Matador Reports 4th Quarter and Full Year 2020 Financial Results

Source: www.gulfoilandgas.com 2/23/2021, Location: North America

Matador Resources Company reported financial and operating results for the fourth quarter and full year 2020.

Management Summary Comments
Joseph Wm. Foran, Matador’s Chairman and CEO, commented, “On both our website and the webcast planned for tomorrow’s earnings conference call is a set of five slides identified as ‘Chairman’s Remarks’ (Slides A through E) to add color and detail to my remarks. We invite you to review these slides in conjunction with my comments below, which are intended to provide context for Matador’s outstanding results from the fourth quarter and full year 2020. The year 2020 was a challenging and difficult year, but the Matador team came together to meet the challenges and, as a result, Matador finished 2020 as a bigger and better company. The Board and I would like to commend and thank the entire Matador team for their positive and professional response to the challenges we faced in 2020.

Fourth Quarter 2020 Highlights and Achievements
“The fourth quarter of 2020 was an excellent and significant quarter for Matador. Our primary goals in the fourth quarter were to (1) achieve free cash flow, (2) use a portion of that free cash flow to begin paying down debt, (3) grow production by at least 8 to 10% sequentially and (4) ramp-up operations from San Mateo’s newly expanded infrastructure and achieve increased volumes and revenues for San Mateo. As you will see throughout this release, Matador accomplished or exceeded all of these goals and achieved record quarterly highs for oil, natural gas and total oil equivalent production, as well as record quarterly lows for drilling and completion costs per lateral foot and per-unit lease operating and general and administrative expenses. In addition, as we announced on February 17, 2021, Matador’s proved oil and natural gas reserves increased 7% year-over-year to 270.3 million barrels of oil equivalent, an all-time high for Matador, despite the 31% decrease in oil price and the 23% decrease in natural gas price the Company was required to use in estimating proved reserves at December 31, 2020 as compared to the prior year.

“Matador was particularly pleased to achieve free cash flow for the first time in the fourth quarter of 2020. Net cash provided by operating activities in the fourth quarter was $157.6 million, leading to fourth quarter 2020 adjusted free cash flow of $60.7 million. Given this strong free cash flow, Matador repaid $35 million in borrowings outstanding under our reserves-based credit facility during the fourth quarter and then repaid an additional $10 million in January 2021 (see Slide C). Further, at year-end 2020, Matador’s leverage ratio under our reserves-based credit facility was 2.9x, well below the sole covenant under our credit facility to maintain this leverage ratio below 4.0x. Matador expects to generate adjusted free cash flow in aggregate for full year 2021 and plans to continue using a significant portion of this discretionary cash flow to continue reducing the borrowings outstanding under our credit facility.

“Matador’s total oil equivalent production grew 14% sequentially to 83,200 BOE per day in the fourth quarter of 2020, above our expectations for 8 to 10% production growth in the fourth quarter and an all-time quarterly high for Matador, as we enjoyed the first full quarter of production from our recently completed Boros wells in the Stateline asset area and Leatherneck wells in the Greater Stebbins Area. Our operations and asset teams also continued to achieve new milestones in their efforts to improve our capital efficiency and operating costs, achieving lower-than-expected capital expenditures and operating expenses. Drilling and completion costs for all operated horizontal wells completed and turned to sales in the fourth quarter of 2020 averaged $625 per completed lateral foot, an all-time low for Matador (see Slide D). Lease operating expenses on a unit-of-production basis declined 8% sequentially to $3.20 per BOE, and general and administrative expenses on a unit-of production basis declined 4% sequentially to $2.16 per BOE—both were all time lows for Matador.

“San Mateo also achieved record quarterly results in the fourth quarter of 2020 (see Slide E). Natural gas gathering and processing, oil gathering and transportation and produced water handling volumes were all up significantly on a sequential basis in the fourth quarter of 2020, as San Mateo enjoyed the first full quarter of operations following the completion and successful startup of the expansion of the Black River Processing Plant and the related pipeline infrastructure and began gathering and processing natural gas and gathering, transporting and handling oil and produced water from Matador’s Stateline asset area and the Greater Stebbins Area. San Mateo also reported free cash flow in the fourth quarter of 2020, with net cash from operating activities of $26.1 million leading to adjusted free cash flow of $21.4 million. As a result, in January 2021, San Mateo repaid $11 million in borrowings outstanding under its credit facility. San Mateo expects to generate free cash flow throughout 2021 as well, given the current maintenance level of capital expenditures budgeted for 2021.

Dividend Initiation
“Given Matador’s strong finish to 2020 and our positive outlook for 2021 and beyond, Matador was very pleased to announce yesterday that the Board of Directors has adopted a dividend policy pursuant to which the Company intends to pay quarterly cash dividends on its common stock of $0.025 per share. Pursuant to this policy, the Board declared Matador’s first quarterly cash dividend of $0.025 per share of common stock payable on March 31, 2021 to shareholders of record as of March 24, 2021. The announcement of Matador’s first cash dividend marks another significant step for Matador in returning value to our shareholders and reflects our confidence in Matador’s financial strength and ability to generate sustained free cash flow going forward.

2021 Operating Plan and Market Guidance
“Finally, in conjunction with this earnings release, we have also released today our 2021 operating plan and market guidance. As you will see in that companion release, we believe that 2021 should be particularly exciting for Matador and its stakeholders, as we work to continue developing our excellent Delaware Basin assets, transition to free cash flow, continue to pay down debt and institute a dividend to augment our returns to shareholders. Our 2021 operating plan will focus on our federal properties, and in response to recent actions taken by the newly inaugurated Biden administration, we have elected to pick up a fourth operated drilling rig in March to ensure the orderly development of our federal leasehold in the Delaware Basin. We are off to a good start in 2021 and are certainly encouraged by the recent improvement in commodity prices. We are excited about the year ahead and believe our 2021 operating plan should generate substantial value growth for our stakeholders in the year ahead and for years to come.”

Fourth Quarter 2020 Operational and Financial Highlights
Adjusted Free Cash Flow Achieved in Fourth Quarter 2020
? Fourth quarter 2020 net cash provided by operating activities was $157.6 million (GAAP basis), leading to fourth quarter 2020 adjusted free cash flow (a non-GAAP financial measure) of $60.7 million. These cash flow measures were above Matador’s expectations for the fourth quarter and allowed the Company to repay $35 million in borrowings outstanding under its reserves-based revolving credit facility in the fourth quarter as noted below. Matador anticipates that it should generate positive adjusted free cash flow in aggregate for full year 2021, even in light of adding a fourth operated rig in March, given the current outlook for oil and natural gas prices in 2021.

Record Oil, Natural Gas and Oil Equivalent Production
? As summarized in the table below, Matador’s fourth quarter 2020 average daily oil, natural gas and total oil equivalent production were all record quarterly highs for the Company and above the Company’s expectations. The majority of the production increase resulted from better-than-expected performance from a number of wells completed and turned to sales during the first three quarters of 2020, including the first full quarter of production from the 13 Boros wells in the Stateline asset area that were turned to sales in September 2020. The Company also achieved better-than-expected results from several wells completed and turned to sales in the Rustler Breaks asset area during the fourth quarter.

Net Income, Earnings Per Share and Adjusted EBITDA
? Fourth quarter 2020 net loss (GAAP basis) was $89.5 million, or a net loss of $0.77 per diluted common share, a sequential increase from a net loss of $276.1 million in the third quarter of 2020, and a year-over-year decrease from net income of $24.0 million in the fourth quarter of 2019.
? Fourth quarter 2020 adjusted net income (a non-GAAP financial measure) was $32.3 million, or adjusted net income of $0.27 per diluted common share, a sequential increase from an adjusted net income of $11.6 million in the third quarter of 2020, and a year-over-year decrease from adjusted net income of $46.1 million in the fourth quarter of 2019.
? Fourth quarter 2020 adjusted earnings before interest expense, income taxes, depletion, depreciation and amortization and certain other items (“Adjusted EBITDA,” a non-GAAP financial measure) were $150.1 million, a sequential increase from $121.0 million in the third quarter of 2020, and a year-over-year decrease from $181.0 million in the fourth quarter of 2019.

Record-Low Lease Operating and General and Administrative Unit Costs
? Lease operating expenses (“LOE”) in the fourth quarter of 2020 were a Matador-record low of $3.20 per BOE, an 8% sequential decrease from $3.48 per BOE in the third quarter of 2020, and a 28% year-over-year decrease from $4.43 per BOE in the fourth quarter of 2019. This record low LOE per BOE in the fourth quarter resulted primarily from (1) the Company’s ongoing efforts to reduce costs and improve the efficiency of its operations, (2) the 14% increase in total oil and natural gas production during the fourth quarter of 2020, (3) additional produced water being gathered by pipeline, including via San Mateo’s gathering systems, thereby reducing trucking costs, and (4) lower service costs.
? General and administrative (“G&A”) expenses in the fourth quarter of 2020 were a Matador-record low of $2.16 per BOE, a 4% sequential decrease from $2.25 per BOE in the third quarter of 2020, and a 32% year-over-year decrease from $3.17 per BOE in the fourth quarter of 2019. Matador’s G&A expenses continued to be positively impacted primarily by the G&A cost reductions initially implemented in the first quarter of 2020 and maintained throughout the remainder of the year. This record low G&A per BOE in the fourth quarter was also attributable to the 14% year-over-year increase in total oil and natural gas production during the fourth quarter. Record-Low Drilling and Completion Costs of $625 per Completed Lateral Foot
? Drilling and completion costs for all operated horizontal wells completed and turned to sales in the fourth quarter of 2020 averaged $625 per completed lateral foot, a sequential decrease of 21% from average drilling and completion costs of $790 per completed lateral foot in the third quarter of 2020, and a decrease of 46% from average drilling and completion costs of $1,165 per completed lateral foot achieved in full year 2019. Drilling and completion costs of $625 per completed lateral foot were the lowest quarterly drilling and completion costs per completed lateral foot in Matador’s history.
? Matador incurred capital expenditures for drilling, completing and equipping wells (“D/C/E capital expenditures”) of approximately $63 million in the fourth quarter of 2020, or 21% below the Company’s estimate of $78 million for D/C/E capital expenditures during the quarter. For full year 2020, Matador’s D/C/E capital expenditures were approximately $450 million, or about 3% below the midpoint of Matador’s updated guidance of $465 million for full year 2020 D/C/E capital expenditures, as provided on October 27, 2020. Total Borrowings and Leverage Ratio Below Expectations
? At December 31, 2020, total borrowings outstanding under Matador’s reserves-based credit facility were $440 million, a reduction of $35 million from total borrowings outstanding of $475 million at September 30, 2020. This reduction in borrowings outstanding of $35 million was $10 million more than the Company’s fourth quarter guidance for an anticipated repayment of $25 million under its reserves-based credit facility.
? At December 31, 2020, Matador’s leverage ratio, as defined in the Company’s reserves-based credit facility, was 2.9x, which was below the Company’s expectations for year-end 2020. The leverage ratio of 2.9x was also well below the sole covenant under the Company’s reserves-based credit facility to maintain this leverage ratio below 4.0x.
? In January 2021, Matador repaid an additional $10 million in borrowings outstanding under the reserves-based credit facility. Total borrowings outstanding under the reserves-based credit facility at February 23, 2021 were $430 million.

Dividend Initiation
? On February 22, 2021, Matador announced that its Board of Directors (the “Board”) adopted a dividend policy pursuant to which the Company intends to pay quarterly cash dividends on its common stock of $0.025 per share. Pursuant to this policy, the Board declared Matador’s first quarterly cash dividend of $0.025 per share of common stock payable on March 31, 2021 to shareholders of record as of March 24, 2021.
? Operations Update
? Drilling and Completion Activity
? Matador operated three drilling rigs in the Delaware Basin during the fourth quarter of 2020 and continues to do so at February 23, 2021. Two of these rigs are currently operating in Matador’s Stateline asset area and one rig is currently drilling two wells in the Wolf asset area in Loving County, Texas. As highlighted in the Company’s 2021 operating plan and market guidance also released today, Matador expects to add a fourth rig to its operated drilling program in March 2021 and currently plans to operate four rigs in the Delaware Basin throughout the remainder of 2021. Matador has elected to pick up a fourth operated drilling rig in March 2021 to ensure the orderly development of the Company’s federal leasehold in the Delaware Basin going forward in response to recent actions taken by the newly inaugurated Biden administration. Additional details regarding Matador’s 2021 operating plans are provided in the Company’s 2021 Operating Plan and Market Guidance press release issued separately today.
? Wells Completed and Turned to Sales
? During the fourth quarter of 2020, Matador completed and turned to sales a total of 14 gross (4.3 net) wells in its various operating areas as shown in the table below. This total was comprised of five gross (2.6 net) operated wells and nine gross (1.7 net) non-operated wells. All five operated wells were two-mile laterals.
? Significant Well Results
? The following table highlights the 24-hour initial potential (“IP”) test results from the five wells completed and turned to sales in the Rustler Breaks asset area in Eddy County, New Mexico during the fourth quarter of 2020, all of which are two-mile laterals. All five wells were completed and turned to sales at varying times during October and November 2020 and were the only operated wells the Company completed and turned to sales during the fourth quarter of 2020.

As previously noted in this earnings release, drilling and completion costs for these five operated wells completed and turned to sales in the Rustler Breaks asset area in the fourth quarter of 2020 averaged approximately $625 per completed lateral foot. These costs were the lowest quarterly drilling and completion costs per lateral foot that Matador has achieved to date in the Delaware Basin.

Matador was very encouraged by the results from the Ray State #113H well, which was another successful test of the First Bone Spring formation moving north in the Rustler Breaks asset area. This well’s test result and strong initial production performance demonstrate yet again the potential for the First Bone Spring formation throughout the Rustler Breaks asset area.

Matador was also very pleased with the 24-hour IP test results from the Ace Stern Vegas wells, including the high oil cuts from each of these three wells. The Ace Stern Vegas #137H well was Matador’s first test of the Third Bone Spring formation this far north in the Rustler Breaks asset area, and the Company was very encouraged by the strong test results from this well, which bodes well for the further prospectivity of the Third Bone Spring formation in the northern portion of the Rustler Breaks asset area.

Realized Commodity Prices
Oil Prices
Matador’s weighted average realized oil price, excluding derivatives, increased 6% sequentially from $38.67 per barrel in the third quarter of 2020 to $40.99 per barrel in the fourth quarter of 2020. Matador’s weighted average oil price differential relative to the NYMEX West Texas Intermediate (WTI) benchmark, inclusive of the monthly roll and transportation costs, improved from ($2.25) per barrel in the third quarter of 2020 to ($1.71) per barrel in the fourth quarter of 2020.

For the first quarter of 2021, Matador’s weighted average oil price differential relative to the WTI benchmark price, inclusive of the monthly roll and transportation costs, is anticipated to be in the range of ($1.00) to ($2.00) per barrel.

Matador’s realized loss on derivatives (commodity price hedges) of approximately $10.6 million in the fourth quarter of 2020 was primarily attributable to certain losses associated with its oil swaps with a strike price of $35.00 per barrel. The Company put these oil swaps in place when restructuring its oil hedges early in the second quarter of 2020 to protect the balance sheet and ensure it would remain in compliance with its sole reserves-based credit facility leverage covenant in 2020, which requires the Company to maintain a leverage ratio, as defined in the credit agreement, below 4.0x. Overall, this restructuring of the Company’s oil hedges proved effective, as Matador realized a net gain on derivatives of $38.9 million for the year ended December 31, 2020 and ended the year with a leverage ratio of 2.9x. Please see the accompanying slide presentation for a more complete summary of Matador’s current oil and natural gas derivative positions.

Natural Gas Prices
Matador’s weighted average realized natural gas price, excluding derivatives, increased 31% sequentially from $2.27 per thousand cubic feet in the third quarter of 2020 to $2.97 per thousand cubic feet in the fourth quarter of 2020. Matador realized a weighted average natural gas price differential of +$0.21 per thousand cubic feet above the average NYMEX Henry Hub natural gas price in the fourth quarter, as compared to a differential of +$0.15 per thousand cubic feet above the average NYMEX Henry Hub natural gas price in the third quarter of 2020.

Matador is a two-stream reporter, and the revenues associated with its NGL production are included in the weighted average realized natural gas price.

For the first quarter of 2021, Matador’s weighted average natural gas price differential relative to the Henry Hub benchmark price is anticipated to be in the range of +$0.50 to +$1.00 per thousand cubic feet, primarily attributable to improved natural gas price differentials at the Waha hub in West Texas, as well as to recent improvements in prices for NGLs.

Matador realized no gains or losses on any of its natural gas hedges in place during the fourth quarter of 2020.

San Mateo Highlights and Update
Operating Highlights and Financial Results
During the fourth quarter of 2020, San Mateo, Matador’s midstream affiliate, enjoyed the first full quarter of operations following the completion and successful start-up of the expansion of its cryogenic natural gas processing plant in Eddy County, New Mexico (the “Black River Processing Plant”) in the third quarter. The expansion of the Black River Processing Plant added an incremental designed inlet capacity of 200 million cubic feet of natural gas per day to the previously designed inlet capacity of 260 million cubic feet per day for a total designed inlet capacity of 460 million cubic feet per day. The expanded Black River Processing Plant supports Matador’s exploration and development activities in the Delaware Basin and is currently gathering and processing natural gas from Matador’s Stateline asset area and from the Stebbins and surrounding leaseholds in the Arrowhead asset area (the “Greater Stebbins Area”). The Black River Processing Plant also processes natural gas from Matador’s Rustler Breaks asset area and provides natural gas processing services for other San Mateo customers in the area.

The fourth quarter of 2020 was also the first full quarter of operations for approximately 43 miles of large diameter natural gas gathering pipelines that San Mateo placed in service during the third quarter of 2020 between the Black River Processing Plant and Matador’s Stateline asset area (approximately 24 miles) and the Greater Stebbins Area (approximately 19 miles). In addition, San Mateo also enjoyed the first quarter of operations for approximately 19 miles of various diameter crude oil pipelines from certain points of origin in the Greater Stebbins Area to the existing San Mateo interconnect with a subsidiary of Plains All American Pipeline, L.P. in Eddy County, New Mexico. San Mateo is currently gathering or transporting Matador’s oil and natural gas production via pipeline in both the Stateline asset area and the Greater Stebbins Area, as well as in the Wolf and Rustler Breaks asset areas. San Mateo is handling Matador’s produced water in each of these areas as well.

San Mateo’s operations in the fourth quarter of 2020 were highlighted by sequential increases in natural gas gathering and processing, water handling and oil gathering and transportation volumes. As expected, natural gas gathering and processing volumes, water handling volumes and oil gathering and transportation volumes all increased significantly in the fourth quarter of 2020 as San Mateo gathered, transported, processed and handled the first full quarter of oil and natural gas production and produced water from Matador’s recently completed Boros wells in the Stateline asset area and the Leatherneck wells in the Greater Stebbins Area.

Operating Highlights
During the fourth quarter of 2020, San Mateo:
? Gathered and transported an average of 42,500 barrels of oil per day, a 39% sequential increase, as compared to 30,600 barrels per day in the third quarter of 2020, and a 59% year-over-year increase, as compared to 26,700 barrels per day in the fourth quarter of 2019.
? Handled an average of 260,000 barrels of produced water per day, a 12% sequential increase, as compared to 233,000 barrels per day in the third quarter of 2020, and a 22% year-over-year increase, as compared to 213,000 barrels per day in the fourth quarter of 2019.
? Gathered an average of 216 million cubic feet of natural gas per day, a 12% sequential increase, as compared to 193 million cubic feet per day in the third quarter of 2020, and an 18% year-over-year decrease, as compared to 262 million cubic feet per day in the fourth quarter of 2019.
? Processed an average of 175 million cubic feet of natural gas per day at the Black River Processing Plant, a 17% sequential increase, as compared to 150 million cubic feet per day in the third quarter of 2020, and a 24% year-over-year decrease, as compared to 232 million cubic feet per day in the fourth quarter of 2019.

Financial Results
During the fourth quarter of 2020, San Mateo achieved record financial results, including:
? Net income (GAAP basis) of $26.2 million, a 29% sequential increase from $20.3 million in the third quarter of 2020, and a 34% year-over-year increase from $19.6 million in the fourth quarter of 2019. This quarterly result was a record high for San Mateo and above the Company’s expectations for the fourth quarter, primarily resulting from stronger-than-expected production volumes from Matador’s Boros and Leatherneck wells.
? Adjusted EBITDA (a non-GAAP financial measure) of $35.4 million, a 27% sequential increase from $28.0 million in the third quarter of 2020, and a 34% year-over-year increase from $26.5 million in the fourth quarter of 2019. This quarterly result was a record high for San Mateo and above the Company’s expectations for the fourth quarter for the reasons noted above.
? Net cash provided by San Mateo operating activities (GAAP basis) of $26.1 million, leading to San Mateo adjusted free cash flow (a non-GAAP financial measure) of $21.4 million. San Mateo achieved these cash flow measures in the fourth quarter as a result of the completion of the significant expansion projects in Eddy County, New Mexico during the third quarter of 2020. San Mateo expects to generate adjusted free cash flow going forward, assuming a maintenance level of capital expenditures in future periods.
? In January 2021, San Mateo repaid $11 million in borrowings outstanding under its credit facility. Total borrowings outstanding under the San Mateo credit facility at February 23, 2021 were $323 million. The San Mateo credit facility is non-recourse with respect to Matador.

Capital Expenditures
Matador’s portion of San Mateo’s capital expenditures was approximately $7 million in the fourth quarter of 2020, about $6 million less than the Company’s estimate of $13 million for the fourth quarter, primarily attributable to both cost savings on completed projects and the timing of operations. For full year 2020, Matador’s portion of San Mateo’s capital expenditures was approximately $88 million, or about 7% below the midpoint of Matador’s guidance of $95 million for its portion of San Mateo’s full year 2020 capital expenditures. San Mateo’s full year 2020 capital expenditures totaled approximately $200 million.


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