.

For the six months ended June 30, 2014, Matador reported net income of $34.6 millionand earnings of $0.51 per diluted common share, as compared to net income of $9.6 million and earnings of $0.17 per diluted common share for the six months ended June 30, 2013. The Company’s earnings per share for the six months ended June 30, 2014 were favorably impacted by its growth in oil and natural gas production and revenues and continuing improvements in reducing lease operating expenses, but were unfavorably impacted by a non-cash unrealized loss on derivatives of $8.3 millionrecorded during the period, primarily resulting from the Company’s hedging activities on oil. The Company’s earnings per share for the six months ended June 30, 2013 were favorably impacted by (1) a non-cash unrealized gain on derivatives of $2.7 million, (2) no deferred income tax provision being recorded during the period and (3) 18% fewer weighted average common shares outstanding, but such earnings per share were unfavorably impacted by a full-cost ceiling test impairment of $21.2 million recorded during the first quarter of 2013 that was reflected in the Company’s condensed consolidated statement of operations for the six months ended June 30, 2013.

Summary of Sequential Financial Results

  • Average daily oil equivalent production increased 30% from 11,904 BOE per day in the first quarter of 2014 to 15,424 BOE per day in the second quarter of 2014.
  • Average daily oil equivalent production increased 7% from 12,723 BOE per day for the six months ended December 31, 2013 to 13,673 BOE per day for the six months ended June 30, 2014.
  • Oil production increased 21% from 661,000 Bbl, or 7,344 Bbl of oil per day, in the first quarter of 2014 to 802,000 Bbl, or 8,809 Bbl of oil per day, in the second quarter of 2014.
  • Oil production increased 19% from 1,225,000 Bbl for the six months endedDecember 31, 2013 to 1,463,000 Bbl for the six months ended June 30, 2014.
  • Natural gas production increased 47% from 2.5 Bcf, or 27.4 MMcf of natural gas per day, in the first quarter of 2014 to 3.6 Bcf, or 39.7 MMcf of natural gas per day, in the second quarter of 2014.
  • Natural gas production decreased 9% from 6.7 Bcf for the six months endedDecember 31, 2013 to 6.1 Bcf for the six months ended June 30, 2014.
  • Oil and natural gas revenues increased 25% from $78.9 million in the first quarter of 2014 to $99.1 million in the second quarter of 2014. The Company realized a weighted average oil price of $97.92 per Bbl and a weighted average natural gas price of $5.69 per Mcf during the second quarter of 2014, as compared to $96.34per Bbl and $6.20 per Mcf, respectively, during the first quarter of 2014.
  • Oil and natural gas revenues increased 17% from $151.5 million for the six months ended December 31, 2013 to $178.0 million for the six months ended June 30, 2014. The Company realized a weighted average oil price of $97.20 per Bbl and a weighted average natural gas price of $5.90 per Mcf for the six months ended June 30, 2014, as compared to $97.58 per Bbl and $4.78 per Mcf, respectively, for the six months ended December 31, 2013.
  • Adjusted EBITDA increased 23% from $56.3 million in the first quarter of 2014 to $69.5 million in the second quarter of 2014.
  • Adjusted EBITDA increased 14% from $110.3 million reported for the six months ended December 31, 2013 to $125.8 million for the six months ended June 30, 2014.
  • Net income increased 11% from $16.4 million in the first quarter of 2014 to $18.2 million in the second quarter of 2014. Net income decreased 3% from $35.5 millionreported for the six months ended December 31, 2013 to $34.6 million reported for the six months ended June 30, 2014.

Operating Expenses

Production Taxes and Marketing

Production taxes and marketing expenses increased from $4.5 million (or $4.62 per BOE) for the three months ended June 30, 2013 to $9.1 million (or $6.50 per BOE) for the three months ended June 30, 2014. This increase was primarily due to the increase in oil and natural gas revenues by approximately 70% during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. A large portion of this increase on an absolute basis was attributable to production taxes associated with the increase in oil production and associated oil revenues during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013, resulting primarily from drilling operations in the Eagle Ford shale, but also from initial production contributions from the Company’s first operated wells in the Permian Basin. Oil comprised 57% of the Company’s total production volume in the second quarter of 2014, as compared to 46% in the second quarter of 2013. The increase in production taxes and marketing expenses during the second quarter of 2014, as compared to the second quarter of 2013, also reflected the higher percentage of Matador’s natural gas production coming from the Eagle Ford shale in Texas, where natural gas production taxes are higher than production taxes associated with the Haynesville shale gas inLouisiana. The Company produced 48% of its total natural gas volume from the Eagle Ford in the second quarter of 2014, as compared to only 31% in the second quarter of 2013. Production taxes and marketing expenses for the three months ended June 30, 2014 also reflected some increased charges associated with non-operated natural gas processing fees in South Texas. Production taxes and marketing expenses increased from $8.5 million (or $4.40 per BOE) for the six months ended June 30, 2013 to $15.1 million (or $6.11 per BOE) for the six months ended June 30, 2014.

Lease Operating Expenses

Lease operating expenses increased on an absolute basis, but importantly, decreased 21% on a unit-of-production basis, from $10.1 million (or $10.53 per BOE) for the three months ended June 30, 2013 to $11.7 million (or $8.34 per BOE) for the three months ended June 30, 2014. Between these respective periods, total oil and natural gas production increased 46% from approximately 963,000 BOE to approximately 1.4 million BOE, including an increase in oil production of 79% from 447,000 Bbl to 802,000 Bbl. Oil production was 57% of total production by volume in the second quarter of 2014, as compared to 46% of total production by volume in the second quarter of 2013, which would typically result in higher LOE on a per unit basis. The significant (21%) decrease achieved in LOE on a per unit basis resulted from the progress made in reducing LOE during the last twelve months, which was primarily attributable to (1) the installation of permanent production facilities on almost all Eagle Ford properties, alleviating the need for the extended use of flowback equipment to produce newly completed Eagle Ford wells, (2) the early use of gas lift on most newly completed Eagle Ford wells and (3) a decrease in salt water disposal costs on a per Bbl basis, as well as continued improvement in overall operational processes, in the Company’s South Texasoperations. For the six months ended June 30, 2014, lease operating expenses were essentially flat on an absolute basis, but decreased 21% on a unit-of-production basis, from $21.0 million (or $10.82 per BOE) for the six months ended June 30, 2013 to $21.1 million (or $8.51 per BOE) for the six months ended June 30, 2014. Between these respective periods, total oil and natural gas production increased 27% from approximately 1.9 million BOE to approximately 2.5 million BOE, including an increase in oil production of 61% from 908,000 Bbl to 1.46 million Bbl.

Depletion, depreciation and amortization

Due to Matador’s higher production volumes, depletion, depreciation and amortization expenses increased 57% on an absolute basis from $20.2 million for the three months ended June 30, 2013 to $31.8 million for the three months ended June 30, 2014. The 57% increase in total DD&A expenses was primarily attributable to the 46% increase in total oil and natural gas production from 963,000 BOE to approximately 1.4 million BOE during the respective periods. On a unit-of-production basis, however, DD&A expenses increased only 8% from $21.01 per BOE for the three months ended June 30, 2013 to $22.66 per BOE for the three months ended June 30, 2014. DD&A expenses increased 15% on an absolute basis from $48.5 million for the six months ended June 30, 2013 to $55.8 million for the six months ended June 30, 2014. Notably, on a unit-of-production basis, DD&A expenses decreased 10% from $24.93 per BOE for the six months ended June 30, 2013 to $22.56 per BOE for the six months ended June 30, 2014.

General and administrative

General and administrative expenses increased from $4.1 million (or $4.31 per BOE) for the three months ended June 30, 2013 to $8.1 million (or $5.77 per BOE) for the three months ended June 30, 2014. The increase in G&A expenses for the three months endedJune 30, 2014 was largely attributable to additional payroll expenses associated with personnel added between the respective periods to support increased land, drilling, completion and production operations. The remaining increase was due to an increase in stock-based compensation expense from $1.0 million for the three months endedJune 30, 2013 to $1.8 million for the three months ended June 30, 2014. The increase in stock-based compensation expense is attributable to the continued vesting of awards granted in 2012 and 2013 and new awards granted in 2014, as well as the increased fair value of liability-based stock options during the three months ended June 30, 2014, resulting from an increase in the price per share of Matador’s common stock from$24.49 to $29.28 during the second quarter of 2014. These equity awards have helped Matador attract, retain and incentivize its growing technical, operational, land and accounting staff. The Company’s G&A expenses increased 34% on a unit-of-production basis from $4.31 per BOE for the three months ended June 30, 2013 to $5.77 per BOE for the three months ended June 30, 2014. General and administrative expenses increased from $8.8 million (or $4.50 per BOE) for the six months ended June 30, 2013 to $15.3 million (or $6.19 per BOE) for the six months ended June 30, 2014.

Proved Reserves and PV-10

At June 30, 2014, Matador’s estimated total proved oil and natural gas reserves were 57.2 million BOE, including 18.6 million Bbl of oil and 231.4 Bcf of natural gas, with a PV-10, a non-GAAP financial measure, of $826.0 million (Standardized Measure of $723.0 million), as compared to estimated total proved oil and natural gas reserves of 51.7 million BOE, including 16.4 million Bbl of oil and 212.2 Bcf of natural gas, with a PV-10 of$655.2 million (Standardized Measure of $578.7 million) at December 31, 2013, and as compared to estimated total proved oil and natural gas reserves of 38.9 million BOE, including 12.1 million Bbl of oil and 160.8 Bcf of natural gas, with a PV-10 of $522.3 million (Standardized Measure of $477.6 million) at June 30, 2013. Total proved reserves of 57.2 million BOE at June 30, 2014 represented a 47% year-over-year increase, as compared to 38.9 million BOE at June 30, 2013, and an 11% sequential six-month increase, as compared to 51.7 million BOE at December 31, 2013. The PV-10 of $826.0 million at June 30, 2014 represented a 58% year-over-year increase, as compared to$522.3 million at June 30, 2013, and a 26% sequential six-month increase, as compared to $655.2 million at December 31, 2013.

Proved oil reserves increased 54% year-over-year to 18.6 million Bbl at June 30, 2014, as compared to 12.1 million Bbl at June 30, 2013, and increased 14% on a sequential six-month basis from 16.4 million Bbl at December 31, 2013. Proved natural gas reserves increased 44% year-over-year to 231.4 Bcf at June 30, 2014, as compared to 160.8 Bcf at June 30, 2013, and increased 9% on a sequential six-month basis, as compared to 212.2 Bcf at December 31, 2013. At June 30, 2014, approximately 35% of the Company’s total proved reserves were proved developed reserves, 33% were oil and 67% were natural gas. At December 31, 2013, approximately 33% of the Company’s total proved reserves were proved developed reserves, 32% were oil and 68% were natural gas.

In comparing the Company’s reserves growth between periods, and especially during the first six months of 2014, it is important to note that, as a result of the Company’s drilling, completions and production schedule and particularly its infill development plans in the Eagle Ford shale, many of the wells drilled during the first six months of 2014 were identified as proved developed non-producing or proved undeveloped locations and reserves at December 31, 2013. Of the 21 gross (17.3 net) Eagle Ford wells drilled or participated in by the Company in the first six months of 2014, 16 gross (13.4 net) of these wells were included in the December 31, 2013 total proved reserves as PUD or PDNP locations. In addition, all of the Company’s 22 gross (1.0 net)Haynesville shale wells, as well as one gross (0.95 net) of the Company’s Permian Basinwells drilled and placed on production during the first six months of 2014, were included in the December 31, 2013 total proved reserves as PUD or PDNP locations. The Company anticipates that most of the wells it drills in the Eagle Ford shale during the second half of 2014 will not be PUD locations as identified at December 31, 2013, as it moves to newer portions of its more developed Eagle Ford properties, as well as certain of its recently acquired Eagle Ford acreage where proved reserves have yet to be identified and included in the Company’s total proved reserves. The Company anticipates drilling no additional PUD locations in the Permian Basin for the remainder of 2014.

As noted earlier, Matador reports its production and estimated proved reserves in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Where the Company produces liquids-rich natural gas, such as in the Eagle Ford shale in South Texas and the Permian Basin, the economic value of the natural gas liquids associated with the natural gas is included as an uplift to the estimated natural gas wellhead price on those properties where the natural gas liquids are extracted and sold. The reserves estimates in all periods presented were prepared by the Company’s internal engineering staff and audited by an independent reservoir engineering firm,Netherland, Sewell & Associates, Inc. These reserves estimates were prepared in accordance with the SEC’s rules for oil and natural gas reserves reporting and do not include any unproved reserves classified as probable or possible that might exist on Matador’s properties. The unweighted arithmetic averages of first-day-of-the-month oil and natural gas prices, respectively, used in preparing these estimates were $96.75 per Bbl and $4.104 per MMBtu for the period from July 2013 through June 2014, $93.42 per Bbl and $3.670 per MMBtu for the period from January 2013 through December 2013 and$88.13 per Bbl and $3.444 per MMBtu for the period from July 2012 through June 2013. These prices were adjusted by property for quality, energy content, regional price differentials, transportation fees, marketing deductions and other factors affecting the oil and natural gas prices received at the wellhead.