UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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| ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20162018
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from | | to |
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| Commission file number 001-34574 |
Matador Resources Company
(Exact name of registrant as specified in its charter)
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| Texas | | 27-4662601 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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5400 LBJ Freeway, Suite 1500 Dallas, Texas 75240 | | 75240 |
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| | Registrant’s telephone number, including area code: (972) 371-5200 | |
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| | Securities registered pursuant to Section 12(b) of the Act: | |
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| | Title of each class | | Name of each exchange on which registered | |
| | Common Stock, par value $0.01 per share | | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ý No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes ¨ No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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| Large accelerated filer | ý | | | Accelerated filer | ¨ | |
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| Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | | Smaller reporting company | ¨ | |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No ý
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates, computed by reference to the price at which the common equity was last sold, as of the last business day of the registrant’s most recently completed second fiscal quarter was $1,625,286,901.$3,305,546,848.
As of February 24, 2017,26, 2019, there were 100,034,559116,388,317 shares of common stock outstanding.
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| DOCUMENTS INCORPORATED BY REFERENCE |
The information required by Part III of this Annual Report on Form 10-K, to the extent not set forth herein, is incorporated by reference to the registrant’s definitive proxy statement relating to the 20172019 Annual Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year to which this Annual Report on Form 10-K relates.
MATADOR RESOURCES COMPANY
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 20162018
TABLE OF CONTENTS
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| PART I | |
ITEM 1. | | |
ITEM 1A. | | |
ITEM 1B. | | |
ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
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| PART II | |
ITEM 5. | | |
ITEM 6. | | |
ITEM 7. | | |
ITEM 7A. | | |
ITEM 8. | | |
ITEM 9. | | |
ITEM 9A. | | |
ITEM 9B. | | |
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| PART III | |
ITEM 10. | | |
ITEM 11. | | |
ITEM 12. | | |
ITEM 13. | | |
ITEM 14. | | |
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| PART IV | |
ITEM 15. | | |
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this “Annual Report”) constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended or the Securities Act,(the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended or the Exchange Act.(the “Exchange Act”). Additionally, forward-looking statements may be made orally or in press releases, conferences, reports, on our website or otherwise, in the future by us or on our behalf. Such statements are generally identifiable by the terminology used such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecasted,” “hypothetical,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should”“should,” “would” or other similar words, although not all forward-looking statements contain such identifying words.
By their very nature, forward-looking statements require us to make assumptions that may not materialize or that may not be accurate. Forward-looking statements are subject to known and unknown risks and uncertainties and other factors that may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, among others: general economic conditions, changes in oil, natural gas and natural gas liquids prices and the demand for oil, natural gas and natural gas liquids, the success of our drilling program, the timing of planned capital expenditures, the sufficiency of our cash flow from operations together with available borrowing capacity under our credit agreement,facilities, uncertainties in estimating proved reserves and forecasting production results, operational factors affecting the commencement or maintenance of producing wells, the condition of the capital markets generally, as well as our ability to access them, the proximity to our properties and capacity of transportation facilities, availability of acquisitions, our ability to integrate acquisitions with our business, weather and environmental conditions, uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business, and the other factors discussed below and elsewhere in this Annual Report and in other documents that we file with or furnish to the United States Securities and Exchange Commission or the SEC,(the “SEC”), all of which are difficult to predict. Forward-looking statements may include statements about:
our business strategy;
our reserves;
our technology;estimated future reserves and the present value thereof;
our cash flows and liquidity;
our financial strategy, budget, projections and operating results;
our oil and natural gas realized prices;
the timing and amount of future production of oil and natural gas;
the availability of drilling and production equipment;
the availability of oil field labor;
the amount, nature and timing of capital expenditures, including future exploration and development costs;
the availability and terms of capital;
our drilling of wells;
our ability to negotiate and consummate acquisition and divestiture opportunities;
government regulation and taxation of the oil and natural gas industry;
our marketing of oil and natural gas;
our exploitation projects or property acquisitions;
the integration of acquisitions with our business;
our ability and the ability of our midstream joint venture to construct and operate midstream facilities, including the operation and expansion of our Black River cryogenic natural gas processing plant and the drilling of additional salt water disposal wells;
the ability of our midstream joint venture to attract third-party volumes;
our costs of exploiting and developing our properties and conducting other operations;
general economic conditions;
competition in the oil and natural gas industry, including in both the exploration and production and midstream segments;
the effectiveness of our risk management and hedging activities;
our technology;
environmental liabilities;
counterparty credit risk;
developments in oil-producing and natural gas-producing countries;
our future operating results;
estimated future reserves and the present value thereof; and
our plans, objectives, expectations and intentions contained in this Annual Report or in our other filings with the SEC that are not historical.
Although we believe that the expectations conveyed by the forward-looking statements in this Annual Report are reasonable based on information available to us on the date hereof, no assurances can be given as to future results, levels of activity, achievements or financial condition.
You should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors. The foregoing statements are not exclusive and further information concerning us, including factors that potentially could materially affect our financial results, may emerge from time to time. We do not intendundertake no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements, except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.
PART I
Item 1. Business.
In this Annual Report, references to “we,” “our” or the “Company” refer to Matador Resources Company and its subsidiaries as a whole (unless the context indicates otherwise) and references to “Matador” refer solely to Matador Resources Company. For certain oil and natural gas terms used in this Annual Report, see the “Glossary of Oil and Natural Gas Terms” included in this Annual Report.
General
We are an independent energy company engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States, with an emphasis on oil and natural gas shale and other unconventional plays. Our current operations are focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. We also operate in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. Additionally, we conduct midstream operations, primarily as of February 17, 2017, through our midstream joint venture, San Mateo Midstream, LLC (“San Mateo” or the “Joint Venture”), in support of our exploration, development and production operations and provide natural gas processing, oil transportation services, oil, natural gas oil and salt water gathering services and salt water disposal services to third parties on a limited basis.parties.
We are a Texas corporation founded in July 2003 by Joseph Wm. Foran, Chairman and CEO. Mr. Foran began his career as an oil and natural gas independent in 1983 when he founded Foran Oil Company with $270,000 in contributed capital from 17 friends and family members. Foran Oil Company was later contributed to Matador Petroleum Corporation upon its formation by Mr. Foran in 1988. Mr. Foran served as Chairman and Chief Executive Officer of that company from its inception until it was sold in June 2003 to Tom Brown, Inc., in an all cash transaction for an enterprise value of approximately $388.5 million.
On February 2, 2012, our common stock began trading on the New York Stock Exchange (the “NYSE”) under the symbol “MTDR.” Prior to trading on the NYSE, there was no established public trading market for our common stock.
Our goal is to increase shareholder value by building oil and natural gas reserves, production and cash flows at an attractive rate of return on invested capital. We plan to achieve our goal by, among other items, executing the following business strategies:
focus our exploration and development activities primarily on unconventional plays, including the Wolfcamp and Bone Spring plays in the Delaware Basin, the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas;
identify, evaluate and develop additional oil and natural gas plays as necessary to maintain a balanced portfolio of oil and natural gas properties;
continue to improve operational and cost efficiencies;
identify and develop midstream opportunities that support and enhance our exploration and development activities;activities and that generate value for San Mateo;
maintain our financial discipline; and
pursue opportunistic acquisitions, divestitures and joint ventures.
Despite a challenging commodity price environment in 2016,since 2014, the successful execution of our business strategies in 2018 led to significant increases in our oil and natural gas production and proved oil and natural gas reserves. We also significantly increasedcontinued to increase our leasehold and minerals position in the Delaware Basin.Basin, in particular through the BLM Acquisition (as defined below). In addition, we concluded several important financing transactions in 2016,2018, including two equity offerings, anthe May 2018 public
offering of 7,000,000 shares of our common stock, the refinancing and issuance of senior unsecured notes and an increasetwo increases in the borrowing base under our Credit Agreement (as defined below). These transactions, as well asSan Mateo also achieved several important milestones in 2018, including the completion and successful start-up of the expansion of the Black River Processing Plant (as defined below), the formation of a strategic relationship between a subsidiary of San Mateo and a subsidiary of Plains All American Pipeline, L.P. (“Plains”) to gather and transport crude oil for us and third-party customers in and around the Joint Venture in February 2017,Rustler Breaks asset area, the completion and start-up of the Rustler Breaks Oil Pipeline System (as defined below), the addition of several significant third-party customers for salt water gathering and disposal and natural gas gathering and processing and the closing of the San Mateo Credit Facility (as defined below). These achievements and transactions increased our operational flexibility and further strengthenedopportunities while preserving the strength of our balance sheet.sheet and our liquidity position.
20162018 Highlights
Increased Oil, Natural Gas and Oil Equivalent Production
For the year ended December 31, 2016,2018, we achieved record oil, natural gas and average daily oil equivalent production. In 2016,2018, we produced 5.111.1 million Bbl of oil, an increase of 13%42%, as compared to 4.57.9 million Bbl of oil produced in 2015.2017. We also produced 30.547.3 Bcf of natural gas, an increase of 10%24% from 27.738.2 Bcf of natural gas produced in 2015.2017. Our average daily oil equivalent production for the year ended December 31, 20162018 was 27,81352,128 BOE per day, including 13,92430,524 Bbl of oil per day and 83.3129.6 MMcf of natural gas per day, an increase of 12%34%, as compared to 24,95538,936 BOE per day, including 12,30621,510 Bbl of oil per day and 75.9104.6 MMcf of natural gas per day, for the year ended December 31, 2015.2017. The increase in oil and natural gas production was primarily a result ofattributable to our ongoing delineation and development operationsdrilling activities in the Delaware Basin throughout 2016,2018, which offset declining production in the Eagle Ford and Haynesville shales where we have significantly reduced our operated activity since late 2014 and early 2015. Oil production comprised 50%59% of our total production (using a conversion ratio of one Bbl of oil per six Mcf of natural gas) for the year ended December 31, 2016,2018, as compared to 49%55% for the year ended December 31, 2015.2017.
Increased Oil, Natural Gas and Oil Equivalent Reserves
At December 31, 2016,2018, our estimated total proved oil and natural gas reserves were 105.8215.3 million BOE, including 57.0123.4 million Bbl of oil and 292.6551.5 Bcf of natural gas, an increase of 24%41% from 152.8 million BOE, including 86.7 million Bbl of oil and 396.2 Bcf of natural gas, at December 31, 2015.2017. The associated Standardized Measure and PV-10 of our estimated total proved oil and natural gas reserves increased 9%79% and 7%93% to $575.0 million$2.25 billion and $581.5 million,$2.58 billion, respectively, at December 31, 2016,2018, from $529.2 million$1.26 billion and $541.6 million,$1.33 billion, respectively, at December 31, 2015,2017, primarily as a result of our ongoing delineation and development operationsdrilling activities in the Delaware Basin.Basin during 2018 and higher weighted average oil and natural gas prices used to estimate proved reserves. PV-10 is a non-GAAP financial measure. For a reconciliation of PV-10 to Standardized Measure, see “—Estimated Proved Reserves.”
Our proved oil reserves grew 25%42% to 57.0123.4 million Bbl at December 31, 20162018 from 45.686.7 million Bbl at December 31, 2015.2017. Our proved natural gas reserves increased 24%39% to 292.6551.5 Bcf at December 31, 20162018 from 236.9396.2 Bcf at December 31, 2015.2017. This growth in oil and natural gas reserves was primarily attributable to our ongoing delineation and development operationsdrilling activities in the Delaware Basin during 2016.2018.
At December 31, 2016,2018, proved developed reserves included 22.653.2 million Bbl of oil and 126.8246.2 Bcf of natural gas, and proved undeveloped reserves included 34.470.2 million Bbl of oil and 165.9305.2 Bcf of natural gas. Proved developed reserves and proved oil reserves comprised 41%44% and 54%57%, respectively, of our total proved oil and natural gas reserves at December 31, 2016.2018. Proved developed reserves and proved oil reserves comprised 40%45% and 54%57%, respectively, of our total proved oil and natural gas reserves at December 31, 2015.2017.
Operational Highlights
We focus on optimizing the development of our resource base by seeking ways to maximize our recovery per well relative to the cost incurred and to minimize our operating costs per BOE produced. We apply an analytical approach to track and monitor the effectiveness of our drilling and completion techniques and service providers. This allows us to better manage operating costs, the pace of development activities, technical applications, the gathering and marketing of our production and capital allocation. Additionally, we concentrate on our core areas, which allows us to achieve economies of scale and reduce operating costs. Largely as a result of these factors, we believe that we have increased our technical knowledge of drilling, completing and producing Delaware Basin wells, particularly over the past three years, as we continue to apply what we learned from our Eagle Ford shale and Haynesville shale experience. Thefive years. We expect the Delaware Basin will continue to be our primary area of focus in 2017.2019.
We completed and began producing oil and natural gas from 55141 gross (37.0(73.8 net) wells in the Delaware Basin in 2016,2018, including 4082 gross (35.6(66.8 net) operated and 1559 gross (1.4(7.0 net) non-operated wells. We also added to and upgraded our acreage position in the Delaware Basin during 2016.2018. As a result, at December 31, 2016,2018, our total acreage position in the Delaware Basin had increased to approximately 163,700222,200 gross (94,300(132,000 net) acres, primarily in Loving County, Texas and Lea and Eddy Counties, New Mexico. Overall, weWe have been very pleased with the initial performance of the wells we have drilled and completed, or participated in as a non-operator,focused our Delaware Basin operations thus far inon our sixseven main asset areas in the Delaware Basin—areas—the Wolf and Jackson Trust asset areas in Loving County, Texas, the Rustler Breaks and Arrowhead asset areas in Eddy County, New Mexico and the Antelope Ridge, Ranger and Twin Lakes asset areas in Lea County, New Mexico. As a result, ourOur Delaware Basin properties have become an increasingly importantthe most significant component of our asset portfolio. Our average daily oil equivalent production from the Delaware Basin increased approximately 145% (2.5-fold)54% to 15,94145,237 BOE per day (57%(87% of total oil equivalent production), including 10,39528,026 Bbl of oil per day (75%(92% of total oil production) and 33.3103.3 MMcf of natural gas per day (40%(80% of total natural gas production), in 2016,2018, as compared to 6,51829,463 BOE per day (26%(76% of total oil equivalent production), including 4,64818,023 Bbl of oil per day (38%(84% of total oil production) and 11.268.6 MMcf of natural gas per day (15%(66% of total natural gas production), in 2015.2017. We expect our Delaware Basin production to increase throughout 2017in 2019 as we continue the delineation and development of these asset areas.
Operational highlights in the Delaware Basin (as further described below in “—Principal Areas of Interest — Exploration and Production Segment—Southeast New Mexico and West Texas — Texas—Delaware Basin” and “—Midstream Segment”) in 20162018 included:
our continued improvement in operational efficiencies throughout the Delaware Basin, particularly in our Rustler Breaks and Wolf asset areas, as we achieved improvements in both drilling times and well costs;
in our Rustler Breaks asset area, the results from the David Edelstein State Com 12&11-24S-27E RB #203H well, our first operated two-mile horizontal well, the performance of our Wolfcamp A-XY completions moving to the northwest region of the asset area, positive tests of the Second Bone Spring formation and the continued delineation and development of previously tested horizons—the Second Bone Spring, the Wolfcamp A-XY and two benches of the Wolfcamp B—and the successful testing of a new, deeper bench of the Wolfcamp B interval, which is sometimes referred to as the Blair Shale;horizons;
in our Wolf asset area, the results from several wells with longer laterals (greater than one mile) drilled and completed in the Wolfcamp A-XY interval in the southern portion of the asset area;
in our Jackson Trust asset area, the continued development of the Wolfcamp A-XY interval as well as the significant improvement in well results in the Second Bone Spring, as compared to our initial tests in thatA-Lower interval;
in our Arrowhead and Ranger asset areas, the results from our Second and Third Bone Spring completions, particularly in the SST and Stebbins acreage blocks in the Arrowhead asset area, and results from the recently completed Verna Rae Federal #204H well in the Ranger asset area, whose 24-hour initial potential (“IP”) test results and subsequent well performance demonstrate the initial results from three wells completedpotential prospectivity of the Wolfcamp formation moving north in the Delaware Basin;
in our Antelope Ridge asset area, the testing of six distinct intervals during 2018, including the Brushy Canyon, First, Second and Third Bone Spring, formation on our Mallon leasehold, which tested at the highest 24-hour initial potential flow rates of any wells we have drilled to date in the Delaware BasinWolfcamp A-XY and which illustrate the potential of our northern Delaware Basin acreage position;
a positive test of the Strawn formation in our Twin Lakes asset area from the Olivine State 5-16S-37E TL #1, a vertical well;Wolfcamp A-Lower; and
the significant progress made within our midstream operations, including (i) the start-upcompletion and successful startup of ourthe expansion of San Mateo’s Black River cryogenic natural gas processing plant in the Rustler Breaks asset area (the “Black River Processing Plant”) and associatedto a designed inlet capacity of 260 MMcf of natural gas gathering systemper day, (ii) the completion of a natural gas liquids (“NGL”) pipeline connection at the Black River Processing Plant to the NGL pipeline owned by EPIC Y-Grade Pipeline LP, (iii) the ongoing buildout of oil, natural gas and water pipeline systems in ourboth the Rustler Breaks and Wolf asset areas, (iv) the entrance into a strategic relationship with Plains to gather and transport crude oil in the Rustler Breaks asset area, our initial salt water disposal well(v) placing into service crude oil gathering and facilitytransportation systems in the Wolf and associated water gathering lines in our Rustler Breaks asset areaareas, (vi) entering into long-term agreements with significant producers in Eddy County, New Mexico relating to the gathering and twodisposal of one such producer’s salt water and the gathering and processing of another such producer’s natural gas production and (vii) the drilling and completion of additional commercial salt water disposal wells and the construction of associated commercial facilities in our Wolfthe Rustler Breaks asset area.area, significantly increasing San Mateo’s salt water disposal capacity.
We also completed and began producing oil and natural gas from four gross (1.5 net) wells in the Eagle Ford shale in South Texas in 2018, including one gross (1.0 net) operated and three gross (0.5 net) non-operated wells. We did not conduct any operated drilling and completion activities on our leasehold properties in South Texas or in Northwest Louisiana and East Texas during 2016,2018, although we did participate in the drilling and completion of 2eight gross (less than 0.1 net) non-operated Eagle Ford shale wells and 15 gross (2.1(0.2 net) non-operated Haynesville shale wells that began producing in 2016.2018.
Financing Arrangements
On March 11, 2016, we completedWe concluded several important financing transactions in 2018 that increased our operational flexibility and opportunities, while preserving the strength of our balance sheet and improving our liquidity position. These transactions included:
the completion of a public offering of 7,500,0007,000,000 shares of our common stock. After deducting offering costs totaling approximately $0.8 million,stock, whereby we received net proceeds of approximately $141.5 million. In late October 2016, the lenders party to our third amended$226.4 million;
a series of transactions whereby we (i) issued $1.05 billion aggregate principal amount of senior notes and restated credit agreement (the “Credit Agreement”), under which we had no borrowings outstanding at December 31, 2016, increased our borrowing base from $300.0 million to $400.0 million. On December 9, 2016, we issued $175.0 million of our 6.875% senior unsecured notes due 2023 (the “Additional Notes”) in a private placement. We received net proceeds from the issuance of Additional Notes of $181.5 million, including the issue premium, but after deducting the initial purchasers’ discounts and estimated offering expenses and excluding accrued interest paid by buyers of the Additional Notes. Also on December 9, 2016, we completed a public offering of 6,000,000 shares of our common stock. After deducting offering costs totaling approximately $0.4 million, we received net proceeds of approximately $145.8 million. See Notes 6$1.04 billion, (ii) redeemed $575.0 million aggregate principal amount of senior notes, (iii) improved the coupon rate on our senior notes outstanding to 5.875% from 6.875% and 10 to(iv) extended the consolidated financial statements in this Annual Report for more details on each of the above items.
2017 Recent Developments
Between January 1, 2017 and February 22, 2017, we acquired approximately 13,900 gross (8,200 net) leasehold and mineral acres and approximately 1,000 BOE per day of related production from various lessors and other operators, mostly in and around our existing acreage in the Delaware Basin. Some of this acreage, and a portion of the production, included properties identified at the timematurity date of our December 2016 equity andsenior notes offerings. These transactions were pending at the time of those offerings and closed subsequentfrom 2023 to December 31, 2016, bringing our total Permian Basin acreage position at February 22, 2017 to 177,600 gross (101,400 net) acres, almost all of which was located in the Delaware Basin. We have incurred capital expenditures of approximately $111 million since January 1, 2017 to acquire leasehold and mineral interests and the related production.
On February 17, 2017, we announced the formation of San Mateo, a strategic joint venture with a subsidiary of Five Point Capital Partners LLC (“Five Point”). The midstream assets contributed to San Mateo include (i) the Black River Processing Plant; (ii) one salt water disposal well and a related commercial salt water disposal facility in the Rustler Breaks asset area; (iii) three salt water disposal wells and related commercial salt water disposal facilities in the Wolf asset area; and (iv) substantially all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas (collectively, the “Delaware Midstream Assets”). We received $171.5 million in connection with the formation of the Joint Venture and may earn up to an additional $73.5 million in performance incentives over the next five years. We continue to operate the Delaware Midstream Assets and retain operational control of the Joint Venture. The Company and Five Point own 51% and 49% of the Joint Venture, respectively. San Mateo will continue to provide firm capacity service to us at market rates, while also being a midstream service provider to third parties in and around our Wolf and Rustler Breaks asset areas.2026;
the amendment of our third amended and restated credit agreement (the “Credit Agreement”) to, among other items, (i) increase the maximum facility amount to $1.5 billion, (ii) increase the borrowing base to $850.0 million, (iii) increase the elected borrowing commitment to $500.0 million, (iv) extend the maturity to October 31, 2023, (v) reduce borrowing rates by 0.25% per annum and (vi) set the maximum leverage ratio at 4.00 to 1.00; and
San Mateo’s entrance into a $250.0 million credit facility led by The Bank of Nova Scotia, as administrative agent (the “San Mateo Credit Facility”), and the cash distribution of $195.0 million, which was distributed 51% to us and 49% to our partner.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for additional information regarding these financing arrangements.
BLM Acquisition
On September 12, 2018, we announced the successful acquisition of 8,400 gross and net leasehold acres in Lea and Eddy Counties, New Mexico for approximately $387 million, or a weighted average cost of approximately $46,000 per net acre, in the Bureau of Land Management (the “BLM”) New Mexico Oil and Gas Lease Sale on September 5 and 6, 2018 (the “BLM Acquisition”). The acquired leasehold acreage includes approximately 2,800 gross and net acres in the Stateline asset area on the Texas/New Mexico border, 4,800 gross and net acres in the Antelope Ridge asset area, 400 gross and net acres in the Arrowhead asset area and 400 gross and net acres in the Twin Lakes asset area. The leases for all tracts covering the BLM Acquisition were issued in the fourth quarter of 2018.
At February 26, 2019, we were actively pursuing drilling permits on a number of these tracts, including the approximately 2,800 gross and net acres in the Stateline asset area and the approximately 1,200 gross and net acres in the western portion of the Antelope Ridge asset area. We expect to begin drilling operations on these Stateline and western Antelope Ridge properties as early as the fourth quarter of 2019 or the first quarter of 2020.
Midstream Highlights
On January 22, 2018, we announced a strategic relationship between a subsidiary of San Mateo and a subsidiary of Plains to gather and transport crude oil for upstream producers in and around the Rustler Breaks asset area in Eddy County, New Mexico. Subsidiaries of San Mateo and Plains have agreed to work together through a joint tariff arrangement and related transactions to offer third-party producers located within a joint development area of approximately 400,000 acres in Eddy County, New Mexico (the “Joint Development Area”) crude oil transportation services from the wellhead to Midland, Texas with access to other end markets, such as Cushing and the Gulf Coast. San Mateo completed its expanded oil gathering system in the Wolf asset area in Loving County, Texas (the “Wolf Oil Pipeline System”) in May 2018, and, in December 2018, San Mateo placed into service its crude oil gathering and transportation system in the Rustler Breaks asset area in Eddy County, New Mexico (the “Rustler Breaks Oil Pipeline System”) following a successful open season to gauge shipper interest in committed crude oil interstate transportation service on the Rustler Breaks Oil Pipeline System earlier in 2018.
In late March 2018, San Mateo completed the expansion of the Black River Processing Plant, adding an incremental designed inlet capacity of 200 MMcf of natural gas per day and bringing the total designed inlet capacity of the Black River Processing Plant to 260 MMcf of natural gas per day. The expanded Black River Processing Plant supports our exploration and development activities in the Delaware Basin, and with the expanded capacity, San Mateo can offer natural gas processing services to other producers as well.
In October 2018, a subsidiary of San Mateo entered into a long-term agreement with a producer in Eddy County, New Mexico relating to the gathering and processing of such producer’s natural gas production. As a result of this agreement, along with prior natural gas gathering and processing agreements entered into by San Mateo with its customers, including the Company, at December 31, 2018, San Mateo had entered into contracts to provide firm gathering and processing services for over 200 MMcf of natural gas per day, or over 80% of the designed inlet capacity of 260 MMcf of natural gas per day, at the Black River Processing Plant. In addition, in June 2018, a subsidiary of San Mateo entered into a long-term agreement with another significant producer in Eddy County, New Mexico to gather and dispose of the customer’s produced salt water. The agreement includes the dedication of certain of the third party’s wells, which are or will be located near San Mateo’s existing salt water gathering system in Eddy County, New Mexico.
2019 Recent Developments
On February 25, 2019, we announced the formation of San Mateo Midstream II, LLC (“San Mateo II”), a strategic joint venture with a subsidiary of Five Point Energy LLC (“Five Point”) designed to expand our midstream operations in the Delaware Basin, specifically in Eddy County, New Mexico. San Mateo II is owned 51% by us and 49% by Five Point. As part of this transaction, we dedicated to San Mateo II acreage in the Stebbins area and the Stateline asset area pursuant to 15-year, fixed-fee agreements for oil, natural gas and salt water gathering, natural gas processing and salt water disposal. In addition, Five Point has committed to pay $125 million of the first $150 million of capital expenditures incurred by San Mateo II to
Principal Areasdevelop facilities in the Stebbins area and the Stateline asset area. Five Point has also provided us the opportunity to earn deferred performance incentives of Interest — up to $150 million over the next five years as we execute our operational plans in and around the Stebbins area and the Stateline asset area, plus additional performance incentives for securing volumes from third-party customers.
Exploration and Production Segment
Our focus since inception has beencurrent operations are focused primarily on the exploration for oil and natural gas in unconventional plays with an emphasis in recent years onliquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas,Texas. We also operate in the Eagle Ford shale play in South Texas and the Haynesville shale playand Cotton Valley plays in Northwest Louisiana and East Texas. During 2016,2018, we devoted most of our efforts and most of our capital expenditures to our drilling and completion operations in the Wolfcamp and Bone Spring plays in the Delaware Basin, as well as our midstream operations there. Since our inception, our exploration and development efforts have concentrated primarily on known hydrocarbon-producing basins with well-established production histories offering the potential for multiple-zone completions. We have also sought to balance the risk profile of our asset areas by exploring for and developing more conventional targets as well, although atfor the year ended December 31, 2016,2018, essentially all of our efforts were focused on unconventional plays.
At December 31, 2016, our principal areas of interest consisted of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas, the Eagle Ford shale play in South Texas and the Haynesville shale play, as well as the traditional Cotton Valley and Hosston (Travis Peak) formations, in Northwest Louisiana and East Texas.
The following table presents certain summary data for each of our operating areas as of and for the year ended December 31, 2016.2018. | | | | | | | | Producing | | Total Identified | | Estimated Net Proved | | | | | | | Producing | | Total Identified | | Estimated Net Proved | | |
| | Wells | | Drilling Locations (1) | | Reserves (2) | | Avg. Daily | | Wells | | Drilling Locations (1) | | Reserves (2) | | Avg. Daily |
| | Gross | | Net | | Gross | | Net | | Gross | | Net | | | | % | | Production | Gross | | Net | | Gross | | Net | | Gross | | Net | | | | % | | Production |
| Acreage | | Acreage | | MBOE (3) | | Developed | | (BOE/d) (3) | Acreage | | Acreage | | MBOE (3) | | Developed | | (BOE/d) (3) |
| Southeast New Mexico/West Texas: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Delaware Basin (4) | 163,703 |
| | 94,312 |
| | 312 |
| | 135.1 |
| | 4,162 |
| | 1,660.2 |
| | 79,388 |
| | 35.5 |
| | 15,941 |
| 222,200 |
| | 132,000 |
| | 630 |
| | 290.7 |
| | 5,442 |
| | 2,472.2 |
| | 191,490 |
| | 42.3 |
| | 45,237 |
|
| South Texas: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Eagle Ford (5) | 30,669 |
| | 27,777 |
| | 136 |
| | 115.1 |
| | 249 |
| | 214.2 |
| | 13,298 |
| | 55.0 |
| | 4,952 |
| 32,000 |
| | 28,900 |
| | 148 |
| | 122.5 |
| | 238 |
| | 206.9 |
| | 12,189 |
| | 61.5 |
| | 3,158 |
|
| Northwest Louisiana/East Texas: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Haynesville | 20,105 |
| | 12,452 |
| | 204 |
| | 19.8 |
| | 431 |
| | 103.0 |
| | 12,414 |
| | 61.1 |
| | 6,517 |
| 19,600 |
| | 12,000 |
| | 227 |
| | 20.4 |
| | 395 |
| | 100.2 |
| | 10,919 |
| | 46.5 |
| | 3,417 |
|
Cotton Valley (6) | 21,614 |
| | 19,071 |
| | 81 |
| | 54.2 |
| | 71 |
| | 50.1 |
| | 652 |
| | 100.0 |
| | 403 |
| 21,100 |
| | 18,600 |
| | 79 |
| | 53.3 |
| | 71 |
| | 49.2 |
| | 715 |
| | 100.0 |
| | 316 |
|
Area Total (7) | 26,062 |
| | 23,278 |
| | 285 |
| | 74.0 |
| | 502 |
| | 153.1 |
| | 13,066 |
| | 63.0 |
| | 6,920 |
| 25,500 |
| | 22,800 |
| | 306 |
| | 73.7 |
| | 466 |
| | 149.4 |
| | 11,634 |
| | 49.8 |
| | 3,733 |
|
Total (8) | 220,434 |
| | 145,367 |
| | 733 |
| | 324.2 |
| | 4,913 |
| | 2,027.5 |
| | 105,752 |
| | 41.4 |
| | 27,813 |
| 279,700 |
| | 183,700 |
| | 1,084 |
| | 486.9 |
| | 6,146 |
| | 2,828.5 |
| | 215,313 |
| | 43.8 |
| | 52,128 |
|
__________________ | |
| (1) | Identified and engineered drilling locations. These locations have been identified for potential future drilling and were not producing at December 31, 2016.2018. The total net engineered drilling locations are calculated by multiplying the gross engineered drilling locations in an operating area by our working interest participation in such locations. Each location represents a one-mile lateral. At December 31, 2016,2018, these engineered drilling locations included only 163301 gross (90.3(147.6 net) locations to which we have assigned proved undeveloped reserves, primarily in the Wolfcamp or Bone Spring plays, but also in the DelawareBrushy Canyon, Avalon and Strawn formations, in the Delaware Basin, 2117 gross (21.0(17.0 net) locations to which we have assigned proved undeveloped reserves in the Eagle Ford and 1214 gross (4.0(4.9 net) locations to which we have assigned proved undeveloped reserves in the Haynesville. |
| |
| (2) | These estimates were prepared by our engineering staff and audited by Netherland, Sewell & Associates, Inc., independent reservoir engineers. For additional information regarding our oil and natural gas reserves, see “—Estimated Proved Reserves” and Supplemental Oil and Natural Gas Disclosures included in the unaudited supplementary information in this Annual Report, which is incorporated herein by reference. |
| |
| (3) | Production volumes and proved reserves reported in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
| |
| (4) | Includes potential future engineered drilling locations in the Wolfcamp, Bone Spring, Delaware,Brushy Canyon, Strawn and Avalon plays on our acreage in the Delaware Basin at December 31, 2016.2018. |
| |
| (5) | Includes one well producing small quantities of oil from the Austin Chalk formation and two wells producing small quantities of natural gas from the San Miguel formation in Zavala County, Texas. |
| |
| (6) | Includes the Cotton Valley formation and shallower zones and also includes one well producing from the Frio formation in Orange County, Texas. |
| |
| (7) | Some of the same leases cover the net acres shown for both the Haynesville formation and the shallower Cotton Valley formation. Therefore, the sum of the net acreage for both formations is not equal to the total net acreage for Northwest Louisiana and East Texas. This total includes acreage that we are producing from or that we believe to be prospective for these formations. |
| |
(8) | During the year ended December 31, 2016, we released all of our acreage in Wyoming, Utah and Idaho. |
We are active both as an operator and as a co-working interest owner with largervarious industry participants, including affiliates of EOG Resources, Inc., Royal Dutch Shell plc, Chesapeake Energy Corporation, EP Energy Company, Concho Resources Inc., Devon Energy Corporation, Cimarex Energy Company, BHP Billiton, Mewbourne Oil Company, Occidental Petroleum Corporation, Chevron Corporation and others.participants. At December 31, 2016,2018, we operated the majority of our acreage in the Delaware Basin in Southeast New Mexico and West Texas. In those wells where we are not the operator, our working interests are often relatively small. At December 31, 2016,2018, we also were the operator for approximately 93%94% of our Eagle Ford acreage and approximately 64% of our Haynesville acreage, including
approximately 65% of our Haynesville acreage, including approximately 32% of our acreage in what we believe is the core area of the Haynesville play. A large portion of our acreage in the core area of the Haynesville shale is operated by Chesapeake.an affiliate of Chesapeake Energy Corporation.
While we do not always have direct access to our operating partners’ drilling plans with respect to future well locations on non-operated properties, we do attempt to maintain ongoing communications with the technical staff of these operators in an effort to understand their drilling plans for purposes of our capital expenditure budget and our booking of any related proved undeveloped well locations and reserves. We review these locations with Netherland, Sewell & Associates, Inc., independent reservoir engineers, on a periodic basis to ensure their concurrence with our estimates of these drilling plans and our approach to booking these reserves.
Southeast New Mexico and West Texas — Delaware Basin
The greater Permian Basin in Southeast New Mexico and West Texas is a mature exploration and production provinceregion with extensive developments in a wide variety of petroleum systems resulting in stacked target horizons in many areas. Historically, the majority of development in this basin has focused on relatively conventional reservoir targets, but the combination of advanced formation evaluation, 3-D seismic technology, horizontal drilling and hydraulic fracturing technology is enhancing the development potential of this basin, particularly in the organic rich shales, or source rocks, of the Wolfcamp formation and in the low permeability sand and carbonate reservoirs of the Bone Spring, Avalon and Delaware formations. We believe these formations, which have been typically considered low quality rocks because of their low permeability, are strong candidates for horizontal drilling and advanced hydraulic fracturing techniques.
In the western part of the Permian Basin, also known as the Delaware Basin, the Lower Permian age Bone Spring (also called the Leonardian) and Wolfcamp formations are several thousand feet thick and contain stacked layers of shales, sandstones, limestones and dolomites. These intervals represent a complex and dynamic submarine depositional system that also includes organic rich shales that are the source rocks for oil and natural gas produced in the basin. Historically, production has come from conventional reservoirs; however, we and other industry players have realized that the source rocks also have sufficient porosity and permeability to be commercial reservoirs. In addition, the source rocks are interbedded with reservoir layers that have filled with hydrocarbons, both of which can produce significant volumes of oil and natural gas when connected by horizontal wellbores with multi-stage hydraulic fracture treatments. Particularly in the Delaware Basin, there are multiple horizontal targets in a given area that exist within the several thousand feet of hydrocarbon bearing layers that make up the Bone Spring and Wolfcamp plays. Multiple horizontal drilling and completion targets are being identified and targeted by companies, including us, throughout the vertical section, including the Delaware,Brushy Canyon, Avalon, Bone Spring (First, Second and Third Sand) and several intervals within the Wolfcamp shale, often identified as Wolfcamp A through D.
As noted above in “—20162018 Highlights—Operational Highlights,” we increased our acreage position in the Delaware Basin during 2016,2018, and as a result, at December 31, 2016,2018, our total acreage position in Southeast New Mexico and West Texas was approximately 163,700222,200 gross (94,300(132,000 net) acres, primarily in Loving County, Texas and Lea and Eddy Counties, New Mexico. These acreage totals included approximately 32,70034,200 gross (20,400(17,500 net) acres in our Ranger asset area in Lea County, 48,00060,100 gross (17,000(25,700 net) acres in our Arrowhead asset area in Eddy County, 25,10045,300 gross (16,500(26,200 net) acres in our Rustler Breaks asset area in Eddy County, 13,50020,500 gross (8,400(17,300 net) acres in our Antelope Ridge asset area in Lea County, 14,400 gross (10,700 net) acres in our Wolf and Jackson Trust asset areas in Loving County, 2,800 gross (2,800 net) acres in our recently acquired Stateline asset area in Eddy County and 42,90044,300 gross (30,800(31,300 net) acres in our Twin Lakes asset area in Lea County at December 31, 2016.2018. We consider the vast majority of our Delaware Basin acreage position to be prospective for oil and liquids-rich targets in the Bone Spring and Wolfcamp formations. Other potential targets on certain portions of our acreage include the Avalon and Delaware formations, as well as the Abo, Strawn, Devonian, Penn Shale, Atoka and Morrow formations. At December 31, 2016,2018, our acreage position in the Delaware Basin was approximately 36%54% held by existing production. Excluding the Twin Lakes asset area, where we have drilled only one vertical Strawnoperated well and two horizontal operated wells, and the acreage acquired in the BLM Acquisition, which has 10-year leases with favorable lease-holding provisions, our acreage position in the Delaware Basin was approximately 47%73% held by existing production at December 31, 2016.2018.
During the year ended December 31, 2016,2018, we continued the delineation and development of our Delaware Basin acreage. We completed and began producing oil and natural gas from 55141 gross (37.0(73.8 net) wells in the Delaware Basin, including 4082 gross (35.6(66.8 net) operated wells and 1559 gross (1.4(7.0 net) non-operated wells, throughout our various asset areas. At December 31, 2016,2018, we had tested a number of different producing horizons at various locations across our acreage position, including the Brushy Canyon, Avalon, the First Bone Spring, two benches of the Second Bone Spring, the Third Bone Spring, three benches of the Wolfcamp A, including the X and Y sands and the more organic, lower section of the Wolfcamp A, three benches of the Wolfcamp B, the Wolfcamp D, the Morrow and the Strawn. Most of our delineation and development efforts have been focused on multiple completion targets between the SecondFirst Bone Spring and the Wolfcamp B.
As a result of our ongoing drilling and completion operations in these asset areas, our Delaware Basin production increased significantly in 2016.2018. Our average daily oil equivalent production from the Delaware Basin increased approximately 145% (2.5-fold)54% to 15,94145,237 BOE per day (57%(87% of total oil equivalent production), including 10,39528,026 Bbl of oil per day (75%(92% of total oil production) and 33.3103.3 MMcf of natural gas per day (40%(80% of total natural gas production), in 2016,2018, as compared to 6,51829,463 BOE per day (26%(76% of total oil equivalent production), including 4,64818,023 Bbl of oil per day (38%(84% of total oil production) and 11.268.6
MMcf of natural gas per day (15%(66% of total natural gas production), in 2015. In addition, our2017. Our average daily oil equivalent production from the Delaware Basin also grew approximately 138% (2.4-fold)41% from 8,72034,859 BOE per day in the fourth quarter of 20152017 to 20,67049,309 BOE per day in the fourth quarter of 2016.2018.
At December 31, 2016,2018, approximately 75%89% of our estimated total proved oil and natural gas reserves, or 79.4191.5 million BOE, was attributable to the Delaware Basin, including approximately 46.9114.8 million Bbl of oil and 195.1460.0 Bcf of natural gas, a 68%48% increase, as compared to 47.1129.0 million BOE for the year ended December 31, 2015.2017. Our Delaware Basin proved reserves at December 31, 20162018 comprised approximately 82%93% of our proved oil reserves and 67%83% of our proved natural gas reserves, as compared to approximately 69%89% of our proved oil reserves and 40%78% of our proved natural gas reserves at December 31, 2015.2017.
At December 31, 2016,2018, we had identified 4,1625,442 gross (1,660.2(2,472.2 net) engineered locations for potential future drilling on our Delaware Basin acreage, primarily in the Wolfcamp or Bone Spring plays, but also including the shallower AvalonBrushy Canyon and DelawareAvalon formations and the deeper Strawn formation. These locations include 2,5463,451 gross (1,478.1(2,278.0 net) locations that we anticipate operating as we hold a working interest of at least 25% in each of these locations. Each horizontal drilling location assumes a one-mile lateral, although we anticipate that many of our future wells will have lateral lengths longer than one mile. These engineered locations have been identified on a property-by-property basis and take into account criteria such as anticipated geologic conditions and reservoir properties, estimated rates of return, estimated recoveries from our Delaware Basin wells and other nearby wells based on available public data, drilling densities observed on properties of other operators, estimated horizontal lateral lengths, estimated drilling and completion costs, spacing and other rules established by regulatory authorities and surface considerations, among other criteria. Our engineered well locations at December 31, 20162018 do not yet include all portions of our acreage position and do not include any horizontal locations in our Twin Lakes asset area in Lea County, New Mexico (other than our upcoming horizontal test of the Wolfcamp D in 2017).Mexico. Our identified well locations presume that these properties may be developed on 80- to 160-acre well spacing although we believe that denser well spacing may be possible and that multiple intervals may be prospective at any one surface location. Although we believe that denser well spacing may be possible, at December 31, 2018, the majority of our estimated locations were based on the assumption of 160-acre well spacing. As we explore and develop our Delaware Basin acreage further, we anticipate that we may identify additional locations for future drilling. At December 31, 2016,2018, these potential future drilling locations included only 163301 gross (90.3(147.6 net) locations in the Delaware Basin, primarily in the Wolfcamp and Bone Spring plays, but also in the DelawareBrushy Canyon, Avalon and Strawn formations, to which we have assigned proved undeveloped reserves.
At December 31, 2016 and February 22, 2017,2018, we were operating foursix drilling rigs in the Delaware Basin—Basin, and we expect to operate these six rigs in the Delaware Basin throughout 2019, including two rigs in each of the Rustler Breaks and Antelope Ridge asset area,areas, one rig in the Wolf/Jackson Trust asset areas and one rig in the Ranger/Arrowhead and Twin Lakes asset areas. We intendhave continued to build significant optionality into our drilling program. Three of our rigs operate fouron longer-term contracts with remaining average terms of approximately 12 months. The other three rigs in these asset areas throughoutare on short-term contracts with remaining obligations of six months or less. This affords us the remainder of 2017,ability to modify our drilling program as we may deem necessary based on changing commodity prices and we expect to add a fifth drilling rig in the Delaware Basin beginning early in the second quarter of 2017. Thereafter, we expect to operate this fifth drilling rig in the Rustler Breaks asset area throughout the remainder of 2017.other factors. We are also participatingplanning to participate in non-operated wells in the Delaware Basin as these opportunities arise. We have allocated substantially all of our 2017 estimated capital expenditure budget to our drilling and completion program and midstream operationsarise in the Delaware Basin, with the exception of amounts allocated to limited operations in the Eagle Ford and Haynesville shales to maintain and extend leases and to participate in certain non-operated well opportunities.2019.
Rustler Breaks Asset Area - Eddy County, New Mexico
We made significant progress delineating, developingoperated two to three drilling rigs in our Rustler Breaks asset area during most of 2018. We completed and testing our acreage positionturned to sales 83 gross (41.8 net) horizontal wells and two gross (1.5 net) vertical wells in the Rustler Breaks asset area in 2016. The ten2018, including 46 gross (38.0 net) operated and 39 gross (5.3 net) non-operated wells. Most of these wells were completed in the Wolfcamp A-XY or Wolfcamp B-Blair intervals.
One of the key achievements of our drilling and completions program in our Rustler Breaks asset area in 2018 was our first operated two-mile horizontal well—the David Edelstein State Com 12&11-24S-27E RB #203H (Edelstein #203H) well, a Wolfcamp A-XY completion. The Edelstein #203H well tested 2,378 BOE per day (77% oil) during a 24-hour IP test in the third quarter of 2018.
We were pleased in 2018 with the success of our wells drilled in the northwestern portion of our acreage position. For example, the Miss Sue 12-23S-27E RB #201H (Miss Sue #201H) and two Wolfcamp B (Middle)the Michael Collins 11-23S-27E RB #201H (Michael Collins #201H) wells completedtested 1,706 BOE per day (76% oil) and placed on2,125 BOE per day (78% oil), respectively, during 24-hour IP tests. The Joe Coleman 13-23S-27E RB #201H and #203H (Joe Coleman #201H and #203H) wells tested 1,702 BOE per day (80% oil) and 1,831 BOE per day (73% oil), respectively, during 24-hour IP tests. In seven months of production, the Joe Coleman #201H and #203H wells have produced approximately 210,000 BOE (69% oil) and 190,000 BOE (70% oil), respectively.
In addition, the Garrett Fed Com #122H (Garrett #122H) well, a Second Bone Spring completion in the Rustler Breaks asset area, in 2016 were consistent with or better than the best Wolfcamp A-XY wells and Wolfcamp B (Middle) wells drilled by us in this asset area to date. The Paul 25-24S-28E RB #221H well tested at the highest 24-hour initial potential flow rate of any Wolfcamp A-XY well we have drilled at Rustler Breaks—1,701flowed 2,411 BOE per day (74%(84% oil)—and early performance from this well indicates that it may be during a 24-hour IP test. We expect to further delineate the best Wolfcamp A-XY well drilledSecond Bone Spring formation moving to date at Rustler Breaks. During 2016, we testedthe northwest in our first five wells drilled in the deepest bench of the Wolfcamp B (Blair) at Rustler Breaks. This is the third bench of the Wolfcamp B we have successfully tested at Rustler Breaks. These three target benches of the Wolfcamp B occur starting approximately 300 feet into the 1,000-foot thick Wolfcamp B interval at Rustler Breaks and are each about 200 to 250 feet apart vertically.
The 24-hour initial potential flow rates from the five Wolfcamp B (Blair) wells we completed and placed on production in 2016—the Dr. Scrivner Federal 01-24S-28E RB #228H, the Jimmy Kone 05-24S-28E RB #228H, the Janie Conner 13-24S-28E RB #221H, the Anne Com 15-24S-28E RB #221H (Anne Com #221H) and the Tiger 14-24S-28E RB #227H—were the five highest 24-hour test results we have reported in the Delaware Basin to date (with the exception of the three Mallon wells discussed below) at 2,570 BOE per day, 2,438 BOE per day, 2,384 BOE per day, 2,364 BOE per day and 1,812 BOE per day, respectively, at about 35% oil. These 24-hour initial potential test results compare favorably to those from other wells completed in the Wolfcamp B (Middle), the Tiger 14-24S-28E RB #224H and Janie Conner 13-24S-28E RB #224H wells, which had 24-hour initial potential rates of 1,533 BOE per day (43% oil) and 1,703 BOE per day (59% oil), respectively. The initial oil volumes from these lower Wolfcamp B (Blair) completions were reasonably comparable to or better than those in the Wolfcamp B (Middle), while the initial natural gas volumes were higher. In some instances, the oil rates tested on the lower Wolfcamp B (Blair) wells were close to those tested on the Wolfcamp A-XY wells.
In the Rustler Breaks asset area in 2016, we reduced our average drilling time from spud to total depthusing two-mile laterals beginning in the Wolfcamp A-XY by approximately 31% and 16%, as compared to 2014 and 2015, respectively, and in the Wolfcamp B by approximately 50% and 35%, respectively. Our fastest-drilled Wolfcamp A-XY well, the B. Banker 33-23S-28E #226H well, was drilled in 12.5 days from spud to a total depthlatter part of 14,350 feet, a decrease of almost 50% from the average drilling time in late 2014, and our fastest-drilled Wolfcamp B well, the Anne Com #221H, was drilled in 17.4 days from spud to a total depth of 15,364 feet, a decrease of 58% from the average drilling time in 2014. These drilling times of 12.5 and 17.4 days were faster than our 2016 drilling objectives of 14 days for the Wolfcamp A-XY and 18 days for the Wolfcamp B, respectively, from spud to total depth. We delivered faster drilling times as a result of our increased knowledge of the geology and our experience with drilling in the Rustler Breaks asset area, as well as improvements in drilling the curve between the vertical and horizontal portions of these wells and continued applications of improved drill bit and bottomhole assembly technologies.
Due in part to these improvements in drilling times, continued innovation by our technical staff and lower oilfield services costs, the costs associated with recent Wolfcamp A-XY and Wolfcamp B wells at Rustler Breaks continued to decline throughout 2016. We were able to drill, complete and equip several wells in the Wolfcamp A-XY for just under $5 million each and in the Wolfcamp B for approximately $5.7 million each in mid-to-late 2016.
All of the Wolfcamp A-XY wells completed and placed on production in the Rustler Breaks asset area in 2016 were stimulated using our Generation 3 Wolfcamp stimulation treatment design, consisting of approximately 40 Bbl of fracturing fluid and 3,000 pounds of primarily 30/50 white sand per completed lateral foot. Similarly, we pumped this Generation 3 Wolfcamp stimulation treatment design in our Wolfcamp B (Blair) completions in the third and fourth quarters of 2016. Prior to this, most of our Wolfcamp A and B completions in the Rustler Breaks asset area used approximately 30 to 40 Bbl of fracturing fluid and 2,000 pounds of primarily 30/50 white sand per completed lateral foot. We also continued to pump diverting agents in most of our stimulation treatments in the Rustler Breaks asset area during the third and fourth quarters of 2016.
Wolf and Jackson Trust Asset Areas
Operational efficiencies continued to improve in the Wolf asset area as well. In 2016, we reduced our average drilling time from spud to total depth in the Wolfcamp A-X and A-Y by approximately 52% and 10% as compared to 2014 and 2015, respectively, and in the Second Bone Spring by approximately 42% as compared to our first well drilled in the Second Bone Spring in 2015. Our fastest-drilled Wolfcamp A well, the Dorothy White 82-TTT-B33 #203H well, was drilled in 17.3 days from spud to a total depth of 15,550 feet, a decrease of 61% from the 2014 average drilling time and faster than our 2016 Wolfcamp A drilling objective of 18 days from spud to total depth in the Wolf asset area. The Barnett 90-TTT-B01 WF #124H (Barnett #124H) well, a Second Bone Spring test, was drilled in approximately 11.5 days (11.2 days normalized to a 5,000-foot lateral length) from spud to total depth, with drilling times being faster than our 2016 year-end drilling target of 13 days for Second Bone Spring wells. In the Barnett #124H and subsequent Second Bone Spring wells drilled in 2016, our drilling engineers were also able to eliminate a second intermediate casing string typically used when drilling the Second Bone Spring in this area. Not only did eliminating this casing string save approximately $650,000 in well costs on each Second Bone Spring well drilled in 2016, but it also provided for larger casing to be set through the lateral, thereby reducing hydraulic horsepower costs during fracturing operations and enhancing the number of artificial lift options available in the future. Total costs to drill, complete and equip Second Bone Spring wells in the Wolf asset area were just over $4 million in mid-to-late 2016.
Well costs associated with recent Wolfcamp A-X and A-Y wells drilled and completed in the Wolf asset area also continued to decline. Costs to drill, complete and equip Wolfcamp A wells ranged between $5 and $6 million, with a number of these wells at2019 or below $5.5 million in mid-to-late 2016. As in the Rustler Breaks asset area, we attribute these cost savings to the innovation and use of new technologies by our drilling, completions and production teams, as well as lower oilfield services costs.
Our Second Bone Spring completions in 2016 represented significant improvements over our initial Second Bone Spring well drilled in the Wolf asset area in 2015. We attribute this improvement in well performance to the increased stimulation treatments pumped in 2016. The 2016 wells were completed using approximately 40 Bbl of fracturing fluid and 2,000 pounds of primarily 20/40 sand per completed lateral foot, compared to our initial Second Bone Spring completion in the Wolf asset area, which used only 20 Bbl of fracturing fluid and about 1,300 pounds of primarily 30/50 sand per completed lateral foot. In particular, we were pleased with the test results observed from the Johnson 44-02S-B53 WF #121H well, which had the highest test rate achieved from any Second Bone Spring well we have drilled to date of 1,167 BOE per day (58% oil).
We did not complete and place on production any new wells in our Jackson Trust asset area in 2016, although we do have several wells planned in our Jackson Trust asset area for 2017.early 2020.
RangerWolf and ArrowheadJackson Trust Asset Areas - Loving County, Texas
In the RangerWolf and Jackson Trust asset areaareas, we continued to focus primarily on the Wolfcamp A-XY and Wolfcamp A-Lower formations in Lea County, New Mexico,2018. We operated one drilling rig in our Wolf and Jackson Trust asset areas during 2018, and we completed and turned to sales 11 gross (8.0 net) operated horizontal wells in these asset areas. Most of these wells were completed in the Wolfcamp A-XY interval.
In the fourth quarter of 2018, we completed and placed on production the Mallon 27 Federal Com #1H, #2HWolf 80-TTT-B33 WF #206H and #3H#208H (Wolf #206H and #208H) wells. These wells eachtested 2,509 BOE per day (41% oil) and 2,514 BOE per day (39% oil), respectively, during 24-hour IP tests. We attribute these well results to the selection of which are 7,300-foot lateralsan improved landing target identified through the use of 3-D seismic data, the longer lateral lengths drilled and completed (5,600 and 6,200 feet, respectively) and an improved stimulation design.
Arrowhead and Ranger Asset Areas - Eddy and Lea Counties, New Mexico
We operated one drilling rig in our Arrowhead, Ranger and Twin Lakes asset areas during 2018. We completed and turned to sales 13 gross (7.9 net) horizontal wells in the Arrowhead and Ranger asset areas in 2018, including 10 gross (7.5 net) operated and three gross (0.4 net) non-operated wells. Most of these wells were completed in the Second Bone Spring and Third Bone Spring sand. Theseintervals.
The SST 6 State #123H and #124H wells, were theour first operatedtwo Second Bone Spring wells we have drilled on the SST leasehold north of the Stebbins acreage acquired in our 2015 merger with Harvey E. Yates Company (“HEYCO” and, such merger, the “HEYCO Merger”). In aggregate, these three wells flowed 7,856Arrowhead asset area, tested 2,056 BOE per day (91%(85% oil) and 1,845 BOE per day (86% oil), respectively, during 24-hour IP tests. The SST 6 State #123H well has produced approximately 240,000 BOE (70% oil) in their 24-hour initial potential tests. Eachits first eight months of production, and the SST 6 State #124H well was completed with a 29-stage fracture treatment, includinghas produced approximately 40 Bbl180,000 BOE (73% oil) in its first eight months of fluidproduction.
In addition, we believe recent Wolfcamp wells drilled by Matador and 3,000 poundsother operators demonstrate the prospectivity of primarily 20/40 white sand per completed lateral foot. At December 31, 2016, these were the largest fracture treatments we have pumped in a Bone Spring completion. The Mallon wells were among the best wells we have drilled to dateWolfcamp formation moving north in the Delaware Basin, and these wells illustrateBasin. We achieved positive Wolfcamp results in the potentialRanger asset area with the recent completion of the Verna Rae Federal Com #204H (Verna Rae #204H) well about three miles southwest of our northern Delaware Basin acreage position.Mallon wells. The Verna Rae #204H well flowed 1,586 BOE per day (90% oil) during a 24-hour IP test.
Antelope Ridge Asset Area - Lea County, New Mexico
We did not conduct any operated one to two drilling and completion activitiesrigs in our ArrowheadAntelope Ridge asset area during 2016, although2018. We completed and turned to sales 29 gross (13.2 net) horizontal wells in this asset area in 2018, including 14 gross (12.3 net) operated and 15 gross (0.9 net) non-operated wells. As we did participatebegan to delineate the Antelope Ridge asset area during 2018, we tested six different intervals, completing wells in one new, non-operatedthe Brushy Canyon, First, Second and Third Bone Spring, Wolfcamp A-XY and Wolfcamp A-Lower.
In particular, we were pleased with our delineation of the Wolfcamp A-Lower in the Antelope Ridge asset area. The Strong 14-24S-33E AR #214H (Strong #214H) well, on our Arrowhead acreage duringsecond Wolfcamp A-Lower test in the first quarter of 2016. This well, the Yates Petroleum Corporation Baroque “BTQ” Federal Com #1H well, tested at flow rates averaging approximately 1,300Antelope Ridge asset area, flowed 3,670 BOE per day (including approximately 1,100 Bbl of oil(77% oil) during a 24-hour IP test. The Strong #214H well was a successful follow-up to our initial Wolfcamp A-Lower well in the Antelope Ridge asset area, the Leo Thorsness 13-24S-33E AR #211H (Leo Thorsness #211H) well, which flowed 2,906 BOE per day (72% oil) during a 24-hour IP test. The Strong #214H well has produced approximately 225,000 BOE (75% oil) in its first four months of production, and 1.2 MMcfthe Leo Thorsness #211H well has produced approximately 325,000 BOE (72% oil) in its first 11 months of natural gas per day) beginning in late March 2016. This well is locatedproduction.
We also achieved several strong results in the eastern portionBone Spring in the Antelope Ridge asset area. The Irvin Wall State Com #131H (Irvin Wall #131H) well, our initial Third Bone Spring test in the Antelope Ridge asset area, flowed 2,343 BOE per day (81% oil) during a 24-hour IP test. The Irvin Wall #131H well has produced approximately 150,000 BOE (85% oil) in its first seven months of production. In addition, the Bill Alexander State Com #111H (Bill Alexander #111H) well, our second First Bone Spring test in the Antelope Ridge asset area, flowed 1,808 BOE per day (79% oil) during a 24-hour IP test. The Bill Alexander #111H well was a strong follow-up test of the First Bone Spring formation north of our Arrowheadinitial First Bone Spring completion in the Antelope Ridge asset area, in Eddy County, New Mexico. We own a 9.5% working interest in thisthe Marlan Downey 9-23S-35E AR #111H well, which provides yet another indicationtested 1,491 BOE per day (82% oil) during a 24-hour IP test. The Bill Alexander #111H well has produced approximately 175,000 BOE (80% oil) in its first seven months of the prospectivityproduction.
Twin Lakes Asset Area - Lea County, New Mexico
In 2018, we performed our first test of the Wolfcamp D formation in the western portion of our Twin Lakes asset area in northern Lea County, New Mexico, we drilled an initial data collectionMexico. This well, the Olivine State 5-16S-37E TL #1 (Olivine State #1), during the fourth quarter of 2015. This was a vertical pilot hole drilled for the purpose of collecting whole core and a detailed suite of geophysical logs to assist us in determining the landing target for our initial horizontal test of the Wolfcamp D interval at Twin Lakes. We collected about 400 feet of whole core throughout much of the Wolfcamp D interval, and our geoscience staff, along with third-party vendors, have conducted detailed description and analysis of the core data andNortheast Kemnitz #233H well, logs. The Olivine State #1 was drilled through the Wolfcamp D and into and through the Strawn formation below. The Strawn interval at about 11,500 feet is a complex carbonate formation that has previously produced significant quantities of oil and natural gas in the Twin Lakes area. Upon drilling through the Strawn interval, our geoscience staff analyzed the well logs taken across the interval and determined that there was the potential for a Strawn test. As a result, the Olivine State #1 was perforated and completed in the Strawn interval with a small acid treatment during the first quarter of 2016. This well flowed 691tested approximately 675 BOE per day (84% oil) on electric submersible pump during a 24-hour initial potential test, consistingIP test. This well has exhibited a shallow production decline similar to the D. Culbertson 26-15S-36E TL State #234H (D. Culbertson #234H) well, which was drilled and completed in 2017 and tested approximately 600 BOE per day (82% oil) during a 24-hour IP test. At December 31, 2018, we estimated an ultimate recovery of 579approximately 400,000 BOE from the D. Culbertson #234H well. Oil production from the D. Culbertson #234H well has been essentially flat, averaging approximately 110 Bbl of oil per day over the past 18 months, resulting in upward revisions to its estimated ultimate recovery.
Stateline Asset Area - Eddy County, New Mexico
In early September 2018, we acquired the Stateline asset area in southern Eddy County, New Mexico as part of the BLM Acquisition. The Stateline asset area includes approximately 2,800 gross and 0.7 MMcfnet undeveloped leasehold acres prospective for multiple geologic targets. The acquired leases are federal leases and provide an 87.5% net revenue interest (“NRI”) as compared to approximately 75% NRI on most fee leases today. As a result, we will retain an additional 17% of natural gas per day, at a flowing surface pressurethe net production from each well drilled and completed on these properties. The large majority of 350 psithe acquired acreage is believed to be conducive to drilling longer laterals of up to two miles or more, utilizing central facilities and multi-well pad development. The BLM has formally issued these leases, and we have begun actively pursuing drilling permits on a 32/64 inch choke. Given the positive results from this Strawn test, we elected to produce the Olivine State #1 rather than plug back, kick off and drill a horizontal Wolfcamp D test from this vertical wellbore as originally anticipated.these tracts. We expect to drill a new horizontal well to test the Wolfcamp D interval beginning latebegin drilling operations on these properties in the first quarter of 2017.early 2020.
South Texas — Eagle Ford Shale and Other Formations
The Eagle Ford shale extends across portions of South Texas from the Mexican border into East Texas forming a band roughly 50 to 100 miles wide and 400 miles long. The Eagle Ford is an organically rich calcareous shale and lies between the deeper Buda limestone and the shallower Austin Chalk formation. Along the entire length of the Eagle Ford trend, the structural dip of the formation is consistently down to the south with relatively few, modestly sized structural perturbations. As a result, depth of burial increases consistently southwards along with the thermal maturity of the formation. Where the Eagle Ford is shallow, it is less thermally mature and therefore more oil prone, and as it gets deeper and becomes more thermally mature, the Eagle Ford is more natural gas prone. The transition between being more oil prone and more natural gas prone includes an interval that typically produces liquids-rich natural gas with condensate.
At December 31, 2016,2018, our properties included approximately 30,70032,000 gross (27,800(28,900 net) acres in the Eagle Ford shale play in Atascosa, DeWitt, Gonzales, Karnes, La Salle, Wilson and Zavala Counties in South Texas. We believe that approximately 88% of our Eagle Ford acreage is prospective predominantly for oil or liquids-rich natural gas with condensate.condensate, with the remainder being prospective for less liquids-rich natural gas. Approximately 85%93% of our Eagle Ford acreage was held by production at December 31, 2016,2018, and approximately 95%essentially all of our Eagle Ford acreage was either held by production at December 31, 20162018 or not burdened by lease expirations before 2018.2020.
We did not conduct anyIn early October 2018, we added one operated drilling and completion activities on our leasehold propertiesrig to conduct a short-term drilling program in South Texas during the year ended December 31, 2016, although we did participate in the drilling and completion of two gross (less than 0.1 net) non-operated Eagle Ford shaleto drill up to 10 wells, that were turned to sales in 2016. In fact, as of December 31, 2016, we had not drilled any operated wellsprimarily in the Eagle Ford shale, sinceto take advantage of higher oil and natural gas prices in South Texas, to conduct at least one exploratory test of the Austin Chalk formation and to validate and to hold by production almost all of our remaining undeveloped Eagle Ford acreage. This rig operated in South Texas throughout the fourth quarter of 2018 and into early 2015, when2019. When drilling operations were finalized on the ninth well in early February 2019, this rig was released and was not moved to the Delaware Basin as we completed and placed on production 17 gross (17.0 net) operatedhad previously anticipated. One of the Eagle Ford shale wells was completed and turned to sales during the fourth quarter of 2018, and the remaining eight wells, including one well drilled in the Austin Chalk, are expected to be completed and turned to sales late in the first four monthsquarter or early in the second quarter of 2015. As a result, our2019.
Our average daily oil equivalent production from the Eagle Ford shale decreased 52%28% to 4,9523,158 BOE per day, including 3,5172,485 Bbl of oil per day and 8.64.0 MMcf of natural gas per day, during 2016,2018, as compared to 10,2634,413 BOE per day, including 7,6423,475 Bbl of oil per day and 15.75.6 MMcf of natural gas per day, during 2015.2017. For the year ended December 31, 2016, 18%2018, 6% of our total daily oil equivalent production was attributable to the Eagle Ford shale. Duringshale, as compared to 11% for the year ended December 31, 2015, approximately 41% of our total daily oil equivalent production was attributable to the Eagle Ford shale.
2017.
At December 31, 2016,2018, approximately 13%6% of our estimated total proved oil and natural gas reserves, or 13.312.2 million BOE, was attributable to the Eagle Ford shale, including approximately 10.18.5 million Bbl of oil and 19.321.9 Bcf of natural gas. Our Eagle Ford total proved reserves comprised approximately 18%7% of our proved oil reserves and 7%4% of our proved natural gas reserves at December 31, 2016,2018, as compared to approximately 31%11% of our proved oil reserves and 12%5% of our proved natural gas reserves at December 31, 2015.2017.
At December 31, 2016,2018, we had identified 249238 gross (214.2(206.9 net) engineered locations for potential future drilling on our Eagle Ford acreage. Each drilling location assumes a one-mile lateral, although we anticipate that many of our future wells may have lateral lengths longer than one mile. These locations have been identified on a property-by-property basis and take into
account criteria such as anticipated geologic conditions and reservoir properties, estimated rates of return, estimated recoveries from our producing Eagle Ford wells and other nearby wells based on available public data, drilling densities anticipated on our properties and observed on properties of other operators, estimated horizontal lateral lengths, estimated drilling and completion costs, spacing and other rules established by regulatory authorities and surface considerations, among other factors. The identified well locations presume that we will be able to develop our Eagle Ford properties on 40- to 80-acre spacing, depending on the specific property and the wells we have already drilled. We anticipate that any Eagle Ford wells drilled on our acreage in central and northern La Salle, northern Karnes and southern Wilson Counties can be developed on 40- to 50-acre spacing, while other properties, particularly the eastern portion of our acreage in DeWitt County, are more likely to be developed on 80-acre spacing. Approximately 95% of our Eagle Ford acreage was either held by production or not burdened by lease expirations before 2018 at December 31, 2016. At December 31, 2016,2018, these 249238 gross (214.2(206.9 net) identified drilling locations included only 2117 gross (21.0(17.0 net) locations to which we have assigned proved undeveloped reserves.
These engineered drilling locations include only a single interval in the lower portion of the Eagle Ford shale. We believe portions of our Eagle Ford acreage may be prospective for an additional target in the lower portion of the Eagle Ford shale and for other intervals in the upper portion of the Eagle Ford shale, from which we would expect to produce predominantly oil and liquids. In addition, we believe portions of our Eagle Ford acreage may also be prospective for the Austin Chalk, Buda and Edwardsother formations, from which we would expect to produce predominantly oil and liquids. In particular, we own approximately 8,900 gross (8,900 net) contiguous acres on our Glasscock Ranch property in southeast Zavala County, Texas, which are held by production and which we believe may be prospective for the Buda formation. At December 31, 2016,2018, we had not included any future drilling locations in the upper portion of the Eagle Ford shale, in any additional intervals of the lower portion of the Eagle Ford shale or in the Austin Chalk or Buda formations.formations, even though recent activity from other operators in these formations around our South Texas acreage position has demonstrated the potential prospectivity of these intervals.
Northwest Louisiana and East Texas
We did not conduct any operated drilling and completion activities on our leasehold properties in Northwest Louisiana and East Texas during 2016, although we did participate in the drilling and completion of 15 gross (2.1 net) non-operated — Haynesville shale wells that were turned to sales in 2016. These wells included nine gross (1.9 net) Haynesville wells operated by a subsidiary of Chesapeake Energy Corporation (“Chesapeake”) on our Elm Grove acreage in southern Caddo Parish, Louisiana. These nine wells came on production at an average of 13.5 MMcf per day and were drilled and completed for an average of under $7 million. We do not plan to drill any operated Haynesville shale wells in 2017.
At December 31, 2016, we held approximately 26,100 gross (23,300 net) acres in Northwest Louisiana and East Texas, including 20,100 gross (12,500 net) acres in the Haynesville shale play. We operate all of ourShale, Cotton Valley and shallower production on our leasehold interests in Northwest Louisiana and East Texas, as well as all of our Haynesville production on the acreage outside of what we believe to be the core area of the Haynesville shale play. We operate approximately 32% of the 13,200 gross (6,400 net) acres that we consider to be in the core area of the Haynesville play.
For the year ended December 31, 2016, approximately 25% of our average daily oil equivalent production, or 6,920 BOE per day, including 12 Bbl of oil per day and 41.4 MMcf of natural gas per day, was attributable to our leasehold interests in Northwest Louisiana and East Texas. Natural gas production from these properties comprised approximately 50% of our daily natural gas production, but oil production from these properties comprised only about 0.1% of our daily oil production during 2016, as compared to approximately 64% of our daily natural gas production and approximately 0.1% of our daily oil production during 2015. During the year ended December 31, 2015, approximately 33% of our average daily oil equivalent production, or 8,174 BOE per day, including 16 Bbl of oil per day and 48.9 MMcf of natural gas per day, was attributable to our properties in Northwest Louisiana and East Texas.
For the year ended December 31, 2016, approximately 47% of our daily natural gas production, or 39.1 MMcf of natural gas per day, was produced from the Haynesville shale, with approximately 3%, or 2.3 MMcf of natural gas per day, produced from the Cotton Valley and other shallower formations on these properties. For the year ended December 31, 2015, approximately 61% of our daily natural gas production, or 46.4 MMcf of natural gas per day, was produced from the Haynesville shale, with approximately 3%, or 2.6 MMcf of natural gas per day, produced from the Cotton Valley and other shallower formations on these properties. At December 31, 2016, approximately 12% of our estimated total proved reserves, or 12.4 million BOE, was attributable to the Haynesville shale with another 1% of our proved reserves, or 0.7 million BOE, attributable to the Cotton Valley and shallower formations underlying this acreage.
At December 31, 2016, we had identified and engineered 431 gross (103.0 net) locations for potential future drilling in the Haynesville shale play and 71 gross (50.1 net) locations for potential future drilling in the Cotton Valley formation. These engineered locations have been identified on a property-by-property basis and take into account criteria such as anticipated geologic conditions and reservoir properties, estimated rates of return, estimated recoveries from our producing Haynesville and Cotton Valley wells and other nearby wells based on available public data, drilling densities observed on properties of other operators, including on some of our non-operated properties, estimated horizontal lateral lengths, estimated drilling and completion costs, spacing and other rules established by regulatory authorities and surface conditions, among other criteria. Of the 431 gross (103.0 net) locations identified for future drilling on our Haynesville acreage, 357 gross (50.1 net) locations have been identified within the 13,200 gross (6,400 net) acres that we believe are located in the core area of the Haynesville play. As we explore and develop our Northwest Louisiana and East Texas acreage further, we believe it is possible that we may identify additional locations for future drilling. At December 31, 2016, these potential future drilling locations included only 12 gross (4.0 net) locations in the Haynesville shale (and no locations in the Cotton Valley) to which we have assigned proved undeveloped reserves.
Haynesville and Middle Bossier ShalesOther Formations
The Haynesville shale is an organically rich, overpressured marine shale found below the Cotton Valley and Bossier formations and above the Smackover formation at depths ranging from 10,500 to 13,500 feet across a broad region throughout Northwest Louisiana and East Texas, including principally Bossier, Caddo, DeSoto and Red River Parishes in Louisiana and Harrison, Rusk, Panola and Shelby Counties in Texas. The Haynesville shale produces primarily dry natural gas with almost no associated liquids. The Bossier shale is overpressured and is often divided into lower, middle and upper units. The Middle Bossier shale appears to be productive for natural gas under large portions of DeSoto, Red River and Sabine Parishes in Louisiana and Shelby and Nacogdoches Counties in Texas, where it shares many similar productive characteristics with the deeper Haynesville shale. Although there is some overlap between the Haynesville and Bossier shale plays, the two plays appear quite distinct and a separate horizontal wellbore is typically needed for each formation.
At December 31, 2016, we had approximately 20,100 gross (12,500 net) acres in the Haynesville shale play, primarily in Northwest Louisiana. Based on our analysis of geologic and petrophysical information (including total organic carbon content and maturity, resistivity, porosity and permeability, among other information), well performance data, information available to us related to drilling activity and results from wells drilled across the Haynesville shale play, approximately 13,200 gross (6,400 net) acres are located in what we believe is the core area of the play. We believe the core area of the play includes that area in which the most Haynesville wells have been drilled by operators and from which we anticipate natural gas recoveries would likely exceed 6 Bcf per well. Almost all of our Haynesville acreage is held by production or consists of fee mineral interests that we own and portions of it are also producing from and, we believe, prospective for the Cotton Valley, Hosston (Travis Peak) and other shallower formations. In addition, we believe that approximately 1,200 net acres are prospective for the Middle Bossier shale play. We have never drilled a Middle Bossier shale well, and, although we believe that prospective well locations may exist on this acreage, we have not included any Middle Bossier locations in our engineered drilling locations at December 31, 2016.
Within the acreage that we believe to be in the core area of the Haynesville shale play, we are the operator of approximately 2,100 net acres. We have identified 25 gross (19.6 net) potential additional Haynesville locations that we may drill and operate in the future on this acreage. The remainder of our acreage in the core area of the Haynesville shale play is operated by other companies, including our Elm Grove properties in southern Caddo Parish, Louisiana that are operated by Chesapeake following a sale of a portion of our interests there in July 2008. The working interests in our non-operated Haynesville wells are typically small, ranging from less than 1% to just over 31%.
Cotton Valley, Hosston (Travis Peak) and Other Shallower Formations
Prior to initiating natural gas production from the Haynesville shale in 2009, almost all of our production and reserves in Northwest Louisiana and East Texas was attributable to wells producing from the Cotton Valley formation. We own almost all of the shallow rights from the base of the Cotton Valley formation to the surface under our acreage in Northwest Louisiana and East Texas.
All of the shallow rights underlying our acreage in our Elm Grove properties in Northwest Louisiana, approximately 10,000 gross (9,800 net) acres at December 31, 2016, are held by existing production from the Cotton Valley formation or the Haynesville shale. The Cotton Valley formation was the primary producing zone in the Elm Grove field prior to discovery of the Haynesville shale. The Cotton Valley formation is a low permeability natural gas sand that ranges in thickness from 200 to 300 feet and has porosity ranging from 6% to 10%.
We have identified 71 gross (50.1 net) additionaldid not conduct any operated drilling locations for future Cotton Valley horizontal wellsand completion activities on our Elm Grove properties.leasehold properties in Northwest Louisiana and East Texas during 2018, although we did participate in the drilling and completion of eight gross (0.2 net) non-operated Haynesville shale wells that were turned to sales in 2018. We did not drill any of these locations in 2016 and do not plan to drill any of these locations in 2017. As long as this leasehold acreage is held by existing production from the verticaloperated Haynesville shale or Cotton Valley wells orin 2019.
At December 31, 2018, we held approximately 25,500 gross (22,800 net) acres in Northwest Louisiana and East Texas, including 19,600 gross (12,000 net) acres in the deeper Haynesville shale play and 21,100 gross (18,600 net) acres in the Cotton Valley play. We operate substantially all of our Cotton Valley and shallower production on our leasehold interests in Northwest Louisiana and East Texas, as well as all of our Haynesville production on the acreage outside of what we believe to be the core area of the Haynesville shale play. We operate approximately 32% of the 13,200 gross (6,400 net) acres that we consider to be in the core area of the Haynesville shale play.
For the year ended December 31, 2018, approximately 7% of our average daily oil equivalent production, or 3,733 BOE per day, including 12 Bbl of oil per day and 22.3 MMcf of natural gas per day, was attributable to our leasehold interests in Northwest Louisiana and East Texas. Natural gas production from these properties comprised approximately 17% of our daily natural gas production during 2018, as compared to approximately 29% of our daily natural gas production during 2017. During the year ended December 31, 2017, approximately 13% of our average daily oil equivalent production, or 5,060 BOE per day, including 12 Bbl of oil per day and 30.4 MMcf of natural gas per day, was attributable to our properties in Northwest Louisiana and East Texas.
For the year ended December 31, 2018, approximately 16% of our daily natural gas production, or 20.5 MMcf of natural gas per day, was produced from the Haynesville shale, with approximately 1%, or 1.8 MMcf of natural gas per day, produced from the Cotton Valley and other shallower formations on these properties. For the year ended December 31, 2017, approximately 27% of our daily natural gas production, or 28.3 MMcf of natural gas per day, was produced from the Haynesville shale, with approximately 2%, or 2.1 MMcf of natural gas per day, produced from the Cotton Valley and other shallower formations on these properties. At December 31, 2018, approximately 5% of our estimated total proved reserves, or 10.9 million BOE, was attributable to the Haynesville shale with another 0.3% of our proved reserves, or 0.7 million BOE, attributable to the Cotton Valley and shallower formations underlying this acreage.
At December 31, 2018, we had identified 395 gross (100.2 net) engineered locations for potential future drilling in the Haynesville shale play and 71 gross (49.2 net) engineered locations for potential future drilling in the Cotton Valley formation. Each drilling location assumes a one-mile lateral, although we anticipate that many of our future wells may have lateral lengths longer than one mile. These locations have been identified on a property-by-property basis and take into account criteria such as
wells, however, theseanticipated geologic conditions and reservoir properties, estimated rates of return, estimated recoveries from our producing Haynesville and Cotton Valley natural gas volumes remainwells and other nearby wells based on available to be developed by us should natural gas prices improve,public data, drilling densities observed on properties of other operators, including on some of our non-operated properties, estimated drilling and completion costs, decline or new technologies be developed that increase expected recoveries.
We also continue to holdspacing and other rules established by regulatory authorities and surface conditions, among other criteria. Of the shallow rights primarily by existing production395 gross (100.2 net) locations identified for future drilling on our CentralHaynesville acreage, 321 gross (47.2 net) locations have been identified within the 13,200 gross (6,400 net) acres that we believe are located in the core area of the Haynesville shale play. As we explore and Southwest Pine Island, Longwood, Woodlawn and other asset areas indevelop our Northwest Louisiana and East Texas.Texas acreage further, we believe it is possible that we may identify additional locations for future drilling. At December 31, 2016,2018, these potential future drilling locations included 14 gross (4.9 net) locations in the Haynesville shale (and no locations in the Cotton Valley) to which we held an estimated 11,600 gross (9,200 net) leasehold and mineral acres by existing production in these areas.
Southwest Wyoming, Northeast Utah and Southeast Idaho — Meade Peak Shale
During the year ended December 31, 2016, we released all of our leasehold interests in Southwest Wyoming and adjacent areas in Utah and Idaho, which were originally leased as a part of a natural gas shale exploration prospect targeting the Meade Peak shale. As a result, we held no leasehold interests in these areas at December 31, 2016.have assigned proved undeveloped reserves.
Midstream Segment
TheOur midstream segment conducts midstream operations in support of our exploration, development and production operations and provides natural gas processing, oil transportation services, oil, natural gas oil and salt water gathering services and salt water disposal services to third parties on a limited basis. Through the ownership and operation of these facilities, we improve our ability to manage costs and control the timing of bringing on new production, and we enhance the value received for our production. With the exception of a joint venture, which we controlled and which owned salt water disposal assets in Loving County, Texas, all of our midstream operations were wholly-owned by the Company at December 31, 2016. In February 2017, we contributed our Delaware Midstream Assets to San Mateo.parties.
Southeast New Mexico and West Texas — Delaware Basin
In late August 2016,On February 17, 2017, we successfully completed and began operatingannounced the formation of San Mateo, a strategic joint venture with a subsidiary of Five Point. The midstream assets that were contributed to San Mateo included (i) the Black River Processing PlantPlant; (ii) one salt water disposal well and a related commercial salt water disposal facility in ourthe Rustler Breaks asset areaarea; (iii) three salt water disposal wells and related commercial salt water disposal facilities in Eddy County, New Mexico. The Black River Processing Plant has an inlet capacity of approximately 60 MMcf of natural gas per day, which is almost twice the size of the previous cryogenic processing plant we built in our Wolf asset area and (iv) substantially all related oil, natural gas and salt water gathering systems and pipelines in Loving County, Texas (the “Wolf Processing Plant”)both the Rustler Breaks and subsequently soldWolf asset areas (collectively, the “Delaware Midstream Assets”). We received $171.5 million in connection with the formation of San Mateo. We earned $14.7 million in performance incentives effective January 31, 2018, which was paid by Five Point in the first quarter of 2018. Through January 31, 2019, we had earned an additional $14.7 million in performance incentives that we expect to be paid by Five Point in the first quarter of 2019 and may earn up to an affiliateadditional $44.1 million in performance incentives over the next three years. We continue to operate the Delaware Midstream Assets and retain operational control of EnLink Midstream Partners, LP (“EnLink”)San Mateo. The Company and Five Point own 51% and 49% of San Mateo, respectively. San Mateo continues to provide firm capacity service to us at market rates, while also being a midstream service provider to other customers in October 2015. and around our Wolf and Rustler Breaks asset areas.
In February 2019, we announced an expansion of our midstream business with the formation of San Mateo II. For additional information regarding this strategic joint venture, see “—2019 Recent Developments.”
Natural Gas Gathering and Processing Assets
The Black River Processing Plant and associated gathering system waswere originally built to support our ongoing and future development efforts in the Rustler Breaks asset area and to provide us with priority onefirm takeaway and processing services for our Rustler Breaks natural gas production. It may also provide additional income through the gathering and processing of third-party natural gas. We had previously completed the installation and testing of a 12-inch natural gas trunk line and associated gathering lines running throughout the length of our Rustler Breaks acreage position, and these natural gas gathering lines are being used to gather almost all of our operated natural gas production at Rustler Breaks. In addition, in late December 2016, we placed in service our initial salt water disposal well and associated salt water disposal facility and water gathering pipelines
During 2017, San Mateo began expanding the Black River Processing Plant in our Rustler Breaks asset area. We disposedarea in Eddy County, New Mexico to add an incremental designed inlet capacity of 200 MMcf of natural gas per day to the existing designed inlet capacity of 60 MMcf of natural gas per day. As noted above in “—2018 Highlights—Midstream Highlights,” San Mateo completed this expansion of the Black River Processing Plant in late March 2018, bringing the total designed inlet capacity of the Black River Processing Plant to 260 MMcf of natural gas per day. The expanded Black River Processing Plant supports our exploration and production development activities in the Delaware Basin and offers processing opportunities for other producers’ development efforts.
As noted above in “—2018 Highlights—Midstream Highlights,” in October 2018, a subsidiary of San Mateo entered into a long-term agreement with a significant producer in Eddy County, New Mexico relating to the gathering and processing of such producer’s natural gas production. As a result of this agreement, along with prior natural gas gathering and processing agreements entered into by San Mateo with its customers, including us, at December 31, 2018, San Mateo had entered into contracts to provide firm gathering and processing services for over 800,000 Bbl200 MMcf of salt water duringnatural gas per day, or over 80% of the well’s first two monthsdesigned inlet capacity of operation.260 MMcf of natural gas per day, at the Black River Processing Plant.
In addition, in early 2018, San Mateo completed an NGL pipeline connection at the Black River Processing Plant to the NGL pipeline owned by EPIC Y-Grade Pipeline LP. This NGL connection provides several significant benefits to us and other San Mateo customers compared to transporting the NGLs by truck. San Mateo’s customers receive (i) firm NGL takeaway out of the Delaware Basin, (ii) increased NGL recoveries, (iii) improved pricing realizations through lower transportation and
fractionation costs and (iv) increased optionality through San Mateo’s ability to operate the Black River Processing Plant in ethane recovery mode, if desired.
In our Wolf asset area in Loving County, Texas, we have oil,San Mateo gathers our natural gas and salt water gathering systems that gather our oil,production with the natural gas and water production and a small volume of third-party natural gas. Wegathering system we retained this three-pipeline system following the sale of our wholly-owned subsidiary that owned certain natural gas gathering and processing assets in the Wolf asset area (the “Loving County Processing System”) to an affiliate of EnLink Midstream Partners, LP (“EnLink”) in October 2015. The Loving County Processing System included the Wolfa cryogenic natural gas processing plant (the “Wolf Processing PlantPlant”) and approximately six miles of high-pressure gathering pipeline that connectsconnected our gathering system to the Wolf Processing Plant. We also retainedSubstantially all of our interestremaining midstream assets in the Wolf asset area were contributed to San Mateo in February 2017.
At December 31, 2018, San Mateo’s natural gas gathering systems included natural gas gathering pipelines and related compression and treating systems. During the year ended December 31, 2018, San Mateo gathered approximately 46.1 Bcf of natural gas, as compared to 32.1 Bcf of natural gas gathered during the year ended December 31, 2017. In addition, during the year ended December 31, 2018, San Mateo processed approximately 32.3 Bcf of natural gas, as compared to 18.4 Bcf of natural gas processed during the year ended December 31, 2017.
Crude Oil Gathering and Transportation Assets
As noted above in “—2018 Highlights—Midstream Highlights,” subsidiaries of San Mateo and Plains have entered into a strategic relationship to gather and transport crude oil for upstream producers in Eddy County, New Mexico and have agreed to work together through a joint tariff arrangement and related transactions to offer producers located within the Joint Development Area crude oil transportation services from the wellhead to Midland, Texas with access to other end markets.
Also, as noted above in “—2018 Highlights—Midstream Highlights,” San Mateo completed its expanded Wolf Oil Pipeline System in May 2018 and placed into service the Rustler Breaks Oil Pipeline System in December 2018. With the Wolf Oil Pipeline System and the Rustler Breaks Oil Pipeline System (collectively, the “San Mateo Oil Pipeline Systems”) in service, at December 31, 2018, we estimated we had on pipe almost all of our oil production from the Wolf and Rustler Breaks asset areas, which comprised approximately 70% of our Delaware Basin oil production in the fourth quarter of 2018. With the San Mateo Oil Pipeline Systems in service, we expect to improve our oil price realizations in the Wolf and Rustler Breaks asset areas through the elimination of higher priced trucking services.
At December 31, 2018, the San Mateo Oil Pipeline Systems included crude oil gathering and transportation pipelines from origin points in Loving County, Texas and Eddy County, New Mexico to interconnects with Plains Pipeline, L.P. and two trucking facilities. During the year ended December 31, 2018, the San Mateo Oil Pipeline Systems had throughput of approximately 2.0 million Bbl of oil, as compared to 0.5 million Bbl of oil throughput during the year ended December 31, 2017.
Produced Water Gathering and Disposal Assets
During 2018, San Mateo placed into service three commercial salt water disposal assetswells in Loving County. During 2016, we disposedthe Rustler Breaks asset area and placed into service one additional commercial salt water disposal well there in February 2019, bringing San Mateo’s commercial salt water disposal well count in the Rustler Breaks asset area to six at February 26, 2019. In addition to its six commercial salt water disposal wells and associated facilities in the Rustler Breaks asset area, at February 26, 2019, San Mateo had three commercial salt water disposal wells and associated facilities in the Wolf asset area, and San Mateo’s salt water gathering systems included salt water gathering pipelines in the Rustler Breaks and Wolf asset areas. At February 26, 2019, San Mateo had a designed disposal capacity of approximately 10.2250,000 Bbl of salt water per day.
As noted above in “—2018 Highlights—Midstream Highlights,” in June 2018, a subsidiary of San Mateo entered into a long-term agreement with a significant producer in Eddy County, New Mexico to gather and dispose of the customer’s produced salt water. The agreement includes the dedication of certain of the third party’s wells, which are or will be located near San Mateo’s existing salt water gathering system in Eddy County, New Mexico.
During the year ended December 31, 2018, San Mateo gathered approximately 44.0 million Bbl of salt water, including disposal of third-party salt water on a commercial basis. At February 22, 2017, San Mateo had capacityas compared to dispose of approximately 50,00020.0 million Bbl of salt water per day ingathered during the Wolf asset area.year ended December 31, 2017. In addition, during the year ended December 31, 2018, San Mateo is in the processdisposed of completing its thirdapproximately 47.5 million Bbl of salt water, disposal well and related disposal facility in the Wolf asset area, which is expectedas compared to be operational by the end23.6 million Bbl of the first quarter of 2017 and which should increase the total salt water disposal capacity indisposed of during the Wolf asset area to approximately 75,000 Bbl per day.year ended December 31, 2017.
South Texas / Northwest Louisiana and East Texas
In South Texas, we own a natural gas gathering system that gathers natural gas production from certain of our operated Eagle Ford leases. In Northwest Louisiana and East Texas, we have midstream assets that gather and treat natural gas from most of our operated leases there and from third parties. We also have fourparties and five non-commercial salt water disposal wells that dispose of our salt water. Our midstream assets in South Texas and Northwest Louisiana and East Texas are not part of San Mateo.
Operating Summary
The following table sets forth certain unaudited production and operating data for the years ended December 31, 2016, 20152018, 2017 and 2014.2016. | | | | | Year Ended December 31, | | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | | 2018 | | 2017 | | 2016 |
| Unaudited Production Data: | | | | | | | | | | | | | |
| Net Production Volumes: | | | | | | | | | | | | | |
| Oil (MBbl) | | 5,096 |
| | 4,492 |
| | 3,320 |
| | | 11,141 |
| | 7,851 |
| | 5,096 |
|
| Natural gas (Bcf) | | 30.5 |
| | 27.7 |
| | 15.3 |
| | | 47.3 |
| | 38.2 |
| | 30.5 |
|
Total oil equivalent (MBOE) (1) | | 10,180 |
| | 9,109 |
| | 5,870 |
| | | 19,026 |
| | 14,212 |
| | 10,180 |
|
Average daily production (BOE/d) (1) | | 27,813 |
| | 24,955 |
| | 16,082 |
| | | 52,128 |
| | 38,936 |
| | 27,813 |
|
| Average Sales Prices: | | | | | | | | | | | | | |
| Oil, without realized derivatives (per Bbl) | | $ | 41.19 |
| | $ | 45.27 |
| | $ | 87.37 |
| | | $ | 57.04 |
| | $ | 49.28 |
| | $ | 41.19 |
|
| Oil, with realized derivatives (per Bbl) | | $ | 42.34 |
| | $ | 59.13 |
| | $ | 88.94 |
| | | $ | 57.38 |
| | $ | 48.81 |
| | $ | 42.34 |
|
| Natural gas, without realized derivatives (per Mcf) | | $ | 2.66 |
| | $ | 2.71 |
| | $ | 5.08 |
| | | $ | 3.49 |
| | $ | 3.72 |
| | $ | 2.66 |
|
| Natural gas, with realized derivatives (per Mcf) | | $ | 2.78 |
| | $ | 3.24 |
| | $ | 5.06 |
| | | $ | 3.46 |
| | $ | 3.70 |
| | $ | 2.78 |
|
| Operating Expenses (per BOE): | | | | | | | | | | | | | |
| Production taxes, transportation and processing | | $ | 4.23 |
| | $ | 3.91 |
| (2) | $ | 5.65 |
| | | $ | 4.00 |
| | $ | 4.10 |
| | $ | 4.23 |
|
| Lease operating | | $ | 5.52 |
| | $ | 6.01 |
| (3) | $ | 8.51 |
| (3) | | $ | 4.89 |
| | $ | 4.74 |
| | $ | 5.52 |
|
| Plant and other midstream services operating | | $ | 0.53 |
| | $ | 0.38 |
| | $ | 0.24 |
| | | $ | 1.29 |
| | $ | 0.92 |
| | $ | 0.53 |
|
| Depletion, depreciation and amortization | | $ | 11.99 |
| | $ | 19.63 |
| | $ | 22.95 |
| | | $ | 13.94 |
| | $ | 12.49 |
| | $ | 11.99 |
|
| General and administrative | | $ | 5.41 |
| | $ | 5.50 |
| | $ | 5.48 |
| | | $ | 3.64 |
| | $ | 4.65 |
| | $ | 5.41 |
|
__________________ | |
| (1) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
| |
(2) | $0.01 per BOE reclassified to third-party midstream services revenues due to our midstream business becoming a reportable segment in the third quarter of 2016. |
| |
(3) | $0.38 and $0.24 per BOE reclassified to plant and other midstream services operating expenses for the years ended December 31, 2015 and 2014, respectively, due to our midstream business becoming a reportable segment in the third quarter of 2016. |
The following table sets forth information regarding our production volumes, sales prices and production costs for the year ended December 31, 20162018 from our operating areas, which we consider to be distinct fields for purposes of accounting for production. | | | | | Southeast New Mexico/West Texas | | South Texas | | Northwest Louisiana/East Texas | | | | Southeast
New Mexico/West Texas | | South Texas | | Northwest Louisiana/East Texas | | |
| | | | | |
| | | Delaware Basin | | Eagle Ford (1) | | Haynesville | | Cotton Valley (2) | | Total | | Delaware Basin | | Eagle Ford (1) | | Haynesville | | Cotton Valley (2) | | Total |
| Annual Net Production Volumes | | | | | | | | | | | | | | | | | | | | |
| Oil (MBbl) | | 3,805 |
| | 1,286 |
| | — |
| | 5 |
| | 5,096 |
| | 10,230 |
| | 907 |
| | — |
| | 4 |
| | 11,141 |
|
| Natural gas (Bcf) | | 12.2 |
| | 3.1 |
| | 14.3 |
| | 0.9 |
| | 30.5 |
| | 37.7 |
| | 1.5 |
| | 7.5 |
| | 0.6 |
| | 47.3 |
|
Total oil equivalent (MBOE) (3) | | 5,834 |
| | 1,813 |
| | 2,385 |
| | 148 |
| | 10,180 |
| | 16,512 |
| | 1,152 |
| | 1,247 |
| | 115 |
| | 19,026 |
|
| Percentage of total annual net production | | 57.3 | % | | 17.8 | % | | 23.4 | % | | 1.5 | % | | 100.0 | % | | 86.8 | % | | 6.0 | % | | 6.6 | % | | 0.6 | % | | 100.0 | % |
| Average Net Daily Production Volumes | | | | | | | | | | | | | | | | | | | | |
| Oil (Bbl/d) | | 10,395 |
| | 3,517 |
| | — |
| | 12 |
| | 13,924 |
| | 28,026 |
| | 2,485 |
| | — |
| | 12 |
| | 30,523 |
|
| Natural gas (MMcf/d) | | 33.3 |
| | 8.6 |
| | 39.1 |
| | 2.3 |
| | 83.3 |
| | 103.3 |
| | 4.0 |
| | 20.5 |
| | 1.8 |
| | 129.6 |
|
| Total oil equivalent (BOE/d) | | 15,941 |
| | 4,952 |
| | 6,517 |
| | 403 |
| | 27,813 |
| | 45,237 |
| | 3,158 |
| | 3,417 |
| | 316 |
| | 52,128 |
|
Average Sales Prices (4) | | | | | | | | | | | | | | | | | | | | |
| Oil (per Bbl) | | $ | 41.76 |
| | $ | 39.49 |
| | $ | — |
| | $ | 38.78 |
| | $ | 41.19 |
| | $ | 56.12 |
| | $ | 67.40 |
| | $ | — |
| | $ | 64.72 |
| | $ | 57.04 |
|
| Natural gas (per Mcf) | | $ | 3.15 |
| | $ | 3.11 |
| | $ | 2.17 |
| | $ | 2.27 |
| | $ | 2.66 |
| | $ | 3.55 |
| | $ | 5.46 |
| | $ | 2.85 |
| | $ | 2.80 |
| | $ | 3.49 |
|
| Total oil equivalent (per BOE) | | $ | 33.81 |
| | $ | 33.46 |
| | $ | 13.04 |
| | $ | 14.39 |
| | $ | 28.60 |
| | $ | 42.88 |
| | $ | 60.02 |
| | $ | 17.09 |
| | $ | 18.59 |
| | $ | 42.08 |
|
Production Costs (5) | | | | | | | | | | | | | | | | | | | | |
| Lease operating, transportation and processing (per BOE) | | $ | 7.32 |
| | $ | 12.74 |
| | $ | 4.73 |
| | $ | 17.07 |
| | $ | 7.82 |
| | $ | 4.79 |
| | $ | 17.25 |
| | $ | 5.41 |
| | $ | 19.11 |
| | $ | 5.68 |
|
__________________ | |
| (1) | Includes one well producing small volumes of oil from the Austin Chalk formation and two wells producing small quantities of natural gas from the San Miguel formation in Zavala County, Texas. |
| |
(2) | Includes the Cotton Valley formation and shallower zones and also includes one well producing from the Frio formation in Orange County, Texas. |
| |
(3) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
| |
(4) | Excludes impact of derivative settlements. |
| |
(5) | Excludes plant and other midstream services operating expenses, ad valorem taxes and oil and natural gas production taxes. |
The following table sets forth information regarding our production volumes, sales prices and production costs for the year ended December 31, 2015 from our operating areas, which we consider to be distinct fields for purposes of accounting for production. |
| | | | | | | | | | | | | | | | | | | | |
| | | Southeast New Mexico/West Texas | | South Texas | | Northwest Louisiana/East Texas | | |
| | | | | | |
| | | Delaware Basin | | Eagle Ford (1) | | Haynesville | | Cotton Valley (2) | | Total |
| Annual Net Production Volumes | | | | | | | | | | |
| Oil (MBbl) | | 1,697 |
| | 2,789 |
| | — |
| | 6 |
| | 4,492 |
|
| Natural gas (Bcf) | | 4.1 |
| | 5.7 |
| | 16.9 |
| | 1.0 |
| | 27.7 |
|
Total oil equivalent (MBOE) (3) | | 2,379 |
| | 3,746 |
| | 2,822 |
| | 162 |
| | 9,109 |
|
| Percentage of total annual net production | | 26.1 | % | | 41.1 | % | | 31.0 | % | | 1.8 | % | | 100.0 | % |
| Average Net Daily Production Volumes | | | | | | | | | | |
| Oil (Bbl/d) | | 4,648 |
| | 7,642 |
| | — |
| | 16 |
| | 12,306 |
|
| Natural gas (MMcf/d) | | 11.2 |
| | 15.7 |
| | 46.4 |
| | 2.6 |
| | 75.9 |
|
| Total oil equivalent (BOE/d) | | 6,518 |
| | 10,263 |
| | 7,731 |
| | 443 |
| | 24,955 |
|
Average Sales Prices (4) | | | | | | | | | | |
| Oil (per Bbl) | | $ | 43.54 |
| | $ | 46.33 |
| | $ | — |
| | $ | 43.68 |
| | $ | 45.27 |
|
| Natural gas (per Mcf) | | $ | 3.00 |
| | $ | 3.17 |
| | $ | 2.49 |
| | $ | 2.45 |
| | $ | 2.71 |
|
| Total oil equivalent (per BOE) | | $ | 36.21 |
| | $ | 39.35 |
| | $ | 14.97 |
| | $ | 15.69 |
| | $ | 30.56 |
|
Production Costs (5) | | | | | | | | | | |
Lease operating, transportation and processing (per BOE) (6) | | $ | 8.84 |
| | $ | 9.25 |
| | $ | 4.91 |
| | $ | 19.23 |
| | $ | 7.90 |
|
_________________
| |
(1) | Includes one wells producing small volumes of oil from the Austin Chalk formation and two wells producing small quantities of natural gas from the San Miguel formation in Zavala County, Texas. |
| |
| (2) | Includes the Cotton Valley formation and shallower zones and also includes one well producing from the Frio formation in Orange County, Texas. |
| |
| (3) | Production volumes reported in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
| |
| (4) | Excludes impact of derivative settlements. |
| |
| (5) | Excludes plant and other midstream services operating expenses, ad valorem taxes and oil and natural gas production taxes. |
| |
(6) | Amounts have been adjusted to reflect the reclassification of certain lease operating expenses to plant and other midstream services operating expenses due to our midstream business becoming a reportable segment in the third quarter of 2016. |
The following table sets forth information regarding our production volumes, sales prices and production costs for the year ended December 31, 20142017 from our operating areas, which we consider to be distinct fields for purposes of accounting for production. |
| | | | | | | | | | | | | | | | | | | | |
| | | Southeast
New Mexico/West Texas | | South Texas | | Northwest Louisiana/East Texas | | |
| | | | | | |
| | | Delaware Basin | | Eagle Ford (1) | | Haynesville | | Cotton Valley (2) | | Total |
| Annual Net Production Volumes | | | | | | | | | | |
| Oil (MBbl) | | 6,579 |
| | 1,268 |
| | — |
| | 4 |
| | 7,851 |
|
| Natural gas (Bcf) | | 25.1 |
| | 2.0 |
| | 10.3 |
| | 0.8 |
| | 38.2 |
|
Total oil equivalent (MBOE) (3) | | 10,754 |
| | 1,611 |
| | 1,714 |
| | 133 |
| | 14,212 |
|
| Percentage of total annual net production | | 75.7 | % | | 11.3 | % | | 12.1 | % | | 0.9 | % | | 100.0 | % |
| Average Net Daily Production Volumes | | | | | | | | | | |
| Oil (Bbl/d) | | 18,023 |
| | 3,475 |
| | — |
| | 12 |
| | 21,510 |
|
| Natural gas (MMcf/d) | | 68.6 |
| | 5.6 |
| | 28.3 |
| | 2.1 |
| | 104.6 |
|
| Total oil equivalent (BOE/d) | | 29,463 |
| | 4,413 |
| | 4,697 |
| | 363 |
| | 38,936 |
|
Average Sales Prices (4) | | | | | | | | | | |
| Oil (per Bbl) | | $ | 49.08 |
| | $ | 50.29 |
| | $ | — |
| | $ | 45.52 |
| | $ | 49.28 |
|
| Natural gas (per Mcf) | | $ | 4.03 |
| | $ | 4.69 |
| | $ | 2.83 |
| | $ | 2.79 |
| | $ | 3.72 |
|
| Total oil equivalent (per BOE) | | $ | 39.41 |
| | $ | 45.58 |
| | $ | 16.96 |
| | $ | 17.69 |
| | $ | 37.20 |
|
Production Costs (5) | | | | | | | | | | |
| Lease operating, transportation and processing (per BOE) | | $ | 5.80 |
| | $ | 10.92 |
| | $ | 4.21 |
| | $ | 16.77 |
| | $ | 6.29 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | | Southeast New Mexico/West Texas | | South Texas | | Northwest Louisiana/East Texas | | |
| | | | | | |
| | | Delaware Basin | | Eagle Ford (1) | | Haynesville | | Cotton Valley (2) | | Total |
| Annual Net Production Volumes | | | | | | | | | | |
| Oil (MBbl) | | 480 |
| | 2,834 |
| | — |
| | 6 |
| | 3,320 |
|
| Natural gas (Bcf) | | 1.0 |
| | 6.0 |
| | 7.2 |
| | 1.1 |
| | 15.3 |
|
Total oil equivalent (MBOE) (3) | | 653 |
| | 3,833 |
| | 1,201 |
| | 183 |
| | 5,870 |
|
| Percentage of total annual net production | | 11.1 | % | | 65.3 | % | | 20.5 | % | | 3.1 | % | | 100.0 | % |
| Average Net Daily Production Volumes | | | | | | | | | | |
| Oil (Bbl/d) | | 1,314 |
| | 7,764 |
| | — |
| | 17 |
| | 9,095 |
|
| Natural gas (MMcf/d) | | 2.9 |
| | 16.4 |
| | 19.7 |
| | 2.9 |
| | 41.9 |
|
| Total oil equivalent (BOE/d) | | 1,790 |
| | 10,501 |
| | 3,290 |
| | 501 |
| | 16,082 |
|
Average Sales Prices (4) | | | | | | | | | | |
| Oil (per Bbl) | | $ | 80.16 |
| | $ | 88.58 |
| | $ | — |
| | $ | 91.24 |
| | $ | 87.37 |
|
| Natural gas (per Mcf) | | $ | 4.75 |
| | $ | 6.72 |
| | $ | 3.87 |
| | $ | 4.30 |
| | $ | 5.08 |
|
| Total oil equivalent (per BOE) | | $ | 66.41 |
| | $ | 75.99 |
| | $ | 23.27 |
| | $ | 27.92 |
| | $ | 62.64 |
|
Production Costs (5) | | | | | | | | | | |
Lease operating, transportation and processing (per BOE) (6) | | $ | 13.08 |
| | $ | 10.34 |
| | $ | 8.13 |
| | $ | 17.58 |
| | $ | 10.29 |
|
_________________
| |
| (1) | Includes two wellsone well producing small volumes of oil from the Austin Chalk formation and two wells producing small quantities of natural gas from the San Miguel formation in Zavala County, Texas. |
| |
| (2) | Includes the Cotton Valley formation and shallower zones and also includes one well producing from the Frio formation in Orange County, Texas. |
| |
| (3) | Production volumes reported in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
| |
| (4) | Excludes impact of derivative settlements. |
| |
| (5) | Excludes plant and other midstream services operating expenses, ad valorem taxes and oil and natural gas production taxes. |
The following table sets forth information regarding our production volumes, sales prices and production costs for the year ended December 31, 2016 from our operating areas, which we consider to be distinct fields for purposes of accounting for production. |
| | | | | | | | | | | | | | | | | | | | |
| | | Southeast
New Mexico/West Texas | | South Texas | | Northwest Louisiana/East Texas | | |
| | | | | | |
| | | Delaware Basin | | Eagle Ford (1) | | Haynesville | | Cotton Valley (2) | | Total |
| Annual Net Production Volumes | | | | | | | | | | |
| Oil (MBbl) | | 3,805 |
| | 1,286 |
| | — |
| | 5 |
| | 5,096 |
|
| Natural gas (Bcf) | | 12.2 |
| | 3.1 |
| | 14.3 |
| | 0.9 |
| | 30.5 |
|
Total oil equivalent (MBOE) (3) | | 5,834 |
| | 1,813 |
| | 2,385 |
| | 148 |
| | 10,180 |
|
| Percentage of total annual net production | | 57.3 | % | | 17.8 | % | | 23.4 | % | | 1.5 | % | | 100.0 | % |
| Average Net Daily Production Volumes | | | | | | | | | | |
| Oil (Bbl/d) | | 10,395 |
| | 3,517 |
| | — |
| | 12 |
| | 13,924 |
|
| Natural gas (MMcf/d) | | 33.3 |
| | 8.6 |
| | 39.1 |
| | 2.3 |
| | 83.3 |
|
| Total oil equivalent (BOE/d) | | 15,941 |
| | 4,952 |
| | 6,517 |
| | 403 |
| | 27,813 |
|
Average Sales Prices (4) | | | | | | | | | | |
| Oil (per Bbl) | | $ | 41.76 |
| | $ | 39.49 |
| | $ | — |
| | $ | 38.78 |
| | $ | 41.19 |
|
| Natural gas (per Mcf) | | $ | 3.15 |
| | $ | 3.11 |
| | $ | 2.17 |
| | $ | 2.27 |
| | $ | 2.66 |
|
| Total oil equivalent (per BOE) | | $ | 33.81 |
| | $ | 33.46 |
| | $ | 13.04 |
| | $ | 14.39 |
| | $ | 28.60 |
|
Production Costs (5) | | | | | | | | | | |
| Lease operating, transportation and processing (per BOE) | | $ | 7.32 |
| | $ | 12.74 |
| | $ | 4.73 |
| | $ | 17.07 |
| | $ | 7.82 |
|
| |
(6)(1) | Amounts have been adjusted to reflectIncludes one well producing small volumes of oil from the reclassificationAustin Chalk formation and two wells producing small quantities of certain lease operating expenses tonatural gas from the San Miguel formation in Zavala County, Texas. |
| |
| (2) | Includes the Cotton Valley formation and shallower zones and also includes one well producing from the Frio formation in Orange County, Texas. |
| |
| (3) | Production volumes reported in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
| |
| (4) | Excludes impact of derivative settlements. |
| |
| (5) | Excludes plant and other midstream services operating expenses, due to our midstream business becoming a reportable segment in the third quarter of 2016.ad valorem taxes and oil and natural gas production taxes. |
Our total oil equivalent production of approximately 10.219.0 million BOE for the year ended December 31, 20162018 increased 12%34% from our total oil equivalent production of approximately 9.114.2 million BOE for the year ended December 31, 2015.2017. This increased production was primarily due to our delineation and development operations in the Delaware Basin, which offset declining production in the Eagle Ford and Haynesville shales where we have not drilled any newsignificantly reduced our operated wellsactivity since the second quarter oflate 2014 and early 2015. Our average daily oil equivalent production for the year ended December 31, 20162018 was 27,81352,128 BOE per day, as compared to 24,95538,936 BOE per day for the year ended December 31, 2015.2017. Our average daily oil production for the year ended December 31, 20162018 was 13,92430,524 Bbl of oil per day, an increase of 13%42% from 12,30621,510 Bbl of oil per day for the year ended December 31, 2015.2017. Our average daily natural gas production for the year ended December 31, 20162018 was 83.3129.6 MMcf of natural gas per day, an increase of 10%24% from 75.9104.6 MMcf of natural gas per day for the year ended December 31, 2015.2017.
Our total oil equivalent production of approximately 9.114.2 million BOE for the year ended December 31, 20152017 increased 55%40% from our total oil equivalent production of approximately 5.910.2 million BOE for the year ended December 31, 2014.2016. This increased production was primarily due to our delineation and development operations in the Delaware Basin, and new, non-operated Haynesville shale wells completed and placed onwhich offset declining production on our Elm Grove properties in Northwest Louisiana during the latter half of 2014 and into 2015, as well as from newly drilled and completed wells in the Eagle Ford shale in early 2015.and Haynesville shales. Our average daily oil equivalent production for the year ended December 31, 20152017 was 24,95538,936 BOE per day, as compared to 16,08227,813 BOE per day for the year ended December 31, 2014.2016. Our average daily oil production for the year ended December 31, 20152017 was 12,30621,510 Bbl of oil per day, an increase of 35%54% from 9,09513,924 Bbl of oil per day for the year ended December 31, 2014.2016. Our average daily natural gas production for the year ended December 31, 20152017 was 75.9104.6 MMcf of natural gas per day, an increase of 81%25% from 41.983.3 MMcf of natural gas per day for the year ended December 31, 2014.2016.
Producing Wells
The following table sets forth information relating to producing wells at December 31, 2016.2018. Wells are classified as oil wells or natural gas wells according to their predominant production stream. We had an approximate average working interest of 72%77% in all wells that we operated at December 31, 2016.2018. For wells where we are not the operator, our working interests range from less than 1% to as much as just over 50%, and average approximately 10%11%. In the table below, gross wells are the total number of producing wells in which we own a working interest and net wells represent the total of our fractional working interests owned in the gross wells.
| | | | | Oil Wells | | Natural Gas Wells | | Total Wells | | Oil Wells | | Natural Gas Wells | | Total Wells |
| | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net |
| Southeast New Mexico/West Texas: | | | | | | | | | | | | | | | | | | | | | | | | |
Delaware Basin (1) | | 261 |
| | 116.0 |
| | 51 |
| | 19.1 |
| | 312 |
| | 135.1 |
| | 519 |
| | 241.0 |
| | 111 |
| | 49.7 |
| | 630 |
| | 290.7 |
|
| South Texas: | | | | | | | | | | | | | | | | | | | | | | | | |
Eagle Ford (2) | | 132 |
| | 111.1 |
| | 4 |
| | 4.0 |
| | 136 |
| | 115.1 |
| | 144 |
| | 118.5 |
| | 4 |
| | 4.0 |
| | 148 |
| | 122.5 |
|
| Northwest Louisiana/East Texas: | | | | | | | | | | | | | | | | | | | | | | | | |
| Haynesville | | — |
| | — |
| | 204 |
| | 19.8 |
| | 204 |
| | 19.8 |
| | — |
| | — |
| | 227 |
| | 20.4 |
| | 227 |
| | 20.4 |
|
Cotton Valley (3) | | 2 |
| | 2.0 |
| | 79 |
| | 52.2 |
| | 81 |
| | 54.2 |
| | 2 |
| | 2.0 |
| | 77 |
| | 51.3 |
| | 79 |
| | 53.3 |
|
| Area Total | | 2 |
| | 2.0 |
| | 283 |
| | 72.0 |
| | 285 |
| | 74.0 |
| | 2 |
| | 2.0 |
| | 304 |
| | 71.7 |
| | 306 |
| | 73.7 |
|
| Total | | 395 |
| | 229.1 |
| | 338 |
| | 95.1 |
| | 733 |
| | 324.2 |
| | 665 |
| | 361.5 |
| | 419 |
| | 125.4 |
| | 1,084 |
| | 486.9 |
|
| |
| (1) | Includes 176224 gross (50.5(58.6 net) vertical wells that were acquired in February 2015 as part of the HEYCO Merger.multiple transactions. |
| |
| (2) | Includes one well producing small volumes of oil from the Austin Chalk formation and two wells producing small quantities of natural gas from the San Miguel formation in Zavala County, Texas. |
| |
| (3) | Includes the Cotton Valley formation and shallower zones and also includes one well producing from the Frio formation in Orange County, Texas. |
Estimated Proved Reserves
The following table sets forth our estimated proved oil and natural gas reserves at December 31, 2016, 20152018, 2017 and 2014.2016. Our production and proved reserves are reported in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Where we produce liquids-rich natural gas, such as in the Delaware Basin and the Eagle Ford shale, the economic value of the natural gas liquidsNGLs associated with the natural gas is included in the estimated wellhead natural gas price on those properties where the natural gas liquidsNGLs are extracted and sold. The reserves estimates were based on evaluations prepared by our engineering staff and have been audited for their reasonableness by Netherland, Sewell & Associates, Inc., independent reservoir engineers. These reserves estimates were prepared in accordance with the SEC’s rules for oil and natural gas reserves reporting. The estimated reserves shown are for proved reserves only and do not include any unproved reserves classified as probable or possible reserves that might exist for our properties, nor do they include any consideration that could be attributable to interests in unproved and unevaluated acreage beyond those tracts for which proved reserves have been estimated. Proved oil and natural gas reserves are the estimated quantities of crude oil and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
| | | | | At December 31, (1) | | At December 31, (1) |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
Estimated Proved Reserves Data: (2) | | | | | | | | | | | | |
| Estimated proved reserves: | | | | | | | | | | | | |
| Oil (MBbl) | | 56,977 |
| | 45,644 |
| | 24,184 |
| | 123,401 |
| | 86,743 |
| | 56,977 |
|
Natural Gas (Bcf) (3) | | 292.6 |
| | 236.9 |
| | 267.1 |
| |
Total (MBOE) (4) | | 105,752 |
| | 85,127 |
| | 68,693 |
| |
| Natural Gas (Bcf) | | | 551.5 |
| | 396.2 |
| | 292.6 |
|
Total (MBOE) (3) | | | 215,313 |
| | 152,771 |
| | 105,752 |
|
| Estimated proved developed reserves: | | | | | | | | | | | | |
| Oil (MBbl) | | 22,604 |
| | 17,129 |
| | 14,053 |
| | 53,223 |
| | 36,966 |
| | 22,604 |
|
Natural Gas (Bcf) (3) | | 126.8 |
| | 101.4 |
| | 102.8 |
| |
Total (MBOE) (4) | | 43,731 |
| | 34,037 |
| | 31,185 |
| |
| Natural Gas (Bcf) | | | 246.2 |
| | 190.1 |
| | 126.8 |
|
Total (MBOE) (3) | | | 94,261 |
| | 68,651 |
| | 43,731 |
|
| Percent developed | | 41.4 | % | | 40.0 | % | | 45.4 | % | | 43.8 | % | | 44.9 | % | | 41.4 | % |
| Estimated proved undeveloped reserves: | | | | | | | | | | | | |
| Oil (MBbl) | | 34,373 |
| | 28,515 |
| | 10,131 |
| | 70,178 |
| | 49,777 |
| | 34,373 |
|
Natural Gas (Bcf) (3) | | 165.9 |
| | 135.5 |
| | 164.3 |
| | 305.2 |
| | 206.1 |
| | 165.9 |
|
Total (MBOE) (4)(3) | | 62,021 |
| | 51,090 |
| | 37,508 |
| | 121,052 |
| | 84,120 |
| | 62,021 |
|
Standardized Measure (5) (in millions) | | $ | 575.0 |
| | $ | 529.2 |
| | $ | 913.3 |
| |
PV-10 (6) (in millions) | | $ | 581.5 |
| | $ | 541.6 |
| | $ | 1,043.4 |
| |
Standardized Measure (4) (in millions) | | | $ | 2,250.6 |
| | $ | 1,258.6 |
| | $ | 575.0 |
|
PV-10 (5) (in millions) | | | $ | 2,579.3 |
| | $ | 1,333.4 |
| | $ | 581.5 |
|
| |
| (1) | Numbers in table may not total due to rounding. |
| |
| (2) | Our estimated proved reserves, Standardized Measure and PV-10 were determined using index prices for oil and natural gas, without giving effect to derivative transactions, and were held constant throughout the life of the properties. The unweighted arithmetic averages of the first-day-of-the-month prices for the 12 months ended December 31, 20162018 were $39.25$62.04 per Bbl for oil and $2.48$3.10 per MMBtu for natural gas, for the 12 months ended December 31, 20152017 were $46.79$47.79 per Bbl for oil and $2.59$2.98 per MMBtu for natural gas, and for the 12 months ended December 31, 20142016 were $91.48$39.25 per Bbl for oil and $4.35$2.48 per MMBtu for natural gas. These prices were adjusted by lease for quality, energy content, regional price differentials, transportation fees, marketing deductions and other factors affecting the price received at the wellhead. We report our proved reserves in two streams, oil and natural gas, and the economic value of the natural gas liquidsNGLs associated with the natural gas is included in the estimated wellhead natural gas price on those properties where the natural gas liquidsNGLs are extracted and sold. |
| |
| (3) | Primarily as a result of substantially lower natural gas prices in 2015, we removed approximately 64.3 Bcf (10.7 million BOE) of previously classified proved undeveloped natural gas reserves from our total proved reserves in 2015, most of which were attributable to non-operated properties in the Haynesville shale. |
| |
(4) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. Primarily as a result of the lower weighted average oil and natural gas prices used to estimate proved oil and natural gas reserves in 2016, we removed approximately 11.6 million BOE of previously classified proved undeveloped reserves from our total proved reserves in 2016. |
| |
(5)(4) | Standardized Measure represents the present value of estimated future net cash flows from proved reserves, less estimated future development, production, plugging and abandonment costs and income tax expenses, discounted at 10% per annum to reflect the timing of future cash flows. Standardized Measure is not an estimate of the fair market value of our properties. |
| |
(6)(5) | PV-10 is a non-GAAP financial measure and generally differs from Standardized Measure, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. PV-10 is not an estimate of the fair market value of our properties. We and others in the industry use PV-10 as a measure to compare the relative size and value of proved reserves held by companies and of the potential return on investment related to the companies’ properties without regard to the specific tax characteristics of such entities. Our PV-10 at December 31, 2016, 20152018, 2017 and 20142016 may be reconciled to our Standardized Measure of discounted future net cash flows at such dates by reducing our PV-10 by the discounted future income taxes associated with such reserves. The discounted future income taxes at December 31, 2016, 20152018, 2017 and 20142016 were, in millions, $6.5, $12.4$328.7, $74.8 and $130.1,$6.5, respectively. |
Our estimated total proved oil and natural gas reserves increased 24%41% from 85.1152.8 million BOE at December 31, 20152017 to 105.8215.3 million BOE at December 31, 2016.2018. We added 42.069.6 million BOE in proved oil and natural gas reserves through extensions and discoveries throughout 2016,2018, approximately 4.13.7 times our 20162018 annual production of 10.219.0 million BOE. Our proved oil reserves grew 25%42% from approximately 45.686.7 million Bbl at December 31, 20152017 to approximately 57.0123.4 million Bbl at December 31, 2016.2018. Our proved natural gas reserves increased 24%39% from 236.9396.2 Bcf at December 31, 20152017 to 292.6551.5 Bcf at December 31, 2016.2018. This increase in proved oil and natural gas reserves was primarily a result of our delineation and development operations in the Delaware Basin during 2016.2018. We incurredrealized approximately 11.211.3 million BOE in net downwardupward revisions to our proved reserves during 20162018 primarily as a result of the reclassification ofupward technical revisions resulting from better-than-projected well performance from certain proved undeveloped reserves to contingent resources, primarily due to the lower oil and natural gas prices used to estimate proved reserves at December 31, 2016,wells, as compared to December 31, 2015. These contingent resources may be reclassified to proved undeveloped reserves in future periods should the oil and natural gas prices used to estimate proved oil and natural gas reserves improve from the prices at December 31, 2016.2017. Our proved reserves to production ratio at December 31, 20162018 was 10.4,11.3, an increase of 11%4% from 9.410.8 at December 31, 2015.2017.
Over the past two years, our estimated total proved oil and natural gas reserves more than doubled, increasing 104% from 105.8 million BOE at December 31, 2016 to 215.3 million Bbl at December 31, 2018. Our proved oil reserves grew 117% from 57.0 million Bbl at December 31, 2016 to 123.4 million Bbl at December 31, 2018. Our proved developed oil reserves increased 135% from 22.6 million Bbl at December 31, 2016 to 53.2 million Bbl at December 31, 2018.
The Standardized Measure of our total proved oil and natural gas reserves increased 9%79% from $529.2 million$1.26 billion at December 31, 20152017 to $575.0 million$2.25 billion at December 31, 2016.2018. The PV-10 of our total proved oil and natural gas reserves increased 7%93% from $541.6 million$1.33 billion at December 31, 20152017 to $581.5 million$2.58 billion at December 31, 2016.2018. The increaseincreases in our Standardized Measure and PV-10 are primarily a result of our delineation and development operationsdrilling activities in the Delaware Basin during 2016, which was partially impacted by the lower2018 and higher weighted average oil and natural gas prices used to estimate proved reserves at December 31, 2016,2018, as compared to December 31, 2015.2017. The unweighted arithmetic averages of first-day-of-the-month oil and natural gas prices used to estimate proved reserves at December 31, 20162018 were $39.25$62.04 per Bbl and $2.48$3.10 per MMBtu, a decreasean increase of 17%30% and 4%, respectively, as compared to average oil and natural gas prices of $46.79$47.79 per Bbl and $2.59$2.98 per MMBtu used to estimate proved reserves at December 31, 2015.2017. Our total proved reserves were made up of approximately 54%57% oil and 46%43% natural gas at December 31, 20162018, as compared to 57% oil and 43% natural gas at December 31, 2015.2017. PV-10 is a non-GAAP financial measure. For a reconciliation of PV-10 to Standardized Measure, see the preceding table.
Our proved developed oil and natural gas reserves increased 28%37% from 34.068.7 million BOE at December 31, 20152017 to 43.794.3 million BOE at December 31, 20162018 due primarily to our delineation and development operations in the Delaware Basin. Our proved developed oil reserves increased 32%44% from 17.137.0 million Bbl at December 31, 20152017 to 22.653.2 million Bbl at December 31, 2016.2018. Our proved developed natural gas reserves increased 25%30% from 101.4190.1 Bcf at December 31, 20152017 to 126.8246.2 Bcf at December 31, 2016.2018.
The following table summarizes changes in our estimated proved developed reserves at December 31, 2016.2018. |
| | | |
| | | Proved Developed Reserves |
| | |
| | | (MBOE) (1) |
As of December 31, 20152017 | | 34,03768,651 |
|
| Extensions and discoveries | | 12,58314,666 |
|
| Purchases of minerals-in-place | | 596 |
|
| Revisions of prior estimates | | 4083,091 |
|
| Production | | (10,18019,026 | ) |
| Conversion of proved undeveloped to proved developed | | 6,88326,283 |
|
As of December 31, 20162018 | | 43,73194,261 |
|
| |
| (1) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
Our proved undeveloped oil and natural gas reserves increased 44% from 51.184.1 million BOE at December 31, 20152017 to 62.0121.1 million BOE at December 31, 2016.2018. Our proved undeveloped oil and natural gas reserves increased from 28.549.8 million Bbl and 135.5206.1 Bcf, respectively, at December 31, 20152017 to 34.470.2 million Bbl and 165.9305.2 Bcf, respectively, at December 31, 2016,2018, primarily as a result of our delineation and development operations in the Delaware Basin.
At December 31, 2016,2018, we had no proved undeveloped reserves in our estimates that remained undeveloped for five years or more following their initial booking, and we currently have plans to use anticipated capital resources to develop the proved undeveloped reserves remaining as of December 31, 20162018 within five years of booking these reserves.
The following table summarizes changes in our estimated proved undeveloped reserves at December 31, 2016.2018. |
| | | |
| | | Proved Undeveloped Reserves |
| | |
| | | (MBOE) (1) |
As of December 31, 20152017 | | 51,09084,120 |
|
| Extensions and discoveries | | 29,40854,980 |
|
| Purchases of minerals-in-place | | — |
|
| Revisions of prior estimates | | (11,5948,235 | )
|
| Conversion of proved undeveloped to proved developed | | (6,88326,283 | ) |
As of December 31, 20162018 | | 62,021121,052 |
|
| |
(1) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
The following table sets forth, since 2013,2015, proved undeveloped reserves converted to proved developed reserves during each year and the investments associated with these conversions (dollars in thousands). | | | | | | | | | | | Investment in Conversion of Proved Undeveloped Reserves to Proved Developed Reserves | | | | | | | | Investment in Conversion of Proved Undeveloped Reserves to Proved Developed Reserves |
| | | Proved Undeveloped Reserves
Converted to
Proved Developed Reserves | | | Proved Undeveloped Reserves
Converted to
Proved Developed Reserves | |
| | | |
| | | Oil | | Natural Gas | | Total | | | Oil | | Natural Gas | | Total | |
| | | (MBbl) | | (Bcf) | | (MBOE) (1) | | | (MBbl) | | (Bcf) | | (MBOE) (1) | |
| 2013 | | 2,944 |
| | 8.3 |
| | 4,334 |
| | $ | 115,699 |
| |
| 2014 | | 3,780 |
| | 44.7 |
| | 11,223 |
| | 201,950 |
| |
| 2015 | | 2,854 |
| | 23.4 |
| | 6,747 |
| | 104,989 |
| | 2,854 |
| | 23.4 |
| | 6,747 |
| | 104,989 |
|
| 2016 | | 4,705 |
| | 13.1 |
| | 6,883 |
| | 94,579 |
| | 4,705 |
| | 13.1 |
| | 6,883 |
| | 94,579 |
|
| 2017 | | | 9,300 |
| | 45.0 |
| | 16,808 |
| | 211,860 |
|
| 2018 | | | 16,009 |
| | 61.7 |
| | 26,283 |
| | $ | 356,830 |
|
| Total | | 14,283 |
| | 89.5 |
| | 29,187 |
| | $ | 517,217 |
| | 32,868 |
| | 143.2 |
| | 56,721 |
| | $ | 768,258 |
|
__________________ | |
(1) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
The following table sets forth additional summary information by operating area with respect to our estimated net proved reserves at December 31, 2016.2018. | | | | | Net Proved Reserves (1) | | | | | | Net Proved Reserves (1) | | | | |
| | | Oil | | Natural Gas | | Oil Equivalent | | Standardized Measure (2) | | PV-10 (3) | | Oil | | Natural Gas | | Oil Equivalent | | Standardized Measure (2) | | PV-10 (3) |
| | | (MBbl) | | (Bcf) | | (MBOE) (4) | | (in millions) | | (in millions) | | (MBbl) | | (Bcf) | | (MBOE) (4) | | (in millions) | | (in millions) |
| Southeast New Mexico/West Texas: | | | | | | | | | | | | | | | | | | | | |
| Delaware Basin | | 46,873 |
| | 195.1 |
| | 79,388 |
| | $ | 446.0 |
| | $ | 451.0 |
| | 114,823 |
| | 460.0 |
| | 191,490 |
| | $ | 2,056.7 |
| | $ | 2,357.1 |
|
| South Texas: | | | | | | | | | | | | | | | | | | | | |
Eagle Ford (5) | | 10,066 |
| | 19.3 |
| | 13,298 |
| | 85.6 |
| | 86.6 |
| | 8,537 |
| | 21.9 |
| | 12,189 |
| | 160.9 |
| | 184.4 |
|
| Northwest Louisiana/East Texas: | | | | | | | | | | | | | | | | | | | | |
| Haynesville | | — |
| | 74.5 |
| | 12,414 |
| | 41.5 |
| | 42.0 |
| | — |
| | 65.5 |
| | 10,919 |
| | 31.0 |
| | 35.5 |
|
Cotton Valley (6) | | 38 |
| | 3.7 |
| | 652 |
| | 1.9 |
| | 1.9 |
| | 41 |
| | 4.1 |
| | 715 |
| | 2.0 |
| | 2.3 |
|
| Area Total | | 38 |
| | 78.2 |
| | 13,066 |
| | 43.4 |
| | 43.9 |
| | 41 |
| | 69.6 |
| | 11,634 |
| | 33.0 |
| | 37.8 |
|
| Total | | 56,977 |
| | 292.6 |
| | 105,752 |
| | $ | 575.0 |
| | $ | 581.5 |
| | 123,401 |
| | 551.5 |
| | 215,313 |
| | $ | 2,250.6 |
| | $ | 2,579.3 |
|
__________________ | |
| (1) | Numbers in table may not total due to rounding. |
| |
| (2) | Standardized Measure represents the present value of estimated future net cash flows from proved reserves, less estimated future development, production, plugging and abandonment costs and income tax expenses, discounted at 10% per annum to reflect the timing of future cash flows. Standardized Measure is not an estimate of the fair market value of our properties. |
| |
| (3) | PV-10 is a non-GAAP financial measure and generally differs from Standardized Measure, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. PV-10 is not an estimate of the fair market value of our properties. We and others in the industry use PV-10 as a measure to compare the relative size and value of proved reserves held by companies and of the potential return on investment related to the companies’ properties without regard to the specific tax characteristics of such entities. Our PV-10 at December 31, 20162018 may be reconciled to our Standardized Measure of discounted future net cash flows at such date by reducing our PV-10 by the discounted future income taxes associated with such reserves. The discounted future income taxes at December 31, 20162018 were approximately $6.5$328.7 million. |
| |
| (4) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
| |
| (5) | Includes one well producing small volumes of oil from the Austin Chalk formation and two wells producing small quantities of natural gas from the San Miguel formation in Zavala County, Texas. |
| |
| (6) | Includes the Cotton Valley formation and shallower zones and also includes one well producing from the Frio formation in Orange County, Texas. |
Technology Used to Establish Reserves
Under current SEC rules, proved reserves are those quantities of oil and natural gas which,that, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. Reasonable certainty can be established using techniques that have been proven effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies (including computational
methods) that have been field tested and have been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.
In order to establish reasonable certainty with respect to our estimated proved reserves, we used technologies that have been demonstrated to yield results with consistency and repeatability. The technologies and technical data used in the estimation of our proved reserves include, but are not limited to, electric logs, radioactivity logs, core analyses, geologic maps and available pressure and production data, seismic data and well test data. Reserves for proved developed producing wells were estimated using production performance and material balance methods. Certain new producing properties with little production history were forecastforecasted using a combination of production performance and analogy to offset production. Non-producing reserves estimates for both developed and undeveloped properties were forecastforecasted using either volumetric and/or analogy methods.
Internal Control Over Reserves Estimation Process
We maintain an internal staff of petroleum engineers and geoscience professionals to ensure the integrity, accuracy and timeliness of the data used in our reserves estimation process. Our SeniorExecutive Vice President of Reservoir Engineering and Chief Technology Officer is primarily responsible for overseeing the preparation of our reserves estimates. He received his Bachelor and Master of Science degrees in Petroleum Engineering from Texas A&M University, is a Licensed Professional Engineer in the State of Texas and has over 3941 years of industry experience. Following the preparation of our reserves estimates, these estimates are audited for their reasonableness by Netherland, Sewell & Associates, Inc., independent reservoir engineers. The Operations and Engineering Committee of our Board of Directors reviews the reserves report and our reserves estimation process, and the results of the reserves report and the independent audit of our reserves are reviewed by other members of our Board of Directors including members of our Audit Committee.as well.
Acreage Summary
The following table sets forth the approximate acreage in which we held a leasehold, mineral or other interest at December 31, 2016.2018. | | | | | Developed Acres | | Undeveloped Acres | | Total Acres | | Developed Acres | | Undeveloped Acres | | Total Acres |
| | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net |
| Southeast New Mexico/West Texas: | | | | | | | | | | | | | | | | | | | | | | | | |
| Delaware Basin | | 79,087 |
| | 33,699 |
| | 84,616 |
| | 60,613 |
| | 163,703 |
| | 94,312 |
| | 123,000 |
| | 71,900 |
| | 99,200 |
| | 60,100 |
| | 222,200 |
| | 132,000 |
|
| South Texas: | | | | | | | | | | | | | | | | | | | | | | | | |
| Eagle Ford | | 26,402 |
| | 23,682 |
| | 4,267 |
| | 4,095 |
| | 30,669 |
| | 27,777 |
| | 29,900 |
| | 26,800 |
| | 2,100 |
| | 2,100 |
| | 32,000 |
| | 28,900 |
|
| Northwest Louisiana/East Texas: | | | | | | | | | | | | | |
Northwest Louisiana/East Texas (1): | | | | | | | | | | | | | |
| Haynesville | | 16,739 |
| | 9,088 |
| | 3,366 |
| | 3,364 |
| | 20,105 |
| | 12,452 |
| | 19,000 |
| | 11,500 |
| | 600 |
| | 500 |
| | 19,600 |
| | 12,000 |
|
| Cotton Valley | | 18,108 |
| | 16,078 |
| | 3,506 |
| | 2,993 |
| | 21,614 |
| | 19,071 |
| | 20,400 |
| | 18,500 |
| | 700 |
| | 100 |
| | 21,100 |
| | 18,600 |
|
Area Total (1)(2) | | 22,030 |
| | 19,761 |
| | 4,032 |
| | 3,517 |
| | 26,062 |
| | 23,278 |
| | 24,300 |
| | 22,200 |
| | 1,200 |
| | 600 |
| | 25,500 |
| | 22,800 |
|
Total (2) | | 127,519 |
| | 77,142 |
| | 92,915 |
| | 68,225 |
| | 220,434 |
| | 145,367 |
| | 177,200 |
| | 120,900 |
| | 102,500 |
| | 62,800 |
| | 279,700 |
| | 183,700 |
|
__________________ | |
| (1) | Developed acres include 2,800 gross and net mineral acres in Northwest Louisiana. |
| |
| (2) | Some of the same leases cover the gross and net acreage shown for both the Haynesville formation and the shallower Cotton Valley formation. Therefore, the sum of the gross and net acreage for both formations is not equal to the total gross and net acreage for Northwest Louisiana and East Texas. |
| |
(2) | During the year ended December 31, 2016, we released all of our acreage in Wyoming, Utah and Idaho. |
Undeveloped Acreage Expiration
The following table sets forth the approximate number of gross and net undeveloped acres at December 31, 20162018 that will expire over the next threefive years by operating area unless production is established within the spacing units covering the acreage prior to the expiration dates, the existing leases are renewed prior to expiration or continued operations maintain the leases beyond the expiration of each respective primary term. Undeveloped acreage expiring in 20202024 and beyond represents an immaterial amounttotals 13,500 net acres, of our overall undeveloped acreage.
which 8,800 net acres do not expire until 2028.
| | | | | Acres | | Acres | | Acres | | Acres | | Acres | | Acres | | Acres | | Acres |
| | | Expiring 2017 | | Expiring 2018 | | Expiring 2019 | | Expiring 2019 | | Expiring 2020 | | Expiring 2021 | | Expiring 2022 | | Expiring 2023 |
| | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross |
| Net | | Gross | | Net | | Gross | | Net |
| Southeast New Mexico/West Texas: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Delaware Basin (1) | | 17,604 |
| | 7,987 |
| | 39,704 |
| | 25,294 |
| | 15,404 |
| | 9,086 |
| | 13,900 |
| | 9,400 |
| | 16,400 |
| | 8,900 |
| | 25,100 |
| | 14,900 |
| | 7,600 |
| | 8,200 |
| | 4,000 |
| | 5,400 |
|
| South Texas: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eagle Ford | | 1,435 |
| | 1,375 |
| | 896 |
| | 753 |
| | 204 |
| | 156 |
| | 100 |
| | 100 |
| | 1,600 |
| | 1,500 |
| | 400 |
| | 400 |
| | — |
| | — |
| | — |
| | — |
|
| Northwest Louisiana/East Texas: | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| |
|
| | | | |
| Haynesville | | — |
| | — |
| | — |
| | — |
| | 326 |
| | 324 |
| | 300 |
| | 300 |
| | 200 |
| | 200 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cotton Valley | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Area Total (2) | | — |
| | — |
| | — |
| | — |
| | 326 |
| | 324 |
| | 300 |
| | 300 |
| | 200 |
| | 200 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | 19,039 |
| | 9,362 |
| | 40,600 |
| | 26,047 |
| | 15,934 |
| | 9,566 |
| | 14,300 |
| | 9,800 |
| | 18,200 |
| | 10,600 |
| | 25,500 |
| | 15,300 |
| | 7,600 |
| | 8,200 |
| | 4,000 |
| | 5,400 |
|
| |
| (1) | Approximately 54%49% of the acreage expiring in the Delaware Basin in the next threefive years is associated with our Twin Lakes asset area in northern Lea County, New Mexico. Most of these leases can be extended for an additional two years, should we choose to do so, by paying an additional lease bonus. We also expect to hold or extend portions of the remainingcertain expiring acreage outside of our Twin Lakes asset area in 2017 through our 20172019 drilling activities or by paying an additional lease bonus, where applicable. |
| |
| (2) | Some of the same leases cover the gross and net acreage shown for both the Haynesville formation and the shallower Cotton Valley formation. Therefore, the sum of the gross and net acreage for both formations is not equal to the total gross and net acreage for Northwest Louisiana and East Texas. |
Many of the leases comprising the acreage set forth in the table above will expire at the end of their respective primary terms unless operations are conducted to maintain the respective leases in effect beyond the expiration of the primary term or production from the acreage has been established prior to such date, in which event the lease will remain in effect until the cessation of production in commercial quantities in most cases. We also have options to extend some of our leases through payment of additional lease bonus payments prior to the expiration of the primary term of the leases. In addition, we may attempt to secure a new lease upon the expiration of certain of our acreage; however, there may be third-party leases, or top leases, that become effective immediately if our leases expire at the end of their respective terms and production has not been established prior to such date or operations are not conducted to maintain the leases in effect beyond the primary term. As of December 31, 2016,2018, our leases are primarily fee and state leases with primary terms of three to five years and federal leases with primary terms of 10 years. We believe that our lease terms are similar to our competitors’ lease terms as they relate to both primary term and royalty interests.
Drilling Results
The following table summarizes our drilling activity for the years ended December 31, 2016, 20152018, 2017 and 20142016.
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net | | Gross | | Net |
| Development Wells | | | | | | | | | | | | | | | | | | | | | | | | |
| Productive | | 44 |
| | 23.5 |
| | 53 |
| | 26.7 |
| | 89 |
| | 39.9 |
| | 118 |
| | 54.7 |
| | 72 |
| | 43.7 |
| | 44 |
| | 23.5 |
|
| Dry | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Exploration Wells | | | | | | | | | | | | | | | | | | | | | | | | |
| Productive | | 28 |
| | 15.6 |
| | 28 |
| | 17.5 |
| | 12 |
| | 10.6 |
| | 35 |
| | 20.8 |
| | 33 |
| | 22.3 |
| | 28 |
| | 15.6 |
|
| Dry | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total Wells | | | | | | | | | | | | | | | | | | | | | | | | |
| Productive | | 72 |
| | 39.1 |
| | 81 |
| | 44.2 |
| | 101 |
| | 50.5 |
| | 153 |
| | 75.5 |
| | 105 |
| | 66.0 |
| | 72 |
| | 39.1 |
|
| Dry | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Marketing and Customers
Our crude oil is generally sold under both long-term and short-term extendable and cancellableoil purchase agreements with unaffiliated purchasers based on published price bulletins reflecting an established field posting price. As a consequence, the prices we receive for crude oil and a portion of our heavier liquids move up and down in direct correlation with the oil market as it reacts to supply and demand factors. The prices of the remaining lighter liquids move up and down independently of any relationship between the crude oil and natural gas markets. Transportation costs related to moving crude oil and liquids are also deducted from the price received for crude oil and liquids.
Our natural gas is sold under both long-term and short-term natural gas purchase agreements. Natural gas produced by us is sold at various delivery points at or near producing wells to both unaffiliated independent marketing companies and unaffiliated midstream companies. The prices we receive are calculated based on various pipeline indices less any associated fees.indices. When there is an opportunity to do so, we may have our natural gas processed at ourSan Mateo’s or third parties’ processing facilities to extract liquid hydrocarbons from the natural gas. We are then paid for the extracted liquids based on either a negotiated percentage of the proceeds that are generated from the sale of the liquids, or other negotiated pricing arrangements using then-current market pricing less fixed rate processing, transportation and fractionation fees.
The prices we receive for our oil and natural gas production fluctuate widely. Factors that, directly or indirectly, cause price fluctuations include the level of demand for oil and natural gas, the actions of OPEC,the Organization of Petroleum Exporting Countries (“OPEC”), weather conditions, hurricanes in the Gulf Coast region, oil and natural gas storage levels, transportation capacity constraints, domestic and foreign governmental regulations, price and availability of alternative fuels, political conditions in oil and natural gas producing regions, the domestic and foreign supply of oil and natural gas, the price of foreign imports and overall economic conditions. Decreases in these commodity prices adversely affect the carrying value of our proved reserves and our revenues, profitability and cash flows. Short-term disruptions of our oil and natural gas production occur from time to time due to downstream pipeline system failure, capacity issues and scheduled maintenance, as well as maintenance and repairs involving our own well operations. These situations, if they occur, curtail our production capabilities and ability to maintain a steady source of revenue. See “Risk Factors — Our Success Is Dependent on the Prices of Oil and Natural Gas. Low Oil orand Natural Gas Prices and the SubstantialContinued Volatility in These Prices May Adversely Affect Our Financial Condition and Our Ability to Meet Our Capital Expenditure Requirements and Financial Obligations.”
For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, we had four, four and three significant purchasers, respectively, that accounted for approximately 48%60%, 59%60% and 68%48%, respectively, of our total oil, natural gas and natural gas liquidsNGL revenues. Due to the nature of the markets for oil, natural gas and natural gas liquids,If we do not believe that the loss of anylost one or more of these significant purchasers would have a material adverse impactand were unable to sell our production to other purchasers on terms we consider acceptable, it could materially and adversely affect our business, financial condition, results of operations orand cash flows for any significant period of time.flows. For further details regarding these purchasers, see Note 2 to the consolidated financial statements in this Annual Report. Such information is incorporated herein by reference.
Title to Properties
We endeavor to assure that title to our properties is in accordance with standards generally accepted in the oil and natural gas industry. While we rely upon the judgment of oil and natural gas lease brokers and/or landmen in ascertaining title for certain leasehold acquisitions, we typically obtain detailed title opinions prior to drilling an oil and natural gas well. Some of our acreage will be obtained through farmoutis subject to agreements term assignments and other contractual arrangements with third parties, the terms of which often willthat require the drilling of wells or the undertaking of other exploratory or development activities in order to retain our interests in the acreage. Our title to these contractual interests willmay be contingent upon our satisfactory fulfillment of thesesuch obligations. OurSome of our properties are also subject to customary royalty interests, liens incident to financing arrangements, operating agreements, taxes and other similar burdens that we believe will not materially interfere with the use and operation of these properties or affect the value of these properties.thereof. We intend to maintain our leasehold interests by conductingconduct operations, makingmake lease rental payments or producingproduce oil and natural gas from wells in paying quantities, where required, prior to expiration of various time periods in order to avoid lease termination. See “Risk Factors — We May Incur Losses or Costs as a Result of Title Deficiencies in the Properties in Which We Invest.”
We believe that we have satisfactory title to all of our material assets. Although title to these properties is subject to customary encumbrances, such as customary interests generally retained in connection with the acquisition of real property, customary royalty interests and contract terms and restrictions, liens for current taxes and other burdens, easements, restrictions and minor encumbrances customary in the oil and natural gas industry, we believe that none of these liens, restrictions, easements, burdens or encumbrances will materially interfere with the use and operation of these properties in the conduct of our business. In addition, we believe that we have obtained sufficient right-of-way grants and permits from public authorities and private parties for us to operate our business.
Seasonality
Generally, but not always, the demand and price levels for natural gas increase during winter months and decrease during summer months.summer. To lessen seasonal demand fluctuations, pipelines, utilities, local distribution companies and industrial users utilize natural gas storage facilities and forward purchase some of their anticipated winter requirements during the summer. However, increased summertime demand for electricity can place increased demand on storage volumes. Demand for oil and heating oil is also generally higher in the winter and the summer driving season, although oil prices are impactedaffected more significantly by global supply and demand. Seasonal anomalies, such as mild winters, sometimes lessen these fluctuations. Certain of our drilling, completion and other operations are also subject to seasonal limitations where equipment may not be available during periods of peak demand or where weather conditions and events result in delayed operations. See “Risk Factors — Because Our Reserves and Production Are Concentrated in a Few Core Areas, Problems in Production and Markets Relating to a Particular Area Could Have a Material Impact on Our Business.”
Competition
The oil and natural gas industry is highly competitive. We compete with major and independent oil and natural gas companies for exploration opportunities acreage and propertyacreage acquisitions as well as drilling rig contractsrigs and other equipment and labor required to drill, complete, operate and develop our properties. We also compete with public and private midstream companies for natural gas gathering processing and compressionprocessing opportunities, as well as salt water gathering and disposal and oil gathering and transportation activities in the areas in which we operate. In addition, competition in the midstream industry is based on the geographic location of facilities, business reputation, reliability and pricing arrangements for the services offered. San Mateo competes with other midstream companies that provide similar services in its areas of operations, and such companies may have legacy relationships with producers in those areas and may have a longer history of efficiency and reliability.
Many of our competitors have substantially greater financial resources, staffs, facilities and other resources. In addition, larger competitors may be able to absorb the burden of any changes in federal, state and local laws and regulations more easily than we can, which wouldcould adversely affect our competitive position. These competitors may be willing and able to pay more for drilling rigs, leasehold and mineral acreage, productive oil and natural gas properties or midstream facilities and may be able to identify, evaluate, bid for and purchase a greater number of properties and prospects than we can. Our competitors may also be able to afford to purchase and operate their own drilling rigs and hydraulic fracturing equipment.
Our ability to drill and explore for oil and natural gas, to acquire properties and to provide competitive midstream services will depend upon our ability to conduct operations, to evaluate and select suitable properties and to consummate transactions in this highly competitive environment. We have been conducting field operations since 2004 while many of our competitors may have a longer history of operations. Additionally, most of our competitors have demonstrated the ability to operate through industry cycles.
The oil and natural gas industry also competes with other energy-related industries in supplying the energy and fuel requirements of industrial, commercial and individual consumers. See “Risk Factors — Competition in the Oil and Natural Gas Industry Is Intense, Making It More Difficult for Us to Acquire Properties, Market Oil and Natural Gas, Provide Midstream Services and Secure Trained Personnel.”
Regulation
Oil and Natural Gas Regulation
Our oil and natural gas exploration, development, production, midstream and related operations are subject to extensive federal, state and local laws, rules and regulations. Failure to comply with these laws, rules and regulations can result in substantial monetary penalties or delay or suspension of operations. The regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Because these laws, rules and regulations are frequently amended or reinterpreted and new laws, rules and regulations are promulgated, we are unable to predict the future cost or impact of complying with the laws, rules and regulations to which we are, or will become, subject. Our competitors in the oil and natural gas industry are generally subject to the same regulatory requirements and restrictions that affect our operations. We cannot predict the impact of future government regulation on our properties or operations.
Texas, New Mexico, Louisiana and many other states require permits for drilling operations, drilling bonds and reports concerning operations and impose other requirements relating to the exploration, development and production of oil and natural gas. Many states also have statutes or regulations addressing conservation of oil and natural gas and other matters, including provisions for the unitization or pooling of oil and natural gas properties, the establishment of maximum rates of production from wells, the regulation of well spacing, the surface use and restoration of properties upon which wells are drilled, the prohibition or restriction on venting or flaring natural gas, the sourcing and disposal of water used and produced in the drilling and completion process and the plugging and abandonment of wells. ManyWhile not presently the case in the states in which we operate, some states restrict production to the market demand for oil and natural gas. Some states have enacted statutes prescribinggas or prescribe ceiling prices for natural gas sold within their boundaries. Additionally, some regulatory agencies have, from time to time, imposed price controls and
limitations on production by restricting the rate of flow of oil and natural gas wells below natural production capacity in order to conserve supplies of oil and natural gas. Moreover, each state generally imposes a production or severance tax with respect to the production and sale of oil, natural gas and natural gas liquidsNGLs within its jurisdiction.
Some of our oil and natural gas leases are issued by agencies of the federal government, as well as agencies of the states in which we operate. These leases contain various restrictions on access and development and other requirements that may impede our ability to conduct operations on the acreage represented by these leases.
Our sales of natural gas, as well as the revenues we receive from our sales, are affected by the availability, terms and costs of transportation. The rates, terms and conditions applicable to the interstate transportation of natural gas by pipelines are regulated by the Federal Energy Regulatory Commission or FERC,(“FERC”) under the Natural Gas Act of 1938 or the NGA,(the “NGA”), as well as under Section 311 of the Natural Gas Policy Act of 1978 (the “NGPA”). Natural gas gathering facilities are exempt from the jurisdiction of FERC under section 1(b) of the NGA, and intrastate crude oil pipeline facilities are not subject to FERC’s jurisdiction under the Interstate Commerce Act (the “ICA”). State regulation of natural gas gathering facilities and intrastate crude oil pipeline facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements or the NGPA. Since 1985, FERC has implemented regulations intended to increase competition withincomplaint-based rate regulation. We believed, as of February 26, 2019, that the natural gas industry by making natural gaspipelines in our gathering systems met the traditional tests FERC has used to establish a pipeline’s status as a gatherer not subject to FERC jurisdiction. In December 2018, San Mateo placed into service the Rustler Breaks Oil Pipeline System following an open season to gauge shipper interest in committed crude oil interstate transportation more accessibleservice on the Rustler Breaks Oil Pipeline System earlier in 2018. The Rustler Breaks Oil Pipeline System, which is subject to natural gas buyersFERC jurisdiction, includes approximately 17 miles of 10-inch diameter crude oil gathering and sellers ontransportation pipelines from origin points in Eddy County, New Mexico to an open-access, non-discriminatory basis. The natural gas industryinterconnect with Plains Pipeline, L.P. We believe the other crude oil pipelines in our gathering systems meet the traditional tests FERC has historically, however, been heavily regulated, and we can give no assurance that the current less stringent regulatory approach ofused to establish a pipeline’s status as an intrastate facility not subject to FERC will continue.
jurisdiction.
In 2005, Congress enacted the Domenici-Barton Energy Policy Act of 2005 or the Energy(the “Energy Policy Act.Act”). The Energy Policy Act, among other things, amended the NGA to prohibit market manipulation in connection with the purchase or sale of natural gas or the purchase or sale of transportation services subject to FERC jurisdiction by any entity, to direct FERC to facilitate transparency in the market for the sale or transportation of natural gas in interstate commerce and to significantly increase the penalties for violations of, among other things, the NGA, the NGPA or FERC rules, regulations or orders thereunder. FERC has promulgated regulations to implement the Energy Policy Act. Should we violate the anti-market manipulation laws and related regulations, in addition to FERC-imposed penalties and disgorgement, we may also be subject to third-party damage claims.
Intrastate natural gas transportation is subject to regulation by state regulatory agencies.agencies (and to a limited extent by FERC, as noted above). The basis for intrastate regulation of natural gas transportation and the degree of regulatory oversight and scrutiny given to intrastate natural gas pipeline rates and services varies from state to state. Because these regulations will apply to all intrastate natural gas shippers within the same state on a comparable basis, we believe that the regulation in any states in which we operate will not affect our operations in any way that is materially different from our competitors that are similarly situated.
Natural gas gathering facilities are exempt fromAs mentioned above, in December 2018, San Mateo placed into service the jurisdiction ofRustler Breaks Oil Pipeline System. The Rustler Breaks Oil Pipeline System is subject to regulation by FERC under section 1(b)the ICA and the Energy Policy Act of 1992 (the “EP Act”). The ICA and its implementing regulations give FERC authority to regulate the NGA,rates charged for service on interstate common carrier pipelines and intrastate crude oil gathering facilities are also exempt from FERC’s jurisdiction undergenerally require the Interstate Commerce Act. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish a pipeline’s status as a gatherer not subject to FERC jurisdiction,rates and that thepractices of interstate crude oil pipelines in our gathering systems meetto be just, reasonable, not unduly discriminatory and not unduly preferential. The ICA also requires tariffs that set forth the traditional testsrates an interstate crude oil pipeline company charges for providing transportation services on its FERC-jurisdictional pipelines, as well as the rules and regulations governing these services, to be maintained on file with FERC has usedand posted publicly. The EP Act and its implementing regulations also generally allow interstate crude oil pipelines to establishannually index their rates up to a pipeline’s status as an intrastate facility not subjectprescribed ceiling level and require that such pipelines index their rates down to FERC jurisdiction. State regulation of gathering facilities generally includes various safety, environmental and, in some circumstances, nondiscriminatory take requirements or complaint-based rate regulation.the prescribed ceiling level if the index is negative.
The price we receive from the sale of oil and natural gas liquidsNGLs will be affected by the availability, terms and cost of transportation of thesuch products to market. UnderAs noted above, under rules adopted by FERC, interstate oil pipelines can change rates based on an inflation index, though other rate mechanisms may be used in specific circumstances. Intrastate oil pipeline transportation rates are subject to regulationregulations promulgated by state regulatory commissions, which variesvary from state to state. We are not able to predict with certainty the effects, if any, of these regulations on our operations.
In 2007, the Energy Independence & Security Act of 2007 or the EISA,(the “EISA”), went into effect. The EISA, among other things, prohibits market manipulation by any person in connection with the purchase or sale of crude oil, gasoline or petroleum distillates at wholesale in contravention of such rules and regulations that the Federal Trade Commission may prescribe, directs the Federal Trade Commission to enforce the regulations and establishes penalties for violations thereunder.
The Pipeline and Hazardous Materials Safety Administration or PHMSA,(“PHMSA”) imposes pipeline safety requirements on regulated pipelines and gathering lines pursuant to its authority under the Natural Gas Pipeline Safety Act and the Hazardous Liquid Pipeline Safety Act, each as amended. The Rustler Breaks Oil Pipeline System is subject to PHMSA oversight. The
Department of Transportation, through PHMSA, has established rules regarding integrity management programs for interstate oil pipelines, including the Rustler Breaks Oil Pipeline System. In recent years, pursuant to these laws and in addition, the Pipeline Safety, Regulatory Certainty, and Job Creation Act of 2011, PHMSA has expanded its regulation of gathering lines, subjecting previously unregulated pipelines to requirements regarding damage prevention, corrosion control, public education programs, maximum allowable operating pressure limits and other requirements. Certain of our natural gas gathering lines are federally “regulated gathering lines” subject to PHMSA requirements. On April 8, 2016, PHMSA published a notice of proposed rulemaking (NPRM) that would amend existing integrity management requirements, expand assessment and repair requirements in areas with medium population densities and extend regulatory requirements to onshore natural gas gathering lines that are currently exempt. On January 13, 2017, PHMSA issued, but has yet todid not publish, a similar proposed rule for hazardous liquids (i.e., oil) pipelines and gathering lines. It is unclear when or if this rule will go into effect as, on January 20, 2017, the Trump administration requested that all regulations that had been sent to the Office of the Federal Register, but not yet published, be immediately withdrawn for further review. In addition, states have adopted regulations, similar to existing PHMSA regulations, for intrastate gathering and transmission lines. See “Risk Factors — We May Incur Significant Costs and Liabilities Resulting from Compliance with Pipeline Safety Regulations.”
Additional expansion of pipeline safety requirements or our operations could subject us to more stringent or costly safety standards, which could result in increased operating costs or operational delays.
U.S. Federal and State Taxation
The federal, state and local governments in the areas in which we operate impose taxes on the oil and natural gas products we sell and, for many of our wells, sales and use taxes on significant portions of our drilling and operating costs. Many states have raised state taxes on energy sources or state taxes associated with the extraction of hydrocarbons, and additional increases may occur. In January 2019, a bill was introduced in the New Mexico Senate to add a surtax on natural gas processors that would start at $0.60 per MMBtu in 2020 and escalate to $3.00 per MMBtu by 2024. If passed, such a surtax would adversely affect the ability of San Mateo and other natural gas processors to operate in New Mexico and would adversely affect the prices we receive for our natural gas processed in New Mexico. In addition, from time to time there has been a significant amount of discussion by legislators and presidential administrations concerning a variety of energy tax proposals, including proposals that would eliminate allowing small U.S. oil and natural gas companies to deduct intangible drilling costs as incurred and percentage depletion. Changes to tax laws could adversely affect our business and our financial results. See “Risk Factors — We Are Subject to Federal, State and Local Taxes, and May Become Subject to New Taxes or Have Eliminated or Reduced Certain Federal Income Tax Deductions Currently Available with Respect to Oil and Natural Gas Exploration and Production Activities as a Result of Future Legislation, Which Could Adversely Affect Our Business, Financial Condition, Results of Operations and Cash Flows.Flows” and “Risk Factors — Recently Enacted Tax Legislation May Impact Our Ability to Fully Utilize Our Interest Expense Deductions and Net Operating Loss Carryovers to Fully Offset Our Taxable Income in Future Periods.”
Hydraulic Fracturing Policies and Procedures
We use hydraulic fracturing as a means to maximize the recovery of oil and natural gas in almost every well that we drill and complete. Our engineers responsible for these operations attend specialized hydraulic fracturing training programs taught by industry professionals. Although average drilling and completion costs for each area will vary, as will the cost of each well within a given area, on average approximately one-half to two-thirds of the total well costs for our horizontal wells are attributable to overall completion activities, which are primarily focused on hydraulic fracture treatment operations. These costs are treated in the same way as all other costs of drilling and completion of our wells and are included in and funded through our normal capital expenditure budget. A change to any federal and state laws and regulations governing hydraulic fracturing could impact these costs and adversely affect our business and financial results. See “Risk Factors — Federal and State Legislation and Regulatory Initiatives Relating to Hydraulic Fracturing Could Result in Increased Costs and Additional Operating Restrictions or Delays.”
The protection of groundwater quality is important to us. We believe that we follow all state and federal regulations and apply industry standard practices for groundwater protection in our operations. These measures are subject to close supervision by state and federal regulators (including the Bureau of Land Management, or the BLM, with respect to federal acreage).
Although rare, if and when the cement and steel casing used in well construction requires remediation, we deal with these problems by evaluating the issue and running diagnostic tools, including cement bond logs and temperature logs, and conducting pressure testing, followed by pumping remedial cement jobs and taking other appropriate remedial measures.
The vast majority of our hydraulic fracturing treatments are made up of water and sand or other kinds of man-made propping agents.proppants. We use major hydraulic fracturing service companies whothat track and report chemical additives that are used in fracturing operations as required by the appropriate governmental agencies. These service companies fracture stimulate thousands of wells each year for the industry and invest millions of dollars to protect the environment through rigorous safety procedures and also work to develop more environmentally friendly fracturing fluids. We also follow safety procedures and monitor
all aspects of our fracturing operations in an attempt to ensure environmental protection. We do not pump any diesel in the fluid systems of any of our fracture stimulation procedures.
While current fracture stimulation procedures utilize a significant amount of water, we typically recover less than 10% of this fracture stimulation water before produced salt water becomes a significant portion of the fluids produced. All produced water, including fracture stimulation water, is either recycled or disposed of in permitted and regulated disposal facilities in a way that is designed to avoid any impact to surface waters. Since mid-2015, we have also been recycling a portion of our produced salt water in certain of our Delaware Basin asset areas. Recycling produced salt water mitigates the need for salt water disposal and also provides cost savings to us.
Environmental, Health and Safety Regulation
The exploration, development, production, gathering and processing of oil and natural gas, including the operation of salt water injection and disposal wells, are subject to various federal, state and local environmental laws and regulations. These laws and regulations can increase the costs of planning, designing, drilling, completing and operating oil and natural gas wells, midstream facilities and salt water injection and disposal wells. Our activities are subject to a variety of environmental laws and regulations, including but not limited to: the Oil Pollution Act of 1990 or the OPA 90,(the “OPA 90”), the Clean Water Act or the CWA,(the “CWA”), the Comprehensive Environmental Response, Compensation and Liability Act or CERCLA,(“CERCLA”), the Resource Conservation and Recovery Act or RCRA,(“RCRA”), the Clean Air Act or the CAA,(the “CAA”), the Safe Drinking Water Act or the SDWA,(the “SDWA”), and the Occupational Safety and Health Act or OSHA,(“OSHA”), as well as comparable state statutes and regulations. We are also subject to regulations governing the handling, transportation, storage and disposal of wastes generated by our activities and naturally occurring radioactive materials or NORM,(“NORM”) that may result from our oil and natural gas operations. Administrative, civil and criminal fines and penalties may be imposed for noncompliance with these environmental laws and regulations.regulations, and violations and liability with respect to these laws and regulations could also result in remedial clean-ups, natural resource damages, permit modifications or revocations, operational interruptions or shutdowns and other liabilities. Additionally, these laws and regulations require the acquisition of permits or other governmental authorizations before undertaking some activities, may require notice to stakeholders of proposed and ongoing operations, limit or prohibit other activities because of protected wetlands, areas or species and require investigation and cleanup of pollution. These laws, rules and regulations may also restrict the production rate of oil and natural gas below the rate that would otherwise be possible. We expect to remain in compliance in all material respects with currently applicable environmental laws and regulations and do not expect that these laws and regulations will have a material adverse impact on us.
The OPA 90 and its regulations impose requirements on “responsible parties” related to the prevention of crude oil spills and liability for damages resulting from oil spills into or upon navigable waters, adjoining shorelines or in the exclusive economic zone of the United States. A “responsible party” under the OPA 90 may include the owner or operator of an onshore facility. The OPA 90 subjects responsible parties to strict, joint and several financial liability for removal and remediation costs and other damages, including natural resource damages, caused by an oil spill that is covered by the statute. Failure to comply with the OPA 90 may subject a responsible party to civil or criminal enforcement action.
The CWA and comparable state laws impose restrictions and strict controls regarding the discharge of produced waters, fill materials and other materials into navigable waters. These controls have become more stringent over the years, and it is
possible that additional restrictions will be imposed in the future. Permits are required to discharge pollutants into certain state and federal waters and to conduct construction activities in those waters and wetlands. The CWA and comparable state statutes provide for civil, criminal and administrative penalties for any unauthorized discharges of oil and other pollutants and impose liability for the costs of removal or remediation of contamination resulting from such discharges. In September 2015, a rule issued by the Environmental Protection Agency (the “EPA”) and U.S. Army Corps of Engineers (the “Corps”) to revise the definition of “waters of the United States” (“WOTUS”) for all CWA programs, thereby defining the scope of the EPA’s and the Corps’ jurisdiction, became effective. To the extent the revision expands the scope of jurisdiction of the CWA, we could face increased costs and delays with respect to obtaining permits for dredge and fill activities in wetland areas. However, citing uncertainty caused by litigation surrounding the validity of this rule, in 2018 the EPA and the Corps announced a two-year stay of the application of the rule. Federal district court decisions have preserved the stay in Texas, New Mexico and Louisiana, and such jurisdictions remain subject to pre-2015 WOTUS regulations. As noted, litigation surrounding this rule is ongoing. On December 11, 2018, the EPA and the Corps released a proposal to revise the 2015 Clean Water Rule so as to narrow the regulatory definition of WOTUS, with a 60-day comment period to follow.
CERCLA, also known as the “Superfund” law, imposes liability, without regard to fault or the legality of the original conduct, on various classes of persons that are considered to have contributed to the release of a “hazardous substance” into the environment. These persons include the owner or operator of the site where the release occurred and companies that disposed of, or arranged for the disposal of, the hazardous substances found at the site. Persons who are responsible for releases of hazardous substances under CERCLA may be subject to joint and several liability for the costs of cleaning up the hazardous substances and for damages to natural resources. In addition, it is not uncommon for neighboring landowners and other third parties to file claims for personal injury and property damage allegedly caused by hazardous substances released into the
environment. Although CERCLA generally exempts petroleum from the definition of hazardous substances, our operations may, and in all likelihood will, involve the use or handling of materials that may beare classified as hazardous substances under CERCLA. Each state also has environmental cleanup laws analogous to CERCLA.
RCRA and comparable state and local statutes govern the management, including treatment, storage and disposal, of both hazardous and nonhazardous solid wastes. We generate hazardous and nonhazardous solid waste in connection with our routine operations. At present, RCRA includes a statutory exemption that allows many wastes associated with crude oil and natural gas exploration and production to be classified as nonhazardous waste. A similar exemption is contained in many of the state counterparts to RCRA. Not all of the wastes we generate fall within these exemptions. At various times in the past, proposals have been made to amend RCRA to eliminate the exemption applicable to crude oil and natural gas exploration and production wastes. Repeal or modifications of this exemption by administrative, legislative or judicial process, or through changes in applicable state statutes, would increase the volume of hazardous waste we are required to manage and dispose of and would cause us, as well as our competitors, to incur increased operating expenses. Hazardous wastes are subject to more stringent and costly disposal requirements than nonhazardous wastes.
The CAA, as amended, and comparable state laws restrictrestricts the emission of air pollutants from many sources, including oil and natural gas production. In addition, certain states have comparable legislation, which may be more restrictive than the CAA. These laws and any implementing regulations impose stringent air permit requirements and require us to obtain pre-approval for the construction or modification of certain projects or facilities expected to produce air emissions, or to use specific equipment or technologies to control emissions. See “Risk Factors — New Regulations on All Emissions from Our Operations Could Cause Us to Incur Significant Costs.” In January 2019, New Mexico’s governor signed an executive order declaring that New Mexico would support the goals of the Paris Agreement by joining the U.S. Climate Alliance, a bipartisan coalition of governors committed to reducing greenhouse gas emissions consistent with the goals of the Paris Agreement. The stated objective of the executive order is to achieve a statewide reduction in greenhouse gas emissions of at least 45% by 2030 as compared to 2005 levels. The executive order also requires New Mexico regulatory agencies to create an “enforceable regulatory framework” to ensure methane emission reductions. Federal and state regulatory agencies can impose administrative, civil and criminal penalties for non-compliance with air permits or other requirements of the federal CAA and associated state laws and regulations.
Changes in environmental laws and regulations occur frequently, and any changes that result in more stringent and costly waste handling, storage, transport, disposal, cleanup or operating requirements could materially adversely affect our operations and financial condition, as well as those of the oil and natural gas industry in general. For instance, recent scientific studies have suggested that emissions of certain gases, commonly referred to as “greenhouse gases,” and including carbon dioxide and methane, may be contributing to the warming of the Earth’s atmosphere. Based on these findings, the Environmental Protection Agency, or the EPA has begun adopting and implementing a comprehensive suite of regulations to restrict emissions of greenhouse gases under existing provisions of the CAA. Legislative and regulatory initiatives related to climate change and greenhouse gas emissions could, and in all likelihood would, require us to incur increased operating costs adversely affecting our profits and could adversely affect demand for the oil and natural gas we produce, depressing the prices we receive for oil and natural gas. See “Risk Factors — Legislation or Regulations Restricting Emissions of Greenhouse Gases Could Result in Increased Operating Costs and Reduced Demand for the Oil, Natural Gas and Natural Gas LiquidsNGLs We Produce, while the Physical Effects of Climate Change Could Disrupt Our Production and Cause Us to Incur Significant Costs in Preparing for or Responding to Those Effects” and “Risk Factors — New Regulations on All Emissions from Our Operations Could Cause Us to Incur Significant Costs.”
We own and operate underground injection wells throughout our areas of operation. Underground injection is the subsurface placement of fluid through a well, such as the reinjection of brine produced and separated from oil and natural gas production. In our industry, undergroundUnderground injection not only allows us to safely and economically dispose of produced water, but if injected into an oil bearing zone, it can increase the oil production from such zone.water. The SDWA establishes a regulatory framework for underground injection, the primary objective of which is to ensure the mechanical integrity of the injection apparatus and to prevent migration of fluids from the injection zone into underground sources of drinking water. The disposal of hazardous waste by underground injection is subject to stricter requirements than the disposal of produced water. As of December 31, 2016, we owned and operated twelve underground injection wells and we expect to own and operate similar wells in the future. Failure to obtain, or abide by, the requirements for the issuance of necessary permits could subject us to civil and/or criminal enforcement actions and penalties. In addition, in some instances, the operation of underground injection wells has been alleged to cause earthquakes (induced seismicity) as a result of flawed well design or operation. This has resulted in stricter regulatory requirements in some jurisdictions relating to the location and operation of underground injection wells. In addition, a number of lawsuits have been filed in some states alleging that fluid injection or oil and natural gas extraction have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise, to assess the relationship between seismicity and the use of such wells. For example, on October 28, 2014, the Texas Railroad Commission (the “TRC”), adopted disposal well rule amendments designed, among other things, to require applicants for new disposal wells that will receive non-hazardous produced water or other oil and natural gas waste to conduct seismic activity searches utilizing the U.S. Geological Survey. The searches are intended to determine the potential for earthquakes within a circular area of 100 square miles around a proposed new disposal well. If the permittee or an applicant for a disposal well permit fails to demonstrate that the produced water or other fluids are confined to
operationthe disposal zone or if scientific data indicates such a disposal well is likely to be, or determined to be, contributing to seismic activity, then the TRC may deny, modify, suspend or terminate the permit application or existing operating permit for that disposal well. The TRC has used this authority to deny permits for waste disposal wells. The potential adoption of underground injection wells.federal, state and local legislation and regulations intended to address induced seismicity in the areas in which we operate could restrict our drilling and production activities, as well as our ability to dispose of produced water gathered from such activities, which could result in increased costs and additional operating restrictions or delays. We do not expect these developments to have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our activities involve the use of hydraulic fracturing. For more information on our hydraulic fracturing operations, see “—Hydraulic Fracturing Policies and Procedures.” Recently, there has been increasing regulatory scrutiny of hydraulicHydraulic fracturing which is generally exempted from federal regulation as underground injection (unless diesel is a component of the fracturing fluid) under the SDWA. The process of hydraulic fracturing is typically regulated by state oil and natural gas commissions. Some states and localities have placed additional regulatory burdens upon hydraulic fracturing activities and, in some areas, severely restricted or prohibited those activities. In February 2019, a bill was introduced in the New Mexico Senate to place a moratorium on hydraulic fracturing that, if enacted, would last through June 1, 2023. In addition, separate and apart from the referenced potential connection between injection wells and seismicity, concerns have been raised that hydraulic fracturing activities may be correlated to induced seismicity. The scientific community and regulatory agencies at all levels are studying the possible linkage between oil and natural gas activity and induced seismicity, and some state regulatory agencies have modified their regulations or guidance to mitigate potential causes of induced seismicity. If the exemption for hydraulic fracturing is removed from the SDWA, or if other legislation is enacted at the federal, state or local level imposing any restrictions on the use of hydraulic fracturing, this could have a significant impact on our financial condition, results of operations and cash flows. Additional burdens upon hydraulic fracturing, such as reporting or permitting requirements, will result in additional expense and delay in our operations. Restrictions on hydraulic fracturing could also reduce the amount of oil and natural gas that we are ultimately able to produce from our reserves. See “Risk Factors — Federal and State Legislation and Regulatory Initiatives Relating to Hydraulic Fracturing Could Result in Increased Costs and Additional Operating Restrictions or Delays.”
Oil and natural gas exploration and production, operations and other activities have been conducted aton some of our properties by previous owners and operators. Materials from these operations remain on some of the properties, and, in some instances, require remediation. In addition, we occasionally must agree to indemnify sellers of producing properties from whom we acquire the properties against some of the liability for environmental claims associated with the properties.properties we purchase. While we do not believe that costs we incur for compliance with environmental regulations and remediating previously or currently owned or operated properties will be material, we cannot provide any assurances that these costs will not result in material expenditures that adversely affect our profitability.
Additionally, in the course of our routine oil and natural gas operations, surface spills and leaks, including casing leaks, of oil, produced water or other materials may occur, and we may incur costs for waste handling and environmental compliance. It is also possible that our oil and natural gas operations may require us to manage NORM. NORM is present in varying concentrations in sub-surface formations, including hydrocarbon reservoirs, and may become concentrated in scale, film and sludge in equipment that comes in contact with crude oil and natural gas production and processing streams. Some states, including Texas, New Mexico and Louisiana, have enacted regulations governing the handling, treatment, storage and disposal of NORM. Moreover, we will be able to control directly the operations of only those wells we operate. Despite our lack of control over wells owned partly by us but operated by others, the failure of the operator to comply with the applicable environmental regulations may, in certain circumstances, be attributable to us.
We are subject to the requirements of OSHA and comparable state statutes. The OSHA Hazard Communication Standard, the “community right-to-know” regulations under Title III of the federal Superfund Amendments and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used, released or produced in our operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. We are also subject to the requirements and reporting set forth in OSHA workplace standards.
The Endangered Species Act or ESA,(the “ESA”), was established to protect endangered and threatened species. Pursuant to the ESA, if a species is listed as threatened or endangered, restrictions may be imposed on activities adversely affecting that species’ habitat. Similar protections are offered to migratory birds under the Migratory Bird Treaty Act. The U.S. Fish and Wildlife Service must also designate the species’ critical habitat and suitable habitat as part of the effort to ensure survival of the species. A critical habitat or suitable habitat designation could result in material restrictions on land use and may materially impact oil and natural gas development. Our oil and natural gas operations in certain of our operating areas could also be adversely affected by seasonal or permanent restrictions on drilling activity designed to protect certain wildlife in the Delaware Basin.Basin and other areas in which we operate. See “Risk Factors—Factors — We Are Subject to Government Regulation and Liability, Including Complex Environmental Laws, Which Could Require Significant Expenditures.” Our ability to maximize production from our leases may be adversely impacted by these restrictions.
A significant portion of our Delaware Basin acreage position, including all of the BLM Acquisition, consists of federal leasehold administered by the BLM. Permitting for oil and natural gas activities on federal lands can take significantly longer than the permitting process for oil and natural gas activities not located on federal lands. Delays in obtaining necessary permits can disrupt our operations and have an adverse effect on our business. These BLM leases contain relatively standardized terms and require compliance with detailed regulations and orders, which are subject to change. These operations are also subject to BLM rules regarding engineering and construction specifications for production facilities, safety procedures, the valuation of production, the payment of royalties, the removal of facilities, the posting of bonds, hydraulic fracturing, the control of air emissions and other areas of environmental protection. These rules could result in increased compliance costs for our operations, which in turn could have an adverse effect on our business and results of operations. Under certain circumstances, the BLM may require our operations on federal leases to be suspended or terminated. Oil and natural gas exploration and production activities on federal lands are also subject to the National Environmental Policy Act (“NEPA”). NEPA requires federal agencies, including the Department of Interior, to evaluate major agency actions having the potential to significantly impact the environment. In the course of such evaluations, an agency will prepare an environmental assessment that assesses the potential direct, indirect and cumulative impacts of a proposed project and, if necessary, will prepare a more detailed environmental impact statement that may be made available for public review and comment. This process has the potential to delay or even halt development of future oil and natural gas projects with NEPA applicability.
We have not in the past been, and do not anticipate in the near future to be, required to expend amounts that are material in relation to our total capital expenditures as a result of environmental laws and regulations, but since these laws and regulations are periodically amended, we are unable to predict the ultimate cost of compliance. We have no assurance that more stringent laws and regulations protecting the environment will not be adopted or that we will not otherwise incur material expenses in connection with environmental laws and regulations in the future. See “Risk Factors — We Are Subject to Government Regulation and Liability, Including Complex Environmental Laws, Which Could Require Significant Expenditures.”
The clear trend in environmental regulation is to place more restrictions and limitations on activities that may affect the environment. Any changes in environmental laws and regulations or re-interpretation of enforcement policies that result in more stringent and costly permitting, emissions control, waste handling, storage, transport, disposal or remediation
requirements could have a material adverse effect on our operations and financial condition. We may be unable to pass on such increased compliance costs to our customers. Moreover, accidental releases or spills may occur in the course of our operations, and we have no assurance that we will not incur significant costs and liabilities as a result of such releases or spills, including any third-party claims for damage to property, natural resources or persons.
We maintain insurance against some, but not all, potential risks and losses associated with our industry and operations. We generally do not currently carry business interruption insurance. For some risks, we may not obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. If a significant accident or other event occurs and is not fully covered by insurance, it could materially adversely affect our financial condition, results of operations and cash flows.
Office Lease
Our corporate headquarters are located at One Lincoln Centre, 5400 LBJ Freeway, Suite 1500, Dallas, Texas 75240. See Note 13 to the consolidated financial statements in this Annual Report for more details regarding our office lease. Such information is incorporated herein by reference.
Employees
At December 31, 2016,2018, we had 165264 full-time employees. We believe that our relationships with our employees are satisfactory. No employee is covered by a collective bargaining agreement. From time to time, we use the services of independent consultants and contractors to perform various professional services, particularly in the areas of geology and geophysics, land, production and midstream operations, construction, design, well site surveillance and supervision, permitting and environmental assessment, and legal and income tax preparation and accounting services. Independent contractors, at our request, drill all of our wells and usually perform field and on-site production operation services for us, including midstream services, facilities construction, pumping, maintenance, dispatching, inspection and testing. If significant opportunities for company growth arise and require additional management and professional expertise, we will seek to employ qualified individuals to fill positions where that expertise is necessary to develop those opportunities.
Available Information
Our Internet website address is www.matadorresources.com. We make available, free of charge, through our website, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after providing such reports to the SEC. Also, the charters of our Audit Committee, Compensation Committee, Corporate Governance Committee, Executive Committee, Nominating Committee and NominatingStrategic Planning and Compensation Committee, and our Code of Ethics and Business Conduct for Officers, Directors and Employees, are available through our website, and we also intend to disclose any amendments to our Code of Ethics and Business Conduct, or waivers to such code on behalf of our Chief Executive Officer, Chief Financial Officer or Chief Accounting Officer, on our website. All of these corporate governance materials are available free of charge and in print to any shareholder who provides a written request to the Corporate Secretary at One Lincoln Centre, 5400 LBJ Freeway, Suite 1500, Dallas, Texas 75240. The contents of our website are not intended to be incorporated by reference into this Annual Report or any other report or document we file and any reference to our website is intended to be an inactive textual reference only.
Item 1A. Risk Factors.
Risks Related to the Oil and Natural Gas Industry and Our Business
Our Success Is Dependent on the Prices of Oil and Natural Gas. Continued Low Oil and Natural Gas Prices and the Continued Volatility in These Prices May Adversely Affect Our Financial Condition and Our Ability to Meet Our Capital Expenditure Requirements and Financial Obligations.
The prices we receive for ourthe oil and natural gas we produce heavily influence our revenue, profitability, cash flow available for capital expenditures, access to capital, borrowing capacity under our Credit Agreement, and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil and natural gas have been volatile and will likely continue to be volatile in the future. During 2016,2018, the average price of oil was $43.40$64.89 per Bbl, based upon the NYMEX West Texas Intermediate oil futures contract price for the earliest delivery date, and the average price of natural gas was $2.55$3.07 per MMBtu, based upon the NYMEX Henry Hub natural gas futures contract price for the earliest delivery date. Starting in February and March of 2016, respectively,During 2018, oil and natural gas prices began to increase from their most recent lows. Oil prices increased 106% from $26.21the year at $60.42 per Bbl and reached a high of $76.41 per Bbl in mid-February 2016early October. Throughout the fourth quarter of 2018, however, oil prices declined more than 40% from the high in early October to $54.06a low of $42.53 per Bbl in late December 2016, and naturalDecember. Natural gas prices increased 140% from $1.64began 2018 at $2.95 per MMBtu and reached a high of $4.84 per MMBtu in early March 2016mid-November before declining to $3.93$2.94 per MMBtu in late December 2016. December.
Further, becauseBecause we use the full-cost method of accounting, we perform a ceiling test quarterly that may be impacted by declining prices of oil and natural gas. Significant price declines caused us to recognize full-cost ceiling impairments in each of the quarters of 2015 and in the first two quarters of 2016, and should prices decline again, we may recognize further full-cost ceiling impairments. Such full-cost ceiling impairments reduce the book value of our net tangible assets, retained earnings and shareholders’ equity but do not impact our cash flows from operations, liquidity or capital resources. See “—We May Be Required to Write Down the Carrying Value of Our Proved Properties under Accounting Rules, and These Write-Downs Could Adversely Affect Our Financial Condition.”
The prices we receive for our production, and the levels of our production, depend on numerous factors. These factors include, but are not limited to, the following:
the domestic and foreign supply of, and demand for, oil and natural gas;
the actions of the Organization of Petroleum Exporting Countries, or OPEC and state-controlled oil companies relating to oil price and production controls;
the prices and availability of competitors’ supplies of oil and natural gas;
the price and quantity of foreign imports;
the impact of U.S. dollar exchange rates on oil and natural gas prices;rates;
domestic and foreign governmental regulations and taxes;
speculative trading of oil and natural gas futures contracts;
the availability, proximity and capacity of gathering, processing and transportation systems for oil, natural gas;gas and NGLs;
the availability of refining capacity;
the prices and availability of alternative fuel sources;
weather conditions and natural disasters;
political conditions in or affecting oil and natural gas producing regions or countries, including the United States, Middle East, South America and Russia;
the continued threat of terrorism and the impact of military action and civil unrest;
public pressure on, and legislative and regulatory interest within, federal, state and local governments to stop, significantly limit or regulate hydraulic fracturing activities;
the level of global oil and natural gas inventories and exploration and production activity;
the impact of energy conservation efforts;
technological advances affecting energy consumption; and
overall worldwide economic conditions.
These factors make it difficult to predict future commodity price movements with any certainty. Substantially all of our oil and natural gas sales are made in the spot market or pursuant to contracts based on spot market prices and are not pursuant to long-term fixed price contracts. Further, oil prices and natural gas prices do not necessarily fluctuate in direct relation to each other.
Declines in oil or natural gas prices not only reduce our revenue, but could also reduce the amount of oil and natural gas that we can produce economically and could reduce the amount we may borrow under our Credit Agreement. Should oil or natural gas prices decrease to economically unattractive levels and remain at economically unattractive levelsthere for an extended period of time, we may elect in the future to delay some of our exploration and development plans for our prospects, or to cease exploration or development activities on certain prospects due to the anticipated unfavorable economics from such activities or to cease or delay further expansion of our midstream projects, each of which could have a material adverse effect on our business, financial condition, results of operations and reserves. In addition, such declines in commodity prices could cause a reduction in our borrowing base. If the borrowing base were to be less than the outstanding borrowings under our Credit Agreement at any time, we would be required to provide additional collateral satisfactory in nature and value to the lenders to increase the borrowing base to an amount sufficient to cover such excess or repay the deficit in equal installments over a period of six months.
Our Exploration, Development, Exploitation and Midstream Projects Require Substantial Capital Expenditures That May Exceed Our Cash Flows from Operations and Potential Borrowings, and We May Be Unable to Obtain Needed Capital on Satisfactory Terms, Which Could Adversely Affect Our Future Growth.
Our exploration, development, exploitation and midstream activities are capital intensive. Our cash, operating cash flows, contributions from our joint venture partners and potential future borrowings, under our Credit Agreement, the San Mateo Credit Facility or otherwise, may not be sufficient to fund all of our future acquisitions or future capital expenditures. The rate of our future growth is dependent, at least in part, on our ability to access capital at rates and on terms we determine to be acceptable.
We may sell additional equity securities or issue additional debt securities to raise capital. If we succeed in selling additional equity securities or securities convertible into equity securities to raise funds or make acquisitions, the ownership of our existing shareholders would be diluted, and new investors may demand rights, preferences or privileges senior to those of existing shareholders. If we raise additional capital through the issuance of new debt securities or additional indebtedness, we may become subject to additional covenants that restrict our business activities.
Our cash flows from operations and access to capital are subject to a number of variables, including:
our estimated proved oil and natural gas reserves;
the amount of oil and natural gas we produce from existing wells;produce;
the prices at which we sell our production;
the costs of developing and producing our oil and natural gas reserves;
the costs of constructing, operating and maintaining our midstream facilities;
our ability to attract third-party customers for our midstream services;
our ability to acquire, locate and produce new reserves;
the ability and willingness of banks to lend to us; and
our ability to access the equity and debt capital markets.
In addition, the possible occurrence of future events, such as further decreases in the prices of oil and natural gas, or extended periods of such decreased prices, terrorist attacks, wars or combat peace-keeping missions, financial market disruptions, general economic recessions, oil and natural gas industry recessions, large company bankruptcies, accounting scandals, overstated reserves estimates by major public oil companies and disruptions in the financial and capital markets, has caused financial institutions, credit rating agencies and the public to more closely review the financial statements, capital structures and spending and earnings of public companies, including energy companies. Such events have constrained the capital
available to the energy industry in the past, and such events or similar events could adversely affect our access to funding for our operations in the future.
If our revenues decrease as a result of lower oil and natural gas prices, operating difficulties, declines in reserves or the value thereof or for any other reason, we may have limited ability to obtain the capital necessary to sustain our operations at current levels, further develop and exploit our current properties or invest in certain exploration opportunities. Alternatively, to fund acquisitions, increase our rate of growth, expand our midstream operations, develop our properties or pay for higher service costs, we may decide to alter or increase our capitalization substantially through the issuance of debt or equity securities, the sale of production payments, the sale or joint venture of midstream assets or oil and natural gas producing assets or acreage, the borrowing of funds or otherwise to meet any increase in capital spending. If we succeed in selling additional equity securities or securities convertible into equity securities to raise funds or make acquisitions, the ownership of our existing shareholders would be diluted, and new investors may demand rights, preferences or privileges senior to those of existing shareholders. If we raise additional capital through the issuance of new debt securities or additional indebtedness, we may become subject to additional covenants that restrict our business activities. If we are unable to raise additional capital from available sources at acceptable terms, our business, financial condition and future results of operations could be adversely affected.
Drilling for and Producing Oil and Natural Gas Are Highly Speculative and Involve a High Degree of Operational and Financial Risk, with Many Uncertainties That Could Adversely Affect Our Business.
Exploring for and developing hydrocarbon reserves involves a high degree of operational and financial risk, which precludes us from definitively predicting the costs involved and time required to reach certain objectives. Our drilling locations are in various stages of evaluation, ranging from locations that are ready to drill to locations that will require substantial additional interpretation before they can be drilled. The budgeted costs of planning, drilling, completing and operating wells are often exceeded and such costs can increase significantly due to various complications that may arise during drilling, completion and operation. Before a well is spud, we may incur significant geological, geophysical and land costs, including seismic costs, which are incurred whether or not a well eventually produces commercial quantities of hydrocarbons, or is drilled at all. Exploration wells bear a much greater risk of loss than development wells. The analogies we draw from available data from other wells, more fully explored locations or producing fields may not be applicable to our drilling locations. If our actual drilling and development costs are significantly more than our estimated costs, we may not be able to continue our operations as proposed and could be forced to modify our drilling plans accordingly.
If we decide to drill a certain location, there is a risk that no commercially productive oil or natural gas reservoirs will be found or produced. We may drill or participate in new wells that are not productive. We may drill or participate in wells that are productive, but that do not produce sufficient net revenues to return a profit after drilling, operating and other costs. There is no way to affirmatively determine in advance of drilling and testing whether any particular location will yield oil or natural gas in sufficient quantities to recover exploration, drilling and completion costs or to be economically viable. Even if sufficient amounts of oil or natural gas exist, we may damage the potentially productive hydrocarbon-bearing formation or experience mechanical difficulties while drilling or completing the well, resulting in a reduction in production and reserves from, or abandonment of, the well. The productivity and profitability of a well may be negatively affected by a number of additional factors, including the following:
general economic and industry conditions, including the prices received for oil and natural gas;
shortages of, or delays in, obtaining equipment, including hydraulic fracturing equipment, and qualified personnel;
potential drainage of oil and natural gas from our properties by adjacent operators;
the existence or magnitude of faults or unanticipated geological features;
loss of or damage to oilfield development and service tools;
accidents, equipment failures or mechanical problems;
title defects of the underlying properties;
increases in severance taxes;
adverse weather conditions that delay drilling activities or cause producing wells to be shut in;
domestic and foreign governmental regulations; and
proximity to and capacity of gathering, processing and transportation facilities.
Furthermore, our exploration and production operations involve using some of the latest drilling and completion techniques developed by us, other operators and our service providers. For example, risks that we face while drilling and completing horizontal wells include, but are not limited to, the following:
landing our wellbore in the desired drilling zone;
staying in the desired drilling zone while drilling horizontally through the formation;
running our casing the entire length of the wellbore;
fracture stimulating the planned number of stages;
drilling out the plugs between stages following hydraulic fracturing operations; and
being able to run tools and other equipment consistently through the horizontal wellbore.
If we do not drill productive and profitable wells in the future, our business, financial condition, results of operations, cash flows and reserves could be materially and adversely affected.
The Borrowing Base under Our Credit Agreement Is Subject to Periodic Redetermination.
The borrowing base under the Credit Agreement is determined semi-annually as of May 1 and November 1 by the lenders based primarily on the estimated value of our proved oil and natural gas reserves at December 31 and June 30 of each year, respectively. Both we and the lenders may request an unscheduled redetermination of the borrowing base once each between scheduled redetermination dates. In addition, our lenders have the flexibility to reduce our borrowing base due to a variety of factors, some of which may be beyond our control. As of February 22, 2017, our borrowing base was $400.0 million, and we had no outstanding borrowings under, and approximately $0.8 million in outstanding letters of credit issued pursuant to, the Credit Agreement. We could be required to repay a portion of any outstanding bank debt to the extent that, after a redetermination, our outstanding borrowings at such time exceeded the redetermined borrowing base. We may not have sufficient funds to make such repayments, which could result in a default under the terms of the Credit Agreement and an acceleration of the loans thereunder requiring us to negotiate renewals, arrange new financing or sell significant assets, all of which could have a material adverse effect on our business and financial results.
The Terms of the Agreements Governing Our Outstanding Indebtedness May Restrict Our Current and Future Operations, Particularly Our Ability to Respond to Changes in Business or to Take Certain Actions.
Our Credit Agreement and the indenture governing our senior notes contain, and any future indebtedness we incur will likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interest. One or more of these agreements include covenants that, among other things, restrict our ability to:
incur or guarantee additional debt or issue certain types of preferred stock;
pay dividends on capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness;
transfer or sell assets;
make certain investments;
create certain liens;
enter into agreements that restrict dividends or other payments from our Restricted Subsidiaries (as defined in the indenture) to us;
consolidate, merge or transfer all or substantially all of our assets;
engage in transactions with affiliates; and
create unrestricted subsidiaries.
A breach of any of these covenants could result in an event of default under our Credit Agreement and the indenture governing our outstanding senior notes. For example, our Credit Agreement requires us to maintain a debt to EBITDA ratio, which is defined as total debt outstanding divided by a rolling four quarter EBITDA calculation, of 4.25 or less. Low oil and natural gas prices or any decline in the prices of oil or natural gas may adversely impact our EBITDA, cash flows and debt levels, and therefore our ability to comply with this covenant. Upon the occurrence of such an event of default, all amounts outstanding under the applicable debt agreements could be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated. If indebtedness under our Credit Agreement or indenture is accelerated, there can be no assurance that we will have sufficient assets to repay such indebtedness. The operating and financial restrictions and covenants in these debt agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
We May Not Be Able to Generate Sufficient Cash to Service All of Our Indebtedness and May Be Forced to Take Other Actions to Satisfy Our Obligations under Applicable Debt Instruments, Which May Not Be Successful.
Our ability to make scheduled payments on or to refinance our indebtedness obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance indebtedness. Our ability to restructure or refinance indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service and other obligations. Our Credit Agreement and the indenture governing our outstanding senior notes currently restrict our ability to dispose of assets and our use of the proceeds from such disposition. We may not be able to consummate those dispositions, and the proceeds of any such disposition may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet scheduled debt service obligations, which could have a material adverse effect on our financial condition and results of operations.
We May Incur Additional Indebtedness, Which Could Reduce Our Financial Flexibility, Increase Interest Expense and Adversely Impact Our Operations and Our Unit Costs.
At February 22, 2017, we had available borrowings of approximately $399.2 million under our Credit Agreement (after giving effect to outstanding letters of credit). Our borrowing base is determined semi-annually by our lenders based primarily on the estimated value of our existing and future oil and natural gas reserves, but both we and our lenders can request one unscheduled redetermination between scheduled redetermination dates. Our Credit Agreement is secured by our interests in the majority of our oil and natural gas properties, and contains covenants restricting our ability to incur additional indebtedness, sell assets, pay dividends and make certain investments. Since the borrowing base is subject to periodic redeterminations, if a redetermination resulted in a lower borrowing base, we could be required to provide additional collateral satisfactory in nature and value to the lenders to increase the borrowing base to an amount sufficient to cover such excess or repay the deficit in equal installments over a period of six months. If we are required to do so, we may not have sufficient funds to fully make such repayments.
In the future, subject to the restrictions in the indenture governing our outstanding senior notes and in other instruments governing our other outstanding indebtedness (including our Credit Agreement), we may incur significant amounts of additional indebtedness, including under our Credit Agreement or through the issuance of additional notes, in order to fund acquisitions, develop our properties or invest in certain exploration opportunities. Interest rates on such future indebtedness may be higher than current levels, causing our financing costs to increase accordingly.
A high level of indebtedness could affect our operations in several ways, including the following:
requiring a significant portion of our cash flows to be used for servicing our indebtedness;
increasing our vulnerability to general adverse economic and industry conditions;
placing us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, may be able to take advantage of opportunities that our level of indebtedness may prevent us from pursuing;
restricting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes; and
increasing the risk that we may default on our debt obligations.
Our Credit Rating May Be Downgraded, Which Could Reduce Our Financial Flexibility, Increase Interest Expense and Adversely Impact Our Operations.
As of February 22, 2017, our corporate credit rating from Standard & Poor’s Rating Services was “B” and our corporate credit rating from Moody’s Investors Service was “B2.” We cannot assure you that our credit ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Any future downgrade could increase the cost of any indebtedness incurred in the future.
Any increase in our financing costs resulting from a credit rating downgrade could adversely affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes. If a credit rating downgrade were to occur at a time when we were experiencing significant working capital requirements or otherwise lacked liquidity, our results of operations could be materially adversely affected.
Our Operations Are Subject to Operational Hazards and Unforeseen Interruptions for Which We May Not Be Adequately Insured.
There are numerous operational hazards inherent in oil and natural gas exploration, development, production, gathering, transportation and processing, including:
natural disasters;
adverse weather conditions;
loss of drilling fluid circulation;
blowouts where oil or natural gas flows uncontrolled at a wellhead;
cratering or collapse of the formation;
pipe or cement leaks, failures or casing collapses;
damage to pipelines, processing plants and disposal wells and associated facilities;
fires or explosions;
releases of hazardous substances or other waste materials that cause environmental damage;
pressures or irregularities in formations; and
equipment failures or accidents.
In addition, there is an inherent risk of incurring significant environmental costs and liabilities in the performance of our operations and services, some of which may be material, due to our handling of petroleum hydrocarbons and wastes, our emissions to air and water, the underground injection or other disposal of wastes, the use of hydraulic fracturing fluids and historical industry operations and waste disposal practices. Any of these or other similar occurrences could result in the disruption or impairment of our operations, substantial repair costs, personal injury or loss of human life, significant damage to property, environmental pollution and substantial revenue losses. The location of our wells, gathering systems, pipelines and other facilities near populated areas, including residential areas, commercial business centers and industrial sites, could significantly increase the level of damages resulting from these risks.
Insurance against all operational risks is not available to us. We are not fully insured against all risks, including development and completion risks that are generally not recoverable from third parties or insurance. Pollution and environmental risks generally are not fully insurable. In addition, we may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the perceived risks presented. Losses could, therefore, occur for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. Moreover, insurance may not be available in the future at commercially reasonable prices or on commercially reasonable terms. Changes in the insurance markets due to various factors may make it more difficult for us to obtain certain types of coverage in the future. As a result, we may not be able to obtain the levels or types of insurance we would otherwise have obtained prior to these market changes, and the insurance coverage we do obtain may not cover certain hazards or all potential losses that are currently covered, and may be subject to large deductibles. Losses and liabilities from uninsured and underinsured events and delays in the payment of insurance proceeds could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Because Our Reserves and Production Are Concentrated in a Few Core Areas, Problems in Production and Markets Relating to a Particular Area Could Have a Material Impact on Our Business.
Almost all of our current oil and natural gas production and our proved reserves are attributable to our properties in the Delaware Basin in Southeast New Mexico and West Texas, the Eagle Ford shale in South Texas and the Haynesville shale in
Northwest Louisiana and East Texas. In 2015 and 2016, the vast majority of our capital expenditures have been allocated torecent years, the Delaware Basin. As a result,Basin has become an area of increasing focus for the year ended December 31, 2016,us, and approximately 57%87% of our total oil and natural gas production including approximately 75% of our average daily oil production,for the year ended 2018 was attributable to our properties in the Delaware BasinBasin. In 2016, 2017 and approximately 18%2018, the vast majority of our total oil and natural gas production, including approximately 25% of our average daily oil production, was attributablecapital expenditures were allocated to our properties in the Eagle Ford shale. At December 31, 2016, approximately 75% of our total proved oil and natural gas reserves were attributable to our properties in the Delaware Basin. We expect that a significant portionsubstantially all of our operationscapital expenditures in 20172019 will continue to be in the Delaware Basin.Basin, with the exception of amounts incurred in 2019 to conclude our South Texas drilling program and amounts allocated to limited operations in our South Texas and Haynesville shale positions to maintain and extend leases and to participate in certain non-operated well opportunities.
The industry focus on the Delaware Basin may adversely impact our ability to gather, transport and process our oil and natural gas production due to significant competition for gathering systems, pipelines, processing facilities and oil, condensate and condensatesalt water trucking operations. For example, infrastructure constraints have in the past required, and may in the future require, us to flare natural gas occasionally, decreasing the volumes sold from our wells. Due to the concentration of our operations, we may be disproportionately exposed to the impact of delays or interruptions of production from our wells in our operating areas caused by transportation capacity constraints or interruptions, curtailment of production, availability of equipment, facilities, personnel or services, significant governmental regulation, natural disasters, adverse weather conditions or plant closures for scheduled maintenance.
Our operations may also be adversely affected by weather conditions and events such as hurricanes, tropical storms and inclement winter weather, resulting in delays in drilling and completions, damage to facilities and equipment and the inability to receive equipment or access personnel and products at affected job sites in a timely manner. For example, in recent years the Delaware Basin has experienced periods of severe winter weather that impacted many operators. In particular, the weather conditions and freezing temperatures have resulted in power outages, curtailments in trucking, delays in drilling and completion of wells and other production constraints. In recent years, certainCertain areas of the Delaware Basin have also experienced periods of severe flooding that impacted our operations as well as many other operators in the area, resulting in delays in drilling, completing and initiating production on certain wells. As we continue to focus our operations on the Delaware Basin, we may increasingly face these and other challenges posed by severe weather.
Similarly, certain areas of the Eagle Ford shale play are prone to severe tropical weather, such as Hurricane Harvey in August 2017, which caused many operators to shut in production. We experienced minor operational interruptions in our central and eastern Eagle Ford operations as a result of Hurricane Harvey, although future storms might cause more severe damage and interruptions or disrupt our ability to market production from our operating areas, including the Eagle Ford shale and the Delaware Basin.
Due to the concentrated nature of our portfolio of properties, a number of our properties could experience any of the same conditions at the same time, resulting in a relatively greater impact on our results of operations than they might have on other companies that have a more diversified portfolio of properties. For example, our operations in the Delaware Basin are subject to particular restrictions on drilling activities based on environmental sensitivities and requirements and potash mining operations. Such delays, interruptions or restrictions could have a material adverse effect on our financial condition, results of operations and cash flows.
We May Not Be Able to Generate Sufficient Cash to Service All of Our Indebtedness and May Be Forced to Take Other Actions to Satisfy Our Obligations under Applicable Debt Instruments, Which May Not Be Successful.
Our ability to make scheduled payments on or to refinance our indebtedness obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund debt service obligations, we may be forced to reduce or delay investments and capital expenditures, sell assets, seek additional capital or restructure or refinance indebtedness. Our ability to restructure or refinance indebtedness will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of indebtedness could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict business operations. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives. In addition, any failure to make payments of interest and principal on outstanding indebtedness on a timely basis would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness. In the absence of sufficient cash flows and capital resources, we could face substantial liquidity problems and might be required to dispose of material assets or operations to meet debt service and other obligations. Our Credit Agreement, the San Mateo Credit Facility and the indenture governing our outstanding senior notes currently restrict our ability to dispose of assets and our use of the proceeds from such disposition. We may not be able to consummate those dispositions, and the proceeds of any such disposition may not be adequate to meet any debt service obligations then due. These alternative measures may not be successful and may not permit us to meet scheduled debt service obligations, which could have a material adverse effect on our financial condition and results of operations.
We May Incur Additional Indebtedness, Which Could Reduce Our Financial Flexibility, Increase Interest Expense and Adversely Impact Our Operations and Our Unit Costs.
As of February 26, 2019, the maximum facility amount under the Credit Agreement was $1.5 billion, the borrowing base was $850.0 million and our elected borrowing commitment was $500.0 million. Borrowings under the Credit Agreement are limited to the lowest of the borrowing base, maximum facility amount and elected borrowing commitment. At February 26, 2019, we had available borrowing capacity of approximately $406.3 million under our Credit Agreement (after giving effect to outstanding letters of credit). Our borrowing base is determined semi-annually by our lenders based primarily on the estimated value of our existing and future oil and natural gas reserves, but both we and our lenders can request one unscheduled redetermination between scheduled redetermination dates. Our Credit Agreement is secured by our interests in the majority of our oil and natural gas properties and contains covenants restricting our ability to incur additional indebtedness, sell assets, pay dividends and make certain investments. Since the borrowing base is subject to periodic redeterminations, if a redetermination resulted in a borrowing base that is less than our borrowings under the Credit Agreement, we would be required to provide additional collateral satisfactory in nature and value to the lenders to increase the borrowing base to an amount sufficient to cover such excess or repay the deficit in equal installments over a period of six months. If we are required to do so, we may not have sufficient funds to fully make such repayments.
As of February 26, 2019, the facility amount under the San Mateo Credit Facility was $250.0 million, and San Mateo had available borrowing capacity of approximately $13.8 million (after giving effect to outstanding letters of credit). The San Mateo Credit Facility includes an accordion feature, which could expand the commitments of the lenders to up to $400.0 million. The San Mateo Credit Facility is guaranteed by San Mateo’s subsidiaries and secured by substantially all of San Mateo’s assets, including real property. The San Mateo Credit Facility contains covenants restricting San Mateo’s ability to incur additional indebtedness, sell assets, pay dividends and make certain investments.
In the future, subject to the restrictions in the indenture governing our outstanding senior notes and in other instruments governing our other outstanding indebtedness (including our Credit Agreement and the San Mateo Credit Facility), we may incur significant amounts of additional indebtedness, including under our Credit Agreement and the San Mateo Credit Facility, through the issuance of additional notes or otherwise, in order to fund acquisitions, develop our properties or invest in certain opportunities. Interest rates on such future indebtedness may be higher than current levels, causing our financing costs to increase accordingly.
A high level of indebtedness could affect our operations in several ways, including the following:
requiring a significant portion of our cash flows to be used for servicing our indebtedness;
increasing our vulnerability to general adverse economic and industry conditions;
placing us at a competitive disadvantage compared to our competitors that are less leveraged and, therefore, may be able to take advantage of opportunities that our level of indebtedness may prevent us from pursuing;
restricting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes; and
increasing the risk that we may default on our debt obligations.
The Borrowing Base under Our Credit Agreement Is Subject to Periodic Redetermination, and We Are Subject to Interest Rate Risk under Our Credit Agreement and the San Mateo Credit Facility.
The borrowing base under the Credit Agreement is determined semi-annually as of May 1 and November 1 by the lenders based primarily on the estimated value of our proved oil and natural gas reserves at December 31 and June 30 of each year, respectively. We and the lenders may each request an unscheduled redetermination of the borrowing base once between scheduled redetermination dates. In addition, our lenders have the flexibility to reduce our borrowing base due to a variety of factors, some of which may be beyond our control. As of February 26, 2019, our borrowing base was $850.0 million, our elected borrowing commitment was $500.0 million and we had $80.0 million in outstanding borrowings under, and approximately $13.7 million in outstanding letters of credit issued pursuant to, the Credit Agreement. As of February 26, 2019, the maximum facility amount under the Credit Agreement was $1.5 billion. Borrowings under the Credit Agreement are limited to the lowest of the borrowing base, maximum facility amount and elected borrowing commitment. We could be required to repay a portion of any outstanding debt under the Credit Agreement to the extent that, after a redetermination, our outstanding borrowings at such time exceeded the redetermined borrowing base. We may not have sufficient funds to make such repayments, which could result in a default under the terms of the Credit Agreement and an acceleration of the loans thereunder, requiring us to negotiate renewals, arrange new financing or sell significant assets, all of which could have a material adverse effect on our business and financial results.
Our earnings are exposed to interest rate risk associated with borrowings under our Credit Agreement and the San Mateo Credit Facility. Borrowings under the Credit Agreement may be in the form of a base rate loan or a Eurodollar loan. If we
borrow funds as a base rate loan, such borrowings will bear interest at a rate equal to the greatest of (i) the prime rate for such day, (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) on such day, plus 0.50% and (iii) the daily adjusting LIBOR rate (as defined in the Credit Agreement) plus 1.0% plus, in each case, an amount ranging from 0.25% to 1.25% per annum depending on the level of borrowings under the Credit Agreement. If we borrow funds as a Eurodollar loan, such borrowings will bear interest at a rate equal to (x) the reserve adjusted LIBOR rate (as defined in the Credit Agreement) plus (y) an amount ranging from 1.25% to 2.25% per annum depending on the level of borrowings under the Credit Agreement. If we have outstanding borrowings under our Credit Agreement and interest rates increase, so will our interest costs, which may have a material adverse effect on our results of operations and financial condition.
Similarly, borrowings under the San Mateo Credit Facility may be in the form of a base rate loan or a Eurodollar loan. If San Mateo borrows funds as a base rate loan, such borrowings will bear interest at a rate equal to the greatest of (i) the prime rate for such day, (ii) the Federal Funds Effective Rate (as defined in the San Mateo Credit Facility) on such day, plus 0.50% and (iii) the Adjusted LIBO Rate (as defined in the San Mateo Credit Facility) plus 1.0% plus, in each case, an amount ranging from 0.50% to 1.50% per annum depending on San Mateo’s Consolidated Total Leverage Ratio (as defined in the San Mateo Credit Facility). If San Mateo borrows funds as a Eurodollar loan, such borrowings will bear interest at a rate equal to (x) the Adjusted LIBO Rate for the chosen interest period plus (y) an amount ranging from 1.50% to 2.50% per annum depending on San Mateo’s Consolidated Total Leverage Ratio. If San Mateo has outstanding borrowings under the San Mateo Credit Facility and interest rates increase, so will San Mateo’s interest costs, which may have a material adverse effect on San Mateo’s results of operations and financial condition.
The Terms of the Agreements Governing Our Outstanding Indebtedness May Restrict Our Current and Future Operations, Particularly Our Ability to Respond to Changes in Business or to Take Certain Actions.
Our Credit Agreement, the San Mateo Credit Facility and the indenture governing our senior notes contain, and any future indebtedness we incur will likely contain, a number of restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to engage in acts that may be in our best long-term interest. One or more of these agreements include covenants that, among other things, restrict our ability to:
incur or guarantee additional debt or issue certain types of preferred stock;
pay dividends on capital stock or redeem, repurchase or retire our capital stock or subordinated indebtedness;
transfer or sell assets;
make certain investments;
create certain liens;
enter into agreements that restrict dividends or other payments from our Restricted Subsidiaries (as defined in the indenture) to us;
consolidate, merge or transfer all or substantially all of our assets;
engage in transactions with affiliates; and
create unrestricted subsidiaries.
A breach of any of these covenants could result in an event of default under our Credit Agreement, the San Mateo Credit Facility and the indenture governing our outstanding senior notes. For example, our Credit Agreement requires us to maintain a debt to EBITDA ratio, which is defined as debt outstanding (net of up to $50 million of cash or cash equivalents) divided by a rolling four quarter EBITDA calculation, of 4.00 or less. Low oil and natural gas prices or any decline in the prices of oil or natural gas may adversely impact our EBITDA, cash flows and debt levels, and therefore our ability to comply with this covenant.
Similarly, the San Mateo Credit Facility requires San Mateo to meet a debt to EBITDA ratio, which is defined as consolidated total funded indebtedness outstanding (as defined in the San Mateo Credit Facility) divided by a rolling four quarter EBITDA calculation, of 5.00 or less, subject to certain exceptions. The San Mateo Credit Facility also requires San Mateo to maintain an interest coverage ratio, which is defined as a rolling four quarter EBITDA calculation divided by San Mateo’s consolidated interest expense, of 2.50 or more. Lower revenues as a result of less volumes than anticipated, or otherwise, or an increase in interest rates may adversely impact San Mateo’s EBITDA and interest expense, and therefore San Mateo’s ability to comply with these covenants.
Upon the occurrence of an event of default, all amounts outstanding under the applicable debt agreements could be declared to be immediately due and payable and all applicable commitments to extend further credit could be terminated. If indebtedness under our Credit Agreement, the San Mateo Credit Facility or the indenture governing our outstanding senior notes is accelerated, there can be no assurance that we will have sufficient assets to repay such indebtedness. The operating and
financial restrictions and covenants in these debt agreements and any future financing agreements could adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
Our Credit Rating May Be Downgraded, Which Could Reduce Our Financial Flexibility, Increase Interest Expense and Adversely Impact Our Operations.
As of February 26, 2019, our corporate credit rating from Standard & Poor’s Rating Services was “B+” and our corporate credit rating from Moody’s Investors Service was “B1.” We cannot assure you that our credit ratings will remain in effect for any given period of time or that a rating will not be lowered or withdrawn entirely by a rating agency if, in its judgment, circumstances so warrant. Any future downgrade could increase the cost of any indebtedness incurred in the future.
Any increase in our financing costs resulting from a credit rating downgrade could adversely affect our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions and general corporate or other purposes. If a credit rating downgrade were to occur at a time when we were experiencing significant working capital requirements or otherwise lacked liquidity, our results of operations could be materially adversely affected.
We Depend upon Several Significant Purchasers for the Sale of Most of Our Oil and Natural Gas Production. The Loss of One or More of These Purchasers Could, Among Other Factors, Limit Our Access to Suitable Markets for the Oil and Natural Gas We Produce.
We depend upon several significant purchasers for the sale of most of our oil and natural gas production. For the years ended December 31, 2018, 2017 and 2016, we had four, four and three significant purchasers, respectively, that collectively accounted for approximately 60%, 60% and 48%, respectively, of our total oil, natural gas and NGL revenues. We cannot assure you that we will continue to have ready access to suitable markets for our future production. If we lost one or more of these customers and were unable to sell our production to other customers on terms we consider acceptable, it could materially and adversely affect our business, financial condition, results of operations and cash flows.
The Unavailability or High Cost of Drilling Rigs, Completion Equipment and Services, Supplies and Personnel, Including Hydraulic Fracturing Equipment and Personnel, Could Adversely Affect Our Ability to Establish and Execute Exploration and Development Plans within Budget and on a Timely Basis, Which Could Have a Material Adverse Effect on Our Financial Condition, Results of Operations and Cash Flows.
Shortages or the high cost of drilling rigs, completion equipment and services, personnel or supplies, including sand and other proppants, could delay or adversely affect our operations. When drilling activity in the United States or a particular operating area increases, associated costs typically also increase, including those costs related to drilling rigs, equipment, supplies, including sand and other proppants, and personnel and the services and products of other industry vendors. These costs may increase, and necessary equipment, supplies and services may become unavailable to us at economical prices. Should this increase in costs occur, we
may delay drilling or completion activities, which may limit our ability to establish and replace reserves, or we may incur these higher costs, which may negatively affect our business, financial condition, results of operations and cash flows. In addition, should low oil or natural gas prices continue or should oil and natural gas prices decline, further, third-party service providers may face financial difficulties and be unable to provide services. A reduction in the number of service providers available to us may negatively impact our ability to retain qualified service providers, or obtain such services at costs acceptable to us.
In addition, the demand for hydraulic fracturing services from time to time exceeds the availability of fracturing equipment and crews across the industry and in certain operating areas in particular. The accelerated wear and tear of hydraulic fracturing equipment due to its deployment in unconventional oil and natural gas fields characterized by longer lateral lengths and larger numbers of fracturing stages could further amplify such an equipment and crew shortage. If demand for fracturing services were to increase or the supply of fracturing equipment and crews were to decrease, higher costs or delays in procuring these services could result, which could adversely affect our business, financial condition, results of operations and cash flows.
If We Are Unable to Acquire Adequate Supplies of Water for Our Drilling and Hydraulic Fracturing Operations or Are Unable to Dispose of the Water We Use at a Reasonable Cost and Pursuant to Applicable Environmental Rules, Our Ability to Produce Oil and Natural Gas Commercially and in Commercial Quantities Could Be Impaired.
We use a substantial amount of water in our drilling and hydraulic fracturing operations. Our inability to obtain sufficient amounts of water at reasonable prices, or treat and dispose of water after drilling and hydraulic fracturing, could adversely impact our operations. In recent years, Southeast New Mexico and West Texas have experienced severe drought. As a result, we may experience difficulty in securing the necessary volumes of water for our operations. Moreover, the imposition of new environmental initiatives and regulations could include restrictions on our ability to conduct certain operations such as hydraulic fracturing or disposal of waste, including, but not limited to, produced water, drilling fluids and other wastes associated with the exploration, development and production of oil and natural gas. Furthermore, future environmental regulations and permitting requirements governing the withdrawal, storage and use of surface water or groundwater necessary for hydraulic fracturing of wells could increase operating costs and cause delays, interruptions or termination of operations, the
extent of which cannot be predicted, all of which could have an adverse effect on our business, financial condition, results of operations and cash flows.
If Regulatory Changes Prevent Our Ability to Continue to Drill Wells in the Manner We Have Been, It Could Have a Material Adverse Impact on Our Future Production Results.
In Texas, allocation wells allow an operator to drill a horizontal well under two or more leaseholds that are not pooled or across multiple existing pooled units. In New Mexico, operators are able to pool multiple spacing units in order to drill a single horizontal well across several leaseholds. We are active in drilling and producing both allocation wells in Texas and pooled spacing unit wells in New Mexico. If there are regulatory changes with regard to such wells, the applicable state agency denies or significantly delays the permitting of such wells, legislation is enacted that negatively impacts the current process under which such wells are permitted or litigation challenges the regulatory schemes pursuant to which such wells are permitted, it could have an adverse impact on our ability to drill long horizontal lateral wells on some of our leases, which in turn could have a material adverse impact on our anticipated future production.
Unless We Replace Our Oil and Natural Gas Reserves, Our Reserves and Production Will Decline, Which Would Adversely Affect Our Business, Financial Condition, Results of Operations and Cash Flows.
The rate of production from our oil and natural gas properties declines as our reserves are depleted. Our future oil and natural gas reserves and production and, therefore, our income and cash flow, are highly dependent on our success in efficiently developing and exploiting our current reserves and economically finding or acquiring additional oil and natural gas producing properties. We are currently focusing primarily on increasing our production and reserves from the Delaware Basin, an area in which our competitors have been active. As a result of this activity, we may have difficulty expanding our current production or acquiring new properties in this area and may experience such difficulty in other areas in the future. During periods of low oil and/or natural gas prices, existing reserves may no longer be economic, and it will become more difficult to raise the capital necessary to finance expansion activities. If we are unable to replace our current and future production, our reserves will decrease, and our business, financial condition, results of operations and cash flows would be adversely affected.
We Conduct a Portion of Our Operations through Joint Ventures, Which Subjects Us to Additional Risks That Could Have a Material Adverse Effect on the Success of These Operations, Our Financial Position, Results of Operations or Cash Flows.
We own and operate substantially all of our midstream assets in the Delaware Basin through San Mateo, and we may enter into other joint venture arrangements in the future. The nature of a joint venture requires us to share a portion of control with unaffiliated third parties. If our joint venture partners do not fulfill their contractual and other obligations, the affected joint venture may be unable to operate according to its business plan, and we may be required to increase our level of financial commitment or seek third-party capital, which could dilute our ownership in the applicable joint venture. If we do not timely meet our financial commitments or otherwise comply with our joint venture agreements, our ownership of and rights with respect to the applicable joint venture may be reduced or otherwise adversely affected. Furthermore, there can be no assurance that any joint venture will be successful or generate cash flows at the level we have anticipated, or at all. Differences in views among joint venture participants could also result in delays in business decisions or otherwise, failures to agree on major issues, operational inefficiencies and impasses, litigation or other issues. We provide management functions for San Mateo and may provide such services for future joint venture arrangements, which may require additional time and attention of management or require us to hire or contract additional personnel. Third parties may also seek to hold us liable for a joint venture’s liabilities. These issues or any other difficulties that cause a joint venture to deviate from its original business plan could have a material adverse effect on our financial condition, results of operations and cash flows.
Our Midstream Operations Are Subject to Operational Risks, Which Could Result in Significant Damages and the Loss of Revenue.
San Mateo owns, and we operate, the Black River Processing Plant. There are significant risks associated with the operation of cryogenic natural gas processing plants. Natural gas and NGLs are volatile and explosive and may include carcinogens. Damage to or improper operation of the Black River Processing Plant could result in an explosion or the discharge of toxic gases, which could result in significant damage claims, interrupt a revenue source and prevent us from processing some or all of the natural gas produced from our wells or third-party wells located in the Rustler Breaks asset area. Furthermore, if we were unable to process such natural gas, we may be forced to flare natural gas from, or shut in, the affected wells for an indefinite period of time.
In addition, San Mateo’s gathering, processing and transportation assets connect to other pipelines or facilities owned and operated by unaffiliated third parties. The continuing operation of, and our continuing access to, such third-party pipelines, processing facilities and other midstream facilities is not within our control. These pipelines, plants and other midstream facilities may become unavailable because of testing, turnarounds, line repair, maintenance, reduced operating pressure, lack of operating capacity, regulatory requirements and curtailments of receipt or deliveries due to insufficient capacity or because of damage from severe weather conditions or other operational issues. In addition, if San Mateo’s costs to access and transport on
these third-party pipelines significantly increase, its profitability could be reduced. If any such increase in costs occurs, if any of these pipelines or other midstream facilities become unable to receive, transport or process product, or if the volumes San Mateo gathers, processes or transports do not meet the product quality requirements of such pipelines or facilities, our and San Mateo’s revenues and cash flow could be adversely affected.
Because of the Natural Decline in Production in the Regions of San Mateo’s Midstream Operations, San Mateo’s Long-Term Success Depends on its Ability to Obtain New Sources of Supplies, Which Depends on Certain Factors Beyond San Mateo’s Control. Any Decrease in Supplies to its Midstream Facilities Could Adversely Affect San Mateo’s Business and Operating Results.
San Mateo’s midstream facilities are or will be connected to oil and natural gas wells operated by us or by third parties from which production will naturally decline over time, which means that the cash flows associated with these sources of oil, natural gas, NGLs and produced water will also decline over time. Some of these third parties are not subject to minimum volume commitments. To maintain or increase throughput levels on San Mateo’s gathering systems and the utilization rate at its other midstream facilities, San Mateo must continually obtain new supplies. San Mateo’s ability to obtain additional sources of oil, natural gas, NGLs and produced water depends, in part, on the level of successful drilling and production activity near its gathering and transportation systems and other midstream facilities. San Mateo has no control over the level of third-party activity in the areas of its operations, the amount of reserves associated with the wells or the rate at which production from a well will decline. In addition, San Mateo has no control over third-party producers or their drilling or production decisions, which are affected by, among other things, prevailing and projected energy prices, demand for hydrocarbons, the level of reserves, geological considerations, governmental regulations, the availability of drilling rigs, other production and development costs and the availability and cost of capital.
We Do Not Own All of the Land on Which Our Midstream Assets Are Located, Which Could Disrupt Our Operations.
We do not own all of the land on which our midstream assets are located, and we are therefore subject to the possibility of more onerous terms and/or increased costs or royalties to retain necessary land access if we do not have valid rights-of-way or leases or if such rights-of-way or leases lapse or terminate. We sometimes obtain the rights to land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts, leases or otherwise, could cause us to cease operations on the affected land or find alternative locations for our operations at increased costs, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Construction of Midstream Projects Subjects Us to Risks of Construction Delays, Cost Over-Runs, Limitations on Our Growth and Negative Effects on Our Financial Condition, Results of Operations, Cash Flows and Liquidity.
From time-to-time, we, through San Mateo or otherwise, plan and construct midstream projects, some of which may take a number of months before commercial operation, such as construction of oil, natural gas and water gathering systems, construction of natural gas processing plants, drilling of commercial salt water disposal wells and construction of related facilities. These projects are complex and subject to a number of factors beyond our control, including delays from third-party landowners, the permitting process, compliance with laws, unavailability of materials, labor disruptions, environmental hazards, financing, accidents, weather and other factors. Any delay in the completion of these projects could have a material adverse effect on our business, results of operations, liquidity and financial condition. The construction of salt water disposal facilities, pipelines and gathering and processing facilities requires the expenditure of significant amounts of capital, which may exceed our estimated costs. Estimating the timing and expenditures related to these development projects is very complex and subject to variables that can significantly increase expected costs. Should the actual costs of these projects exceed our estimates, our liquidity and financial condition could be adversely affected. This level of development activity requires significant effort from our management and technical personnel and places additional requirements on our financial resources and internal financial controls. We may not have the ability to attract and/or retain the necessary number of personnel with the skills required to bring complicated projects to successful conclusions.
Gathering, Processing and Transportation Services Are Subject to Complex Federal, State and Other Laws That Could Adversely Affect the Cost, Manner or Feasibility of Conducting Our Business.
The operations of our midstream business, including San Mateo, and the operations of the third parties on whom we rely for gathering, processing and transportation services, are subject to complex and stringent laws and regulations that require obtaining and maintaining numerous permits, approvals and certifications from various federal, state and local government authorities. Substantial costs may be incurred in order to comply with existing laws and regulations. If existing laws and regulations governing such services are revised or reinterpreted, or if new laws and regulations become applicable to operations, these changes may affect the costs that we pay for such services or the results of our midstream business, including San Mateo. Similarly, a failure to comply with such laws and regulations by us or the parties on whom we rely could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Business — Regulation.”
Our Oil and Natural Gas Reserves Are Estimated and May Not Reflect the Actual Volumes of Oil and Natural Gas We Will Recover, and Significant Inaccuracies in These Reserves Estimates or Underlying Assumptions Will Materially Affect the Quantities and Present Value of Our Reserves.
The process of estimating accumulations of oil and natural gas is complex and inexact due to numerous inherent uncertainties. This process relies on interpretations of available geological, geophysical, engineering and production data. The extent, quality and reliability of this technical data can vary. This process also requires certain economic assumptions related to, among other things, oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The accuracy of a reserves estimate is a function of:
the quality and quantity of available data;
the interpretation of that data;
the judgment of the persons preparing the estimate; and
the accuracy of the assumptions used.
The accuracy of any estimates of proved oil and natural gas reserves generally increases with the length of production history. Due to the limited production history of many of our properties, the estimates of future production associated with these properties may be subject to greater variance to actual production than would be the case with properties having a longer production history. As our wells produce over time and more data becomes available, the estimated proved reserves will be
redetermined on at least an annual basis and may be adjusted to reflect new information based upon our actual production history, results of exploration and development, prevailing oil and natural gas prices and other factors.
Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas most likely will vary from our estimates. It is possible that future production declines in our wells may be greater than we have estimated. Any significant variance from our estimates could materially affect the quantities and present value of our reserves.
The Calculated Present Value of Future Net Revenues from Our Proved Oil and Natural Gas Reserves Will Not Necessarily Be the Same as the Current Market Value of Our Estimated Oil and Natural Gas Reserves.
It should not be assumed that the present value of future net cash flows included in this Annual Report is the current market value of our estimated proved oil and natural gas reserves. As required by SEC rules and regulations, the estimated discounted future net cash flows from proved oil and natural gas reserves are based on current costs held constant over time without escalation and on commodity prices using an unweighted arithmetic average of first-day-of-the-month index prices, appropriately adjusted, for the 12-month period immediately preceding the date of the estimate. Actual future prices and costs may be materially higher or lower than the prices and costs used for these estimates and will be affected by factors such as:
actual prices we receive for oil and natural gas;
actual costs and timing of development and production expenditures;
the amount and timing of actual production; and
changes in governmental regulations or taxation.
In addition, the 10% discount factor that is required to be used to calculate discounted future net revenues for reporting purposes under U.S. generally accepted accounting principles or GAAP,(“GAAP”), is not necessarily the most appropriate discount factor based on the cost of capital in effect from time to time and risks associated with our business and the oil and natural gas industry in general.
Approximately 59%56% of Our Total Proved Reserves at December 31, 20162018 Consisted of Undeveloped and Developed Non-Producing Reserves, and Those Reserves May Not Ultimately Be Developed or Produced.
At December 31, 2016,2018, approximately 59%56% of our total proved reserves were undeveloped and less thanapproximately 1% of our total proved reserves were developed non-producing. Our undeveloped and/or developed non-producing reserves may never be developed or produced or such reserves may not be developed or produced within the time periods we have projected or at the costs we have estimated. SEC rules require that, subject to limited exceptions, proved undeveloped reserves may only be booked if they are related to wells scheduled to be drilled within five years after the date of booking. Delays in the development of our reserves or increases in costs to drill and develop such reserves would reduce the present value of our estimated proved undeveloped reserves and future net revenues estimated for such reserves, resulting in some projects becoming uneconomical and reducing our total proved reserves. In addition, delays in the development of reserves or declines in the oil and/or natural gas prices used to estimate proved reserves in the future could cause us to have to reclassify a portion of our proved reserves as unproved reserves. Any reduction in our proved reserves caused by the reclassification of undeveloped or developed non-producing reserves could materially affect our business, financial condition, results of operations and cash flows.
Our Identified Drilling Locations Are Scheduled over Several Years, Making Them Susceptible to Uncertainties That Could Materially Alter the Occurrence or Timing of Their Drilling.
Our management team has identified and scheduled drilling locations in our operating areas over a multi-year period. Our ability to drill and develop these locations depends on a number of factors, including oil and natural gas prices, assessment of risks, costs, drilling results, reservoir heterogeneities, the availability of equipment and capital, approval by regulators, lease terms, seasonal conditions and seasonal conditions.the actions of other operators. Additionally, as lateral lengths greater than one mile become increasingly common in the Delaware Basin, we will have to cooperate with other operators to ensure that our acreage is included in drilling units or otherwise developed. The final determination on whether to drill any of thesethe identified locations will be dependent upon the factors described elsewhere in this Annual Report as well as, to some degree, the results of our drilling activities with respect to our established drilling locations. Because of these uncertainties, we do not know if the drilling locations we have identified will be drilled within our expected timeframe, or at all, or if we will be able to economically produce hydrocarbons from these or any other potential drilling locations. Our actual drilling activities may be materially different from our current expectations, which could adversely affect our business, financial condition, results of operations and cash flows.
Certain of Our Unproved and Unevaluated Acreage Is Subject to Leases That Will Expire over the Next Several Years Unless Production Is Established on Units Containing the Acreage.
At December 31, 2016,2018, we had leasehold interests in approximately 44,97549,300 net acres across all of our areas of interest that are not currently held by production and are subject to leases with primary or renewed terms that expire prior to 2020.2024. Unless we establish and maintain production, generally in paying quantities, on units containing these leases during their terms or we renew such leases, these leases will expire. The cost to renew such leases may increase significantly, and we may not be able to renew such leases on commercially reasonable terms or at all. In addition, on certain portions of our acreage, third-party
leases, or top leases, may have been taken and could become immediately effective if our leases expire. If our leases expire or we are unable to renew such leases, we will lose our right to develop the related properties. As such, our actual drilling activities may materially differ from our current expectations, which could adversely affect our business, financial condition, results of operations and cash flows.
The 2-D and 3-D Seismic Data and Other Advanced Technologies We Use Cannot Eliminate Exploration Risk, Which Could Limit Our Ability to Replace and Grow Our Reserves and Materially and Adversely Affect Our Results of Operations and Cash Flows.
We employ visualization and 2-D and 3-D seismic images to assist us in exploration and development activities where applicable. These techniques only assist geoscientists in identifying subsurface structures and hydrocarbon indicators and do not allow the interpreter to know conclusively if hydrocarbons are present or economically producible. We could incur losses by drilling unproductive wells based on these technologies. Furthermore, seismic and geological data can be expensive to license or obtain and we may not be able to license or obtain such data at an acceptable cost. Poor results from our exploration activities could limit our ability to replace and grow reserves and adversely affect our business, financial condition, results of operations and cash flows.
Competition in the Oil and Natural Gas Industry Is Intense, Making It More Difficult for Us to Acquire Properties, Market Oil and Natural Gas, Provide Midstream Services and Secure Trained Personnel.
Competition is intense in virtually all facets of our business. Our ability to acquire additional prospects and to find and develop reserves in the future will depend in part on our ability to evaluate and select suitable properties and to consummate transactions in a highly competitive environment for acquiring properties, marketing oil and natural gas and securing trained personnel. Similarly, our midstream business, and particularly the success of the Joint Venture,San Mateo, depends in part on our ability to compete with other midstream service companies to attract third-party customers to our midstream facilities. San Mateo competes with other midstream companies that provide similar services in its areas of operations, and such companies may have legacy relationships with producers in those areas and may have a longer history of efficiency and reliability. Also, there is substantial competition for capital available for investment in the oil and natural gas industry. Many of our competitors possess and employ financial, technical and personnel resources substantially greater than ours. Those companies may be able to pay more for productive oil and natural gas properties and exploratory prospects and to evaluate, bid for and purchase a greater number of properties and prospects than our financial, technical or personnel resources permit. In addition, other companies may be able to offer better compensation packages to attract and retain qualified personnel than we are able to offer. The cost to attract and retain qualified personnel has increased in recent years due to competition and may increase substantially in the future. We may not be able to compete successfully in the future in acquiring prospective reserves, developing reserves, developing midstream assets, marketing hydrocarbons, attracting and retaining quality personnel and raising additional capital, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Competitors May Use Superior Technology and Data Resources That We May Be Unable to Afford or That Would Require a Costly Investment by Us in Order to Compete with Them More Effectively.
Our industry is subject to rapid and significant advancements in technology, including the introduction of new products, equipment and services using new technologies and databases. As our competitors use or develop new technologies, we may be placed at a competitive disadvantage, and competitive pressures may force us to implement new technologies at a substantial cost. In addition, many of our competitors willmay have greater financial, technical and personnel resources that allow them to enjoy technological advantages and may in the future allow them to implement new technologies before we can. We cannot be certain that we will be able to implement technologies on a timely basis or at a cost that is acceptable to us. One or more of the technologies that we will use or that we may implement in the future may become obsolete, and our operations may be adversely affected.
Strategic Relationships upon Which We May Rely Are Subject to Change, Which May Diminish Our Ability to Conduct Our Operations.
Our ability to explore, develop and produce oil and natural gas resources successfully, acquire oil and natural gas interests and acreage and conduct our midstream activities depends on our developing and maintaining close working relationships with industry participants and on our ability to select and evaluate suitable acquisition opportunities in a highly competitive environment. These relationships are subject to change and, if they do, our ability to grow may be impaired.
To develop our business, we endeavor to use the business relationships of our management, boardBoard of Directors and special boardBoard advisors to enter into strategic relationships, which may take the form of contractual arrangements with other oil and natural gas companies and service companies, including those that supply equipment and other resources that we expect to use in our business, as well as midstream companies and certain financial institutions. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
The Marketability of Our Production Is Dependent upon Oil, and Natural Gas and NGL Gathering, Processing and Transportation Facilities, and the Unavailability of Satisfactory Oil, and Natural Gas and NGL Gathering, Processing and Transportation Arrangements Could Have a Material Adverse Effect on Our Revenue.
The unavailability of satisfactory oil, natural gas and natural gas liquidsNGL gathering, processing and transportation arrangements may hinder our access to oil, natural gas and natural gas liquidsNGL markets or delay production from our wells. The availability of a ready market for our oil, natural gas and natural gas liquidsNGL production depends on a number of factors, including the demand for, and supply of, oil, natural gas and natural gas liquidsNGLs and the proximity of reserves to pipelines and terminal facilities. Our ability to market our production depends in substantial part on the availability and capacity of gathering systems, pipelines, processing facilities and oil and condensate trucking operations. Such systems and operations include those of the Joint Venture,San Mateo, as well as other systems and operations owned and operated by third parties. The continuing operation of, and our continuing access to, third-party systems and operations is outside our control. Regardless of who operates the midstream systems or operations upon which we rely, our failure to obtain these services on acceptable terms could materially harm our business. In addition, certain of these gathering systems, pipelines and processing facilities, particularly in the Delaware Basin, may be outdated or in need of repair and subject to higher rates of line loss, failure and breakdown. Furthermore, such facilities may become unavailable because of testing, turnarounds, line repair, maintenance, reduced operating pressure, lack of operating capacity, regulatory requirements and curtailments of receipt or deliveries due to insufficient capacity or because of damage from severe weather conditions or other operational issues.
We may be required to shut in wells for lack of a market or because of inadequate or unavailable pipelines, gathering systems, processing facilities or trucking capacity. If that were to occur, we would be unable to realize revenue from those wells until production arrangements were made to deliver our production to market. Furthermore, if we were required to shut in wells we might also be obligated to pay shut-in royalties to certain mineral interest owners in order to maintain our leases. In addition, if we are unable to market our production we may be required to flare natural gas, occasionally, which would decrease the volumes sold from our wells.wells, and, in certain circumstances, would require us to pay royalties on such flared natural gas.
The disruption of our or third-party facilities due to maintenance, weather or other factors could negatively impact our ability to market and deliver our oil, natural gas and natural gas liquids.NGLs. If our costs to access and transport on these pipelines significantly increase, our profitability could be reduced. Third parties control when or if their facilities are restored and what prices will be charged. In the past, we have experienced pipeline and natural gas processing interruptions and capacity and infrastructure constraints associated with natural gas production, which has, among other things, required us to flare natural gas occasionally. While we have entered into natural gas processing and transportation agreements covering the anticipated natural gas production from a significant portion of our Delaware Basin acreage in Southeast New Mexico and West Texas, and our Eagle Ford shale acreage in South Texas, no assurance can be given that these agreements will alleviate these issues completely, and we may be required to pay deficiency payments
under such agreements if we do not meet the gathering, disposal or processing commitments, as applicable. We may experience similar interruptions and processing capacity constraints as we continue to explore and develop our Wolfcamp, Bone Spring and other liquids-rich plays in the Delaware Basin in 2017.2019. If we were required to shut in our production or flare our natural gas for long periods of time due to pipeline interruptions or lack of processing facilities or capacity of these facilities, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Financial Difficulties Encountered by Our Oil and Natural Gas Purchasers, Third-Party Operators or Other Third Parties Could Decrease Our Cash Flows from Operations and Adversely Affect the Exploration and Development of Our Prospects and Assets.
We derive most of our revenues from the sale of our oil, natural gas and natural gas liquidsNGLs to unaffiliated third-party purchasers, independent marketing companies and midstream companies. We are also subject to credit risk due to the concentration of our oil and natural gas receivables with several significant customers. We cannot predict the extent to which counterparties’ businesses would be impacted if oil and natural gas prices decline, such prices remain depressed for a sustained period of time or other conditions in our industry were to deteriorate. Any delays in payments from our purchasers caused by financial problems encountered by them will have an immediate negative effect on our results of operations and cash flows.
Liquidity and cash flow problems encountered by our working interest co-owners or the third-party operators of our non-operated properties may prevent or delay the drilling of a well or the development of a project. Our working interest co-owners may be unwilling or unable to pay their share of the costs of projects as they become due. In the case of a farmout party, we would have to find a new farmout party or obtain alternative funding in order to complete the exploration and development of the prospects subject to a farmout agreement. In the case of a working interest owner, we could be required to pay the working interest owner’s share of the project costs. If we are not able to obtain the capital necessary to fund either of these contingencies or find a new farmout party, our results of operations and cash flows could be negatively affected.
Our Natural Gas Processing Operations Are Subject to Operational Risks, Which Could Result in Significant Damages and the Loss of Revenue.
The Joint Venture owns, and we operate, the Black River Processing Plant. There are significant risks associated with the operation of cryogenic natural gas processing plants. Natural gas and natural gas liquids are volatile and explosive and may include carcinogens. Damage to or improper operation of a cryogenic natural gas processing plant could result in an explosion or the discharge of toxic gases, which could result in significant damage claims, interrupt a revenue source and prevent us from processing some or all of the natural gas produced from our wells located in the Rustler Breaks asset area. Furthermore, if we were unable to process such natural gas, we may be forced to flare natural gas from, or shut in, the affected wells for an indefinite period of time.
We Have Entered into Certain Long-Term Contracts That Require Us to Pay Fees to Our Service Providers Based on Minimum Volumes Regardless of Actual Volume Throughput and That May Limit Our Ability to Use Other Service Providers.
In connection with the sale of the Loving County Processing System in October 2015,From time to time, we have entered into a 15-year fixed-feeand may in the future enter into certain oil, natural gas gathering and processing agreement covering the anticipated natural gas production from a significant portion of our acreage in the Wolf asset area in the Delaware Basin (the “Wolf Gathering Agreement”). In addition, in connection with the formation of the Joint Venture, we entered into certain 15-year fixed-fee natural gas, oil andor salt water gathering or transportation agreements, andnatural gas processing agreements, salt water disposal agreements covering the Rustler Breaks and Wolf asset areas and a natural gas processing agreement covering the Rustler Breaks asset area (collectively, the “Joint Venture Agreements”). We are also subject to a firm natural gas processing and transportation agreement covering the anticipated natural gas production from a significant portion of our Eagle Ford shale acreage in South Texas, which agreement expires in September 2017. In eachor similar commercial arrangements with midstream companies, including San Mateo. Certain of these agreements we have provided certainrequire us to meet minimum volume commitments.commitments, often regardless of actual throughput. Lower commodity prices may lead to reductions in our drilling program, which may result in insufficient production to fulfill our obligations under these agreements. These agreements obligate us to pay fees on minimum volumes to our service providers (including the Joint Venture) regardless of actual throughput. As of December 31, 2016,2018, our long-term contractual obligations under agreements with minimum volume commitments totaled approximately $12.9$641.2 million over the termterms of the agreements (excludingagreements. In addition, in connection with the Joint Venture Agreements, which wereformation of San Mateo II, we entered into in 2017).agreements with minimum volume commitments that totaled approximately $363.8 million. If we have insufficient production to meet the minimum volumes,volume commitments under any of these agreements, our cash flow from operations will be reduced, which may require us to reduce or delay our planned investments and capital expenditures or seek alternative means of financing, all of which may have a material adverse effect on our results of operations.
Pursuant to the Wolf Gathering Agreement and the Joint Venture Agreements,certain of our agreements with midstream companies, we have dedicated our current and future leasehold interests in the Wolf and Rustler Breakscertain of our asset areas to EnLink or the Joint Venture, as applicable.counterparties. As a result, we will be limited in our ability to use other gathering, processing, disposal and transportation service providers, in the Wolf and Rustler Breaks asset areas, even if such service providers are able to offer us more favorable pricing or more efficient service.
Gathering, Processing and Transportation Services Are Subject to Complex Federal, State and Other Laws that Could Adversely Affect the Cost, Manner or Feasibility of Conducting Our Business.
The operations of our midstream business, including the Joint Venture, and the operations of the third parties on whom we rely for gathering, processing and transportation services, are subject to complex and stringent laws and regulations that require obtaining and maintaining numerous permits, approvals and certifications from various federal, state and local government authorities. Substantial costs may be incurred in order to comply with existing laws and regulations. If existing laws and regulations governing such services are revised or reinterpreted, or if new laws and regulations become applicable to operations, these changes may affect the costs that we pay for such services or the results of our midstream business, including the Joint Venture. Similarly, a failure to comply with such laws and regulations by us or the parties on whom we rely could have a material adverse effect on our business, financial condition, results of operations and cash flows. See “Business — Regulation.”
We Have Limited Control over Activities on Properties We Do Not Operate.
We are not the operator on some of our properties, particularly in the Haynesville shale. As a result of our sale of certain assets to Chesapeake in 2008, we do not operate one of our most significant natural gas assets in the Haynesville shale. We also have other non-operated acreage positions in Northwest Louisiana, South Texas, Southeast New Mexico and West Texas. Because we are not the operator for these properties, our ability to exercise influence over the operations of these properties or their associated costs is limited. Our dependence on the operators and other working interest owners of these projects and our limited ability to influence operations and associated costs, or control the risks, could materially and adversely affect the drilling results, reserves and future cash flows from these properties. The success and timing of our drilling and development activities on properties operated by others therefore depends upon a number of factors, including:
the timing and amount of capital expenditures;
the operator’s expertise and financial resources;
the rate of production of reserves, if any;
approval of other participants in drilling wells; and
selection and implementation or execution of technology.
In areas where we do not have the right to propose the drilling of wells, we may have limited influence on when, how and at what pace our properties in those areas are developed. Further, the operators of those properties may experience financial problems in the future or may sell their rights to another operator not of our choosing, both of which could limit our ability to develop and monetize the underlying oil or natural gas reserves. In addition, the operators of these properties may elect to curtail the oil or natural gas production or to shut in the wells on these properties during periods of low oil or natural gas prices, and we may receive less than anticipated or no production and associated revenues from these properties until the operator elects to return them to production.
We Conduct a Portion of Our Operations through Joint Ventures, Which Subjects Us to Additional Risks That Could Have a Material Adverse Effect on the Success of These Operations, Our Financial Position, Results of Operations or Cash Flows.
We own and operate substantially all of our midstream assets in the Delaware Basin through the Joint Venture, and we may enter into other joint venture arrangements in the future. The nature of a joint venture requires us to share a portion of control with unaffiliated third parties. If our joint venture partners do not fulfill their contractual and other obligations, the affected joint venture may be unable to operate according to its business plan, and we may be required to increase our level of financial commitment. If we do not timely meet our financial commitments or otherwise comply with our joint venture agreements, our ownership of and rights with respect to the applicable joint venture may be reduced or otherwise adversely affected. Furthermore, there can be no assurance that any joint venture will be successful or generate cash flows at the level we have anticipated, or at all. Differences in views among joint venture participants could also result in delays in business decisions or otherwise, failures to agree on major issues, operational inefficiencies and impasses, litigation or other issues. We provide management functions for the Joint Venture and may provide such services for future joint venture arrangements, which may require additional time and attention of management or require us to hire or contract additional personnel. Third parties may also seek to hold us liable for the joint ventures’ liabilities. These issues or any other difficulties that cause a joint venture to deviate from its original business plan could have a material adverse effect on our financial condition, results of operations and cash flows.
We Do Not Own All of the Land on Which Our Midstream Assets Are Located, Which Could Disrupt Our Operations.
We do not own all of the land on which our midstream assets are located, and we are therefore subject to the possibility of more onerous terms and/or increased costs or royalties to retain necessary land use if we do not have valid rights-of-way or leases or if such rights-of-way or leases lapse or terminate. We sometimes obtain the rights to land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts, leases or otherwise, could cause us to cease operations on the affected land or find alternative locations for our operations at increased costs, each of which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Construction of Midstream Projects Subjects Us to Risks of Construction Delays, Cost Over-Runs, Limitations on Our Growth and Negative Effects on Our Financial Condition, Results of Operations, Cash Flows and Liquidity.
From time-to-time we, through the Joint Venture or otherwise, plan and construct midstream projects, some of which will take a number of months before commercial operation, such as the Joint Venture’s expansion of the Black River Processing Plant or the drilling of additional salt water disposal wells and construction of related facilities. These projects are complex and subject to a number of factors beyond our control, including delays from third-party landowners, the permitting process, complying with laws, unavailability of materials, labor disruptions, environmental hazards, financing, accidents, weather and other factors. Any delay in the completion of these projects could have a material adverse effect on our business, results of operations, liquidity and financial condition. The construction of salt water disposal facilities, pipelines and gathering and processing facilities requires the expenditure of significant amounts of capital, which may exceed our estimated costs. Estimating the timing and expenditures related to these development projects is very complex and subject to variables that can significantly increase expected costs. Should the actual costs of these projects exceed our estimates, our liquidity and financial condition could be adversely affected. This level of development activity requires significant effort from our management and technical personnel and places additional requirements on our financial resources and internal financial controls. We may not have the ability to attract and/or retain the necessary number of personnel with the skills required to bring complicated projects to successful conclusions.
A Component of Our Growth May Come through Acquisitions, and Our Failure to Identify or Complete Future Acquisitions Successfully Could Reduce Our Earnings and Hamper Our Growth.
We may be unable to identify properties for acquisition or to make acquisitions on terms that we consider economically acceptable. There is intense competition for acquisition opportunities in our industry. Competition for acquisitions may increase the cost of, or cause us to refrain from, completing acquisitions. The pursuit and completion of acquisitions may be dependent upon, among other things, our ability to obtain debt and equity financing and, in some cases, regulatory approvals. Our ability to grow through acquisitions will require us to continue to invest in operations and financial and management information systems and to attract, retain, motivate and effectively manage our employees. In addition, if we are not successful in identifying and acquiring properties, our earnings could be reduced and our growth could be restricted.
In addition, we may be unable to successfully integrate potential acquisitions into our existing operations. The inability to manage the integration of acquisitions effectively could reduce our focus on subsequent acquisitions and current operations, and could negatively impact our results of operations and growth potential. Members of our senior management team may be required to devote considerable amounts of time to the integration process, which will decrease the time they will have to manage our business.
Furthermore, our decision to acquire properties that are substantially different in operating or geologic characteristics or geographic locations from areas with which our staff is familiar may impact our productivity in such areas. Our financial condition, results of operations and cash flows may fluctuate significantly from period to period as a result of the completion of significant acquisitions during particular periods.
We may engage in bidding and negotiation to complete successful acquisitions. We may be required to alter or increase substantially our capitalization to finance these acquisitions through the use of cash on hand, the issuance of debt or equity securities, the sale of production payments, the sale or joint venture of midstream assets or oil and natural gas producing assets or acreage, the borrowing of funds or otherwise. Our Credit Agreement, the San Mateo Credit Facility and the indenture governing our outstanding senior notes include covenants limiting our ability to incur additional debt. If we were to proceed with one or more acquisitions involving the issuance of our common stock, our shareholders would suffer dilution of their interests.
We May Purchase Oil and Natural Gas Properties with Liabilities or Risks That We Did Not Know Aboutabout or That We Did Not Assess Correctly, and, as a Result, We Could Be Subject to Liabilities That Could Adversely Affect Our Results of Operations.
Before acquiring oil and natural gas properties, we assess the potential reserves, future oil and natural gas prices, operating costs, potential environmental liabilities and other factors relating to the properties. However, our review involves many assumptions and estimates, and their accuracy is inherently uncertain. As a result, we may not discover all existing or potential problems associated with the properties we buy. We may not become sufficiently familiar with the properties to assess fully their deficiencies and capabilities. We do not generally perform inspections on every well or property, and we may not be able to observe mechanical and environmental problems even when we conduct an inspection. The seller may not be willing or financially able to give us contractual protection against any identified problems, and we may decide to assume environmental and other liabilities in connection with properties we acquire. If we acquire properties with risks or liabilities we did not know about or that we did not assess correctly, our financial condition, results of operations and cash flows could be adversely affected as we settle claims and incur cleanup costs related to these liabilities.
Our Ability to Complete Dispositions of Assets, or Interests in Assets, May Be Subject to Factors Beyond Our Control, and in Certain Cases We May Be Required to Retain Liabilities for Certain Matters.
From time to time, we may sell an interest in a strategic asset for the purpose of assisting or accelerating the asset’s development. In addition, we regularly review our property base for the purpose of identifying nonstrategic assets, the disposition of which would increase capital resources available for other activities and create organizational and operational efficiencies. Various factors could materially affect our ability to dispose of such interests or nonstrategic assets or complete announced dispositions, including the receipt of approvals of governmental agencies or third parties and the identification of purchasers willing to acquire the interests or purchase the nonstrategic assets on terms and at prices acceptable to us.
Sellers typically retain certain liabilities or indemnify buyers for certain pre-closing matters, such as matters of litigation, environmental contingencies, royalty obligations and income taxes. The magnitude of any such retained liability or
indemnification obligation may be difficult to quantify at the time of the transaction and ultimately may be material. Also, as is typical in divestiture transactions, third parties may be unwilling to release us from guarantees or other credit support provided prior to the sale of the divested assets. As a result, after a divestiture, we may remain secondarily liable for the obligations guaranteed or supported to the extent that the buyer of the assets fails to perform these obligations.
We May Incur Losses or Costs as a Result of Title Deficiencies in the Properties in Which We Invest.
If an examination of the title history of a property that we have purchased reveals an oil and natural gas lease has been purchased in error from a person who is not the mineral interest owner or if the property has other title deficiencies, our interest would likely be worth less than what we paid or may be worthless. In such an instance, all or part of the amount paid for such oil and natural gas lease as well as all or part of any royalties paid pursuant to the terms of the lease prior to the discovery of the title defect would be lost.
It is not our practice in all acquisitions of oil and natural gas leases, or undivided interests in oil and natural gas leases, to undergo the expense of retaining lawyers to examine the title to the mineral interest to be placed under lease or already placed under lease. Rather, in certain acquisitions we rely upon the judgment of oil and natural gas lease brokers and/or landmen who perform the field work by examining records in the appropriate governmental office before attempting to acquire a lease on a specific mineral interest.
Prior to the drilling of an oil and natural gas well, however, it is standard industry practice for the operator of the well to obtain a preliminary title review of the spacing unit within which the proposed well is to be drilled to ensure there are no obvious deficiencies in title to the well. Frequently, as a result of such examinations, certain curative work must be done to correct deficiencies in the marketability of the title, and such title review and curative work entails expense, which may be significant and difficult to accurately predict. Our failure to cure any title defects may adversely impact our ability to increase production and reserves. In the future, we may suffer a monetary loss from title defects or title failure. Additionally, unproved and unevaluated acreage has greater risk of title defects than developed acreage. If there are any title defects or defects in
assignment of leasehold rights in properties in which we hold an interest, we will suffer a financial loss whichthat could adversely affect our financial condition, results of operations and cash flows.
We May Be Required to Write Down the Carrying Value of Our Proved Properties under Accounting Rules, and These Write-Downs Could Adversely Affect Our Financial Condition.
There is a risk that we will be required to write down the carrying value of our oil and natural gas properties when oil or natural gas prices are low or are declining. In addition, non-cash write-downs may occur if we have:
downward adjustments to our estimated proved reserves;
increases in our estimates of development costs; or
deterioration in our exploration and development results.
We periodically review the carrying value of our oil and natural gas properties under full-cost accounting rules. Under these rules, the net capitalized costs of oil and natural gas properties less related deferred income taxes may not exceed a cost center ceiling that is calculated by determining the present value, based on constant prices and costs projected forward from a single point in time, of estimated future after-tax net cash flows from proved reserves, discounted at 10%. If the net capitalized costs of our oil and natural gas properties less related deferred income taxes exceed the cost center ceiling, we must charge the amount of this excess to operations in the period in which the excess occurs. We may not reverse write-downs even if prices increase in subsequent periods.
During the first and second and quarters of 2016, our net capitalized costs less related deferred income taxes exceeded the full-cost ceiling. As a result, we recorded impairment charges totaling $158.6 million, exclusive of tax effect, to our net capitalized costs for the year ended December 31, 2016. For further discussion of the full-cost ceiling impairment at December 31, 2016, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Expenses.” A write-down does not affect net cash flows from operating activities, liquidity or capital resources, but it does reduce the book value of our net tangible assets, retained earnings and shareholders’ equity, and could lower the value of our common stock.
Hedging Transactions, or the Lack Thereof, May Limit Our Potential Gains and Could Result in Financial Losses.
To manage our exposure to price risk, we, from time to time, enter into hedging arrangements, using primarily “costless collars” or “swaps” with respect to a portion of our future production. Costless collars provide us with downside price protection through the purchase of a put option, which is financed through the sale of a call option. Because the call option proceeds are used to offset the cost of the put option, these arrangements are initially “costless” to us. Three-way costless collars also provide us with downside price protection through the purchase of a put option, but they also allow us to participate in price upside through the purchase of a call option. The purchase of both the put option and call option are financed through the sale of a call option. Because the proceeds from the call option sale are used to offset the cost of the purchased put and call options, these arrangements are also initially “costless” to us. In the case of a costless collar, the put option and the call option or options have different fixed price components. In a swap contract, a floating price is exchanged for a fixed price over the specified period, providing downside price protection. The goal of these and other hedges is to lock in a range of prices in the case of collars or a fixed price in the case of swaps so as to mitigate price volatility and increase the predictability of cash flows. These transactions limit our potential gains if oil, natural gas or natural gas liquidsNGL prices rise above the maximum price established
by the call option or swap as applicable, and may offer protection if prices fall below the minimum price established by the put option or swap, as applicable, only to the extent of the volumes then hedged.
In addition, hedging transactions may expose us to the risk of financial loss in certain other circumstances, including instances in which our production is less than expected or the counterparties to our put and call option or swap contracts fail to perform under the contracts. Disruptions in the financial markets could lead to sudden changes in a counterparty’s liquidity, which could impair its ability to perform under the terms of the contracts. We are unable to predict sudden changes in a counterparty’s creditworthiness or ability to perform under contracts with us. Even if we do accurately predict sudden changes, our ability to mitigate that risk may be limited depending upon market conditions.
Furthermore, there may be times when we have not hedged our production when, in retrospect, it would have been advisable to do so. Decisions as to whether, at what price and what production volumes to hedge are difficult and depend on market conditions and our forecast of future production and oil, natural gas and natural gas liquidsNGL prices, and we may not always employ the optimal hedging strategy. We may employ hedging strategies in the future that differ from those that we have used in the past, and neither the continued application of our current strategies nor our use of different hedging strategies may be successful. As of February 22, 2017,26, 2019, we had approximately 70%50% and 50%15% of our estimated remaining 20172019 oil and natural gas production, respectively, hedged. We currently have no hedges in place for natural gas liquidsNGLs, limited oil basis hedges in place for 2020 and otherwise no hedges in place beyond 2019 for oil or natural gas beyond 2017; however, we have a portion of our anticipated oil volumes hedged in 2018.
gas.
An Increase in the Differential between the NYMEX or Other Benchmark Prices of Oil and Natural Gas and the Wellhead Price We Receive for Our Production Could Adversely Affect Our Business, Financial Condition, Results of Operations and Cash Flows.
The prices that we receive for our oil and natural gas production sometimes reflect a discount to the relevant benchmark prices, such as NYMEX, that are used for calculating hedge positions. The difference between the benchmark prices and the prices we receive is called a differential. Increases in the differential between the benchmark prices for oil and natural gas and the wellhead prices we receive could adversely affect our business, financial condition, results of operations and cash flows. We do not have,For example, we sell much of our natural gas produced from the Delaware Basin at the Waha Hub. The price differential between the Waha Hub index and may not havethe Henry Hub index increased significantly through 2018 from approximately $0.50 per MMBtu at the beginning of the year to between $1.00 and $2.00 per MMBtu for most of 2018, but reaching highs of greater than $4.00 per MMBtu for a brief period at the end of the year. The natural gas price differential had narrowed to between $1.00 and $2.00 per MMBtu at the beginning of 2019, although it is possible that the differential could widen again at certain times during 2019.
Similarly, we sell much of our oil produced from the Delaware Basin at the Midland (Texas) Hub. The price differential between the West Texas Intermediate oil price and the oil price at the Midland Hub, also known as the Midland-Cushing (Oklahoma) differential, also increased significantly through 2018 from essentially no difference in the future, anyfirst quarter of 2018 to as much as $16.00 per Bbl in late September. The oil price differential had narrowed to about $5.00 per Bbl at the beginning of 2019, although it is possible that the differential could widen again at certain times during 2019. We have no derivative contracts covering the amount of thein place to mitigate our exposure to these oil and natural gas price differentials during 2019 and have limited oil basis differentials we experience with respect to our production. As such, we will be exposed to any increasehedges in such differentials.place for 2020.
We Are Subject to Government Regulation and Liability, Including Complex Environmental Laws, Which Could Require Significant Expenditures.
The exploration, development, production, gathering, processing, transportation and sale of oil and natural gas in the United States are subject to many federal, state and local laws, rules and regulations, including complex environmental laws and regulations. Matters subject to regulation include discharge permits, drilling bonds, reports concerning operations, the spacing of wells, unitization and pooling of properties, taxation and environmental matters and health and safety criteria addressing worker protection. Under these laws and regulations, we may be required to make large expenditures that could materially adversely affect our financial condition, results of operations and cash flows. In addition to expenditures required in order for us to comply with such laws and regulations, these expenditures could also include payments for:
personal injuries;
property damage;
containment and clean-up of oil and other spills;
management and disposal of hazardous materials;
remediation, clean-up costs and natural resource damages; and
other environmental damages.
We do not believe that full insurance coverage for all potential damages is available at a reasonable cost. Failure to comply with these laws and regulations may also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties, injunctive relief and/or the imposition of investigatory or other remedial obligations. The costs of remedying noncompliance may be significant, and remediation obligations could adversely affect our financial condition, results of operations and leasehold acreage. Laws, rules and regulations protecting the environment have changed frequently and the changes often include increasingly stringent requirements. These laws, rules and regulations may impose liability on us for environmental damage and disposal of hazardous materials even if we were not negligent or at fault. We may also be found to be liable for the conduct of others or for acts that complied with applicable laws, rules or regulations at the time we performed those acts. These laws, rules and regulations are interpreted and enforced by numerous federal and state agencies. In addition, private parties, including the owners of properties upon which our wells are drilled or facilities are located, or the owners of properties adjacent to or in close proximity to those properties, may also pursue legal actions against us based on alleged non-compliance with certain of these laws, rules and regulations. For example, a number of lawsuits have been filed in some states alleging that fluid injection or oil and natural gas extraction have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal.
Part of the regulatory environment in which we operate includes, in some cases, federal requirements for obtaining environmental assessments, environmental impact statements and/or plans of development before commencing exploration and production or midstream activities. Oil and natural gas operations in certain of our operating areas can be adversely affected by seasonal or permanent restrictions on drilling activities designed to protect various wildlife. The designation of previously unprotected species as threatened or endangered species could prohibit drilling or other operations in certain of our operating areas, cause us to incur increased costs arising from species protection measures or result in limitations on our exploration and production and midstream activities, each of which could have an adverse impact on our ability to develop and produce our reserves.
We Are Subject to Federal, State and Local Taxes, and May Become Subject to New Taxes or Have Eliminated or Reduced Certain Federal Income Tax Deductions Currently Available with Respect to Oil and Natural Gas Exploration and Production Activities as a Result of Future Legislation, Which Could Adversely Affect Our Business, Financial Condition, Results of Operations and Cash Flows.
The federal, state and local governments in the areas in which we operate impose taxes on the oil and natural gas products we sell and, for many of our wells, sales and use taxes on significant portions of our drilling and operating costs. Many states have raised state taxes on energy sources or state taxes associated with the extraction of hydrocarbons, and additional increases may occur. In addition, there has been a significant amount of discussion by legislators and presidential administrations concerning a variety of energy tax proposals.
Periodically, legislation is introduced to eliminate certain key U.S. federal income tax preferences currently available to oil and natural gas exploration and production companies. Such changes include, but are not limited to, (i) the repeal of the percentage depletion allowance for certain oil and natural gas properties, (ii) the elimination of current deductions for intangible drilling and development costs, (iii) the elimination of the deduction for certain U.S. production or manufacturing activities and (iv) the increase in the amortization period for geological and geophysical costs paid or incurred in connection with the exploration for, or development of, oil or natural gas within the United States. The Tax Cuts and Jobs Act did not include any of these proposals, except for the repeal of the domestic manufacturing tax deduction for oil and natural gas companies. However, it is possible that such provisions could be proposed in the future. The passage of any legislation or any other similar change in U.S. federal income tax law could affect certain tax deductions that are currently available with respect to oil and natural gas exploration and production activities and could negatively impact our financial condition, results of operations and cash flows.
In January 2019, a bill was introduced in the New Mexico Senate to add a surtax on natural gas processors that would start at $0.60 per MMBtu in 2020 and escalate to $3.00 per MMBtu by 2024. If passed, such a surtax would adversely affect the ability of San Mateo and other natural gas processors to operate in New Mexico and would adversely affect the prices we receive for our natural gas processed in New Mexico.
Recently Enacted Tax Legislation May Impact Our Ability to Fully Utilize Our Interest Expense Deductions and Net Operating Loss Carryovers to Fully Offset Our Taxable Income in Future Periods.
The Tax Cuts and Jobs Act includes provisions that generally (i) limit our annual deductions for interest expense to no more than 30% of our “adjusted taxable income” (plus 100% of our business interest income) for the year, (ii) permit us to offset only 80% (rather than 100%) of our taxable income with net operating losses we generate and (iii) limit our ability to deduct certain elements of executive compensation. Interest expense and net operating losses subject to these limitations may be carried forward by us for use in later years, subject to these limitations. Additionally, the Tax Cuts and Jobs Act repealed the domestic manufacturing tax deduction for oil and natural gas companies. These tax law changes could have the effect of causing us to incur income tax liability sooner than we otherwise would have incurred such liability or, in certain cases, could cause us to incur income tax liability that we might not have incurred otherwise, in the absence of these tax law changes.
Federal and State Legislation and Regulatory Initiatives Relating to Hydraulic Fracturing Could Result in Increased Costs and Additional Operating Restrictions or Delays.
Hydraulic fracturing involves the injection of water, sand or other propping agentsproppants and chemicals under pressure into rock formations to stimulate oil and natural gas production. We routinely use hydraulic fracturing to complete wells in order to produce oil, natural gas and natural gas liquidsNGLs from formations such as the Wolfcamp and Bone Spring plays, the Eagle Ford shale and the Haynesville shale, where we focus our operations. The EPA releasedHydraulic fracturing has been regulated at the final resultsstate and local level through permitting and compliance requirements. Federal, state and local laws or regulations targeting various aspects of its comprehensive research study on the potential adverse impacts that hydraulic fracturing mayprocess are being considered, or have on drinking water resources in December 2016. The EPA concluded that hydraulic fracturing activities can impact drinking water resources under certain circumstances, including large volume spills and inadequate mechanical integrity of wells. The results of the EPA’s study could spur action towards federal legislation and regulation of hydraulic fracturingbeen proposed or similar production operations.implemented. In past sessions, Congress has considered, but did not pass, legislation to amend the SDWA, to remove the SDWA’s exemption granted to most hydraulic fracturing operations (other than operations using fluids containing diesel) and to require reporting and disclosure of chemicals used by oil and natural gas companies in the hydraulic fracturing process. The EPA has issued SDWA permitting guidance for hydraulic fracturing operations involving the use of diesel fuel in fracturing fluids in those states where the EPA is the permitting authority. Also at the federal level, the BLM issued final rules, including new requirements relating to public disclosure, wellbore integrity and handling of flowback water, to regulate hydraulic fracturing on federal and Indian lands in March 2015, although these2015. These rules were struck downrescinded by rule in December 2017; however, in January 2018, California and a federal courtcoalition of environmental groups filed a lawsuit in Wyoming in June 2016. An appealthe Northern District of California to challenge the BLM’s rescission of the decisionrules. This litigation is pending.ongoing and future implementation of the BLM rules is uncertain at this time.
In addition, a number of states and local regulatory authorities are considering or have implemented more stringent regulatory requirements applicable to hydraulic fracturing, including bans or moratoria on drilling that effectively prohibit further production of oil and natural gas through the use of hydraulic fracturing or similar operations. For example, in December 2014, New York announced a moratorium on high volume fracturing activities combined with horizontal drilling following the issuance of a study regarding the safety of hydraulic fracturing. Certain communities in Colorado have also enacted bans on hydraulic fracturing. These actions are the subject of legal challenges. Texas and New Mexico and Wyoming have adopted regulations that require the disclosure of information regarding the substances used in the hydraulic fracturing process. Moreover,In February 2019, a bill was introduced in light of concerns about seismic activity being triggered by the injection of produced waters into underground wells, certain regulators are also considering additional requirements relatedNew Mexico Senate to seismic safety forplace a moratorium on hydraulic fracturing activities. A 2015 U.S. Geological Survey report identified areas of increased rates of induced seismicity that, could be attributed to fluid injection or oil and natural gas extraction.if enacted, would last through June 1, 2023.
The adoption of new laws or regulations imposing reporting or operational obligations on, or otherwise limiting or prohibiting, the hydraulic fracturing process could make it more difficult to complete oil and natural gas wells in unconventional plays. In addition, if hydraulic fracturing becomes regulated at the federal level as a result of federal legislation or regulatory initiatives by the EPA or BLM, hydraulic fracturing activities could become subject to additional permitting requirements, and also to attendant permitting delays and potential increases in cost, which could adversely affect our business and results of operations.
The Potential Adoption of Federal, State and Local Legislation and Regulations Intended to Address Potential Induced Seismicity in the Areas in Which We Operate Could Restrict Our Drilling and Production Activities, as well as Our Ability to Dispose of Produced Water Gathered from Such Activities, Which Could Decrease San Mateo’s Revenues and Result in Increased Costs and Additional Operating Restrictions or Delays.
State and federal regulatory agencies recently have focused on a possible connection between the operation of injection wells used for oil and natural gas waste disposal and the increased occurrence of seismic activity. When caused by human activity, such events are called induced seismicity. Regulatory agencies at all levels are continuing to study the possible linkage between oil and natural gas activity and induced seismicity. In addition, a number of lawsuits have been filed in some states alleging that fluid injection or oil and natural gas extraction have caused damage to neighboring properties or otherwise violated state and federal rules regulating waste disposal. In response to these concerns, regulators in some states are seeking to impose additional requirements, including requirements regarding the permitting of produced water disposal wells or otherwise, to assess the relationship between seismicity and the use of such wells.
While the scientific community and regulatory agencies at all levels are continuing to study the possible linkage between oil and natural gas activity and induced seismicity, some state regulatory agencies, including in Texas, have modified their regulations or guidance to mitigate potential causes of induced seismicity.
Increased seismicity in areas in which we operate could result in additional regulation and restrictions on our operations and could lead to operational delays or increased operating costs. Additional regulation and attention given to induced seismicity could also lead to greater opposition, including litigation, to oil and natural gas activities. We and San Mateo dispose of large volumes of produced water gathered from our or third parties’ drilling and production operations by injecting it into wells pursuant to permits issued to us by governmental authorities overseeing such disposal activities. While these permits are issued pursuant to existing laws and regulations, these legal requirements are subject to change, which could result in the imposition of more stringent operating constraints or new monitoring and reporting requirements, owing to, among other things, concerns of the public or governmental authorities regarding such gathering or disposal activities. The adoption and implementation of any new laws or regulations that restrict our ability to dispose of produced water gathered from drilling and production activities could decrease San Mateo’s revenues and result in increased costs and additional operating restrictions or delays.
Legislation or Regulations Restricting Emissions of Greenhouse Gases Could Result in Increased Operating Costs and Reduced Demand for the Oil, Natural Gas and Natural Gas LiquidsNGLs We Produce, while the Physical Effects of Climate Change Could Disrupt Our Production and Cause Us to Incur Significant Costs in Preparing for or Responding to Those Effects.
We believe it is likely that scientific and political attention to issues concerning the extent, causes of and responsibility for climate change will continue, with the potential for further regulations and litigation that could affect our operations. Our operations result in greenhouse gas emissions. The EPA has published its final findings that emissions of carbon dioxide, methane and other greenhouse gases present an endangerment to public health and welfare because emissions of such gases are, according to the EPA, contributing to the warming of the earth’s atmosphere and other climatic changes. Accordingly, the EPA has adopted rules under the CAA for the permitting of greenhouse gas emissions from stationary sources under the Prevention of Significant Deterioration (“PSD”) and Title V permitting programs. The EPA has adopted a multi-tiered approach to this permitting, with the largest sources first subject to permitting. In addition, monitoring of greenhouse gas emissions from petroleum and natural gas systems commenced on January 1, 2011, with the first annual reports required to be filed in 2012. In October 2015, the EPA finalized rules that added new sources to the scope of the greenhouse gas monitoring and reporting requirements. These new sources include gathering and boosting facilities as well as completions and workovers from hydraulically fractured oil and natural gas wells. The revisions also include the addition of well identification reporting requirements for certain facilities. There were attempts
at comprehensive federal legislation establishing a cap and trade program, but that legislation did not pass. Further, various states have considered or adopted legislation that seeks to control or reduce emissions of greenhouse gases from a wide range of sources. Finally,Internationally, in December 2015, the United States joined the international community at the 21st Conference of the Parties ofparticipated in the United Nations Framework ConventionConference on Climate Change, inwhich led to the creation of the Paris France. The resulting Paris Agreement calls for the parties to undertake “ambitious efforts” to limit the average global temperature and to conserve and enhance sinks and reservoirs of greenhouse gases.Agreement. The Paris Agreement, if ratified, establisheswhich was signed by the United States in April 2016, requires countries to review and “represent a frameworkprogression” in their intended nationally determined contributions, which set greenhouse gas emission reduction goals, every five years beginning in 2020. In June 2017, the Trump administration announced its intention for the partiesUnited States to cooperate and report actionswithdraw from the Paris Agreement. Pursuant to reducethe terms of the Paris Agreement, the earliest date the United States can withdraw is November 2020. In January 2019, New Mexico’s governor signed an executive order declaring that New Mexico would support the goals of the Paris Agreement by joining the U.S. Climate Alliance, a bipartisan coalition of governors committed to reducing greenhouse gas emissions.emissions consistent with the goals of the Paris Agreement. The stated objective of the executive order is to achieve a statewide reduction in greenhouse gas emissions of at least 45% by 2030 as compared to 2005 levels. The executive order also requires New Mexico regulatory agencies to create an “enforceable regulatory framework” to ensure methane emission reductions. The EPA has also finalized regulations targeting new sources of methane emissions from the oil and natural gas industry. However, in June 2017, the EPA proposed a two-year stay of certain requirements under this rule and in September 2018 proposed targeted improvements to the rule, including amendments to the rule’s fugitive emissions monitoring requirements, which are expected to “significantly reduce” the rule’s regulatory burden. Any future international agreements, federal or state laws or implementing regulations that may be adopted to address greenhouse gas emissions could, and in all likelihood would, require us to incur increased operating costs, adversely affecting our profits, and could adversely affect demand for the oil and natural gas we produce, depressing the prices we receive for oil and natural gas.
In an interpretative guidance on climate change disclosures, the SEC indicated that climate change could have an effect on the severity of weather (including hurricanes and floods), sea levels, the arability of farmland and water availability and quality. If such effects were to occur, there is the potential for our exploration and production operations to be adversely affected. Potential adverse effects could include damages to our facilities from powerful winds or rising waters in low-lying areas, disruption of our production, less efficient or non-routine operating practices necessitated by climate effects and increased costs for insurance coveragescoverage in the aftermath of such effects. Significant physical effects of climate change could also have an indirect effect on our financing and operations by disrupting the transportation or process-related services provided by us or other midstream companies, service companies or suppliers with whom we have a business relationship. We may not be able to recover through insurance some or any of the damages, losses or costs that may result from potential physical effects of climate change. In addition, our hydraulic fracturing operations require large amounts of water. See “—If We Are Unable to Acquire Adequate Supplies of Water for Our Drilling and Hydraulic Fracturing Operations or Are Unable to Dispose of the Water We Use at a Reasonable Cost and Pursuant to Applicable Environmental Rules, Our Ability to Produce Oil and Natural Gas Commercially and in Commercial Quantities Could Be Impaired.” Should climate change or other drought conditions occur, our ability to obtain water of a sufficient quality and quantity could be impacted and in turn, our ability to perform hydraulic fracturing operations could be restricted or made more costly.
The adoption of legislation or regulatory programs to reduce greenhouse gas emissions could require us to incur increased operating costs, such as costs to purchase and operate emissions control systems, to acquire emissions allowances or to comply with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the
cost of consuming, and thereby reduce demand for, the oil and natural gas we produce. Consequently, legislation and regulatory programs to reduce emissions of greenhouse gases could have an adverse effect on our business, financial condition and results of operations. Reduced demand for the oil and natural gas that we produce could also have the effect of lowering the value of our reserves. In addition, there have also been efforts in recent years to influence the investment community, including investment advisors and certain sovereign wealth, pension and endowment funds promoting divestment of fossil fuel equities and pressuring lenders to limit funding to companies engaged in the extraction of fossil fuel reserves. Such environmental activism and initiatives aimed at limiting climate change and reducing air pollution could interfere with our business activities, operations and ability to access capital. Finally, increasing attention to the risks of climate change has resulted in an increased possibility of lawsuits or investigations brought by public and private entities against oil and natural gas companies in connection with their greenhouse gas emissions. Should we be targeted by any such litigation or investigations, we may incur liability, which, to the extent that societal pressures or political or other factors are involved, could be imposed without regard to the causation of or contribution to the asserted damage, or to other mitigating factors. The ultimate impact of greenhouse gas emissions-related agreements, legislation and measures on our financial performance is highly uncertain because we are unable to predict with certainty, for a multitude of individual jurisdictions, the outcome of political decision-making processes and the variables and tradeoffs that inevitably occur in connection with such processes.
New Regulations on All Emissions from Our Operations Could Cause Us to Incur Significant Costs.
On April 17, 2012,In recent years, the EPA issued final rules to subject oil and natural gas operations to regulation under the New Source Performance Standards or NSPS,(“NSPS”) and National Emission Standards for Hazardous Air Pollutants or NESHAPS, programs under the CAA and to impose new and amended requirements under both programs. The EPA rules include NSPS standards for completions of hydraulically fractured oil and natural gas wells, compressors, controllers, dehydrators, storage tanks, natural gas processing plants and certain other equipment. Further, in May 2016, the EPA issued final NSPS governing methane emissions from the oil and natural gas industry as well as source determination standards for determining when oil and natural gas sources should be aggregated for CAA permitting and compliance purposes. The NSPS for methane extends the 2012 NSPS to completions of hydraulically fractured oil and natural gas wells, equipment leaks, pneumatic pumps and natural gas compressors. These rules have required changes to our operations, including the installation of new equipment to control emissions. The EPA finalized a more stringent National Ambient Air Quality Standard (“NAAQS”) for ozone in October 2015. The EPA finished promulgating final area designations under the new standard in 2018, which, to the extent areas in which we operate have been classified as “non-attainment” areas, may result in an increase in costs for emission controls and requirements for additional monitoring and testing, as well as a more cumbersome permitting process. If regions reclassified as non-attainment areas under the lower ozone standard begin implementing new, more stringent regulations, those regulations could also apply to our or our customers’ operations. Generally, it will take the states several years to develop compliance plans for their non-attainment areas. The EPA’s final rule has been judicially challenged by both industry and other interested parties, and the outcome of this litigation may also announced that it intendsimpact implementation and revisions to impose methane emission standards for existing sources and has issued information collection requests for oil and natural gas facilities.the rule. In November 2016, the Department of the Interior issued final rules relating to the venting, flaring and leaking of natural gas by oil and natural gas producers who operate on federal and Indian lands. The rules limit routine flaring of natural gas, require the payment of royalties on avoidable natural gas losses and require plans or programs relating to natural gas capture and leak detection and repair. TheseThe BLM then finalized a revised rule in 2018 which scaled back the waste-prevention requirements of the 2016 rule. Environmental groups have sued in federal district court to challenge the legality of aspects of the revised rule, and the outcome of this litigation is currently uncertain. If not withdrawn or significantly revised, these rules are expected to result in an increase to our operating costs and changes in our operations. In addition, several states are pursuing similar measures to regulate emissions of methane from new and existing sources within the oil and natural gas source category. As a result of this continued regulatory focus, future federal and state regulations of the oil and natural gas industry remain a possibility and could result in increased compliance costs for our operations.
We May Incur Significant Costs and Liabilities Resulting from Compliance with Pipeline Safety Regulations.
Our pipelines are subject to stringent and complex regulation related to pipeline safety and integrity management. For instance, the Department of Transportation, through PHMSA, has established a series of rules that require pipeline operators to develop and implement integrity management programs for hazardous liquid (including oil) pipeline segments that, in the event of a leak or rupture, could affect high-consequence areas. The Rustler Breaks Oil Pipeline System is subject to such rules. PHMSA also recently proposed rulemaking that would expand existing integrity management requirements to natural gas transmission and gathering lines in areas with medium population densities. Additional action by PHMSA with respect to pipeline integrity management requirements may occur in the future. At this time, we cannot predict the cost of such requirements, but they could be significant. Moreover, violations of pipeline safety regulations can result in the imposition of significant penalties.
Several states have also passed legislation or promulgated rules to address pipeline safety. Compliance with pipeline integrity laws and other pipeline safety regulations issued by state agencies such as the TRC could result in substantial expenditures for testing, repairs and replacement. Due to the possibility of new or amended laws and regulations or reinterpretation of existing laws and regulations, there can be no assurance that future compliance with PHMSA or state requirements will not have a material adverse effect on our operations.results of operations or financial position.
A Change in the Jurisdictional Characterization of Some of Our Assets by FERC or a Change in Policy by It May Result in Increased Regulation of Our Assets, Which May Cause Our Revenues to Decline and Operating Expenses to Increase.
Section 1(b) of the NGA exempts natural gas gathering facilities from regulation by FERC under the NGA. We believe that the natural gas pipelines in our gathering systems meet the traditional tests FERC has used to establish a pipeline’s status as a gatherer not subject to FERC regulation. However, the distinction between FERC-regulated transmission services and federally unregulated gathering services is the subject of ongoing litigation, so the classification and regulation of our gathering facilities are subject to change based on future determinations by FERC, the courts or Congress. Similarly, intrastate crude oil pipeline facilities are exempt from regulation by FERC under the Interstate Commerce Act.ICA. In December 2018, San Mateo placed into service the Rustler Breaks Oil Pipeline System, which is subject to FERC jurisdiction and includes approximately 17 miles of 10-inch diameter crude oil gathering and transportation pipelines from origin points in Eddy County, New Mexico to an interconnect with Plains Pipeline, L.P. We believe that the other crude oil pipelines in our gathering systems meet the traditional tests FERC has used to establish a pipeline’s status as an intrastate facility not subject to FERC regulation. However, whetherWhether a pipeline provides service in interstate commerce or intrastate commerce is highly fact dependent and determined on a case-by-case basis. A change in the jurisdictional characterization of
our facilities by FERC, the courts or Congress, a change in policy by FERC or Congress or the expansion of our activities may result in increased regulation of our assets, which may cause our revenues to decline and operating expenses to increase.
The Rates of Our Regulated Assets are Subject to Review and Reporting by Federal Regulators, Which Could Adversely Affect Our Revenues.
The Rustler Breaks Oil Pipeline System transports crude oil in interstate commerce. FERC regulates the rates, terms and conditions of service on pipelines that transport crude oil in interstate commerce. If a party with an economic interest were to file either a complaint against our tariff rates or protest any proposed increases to our tariff rates, or FERC were to initiate an investigation of our rates, then our rates could be subject to detailed review. If any proposed rate increases were found by FERC to be in excess of just and reasonable levels, FERC could order us to reduce our rates, and to refund the amount by which the rate increases were determined to be excessive, plus interest. If our existing rates were found by FERC to be in excess of just and reasonable levels, we could be ordered to refund the excess we collected for up to two years prior to the date of the filing of the complaint challenging the rates, and we could be ordered to reduce our rates prospectively. In addition, a state commission also could investigate our intrastate rates or our terms and conditions of service on its own initiative or at the urging of a shipper or other interested party. If a state commission found that our rates exceeded levels justified by our cost of service, the state commission could order us to reduce our rates. Any such reductions may result in lower revenues and cash flows. As of February 26, 2019, the shippers on the Rustler Breaks Oil Pipeline System have agreed not to challenge, or to cause others to challenge or assist others in challenging, our tariff rates in effect during the terms of their respective agreements; however, other current or future shippers may still challenge our tariff rates.
In addition, FERC’s ratemaking policies are subject to change and may impact the rates charged and revenues received on the Rustler Breaks Oil Pipeline System and any other natural gas or crude oil pipeline that is determined to be under the jurisdiction of FERC.
Should We Fail to Comply with All Applicable FERC-Administered Statutes, Rules, Regulations and Orders, We Could Be Subject to Substantial Penalties and Fines.
Under the Energy Policy Act, FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1.0approximately $1.2 million per day for each violation and disgorgement of profits associated with any violation. TheThis maximum penalty authority established by statute will continue to be adjusted periodically for inflation. While the nature of our gathering facilities is such that wethese facilities have not yet been regulated by FERC. ItFERC, the Rustler Breaks Oil Pipeline System does transport crude oil in interstate commerce and, therefore, is possible, however, that laws,subject to FERC regulation. Laws, rules and regulations pertaining to those and other matters may be considered or adopted by FERC or Congress from time to time. Failure to comply with those laws, rules and regulations in the future could subject us to civil penalty liability.
The Derivatives Legislation Adopted by Congress Could Have an Adverse Impact on Our Ability to Hedge Risks Associated with Our Business.
On July 21, 2010, President Obama signed into law theThe Dodd-Frank Wall Street Reform and Consumer Protection Act or the Dodd-Frank Act, which is intended to modernize and protect the integrity of the U.S. financial system. The Dodd-Frank Act,(the “Dodd-Frank Act”), among other things, establishesestablished federal oversight and regulation of certain derivative products, including commodity hedges of the type we use. The Dodd-Frank Act requires the Commodity Futures Trading Commission or CFTC,(“CFTC”) and the SEC to promulgate rules and regulations implementing the Dodd-Frank Act. Although the CFTC has finalized certain regulations, others remain to be finalized or implemented, and it is not possible at this time to predict when, or if, this will be accomplished.
In October 2011, the CFTC issued regulations to set position limits for certain futures and option contracts in the major energy markets and for swaps that are their economic equivalents. The initial position limits rule was vacated by the United States District Court for the District of Columbia in September 2012. However, in November 2013, the CFTC proposed new
rules that would place limits on positions in certain core futures and equivalent swaps contracts for or linked to certain physical commodities, subject to exceptions for certain bona fide hedging transactions. During the last quarter of 2016, the CFTC decided to re-propose, rather than finalize, certain regulations, including limitations on speculative futures and swap positions. The CFTC has not acted on the re-proposed position limit regulations. As these new position limit rules are not yet final, the impact of those provisions on us is uncertain at this time. The Dodd-Frank Act could also result in additional regulatory requirements on our derivative arrangements, which could include new margin, reporting and clearing requirements. In addition, this legislation could have a substantial impact on our counterparties and may increase the cost of our derivative arrangements in the future.
If these types of commodity hedges become unavailable or uneconomic, our commodity price risk could increase, which would increase the volatility of revenues and may decrease the amount of credit available to us. Any limitations or changes in our use of derivative arrangements could also materially affect our cash flows, which could adversely affect our ability to make capital expenditures.
Finally, the Dodd-Frank Act was intended, in part, to reduce the volatility of oil and natural gas prices, which some legislators attributed to speculative trading in derivatives and commodity instruments related to oil and natural gas. Our revenues could therefore be adversely affected if a consequence of the Dodd-Frank Act and implementing regulations is to lower commodity prices.
Any of these consequences could have a material adverse effect on our business, financial condition and results of operations.
We May Have Difficulty Managing Growth in Our Business, Which Could Have a Material Adverse Effect on Our Business, Financial Condition, Results of Operations and Cash Flows and Our Ability to Execute Our Business Plan in a Timely Fashion.
Because of our size, growth in accordance with our business plans, if achieved, will place a significant strain on our financial, technical, operational and management resources. As and when we expand our activities, including our midstream business, through the Joint VentureSan Mateo or otherwise, there will be additional demands on our financial, technical and management resources. The failure to continue to upgrade our technical, administrative, operating and financial control systems or the occurrence of unexpected expansion difficulties, including the inability to recruit and retain experienced managers, geoscientists, petroleum engineers, landmen, midstream professionals, attorneys and financial and accounting professionals, could have a material adverse effect on our business, financial condition, results of operations and cash flows and our ability to execute our business plan in a timely fashion.
Our Success Depends, to a Large Extent, on Our Ability to Retain Our Key Personnel, Including Our Chairman and Chief Executive Officer, Management and Technical Team, the Members of Our Board of Directors and Our Special Board Advisors, and the Loss of Any Key Personnel, Board Member or Special Board Advisor Could Disrupt Our Business Operations.
Investors in our common stock must rely upon the ability, expertise, judgment and discretion of our management and the success of our technical team in identifying, evaluating and developing prospects and reserves. Our performance and success are dependent to a large extent on the efforts and continued employment of our management and technical personnel, including
our Chairman and Chief Executive Officer, Joseph Wm. Foran. We do not believe that they could be quickly replaced with personnel of equal experience and capabilities, and their successors may not be as effective. We have entered into employment agreements with Mr. Foran and other key personnel. However, these employment agreements do not ensure that these individuals will remain in our employment. If Mr. Foran or other key personnel resign or become unable to continue in their present roles and if they are not adequately replaced, our business operations could be adversely affected. With the exception of Mr. Foran, we do not maintain, nor do we plan to obtain, any insurance against the loss of any of these individuals.
We have an active Board of Directors that meets at least quarterly throughout the year and is closely involved in our business and the determination of our operational strategies. Members of our Board of Directors work closely with management to identify potential prospects, acquisitions and areas for further development. Certain of our directors have been involved with us since our inception and have a deep understanding of our operations and culture. If any of our directors resign or become unable to continue in their present role, it may be difficult to find replacements with the same knowledge and experience and, as a result, our operations may be adversely affected.
In addition, our boardBoard of Directors consults regularly with our special Board advisors regarding our business and the evaluation, exploration, engineering and development of our prospects.prospects and properties. Due to the knowledge and experience of our special advisors, they play a key role in our multi-disciplined approach to making decisions regarding prospects, acquisitions and development. If any of our special advisors resign or become unable to continue in their present role, our operations may be adversely affected.
Information Technology Systems Implementation Issues Could Disrupt Our Internal Operations, Increase Our Costs and Could Have a Material Adverse Effect on Our Financial Results or Our Ability to Report Our Financial Results.
We are currently in the process
53
A Cyber Incident Could Occur and Result in Information Theft, Data Corruption, Operational Disruption or Financial Loss.
The oil and natural gas industry is dependent on digital technologies to conduct certain exploration, development, production, gathering, processing and financial activities. We depend on digital technology to, among other things, estimate oil and natural gas reserves quantities, plan, execute and analyze drilling, completion, production, gathering, processing and disposal operations, process and record financial and operating data and communicate with employees, shareholders, royalty owners and other third-party industry participants. Industrial control systems, such as our supervisory control and data acquisition (SCADA) systems, control important processes and facilities that are critical to our operations. If any of such programs or systems were to fail or create erroneous information in our hardware or software network infrastructure or we were subject to cyberspace breaches, phishing schemes or attacks, possible consequences include financial losses and the inability to engage in any of the aforementioned activities. Any such consequence could have a material adverse effect on our business.
While we have not experienced any material losses due to cyber-attacks,cyber incidents, we may suffer such losses in the future. If our systems for protecting against cyber incidents prove to be insufficient, we could be adversely affected by unauthorized access to proprietary information, which could lead to data corruption, communication interruption, exposure of our or third parties’ confidential or proprietary information, operational disruptions or financial loss. As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify and enhance our protective systems or to investigate and remediate any vulnerabilities.
Risks Relating to Our Common Stock
The Price of Our Common Stock Has Fluctuated Substantially and May Fluctuate Substantially in the Future.
Our stock price has experienced volatility and could vary significantly as a result of a number of factors. In 2016,2018, our stock price fluctuated between a high of $27.71$35.22 and a low of $11.13.$13.97. In addition, the trading volume of our common stock may continue to fluctuate and cause significant price variations to occur. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock. In addition, the stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock.
Factors that could affect our stock price or result in fluctuations in the market price or trading volume of our common stock include:
our actual or anticipated operating and financial performance and drilling locations, including oil and natural gas reserves estimates;
quarterly variations in the rate of growth of our financial indicators, such as net income per share, net income and cash flows, or those of companies that are perceived to be similar to us;
changes in revenue, cash flows or earnings estimates or publication of reports by equity research analysts;
speculation in the press or investment community;
announcement or consummation of acquisitions, dispositions or dispositionsjoint ventures by us;
public reaction to our operations or plans, press releases, announcements and filings with the SEC;
sales of our common stock by usthe Company, directors, officers or other shareholders, or the perception that such sales may occur;
general financial market conditions and oil and natural gas industry market conditions, including fluctuations in the price of oil, natural gas and natural gas liquids;NGLs;
the realization of any of the risk factors presented in this Annual Report;
the recruitment or departure of key personnel;
commencement of, or involvement in or unfavorable resolution of litigation;
the success of our exploration and development operations, our midstream business (including San Mateo) and the marketing of any oil, natural gas and natural gas liquidsNGLs we produce;
changes in market valuations of companies similar to ours; and
domestic and international economic, legal and regulatory factors unrelated to our performance.
If We Fail to Maintain Effective Internal Control over Financial Reporting in the Future, Our Ability to Accurately Report Our Financial Results Could Be Adversely Affected.
As a public company with listed equity securities, we are required to comply with laws, regulations and requirements, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, related regulations of the SEC and the requirements of the NYSE. Complying with these statutes, regulations and requirements is difficult and costly and occupies a significant amount of time of our Board of Directors and management.
Pursuant to the Sarbanes-Oxley Act, we are required to maintain internal control over financial reporting. Our efforts to maintain our internal controls may not be successful, and we may be unable to maintain effective controls over our financial processes and reporting in the future and comply with the certification and reporting obligations under Sections 302 and 404 of the Sarbanes-Oxley Act. Our management does not expect that our internal controls and disclosure controls will prevent all possible error or all fraud. Further, our remediation efforts may not enable us to avoid material weaknesses in the future. Any failure to maintain effective controls could result in material misstatements that are not prevented or detected and corrected on a timely basis, which could potentially subject us to sanction or investigation by the SEC, the NYSE or other regulatory authorities. Ineffective internal controls could also cause investors to lose confidence in our reported financial information and adversely affect our business and our stock price.
We Do Not Presently Intend to Pay Any Cash Dividends on or Repurchase Any Shares of Our Common Stock.
We do not presently intend to pay any cash dividends on or repurchase any shares of our common stock. Any payment of future dividends will be at the discretion of our Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applicable to the payment of dividends and other considerations that our Board of Directors deems relevant. Cash dividend payments in the future may only be made out of legally available funds and, if we experience substantial losses, such funds may not be available. In addition, certain covenants in our Credit Agreement, the San Mateo Credit Facility and the indenture governing our outstanding senior notes may limit our ability to pay dividends or repurchase shares of our common stock. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment, and there is no guarantee that the price of our common stock will exceed the price you paid.
Future Sales of Shares of Our Common Stock by Existing Shareholders and Future Offerings of Our Common Stock by Us Could Depress the Price of Our Common Stock.
The market price of our common stock could decline as a result of sales of a large number of shares of our common stock in the market, including shares of equity or debt securities convertible into common stock, and the perception that these sales could occur may also depress the market price of our common stock. If our existing shareholders, including directors or officers, sell, or indicate an intent to sell, substantial amounts of our common stock in the public market, the trading price of our common stock could decline significantly. Sales of our common stock may make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate. These sales could also cause our stock price to decrease and make it more difficult for you to sell shares of our common stock.
We may also sell or issue additional shares of common stock or equity or debt securities convertible into common stock in public or private offerings or in connection with acquisitions. We cannot predict the size of future issuances of our common stock or convertible securities or the effect, if any, that future issuances and sales of shares of our common stock or convertible securities would have on the market price of our common stock.
Provisions of Our Certificate of Formation, Bylaws and Texas Law May Have Anti-Takeover Effects That Could Prevent a Change in Control Even if It Might Be Beneficial to Our Shareholders.
Our certificate of formation and bylaws contain certain provisions that may discourage, delay or prevent a merger or acquisition that our shareholders may consider favorable. These provisions include:
authorization for our Board of Directors to issue preferred stock without shareholder approval;
a classified Board of Directors so that not all members of our Board of Directors are elected at one time;
the prohibition of cumulative voting in the election of directors; and
a limitation on the ability of shareholders to call special meetings to those owning at least 25% of our outstanding shares of common stock.
Provisions of Texas law may also discourage, delay or prevent someone from acquiring or merging with us, which may cause the market price of our common stock to decline. Under Texas law, a shareholder who beneficially owns more than 20% of our voting stock, or an affiliated shareholder, cannot acquire us for a period of three years from the date this person became an affiliated shareholder, unless various conditions are met, such as approval of the transaction by our Board of Directors before this person became an affiliated shareholder or approval of the holders of at least two-thirds of our outstanding voting shares not beneficially owned by the affiliated shareholder.
Our Directors and Executive Officers Own a Significant Percentage of Our Equity, Which Could Give Them Influence in Corporate Transactions and Other Matters, and the Interests of Our Directors and Executive Officers Could Differ from Other Shareholders.
As of February 22, 2017,26, 2019, our directors and executive officers beneficially owned approximately 12%7% of our outstanding common stock. These shareholders could influence or control to some degree the outcome of matters requiring a shareholder vote, including the election of directors, the adoption of any amendment to our certificate of formation or bylaws and the approval of mergers and other significant corporate transactions. Their influence or control of the Company may have the effect of delaying or preventing a change of control of the Company and may adversely affect the voting and other rights of other shareholders. In addition, due to their ownership interest in our common stock, our directors and executive officers may be able to remain entrenched in their positions.
Our Board of Directors Can Authorize the Issuance of Preferred Stock, Which Could Diminish the Rights of Holders of Our Common Stock and Make a Change of Control of the Company More Difficult Even if It Might Benefit Our Shareholders.
Our Board of Directors is authorized to issue shares of preferred stock in one or more series and to fix the voting powers, preferences and other rights and limitations of the preferred stock. Accordingly, we may issue shares of preferred stock with a preference over our common stock with respect to dividends or distributions on liquidation or dissolution, or that may otherwise adversely affect the voting or other rights of the holders of common stock.
Issuances of preferred stock, depending upon the rights, preferences and designations of the preferred stock, may have the effect of delaying, deterring or preventing a change of control of the Company, even if that change of control might benefit our shareholders.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
See “Business” for descriptions of our properties. We also have various operating leases for rental of office space and office and field equipment. See Note 13 to the consolidated financial statements in this Annual Report for the future minimum rental payments. Such information is incorporated herein by reference.
Item 3. Legal Proceedings.
We are a party to several lawsuits encountered in the ordinary course of our business. While the ultimate outcome and impact to us cannot be predicted with certainty, in the opinion of management, it is remote that these lawsuits will have a material adverse impact on our financial condition, results of operations or cash flows.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
General Market Information
Shares of our common stock are traded on the NYSE under the symbol “MTDR.” Our shares have been traded on the NYSE since February 2, 2012. Prior to trading on the NYSE, there was no established public trading market for our common stock.
On February 24, 2017,26, 2019, we had 100,034,559116,388,317 shares of common stock outstanding held by approximately 300360 record holders, excluding shareholders for whom shares are held in “nominee” or “street” name.
The following table sets forth the high and low sales prices of our common stock as reported by the NYSE for the periods indicated.
|
| | | | | | | | | | | | | | | | |
| | | 2016 | | 2015 |
| | | High | | Low | | High | | Low |
| First Quarter | | $ | 20.94 |
| | $ | 11.13 |
| | $ | 25.08 |
| | $ | 18.28 |
|
| Second Quarter | | $ | 25.54 |
| | $ | 18.03 |
| | $ | 29.90 |
| | $ | 22.01 |
|
| Third Quarter | | $ | 24.71 |
| | $ | 18.56 |
| | $ | 26.07 |
| | $ | 19.08 |
|
| Fourth Quarter | | $ | 27.71 |
| | $ | 20.45 |
| | $ | 28.25 |
| | $ | 18.87 |
|
On February 24, 2017, the last reported sales price of our common stock on the NYSE was $24.42 per share.
Dividend Policy
We do not anticipate declaring or paying any cash dividends to holders of our common stock in the foreseeable future. We currently intend to retain future earnings to finance the expansion of our business. Our future dividend policy is within the discretion of our Board of Directors and will depend upon various factors, including our results of operations, financial condition, capital requirements and investment opportunities. In addition, certain covenants in our Credit Agreement and the indenture governing our outstanding senior notes may limit our ability to pay dividends on our common stock. During the years ended December 31, 2016 and 2015, we did not pay dividends to holders of our common stock.
Equity Compensation Plan Information
The following table presents the securities authorized for issuance under our equity compensation plans as of December 31, 2016.2018. | | Equity Compensation Plan Information | | Plan Category | | Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans | | Number of Shares to be Issued Upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans |
Equity compensation plans approved by security holders(1) (2) | | 2,872,954 |
| | $ | 15.59 |
| | 3,963,427 |
| | 2,962,249 |
| | $ | 23.48 |
| | 991,281 |
|
| Equity compensation plans not approved by security holders | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total | | 2,872,954 |
| | $ | 15.59 |
| | 3,963,427 |
| | 2,962,249 |
| | $ | 23.48 |
| | 991,281 |
|
__________________
| |
| (1) | Our Board of Directors has determined not to make any additional grants of awards under the Matador Resources Company 2003 Stock and Incentive Plan. |
| |
| (2) | The Matador Resources Company Amended and Restated 2012 Long-Term Incentive Plan was adopted by our Board of Directors in April 2015 and approved by our shareholders on June 10, 2015. For a description of our Amended and Restated 2012 Long-Term Incentive Plan, see Note 8 to the consolidated financial statements in this Annual Report. |
Share Performance Graph
The following graph compares the cumulative return on a $100 investment in our common stock from February 2, 2012, the date our common stock began trading on the NYSE,December 31, 2013 through December 31, 2016,2018, to that of the cumulative return on a $100 investment in the Russell 2000 Index and the Russell 2000 Energy Index for the same period. In calculating the cumulative return, reinvestment of dividends, if any, is assumed.
This graph is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing. This graph is included in accordance with the SEC’s disclosure rules. This historic stock performance is not indicative of future stock performance.
Comparison of Cumulative Total Return Among
Matador Resources Company, the Russell 2000 Index
and the Russell 2000 Energy Index
Repurchase of Equity by the Company or Affiliates
During the quarter ended December 31, 2016,2018, the Company re-acquired shares of common stock from certain employees in order to satisfy the employees’ tax liability in connection with the vesting of restricted stock. |
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs |
| October 1, 2016 to October 31, 2016 | | 1,131 |
| | $ | 23.66 |
| | — |
| | — |
|
| November 1, 2016 to November 30, 2016 | | 1,288 |
| | 21.45 |
| | — |
| | — |
|
| December 1, 2016 to December 31, 2016 | | 1,306 |
| | 25.65 |
| | — |
| | — |
|
| Total | | 3,725 |
| | $ | 23.59 |
| | — |
| | — |
|
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs |
| October 1, 2018 to October 31, 2018 | | 11,777 |
| | $ | 33.39 |
| | — |
| | — |
|
| November 1, 2018 to November 30, 2018 | | 216 |
| | 25.79 |
| | — |
| | — |
|
| December 1, 2018 to December 31, 2018 | | 106 |
| | 15.49 |
| | — |
| | — |
|
| Total | | 12,099 |
| | $ | 33.10 |
| | — |
| | — |
|
_________________
(1) The shares were not re-acquired pursuant to any repurchase plan or program.
| |
| (1) | The shares were not re-acquired pursuant to any repurchase plan or program. The Company re-acquired shares of common stock from certain employees in order to satisfy the employees’ tax liability in connection with the vesting of restricted stock. |
Item 6. Selected Financial Data.
The following selected financial information is summarized from our results of operations for the five-year period ended December 31, 20162018 and selected consolidated balance sheet and cash flow data at December 31, 2018, 2017, 2016, 2015 2014, 2013 and 2012.2014. You should read the following selected financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto included elsewhere in this Annual Report. The financial information included in this Annual Report may not be indicative of our future results of operations, financial condition or cash flows.
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (In thousands, except per share data) | | | | | | | | | | | | | | | | | | | | |
| Statement of operations data: | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | | | | | | | | | | | | | | | | | |
| Oil and natural gas revenues | | $ | 291,156 |
| | $ | 278,340 |
| | $ | 367,712 |
| | $ | 269,030 |
| | $ | 155,998 |
| | $ | 800,700 |
| | $ | 528,684 |
| | $ | 291,156 |
| | $ | 278,340 |
| | $ | 367,712 |
|
| Third-party midstream services revenue | | 5,218 |
| | 1,864 |
| | 1,213 |
| | 207 |
| | 183 |
| |
| Third-party midstream services revenues | | | 21,920 |
| | 10,198 |
| | 5,218 |
| | 1,864 |
| | 1,213 |
|
| Sales of purchased natural gas | | | 7,071 |
| | — |
| | — |
| | — |
| | — |
|
| Lease bonus - mineral acreage | | | 2,489 |
| | — |
| | — |
| | — |
| | — |
|
| Realized gain (loss) on derivatives | | 9,286 |
| | 77,094 |
| | 5,022 |
| | (909 | ) | | 13,960 |
| | 2,334 |
| | (4,321 | ) | | 9,286 |
| | 77,094 |
| | 5,022 |
|
| Unrealized (loss) gain on derivatives | | (41,238 | ) | | (39,265 | ) | | 58,302 |
| | (7,232 | ) | | (4,802 | ) | |
| Unrealized gain (loss) on derivatives | | | 65,085 |
| | 9,715 |
| | (41,238 | ) | | (39,265 | ) | | 58,302 |
|
| Total revenues | | 264,422 |
| | 318,033 |
| | 432,249 |
| | 261,096 |
| | 165,339 |
| | 899,599 |
| | 544,276 |
| | 264,422 |
| | 318,033 |
| | 432,249 |
|
| Expenses | | | | | | | | | | | | | | | | | | | | |
Production taxes, transportation and processing(1) | | 43,046 |
| | 35,650 |
| | 33,172 |
| | 20,973 |
| | 11,672 |
| |
Lease operating(2) | | 56,202 |
| | 54,704 |
| | 49,945 |
| | 37,971 |
| | 27,868 |
| |
| Production taxes, transportation and processing | | | 76,138 |
| | 58,275 |
| | 43,046 |
| | 35,650 |
| | 33,172 |
|
| Lease operating | | | 92,966 |
| | 67,313 |
| | 56,202 |
| | 54,704 |
| | 49,945 |
|
| Plant and other midstream services operating | | 5,389 |
| | 3,489 |
| | 1,408 |
| | 749 |
| | 316 |
| | 24,609 |
| | 13,039 |
| | 5,389 |
| | 3,489 |
| | 1,408 |
|
| Purchased natural gas | | | 6,635 |
| | — |
| | — |
| | — |
| | — |
|
| Depletion, depreciation and amortization | | 122,048 |
| | 178,847 |
| | 134,737 |
| | 98,395 |
| | 80,454 |
| | 265,142 |
| | 177,502 |
| | 122,048 |
| | 178,847 |
| | 134,737 |
|
| Accretion of asset retirement obligations | | 1,182 |
| | 734 |
| | 504 |
| | 348 |
| | 256 |
| | 1,530 |
| | 1,290 |
| | 1,182 |
| | 734 |
| | 504 |
|
| Full-cost ceiling impairment | | 158,633 |
| | 801,166 |
| | — |
| | 21,229 |
| | 63,475 |
| | — |
| | — |
| | 158,633 |
| | 801,166 |
| | — |
|
| General and administrative | | 55,089 |
| | 50,105 |
| | 32,152 |
| | 20,779 |
| | 14,543 |
| | 69,308 |
| | 66,016 |
| | 55,089 |
| | 50,105 |
| | 32,152 |
|
| Total expenses | | 441,589 |
| | 1,124,695 |
| | 251,918 |
| | 200,444 |
| | 198,584 |
| | 536,328 |
| | 383,435 |
| | 441,589 |
| | 1,124,695 |
| | 251,918 |
|
| Operating (loss) income | | (177,167 | ) | | (806,662 | ) | | 180,331 |
| | 60,652 |
| | (33,245 | ) | |
| Operating income (loss) | | | 363,271 |
| | 160,841 |
| | (177,167 | ) | | (806,662 | ) | | 180,331 |
|
| Other income (expense) | | | | | | | | | | | | | | | | | | | | |
| Net gain (loss) on asset sales and inventory impairment | | 107,277 |
| | 908 |
| | — |
| | (192 | ) | | (485 | ) | |
| Net (loss) gain on asset sales and inventory impairment | | | (196 | ) | | 23 |
| | 107,277 |
| | 908 |
| | — |
|
| Interest expense | | (28,199 | ) | | (21,754 | ) | | (5,334 | ) | | (5,687 | ) | | (1,002 | ) | | (41,327 | ) | | (34,565 | ) | | (28,199 | ) | | (21,754 | ) | | (5,334 | ) |
Other (expense) income(3) | | (4 | ) | | 616 |
| | 132 |
| | 18 |
| | 42 |
| |
| Total other income (expense) | | 79,074 |
| | (20,230 | ) | | (5,202 | ) | | (5,861 | ) | | (1,445 | ) | |
| Net (loss) income | | (97,057 | ) | | (679,524 | ) | | 110,754 |
| | 45,094 |
| | (33,261 | ) | |
| Prepayment premium on extinguishment of debt | | | (31,226 | ) | | — |
| | — |
| | — |
| | — |
|
| Other income (expense) | | | 1,551 |
| | 3,551 |
| | (4 | ) | | 616 |
| | 132 |
|
| Total other (expense) income | | | (71,198 | ) | | (30,991 | ) | | 79,074 |
| | (20,230 | ) | | (5,202 | ) |
| Net income (loss) | | | 299,764 |
| | 138,007 |
| | (97,057 | ) | | (679,524 | ) | | 110,754 |
|
| Net (income) loss attributable to non-controlling interest in subsidiaries | | (364 | ) | | (261 | ) | | 17 |
| | — |
| | — |
| | (25,557 | ) | | (12,140 | ) | | (364 | ) | | (261 | ) | | 17 |
|
Net (loss) income attributable to
Matador Resources Company shareholders | | $ | (97,421 | ) | | $ | (679,785 | ) | | $ | 110,771 |
| | $ | 45,094 |
| | $ | (33,261 | ) | |
| Net income (loss) attributable to Matador Resources Company shareholders | | | $ | 274,207 |
| | $ | 125,867 |
| | $ | (97,421 | ) | | $ | (679,785 | ) | | $ | 110,771 |
|
| Earnings (loss) per common share | | | | | | | | | | | | | | | | | | | | |
| Basic | | | | | | | | | | | | $ | 2.41 |
| | $ | 1.23 |
| | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.58 |
|
Class A (4) | | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.58 |
| | $ | 0.77 |
| | $ | (0.62 | ) | |
Class B (4) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.35 | ) | |
| Diluted | | | | | | | | | | | | $ | 2.41 |
| | $ | 1.23 |
| | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.56 |
|
Class A (4) | | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.56 |
| | $ | 0.77 |
| | $ | (0.62 | ) | |
Class B (4) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (0.35 | ) | |
Class B dividend declared, per share (4) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.27 |
| |
__________________ | |
(1) | $0.1 million was reclassified to third-party midstream services revenues for the year ended December 31, 2015 due to our midstream business becoming a reportable segment in the third quarter of 2016. There were no such reclassifications made in any other periods presented. |
| |
(2) | $3.5 million, $1.4 million, $0.7 million and $0.3 million were reclassified to plant and other midstream services operating expenses for the years ended December 31, 2015, 2014, 2013 and 2012, respectively, due to our midstream business becoming a reportable segment in the third quarter of 2016. |
| |
(3) | $1.7 million, $1.2 million, $0.2 million and $0.2 million were reclassified to midstream services revenues for the years ended December 31, 2015, 2014, 2013 and 2012, respectively, due to our midstream business becoming a reportable segment in the third quarter of 2016. |
| |
(4) | Our Class B common stock converted into Class A common stock upon the consummation of our initial public offering on February 7, 2012 and the Class A common stock then became the only class of common stock authorized. The term “Class A common stock” refers to shares of our Class A |
|
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (In thousands) | | | | | | | | | | |
| Balance sheet data: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 64,545 |
| | $ | 96,505 |
| | $ | 212,884 |
| | $ | 16,732 |
| | $ | 8,407 |
|
| Restricted cash | | $ | 19,439 |
| | $ | 5,977 |
| | $ | 1,258 |
| | $ | 44,357 |
| | $ | 609 |
|
| Net property and equipment | | $ | 3,122,864 |
| | $ | 1,881,456 |
| | $ | 1,184,525 |
| | $ | 1,012,406 |
| | $ | 1,322,072 |
|
| Total assets | | $ | 3,455,518 |
| | $ | 2,145,690 |
| | $ | 1,464,665 |
| | $ | 1,140,861 |
| | $ | 1,434,490 |
|
| Current liabilities | | $ | 330,022 |
| | $ | 282,606 |
| | $ | 169,505 |
| | $ | 136,830 |
| | $ | 142,036 |
|
| Long-term liabilities | | $ | 1,345,839 |
| | $ | 605,538 |
| | $ | 603,715 |
| | $ | 515,072 |
| | $ | 425,913 |
|
| Total Matador Resources Company shareholders’ equity | | $ | 1,688,880 |
| | $ | 1,156,556 |
| | $ | 690,125 |
| | $ | 488,003 |
| | $ | 866,408 |
|
common stock prior to the automatic conversion of our Class B common stock into Class A common stock upon the consummation of our initial public offering.
|
| | | | | | | | | | | | | | | | | | | | |
| | | At December 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| (In thousands) | | | | | | | | | | |
| Balance sheet data: | | | | | | | | | | |
| Cash and cash equivalents | | $ | 212,884 |
| | $ | 16,732 |
| | $ | 8,407 |
| | $ | 6,287 |
| | $ | 2,095 |
|
| Restricted cash | | 1,258 |
| | 44,357 |
| | 609 |
| | — |
| | — |
|
| Certificates of deposit | | — |
| | — |
| | — |
| | — |
| | 230 |
|
| Net property and equipment | | 1,184,525 |
| | 1,012,406 |
| | 1,322,072 |
| | 845,877 |
| | 591,090 |
|
| Total assets | | 1,464,665 |
| | 1,140,861 |
| | 1,434,490 |
| | 890,330 |
| | 632,029 |
|
| Current liabilities | | 169,505 |
| | 136,830 |
| | 142,036 |
| | 100,327 |
| | 96,492 |
|
| Long-term liabilities | | 603,715 |
| | 515,072 |
| | 425,913 |
| | 221,079 |
| | 156,433 |
|
| Total Matador Resources Company shareholders’ equity | | $ | 690,125 |
| | $ | 488,003 |
| | $ | 866,408 |
| | $ | 568,924 |
| | $ | 379,104 |
|
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (In thousands) | | | | | | | | | | | | | | | | | | | | |
| Other financial data: | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 134,086 |
| | $ | 208,535 |
| | $ | 251,481 |
| | $ | 179,470 |
| | $ | 124,228 |
| | $ | 608,523 |
| | $ | 299,125 |
| | $ | 134,086 |
| | $ | 208,535 |
| | $ | 251,481 |
|
| Net cash used in investing activities | | (405,640 | ) | | (425,154 | ) | | (570,531 | ) | | (366,939 | ) | | (306,916 | ) | | $ | (1,515,253 | ) | | $ | (819,284 | ) | | $ | (448,739 | ) | | $ | (381,406 | ) | | $ | (569,922 | ) |
| Oil and natural gas properties capital expenditures | | (379,067 | ) | | (432,715 | ) | | (560,849 | ) | | (363,192 | ) | | (300,689 | ) | | $ | (1,357,802 | ) | | $ | (699,445 | ) | | $ | (379,067 | ) | | $ | (432,715 | ) | | $ | (560,849 | ) |
| Expenditures for other property and equipment | | (74,845 | ) | | (64,499 | ) | | (9,152 | ) | | (3,977 | ) | | (7,332 | ) | |
| Expenditures for midstream and other property and equipment | | | $ | (165,784 | ) | | $ | (120,816 | ) | | $ | (74,845 | ) | | $ | (64,499 | ) | | $ | (9,152 | ) |
| Net cash provided by financing activities | | 467,706 |
| | 224,944 |
| | 321,170 |
| | 191,661 |
| | 174,499 |
| | $ | 888,232 |
| | $ | 408,499 |
| | $ | 467,706 |
| | $ | 224,944 |
| | $ | 321,170 |
|
Adjusted EBITDA (1) | | $ | 157,928 |
| | $ | 223,155 |
| | $ | 262,943 |
| | $ | 191,771 |
| | $ | 115,923 |
| |
Adjusted EBITDA attributable to Matador Resources Company shareholders (1) | | | $ | 553,223 |
| | $ | 336,063 |
| | $ | 157,892 |
| | $ | 223,138 |
| | $ | 262,943 |
|
__________________
| |
| (1) | Adjusted EBITDA is a non-GAAP financial measure. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our net income (loss) and net cash provided by operating activities, see “ – Non-GAAP—Non-GAAP Financial Measures” below. |
Non-GAAP Financial Measures
We define Adjusted EBITDA as earnings before interest expense, income taxes, depletion, depreciation and amortization, accretion of asset retirement obligations, property impairments, unrealized derivative gains and losses, certain other non-cash items and non-cash stock-based compensation expense, prepayment premium on extinguishment of debt and net gain or loss on asset sales and inventory impairment. Adjusted EBITDA is not a measure of net income (loss) or cash flows as determined by GAAP. Adjusted EBITDA is a supplemental non-GAAP financial measure that is used by management and external users of our consolidated financial statements, such as industry analysts, investors, lenders and rating agencies.
Management believes Adjusted EBITDA is necessary because it allows us to evaluate our operating performance and compare the results of operations from period to period without regard to our financing methods or capital structure. We exclude the items listed above from net income (loss) in calculating Adjusted EBITDA because these amounts can vary substantially from company to company within our industry depending upon accounting methods and book values of assets, capital structures and the method by which certain assets were acquired.
Adjusted EBITDA should not be considered an alternative to, or more meaningful than, net income (loss) or cash flows from operating activities as determined in accordance with GAAP or as a primary indicator of our operating performance or liquidity. Certain items excluded from Adjusted EBITDA are significant components of understanding and assessing a company’s financial performance, such as a company’s cost of capital and tax structure. Our Adjusted EBITDA may not be comparable to similarly titled measures of another company because all companies may not calculate Adjusted EBITDA in the same manner.
The following table presents our calculation of Adjusted EBITDA and the reconciliation of Adjusted EBITDA to the GAAP financial measures of net income (loss) and net cash provided by operating activities, respectively.
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (In thousands) | | | | | | | | | | | | | | | | | | | | |
| Unaudited Adjusted EBITDA Reconciliation to Net (Loss) Income: | | | | | | | | | | | |
| Net (loss) income attributable to Matador Resources Company shareholders | | $ | (97,421 | ) | | $ | (679,785 | ) | | $ | 110,771 |
| | $ | 45,094 |
| | $ | (33,261 | ) | |
| Unaudited Adjusted EBITDA Reconciliation to Net Income (Loss): | | | | | | | | | | | |
| Net income (loss) attributable to Matador Resources Company shareholders | | | $ | 274,207 |
| | $ | 125,867 |
| | $ | (97,421 | ) | | $ | (679,785 | ) | | $ | 110,771 |
|
| Net income (loss) attributable to non-controlling interest in subsidiaries | | | 25,557 |
| | 12,140 |
| | 364 |
| | 261 |
| | (17 | ) |
| Net income (loss) | | | 299,764 |
| | 138,007 |
| | (97,057 | ) | | (679,524 | ) | | 110,754 |
|
| Interest expense | | 28,199 |
| | 21,754 |
| | 5,334 |
| | 5,687 |
| | 1,002 |
| | 41,327 |
| | 34,565 |
| | 28,199 |
| | 21,754 |
| | 5,334 |
|
| Total income tax (benefit) provision | | (1,036 | ) | | (147,368 | ) | | 64,375 |
| | 9,697 |
| | (1,430 | ) | | (7,691 | ) | | (8,157 | ) | | (1,036 | ) | | (147,368 | ) | | 64,375 |
|
| Depletion, depreciation and amortization | | 122,048 |
| | 178,847 |
| | 134,737 |
| | 98,395 |
| | 80,454 |
| | 265,142 |
| | 177,502 |
| | 122,048 |
| | 178,847 |
| | 134,737 |
|
| Accretion of asset retirement obligations | | 1,182 |
| | 734 |
| | 504 |
| | 348 |
| | 256 |
| | 1,530 |
| | 1,290 |
| | 1,182 |
| | 734 |
| | 504 |
|
| Full-cost ceiling impairment | | 158,633 |
| | 801,166 |
| | — |
| | 21,229 |
| | 63,475 |
| | — |
| | — |
| | 158,633 |
| | 801,166 |
| | — |
|
| Unrealized loss (gain) on derivatives | | 41,238 |
| | 39,265 |
| | (58,302 | ) | | 7,232 |
| | 4,802 |
| |
| Unrealized (gain) loss on derivatives | | | (65,085 | ) | | (9,715 | ) | | 41,238 |
| | 39,265 |
| | (58,302 | ) |
| Stock-based compensation expense | | 12,362 |
| | 9,450 |
| | 5,524 |
| | 3,897 |
| | 140 |
| | 17,200 |
| | 16,654 |
| | 12,362 |
| | 9,450 |
| | 5,524 |
|
| Net (gain) loss on asset sales and inventory impairment | | (107,277 | ) | | (908 | ) | | — |
| | 192 |
| | 485 |
| |
| Adjusted EBITDA | | $ | 157,928 |
| | $ | 223,155 |
| | $ | 262,943 |
| | $ | 191,771 |
| | $ | 115,923 |
| |
| Net loss (gain) on asset sales and inventory impairment | | | 196 |
| | (23 | ) | | (107,277 | ) | | (908 | ) | | — |
|
| Prepayment premium on extinguishment of debt | | | 31,226 |
| | — |
| | — |
| | — |
| | — |
|
| Consolidated Adjusted EBITDA | | | 583,609 |
| | 350,123 |
| | 158,292 |
| | 223,416 |
| | 262,926 |
|
| Adjusted EBITDA attributable to non-controlling interest in subsidiaries | | | (30,386 | ) | | (14,060 | ) | | (400 | ) | | (278 | ) | | 17 |
|
| Adjusted EBITDA attributable to Matador Resources Company shareholders | | | $ | 553,223 |
| | $ | 336,063 |
| | $ | 157,892 |
| | $ | 223,138 |
| | $ | 262,943 |
|
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| (In thousands) | | | | | | | | | | | | | | | | | | | | |
Unaudited Adjusted EBITDA Reconciliation to Net Cash Provided by
Operating Activities: | | | | | | | | | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 134,086 |
| | $ | 208,535 |
| | $ | 251,481 |
| | $ | 179,470 |
| | $ | 124,228 |
| | $ | 608,523 |
| | $ | 299,125 |
| | $ | 134,086 |
| | $ | 208,535 |
| | $ | 251,481 |
|
| Net change in operating assets and liabilities | | (1,809 | ) | | (8,980 | ) | | 5,978 |
| | 6,210 |
| | (9,307 | ) | | (64,429 | ) | | 25,058 |
| | (1,809 | ) | | (8,980 | ) | | 5,978 |
|
| Interest expense, net of non-cash portion | | 27,051 |
| | 20,902 |
| | 5,334 |
| | 5,687 |
| | 1,002 |
| | 39,970 |
| | 34,097 |
| | 27,051 |
| | 20,902 |
| | 5,334 |
|
| Current income tax (benefit) provision | | (1,036 | ) | | 2,959 |
| | 133 |
| | 404 |
| | — |
| | (455 | ) | | (8,157 | ) | | (1,036 | ) | | 2,959 |
| | 133 |
|
| Net (income) loss attributable to non-controlling interest in subsidiaries | | (364 | ) | | (261 | ) | | 17 |
| | — |
| | — |
| |
| Adjusted EBITDA | | $ | 157,928 |
| | $ | 223,155 |
| | $ | 262,943 |
| | $ | 191,771 |
| | $ | 115,923 |
| |
| Adjusted EBITDA attributable to non-controlling interest in subsidiaries | | | (30,386 | ) | | (14,060 | ) | | (400 | ) | | (278 | ) | | 17 |
|
| Adjusted EBITDA attributable to Matador Resources Company shareholders | | | $ | 553,223 |
| | $ | 336,063 |
| | $ | 157,892 |
| | $ | 223,138 |
| | $ | 262,943 |
|
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes appearing elsewhere in this Annual Report. The following discussion contains “forward-looking statements” that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Some of the key factors whichthat could cause actual results to vary from our expectations include changes in oil or natural gas prices, the timing of planned capital expenditures, availability under our Credit Agreement borrowing base and the San Mateo Credit Facility, uncertainties in estimating proved reserves and forecasting production results, operational factors affecting the commencement or maintenance of producing wells,our oil and natural gas and midstream operations, the condition of the capital markets generally, as well as our ability to access them, the proximity to and capacity of gathering, processing and transportation facilities, availability and integration of acquisitions, uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business, as well as those factors discussed below and elsewhere in this Annual Report, all of which are difficult to predict. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. See “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are an independent energy company founded in July 2003 and engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States, with an emphasis on oil and natural gas shale and other unconventional plays. Our current operations are focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. We also operate in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. Additionally, we
conduct midstream operations, primarily as of February 17, 2017, through our midstream joint venture, San Mateo, in support of our exploration, development and production operations and provide natural gas processing, oil transportation services, oil, natural gas oil and salt water gathering services and salt water disposal services to third parties on a limited basis.parties.
20162018 Operational Highlights
During the year ended December 31, 2016,2018, we completed and began producing oil and natural gas from 4082 gross (35.6(66.8 net) operated and 1559 gross (1.4(7.0 net) non-operated wells in the Delaware Basin.Basin and from one gross (1.0 net) operated and three gross (0.5 net) non-operated Eagle Ford shale wells. We did not conduct any operated drilling and completion activities on our leasehold properties in South Texas or in Northwest Louisiana and East Texas during 2016,2018, although we did participate in the drilling and completion of 15eight gross (2.1(0.2 net) non-operated Haynesville shale wells and two gross (less than 0.1 net) non-operated Eagle Ford shale wells that began producing in 2016.2018.
At January 1, 2016,During 2018, we werecontinued our focus on the exploration, delineation and development of our Delaware Basin acreage in Loving County, Texas and Lea and Eddy Counties, New Mexico. We began 2018 operating threesix drilling rigs in the Delaware Basin in Southeast New Mexico and West Texas, andcontinued to do so through December 31, 2018. In early October 2018, we added a seventh operated these drilling rigs in certain of our various asset areas in the Delaware Basin throughout most of 2016. We contracted a fourth drilling rig in late August 2016 to begin drilling our first salt water disposal well in our Rustler Breaks asset area in Eddy County, New Mexico. After we finished drilling that well, we moved the rig to our Wolf asset areadrilling program on a short-term contract in Loving County,South Texas to drill a third salt water disposal well there. In late November 2016, we electedup to move this fourth drilling rig back10 wells, primarily in the Eagle Ford shale, to our Rustler Breaks asset area to begin drillingtake advantage of higher oil and natural gas wells there. At December 31, 2016prices in South Texas, to conduct at least one exploratory test of the Austin Chalk formation and to validate and to hold by production almost all of our remaining undeveloped Eagle Ford acreage. This rig operated in South Texas throughout the fourth quarter of 2018 and into early 2019. When drilling operations were finalized on the ninth well in early February 22, 2017 we continued2019, this rig was released and was not moved to operate four drilling rigs in the Delaware Basin as we had previously anticipated. One of the Eagle Ford shale wells was completed and turned to sales during the fourth quarter of 2018, and the remaining eight wells, including two rigsone well drilled in our Rustler Breaks asset area, one rigthe Austin Chalk, are expected to be completed and turned to sales late in our Wolf asset area and one rigthe first quarter or early in our Ranger and Arrowhead asset areas in Lea and Eddy Counties, New Mexico. the second quarter of 2019.
The vast majority of our 20162018 capital expenditures of $454.4 million werewas directed to (i) the delineation and development of our leasehold position in the Delaware Basin, to(ii) the development of certain midstream assets to support our operations there, (iii) our participation in non-operated wells drilled and tocompleted in the Delaware Basin and (iv) the acquisition of additional leasehold and mineral interests prospective for the Wolfcamp, Bone Spring and other liquids-rich plays in the Delaware Basin.plays. Our remaining capital expenditures were primarily directed to the installation of pumping units and other facilities on certainbeginning of our Eagle Ford shale wellsshort-term drilling and completion program in South Texas and to our participation in several non-operated wells drilled and completed in the Eagle Ford and Haynesville shales throughout 2016, as noted above.2018.
We increased ourIn September 2018, we announced the BLM Acquisition, pursuant to which we acquired 8,400 gross and net leasehold position significantlyacres in Lea and Eddy Counties, New Mexico for approximately $387 million, or a weighted average cost of approximately $46,000 per net acre. In addition to the BLM Acquisition, we also acquired 21,400 net leasehold and mineral acres in the Delaware Basin during 2016. At2018, and as a result, at December 31, 2016,2018, we held approximately 163,700222,200 gross (94,300(132,000 net) acres in the Permian Basin in Southeast New Mexico and West Texas, primarily in the Delaware Basin, in Lea and Eddy Counties, New Mexico and Loving County, Texas. Between January 1, 2017 and February 22, 2017, we acquired approximately 13,900 gross (8,200 net) leasehold and mineral acres and approximately 1,000 BOE per day of related production from various lessors and other operators, mostly in and around our existing acreage in the Delaware Basin. This brought our total Permian Basin acreage position at February 22, 2017 to 177,600 gross (101,400 net) acres, almost all of which was located in the Delaware Basin.
Our oil production, natural gas production and average daily oil equivalent production during 2016 were the best in the Company’s history. Our average daily oil equivalent production for the year ended December 31, 20162018 was 27,81352,128 BOE per day, including 13,92430,524 Bbl of oil per day and 83.3129.6 MMcf of natural gas per day, an increase of 12%34% as compared to 24,95538,936 BOE per day, including 12,30621,510 Bbl of oil per day and 75.9104.6 MMcf of natural gas per day, for the year ended December 31, 2015.2017. Our average daily oil production in 20162018 of 13,92430,524 Bbl of oil per day increased 13%42%, as compared to an average daily oil production of 12,30621,510 Bbl of oil per day in 2015.2017. This increase in oil production was primarily a result of our ongoing delineation and development drilling activities in the Delaware Basin, which offset declining oil production in the Eagle Ford shale where we have not drilled any new operated wells since the second quarter of 2015.Basin. Our average daily natural gas production of 83.3129.6 MMcf per day for the year ended December 31, 20162018 increased 10%24% from 75.9104.6 MMcf per day for the year ended December 31, 2015.2017. This increase in natural gas production was primarily attributable to increased natural gas production associated with our operationsongoing delineation and development drilling activities in the Delaware Basin and new, non-operated Haynesville shale wells completed and placed on production on our Elm Grove properties in Northwest Louisiana in the latter half of 2015 and into 2016.Basin. Oil production comprised 50%59% of our total production (using a conversion ratio of one Bbl of oil per six Mcf of natural gas) for the year ended December 31, 2016,2018, as compared to 49%55% for the year ended December 31, 2015.2017.
For the year ended December 31, 2016,2018, our oil and natural gas revenues were $291.2$800.7 million, an increase of 5%51% from oil and natural gas revenues of $278.3$528.7 million for the year ended December 31, 2015.2017. Our oil revenues and natural gas revenues increased 3%64% and 8%16% to approximately $209.9$635.6 million and $81.2$165.1 million, respectively, as a result ofcompared to $386.9 million and $141.8 million, respectively, for the year ended December 31, 2017. The increase in oil and natural gas revenues resulted from (i) the increases in oil and natural gas production for the year ended December 31, 20162018 as noted above and (ii) higher weighted average realized oil prices of $57.04 per Bbl in 2018, as compared to $203.4 million and $75.0 million, respectively, for the year ended December 31, 2015. The increase$49.28 per Bbl in both oil and natural gas production in 2016 helped to mitigate the impacts of somewhat2017, offset by lower realized weighted average oil andrealized natural gas prices of $41.19 per Bbl and $2.66$3.49 per Mcf in 2016, respectively,2018, as compared to $45.27 per Bbl and $2.71$3.72 per Mcf in 2015, respectively.2017.
We reported a net lossincome attributable to Matador Resources Company shareholders of approximately $97.4$274.2 million, or $1.07$2.41 per diluted common share, on a GAAP basis for the year ended December 31, 2016,2018, as compared to a net lossincome of $679.8$125.9 million, or $8.34$1.23 per diluted common share, for the year ended December 31, 2015. Our net loss and net loss per diluted common share on a GAAP basis were significantly impacted by full-cost ceiling impairments of $158.6 million and $801.2 million for the years ended December 31, 2016 and 2015, respectively, as a result of substantial declines in oil and natural gas prices throughout 2015 and 2016.2017. Adjusted EBITDA for the year ended
December 31, 20162018 was $157.9$553.2 million, as compared to Adjusted EBITDA of $223.2$336.1 million reported for the year ended December 31, 2015. This decrease in Adjusted EBITDA resulted, in part, from the lower weighted average oil and natural gas
prices realized in 2016, but was primarily attributable to lower realized hedging revenues of $9.3 million in 2016, as compared to $77.1 million in 2015.2017. Adjusted EBITDA is a non-GAAP financial measure. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our net income (loss) and net cash provided by operating activities, see “Selected Financial Data — Non-GAAP Financial Measures.”
At December 31, 2016,2018, our estimated total proved oil and natural gas reserves were 105.8215.3 million BOE, an all-time high for the Company, including 57.0123.4 million Bbl of oil and 292.6551.5 Bcf of natural gas, with a Standardized Measure of $575.0 million$2.25 billion and a PV-10 of $581.5 million.$2.58 billion. At December 31, 2015,2017, our estimated total proved oil and natural gas reserves were 85.1152.8 million BOE, including 45.686.7 million Bbl of oil and 236.9396.2 Bcf of natural gas, with a Standardized Measure of $529.2 million$1.26 billion and a PV-10 of $541.6 million.$1.33 billion. Our estimated total proved reserves of 105.8215.3 million BOE at December 31, 20162018 represented a 24%41% year-over-year increase, as compared to 85.1152.8 million BOE at December 31, 2015.2017. Our estimated proved oil reserves of 57.0123.4 million Bbl at December 31, 20162018 increased 25%42%, as compared to 45.686.7 million Bbl at December 31, 2015.2017. Our proved oil and natural gas reserves in the Delaware Basin increased 68%48% to 79.4191.5 million BOE at December 31, 2016,2018, as compared to 47.1129.0 million BOE at December 31, 2015,2017, primarily as a result of our ongoing delineation and development operations in the Delaware Basin. At December 31, 2016,2018, approximately 75%89% of our total proved oil and natural gas reserves were attributable to our properties in the Delaware Basin. Our proved oil reserves in the Delaware Basin increased 49%48% to 46.9114.8 million Bbl at December 31, 2016,2018, as compared to 31.477.5 million Bbl at December 31, 2015.2017. Proved oil reserves comprised 54%57% of our total proved reserves at both December 31, 2016 and2018, as compared to 57% at December 31, 2015.2017. These reserves estimates were based on evaluations prepared by our engineering staff and have been audited for their reasonableness and conformance with SEC guidelines by Netherland, Sewell & Associates, Inc., independent reservoir engineers. Standardized Measure represents the present value of estimated future net cash flows from proved reserves, less estimated future development, production, plugging and abandonment costs and income tax expenses, discounted at 10% per annum to reflect the timing of future cash flows. Standardized Measure is not an estimate of the fair market value of our properties. PV-10 is a non-GAAP financial measure. For a reconciliation of PV-10 to Standardized Measure, see “Business — Estimated Proved Reserves.”
2017 Midstream Joint VentureHighlights
On February 17, 2017, we announcedWe made significant progress in our midstream operations during 2018, including, among other accomplishments, (i) the formationcompletion and successful startup of San Mateo,the expansion of the Black River Processing Plant to a designed inlet capacity of 260 MMcf of natural gas per day, (ii) the completion of an NGL pipeline connection at the Black River Processing Plant to the NGL pipeline owned by EPIC Y-Grade Pipeline LP, (iii) the ongoing buildout of oil, natural gas and water pipeline systems in both the Rustler Breaks and Wolf asset areas, (iv) the entrance into a strategic joint venturerelationship with a subsidiary of Five PointPlains to operategather and expand our Delaware Midstream Assets. We received $171.5 milliontransport crude oil in connection with the formation ofRustler Breaks asset area, (v) placing into service crude oil gathering and transportation systems in the Joint Venture and may earn up to an additional $73.5 million in performance incentives over the next five years. We continue to operate the Delaware Midstream Assets and retain operational control of the Joint Venture. The Company and Five Point own 51% and 49% of the Joint Venture, respectively. San Mateo will continue to provide firm capacity service to us at market rates, while also being a midstream service provider to third parties in and around our Wolf and Rustler Breaks asset areas.areas, (vi) entering into long-term agreements with significant producers in Eddy County, New Mexico relating to the gathering and disposal of one such producer’s salt water and the gathering and processing of another such producer’s natural gas production and (vii) the drilling and completion of additional commercial salt water disposal wells and the construction of associated commercial facilities in the Rustler Breaks asset area, significantly increasing San Mateo’s salt water disposal capacity.
20172019 Capital Expenditure Budget
We expect that development of our Delaware Basin assets will be the primary focus of our operations and capital expenditures in 2017.2019. We plan to operate foursix contracted drilling rigs drilling primarily oil and natural gas wells in the Delaware Basin during the first quarterthroughout most of 2017 and expect to add a fifth drilling rig in the Delaware Basin in the second quarter of 2017.2019. Our 20172019 estimated capital expenditure budget consists of $370$640 to $390$680 million for drilling, completions, facilitiescompleting and infrastructureequipping wells (“D/C/E capital expenditures”) and $56$55 to $64$75 million for midstream capital expenditures, which representsprimarily reflects our 51%proportionate share of anSan Mateo and San Mateo II’s estimated 2017combined 2019 capital expenditure budgetexpenditures of $110$180 to $125$220 million and also accounts for portions of the $50 million capital carry that Five Point is expected to provide to us in conjunction with the formation of San Mateo.Mateo II. Substantially all of our 20172019 estimated capital expenditures will be allocated to (i) the further delineation and development of our growing leasehold position, and(ii) the continued construction of midstream assets and (iii) our participation in certain non-operated well opportunities in the Delaware Basin, with the exception of amounts incurred in 2019 to conclude our South Texas drilling program and amounts allocated to limited operations in the Eagle Fordour South Texas and Haynesville shalesshale positions to maintain and extend leases and to participate in certain non-operated well opportunities. Our 20172019 Delaware Basin drilling program willis expected to focus on the continued development of the WolfRustler Breaks and Rustler BreaksWolf asset areas and the further delineation and development of the Antelope Ridge, Jackson Trust, Ranger/Arrowhead and Twin Lakes asset areas although we do anticipate continuing to delineate previously untested zonesas well as the federal leasehold acreage in the Wolfwestern portion of the Antelope Ridge asset area acquired in the BLM Acquisition.
As noted above, we were operating a seventh operated drilling rig at the beginning of 2019 to conduct the short-term drilling program in South Texas, primarily in the Eagle Ford shale. When we concluded this short-term program in February 2019, we released this drilling rig and Rustler Breaks asset areas during 2017.did not move this rig to the Delaware Basin as we had previously anticipated. To further narrow any potential difference between our 2019 capital expenditures and operating cash flows, we may divest portions of our non-core assets, particularly in the Haynesville shale and in our South Texas position, as well as to consider monetizing other
We
assets, such as certain mineral, royalty and non-core midstream interests, as value-creating opportunities arise. In addition, we intend to continue acquiringevaluating the opportunistic acquisition of acreage and mineral interests, principally in the Delaware Basin, during 2017.2019. These monetizations, divestitures and expenditures are opportunity-specific, and purchase price multiples and per-acre prices can vary significantly based on the asset or prospect. As a result, it is difficult to estimate these 20172019 monetizations, divestitures and capital expenditures with any degree of certainty; therefore, we have not provided estimated proceeds related to monetizations or divestitures or estimated capital expenditures related to acreage and mineral acquisitions for 2017.2019.
At December 31, 2016,2018, we had $212.9$64.5 million in cash (excluding restricted cash) and $399.2$457.0 million in undrawn borrowing capacity under our Credit Agreement (after giving effect to outstanding letters of credit). As a result, we expect to fund our capital expenditures for 20172019 through a combination of cash on hand, operating cash flows, proceeds we receivedperformance incentives in connection with the formation of San Mateo that were earned in the Joint Venture andfirst quarter of 2019, borrowings under our Credit Agreement (assuming availability under our borrowing base). and borrowings under the San Mateo Credit Facility. In addition, in 2019, we expect Five Point to provide a portion of the $50 million capital carry in connection with the formation of San Mateo II. We may also consider funding a portion of our 20172019 capital expenditures through borrowings under additional credit arrangements, the sale or joint venture of midstream assets or oil and natural gas producing assets or acreage,leasehold interests, particularly in our non-core asset areas, the sale or joint venture of oil and natural gas mineral interests, as well as potential issuances of equity, debt or convertible securities, none of which may be available on satisfactory terms or at all. The aggregate amount of capital we expend may fluctuate materially based on market conditions,
the actual costs to drill, complete and place on production operated or non-operated wells, our drilling results, the actual costs of our midstream activities, other opportunities that may become available to us and our ability to obtain capital.
Revenues
Our revenues are derived primarily from the sale of oil, natural gas and natural gas liquidsNGL production. Our revenues may vary significantly from period to period as a result of changes in volumes of production sold or changes in oil, natural gas or natural gas liquidsNGL prices.
The following table summarizes our revenues and production data for the periods indicated.
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Operating Data: | | | | | | | | | | | | |
Revenues (in thousands): (1) | | | | | | | | | | | | |
| Oil | | $ | 209,908 |
| | $ | 203,355 |
| | $ | 290,026 |
| | $ | 635,554 |
| | $ | 386,865 |
| | $ | 209,908 |
|
| Natural gas | | 81,248 |
| | 74,985 |
| | 77,686 |
| | 165,146 |
| | 141,819 |
| | 81,248 |
|
| Total oil and natural gas revenues | | 291,156 |
| | 278,340 |
| | 367,712 |
| | 800,700 |
| | 528,684 |
| | 291,156 |
|
| Third-party midstream services revenues | | 5,218 |
| | 1,864 |
| | 1,213 |
| | 21,920 |
| | 10,198 |
| | 5,218 |
|
| Realized gain on derivatives | | 9,286 |
| | 77,094 |
| | 5,022 |
| |
| Unrealized (loss) gain on derivatives | | (41,238 | ) | | (39,265 | ) | | 58,302 |
| |
| Sales of purchased natural gas | | | 7,071 |
| | — |
| | — |
|
| Lease bonus - mineral acreage | | | 2,489 |
| | — |
| | — |
|
| Realized gain (loss) on derivatives | | | 2,334 |
| | (4,321 | ) | | 9,286 |
|
| Unrealized gain (loss) on derivatives | | | 65,085 |
| | 9,715 |
| | (41,238 | ) |
| Total revenues | | $ | 264,422 |
| | $ | 318,033 |
| | $ | 432,249 |
| | $ | 899,599 |
| | $ | 544,276 |
| | $ | 264,422 |
|
Net Production Volumes: (1) | | | | | | | | | | | | |
| Oil (MBbl) | | 5,096 |
| | 4,492 |
| | 3,320 |
| | 11,141 |
| | 7,851 |
| | 5,096 |
|
| Natural gas (Bcf) | | 30.5 |
| | 27.7 |
| | 15.3 |
| | 47.3 |
| | 38.2 |
| | 30.5 |
|
Total oil equivalent (MBOE) (2) | | 10,180 |
| | 9,109 |
| | 5,870 |
| | 19,026 |
| | 14,212 |
| | 10,180 |
|
Average daily production (BOE/d) (2) | | 27,813 |
| | 24,955 |
| | 16,082 |
| | 52,128 |
| | 38,936 |
| | 27,813 |
|
| Average Sales Prices: | | | | | | | | | | | | |
| Oil, without realized derivatives (per Bbl) | | $ | 41.19 |
| | $ | 45.27 |
| | $ | 87.37 |
| | $ | 57.04 |
| | $ | 49.28 |
| | $ | 41.19 |
|
| Oil, with realized derivatives (per Bbl) | | $ | 42.34 |
| | $ | 59.13 |
| | $ | 88.94 |
| | $ | 57.38 |
| | $ | 48.81 |
| | $ | 42.34 |
|
| Natural gas, without realized derivatives (per Mcf) | | $ | 2.66 |
| | $ | 2.71 |
| | $ | 5.08 |
| | $ | 3.49 |
| | $ | 3.72 |
| | $ | 2.66 |
|
| Natural gas, with realized derivatives (per Mcf) | | $ | 2.78 |
| | $ | 3.24 |
| | $ | 5.06 |
| | $ | 3.46 |
| | $ | 3.70 |
| | $ | 2.78 |
|
________________
| |
| (1) | We report our production volumes in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Revenues associated with natural gas liquidsNGLs are included with our natural gas revenues. |
| |
| (2) | Estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas. |
Year Ended December 31, 20162018 as Compared to Year Ended December 31, 20152017
Oil and natural gas revenues. Our oil and natural gas revenues increased $12.8 million to $291.2$272.0 million, or an increase of 5%51%, for the year ended December 31, 2016, as compared to $278.3$800.7 million for the year ended December 31, 2015. Our oil revenues increased $6.6 million, or an increase of 3%,2018, as compared to $209.9$528.7 million for the year ended December 31, 2016, as compared2017. Our oil revenues increased $248.7 million, or 64%, to $203.4$635.6 million for the year ended December 31, 2015.2018, as compared to $386.9 million for the year ended December 31, 2017. The increase in oil revenues resulted from (i) the 13%42% increase in our oil production to 5.111.1 million Bbl of oil for the year ended December 31, 2016,2018, or about 13,92430,524 Bbl of oil per day, as compared to 4.57.9 million Bbl of oil, or about 12,30621,510 Bbl of oil per day, for the year ended December 31, 2015. This increased oil production was primarily2017, and (ii) a result of our ongoing delineation and development drilling in the Delaware Basin, which offset declining oil production in the Eagle Ford shale, where we have not drilled any new operated wells since the second quarter of 2015. The increase in oil revenues was partially impacted by a lowerhigher weighted average oil price realized for the year ended December 31, 20162018 of $41.19$57.04 per Bbl, as compared to $45.27$49.28 per Bbl realized for the year ended December 31, 2015.2017. This increased oil production was primarily attributable to our ongoing delineation and development drilling activities in the Delaware Basin. Our natural gas revenues increased $6.3by $23.3 million, or an increase of 8%16%, to $81.2$165.1 million for the year ended December 31, 2016,2018, as compared to $75.0$141.8 million for the year ended December 31, 2015.2017. The increase in natural gas revenues resulted from the 10%24% increase in our natural gas production to 30.547.3 Bcf for the year ended December 31, 2016,2018, as compared to 27.738.2 Bcf for the year ended December 31, 2015.2017, but was partially offset by a slightly lower weighted average natural gas price realized for the year ended December 31, 2018 of $3.49 per Mcf, as compared to $3.72 per Mcf realized for the year ended December 31, 2017. The increasedincrease in natural gas production was primarily attributable to our ongoing delineation and development drilling activities in the Delaware Basin, which offset declining natural gas production in the Eagle Ford and Haynesville shales where we have significantly reduced our activity since late 2014 and early 2015. The increase in natural gas revenues was partially impacted by a lower weighted average natural gas price realized for the year ended December 31, 2016 of $2.66 per Mcf, as compared to $2.71 per Mcf realized for the year ended December 31, 2015.Basin.
Third-party midstream services revenues. During the third quarter of 2016, our midstream operations became a reportable business segment under GAAP. Our third-party midstream services revenues were previously included in other income.increased $11.7 million, or 115%, to $21.9 million for the year ended December 31, 2018, as compared to $10.2 million for the year ended December 31, 2017. Third-party midstream services revenues are primarilyonly those revenues from midstream operations related to third parties, including working interest owners in our operated wells; all midstream serviceswells. This increase was primarily attributable to the significant increase in third-party salt water gathering and disposal revenues associated with our production are eliminated in consolidation. Our third-party midstream services revenues increased to $5.2approximately $10.5 million or an increase of almost three-fold, for
during the year ended December 31, 2016,2018, as compared to $1.9approximately $2.1 million for the year ended December 31, 2015.2017, resulting from an increase in salt water
gathering and disposal at our facilities in the Rustler Breaks and Wolf asset areas in 2018. The remaining increase in our third-party midstream services revenues was primarily attributable to an increase in natural gas gathering and processing revenues to approximately $10.7 million for the year ended December 31, 2018, as compared to $7.9 million for the year ended December 31, 2017, resulting from an increase in natural gas processing at the Black River Processing Plant. An expansion of the Black River Processing Plant from a designed capacity of 60 MMcf per day to 260 MMcf per day was completed and placed into service in early 2018.
Sales of purchased natural gas. Our sales of purchased natural gas were $7.1 million for the year ended December 31, 2018. We had no sales of purchased natural gas for the year ended December 31, 2017. Sales of purchased natural gas primarily reflect those natural gas purchase transactions that we may periodically enter into with third parties whereby we process the third party’s natural gas at the Black River Processing Plant and then purchase, and subsequently sell, the residue gas and NGLs to other purchasers. These revenues, and the expenses related to these transactions included in “Purchased natural gas,” are presented on a gross basis in our consolidated statement of operations.
Lease bonus - mineral acreage. Our lease bonus - mineral acreage revenues were $2.5 million for the year ended December 31, 2018. We had no lease bonus revenues in 2017. Lease bonus - mineral acreage revenues reflect the payments we receive to enter into or extend leases to third-party lessees to develop the oil and natural gas attributable to certain of our mineral interests.
Realized gain (loss) on derivatives. Our realized net gain on derivatives was $2.3 million for the year ended December 31, 2018, as compared to a net loss of approximately $4.3 million for the year ended December 31, 2017. We realized a net gain of $29.5 million from our oil basis swap contracts for the year ended December 31, 2018, resulting from oil basis prices that were lower than the swap prices on certain of our oil basis swap contracts. This net gain was significantly offset by net losses of $25.7 million and $1.4 million from our oil and natural gas costless collar contracts, respectively, for the year ended December 31, 2018, resulting from oil and natural gas prices that were above the short call/ceiling prices of certain of our oil and natural gas costless collar contracts. We realized a net loss of $3.7 million and $0.6 million from our oil and natural gas derivative contracts, respectively, for the year ended December 31, 2017, resulting from oil and natural gas prices that were above the ceiling prices of certain of our oil and natural gas costless collar contracts. We realized an average gain on our oil derivatives of approximately $0.34 per Bbl of oil produced during the year ended December 31, 2018, as compared to an average loss of $0.47 per Bbl of oil produced during the year ended December 31, 2017. Our total oil volumes hedged for the year ended December 31, 2018 represented 49% of our total oil production, as compared to 59% of our total oil production for the year ended December 31, 2017. We realized an average loss on our natural gas and NGL derivatives of approximately $0.03 per Mcf produced during the year ended December 31, 2018, as compared to an average loss of approximately $0.02 per Mcf produced for the year ended December 31, 2017. Our total natural gas volumes hedged for the year ended December 31, 2018 represented 36% of our total natural gas production, as compared to 63% of our total natural gas production for the year ended December 31, 2017.
Unrealized gain (loss) on derivatives. Our unrealized gain on derivatives was approximately $65.1 million for the year ended December 31, 2018, as compared to an unrealized gain of $9.7 million for the year ended December 31, 2017. During the year ended December 31, 2018, the aggregate net fair value of our open oil and natural gas derivatives and oil basis swap contracts increased from a net liability of approximately $15.2 million to a net asset of approximately $49.8 million, resulting in an unrealized gain on derivatives of approximately $65.1 million for the year ended December 31, 2018. During the year ended December 31, 2017, the aggregate net fair value of our open oil and natural gas derivative contracts increased from a net liability of approximately $25.0 million to a net liability of approximately $15.2 million, resulting in an unrealized gain on derivatives of approximately $9.7 million for the year ended December 31, 2017.
Year Ended December 31, 2017 as Compared to Year Ended December 31, 2016
Oil and natural gas revenues. Our oil and natural gas revenues increased $237.5 million, or 82%, to $528.7 million for the year ended December 31, 2017, as compared to $291.2 million for the year ended December 31, 2016. Our oil revenues increased $177.0 million, or 84%, to $386.9 million for the year ended December 31, 2017, as compared to $209.9 million for the year ended December 31, 2016. The increase in oil revenues resulted from (i) a higher weighted average oil price realized for the year ended December 31, 2017 of $49.28 per Bbl, as compared to $41.19 per Bbl realized for the year ended December 31, 2016, and (ii) the 54% increase in our oil production to 7.9 million Bbl of oil for the year ended December 31, 2017, or about 21,510 Bbl of oil per day, as compared to 5.1 million Bbl of oil, or about 13,924 Bbl of oil per day, for the year ended December 31, 2016. This increased oil production was primarily attributable to our ongoing delineation and development drilling activities in the Delaware Basin, but also to production from the five operated wells we completed and turned to sales in the Eagle Ford shale late in the second quarter and early in the third quarter of 2017. Our natural gas revenues increased by $60.6 million, or 75%, to $141.8 million for the year ended December 31, 2017, as compared to $81.2 million for the year ended December 31, 2016. The increase in natural gas revenues resulted from (i) a higher weighted average natural gas price
realized for the year ended December 31, 2017 of $3.72 per Mcf, as compared to $2.66 per Mcf realized for the year ended December 31, 2016, and (ii) the 25% increase in our natural gas production to 38.2 Bcf for the year ended December 31, 2017, as compared to 30.5 Bcf for the year ended December 31, 2016. The increase in natural gas production was primarily attributable to our ongoing delineation and development drilling activities in the Delaware Basin.
Third-party midstream services revenues. Our third-party midstream services revenues increased $5.0 million, or 95%, to $10.2 million for the year ended December 31, 2017, as compared to $5.2 million for the year ended December 31, 2016. Third-party midstream services revenues are those revenues from midstream operations related to third parties, including working interest owners in our operated wells. This increase was primarily attributable to a significant increase in natural gas gathering and processing revenues to approximately $7.9 million for the year ended December 31, 2017, as compared to $3.6 million for the year ended December 31, 2016, due to (i) the Black River Processing Plant being placed into service in the second half of 2016 and operating for the full year in 2017 and (ii) increased natural gas production in our Rustler Breaks and Wolf asset areas. The remaining increase in our third-party midstream services revenues was primarily attributable to the increase in third-party salt water disposal revenuerevenues to approximately $2.1 million during the year ended December 31, 2017, as compared to approximately $1.6 million for the year ended December 31, 2016, as comparedprimarily due to $0.2an increase in salt water gathering and disposal at our facilities in the Rustler Breaks and Wolf asset areas in 2017.
Realized (loss) gain on derivatives. Our realized net loss on derivatives was $4.3 million for the year ended December 31, 2015, due to increased salt water disposal at our facilities in the Wolf asset area in 2016. The remaining increase was primarily attributable to third-party natural gas gathering and processing fees of $3.6 million for the year ended December 31, 2016,2017, as compared to $1.7 million for the year ended December 31, 2015, including natural gas processing at the Black River Processing Plant, which began operating in August 2016.
Realized gain on derivatives. Our realizeda net gain on derivatives wasof approximately $9.3 million for the year ended December 31, 2016, as compared to a2016. We realized net gainlosses of $77.1$3.7 million and $0.6 million from our oil and natural gas costless collar contracts, respectively, for the year ended December 31, 2015.2017, resulting from oil and natural gas prices that were above the ceiling prices of certain of our oil and natural gas costless collar contracts. We realized net gains of $5.9 million and $3.4 million from our oil and natural gas derivative contracts, respectively, for the year ended December 31, 2016, resulting from oil and natural gas prices that were below the floor prices of certain of our oil and natural gas costless collar contracts. Our realized net gain on derivatives was $77.1 million for the year ended December 31, 2015. We realized net gains of $62.3 million, $12.7 million and $2.2 million from our oil, natural gas and natural gas liquid (“NGL”) derivative contracts, respectively, for the year ended December 31, 2015 resulting from oil and natural gas prices being below the floor prices of most of our oil and natural gas costless collar contracts and NGL prices being below the fixed prices of all of our swap contracts. We realized an average gainloss on our oil derivatives of approximately $2.29$0.47 per Bbl hedged on all of our open oil costless collar contractsproduced during the year ended December 31, 2016,2017, as compared to an average gain of $22.89$1.15 per Bbl hedged forproduced during the year ended December 31, 2015.2016. Our total oil volumes hedged for the year ended December 31, 2016 were also 6% lower2017 represented 59% of our total oil production, as compared to 50% of our total oil production for the year ended December 31, 2015.2016. We realized an average gainloss on our natural gas and NGL derivatives of approximately $0.26$0.02 per MMBtu hedged on all of our open natural gas costless collar contractsMcf produced during the year ended December 31, 2016,2017, as compared to an average gain of approximately $0.73$0.12 per MMBtu hedged on all of our open natural gas costless collar contracts duringMcf produced for the year ended December 31, 2015.2016. Our total natural gas volumes hedged for the year ended December 31, 2016 were also 23% lower than the2017 represented 63% of our total natural gas volumes hedgedproduction, as compared to 44% of our total natural gas production for the year ended December 31, 2015.2016.
Unrealized gain (loss) on derivatives. Our unrealized net lossgain on derivatives was $41.2approximately $9.7 million for the year ended December 31, 2016,2017, as compared to an unrealized net loss of $39.3 million for the year ended December 31, 2015. During the year ended December 31, 2016, the net fair value of our open oil and natural gas derivatives contracts decreased to a net liability of approximately $25.0 million from a net asset of $16.3 million for the year ended December 31, 2015, resulting in an unrealized net loss on derivatives of $41.2 million for the year ended December 31, 2016. During the year ended December 31, 2017, the aggregate net fair value of our open oil and natural gas derivatives contracts increased from a net liability of approximately $25.0 million to a net liability of approximately $15.2 million, resulting in an unrealized gain on derivatives of approximately $9.7 million for the year ended December 31, 2017. During the year ended December 31, 2016, the aggregate net fair value of our open oil and natural gas derivative contracts decreased $32.2from a net asset of approximately $16.3 million and $9.1to a net liability of approximately $25.0 million, respectively, due to the increaseresulting in the underlying oil and natural gas futures prices at December 31, 2016, as well as realized gains from oil and natural gas derivative contracts settled duringan unrealized loss on derivatives of approximately $41.2 million for the year ended December 31, 2016.
Year Ended December 31, 2015 as Compared to Year Ended December 31, 2014
Oil and natural gas revenues. Our oil and natural gas revenues decreased $89.4 million to $278.3 million, or a decrease of 24%, for the year ended December 31, 2015, as compared to $367.7 million for the year ended December 31, 2014. Our oil revenues decreased $86.7 million, a decrease of 30%, to $203.4 million for the year ended December 31, 2015, as compared to $290.0 million for the year ended December 31, 2014. The decrease in oil revenues resulted from a significantly lower weighted average oil price realized for the year ended December 31, 2015 of $45.27 per Bbl, as compared to $87.37 per Bbl realized for the year ended December 31, 2014. The lower weighted average oil price was partially mitigated by the 35% increase in our oil production to 4.5 million Bbl of oil for the year ended December 31, 2015, or about 12,306 Bbl of oil per day, as compared to just over 3.3 million Bbl of oil, or about 9,095 Bbl of oil per day, for the year ended December 31, 2014. This increased oil production was primarily a result of newly drilled and completed wells in the Delaware Basin, as well as from newly drilled and completed wells in the Eagle Ford shale in early 2015. Our natural gas revenues decreased $2.7 million, or a decrease of 3%, to $75.0 million for the year ended December 31, 2015, as compared to $77.7 million for the year ended December 31, 2014. The decrease in natural gas revenues resulted from a lower weighted average natural gas price realized for the year ended December 31, 2015 of $2.71 per Mcf, as compared to $5.08 per Mcf realized for the year ended December 31, 2014. The lower weighted average natural gas price was partially mitigated by the 81% increase in our natural gas production to 27.7 Bcf for the year ended December 31, 2015, as compared to 15.3 Bcf for the year ended December 31, 2014. The increased natural gas production was primarily attributable to new, non-operated Haynesville shale wells completed and placed on production on our Elm Grove properties in Northwest Louisiana during the latter half of 2014 and into 2015, but also included increased natural gas production associated with our operations in the Delaware Basin and the Eagle Ford shale.
Third-party midstream services revenues. Our third-party midstream services revenues increased to $1.9 million, or an increase of 54%, for the year ended December 31, 2015, as compared to $1.2 million for the December 31, 2014. The increase was primarily attributable to third-party oil, natural gas and salt water gathering and salt water disposal fees in our Wolf asset area.
Realized gain (loss) on derivatives. Our realized net gain on derivatives was $77.1 million for the year ended December 31, 2015, as compared to a realized net gain of $5.0 million for the year ended December 31, 2014. We realized net gains of $62.3 million, $12.7 million and $2.2 million from our oil, natural gas and NGL derivative contracts, respectively, for the year ended December 31, 2015 resulting from oil and natural gas prices being below the floor prices of most of our costless collar contracts and NGL prices being below the fixed prices of all of our swap contracts. Our realized net gain on derivatives was $5.0 million for the year ended December 31, 2014. We realized a net gain from our oil derivative contracts of approximately $5.2 million and a net gain of $0.5 million from our NGL derivative contracts for the year ended December 31, 2014 due to oil prices being below the floor prices of some of our oil costless collar contracts and NGL prices being below the fixed prices of some of our swap contracts, respectively, especially during the latter part of 2014. These gains were partially offset by a net loss of $0.7 million on our natural gas derivative contracts, due to natural gas prices being in excess of the ceiling prices of our natural gas costless collar contracts, especially in the early months of 2014. We realized an average gain of approximately $22.89 per Bbl hedged on all of our open oil costless collar contracts during the year ended December 31, 2015, as compared to an average gain of $2.00 per Bbl hedged for the year ended December 31, 2014. Our oil volumes hedged for the year ended December 31, 2015 were also 5% higher as compared to the year ended December 31, 2014. We realized an average gain of approximately $0.73 per MMBtu hedged on all of our open natural gas costless collar contracts during the year ended December 31, 2015, as compared to an average loss of approximately $0.06 per MMBtu hedged on all of our open natural gas costless collar contracts during the year ended December 31, 2014. Our total natural gas volumes hedged for the year ended December 31, 2015 were also 38% higher than the total natural gas volumes hedged for the year ended December 31, 2014.
Unrealized gain (loss) on derivatives. Our unrealized net loss on derivatives was approximately $39.3 million for the year ended December 31, 2015, as compared to an unrealized net gain of approximately $58.3 million for the year ended December 31, 2014. During the year ended December 31, 2015, the net fair value of our open oil, natural gas and NGL derivatives contracts decreased to approximately $16.3 million from $55.5 million for the year ended December 31, 2014, resulting in an unrealized net loss on derivatives of approximately $39.3 million for the year ended December 31, 2015. During the year ended December 31, 2015, the net fair value of our open oil, natural gas and NGL derivative contracts decreased by $31.9 million, $5.4 million and $1.9 million, respectively, due primarily to the realized gains from oil, natural gas and NGL derivative contracts settled during the year ended December 31, 2015.
Expenses
The following table summarizes our operating expenses and other income (expense) for the periods indicated. | | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| (In thousands, except expenses per BOE) | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
Production taxes, transportation and processing (1) | | $ | 43,046 |
| | $ | 35,650 |
| | $ | 33,172 |
| | $ | 76,138 |
| | $ | 58,275 |
| | $ | 43,046 |
|
Lease operating (2) | | 56,202 |
| | 54,704 |
| | 49,945 |
| | 92,966 |
| | 67,313 |
| | 56,202 |
|
| Plant and other midstream services operating | | 5,389 |
| | 3,489 |
| | 1,408 |
| | 24,609 |
| | 13,039 |
| | 5,389 |
|
| Purchased natural gas | | | 6,635 |
| | — |
| | — |
|
| Depletion, depreciation and amortization | | 122,048 |
| | 178,847 |
| | 134,737 |
| | 265,142 |
| | 177,502 |
| | 122,048 |
|
| Accretion of asset retirement obligations | | 1,182 |
| | 734 |
| | 504 |
| | 1,530 |
| | 1,290 |
| | 1,182 |
|
| Full-cost ceiling impairment | | 158,633 |
| | 801,166 |
| | — |
| | — |
| | — |
| | 158,633 |
|
| General and administrative | | 55,089 |
| | 50,105 |
| | 32,152 |
| | 69,308 |
| | 66,016 |
| | 55,089 |
|
| Total expenses | | 441,589 |
| | 1,124,695 |
| | 251,918 |
| | 536,328 |
| | 383,435 |
| | 441,589 |
|
| Operating (loss) income | | (177,167 | ) | | (806,662 | ) | | 180,331 |
| |
| Operating income (loss) | | | 363,271 |
| | 160,841 |
| | (177,167 | ) |
| Other income (expense): | | | | | | | | | | | | |
| Net gain on asset sales and inventory impairment | | 107,277 |
| | 908 |
| | — |
| |
| Net (loss) gain on asset sales and inventory impairment | | | (196 | ) | | 23 |
| | 107,277 |
|
| Interest expense | | (28,199 | ) | | (21,754 | ) | | (5,334 | ) | | (41,327 | ) | | (34,565 | ) | | (28,199 | ) |
Other (expense) income(3) | | (4 | ) | | 616 |
| | 132 |
| |
| Total other income (expense) | | 79,074 |
| | (20,230 | ) | | (5,202 | ) | |
| (Loss) income before income taxes | | (98,093 | ) | | (826,892 | ) | | 175,129 |
| |
| Total income tax (benefit) provision | | (1,036 | ) | | (147,368 | ) | | 64,375 |
| |
| Net (income) loss attributable to non-controlling interest in subsidiaries | | (364 | ) | | (261 | ) | | 17 |
| |
| Net (loss) income attributable to Matador Resources Company shareholders | | $ | (97,421 | ) | | $ | (679,785 | ) | | $ | 110,771 |
| |
| Prepayment premium on extinguishment of debt | | | (31,226 | ) | | — |
| | — |
|
| Other income (expense) | | | 1,551 |
| | 3,551 |
| | (4 | ) |
| Total other (expense) income | | | (71,198 | ) | | (30,991 | ) | | 79,074 |
|
| Income (loss) before income taxes | | | 292,073 |
| | 129,850 |
| | (98,093 | ) |
| Total income tax benefit | | | (7,691 | ) | | (8,157 | ) | | (1,036 | ) |
| Net income attributable to non-controlling interest in subsidiaries | | | (25,557 | ) | | (12,140 | ) | | (364 | ) |
| Net income (loss) attributable to Matador Resources Company shareholders | | | $ | 274,207 |
| | $ | 125,867 |
| | $ | (97,421 | ) |
| Expenses per BOE: | | | | | | | | | | | | |
Production taxes, transportation and processing (1) | | $ | 4.23 |
| | $ | 3.91 |
| | $ | 5.65 |
| |
Lease operating (2) | | $ | 5.52 |
| | $ | 6.01 |
| | $ | 8.51 |
| |
| Production taxes, transportation and processing | | | $ | 4.00 |
| | $ | 4.10 |
| | $ | 4.23 |
|
| Lease operating | | | $ | 4.89 |
| | $ | 4.74 |
| | $ | 5.52 |
|
| Plant and other midstream services operating | | $ | 0.53 |
| | $ | 0.38 |
| | $ | 0.24 |
| | $ | 1.29 |
| | $ | 0.92 |
| | $ | 0.53 |
|
| Depletion, depreciation and amortization | | $ | 11.99 |
| | $ | 19.63 |
| | $ | 22.95 |
| | $ | 13.94 |
| | $ | 12.49 |
| | $ | 11.99 |
|
| General and administrative | | $ | 5.41 |
| | $ | 5.50 |
| | $ | 5.48 |
| | $ | 3.64 |
| | $ | 4.65 |
| | $ | 5.41 |
|
________________
| |
(1) | $0.1 million, or $0.01 per BOE, was reclassified to third-party midstream revenues for the year ended December 31, 2015, due to our midstream business becoming a reportable segment in the third quarter of 2016. There was no such reclassification made in 2014. |
| |
(2) | $3.5 million, or $0.38 per BOE, and $1.4 million, or $0.24 per BOE, were reclassified to plant and other midstream services operating expenses for the years ended December 31, 2015 and 2014, respectively, due to our midstream business becoming a reportable segment in the third quarter of 2016. |
| |
(3) | $1.7 million and $1.2 million were reclassified to midstream services revenues for the years ended December 31, 2015 and 2014, respectively, due to our midstream business becoming a reportable segment in the third quarter of 2016. |
Year Ended December 31, 20162018 as Compared to Year Ended December 31, 20152017
Production taxes, transportation and processing. Our production taxes, transportation and processing expenses increased $7.4by approximately $17.9 million, or 31%, to $43.0 million, an increase of 21%, for the year ended December 31, 2016, as compared to $35.7$76.1 million for the year ended December 31, 2015. On a unit-of-production basis, our production taxes, transportation and processing expenses increased 8%2018, as compared to $4.23 per BOE$58.3 million for the year ended December 31, 2016, as compared to $3.91 per BOE for the year ended December 31, 2015.2017. The increase in production taxes, transportation and processing expenses on an absolute basis was primarily attributable to higher transportation and processing expenses of $26.5the $25.0 million increase in our production taxes to $58.0 million for the year ended December 31, 2016,2018, as compared to transportation and processing expenses of $22.4$33.0 million for the year ended December 31, 2015. This increase of $4.12017, resulting from the $272.0 million was primarily due to the increase in natural gas production in the Delaware Basin as a percentage of our total natural gas production for the year ended December 31, 2016, as compared to the year ended December 31, 2015. Natural gas transportation and processing expenses are higher in the Delaware Basin, as compared to the Eagle Ford shale, as the natural gas gathering and processing infrastructure has yet to meet the demand for these services due to the increased drilling activity in the Delaware Basin over the last few years. We have begun to incur lower processing expenses for most of the natural gas produced in our Rustler Breaks asset area in Eddy County, New Mexico due to the start up in late August 2016 of the Black River Processing Plant, and we expect to fully realize the impact of these lower processing expenses once the plant is operational for an entire year.
Our production taxes increased $3.4 million to $16.6 million for the year ended December 31, 2016, as compared to $13.2 million for the year ended December 31, 2015, primarily due to the 5% increase in oil and natural gas revenues for the year ended December 31, 2016,2018, as compared to the year ended December 31, 2015.2017. The increased production taxes were partially offset by a decrease in transportation and processing expenses. Transportation and processing expenses decreased to $18.2 million for the year ended December 31, 2018, as compared to $25.3 million for the year ended December 31, 2017. On a unit-of-production basis, our production taxes, transportation and processing expenses decreased to $4.00 per BOE for the year ended December 31, 2018, as compared to $4.10 per BOE for the year ended December 31, 2017, which was attributable to the 34% increase in total oil equivalent production between the respective periods.
Lease operating expenses. Our lease operating expenses increased by $25.7 million, or 38%, to $93.0 million for the year ended December 31, 2018, as compared to $67.3 million for the year ended December 31, 2017. Our lease operating expenses on a unit-of-production basis increased 3% to $4.89 per BOE for the year ended December 31, 2018, as compared to $4.74 per BOE for the year ended December 31, 2017. The increase in lease operating expenses for the year ended December 31, 2018 was primarily attributable to an increase in the costs of services and equipment related to the increased number of wells we operated during the year ended December 31, 2018, as compared to the year ended December 31, 2017, resulting from our increased delineation and development drilling activities in the Delaware Basin.
Plant and other midstream services operating. Our plant and other midstream services operating expenses increased by $11.6 million, or 89%, to $24.6 million for the year ended December 31, 2018, as compared to $13.0 million for the year ended
December 31, 2017. This increase was primarily attributable to (i) increased expenses associated with our expanded commercial salt water disposal operations of $13.1 million for the year ended December 31, 2018, as compared to $6.8 million for the year ended December 31, 2017, (ii) increased expenses associated with the Black River Processing Plant, where a significant expansion was completed and placed into service in the first quarter of 2018, of $7.6 million for the year ended December 31, 2018, as compared to $4.6 million for the year ended December 31, 2017, and (iii) increased expenses associated with our expanded pipeline operations in the Wolf and Rustler Breaks asset areas of $3.5 million for the year ended December 31, 2018, as compared to $1.3 million for the year ended December 31, 2017.
Depletion, depreciation and amortization. Our depletion, depreciation and amortization expenses increased by $87.6 million, or 49%, to $265.1 million for the year ended December 31, 2018, as compared to $177.5 million for the year ended December 31, 2017. On a unit-of-production basis, our depletion, depreciation and amortization expenses increased 12% to $13.94 per BOE for the year ended December 31, 2018, as compared to $12.49 per BOE for the year ended December 31, 2017. The increase in both our total and unit-of-production depletion, depreciation and amortization expenses was primarily attributable to (i) higher estimated future development costs associated with proved undeveloped oil and natural gas reserves at December 31, 2018, which was partially offset by the increase in our total proved oil and natural gas reserves between the respective periods, and (ii) increased depreciation expenses associated with our expanded midstream assets of approximately $10.5 million for the year ended December 31, 2018, as compared to $5.2 million for the year ended December 31, 2017.
General and administrative. Our general and administrative expenses increased $3.3 million, or 5%, to $69.3 million for the year ended December 31, 2018, as compared to $66.0 million for the year ended December 31, 2017. The increase in our general and administrative expenses was primarily attributable to increased payroll expenses of approximately $10.7 million associated with additional employees to support our increased land, geoscience, drilling, completion, production, midstream, accounting and administration functions as a result of our continued growth. This increase was partially offset by an increase of capitalized general and administrative expenses of $6.8 million for the year ended December 31, 2018. Our general and administrative expenses decreased 22% on a unit-of-production basis to $3.64 per BOE for the year ended December 31, 2018, as compared to $4.65 per BOE for the year ended December 31, 2017, primarily attributable to the 34% increase in total oil equivalent production between the respective periods.
Interest expense. For the year ended December 31, 2018, we incurred total interest expense of approximately $50.2 million. We capitalized approximately $8.8 million of our interest expense on certain qualifying projects for the year ended December 31, 2018 and expensed the remaining $41.3 million to operations. For the year ended December 31, 2017, we incurred total interest expense of approximately $41.9 million. We capitalized $7.3 million of our interest expense on certain qualifying projects for the year ended December 31, 2017 and expensed the remaining $34.6 million to operations. The increase in total interest expense for the year ended December 31, 2018, as compared to the year ended December 31, 2017, was primarily attributable to an increase in our average debt outstanding. In additionAugust and September 2018, we completed a tender offer and redemption of our $575.0 million aggregate principal amount of 6.875% senior notes due 2023 (the “2023 Notes”). In August 2018, we issued $750.0 million aggregate principal amount of 5.875% notes due 2026 (the “Original 2026 Notes”), and in October 2018, we issued an additional $300.0 million aggregate principal amount of 5.875% notes due 2026 (the “Additional 2026 Notes” and, together with the Original 2026 Notes, the “2026 Notes”), increasing our total senior notes outstanding to $1.05 billion at December 31, 2018, as compared to $575.0 million at December 31, 2017.
Prepayment premium on extinguishment of debt. For the year ended December 31, 2018, we incurred a prepayment premium on extinguishment of debt of $31.2 million resulting from the tender offer to purchase for cash and subsequent redemption of all of our $575.0 million aggregate principal amount of 2023 Notes.
Total income tax (benefit) provision. We recorded a total income tax benefit of $7.7 million for the year ended December 31, 2018. Total income tax expense for the year ended December 31, 2018 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to (i) the change of approximately $80.0 million in our federal valuation allowance for the year ended December 31, 2018, including the reversal of the valuation allowance, as we now believe we will be able to use the federal net operating losses prior to expiration, (ii) the partial reversal of a state valuation allowance of approximately $2.9 million on our state deferred tax assets for the year ended December 31, 2018, as we now believe we will be able to use the state net operating losses prior to expiration, and (iii) the impact of permanent differences between book and taxable income. Our deferred tax assets exceeded our deferred tax liabilities at December 31, 2017 due to the deferred tax amounts generated by the full-cost ceiling impairment charges recorded in prior periods. We established a valuation allowance against the deferred tax assets beginning in the third quarter of 2015, and we retained a full valuation allowance at December 31, 2017, due to uncertainties regarding the future realization of our deferred tax assets. The current tax benefit of $8.2 million for the year ended December 31, 2017 was primarily the result of the Tax Cuts and Jobs Act, under which corporate alternative minimum taxes were repealed.
Year Ended December 31, 2017 as Compared to Year Ended December 31, 2016
Production taxes, transportation and processing. Our production taxes, transportation and processing expenses increased by approximately $15.2 million, or 35%, to $58.3 million for the year ended December 31, 2017, as compared to $43.0 million for the year ended December 31, 2016. The increase in production taxes, transportation and processing expenses on an absolute basis was primarily attributable to the 5%$16.4 million increase in our production taxes to $33.0 million for the year ended December 31, 2017, as compared to $16.6 million for the year ended December 31, 2016, primarily due to the $237.5 million increase in oil and natural gas revenues for the year ended December 31, 2017, as compared to the year ended December 31, 2016. In addition, the production tax rates in New Mexico are higher than production tax rates in Texas. As more of our oil and natural gas production shifts from Texasbecomes attributable to New Mexico, we expect our production tax expenses to continue to experienceincrease. The increased production taxtaxes were partially offset by a decrease in transportation and processing expenses. Transportation and processing expenses decreased to $25.3 million for the year ended December 31, 2017, as compared to transportation and processing expenses of $26.5 million for the year ended December 31, 2016. This decrease of $1.2 million was primarily due to the start-up in late August 2016 of the Black River Processing Plant, which processes most of the natural gas produced in our Rustler Breaks asset area in Eddy County, New Mexico, and which was operational for the full year in 2017. On a unit-of-production basis, our production taxes, transportation and processing expenses decreased to $4.10 per BOE for the year ended December 31, 2017, as compared to $4.23 per BOE for the year ended December 31, 2016, due not only to the decreased transportation and processing charges attributable to the start-up of the Black River Processing Plant, but also to the 40% increase in total oil equivalent production during the year ended December 31, 2017, as compared to the year ended December 31, 2016.
Lease operating expenses. Our lease operating expenses increased $1.5by $11.1 million, or 20%, to $56.2 million, an increase of 3%, for the year ended December 31, 2016, as compared to $54.7$67.3 million for the year ended December 31, 2015.2017, as compared to $56.2 million for the year ended December 31, 2016. The increase in lease operating expenses on an absolute basis for the year ended December 31, 2017 was primarily attributable to an increase in the costs of services and equipment related to the increased number of wells we operated during the year ended December 31, 2017, as compared to the year ended December 31, 2016, resulting from our increased delineation and development drilling activities in the Delaware Basin. Our lease operating expenses on a unit-of-production basis decreased 14% to $4.74 per unit of production decreased 8%BOE for the year ended December 31, 2017, as compared to $5.52 per BOE for the year ended December 31, 2016, as compared to $6.01 per BOE for the year ended December 31, 2015. Our total oil and natural gas production increased 12% to approximately 10.2 million BOE for the year ended December 31, 2016 from approximately 9.1 million BOE for the year ended December 31, 2015.2016. The decrease achieved in lease operating expenses on a unit-of-production basis for the year ended December 31, 2017 was primarily attributable to several key factors, including (i) decreased field supervisory costsincreased efficiencies as a number of third-party contractors became full-time employees duringmore salt water was gathered by pipeline to San Mateo’s disposal facilities in the second quarter of 2016,Delaware Basin, (ii) decreased workover expenses, (iii) decreased salt water disposal and chemical costs associated with our Eagle Ford operations including supervisory, salt water disposal and chemical costs and (iii) increased(iv) a 40% increase in total oil equivalent production in 2017, as compared to the year ended December 31, 2015. This decrease was partially offset by (x) increased salt water disposal costs attributable to increased operations in the Rustler Breaks asset area and (y) increased workover expenses in the Wolf asset area.2016.
Plant and other midstream services operating. Our plant and other midstream services operating expenses increased $1.9by $7.7 million, or 142%, to $5.4 million, an increase of 54%, for the year ended December 31, 2016, as compared to $3.5$13.0 million for the year ended December 31, 2015.2017, as compared to $5.4 million for the year ended December 31, 2016. This increase was primarily attributable to the(i) increased expenses associated with our expanded commercial salt water disposal operations of $6.8 million for the year ended December 31, 2017, as compared to $3.6 million for the year ended December 31, 2016, as compared to $2.2 million for the year ended December 31, 2015. The remaining increase was primarily attributable toand (ii) increased expenses associated with the Black River Processing Plant, thatwhich began operating in August 2016, of $4.6 million for the year ended December 31, 2017, as compared to $0.7 million for the year ended December 31, 2016.
Depletion, depreciation and amortization. Our depletion, depreciation and amortization expenses decreased $56.8increased by $55.5 million, or 45%, to $122.0 million, a decrease of 32%, for the year ended December 31, 2016, as compared to $178.8$177.5 million for the year ended December 31, 2015.2017, as compared to $122.0 million for the year ended December 31, 2016. On a unit-of-production basis, our depletion, depreciation and amortization expenses decreased 39%increased 4% to $12.49 per BOE for the year ended December 31, 2017, as compared to $11.99 per BOE for the year ended December 31, 2016, as compared2016. The increase in both our total depletion, depreciation and amortization and unit-of-production depletion, depreciation and amortization expenses was primarily attributable to $19.63 per BOE(i) increased depreciation expenses of approximately $5.2 million for the year ended December 31, 2015. The decrease2017, as compared to $2.7 million for the year ended December 31, 2016, associated with our new midstream assets placed into service in our total depletion, depreciation2017 and amortization expenses resulted primarily from (i)(ii) higher totalestimated future development costs associated with proved undeveloped oil and natural gas reserves of 105.8 million BOE, or an increase of 24%, at December 31, 2016, as compared to total proved reserves2017, both of 85.1 million BOE at December 31, 2015, (ii)which were offset by the decreased cost on a unit-of-production basis associated with wells drilledincrease in 2016, as compared to prior periods and (iii) the decrease in unamortized property costs resulting from the full-cost ceiling impairments recorded in 2015 and 2016. This increase inour total proved oil and natural gas reserves was primarily attributable tobetween the continued delineation and development of our acreage in the Delaware Basin.respective periods.
Full-cost ceiling impairment. Due primarilyWe recorded no impairment charge to the continued decline in oil and natural gas prices during the first half of 2016, the net capitalized costs of our oil and natural gas properties less related deferred income taxes exceededfor the cost center ceiling. As a result, weyear ended December 31, 2017. We recorded an impairment charge of $158.6 million exclusive of tax effect, for the year ended December 31, 2016 to our net capitalized costs. This charge is reflected in our statement of operations for the year ended December 31, 2016, with the related deferred income tax credit recorded net of a valuation allowance. These full-cost impairment charges for the year ended December 31, 2016 were realized in the first two quarters of the year. Since that time, oil and natural gas prices have improved and as a result, no full-cost ceiling impairment charges were recorded in the third and fourth quarters of 2016.
Due primarily to the sharp decline in oil and natural gas prices during 2015, at December 31, 2015, the net capitalized costs of our oil and natural gas properties less related deferred income taxes exceeded the cost center ceiling. As a result, we recorded an impairment charge of $801.2 million, exclusive of tax effect, to our net capitalized costs. This charge is reflected in our statement of operations for the year ended December 31, 2015, with the related deferred income tax credit recorded net of a valuation allowance.2016.
General and administrative. Our general and administrative expenses increased $5.0$10.9 million, or 20%, to $55.1 million, an increase of 10%, for the year ended December 31, 2016, as compared to $50.1$66.0 million for the year ended December 31, 2015.2017, as compared to $55.1 million for the year ended December 31, 2016. The increase in our general and administrative expenses was primarily attributable to increased payroll expenses of approximately $10.4 million associated with additional employees joining the Company during the year ended December 31, 2016 to support our increased land, geoscience, drilling, completion, production, midstream, accounting and administration functions as a result of the continued growth of the Company. The remaining increase is largely due
Company and to a $2.9the $4.3 million increase in non-cash stock-based compensation expense to $16.7 million for the year ended December 31, 2017, as compared to $12.4 million for the year ended December 31, 2016, as compared to $9.5 million for the year ended December 31, 2015.2016. The increase in our non-cash stock-based compensation expense was attributable to the increased expense related to the continued vesting of awards granted from 20122013 through 2016.2017 and the granting of new awards during 2017, as well as a change in the vesting schedule applicable to equity awards granted to our board of directors resulting in a $1.5 million one-time stock-based compensation expense. Our general and administrative expenses decreased 2%14% on a unit-
of-productionunit-of-production basis to $4.65 per BOE for the year ended December 31, 2017, as compared to $5.41 per BOE for the year ended December 31, 2016, as comparedprimarily due to $5.50 per BOE for the year ended December 31, 2015.40% increase in total oil equivalent production between the respective periods.
Net gain on asset sales and inventory impairment. We recorded a net gain of $107.3 million$23,000 on asset sales and inventory impairment for the year ended December 31, 2016,2017, as compared to $0.9a net gain of $107.3 million for the year ended December 31, 2015. On October 1, 2015, we completed2016 related to the sale of our wholly-owned subsidiary that owned the Loving County Processing System to EnLink. The Loving County Processing System included the Wolf Processing Plant and approximately six miles of high pressure gathering pipeline that connects our natural gas gathering system to the Wolf Processing Plant.
Pursuant to the terms of the transaction, EnLink paid approximately $143.4 million and we received net proceeds of approximately $139.8 million, after deducting customary purchase price adjustments of approximately $3.6 million. Due to the terms of the Wolf Gathering Agreement, the transaction was accounted for as a sale and leaseback transaction; the carrying value of the net assets sold of approximately $31.0 million was removed from the consolidated balance sheet as of December 31, 2015 and the resulting difference of approximately $108.4 million between the net proceeds received less closing costs of $0.4 million and the basis of the assets sold was recorded as a deferred gain on plant sale and was to be recognized as a gain on asset sales over the 15-year term of the gathering and processing agreement.System. See Note 135 to the consolidated financial statements in this Annual Report for more information on this agreement.sale.
DuringInterest expense. For the fourth quarteryear ended December 31, 2017, we incurred total interest expense of 2016, EnLink completed constructionapproximately $41.9 million. We capitalized approximately $7.3 million of another processing plant in Loving County, Texas. Upon completion and successful testing of the new plant, EnLink began processing our natural gas at the new plant. As such, the gathering and processing agreement is no longer considered a lease, and accordingly the Company recognized the remaining unamortized gaininterest expense on the sale of $107.3 million in the consolidated statement of operationscertain qualifying projects for the year ended December 31, 2016.
Interest expense.2017 and expensed the remaining $34.6 million to operations. For the year ended December 31, 2016, we incurred total interest expense of approximately $31.9 million. We capitalized approximately $3.7 million of our interest expense on certain qualifying projects for the year ended December 31, 2016 and expensed the remaining $28.2 million to operations. For the year ended December 31, 2015, we incurredThe increase in total interest expense of approximately $25.7 million. We capitalized approximately $3.9 million of our interest expense on certain qualifying projects for the year ended December 31, 2015 and expensed the remaining $21.8 million to operations. The increase in total interest expense of $6.2 million for the year ended December 31, 2016,2017, as compared to the year ended December 31, 2015,2016, was primarily attributable to an increase in both theour average debt outstanding and the coupon rateoutstanding. In December 2016, we issued an additional $175.0 million of 6.875% for the2023 Notes, increasing our total senior notes issuedoutstanding to $575.0 million from $400.0 million. As a result, we incurred interest on the entire $575.0 million in 2015 and late 2016,senior notes outstanding during the year ended December 31, 2017, as compared to the lower effective interest rates incurred on borrowings under our Credit Agreement. Inyear ended December 31, 2016, we usedwhen the $575.0 million of senior notes were outstanding for only a portion of the net proceeds from the December 2016 senior notes and equity offerings to repay a total of $120.0 million of outstanding borrowings under our Credit Agreement. At December 31, 2016, we had no outstanding borrowings under our Credit Agreement, $0.8 million in outstanding letters of credit and $575.0 million in outstanding senior notes. Due to the higher coupon rate on the senior notes as compared to the interest rates under the Credit Agreement, we expect to incur increased interest expense in future periods.2016.
Total income tax (benefit) provision. Our deferred tax assets exceeded our deferred tax liabilities at December 31, 20162017 due to the deferred tax amounts generated by the full-cost ceiling impairment charges recorded in 2016 and 2015. As a result, weprior periods. We established a valuation allowance against the deferred tax assets beginning in the third quarter of 2015. We2015, and we retained a full valuation allowance at December 31, 20162017 due to uncertainties regarding the future realization of our deferred tax assets. The current tax benefit of $1.0$8.2 million for the year ended December 31, 20162017 was primarily attributable tothe result of the Tax Cuts and Jobs Act, under which corporate alternative minimum taxes were repealed. As a refund due from the Internal Revenue Service.result, corporate alternative minimum tax carryforwards will be refunded. The total income tax expense for the yearyears ended December 31, 2017 and 2016 differed from amounts computed by applying the U.S. federal statutory tax rate to the pre-tax income or loss, respectively, due primarily to the recording of a valuation allowance against the net deferred tax asset position as a result of the full-cost ceiling impairments recorded for the years ended December 31, 2016 and 2015.
Year Ended December 31, 2015 as Compared to Year Ended December 31, 2014
Production taxes, transportation and processing. Our production taxes, transportation and processing expenses increased by $2.5 million to $35.7 million, an increase of 7%, for the year ended December 31, 2015, as compared to $33.2 million for the year ended December 31, 2014. On a unit-of-production basis, however, our production taxes and marketing expenses decreased by 31% to $3.91 per BOE for the year ended December 31, 2015, as compared to $5.65 per BOE for the year ended December 31, 2014. The increase in production taxes, transportation and processing expenses on an absolute basis was primarily attributable to higher natural gas transportation and processing expenses of $22.4 million for the year ended December 31, 2015, as compared to natural gas transportation and processing expenses of $15.2 million for the year ended December 31, 2014, an increase of $7.2 million, due to the 81% increase in our natural gas production to 27.7 Bcf for the year ended December 31, 2015, as compared to 15.3 Bcf of natural gas production for the year ended December 31, 2014. This increase was partially offset by a decrease in our production taxes of $4.8 million to $13.2 million for the year ended December
31, 2015, as compared to $18.0 million for the year ended December 31, 2014, primarily due to the 30% decrease in oil revenues for the year ended December 31, 2015, as compared to the year ended December 31, 2014.
Lease operating expenses. Our lease operating expenses increased by $4.8 million to $54.7 million, an increase of 10%, for the year ended December 31, 2015, as compared to $49.9 million for the year ended December 31, 2014. Our lease operating expenses per unit of production decreased 29% to $6.01 per BOE for the year ended December 31, 2015, as compared to $8.51 per BOE for the year ended December 31, 2014. Our total oil and natural gas production increased 55% to approximately 9.1 million BOE for the year ended December 31, 2015 from approximately 5.9 million BOE for the year ended December 31, 2014, including an increase of 35% in oil production to approximately 4.5 million Bbl for the year ended December 31, 2015, as compared to just over 3.3 million Bbl for the year ended December 31, 2014, which would typically result in higher lease operating expenses. Oil production was 49% of total production by volume for the year ended December 31, 2015, as compared to 57% of total production by volume for the year ended December 31, 2014. The decrease achieved in lease operating expenses on a unit-of-production basis was primarily attributable to several key factors, including (i) no clean-out operations on offsetting producing wells as a result of fracturing operations on newly drilled Eagle Ford shale wells as compared to the same period in 2014, (ii) a decrease in salt water disposal costs on a per barrel basis, particularly in the Delaware Basin, (iii) reduced service costs impacting lease operating expenses and (iv) a higher percentage of natural gas production, including a significant increase in Haynesville natural gas production, which typically has lower operating costs due to its lack of associated oil and water production. A joint venture controlled by us drilled, completed and began injecting salt water into a new disposal well in the Wolf asset area in Loving County, Texas in January 2015, which reduced salt water disposal costs in this area. A second salt water disposal well was drilled and tested in the Wolf asset area and began disposing of salt water in the fourth quarter of 2015. At December 31, 2015, this well was operating with temporary facilities, but it became fully operational with permanent facilities in the first quarter of 2016.
Plant and other midstream services operating. Our plant and other midstream services operating expenses increased by $2.1 million to $3.5 million, an increase of 148%, for the year ended December 31, 2015, as compared to $1.4 million for the year ended December 31, 2014. This increase was primarily attributable to the expenses associated with our salt water disposal facilities in our Wolf asset area, which began operations in early 2015.
Depletion, depreciation and amortization. Our depletion, depreciation and amortization expenses increased by $44.1 million to $178.8 million, an increase of 33%, for the year ended December 31, 2015, as compared to $134.7 million for the year ended December 31, 2014. On a unit-of-production basis, however, our depletion, depreciation and amortization expenses decreased 15% to $19.63 per BOE for the year ended December 31, 2015, as compared to $22.95 per BOE for the year ended December 31, 2014. The absolute increase in our depletion, depreciation and amortization expenses reflected an increase of 55% in our total oil and natural gas production to 9.1 million BOE for the year ended December 31, 2015 from 5.9 million BOE for the year ended December 31, 2014. The 15% decrease in the per-unit-of-production depletion, depreciation and amortization expenses resulted from the 24% increase in total proved oil and natural gas reserves from 68.7 million BOE at December 31, 2014 to 85.1 million BOE at December 31, 2015, which reserves were added at a lower cost per BOE, as well as from the decrease in unamortized property costs resulting from the full-cost ceiling impairments recorded in 2015.
Full-cost ceiling impairment. Due primarily to the sharp decline in oil and natural gas prices during 2015, at December 31, 2015, the net capitalized costs of our oil and natural gas properties less related deferred income taxes exceeded the cost center ceiling. As a result, we recorded an impairment charge of $801.2 million, exclusive of tax effect, to our net capitalized costs. This charge is reflected in our statement of operations for the year ended December 31, 2015, with the related deferred income tax credit recorded net of a valuation allowance. No impairment to the net carrying value of our oil and natural gas properties and no corresponding charge resulting from a full-cost ceiling impairment was recorded during the year ended December 31, 2014.
General and administrative. Our general and administrative expenses increased by $18.0 million to $50.1 million, an increase of 56%, for the year ended December 31, 2015, as compared to $32.2 million for the year ended December 31, 2014. The increase in our general and administrative expenses was primarily attributable to increased payroll expenses associated with additional personnel joining the Company during the year ended December 31, 2015 to support our increased land, geoscience, drilling, completion, production, accounting and administration functions, including the addition of 29 new employees in Roswell, New Mexico as a result of the HEYCO Merger in late February 2015. The remaining increase is largely due to a $4.0 million increase in non-cash stock-based compensation expense to $9.5 million for the year ended December 31, 2015, as compared to $5.5 million for the year ended December 31, 2014. The increase in our non-cash stock-based compensation expense was attributable to the increased expense related to the continued vesting of awards granted from 2012 through 2015 of $9.5 million for the year ended December 31, 2015, as compared to $5.3 million for the year ended December 31, 2014. This increase was partially offset by the decreased expense related to our liability-based stock options of $0.1 million for the year ended December 31, 2015, as compared to $0.2 million for the year ended December 31, 2014. This decreased expense related to our liability-based stock options was attributable to the slight decrease in our stock price from $20.23 per
share at December 31, 2014 to $19.77 per share at December 31, 2015. Our general and administrative expenses increased by less than 1% on a unit-of-production basis to $5.50 per BOE for the year ended December 31, 2015, as compared to $5.48 per BOE for the year ended December 31, 2014.
Interest expense. For the year ended December 31, 2015, we incurred total interest expense of approximately $25.7 million. We capitalized approximately $3.9 million of our interest expense on certain qualifying projects for the year ended December 31, 2015 and expensed the remaining $21.8 million to operations. For the year ended December 31, 2014, we incurred total interest expense of approximately $8.2 million. We capitalized approximately $2.8 million of our interest expense on certain qualifying projects for the year ended December 31, 2014 and expensed the remaining $5.3 million to operations. The increase in total interest expense of $17.5 million for the year ended December 31, 2015, as compared to the year ended December 31, 2014, was attributable to an increase in both the average debt outstanding and the interest rate of 6.875% under the senior notes in 2015, as compared to the effective interest rate of approximately 3.3% under our Credit Agreement in 2014. In late April 2015, we used a portion of the net proceeds from the April 2015 senior notes and equity offerings to repay a total of $465.0 million of outstanding borrowings under our Credit Agreement. At December 31, 2015, we had no outstanding borrowings under our Credit Agreement, $0.6 million in outstanding letters of credit and $400.0 million in outstanding senior notes.
Total income tax (benefit) provision. At December 31, 2015, our deferred tax assets exceeded our deferred tax liabilities and, as a result, we recorded a valuation allowance of $154.3 million against the deferred tax assets. The total income tax expense for the year ended December 31, 2015 differed from amounts computed by applying the U.S. federal statutory tax rates to the pre-tax loss due primarily to the recording of a valuation allowance against the net deferred tax asset position as a result of the full-cost ceiling impairment recorded for the year ended December 31, 2015. We recorded a total income tax benefit of $147.4 million for the year ended December 31, 2015. The total income tax benefit of $147.4 million for the year ended December 31, 2015 is comprised of a current tax expense of $3.0 million, which represented our estimated alternative minimum tax (“AMT”) liability, and a deferred tax benefit of $150.3 million. For the year ended December 31, 2014, we incurred an estimated AMT liability of $0.1 million, which represented the current portion of the income tax provision. The remaining income tax provision of $64.2 million represented deferred taxes for the year ended December 31, 2014. Our effective tax rate for the year ended December 31, 2014 was 36.8%. Total income tax expense for the year ended December 31, 2014 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily due to the impact of permanent differences between book and taxable income.
Liquidity and Capital Resources
Our primary use of capital has been, and we expect will continue to be during 20172019 and for the foreseeable future, for the acquisition, exploration and development of oil and natural gas properties and for midstream investments. Excluding any possible significant acquisitions, we expect to fund our capital expenditure requirements through 20172019 through a combination of cash on hand, operating cash flows, proceeds we receivedperformance incentives in connection with the formation of San Mateo that were earned in the Joint Venture andfirst quarter of 2019, borrowings under our Credit Agreement (assuming availability under our borrowing base). and borrowings under the San Mateo Credit Facility. In addition, in 2019, we expect Five Point to provide a portion of the $50 million capital carry in connection with the formation of San Mateo II. We continually evaluate other capital sources, including borrowings under additional credit arrangements, the sale or joint venture of midstream assets or oil and natural gas producing assets or acreage,leasehold interests, particularly in our non-core asset areas, the sale or joint venture of oil and natural gas mineral interests, as well as potential issuances of equity, debt or convertible securities, none of which may be available on satisfactory terms or at all. Our future success in growing proved reserves and production will be highly dependent on our ability to access outside sources of capital and to generate operating cash flows.
At December 31, 2016,2018, we had cash totaling approximately $212.9$64.5 million and restricted cash totaling approximately $1.3 million. Restricted cash represents cash held by our less-than-wholly-owned subsidiaries.$19.4 million, most of which was associated with San Mateo. By contractual agreement, the cash in the accounts held by our less-than-wholly-owned subsidiaries is not to be commingled with our other Company cash and is to be used only to fund the capital expenditures and operations of these less-than-wholly-owned subsidiaries.
On October 31, 2016, the lenders party to our Credit Agreement increased our borrowing base from $300.0 million to $400.0 million. At December 31, 2016 and February 22, 2017, the borrowing base under our Credit Agreement remained $400.0 million. At both dates, we had no outstanding borrowings and approximately $0.8 million in outstanding letters of credit under the Credit Agreement, and we had $575.0 million of outstanding senior notes.
On March 11, 2016,May 17, 2018, we completed a public offering of 7,500,0007,000,000 shares of our common stock, (the “March Equity Offering”). Afterreceiving net proceeds of approximately $226.4 million after deducting offering costs totaling approximately $0.8 million, we received net$0.2 million. The proceeds of approximately $141.5 million. Wefrom this offering were used to acquire additional leasehold and mineral acres in the net proceedsDelaware Basin, to fund certain midstream initiatives in the Delaware Basin and for general corporate purposes, including to fund a portion of our capital expenditures.
Pending such uses, we used a portion of the proceeds from the offering to repay the $45.0 million in borrowings then outstanding under our Credit Agreement.
As of December 31, 2017, we had $575.0 million of outstanding 2023 Notes with a coupon rate of 6.875%. On December 9, 2016,August 21, 2018, we completedissued $750.0 million of Original 2026 Notes with a public offeringcoupon rate of 6,000,000 shares of common stock (the “December Equity Offering”5.875% in a private placement. The Original 2026 Notes were issued at par value, and together with the March Equity Offering, the “2016 Equity Offerings”). After deducting offering costs totaling approximately $0.4 million, we received net proceeds of approximately $145.8 million.$740.0 million, after deducting the initial purchasers’ discounts and estimated offering expenses. In conjunction with the offering of the Original 2026 Notes (the “2026 Notes Offering”), in August and September 2018, respectively, we completed a tender offer and redemption of all of the 2023 Notes (the “2023 Notes Tender Offer and Redemption”). We used a portion of the net proceeds from the 2026 Notes Offering to fund the 2023 Notes Tender Offer and Redemption.
approximately $46,000 per net acre. We financed the BLM Acquisition using cash on hand and borrowings under the Credit Agreement.
On December 9, 2016,October 4, 2018, we issued $175.0$300.0 million of 6.875% senior notes due 2023 (the “Additional Notes”) inAdditional 2026 Notes with a private placement (the “Notes Offering”)coupon rate of 5.875%. The Additional 2026 Notes were issued pursuant to, and are governed by, the same indenture governing the Company’s original senior notes issued in April 2015 andOriginal 2026 Notes. The Additional 2026 Notes were issued at 105.5%100.5% of par, plus accrued interest from October 15, 2016, resulting in an effective interest rate of 5.5%.August 21, 2018. We received net proceeds from the Notes Offeringthis offering of approximately $181.5$297.3 million, including the issue premium, but after deducting the initial purchasers’ discounts and estimated offering expenses and excluding accrued interest from August 21, 2018 paid by buyersthe initial purchasers of the Additional 2026 Notes. The Additional Notes are our senior unsecured obligations. The Additional Notes mature on April 15, 2023, and interest is payable semi-annually in arrears on April 15 and October 15 of each year.
We haveproceeds from this offering were used to repay a portion of the net proceeds from the Notes Offering and the December Equity Offering to fund the aggregate purchase price for certain leasehold and mineral acquisitions (some of which closed in January and February 2017) and further development of our midstream assets, to repay $120.0$325.0 million in outstanding borrowings under ourthe Credit Agreement, and for general corporate purposes, including capital expenditures associated with the addition of a fourth drilling rig.
On February 17, 2017, we announced the formation of San Mateo, a strategic joint venture with a subsidiary of Five Point to operate and expand our Delaware Midstream Assets. We received $171.5 millionwhich were incurred in connection with the formationBLM Acquisition. In December 2018, pursuant to a registered exchange offer, we exchanged substantially all of the Joint Venture2026 Notes for a like principal amount of 5.875% senior notes due 2026 that have been registered under the Securities Act (the “Notes”). The terms of the Notes are substantially the same as the terms of the 2026 Notes except that the transfer restrictions, registration rights and may earnprovisions for additional interest relating to the 2026 Notes do not apply to the Notes. The Notes will mature September 15, 2026, and interest is payable on the Notes semi-annually in arrears on each March 15 and September 15.
In October 2018, the lenders under our Credit Agreement completed their review of our proved oil and natural gas reserves at June 30, 2018. In connection with such review, we amended the Credit Agreement to, among other items, increase the maximum facility amount to $1.5 billion, increase the borrowing base to $850.0 million, increase the elected borrowing commitment to $500.0 million, extend the maturity to October 31, 2023, reduce borrowing rates by 0.25% per annum and set the maximum leverage ratio at 4.00 to 1.00. This October 2018 redetermination constituted the regularly scheduled November 1 redetermination. Borrowings under the Credit Agreement are limited to the lowest of the borrowing base, the maximum facility amount and the elected borrowing commitment.
In December 2018, San Mateo entered into the San Mateo Credit Facility, a $250.0 million credit facility led by The Bank of Nova Scotia, as administrative agent and including all lenders in the Credit Agreement. The San Mateo Credit Facility, which matures December 19, 2023, includes an accordion feature, which could expand lender commitments to up to an additional $73.5$400.0 million. The San Mateo Credit Facility is guaranteed by San Mateo’s subsidiaries, secured by substantially all of San Mateo’s assets, including real property, and is non-recourse to Matador and its other subsidiaries.
At December 31, 2018, we had (i) $1.05 billion of outstanding Notes, (ii) $40.0 million in performance incentives overborrowings outstanding under the next five years. We continueCredit Agreement and (iii) approximately $3.0 million in outstanding letters of credit issued pursuant to operate the Delaware Midstream AssetsCredit Agreement, and retain operational control of the Joint Venture. The Company and Five Point own 51% and 49% of the Joint Venture, respectively. San Mateo will continuehad $220.0 million in borrowings outstanding under the San Mateo Credit Facility. At February 26, 2019, we had (x) $1.05 billion of outstanding Notes, (y) $80.0 million in borrowings outstanding under the Credit Agreement and (z) approximately $13.7 million in outstanding letters of credit issued pursuant to provide firm capacity servicethe Credit Agreement, and San Mateo had $220.0 million in borrowings outstanding and approximately $16.2 million in outstanding letters of credit issued pursuant to us at market rates, while also being a midstream service provider to third parties in and around our Wolf and Rustler Breaks asset areas.the San Mateo Credit Facility.
We expect that development of our Delaware Basin assets will be the primary focus of our operations and capital expenditures in 2017.2019. We plan to operate foursix contracted drilling rigs drilling primarily oil and natural gas wells in the Delaware Basin during the first quarterthroughout most of 2017 and expect to add a fifth drilling rig in the Delaware Basin in the second quarter of 2017.2019. Our 20172019 estimated capital expenditure budget consists of $370$640 to $390$680 million for drilling, completions, facilitiesD/C/E capital expenditures and infrastructure and $56$55 to $64$75 million for midstream capital expenditures, which representsprimarily reflects our 51%proportionate share of anSan Mateo and San Mateo II’s estimated 2017combined 2019 capital expenditure budgetexpenditures of $110$180 to $125$220 million and also accounts for portions of the $50 million capital carry that Five Point is expected to provide to us in conjunction with the formation of San Mateo.Mateo II. Substantially all of our 20172019 estimated capital expenditures will be allocated to the further delineation and development of our growing leasehold position, andto the continued construction of midstream assets and to our participation in certain non-operated well opportunities in the Delaware Basin, with the exception of amounts incurred in 2019 to conclude our South Texas drilling program and amounts allocated to limited operations in the Eagle Fordour South Texas and Haynesville shalesshale positions to maintain and extend leases and to participate in certain non-operated well opportunities. Our 20172019 Delaware Basin drilling program willis expected to focus on the continued development of the WolfRustler Breaks and Rustler BreaksWolf asset areas and the
further delineation and development of the Antelope Ridge, Jackson Trust, Ranger/Arrowhead and Twin Lakes asset areas although we do anticipate continuing to delineate previously untested zonesas well as the federal leasehold acreage in the Wolfwestern portion of the Antelope Ridge asset area acquired in the BLM Acquisition. We have continued to build significant optionality into our drilling program. Three of our rigs operate on longer-term contracts with remaining average terms of approximately 12 months. The other three rigs are on short-term contracts with remaining obligations of six months or less. This affords us the ability to modify our drilling program as we may deem necessary based on changing commodity prices and Rustler Breaks asset areas during 2017.other factors.
WeTo further narrow any potential difference between our 2019 capital expenditures and operating cash flows, we may divest portions of our non-core assets, particularly in the Haynesville shale and in parts of our South Texas positions, as well as to consider monetizing other assets, such as certain mineral, royalty and non-core midstream interests, as value-creating opportunities arise. In addition, we intend to continue acquiringevaluating the opportunistic acquisition of acreage and mineral interests, principally in the Delaware Basin, during 2017.2019. These monetizations, divestitures and expenditures are opportunity-specific, and purchase price multiples and per-acre prices can vary significantly based on the asset or prospect. As a result, it is difficult to estimate these 20172019 monetizations, divestitures and capital expenditures with any degree of certainty; therefore, we have not provided estimated proceeds related to monetizations or divestitures or estimated capital expenditures related to acreage and mineral acquisitions for 2017.
From January 1 through February 22, 2017, we acquired approximately 13,900 gross (8,200 net) leasehold and mineral acres and approximately 1,000 BOE per day of related production from various lessors and other operators, mostly in and around our existing acreage in the Delaware Basin. As noted above, some of this acreage and a portion of the production included properties identified at the time of the Notes Offering and the December Equity Offering. These transactions were pending at the time of those offerings and closed subsequent to December 31, 2016, bringing our total Permian Basin acreage position at February 22, 2017 to 177,600 gross (101,400 net) acres, almost all of which was located in the Delaware Basin. We have incurred capital expenditures of approximately $111 million since January 1, 2017 to acquire leasehold and mineral interests and the related production.2019.
Our 20172019 capital expenditures may be adjusted as business conditions warrant and the amount, timing and allocation of such expenditures is largely discretionary and within our control. The aggregate amount of capital we will expend may fluctuate materially based on market conditions, the actual costs to drill, complete and place on production operated or non-operated wells, our drilling results, the actual costs and scope of our midstream activities, including the expansion of the Black River Processing Plant, the ability of our Joint Venture partnerjoint venture partners to meet itstheir capital obligations, other opportunities that may become available to us and our ability to obtain capital. When oil or natural gas prices decline, or costs increase significantly, we have the flexibility to defer a significant portion of our capital expenditures until later periods to conserve cash or to focus on projects that we believe have the highest expected returns and potential to generate near-term cash flows. We routinely monitor and adjust our capital expenditures in response to changes in prices, availability of financing, drilling, completion and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs, success or lack of success in our exploration and development activities, contractual obligations, drilling plans for properties we do not operate and other factors both within and outside our control.
Exploration and development activities are subject to a number of risks and uncertainties, which could cause these activities to be less successful than we anticipate. A significant portion of our anticipated cash flows from operations for 20172019 is expected to come from producing wells and development activities on currently proved properties in the Wolfcamp and Bone Spring plays in the Delaware Basin, the Eagle Ford shale in South Texas and the Haynesville shale in Northwest Louisiana. Our existing wells may not produce at the levels we are forecasting and our exploration and development activities in these areas may not be as successful as we anticipate. Additionally, our anticipated cash flows from operations are based upon current expectations of oil and natural gas prices for 20172019 and the hedges we currently have in place. We use commodity derivative financial instruments at times to mitigate our exposure to fluctuations in oil, natural gas and natural gas liquidsNGL prices and to partially offset reductions in our cash flows from operations resulting from declines in commodity prices. As of February 22, 2017, we had approximately 70% of our anticipated oil production and approximately 50% of our anticipated natural gas production hedged for 2017. We have no hedges in place for natural gas liquids and no hedges in place for natural gas beyond 2017; however, we have a portion of our anticipated oil production volumes hedged in 2018. See Note 811 to the consolidated financial statements in this Annual Report for a summary of our open derivative financial instruments at December 31, 2016.2018. See “Risk Factors — Our Exploration, Development, Exploitation and ExploitationMidstream Projects Require Substantial Capital Expenditures That May Exceed Our Cash Flows from Operations and Potential Borrowings, and We May Be Unable to Obtain Needed Capital on Satisfactory Terms, Which Could Adversely Affect Our Future Growth,” “Risk Factors — Drilling for and Producing Oil and Natural Gas Are Highly Speculative and Involve a High Degree of Operational and Financial Risk, with Many Uncertainties That Could Adversely Affect Our Business” and “Risk Factors — Our Identified Drilling Locations Are Scheduled over Several Years, Making Them Susceptible to Uncertainties That Could Materially Alter the Occurrence or Timing of Their Drilling.”
Our cash flows for the years ended December 31, 2016, 20152018, 2017 and 20142016 are presented below.
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| (In thousands) | | | | | | | | | | | | |
| Net cash provided by operating activities | | $ | 134,086 |
| | $ | 208,535 |
| | $ | 251,481 |
| | $ | 608,523 |
| | $ | 299,125 |
| | $ | 134,086 |
|
| Net cash used in investing activities | | (405,640 | ) | | (425,154 | ) | | (570,531 | ) | | (1,515,253 | ) | | (819,284 | ) | | (448,739 | ) |
| Net cash provided by financing activities | | 467,706 |
| | 224,944 |
| | 321,170 |
| | 888,232 |
| | 408,499 |
| | 467,706 |
|
| Net change in cash | | $ | 196,152 |
| | $ | 8,325 |
| | $ | 2,120 |
| | $ | (18,498 | ) | | $ | (111,660 | ) | | $ | 153,053 |
|
Cash Flows Provided by Operating Activities
Net cash provided by operating activities decreased $74.4increased by $309.4 million to $134.1$608.5 million for the year ended December 31, 2016,2018, as compared to net cash provided by operating activities of $208.5$299.1 million for the year ended December 31, 2015.2017. Excluding changes in operating assets and liabilities, net cash provided by operating activities decreasedincreased to $132.3$544.1 million for the year ended December 31, 20162018 from $199.6$324.2 million for the year ended December 31, 2015.2017. This decreaseincrease was primarily attributable to the decrease in ourhigher oil and natural gas production and higher oil prices realized gain on derivatives, which declined by $67.8 million to $9.3 million forduring the year ended December 31, 2016,2018, as compared to $77.1 million for the year ended December 31, 2015.2017. Changes in our operating assets and liabilities between December 31, 20152017 and December 31, 20162018 also resulted in a net decreaseincrease of approximately $7.2$89.5 million in net cash provided by operating activities for the year ended December 31, 2016,2018, as compared to the year ended December 31, 2015.2017.
Net cash provided by operating activities decreasedincreased by $42.9$165.0 million to $208.5$299.1 million for the year ended December 31, 2015,2017, as compared to net cash provided by operating activities of $251.5$134.1 million for the year ended December 31, 2014.2016. Excluding changes in operating assets and liabilities, net cash provided by operating activities decreasedincreased to $199.6$324.2 million for the year ended December 31, 20152017 from $257.5$132.3 million for the year ended December 31, 2014.2016. This decreaseincrease was primarily attributable to the decrease inhigher oil revenues from 2014 to 2015, resulting from a significantly lower weighted average oil priceand natural gas production and higher commodity prices realized forduring the year ended December 31, 2015 of $45.27 per Bbl,2017, as compared to $87.37 per Bbl realized for the year ended December 31, 2014. This decrease was partially offset by the increase of 35% in our oil production to approximately 4.5 million Bbl from just over 3.3 million Bbl during the respective periods.2016. Changes in our operating assets and liabilities between December 31, 20142016 and December 31, 20152017 also resulted in a net increasedecrease of approximately $15.0$26.9 million in net cash provided by operating activities for the year ended December 31, 2015,2017, as compared to the year ended December 31, 2014.2016.
Our operating cash flows are sensitive to a number of variables, including changes in our production and the volatility of oil and natural gas prices between reporting periods. Regional and worldwide economic activity, the actions of OPEC, weather, infrastructure capacity to reach markets and other variable factors significantly impact the prices of oil and natural gas. These factors are beyond our control and are difficult to predict. We use commodity derivative financial instruments to mitigate our exposure to fluctuations in oil, natural gas and natural gas liquidsNGL prices. In addition, we attempt to avoid long-term service
agreements in order to minimize ongoing future commitments. For additional information on the impact of changing prices on our financial condition, see “Quantitative and Qualitative Disclosures About Market Risk.” See also “Risk Factors — Our Success Is Dependent on the Prices of Oil and Natural Gas. Low Oil orand Natural Gas Prices and the SubstantialContinued Volatility in These Prices May Adversely Affect Our Financial Condition and Our Ability to Meet Our Capital Expenditure Requirements and Financial Obligations.”
Cash Flows Used in Investing Activities
Net cash used in investing activities decreased $19.5increased by $696.0 million to $405.6$1.52 billion for the year ended December 31, 2018 from $819.3 million for the year ended December 31, 2016 from $425.2 million for the year ended December 31, 2015.2017. This decreaseincrease in net cash used in investing activities includedwas primarily attributable to (i) a decreasean increase of $53.6$658.4 million in oil and natural gas properties capital expenditures for the year ended December 31, 2016,2018, as compared to the year ended December 31, 2015,2017, and (ii) an increase of approximately $10.3$45.0 million in expenditures for midstream and other property and equipment, which includesincluded the construction and installation of an expansion of the Black River Processing Plant and newassociated infrastructure, additional salt water disposal wells and additional pipeline infrastructure, (iii) a decrease in cash used for acquisitions as the HEYCO Merger occurred in 2015, (iv) a reductioninfrastructure. These increases were partially offset by an increase of $7.4 million in proceeds from sales of assets as the sale of the Loving County Processing System to EnLink occurred in 2015 and (v) a decrease in our restricted cash of $43.7 million attributable to the release from escrow of potential like-kind-exchange funds in connection with the sale of the Loving County Processing System to EnLink.other assets. Cash used for oil and natural gas properties capital expenditures for the year ended December 31, 20162018 was primarily attributable to our operated and non-operated drilling and completion activities in the Delaware Basin, as well as the acquisition of additional leasehold acreage and mineral interests in the Delaware Basin.Basin, including, in particular, the BLM Acquisition.
Net cash used in investing activities decreasedincreased by $145.4$370.5 million to $425.2$819.3 million for the year ended December 31, 20152017 from $570.5$448.7 million for the year ended December 31, 2014.2016. This decreaseincrease in net cash used in investing activities includedwas primarily attributable to (i) a decreasean increase of $128.1$320.4 million in our oil and natural gas properties capital expenditures for the year ended December 31, 2015,2017, as compared to the year ended December 31, 2014,2016, and (ii) proceeds from the sale of the Loving County Processing System to EnLink of $139.8 million, (iii) an increase of approximately $55.3$46.0 million in expenditures for midstream and other property and equipment, which includes the Wolf Processing Plantconstruction and salt water disposal facilities we constructed in Loving County, Texas as well as initial costs associated withinstallation of an expansion of the Black River Processing Plant, additional salt water disposal wells and new pipeline infrastructure, (iv) cash used in the HEYCO Merger of $24.0 million and (v) an increase in our restricted cash of $43.1 million attributable to the escrow account associated with potential like-kind-exchange transactions in connection with the sale of the Loving County Processing System to EnLink.infrastructure. Cash used for oil and natural gas properties capital expenditures for the year ended December 31, 20152017 was primarily attributable to our operated and
non-operated drilling and completion activities in the Delaware Basin, as well as to our operatedthe acquisition of additional leasehold acreage and non-operated drilling activitiesmineral interests in the Eagle Ford shale play and certain non-operated drilling activities in the Haynesville shale.Delaware Basin.
Cash Flows Provided by Financing Activities
Net cash provided by financing activities was $888.2 million for the year ended December 31, 2018, as compared to net cash provided by financing activities of $408.5 million for the year ended December 31, 2017. The net cash provided by financing activities for the year ended December 31, 2018 was primarily attributable to the total proceeds from the issuance of the Notes of $1.05 billion, borrowings under our Credit Agreement of $410.0 million, borrowings under the San Mateo Credit Facility of $220.0 million, proceeds from our May 2018 equity offering of $226.6 million, contributions from non-controlling interest owners of the less-than-wholly-owned subsidiaries of $85.8 million, contributions related to the formation of San Mateo of $14.7 million and proceeds from stock options exercised of $0.8 million. These cash inflows were partially offset by (i) costs related to the 2023 Notes Tender Offer and Redemption of $605.8 million, (ii) repayment of borrowings under our Credit Agreement of $370.0 million, (iii) distributions to non-controlling interest owners of the less-than-wholly-owned subsidiaries of $121.5 million, (iv) costs to issue equity and the 2026 Notes of $14.3 million, (v) costs to enter into or amend credit facilities of $3.1 million and (vi) $6.5 million in taxes paid related to net share settlement of stock-based compensation.
Net cash provided by financing activities was $408.5 million for the year ended December 31, 2017, as compared to net cash provided by financing activities of $467.7 million for the year ended December 31, 2016. The net cash provided by financing activities for the year ended December 31, 2017 was primarily attributable to the total proceeds from our October 2017 equity offering of $208.7 million, contributions related to the formation of San Mateo of $171.5 million and contributions from non-controlling interest owners of less-than-wholly subsidiaries of $44.1 million, offset by distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries of $10.0 million, $5.8 million in taxes paid related to net share settlement of stock-based compensation and the purchase of the non-controlling interest in a less-than-wholly-owned subsidiary of $2.7 million.
Net cash provided by financing activities was $467.7 million for the year ended December 31, 2016, as compared to net cash provided by financing activities of $224.9 million for the year ended December 31, 2015. The net cash provided by financing activities for the year ended December 31, 2016 was primarily attributable to the total proceeds of the 2016 Equity Offeringsequity offerings of $288.5 million, the total proceeds of the Notes OfferingDecember 2016 notes offering of $184.6 million and borrowings under our Credit Agreement of $120.0 million, offset by the costs of the 2016 Equity Offeringsequity offerings of $0.8 million, the costs of the Notes OfferingDecember 2016 notes offering of $2.7 million, the repayment of $120.0 million in borrowings under our Credit Agreement in December 2016 and the payment of $1.9 million in taxes paid related to net share settlement of stock-based compensation.
Net cash provided by financing activities was $224.9 million for the year ended December 31, 2015, as compared to net cash provided by financing activities of $321.2 million for the year ended December 31, 2014. The net cash provided by financing activities for the year ended December 31, 2015 was primarily attributable to the total proceeds of our April 2015 public equity offering of $188.7 million, total proceeds of our April 2015 notes offering of $400.0 million, borrowings under our Credit Agreement of $125.0 million and capital contributed from the non-controlling interest owners in our less-than-wholly-owned subsidiaries of $0.6 million, offset by the costs of the equity offering of $1.2 million, the costs of the April 2015 notes offering of $9.6 million, the repayment of $477.0 million in borrowings under our Credit Agreement during the period and the payment of $1.6 million in taxes related to net share settlement of stock-based compensation.
Net cash provided by financing activities was $321.2 million for the year ended December 31, 2014. The net cash provided by financing activities for the year ended December 31, 2014 was primarily attributable to the total proceeds from our May 2014 public equity offering of $181.9 million and total borrowings of $320.0 million under our Credit Agreement during the period, offset by the costs of the offering of $0.6 million incurred during the period and by the repayment of $180.0 million in borrowings under our Credit Agreement during the period.
See Note 6 to the consolidated financial statements in this Annual Report for a summary of our debt, including our Credit Agreement, the San Mateo Credit Facility and the senior notes.
Off-Balance Sheet Arrangements
From time-to-time, we enter into off-balance sheet arrangements and transactions that can give rise to material off-balance sheet obligations of the Company.obligations. As of December 31, 2016,2018, the material off-balance sheet arrangements and transactions that we hadhave entered into include (i) operating lease agreements, (ii) non-operated drilling commitments, (iii) termination obligations under drilling rig contracts, (iv) firm transportation, gathering, processing disposal and fractionationdisposal commitments and (v) contractual obligations for which the ultimate settlement amounts are not fixed and determinable, such as derivative contracts that are sensitive to future changes in commodity prices or interest rates, gathering, treating fractionation and transportation commitments on uncertain volumes of future throughput, open delivery commitments and indemnification obligations following certain divestitures. Other than the off-balance sheet arrangements described above, the Company haswe have no transactions, arrangements or other relationships with unconsolidated entities or other persons that are reasonably likely to materially affect the Company’sour liquidity or availability of or requirements for capital resources. See “—Obligations and Commitments” below and Note 13 to the consolidated financial statements in this Annual Report for more information regarding the Company’sour off-balance sheet arrangements. Such information is incorporated herein by reference.
Obligations and Commitments
We had the following material contractual obligations and commitments at December 31, 2016.2018.
| | | | | Payments Due by Period | | Payments Due by Period |
| | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| (In thousands) | | | | | | | | | | | | | | | | |
| Contractual Obligations: | | | | | | | | | | | | | | | | | | | | |
Revolving credit borrowings, including letters of credit (1) | | $ | 821 |
| | $ | — |
| | $ | — |
| | $ | 821 |
| | $ | — |
| | $ | 262,991 |
| | $ | — |
| | $ | — |
| | $ | 262,991 |
| | $ | — |
|
Senior unsecured notes (2) | | 575,000 |
| | — |
| | — |
| | — |
| | 575,000 |
| | 1,050,000 |
| | — |
| | — |
| | — |
| | 1,050,000 |
|
| Office leases | | 25,063 |
| | 2,443 |
| | 5,023 |
| | 5,262 |
| | 12,335 |
| | 28,953 |
| | 3,091 |
| | 7,791 |
| | 8,150 |
| | 9,921 |
|
Non-operated drilling commitments (3) | | 11,053 |
| | 11,053 |
| | — |
| | — |
| | — |
| | 24,320 |
| | 24,320 |
| | — |
| | — |
| | — |
|
Drilling rig contracts (4) | | 46,295 |
| | 26,017 |
| | 20,278 |
| | — |
| | — |
| | 28,381 |
| | 28,381 |
| | — |
| | — |
| | — |
|
| Asset retirement obligations | | 20,641 |
| | 915 |
| | 982 |
| | 558 |
| | 18,186 |
| | 31,086 |
| | 1,350 |
| | 914 |
| | 2,094 |
| | 26,728 |
|
Natural gas processing and transportation agreements (5) | | 12,877 |
| | 10,599 |
| | 2,278 |
| | — |
| | — |
| |
Natural gas transportation, gathering and processing agreements with non-affiliates (5) | | | 420,149 |
| | 18,936 |
| | 85,944 |
| | 85,944 |
| | 229,325 |
|
Gathering, processing and disposal agreements with San Mateo (6) | | | 221,101 |
| | 800 |
| | 69,994 |
| | 75,102 |
| | 75,205 |
|
Natural gas construction contracts (7) | | | 3,635 |
| | 3,635 |
| | — |
| | — |
| | — |
|
| Total contractual cash obligations | | $ | 691,750 |
| | $ | 51,027 |
| | $ | 28,561 |
| | $ | 6,641 |
| | $ | 605,521 |
| | $ | 2,070,616 |
| | $ | 80,513 |
| | $ | 164,643 |
| | $ | 434,281 |
| | $ | 1,391,179 |
|
__________________
| |
| (1) | At December 31, 2016,2018, we had no$40.0 million of borrowings outstanding under the Credit Agreement and approximately $0.8$3.0 million in outstanding letters of credit issued pursuant to the Credit Agreement. The Credit Agreement matures in October 2020.2023. We also had $220.0 million of borrowings outstanding under the San Mateo Credit Facility. The San Mateo Credit Facility matures in December 2023. The amounts included in the table above represent principal maturities only. Assuming the amounts outstanding and interest rates of 3.68% and 4.01%, respectively, at December 31, 2018, the interest expense is expected to be approximately $1.5 million and $8.8 million each year until maturity. |
| |
| (2) | The amounts included in the table above represent principal maturities only. Interest expense on the $1.05 billion of Notes that were outstanding as of December 31, 2018 is expected to be approximately $61.7 million each year until maturity. |
| |
| (3) | At December 31, 2016,2018, we had outstanding commitments to participate in the drilling and completion of various non-operated wells. Our working interests in these wells are typically small, and certain of these wells were in progress at December 31, 2016.2018. If all of these wells are drilled and completed, we will have minimum outstanding aggregate commitments for our participation in these wells of approximately $11.1$24.3 million at December 31, 2016,2018, which we expect to incur within the next year. |
| |
| (4) | We do not own or operate our own drilling rigs, but instead we enter into contracts with third parties for such drilling rigs. See Note 13 to the consolidated financial statements in this Annual Report for more information regarding these contractual commitments. |
| |
| (5) | Effective September 1, 2012, we entered into a firm five-year natural gas processing and transportation agreement for a significant portion of our operated natural gas production in South Texas. Effective October 1,In late 2015, we entered into a 15-year fixed-fee natural gas gathering and processing agreement for a significant portion of our operated natural gas production in Loving County, Texas. In late 2017, we entered into an 18-year fixed-fee natural gas transportation agreement where we committed to deliver a portion of the residue gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline in Eddy County, New Mexico. In late 2017, we also entered into a fixed-fee NGL transportation and fractionation agreement whereby we committed to deliver our NGL production at the tailgate of the Black River Processing Plant. We have committed to deliver a minimum amount of NGLs to the counterparty upon construction and completion of a pipeline expansion and a fractionation facility by the counterparty, which is currently expected to be completed in 2020. We have no rights to compel the counterparty to construct this pipeline extension or fractionation facility. If the counterparty does not construct the pipeline extension and fractionation facility, then we do not have any minimum volume commitments under the agreement. If the counterparty constructs the pipeline extension and fractionation facility on or prior to February 28, 2021, then we will have a commitment to deliver a minimum amount of NGLs for seven years following the completion of the pipeline extension and fractionation facility. If we do not meet our NGL volume commitment in any quarter during the seven-year commitment period, we will be required to pay a deficiency fee per gallon of NGL deficiency. The amounts in the table assume that the seven-year period containing minimum NGL volume commitments begins in 2020. In the second quarter of 2018, we entered into a 16-year, fixed-fee natural gas transportation agreement that begins on October 1, 2019, whereby we committed to deliver a portion of the residue gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline. Additionally, in the second quarter of 2018, we entered into a short-term natural gas transportation agreement whereby we committed to deliver a portion of the residue gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline. Lastly, in the second quarter of 2018, we entered into a 10-year, fixed-fee natural gas sales agreement whereby we committed to deliver residue gas through the counterparty’s pipeline to the Texas Gulf Coast beginning on the in-service date for such pipeline, which is expected to be operational in late 2019. See Note 13 to the consolidated financial statements in this Annual Report for more information regarding these contractual commitments. |
| |
| (6) | In February 2017, we dedicated our current and future leasehold interests in the Rustler Breaks and Wolf asset areas pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements. In addition, effective February 1, 2017, we dedicated our current and future leasehold interests in the Rustler Breaks asset area pursuant to a 15-year, fixed-fee natural gas processing agreement. See Note 13 to the consolidated financial statements in this Annual Report for more information regarding these contractual commitments. |
| |
| (7) | During the first quarter of 2018, a subsidiary of San Mateo entered into agreements for additional field compression and an amine gas treatment unit to maximize the operation of the Black River Processing Plant. See Note 13 to the consolidated financial statements in this Annual Report for more information regarding these contractual commitments. |
General Outlook and Trends
Our business success and financial results are dependent on many factors beyond our control, such as economic, political and regulatory developments, as well as competition from other sources of energy. Commodity price volatility, in particular, is a significant risk to our business and results of operations. Commodity prices are affected by changes in market supply and demand, which are impacted by overall economic activity, the actions of OPEC, weather, pipeline capacity constraints, inventory storage levels, oil and natural gas price differentials and other factors.
In 2018, oil prices generally improved from the lower prices we experienced in 2016 and 2017, although oil prices in 2018 remained significantly below their most recent highs in 2014. For the year ended December 31, 2018, oil prices averaged $64.89 per Bbl, based upon the NYMEX West Texas Intermediate oil futures contract price for the earliest delivery date. During 2018, oil prices began the year at $60.42 per Bbl and increased steadily, reaching a high of $76.41 per Bbl in early October. During the fourth quarter of 2018, however, oil prices declined more than 40% from the high in early October to a low of $42.53 per Bbl in late December.
We realized a weighted average oil price of $57.04 per Bbl ($57.38 per Bbl including realized gains for oil derivatives) for our oil production for the year ended December 31, 2018, as compared to $49.28 per Bbl ($48.81 per Bbl including realized losses from oil derivatives) for the year ended December 31, 2017. At February 26, 2019, the NYMEX West Texas Intermediate oil futures contract price for the earliest delivery date had improved from year-end 2018, closing at $55.50 per Bbl, and was lower compared to $63.91 per Bbl on February 26, 2018.
Natural gas prices traded in a fairly narrow range during much of 2018, before both rising and falling sharply during the fourth quarter of 2018. For the year ended December 31, 2018, natural gas prices averaged $3.07 per MMBtu, based upon the NYMEX Henry Hub natural gas futures contract price for the earliest delivery date. During 2018, natural gas prices began the year at $2.95 per MMBtu and reached a high of $4.84 per MMBtu in mid-November, before declining to $2.94 per MMBtu in late December.
We realized a weighted average natural gas price of $3.49 per Mcf ($3.46 per Mcf included realized losses from natural gas derivatives) for our natural gas production for the year ended December 31, 2018, as compared to $3.72 per Mcf ($3.70 per Mcf including realized losses from natural gas and NGL derivatives) for the year ended December 31, 2017. At February 26, 2019, the NYMEX Henry Hub natural gas futures contract price for the earliest delivery date had declined slightly from year-end 2018, closing at $2.86 per MMBtu, and was slightly higher as compared to $2.64 per MMBtu at February 26, 2018.
The prices we receive for oil, natural gas and NGLs heavily influence our revenue, profitability, cash flow available for capital expenditures, access to capital and future rate of growth. Oil, natural gas and NGL prices are subject to wide fluctuations in response to relatively minor changes in supply and demand. Historically, the markets for oil, natural gas and natural gas liquidsNGLs have been volatile and these markets will likely continue to be volatile in the future. Prices for oil, natural gas and natural gas liquids affect the cash flows available to us for capital expenditures and our ability to borrow and raise additional capital. Declines in oil, natural gas or natural gas liquidsNGL prices not only reduce our revenues, but could also reduce the amount of oil, natural gas and/or natural gas liquids thatand NGLs we can produce economically, and, as a result, could have an adverse effect on our financial condition, results of operations, cash flows and reserves. We are uncertain if oil and natural gas prices may rise from their current levels, and in fact, oil and natural gas prices may decrease in future periods. See “Risk Factors — Our Success Is Dependent on the Prices of Oil and Natural Gas. Low Oil and Natural Gas Prices and the Continued Volatility in These Prices May Adversely Affect Our Financial Condition and Our Ability to Meet Our Capital Expenditure Requirements and Financial Obligations.”
From time to time, we use derivative financial instruments to mitigate our exposure to commodity price risk associated with oil, natural gas and natural gas liquidsNGL prices. Even so, decisions as to whether, at what price and what production volumes to hedge are difficult and depend on market conditions and our forecast of future production and oil, natural gas and natural gas liquidsNGL prices, and we may not always employ the optimal hedging strategy. This, in turn, may affect the liquidity that can be accessed through the borrowing base under our Credit Agreement and through the capital markets. See “Risk Factors — Our Success Is Dependent on the Prices of Oil and Natural Gas. Low Oil or Natural Gas Prices and the Substantial Volatility in These Prices May Adversely Affect Our Financial Condition and Our Ability to Meet Our Capital Expenditure Requirements and Financial Obligations.”
In 2016,addition, the prices we receive for oil and natural gas production often reflect a discount to the relevant benchmark prices, remained significantly below their most recent highs in 2014, although commodity prices did begin to improve in the latter half of 2016. Oil prices had increased to $54.06 per Bbl in late December 2016 from $37.04 on December 31, 2015, and natural gas prices had increased to $3.93 per MMBtu in late December 2016 from $2.34 per MMBtu on December 31, 2015. The sharp declines in oil and natural gas prices since late 2014 have impacted our revenues, profitability and cash flows in 2015 and 2016,such as compared to 2014, and additional declines in oil and natural gas prices could have an adverse impact on our borrowing capacity, ability to obtain additional capital, revenues, profitability and cash flows. We are uncertain if oil and natural gas prices may continue to rise from their current levels, and in fact, oil and natural gas prices may decrease again in future periods.
For the year ended December 31, 2016, oil prices averaged $43.40 per Bbl, ranging from a high of $54.06 per Bbl in late December to a low of $26.21 per Bbl in mid-February, based upon the NYMEX West Texas Intermediate oil futures contract price for the earliest delivery date. We realized a weighted average oil price of $41.19 per Bbl ($42.34 per Bbl including realized gains from oil derivatives) for our oil production for the year ended December 31, 2016, as compared to $45.27 per Bbl ($59.13 per Bbl including realized gains from oil derivatives) for the year ended December 31, 2015. At February 24, 2017, the NYMEX West Texas Intermediate oil futures contract for the earliest delivery date had remained fairly steady, closing at $53.99 per Bbl, as compared to $32.15 per Bbl at February 24, 2016.
For the year ended December 31, 2016, natural gas prices averaged $2.55 per MMBtu, ranging from a high of approximately $3.93 per MMBtu in late December to a low of approximately $1.64 per MMBtu in early March, based uponor the NYMEX Henry Hub natural gas futures contractprice. The difference between the benchmark price forand the earliest delivery date. We realizedprice we receive is called a weighted average natural gas pricedifferential. At December 31, 2018, most of $2.66 per Mcf ($2.78 per Mcf including realized gainsour oil production from natural gas derivatives) forthe Delaware Basin was sold based on prices established in Midland, Texas, and most of our natural gas production for the year ended December 31, 2016, as compared to $2.71 per Mcf ($3.24 per Mcf including realized gains from natural gas and NGL derivatives) for the year ended December 31, 2015. At February 24, 2017, the NYMEX Henry Hub natural gas futures contract for the earliest delivery date had declined from late December, closing at $2.63 per MMBtu, as compared to $1.78 per MMBtu at February 24, 2016.
We expect that development of our Delaware Basin assets will be the primary focus of our operations and capital expenditures in 2017. We plan to operate four contracted drilling rigs in the Delaware Basin duringwas sold based on prices established at the first quarter of 2017, with a fifth drilling rig addedWaha Hub in the Delaware Basin infar West Texas. During the second quarter of 2017. Our 2017 estimated capital expenditure budget consists of $370 to $390 million2018, the price differentials for drilling, completions, facilitiesoil sold in Midland and infrastructure and $56 to $64 million for midstream capital expenditures, which represents our 51% share of an estimated 2017 capital expenditure budget of $110 to $125 million for San Mateo. Substantially all of our 2017 estimated capital expenditures will be allocatednatural gas sold at the Waha Hub compared to the further delineationbenchmark prices for oil and developmentnatural gas, respectively, began to widen significantly and continued to widen throughout much of the year. These widening basis differentials negatively impacted our growing leasehold positionoil and midstream assetsnatural gas revenues throughout the second, third and fourth quarters of 2018.
During 2018, the Midland-Cushing (Oklahoma) oil price differential increased substantially from essentially no difference in the Delaware Basin, withfirst quarter to as much as $16.00 per Bbl in late September, although since then, it has improved. The Midland-Cushing (Oklahoma) oil price differential narrowed to about $5.00 per Bbl at the exceptionbeginning of amounts allocated2019 and is anticipated to limited operations in the Eagle Ford and Haynesville shales to maintain and extend leases and to participate in certain non-operated well opportunities. Our 2017 Delaware Basin drilling program will focus on the continued development of the Wolf and Rustler Breaks asset areas and thenarrow further delineation and development of the Jackson Trust, Ranger/Arrowhead and Twin Lakes asset areas, although we do anticipate continuing to delineate previously untested zones in the Wolf and Rustler Breaks asset areas during 2017.
We intend to continue acquiring acreage and mineral interests, principally in the Delaware Basin, during 2017. These expenditures are opportunity-specific and per-acre prices can vary significantly based on the prospect. As a result, it is difficult
during 2019, although it is possible that this differential could widen again at certain times during 2019. Similarly, the natural gas price differential increased significantly throughout 2018 from about $0.50 per MMBtu at the beginning of the year to estimatebetween $1.00 and $2.00 per MMBtu for most of 2018, but reaching highs of greater than $4.00 per MMBtu for a brief period near the end of the year. The natural gas price differential narrowed to between $1.00 and $2.00 per MMBtu at the beginning of 2019 and is anticipated to remain in this range for much of 2019, although it is possible that this differential could widen again at certain times during 2019.
We anticipate that these 2017 capital expenditures with any degreewider oil and natural gas price differentials could persist throughout much of certainty; therefore,2019 or longer until additional oil and natural gas pipeline capacity from West Texas to the Texas Gulf Coast and other end markets is completed. We can provide no assurances as to how long these wider differentials may persist, and as noted above, these price differentials could widen further in future periods. In addition, we have no derivative contracts in place to mitigate our exposure to these oil and natural gas price differentials during 2019 and have limited oil basis hedges in place for 2020.
These widening basis differentials are largely attributable to industry concerns regarding the near-term sufficiency of pipeline takeaway capacity for oil, natural gas and NGL production in the Delaware Basin. At February 26, 2019, we had not provided estimated capital expenditures relatedexperienced material pipeline-related interruptions to acreageour oil, natural gas or NGL production. During the third quarter of 2018, shortages of NGL fractionation capacity were experienced by certain operators in the Delaware Basin and mineral acquisitions for 2017.elsewhere. We did not experience such problems in the third quarter of 2018 and have not experienced such problems since then. Although we do not expect to encounter fractionation capacity problems going forward, we can provide no assurances that such problems will not arise. If we do experience any interruptions with takeaway capacity or NGL fractionation, our oil and natural gas revenues, business, financial condition, results of operations and cash flows could be adversely affected.
Coinciding with the recent improvements in oil and natural gas prices in late 2016,during the first three quarters of 2018, we have begun to experienceexperienced price increases from our service providers for some of the products and services we use in our drilling, completion and production operations. If oil and natural gas prices remain at their current levels for a longer period of time or should they increase further, we would anticipate receiving additional price increases for drilling, completion and production products and services, although we can provide no assurances as to the eventual magnitude of these increases. In addition, we attempt to avoid long-term service agreements where possible in order to minimize ongoing future commitments.
Our oil and natural gas exploration, development, production, midstream and related operations are subject to extensive federal, state and local laws, rules and regulations. The regulatory burden on the oil and natural gas industry increases our cost of doing business and affects our profitability. Because these laws, rules and regulations are frequently amended or reinterpreted and new laws, rules and regulations are proposed or promulgated, we are unable to predict the future cost or impact of complying with the laws, rules and regulations to which we are, or will become, subject. For example, in early 2019, separate bills were introduced in the New Mexico Senate proposing to add a surtax on natural gas processors and proposing to place a moratorium on hydraulic fracturing. New Mexico’s governor also signed an executive order requiring a regulatory framework to ensure reductions of methane emissions. Such laws, rules and regulations, if enacted, could have an adverse impact on our business, financial condition, results of operations and cash flows.
Like other oil and natural gas producing companies, our properties are subject to natural production declines. By their nature, our oil and natural gas wells will experience rapid initial production declines. We attempt to overcome these production declines by drilling to develop and identify additional reserves, by exploring for new sources of reserves and, at times, by acquisitions. During times of severe oil, natural gas and natural gas liquidsNGL price declines, however, drilling additional oil or natural gas wells may not be economical,economic, and we may find it necessary to reduce capital expenditures and curtail drilling operations in order to preserve liquidity. A material reduction in capital expenditures and drilling activities could materially impact our production volumes, revenues, reserves, cash flows and our availability under our Credit Agreement. See “Risk Factors — Our Exploration, Development, Exploitation and ExploitationMidstream Projects Require Substantial Capital Expenditures That May Exceed Our Cash Flows from Operations and Potential Borrowings, and We May Be Unable to Obtain Needed Capital on Satisfactory Terms, Which Could Adversely Affect Our Future Growth.”
We strive to focus our efforts on increasing oil and natural gas reserves and production while controlling costs at a level that is appropriate for long-term operations. Our ability to find and develop sufficient quantities of oil and natural gas reserves at economical costs is critical to our long-term success. Future finding and development costs are subject to changes in the costs of acquiring, drilling and completing our prospects.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets, liabilities, revenues and expenses during each reporting period. We believe that our estimates and assumptions are reasonable and reliable, and believe that the actual results will not differ significantly from those reported; however, such estimates and assumptions are subject to a number of risks and uncertainties, and such risks and uncertainties could cause the actual results to differ materially from our estimates. We consider the following to be our most critical accounting policies and estimates involving significant judgment or estimates by our management. See Note 2 to the consolidated financial statements in this Annual Report for further details on our accounting policies at December 31, 2016. Such information is incorporated herein by reference.2018.
Oil and Natural Gas Properties
We use the full-cost method of accounting for our investments in oil and natural gas properties. Under this method of accounting, all costs associated with the acquisition, exploration and development of oil and natural gas properties and reserves, including unproved and unevaluated property costs, are capitalized as incurred and accumulated in a single cost center representing our activities, which are undertaken exclusively in the United States. Such costs include lease acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, costs of drilling both productive and non-productive wells, capitalized interest on qualifying projects and general and administrative expenses directly related to acquisition, exploration and development activities, but do not include any costs related to production, selling or general corporate administrative activities.
Capitalized costs of oil and natural gas properties are amortized using the unit-of-production method based upon production and estimates of proved reserves quantities. Unproved and unevaluated property costs are excluded from the amortization base used to determine depletion. Unproved and unevaluated properties are assessed for possible impairment on a periodic basis based upon changes in operating or economic conditions. This assessment includes consideration of the following factors, among others: the assignment of proved reserves, geological and geophysical evaluations, intent to drill, remaining lease term and drilling activity and results. Upon impairment, the costs of the unproved and unevaluated properties are immediately included in the amortization base. Exploratory dry holes are included in the amortization base immediately upon the determination that the well is not productive.
Sales of oil and natural gas properties are accounted for as adjustments to net capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between net capitalized costs and proved reserves of oil and natural gas. All costs related to production activities and maintenance and repairs are expensed as incurred. Significant workovers that increase the properties’ reserves are capitalized.
Ceiling Test
The net capitalized costs of oil and natural gas properties are limited to the lower of unamortized costs less related deferred income taxes or the cost center “ceiling.” The cost center ceiling is defined as the sum of:
(a) the present value, discounted at 10%, of future net revenues of proved oil and natural gas reserves, reduced by the estimated costs of developing these reserves, plus
(b) unproved and unevaluated property costs not being amortized, plus
(c) the lower of cost or estimated fair value of unproved and unevaluated properties included in the costs being amortized, if any, less
(d) any income tax effects related to the properties involved.
Any excess of our net capitalized costs above the cost center ceiling as described above is charged to operations as a full-cost ceiling impairment. The fair value of our derivative instruments is not included in the ceiling test computation as we do not designate these instruments as hedge instruments for accounting purposes.
The estimated present value of after-tax future net cash flows from proved oil and natural gas reserves is highly dependent upon the quantities of proved reserves, the estimation of which requires substantial judgment. The associated commodity prices and the applicable discount rate used in these estimates are in accordance with guidelines established by the SEC. Under these guidelines, oil and natural gas reserves are estimated using then-current operating and economic conditions, with no provision for price and cost escalations in future periods except by contractual arrangements. Future net revenues are calculated using prices that represent the arithmetic averages of the first-day-of-the-month oil and natural gas prices for the previous 12-month period, and a 10% discount factor is used to determine the present value of future net revenues.
Because the cost center ceiling calculation is based on the average of historical prices, which may or may not be representative of future prices, and requires a 10% discount factor, the resulting estimated value may not be indicative of the fair market value of our properties. Any impairment related to the excess of our net capitalized costs above the resulting cost center ceiling should not be viewed as an absolute indicator of a reduction in the ultimate value of the related reserves.
Derivative Financial Instruments
From time to time, we use derivative financial instruments to mitigate our exposure to commodity price risk associated with oil, natural gas and natural gas liquidsNGL prices. These instruments typically consist of put and call options in the form of costless (or zero-cost) collars and swap contracts. Costless collars provide us with downside price protection through the purchase of a put option whichthat is financed through the sale of a call option. Because the call option proceeds are used to offset the cost of the put option, these arrangements are initially “costless” to us. Three-way costless collars also provide us with downside price protection through the purchase of a put option, but they also allow us to participate in price upside through the purchase of a call option. The purchase of both the put option and call option are financed through the sale of a call option. Because the proceeds from the call option sale are used to offset the cost of the purchased put and call options, these arrangements are also initially “costless” to us.
In the case of a costless collar, the put option and the call option or options have different fixed price components. In a swap contract, a floating price is exchanged for a fixed price over a specified period, providing downside price protection.
Prior to settlement, our derivative financial instruments are recorded on the balance sheet as either an asset or a liability measured at fair value. We have elected not to apply hedge accounting for our existing derivative financial instruments, and as a result, we recognize the change in derivative fair value between reporting periods currently in our consolidated statements of operations. Such changes in fair value are reported under Revenues as “Unrealized gain (loss) on derivatives.” Changes in the fair value of these open derivative financial instruments can have a significant impact on our reported results from period to period but do not impact our cash flows from operations, liquidity or capital resources. The fair value of our open derivative financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures.
Realized gains and realized losses from the settlement of derivative financial instruments do have a direct impact on our cash flow from operations and liquidity. The impact of these settlements is also reported under Revenues as “Realized gain (loss) on derivatives.”
Revenue Recognition
During the first quarter of 2018, we adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which specifies how and when to recognize revenue. This standard requires expanded disclosures surrounding revenue recognition and is intended to improve the financial reporting requirements for revenue from contracts with customers and converge these requirements with international standards. We followadopted the new guidance using the modified retrospective approach. The adoption did not require an adjustment to opening accumulated deficit for any cumulative effect adjustment and did not have a material impact on our consolidated balance sheets, statements of operations, statement of shareholders’ equity or statements of cash flows.
Prior to the adoption of ASC 606, we recorded oil and natural gas revenues at the time of physical transfer of such products to the purchaser. We followed the sales method of accounting for our oil natural gas and natural gas liquids revenue, whereby we recognize revenue, net of royalties,sales, recognizing revenues based on allour actual proceeds from the oil natural gas and natural gas liquids sold to purchasers regardlesspurchasers.
We enter into contracts with customers to sell our oil and natural gas production. With the adoption of whetherASC 606, revenue from these contracts is recognized in accordance with the salesfive-step revenue recognition model prescribed in ASC 606. Specifically, revenue is recognized when our performance obligations under these contracts are proportionatesatisfied, which generally occurs with the transfer of control of the oil and natural gas to our ownership in the property. Under this method,purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the timeamount of consideration we expect to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production.
The majority of our oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the oil has been transferred to the purchaser. The majority of the oil produced is sold under contracts using market-based pricing, which price is then adjusted for differentials based upon delivery location and oil quality. To the extent the differentials are incurred at or after the transfer of control of the oil, the differentials are included in oil sales on the statements of operations, as they represent part of the transaction price of the contract. If the differentials, or other related costs, are incurred prior to the transfer of control of the oil, those costs are included in production taxes, transportation and processing expenses on our consolidated statements of operations, as they represent payment for services performed outside of the contract with the customer.
Our natural gas is sold at the lease location, at the inlet or outlet of a natural gas processing plant or at an interconnect near a marketing hub following transportation from a processing plant. The majority of our natural gas is sold under fee-based
contracts. When the natural gas is sold at the lease, the purchaser gathers the natural gas and transports the natural gas liquidsvia pipeline to natural gas processing plants where, if necessary, NGLs are producedextracted. The NGLs and remaining residue gas are then sold by the purchaser, or if we elect to take in-kind the natural gas or NGLs, we sell the natural gas or NGLs to a third party. Under the fee-based contracts, we receive NGL and we accrue forresidue gas value, less the fee component, or are invoiced the fee component. To the extent control of the natural gas transfers upstream of the transportation and processing activities, revenue earned but not yet received. is recognized as the net amount received from the purchaser. To the extent that control transfers downstream of those services, revenue is recognized on a gross basis, and the related costs are included in production taxes, transportation and processing expenses on our consolidated statements of operations.
We recognize midstream services revenues at the time services have been rendered and the price is fixed and determinable. Third-party midstream services revenues are those revenues from midstream operations related to third parties, including working interest owners in our operated wells. All midstream services revenues related to our working interest are eliminated in consolidation. Since we have a right to payment from our customers in amounts that correspond directly to the value that the customer receives from the performance completed on each contract, we apply the practical expedient in ASC 606 that allows recognition of revenue in the amount for which there is a right to invoice the customer without estimating a transaction price for each contract and allocating that transaction price to the performance obligations within each contract.
We periodically enter into natural gas purchase transactions with third parties whereby we process the third party’s natural gas at the Black River Processing Plant and then purchase, and subsequently sell, the residue gas and NGLs to other purchasers. Revenues and expenses from these transactions are presented on a gross basis on our consolidated statements of operations as we act as a principal in the transactions by assuming the risk and rewards of ownership, including credit risk, of the natural gas purchased and by assuming the responsibility to deliver and process the natural gas volumes to be sold.
mineral interests, may enter into or extend a lease to a third-party lessee to develop the oil and natural gas attributable to certain of our mineral interests in return for a specified payment or lease bonus. In those instances, revenue is recognized in the period when the lease is signed, and we have no further obligation to the lessee. We record these payments as “Lease bonus - mineral acreage” revenues on our consolidated statements of operations.
Stock-Based Compensation
We account for stock-based compensationmay grant equity-based and liability-based common stock, stock options, restricted stock, restricted stock units, performance stock units and other awards permitted under any long-term incentive plan then in accordance with ASC 718.effect to members of our Board of Directors and certain employees, contractors and advisors. Since 2012, all stock optionstock-based awards have been granted under the 2012 Long-Term Incentive Plan or, for awards granted after June 10, 2015, under the Amended and Restated 2012 Long-Term Incentive Plan, and substantially all of these awards as of December 31, 2018 were equity instruments. We did not grant any stock option awards in 2011. Prior to 2011, all stock option awards were granted under our 2003 Stock and Incentive Plan and since November 22, 2010, these awards have beenare accounted for as liability instruments. We useduse the fair value method to measure and recognize the liability associated with our outstanding liability-based stock options and to measure and recognize the equity associated with our equity-based stock options. Stock options typically vest over three or four years, and the associated compensation expense is recognized on a straight-line basis over the vesting period. Restricted stock and restricted stock units typically vest over a period of one to four years, and compensation expense is recognized on a straight line basis over the vesting period. As our shares were not publicly traded prior to February 2, 2012, prior to the beginning of 2016, we estimated the future volatility of our stock using the historical volatility of the common stock of a group of companies we consider to be a representative peer group. Beginning in 2016, we began usingWe use our own historical volatility to estimate the future volatility of our stock as we had four years of historical stock prices as a publicly traded company. Management believes that, beginning in 2016, our own average historical volatility rates are the best available indicator of future volatility.stock.
We have adopted the “simplified method” as outlined in Staff Accounting Bulletin Topic 14 for estimating the expected term of awards. The risk free interest rate is the rate for constant yield U.S. Treasury securities with a term to maturity that is consistent with the expected term of the award.
Assumptions are reviewed each time new equity-based option awards are granted and quarterly for outstanding liability-based option awards. The assumptions used may be impacted by actual fluctuations in our stock price, movements in market interest rates and option terms. The use of different assumptions produces a different fair value for equity-based option awards and outstanding liability-based option awards and can significantly impact the amount of stock compensation expense recognized in our consolidated statement of operations. We use the Black Scholes Merton model to determine the fair value of service-based option awards and the Monte Carlo method to determine the fair value of option awards that contain a market condition. The fair value of restricted stock and restricted stock unit awards is recognized based on the fair value of our stock on the date of the grant. See Note 8 to the consolidated financial statements in this Annual Report for further details on our stock-based compensation at December 31, 2016. Such information is incorporated herein by reference.2018.
Income Taxes
We account for income taxes using the asset and liability approach for financial accounting and reporting. The amount of income taxes recorded requires interpretations of complex rules and regulations of federal and state taxing authorities. We have recognized deferred tax assets and liabilities for temporary differences, operating losses and tax carryforwards. We evaluate the probability of realizing the future benefits of our deferred tax assets and provide a valuation allowance for the portion of any
deferred tax assets where the likelihood of realizing an income tax benefit in the future does not meet the more likely than not criteria for recognition.
We account for uncertainty in income taxes by recognizing the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. See Note 7 to the consolidated financial statements in this Annual Report for additional information of the impact of the 2017 Tax Cuts and Jobs Act to our consolidated financial statements.
Oil and Natural Gas Reserves Quantities and Standardized Measure of Future Net Revenue
Our engineers and technical staff prepare our estimates of oil and natural gas reserves and associated future net revenues. While the applicable rules allow us to disclose proved, probable and possible reserves, we have elected to present only proved reserves in this Annual Report. The applicable rules define proved reserves as the quantities of oil and natural gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible — producible—from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations — regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.
Our engineers and technical staff must make many subjective assumptions based on their professional judgment in developing reserves estimates. Reserves estimates are updated quarterly and consider recent production levels and other technical information about each well. Estimating oil and natural gas reserves is complex and is inexact because of the numerous uncertainties inherent in the process. The process relies on interpretations of available geological, geophysical, petrophysical, engineering and production data. The extent, quality and reliability of both the data and the associated interpretations can vary. The process also requires certain economic assumptions, including, but not limited to, oil and natural
gas prices, development expenditures, operating expenses, capital expenditures and taxes. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas will most likely vary from our estimates. Accordingly, reserves estimates are generally different from the quantities of oil and natural gas that are ultimately recovered. Any significant variance could materially and adversely affect our future reserves estimates, financial condition, results of operations and cash flows. We cannot predict the amounts or timing of future reserves revisions. If such revisions are significant, they could significantly affect future amortization of capitalized costs and result in an impairment of assets that may be material. See “Risk Factors — Our Oil and Natural Gas Reserves Are Estimated and May Not Reflect the Actual Volumes of Oil and Natural Gas We Will Recover, and Significant Inaccuracies in These Reserves Estimates or Underlying Assumptions Will Materially Affect the Quantities and Present Value of Our Reserves.”
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements in this Annual Report for a description of recent accounting pronouncements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to a variety of market risks including commodity price risk, interest rate risk and counterparty and customer risk. We address these risks through a program of risk management including the use of derivative financial instruments, but we do not enter into derivative financial instruments for trading purposes.
Commodity price exposure. We are exposed to market risk as the prices of oil, natural gas and natural gas liquidsNGLs fluctuate as a result of changes in supply and demand and other factors. To partially reduce price risk caused by these market fluctuations, we have entered into derivative financial instruments in the past and expect to enter into derivative financial instruments in the future to cover a significant portion of our anticipated future production.
We typically use costless (or zero-cost) collars, three-way collars and/or swap contracts to manage risks related to changes in oil, natural gas and natural gas liquidsNGL prices. Costless collars provide us with downside price protection through the purchase of a put option whichthat is financed through the sale of a call option. Because the call option proceeds are used to offset the cost of the put option, these arrangements are initially “costless” to us. Three-way costless collars also provide us with downside price protection through the purchase of a put option, but they also allow us to participate in price upside through the purchase of a call option. The purchase of both the put option and call option are financed through the sale of a call option. Because the proceeds from the call option sale are used to offset the cost of the purchased put and call options, these arrangements are also initially “costless” to us. In the case of a costless collar, the put option or options and the call option have different fixed price
components. In a swap contract, a floating price is exchanged for a fixed price over a specified period, providing downside price protection.
We record all derivative financial instruments at fair value. The fair value of our derivative financial instruments is determined using purchase and sale information available for similarly traded securities. At December 31, 2016, Comerica Bank,2018, The Bank of Nova Scotia BMO Harris Financing (Bank of Montreal), and SunTrust Bank (or affiliates thereof) were the counterparties for all of our derivative instruments. We have considered the credit standing of the counterparties in determining the fair value of our derivative financial instruments.
At December 31, 2016,2018, we had entered into various costless collar, three-way costless collar and swap contracts to mitigate our exposure to fluctuations in oil and natural gas prices, each with (i) an established price floor and ceiling. For each calculation period,ceiling for the specifiedcostless collars, (ii) an established price for determining the realized gain or loss to us pursuant to any oil contract is the arithmetic average of the settlementfloor and fixed prices for the NYMEX West Texas Intermediate oil futures contract forshort call (the ceiling) and the first nearby month corresponding to the calculation period’s calendar month,long call and for any natural gas contract is the settlement(iii) a fixed price for the NYMEX Henry Hub natural gas futures contract for the delivery month corresponding to the calculation period’s calendar month for the settlement date of that contract period.
swaps. When the settlement price is below the price floor established by one or more of these collars, we receive from our counterparty an amount equal to the difference between the settlement price and the price floor multiplied by the contract oil or natural gas volume. When the settlement price is above the price ceiling established by one or more of thesethe costless collars, we pay our counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract oil or natural gas volume. When the settlement price is above the fixed price of the sold call established by one or more of the three-way costless collars but below the fixed price of the long call established by one or more of these three-way costless collars, we pay to the counterparty an amount equal to the difference between the settlement price and the fixed price of the sold call multiplied by the contract oil or natural gas volume. When the settlement price is above the fixed price of the long call established by one or more of the three-way costless collars, we pay to the counterparty an amount equal to the difference between the fixed price of the long call and the fixed price of the sold call multiplied by the contract oil or natural gas volume.
During the year ended December 31, 2018, we entered into various swap contracts to mitigate our exposure to price differences between NYMEX West Texas Intermediate Cushing and Argus West Texas Intermediate Midland crude oil. When the settlement price is below the fixed price established by one or more of these swaps, we receive from the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract oil volume. When the settlement price is above the fixed price established by one or more of these swaps, we pay to the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract oil volume.
See Note 11 to the consolidated financial statements in this Annual Report for a summary of our open derivative financial instruments at December 31, 2016.2018. Such information is incorporated herein by reference.
Effect of Recent Derivatives Legislation. On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, which is intended to modernize and protect the integrity of the U.S. financial system. The Dodd-Frank Act, among other things, establishesestablished federal oversight and regulation of certain derivative products, including commodity hedges of the type we use. The Dodd-Frank Act requires the Commodity Futures Trading Commission, or CFTC and the SEC to promulgate rules and regulations implementing the Dodd-Frank Act. Although the CFTC has finalized certain of these regulations, others remain to be finalized or implemented, and it is not possible at this time to predict when, or if, this will be accomplished. Based upon the limited assessments we are able to make with respect to the Dodd-Frank Act, there is the possibility that the Dodd-Frank Act could have a substantial and adverse impact on our ability to enter into and maintain these commodity hedges. In particular, the Dodd-Frank Act could result in the implementation of
position limits and additional regulatory requirements on our derivative arrangements, which could include new margin, reporting and clearing requirements. In addition, this legislation could have a substantial impact on our counterparties and may increase the cost of our derivative arrangements in the future. See “Risk Factors — The Derivatives Legislation Adopted by Congress Could Have an Adverse Impact on Our Ability to Hedge Risks Associated with Our Business.”
Interest rate risk. We do not and have not used interest rate derivatives to alter interest rate exposure in an attempt to reduce interest rate expense on existing debt since we borrowed under our Credit Agreement for the first time in December 2010. At December 31, 20162018, we had no outstanding borrowings of $40.0 million at an interest rate of 3.68% per annum under our Credit Agreement, and $575.0 million$1.05 billion in senior notesNotes outstanding at a coupon rate of 6.875%5.875% per annum and $220.0 million of outstanding borrowings under the San Mateo Credit Facility at an interest rate of 4.01% per annum. If we incur additional indebtedness in the future and at higher interest rates, we may use interest rate derivatives. Interest rate derivatives would be used solely to modify interest rate exposure and not to modify the overall leverage of the debt portfolio.
Counterparty and customer credit risk. Joint interest receivables arise from billing entities whichthat own partial interests in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we wish to drill. We have limited ability to control participation in our wells. We are also subject to credit risk due to concentration of our oil and natural gas receivables with several significant customers. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial condition, results of operations and cash flows. In addition, our oil, natural gas and natural gas liquids derivative arrangements expose us to credit risk in the event of nonperformance by our counterparties.
While we do not require our customers to post collateral and we do not have a formal process in place to evaluate and assess the credit standing of our significant customers for oil and natural gas receivables and the counterparties on our derivative instruments, we do evaluate the credit standing of such counterparties as we deem appropriate under the
circumstances. This evaluation requires us to conduct the due diligence necessary to determine credit terms and credit limits, which may include (i) reviewing a counterparty’s credit rating, latest financial information and, in the case of a customer with which we have receivables, its historical payment record and the financial ability of its parent company to make payment if the customer cannot and (ii) undertaking the due diligence necessary to determine credit terms and credit limits. The counterparties on our derivative financial instruments in place at February 22, 201726, 2019 were Comerica Bank, The Bank of Nova Scotia, BMO Harris Financing (Bank of Montreal), and SunTrust Bank (or affiliates thereof), which are lenders (or affiliates thereof) under our Credit Agreement, and we are likely to enter into any future derivative instruments with such banks or other lenders (or affiliates thereof) party to the Credit Agreement.
Impact of Inflation. Inflation in the United States has been relatively low in recent years and did not have a material impact on our results of operations for the years ended December 31, 2016, 20152018, 2017 and 2014.2016. Although the impact of inflation has been generally insignificant in recent years, it is still a factor in the U.S. economy and we tend to specifically experience inflationary pressure on the cost of oilfield services and equipment with increases in oil and natural gas prices and with increases in drilling activity in our areas of operations, including the Wolfcamp and Bone Spring plays in the Delaware Basin, the Eagle Ford shale play and the Haynesville shale play. See “Risk Factors — The Unavailability or High Cost of Drilling Rigs, Completion Equipment and Services, Supplies and Personnel, Including Hydraulic Fracturing Equipment and Personnel, Could Adversely Affect Our Ability to Establish and Execute Exploration and Development Plans within Budget and on a Timely Basis, Which Could Have a Material Adverse Effect on Our Financial Condition, Results of Operations and Cash Flows.”
Item 8. Financial Statements and Supplementary Data.
Our financial statements appear at the end of this Annual Report. See the index to the financial statements in Item 15.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report, we evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 20162018 to ensure that (i) information required to be disclosed in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in
the SEC’s rules and forms and that (ii) information required to be disclosed under the Exchange Act is accumulated and communicated to the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
During the quarter ended December 31, 2016,2018, there were no changes in our internal controls that have materially affected or are reasonably likely to have a material effect on our internal control over financial reporting.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, as amended. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we assessed the effectiveness of our internal control over financial reporting as of the end of the period covered by this Annual Report based on the framework in 2013 “Internal Control — Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, our Chief Executive Officer and our Chief Financial Officer concluded that our internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
KPMG, our independent registered public accounting firm, has issued an attestation report on our controls over financial reporting as of December 31, 20162018 as included herein.
Important Considerations
The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Because of these limitations, there can be no assurance that any system of disclosure controls and procedures or internal control over financial reporting will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and Board of Directors and Shareholders
Matador Resources Company:
Opinion on Internal Control Over Financial Reporting
We have audited Matador Resources Company’sCompany and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 20162018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets of the Company as of December 31, 2018 and 2017, the related statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2018, and the related notes (collectively, the “consolidated financial statements”), and our report dated March 1, 2019 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of the Company and subsidiaries as of December 31, 2016, 2015 and 2014, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2016, and our report dated March 1, 2017 expressed an unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Dallas, Texas
March 1, 20172019
Item 9B. Other Information.
Not applicable.On February 27, 2019, we entered into a First Supplemental Indenture (the “Supplemental Indenture”) with Wells Fargo Bank, National Association, as trustee (the “Trustee”), which supplements the Indenture, dated as of August 21, 2018 (the “Indenture”), among Matador, the subsidiary guarantors party thereto and the Trustee. Pursuant to the Supplemental Indenture, WR Permian, LLC, a wholly-owned subsidiary of Matador, was added as a party to and as a guarantor under the Indenture.
The foregoing description of the Supplemental Indenture does not purport to be complete and is qualified in its entirety by reference to the Supplemental Indenture, which is included in this Annual Report as Exhibit 4.3 and is incorporated herein by reference.
On February 26, 2019, our Board of Directors (the “Board”) approved the Matador Resources Company Annual Cash Incentive Plan (the “Plan”). The purpose of the Plan is to provide executives, select managers and key employees of the Company and its subsidiaries with cash-based incentive compensation opportunities tied to the achievement of one or more financial, operational or other performance goals established by the independent members of the Board or any other committee designated by the Board to administer the Plan. Each of the Company’s executive officers are eligible to participate in the Plan. The independent members of the Board, in their sole discretion, will establish the target award opportunities for each Plan participant, the applicable performance period and the performance goals for such performance period, and will ultimately determine Plan payouts in accordance with the terms of the Plan. The foregoing description of the Plan does not purport to be complete and is qualified in its entirety by reference to Plan, which is included in this Annual Report as Exhibit 10.66 and is incorporated herein by reference.
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required in response to this Item 10 is incorporated herein by reference to our definitive proxy statement for our 2019 Annual Meeting of Shareholders to be filed with the SEC pursuant to Regulation 14A promulgated under the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report.
Report (our “Definitive Proxy Statement”). Such responsive information is expected to be included under the captions “Proposal 1—Election of Directors,” “Corporate Governance,” “Executive Compensation” and “Director Compensation.” The information required in response to this Item 10 with respect to compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to our Definitive Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.”
Item 11. Executive Compensation.
The information required in response to this Item 11 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A promulgatedDefinitive Proxy Statement under the Exchange Act not later than 120 days after the end of the fiscal year covered by this Annual Report.
caption “Executive Compensation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Certain information regarding securities authorized for issuance under our equity compensation plans is included under the caption “Equity Compensation Plan Information” in Part II, Item 5 above, of this Annual Report and is incorporated herein by reference herein.reference. Other information required in response to this Item 12 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A promulgatedDefinitive Proxy Statement under the Exchange Act not later than 120 days after the endcaption “Security Ownership of the fiscal year covered by this Annual Report.
Certain Beneficial Owners and Management.”
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required in response to this Item 13 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A promulgatedDefinitive Proxy Statement under the Exchange Act not later than 120 days after the endcaptions “Transactions with Related Persons” and “Corporate Governance—Independence of the fiscal year covered by this Annual Report.
Directors.”
Item 14. Principal Accounting Fees and Services.
The information required in response to this Item 14 is incorporated herein by reference to our definitive proxy statement to be filed with the SEC pursuant to Regulation 14A promulgatedDefinitive Proxy Statement under the Exchange Act not later than 120 days after the endcaption “Proposal 5—Ratification of the fiscal year covered by this Annual Report.Appointment of KPMG LLP.”
.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
The following documents are filed as part of this Annual Report:
1. Index to Consolidated Financial Statements, Report of Independent Registered Public Accounting Firm, Consolidated Balance Sheets as of December 31, 20162018 and 2015,2017, Consolidated Statements of Operations for the Years Ended December 31, 2016, 20152018, 2017 and 2014,2016, Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2016, 20152018, 2017 and 20142016 and Consolidated Statements of Cash Flows for the Years Ended December 31, 2016, 20152018, 2017 and 2014.2016.
2. Exhibits: The exhibits required to be filed by this Item 15 are set forth in the Exhibit Index accompanying this Annual Report.
EXHIBIT INDEX
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Exhibit Number | | Description |
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| 2.1 | | Agreement and Plan of Merger, by and among Matador Resources Company (now known as MRC Energy Company), Matador Holdco, Inc. (now known as Matador Resources Company) and Matador Merger Co., dated August 8, 2011 (incorporated by reference to Exhibit 2.1 to our Registration Statement on Form S-1 filed on August 12, 2011). |
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2.2 | | Agreement and Plan of Merger, dated as of January 19, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on January 20, 2015).* |
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2.3 | | Amendment No. 1 to Agreement and Plan of Merger, dated as of January 26, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.3 to our Annual Report on Form 10-K for the year ended December 31, 2014). |
| | |
2.4 | | Amendment No. 2 to Agreement and Plan of Merger, dated as of February 2, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.4 to our Annual Report on Form 10-K for the year ended December 31, 2014). |
| | |
2.5 | | Amendment No. 3 to Agreement and Plan of Merger, dated as of February 6, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.5 to our Annual Report on Form 10-K for the year ended December 31, 2014).* |
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2.6 | | Amendment No. 4 to Agreement and Plan of Merger, dated as of February 27, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.2 to the Current Report on Form 8-K filed on March 2, 2015).* |
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2.7 | | Amendment No. 5 to Agreement and Plan of Merger, dated as of April 15, 2015, by and among HEYCO Energy Group, Inc., Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed on April 15, 2015). |
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2.8 | | Amendment No. 6 to Agreement and Plan of Merger, dated as of July 20, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015). |
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2.9 | | Amendment No. 7 to Agreement and Plan of Merger, dated as of August 24, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015). |
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2.10 | | Amendment No. 8 to Agreement and Plan of Merger, dated as of September 18, 2015, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.3 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015). |
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2.11 | | Amendment No. 9 to Agreement and Plan of Merger, dated as of March 1, 2016, by and among HEYCO Energy Group, Inc., Harvey E. Yates Company, Matador Resources Company and MRC Delaware Resources, LLC (incorporated by reference to Exhibit 2.1 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2016). |
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2.12 | | |
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| 3.1 | | Certificate of Merger between Matador Resources Company (now known as MRC Energy Company) and Matador Merger Co. (incorporated by reference to Exhibit 3.4 to our Registration Statement on Form S-1 filed on August 12, 2011). |
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3.2 | | Amended and Restated Certificate of Formation of Matador Resources Company (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on February 13, 2012). |
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|
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3.3 | | Certificate of Amendment to the Amended and Restated Certificate of Formation of Matador Resources Company (incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2015)June 30, 2017). |
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| 3.2 | | |
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| 3.3 | | |
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| 3.4 | | |
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3.5 | | Statement of Resolutions for Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed on March 2, 2015). |
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| 4.1 | | |
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| 4.2 | | Registration Rights Agreement, dated February 27, 2015, between Matador Resources Company and HEYCO Energy Group, Inc. (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on March 2, 2015). |
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4.3 | | Voting Agreement, dated February 27, 2015, between Matador Resources Company and HEYCO Energy Group, Inc. (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on March 2, 2015). |
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4.4 | | Indenture, dated as of April 14, 2015,August 21, 2018, by and among Matador Resources Company, the subsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on April 14, 2015)August 21, 2018).
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4.54.3 | | First Supplemental Indenture, dated as of October 1, 2015,February 27, 2019, by and among Matador Resources Company, DLK Wolf Midstream,WR Permian, LLC, the Guarantors named thereinsubsidiary guarantors party thereto and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on October 5, 2015)(filed herewith). |
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4.64.4 | | Second Supplemental Indenture, dated as of November 4, 2015, by and among Matador Resources Company, MRC Permian LKE Company, LLC, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.2 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 2015). |
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4.7 | | Third Supplemental Indenture, dated as of June 8, 2016, by and among Matador Resources Company, Black River Water Management Company, LLC, the Guarantors named therein and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed on June 14, 2016). |
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4.8 | | Registration Rights Agreement, dated as of December 9, 2016,August 21, 2018, by and among Matador Resourcesthe Company, the subsidiary guarantors party theretoGuarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein (incorporated by reference to Exhibit 4.2 to the Current Report on Form 8-K filed on December 9, 2016)August 21, 2018).
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4.94.5 | | Fourth Supplemental Indenture,Registration Rights Agreement, dated as of February 17, 2017,October 4, 2018, by and among Matador Resourcesthe Company, Black River Water Management Company, LLC, DLK Black River Midstream, LLC, Longwood Midstream Holdings, LLC, the Guarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.14.2 to the Current Report on Form 8-K filed on February 24, 2017)October 4, 2018). |
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| 10.1† | | |
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| 10.2† | | |
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| 10.3† | | |
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| 10.4† | | Employment Agreement between Matador Resources Company and Bradley M. Robinson (incorporated by reference to Exhibit 10.6 to Amendment No. 1 to our Registration Statement on Form S-1 filed on November 14, 2011). |
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10.5† | | |
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10.6†10.5† | | |
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10.7†10.6† | | |
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10.8†10.7† | | First Amendment to the Employment Agreement between Matador Resources Company and Bradley M. Robinson (incorporated by reference to Exhibit 10.11 to Amendment No. 1 to our Registration Statement on Form S-1 filed on November 14, 2011). |
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10.9† | | |
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10.10† |
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| 10.8† | | |
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10.11†10.9† | | |
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10.12†10.10† | | Second Amendment to the Employment Agreement between Matador Resources Company and Bradley M. Robinson (incorporated by reference to Exhibit 10.15 to Amendment No. 2 to our Registration Statement on Form S-1 filed on December 30, 2011). |
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10.13† | | |
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10.14†10.11† | | |
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10.15†10.12† | | |
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10.16†10.13† | | |
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10.17†10.14† | | |
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10.18†10.15† | | |
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10.19†10.16† | | |
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10.20†10.17† | | |
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10.21†10.18† | | |
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10.22†10.19† | | |
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10.23†10.20† | | |
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10.2410.21† | | Purchase, Sale and Participation Agreement, by and between Matador Resources Company (now known as MRC Energy Company) and Orca ICI Development, JV, dated at May 16, 2011 (incorporated by reference to Exhibit 10.25 to Amendment No. 1 to our Registration Statement on Form S-1 filed on November 14, 2011). |
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10.25 | | First Amendment to Purchase Sale and Participation Agreement, dated as of June 12, 2013, by and between MRC Energy Company and Orca/ICI Development (incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2013). |
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10.26† | | Form of Non-Qualified Stock Option Agreement granted pursuant to the Matador Resources Company (now known as MRC Energy Company) 2003 Stock and Incentive Plan (incorporated by reference to Exhibit 10.36 to the Annual Report on Form 10-K for the year ended December 31, 2011). |
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10.27†10.22† | | |
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10.28†10.23† | | Form of Nonqualified Stock Option Agreement relating to the Matador Resources Company 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.38 to the Annual Report on Form 10-K for the year ended December 31, 2011). |
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10.29† | | |
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10.30†10.24† | | Form of Restricted Stock Award Agreement relating to the Matador Resources Company 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.40 to the Annual Report on Form 10-K for the year ended December 31, 2011). |
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10.31† | | |
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10.32†10.25† | | Form of Restricted Stock Award Agreement relating to the Matador Resources Company 2012 Long-Term Incentive Plan for employees without employment agreements (incorporated by reference to Exhibit 10.6 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012). |
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10.33† | | Form of Performance Restricted Stock and Restricted Stock Unit Award Agreement relating to the Matador Resources Company 2012 Long-Term Incentive Plan for employees without employment agreements (incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012). |
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10.34† | | |
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10.35† |
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| 10.26 | | Form of Restricted Stock Award Agreement relating to the Matador Resources Company 2012 Long-Term Incentive Plan for employees with employment agreements (incorporated by reference to Exhibit 10.9 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012). |
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10.36† | | Form of Performance Restricted Stock and Restricted Stock Unit Award Agreement relating to the Matador Resources Company 2012 Long-Term Incentive Plan for employees with employment agreements (incorporated by reference to Exhibit 10.10 to the Quarterly Report on Form 10-Q for the quarter ended March 31, 2012). |
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10.37 | | |
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10.3810.27 | | |
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10.3910.28 | | Second Amended, Restated and Consolidated Unconditional Guaranty, by and among MRC Permian Company, MRC Rockies Company, Matador Production Company, Longwood Gathering and Disposal Systems GP, Inc., Longwood Gathering and Disposal Systems, LP, Matador Resources Company and Royal Bank of Canada, as Administrative Agent, dated as of September 28, 2012 (incorporated by reference to Exhibit 10.50 to the Annual Report on Form 10-K for the year ended December 31, 2012). |
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10.4010.29 | | |
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|
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10.4110.30 | | |
| | | |
10.4210.31 | | |
| | | |
10.4310.32 | | |
| | | |
10.4410.33 | | |
| | | |
10.4510.34 | | |
| | | |
10.4610.35 | | |
| | | |
10.4710.36 | | |
| | | |
10.4810.37 | | |
| | | |
10.49†10.38 | |
|
| | |
| 10.39† | | |
| | | |
10.50†10.40† | | Letter Agreement between Matador Resources Company, David F. Nicklin and David F. Nicklin International Consulting, Inc., dated February 26, 2015 (incorporated by reference to Exhibit 10.51 to our Annual Report on Form 10-K for the year ended December 31, 2014). |
| | |
10.51† | | |
| | | |
10.52† |
| | |
| 10.41† | | |
| | | |
10.53†10.42† | | Form of Restricted Stock Award Agreement relating to the Matador Resources Company 2012 Long-Term Incentive Plan for employees without employment agreements (incorporated by reference to Exhibit 10.55 to our Annual Report on Form 10-K for the year ended December 31, 2014). |
| | |
10.54† | | |
| | | |
10.55†10.43† | | |
| | | |
10.56†10.44† | | |
| | |
| 10.45† | | |
| | |
| 10.46† | | |
| | |
| 10.47† | | |
| | |
| 10.48† | | |
| | |
| 10.49† | | |
| | |
| 10.50† | | |
| | |
| 10.51† | | |
| | |
| 10.52† | | |
| | |
| 10.53† | | |
| | |
| 10.54† | | |
| | |
| 10.55† | | |
| | |
| 10.56† | | |
| | |
| 10.57† | | |
| | |
| 10.58† | | |
| | | |
|
| | |
10.5710.59† | |
|
| | |
| 10.60† | |
|
| 10.61 | | Purchase Agreement, dated as of April 9, 2015,August 7, 2018, by and among Matador Resourcesthe Company, the subsidiary guarantors party theretoGuarantors and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on August 9, 2018). |
| | |
| 10.62 | |
|
| | | |
10.58†10.63 | | |
| | |
| 10.64 | | |
| | | |
10.59†10.65 | | Separation Agreement |
| | |
10.60† | | Matador Resources Company Nonqualified Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10.59 to our Annual Report on Form 10-K for the year ended December 31, 2015). |
| | |
10.61 | | PurchaseRestated Credit Agreement, dated as of December 6, 2016,October 31, 2018, by and among Matador ResourcesMRC Energy Company, as Borrower, the subsidiary guarantorsLenders party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated,Royal Bank of Canada, as representative of the several initial purchasers named thereinAdministrative Agent (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 9, 2016)November 1, 2018). |
| | | |
10.62†10.66† | | Form of Restricted Stock Unit Award Agreement relating to the |
| | | |
10.63†10.67† | | |
| | | |
10.64†10.68† | | |
| | | |
| 21.1 | | |
| | | |
| 23.1 | | |
| | | |
| 23.2 | | |
| | | |
| 31.1 | | |
| | | |
| 31.2 | | |
| | | |
| 32.1 | | |
| | | |
| 32.2 | | |
| | | |
| 99.1 | | |
| | | |
| 101 | | The following financial information from Matador Resources Company’s Annual Report on Form 10-K for the year ended December 31, 2016,2018, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Changes in Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Consolidated Financial Statements (submitted electronically herewith). |
| | | |
| † | | Indicates a management contract or compensatory plan or arrangement. |
| | | |
| * | | Pursuant to Item 601(b)(2) of Regulation S-K, the Company agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC upon request. |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | | |
| | | MATADOR RESOURCES COMPANY |
| | | | |
March 1, 20172019 | | By: | | /s/ Joseph Wm. Foran |
| | | | | Joseph Wm. Foran |
| | | | | Chairman and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | |
| /s/ Joseph Wm. Foran | | Chairman and Chief Executive Officer | | March 1, 20172019 |
| Joseph Wm. Foran | | (Principal Executive Officer) | | |
| | | |
| /s/ David E. Lancaster | | Executive Vice President and Chief Financial Officer | | March 1, 20172019 |
| David E. Lancaster | | (Principal Financial Officer) | | |
| | | |
| /s/ Robert T. Macalik | | Senior Vice President and Chief Accounting Officer | | March 1, 20172019 |
| Robert T. Macalik | | Officer (Principal(Principal Accounting Officer) | | |
| | | |
| /s/ Reynald A. Baribault | | Director | | March 1, 20172019 |
| Reynald A. Baribault | | | | |
| | | |
| /s/ R. Gaines Baty | | Director | | March 1, 20172019 |
| R. Gaines Baty | | | | |
| | | | | |
| /s/ Craig T. Burkert | | Director | | March 1, 20172019 |
| Craig T. Burkert | | | | |
| | | | | |
| /s/ William M. Byerley | | Director | | March 1, 20172019 |
| William M. Byerley | | | | |
| | | | | |
/s/ Joe A. DavisMatthew P. Clifton | | Director | | March 1, 20172019 |
Joe A. DavisMatthew P. Clifton | | | | |
| | | | | |
| /s/ Julia P. Forrester Rogers | | Director | | March 1, 20172019 |
| Julia P. Forrester Rogers | | | | |
| | | | |
| /s/ Timothy E. Parker | | Director | | March 1, 2019 |
| Timothy E. Parker | | | | |
| | | | | |
/s/ David M. LaneyPosner | | Director | | March 1, 20172019 |
David M. Laney | | | | |
| | |
/s/ Gregory E. Mitchell | | Director | | March 1, 2017 |
Gregory E. Mitchell | | | | |
| | |
/s/ Steven W. Ohnimus | | Director | | March 1, 2017 |
Steven W. OhnimusPosner
| | | | |
| | | | | |
| /s/ Kenneth L. Stewart | | Director | | March 1, 20172019 |
Kenneth L. Stewart | | | | |
| | | | |
/s/ George M. Yates | | Director | | March 1, 2017 |
George M. Yates
| | | | |
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following is a description of the meanings of some of the oil and natural gas industry terms used in this Annual Report.
Batch drilling. The process by which multiple horizontal wells are drilled from a single pad. In batch drilling, the surface holes for each well are drilled first and then the production holes, including the horizontal laterals for each well, are drilled.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used in this Annual Report in reference to crude oil, or other liquid hydrocarbons.hydrocarbons or salt water.
Bcf. One billion cubic feet.feet of natural gas.
BOE. Barrels of oil equivalent, determined using the ratio of one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural gas.
BOE/d. BOE per day.
Btu or British thermal unit. The quantity of heat required to raise the temperature of one pound of water by one degree Fahrenheit.
Completion. The operations required to establish production of oil or natural gas from a wellbore, usually involving perforations, stimulation and/or installation of permanent equipment in the well, or in the case of a dry hole, the reporting of abandonment to the appropriate agency.
Condensate. Liquid hydrocarbons associated with the production of a primarily natural gas reservoir.
Conventional reservoirs or resources. Natural gas or oil that is produced by a well drilled into a geologic formation in which the reservoir and fluid characteristics permit the natural gas or oil to readily flow to the wellbore.
Coring. The act of taking a core. A core is a solid column of rock, usually from two to four inches in diameter, taken as a sample of an underground formation. It is common practice to take cores from wells in the process of being drilled. A core bit is attached to the end of the drill pipe. The core bit then cuts a column of rock from the formation being penetrated. The core is then removed and tested for evidence of oil or natural gas, and its characteristics (porosity, permeability, etc.) are determined.
Developed acreage. The number of acres that are allocated or assignable to productive wells.
Development well. A well drilled into a proved oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
Dry hole. A well found to be incapable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of such production exceed production-related expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas reserves not classified as proved, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir or to extend a known reservoir.
Farmin or farmout. An agreement under which the owner of a working interest in an oil or natural gas lease assigns the working interest or a portion of the working interest to another party who desires to drill on the leased acreage. Generally, the assignee is required to drill one or more wells in order to earn its interest in the acreage. The assignor usually retains a royalty or reversionary interest in the lease. The interest received by an assignee is a “farmin” while the interest transferred by the assignor is a “farmout.”
Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells in which a working interest is owned.
Held by production. An oil and natural gas property under lease in which the lease continues to be in force after the primary term of the lease in accordance with its terms as a result of production from the property.
Horizontal drilling or well. A drilling operation in which a portion of the well is drilled horizontally within a productive or potentially productive formation. This operation typically yields a horizontal well that has the ability to produce higher volumes than a vertical well drilled in the same formation. A horizontal well is designed to replace multiple vertical wells, resulting in lower capital expenditures for draining like acreage and limiting surface disruption.
Hydraulic fracturing. The technique of improving a well’s production or injection rates by pumping a mixture of fluids into the formation and rupturing the rock, creating an artificial channel. As part of this technique, sand or other material may also be injected into the formation to prop the channel open, so that fluids or gases may more easily flow from the formation, through the fracture channel and into the wellbore. This technique may also be referred to as fracture stimulation.
Liquids. Liquids, or natural gas liquids, are marketable liquid products including ethane, propane, butane, pentane and natural gasoline resulting from the further processing of liquefiable hydrocarbons separated from raw natural gas by a natural gas processing facility.
MBbl. One thousand barrels of crude oil, or other liquid hydrocarbons.hydrocarbons or salt water.
MBOE. One thousand BOE.
Mcf. One thousand cubic feet of natural gas.
MMBtu. One million British thermal units.
MMcf. One million cubic feet of natural gas.
NGL. Natural gas liquids.
Net acres or net wells. The sum of the fractional working interest owned in gross acres or wells.
Net revenue interest. The interest that defines the percentage of revenue that an owner of a well receives from the sale of oil, natural gas and/or natural gas liquids that are produced from the well.
NYMEX. New York Mercantile Exchange.
Overriding royalty interest. A fractional interest in the gross production of oil and natural gas under a lease, in addition to the usual royalties paid to the lessor, free of any expense for exploration, drilling, development, operating, marketing and other costs incident to the production and sale of oil and natural gas produced from the lease. It is an interest carved out of the lessee’s working interest, as distinguished from the lessor’s reserved royalty interest.
Pad. The surface constructed to accommodate the drilling, completion and production operations of an oil or natural gas well.
Pad drilling. The process by which multiple horizontal wells are drilled from a single pad. In pad drilling, each well on the pad is drilled to total depth before the next well is initiated.
Permeability. A reference to the ability of oil and/or natural gas to flow through a reservoir.
Petrophysical analysis. The interpretation of well log measurements, obtained from a string of electronic tools inserted into the borehole, and from core measurements, in which rock samples are retrieved from the subsurface, then combining these measurements with other relevant geological and geophysical information to describe the reservoir rock properties.
Play. A set of known or postulated oil and/or natural gas accumulations sharing similar geologic, geographic and temporal properties, such as source rock, migration pathways, timing, trapping mechanism and hydrocarbon type.
Possible reserves. Additional reserves that are less certain to be recognized than probable reserves.
Probable reserves. Additional reserves that are less certain to be recognized than proved reserves but which, in sum with proved reserves, are as likely as not to be recovered.
Producing well, or productive well. A well that is found to be capable of producing hydrocarbons in sufficient quantities such that proceeds from the sale of the well’s production exceed production-related expenses and taxes.
Properties. Natural gas and oil wells, production and related equipment and facilities and oil, natural gas, or other mineral fee, leasehold and related interests.
Prospect. A specific geographic area which, based on supporting geological, geophysical or other data and preliminary economic analysis using reasonably anticipated prices and costs, is considered to have potential for the discovery of commercial hydrocarbons.
Proved developed non-producing. Hydrocarbons in a potentially producing horizon penetrated by a wellbore, the production of which has been postponed pending installation of surface equipment or gathering facilities, or pending the production of hydrocarbons from another formation penetrated by the wellbore. The hydrocarbons are classified as proved developed but non-producing reserves.
Proved developed reserves. Proved reserves that can be expected to be recovered through existing wells and facilities and by existing operating methods.
Proved reserves. Reserves of oil and natural gas that have been proved to a high degree of certainty by analysis of the producing history of a reservoir and/or by volumetric analysis of adequate geological and engineering data.
Proved undeveloped reserves. Proved reserves that are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required for recompletion.
Recompletion. Completing in the same wellbore to reach a new reservoir after production from the original reservoir has been abandoned.
Repeatability. The potential ability to drill multiple wells within a prospect or trend.
Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or natural gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.
Royalty interest. An interest in an oil and natural gas lease that gives the owner of the interest the right to receive a portion of the production from the leased acreage (or of the proceeds of the sale thereof), but generally does not require the owner to pay any portion of the costs of drilling or operating the wells on the leased acreage. Royalties may be either landowner’s royalties, which are reserved by the owner of the leased acreage at the time the lease is granted, or overriding royalties, which are usually reserved by an owner of the leasehold in connection with a transfer to a subsequent owner.
2-D seismic. The method by which a cross-section of the earth’s subsurface is created through the interpretation of reflectingreflection seismic data collected along a single source profile.
3-D seismic. The method by which a three-dimensional image of the earth’s subsurface is created through the interpretation of reflection seismic data collected over a surface grid. 3-D seismic surveys allow for a more detailed understanding of the subsurface than do 2-D seismic surveys and contribute significantly to field appraisal, exploitation and production.
Spud. The act of beginning to drill an oil or natural gas well.
Throughput. The volume of product transported or passing through a pipeline, plant or other facility.
Trend. A region of oil and/or natural gas production, the geographic limits of which have not been fully defined, having geological characteristics that have been ascertained through supporting geological, geophysical or other data to contain the potential for oil and/or natural gas reserves in a particular formation or series of formations.
Unconventional resource play. A set of known or postulated oil and or natural gas resources or reserves warranting further exploration which are extracted from (i) low-permeability sandstone and shale formations and (ii) coalbed methane. These plays require the application of advanced technology to extract the oil and natural gas resources.
Undeveloped acreage. Lease acreage on which wells have not been drilled or completed to a point that would permit the production of commercial quantities of oil and natural gas, regardless of whether such acreage contains proved reserves. Undeveloped acreage is usually considered to be all acreage that is not allocated or assignable to productive wells.
Unproved and unevaluated properties. Properties where no drilling or other actions have been undertaken that permit such properties to be classified as proved and to which no proved reserves have been assigned.
Vertical well. A hole drilled vertically into the earth from which oil, natural gas or water flows or is pumped.
Visualization. An exploration technique in which the size and shape of subsurface features are mapped and analyzed based upon information derived from well logs, seismic data and other well information.
Volumetric reserve analysis. A technique used to estimate the amount of recoverable oil and natural gas. It involves calculating the volume of reservoir rock and adjusting that volume for rock porosity, hydrocarbon saturation, formation volume factor and recovery factor.
Walking rig. A drilling rig that is capable of moving from one drilling location to another a short distance away using a series of hydraulic “feet” built into the substructure of the rig.
Wellbore. The hole made by a well.
Working interest. The operating interest that gives the owner the right to drill, produce and conduct operating activities on the property and receive a share of production.
Matador Resources Company and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 20152018, 2017 and 20142016
Contents
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| |
| | |
| Consolidated Financial Statements | |
| | |
| |
| |
| |
| |
| | |
| |
| |
Report of Independent Registered Public Accounting Firm
TheTo the Shareholders and Board of Directors and Shareholders
Matador Resources Company:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Matador Resources Company and subsidiaries (collectively the “Company”) as of December 31, 20162018 and 20152017 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. These consolidated2018, and the related notes (collectively, the “consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States)statements”). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Matador Resourcesthe Company and subsidiaries as of December 31, 20162018 and 2015,2017 and the results of theirits operations and theirits cash flows for each of the years in the three-year period ended December 31, 2016,2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2016,2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 20172019 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Dallas, Texas
March 1, 20172019
Matador Resources Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(In thousands, except par value and share data)
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| ASSETS | | | | | | | | |
| Current assets | | | | | | | | |
| Cash | | $ | 212,884 |
| | $ | 16,732 |
| | $ | 64,545 |
| | $ | 96,505 |
|
| Restricted cash | | 1,258 |
| | 44,357 |
| | 19,439 |
| | 5,977 |
|
| Accounts receivable | | | | | | | | |
| Oil and natural gas revenues | | 34,154 |
| | 16,616 |
| | 68,161 |
| | 65,962 |
|
| Joint interest billings | | 19,347 |
| | 16,999 |
| | 61,831 |
| | 67,225 |
|
| Other | | 5,167 |
| | 10,794 |
| | 16,159 |
| | 8,031 |
|
| Derivative instruments | | — |
| | 16,284 |
| | 49,929 |
| | 1,190 |
|
| Lease and well equipment inventory | | 3,045 |
| | 2,022 |
| | 17,564 |
| | 5,993 |
|
| Prepaid expenses and other assets | | 3,327 |
| | 3,203 |
| | 8,057 |
| | 6,287 |
|
| Total current assets | | 279,182 |
| | 127,007 |
| | 305,685 |
| | 257,170 |
|
| Property and equipment, at cost | | | | | | | | |
| Oil and natural gas properties, full-cost method | | | | | | | | |
| Evaluated | | 2,408,305 |
| | 2,122,174 |
| | 3,780,236 |
| | 3,004,770 |
|
| Unproved and unevaluated | | 479,736 |
| | 387,504 |
| | 1,199,511 |
| | 637,396 |
|
| Other property and equipment | | 160,795 |
| | 86,387 |
| |
| Midstream and other property and equipment | | | 450,066 |
| | 281,096 |
|
| Less accumulated depletion, depreciation and amortization | | (1,864,311 | ) | | (1,583,659 | ) | | (2,306,949 | ) | | (2,041,806 | ) |
| Net property and equipment | | 1,184,525 |
| | 1,012,406 |
| | 3,122,864 |
| | 1,881,456 |
|
| Other assets | | 958 |
| | 1,448 |
| | | | |
| Deferred income taxes | | | 20,457 |
| | — |
|
| Other assets | | | 6,512 |
| | 7,064 |
|
| Total other assets | | | 26,969 |
| | 7,064 |
|
| Total assets | | $ | 1,464,665 |
| | $ | 1,140,861 |
| | $ | 3,455,518 |
| | $ | 2,145,690 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | |
| Current liabilities | | | | | | | | |
| Accounts payable | | $ | 4,674 |
| | $ | 10,966 |
| | $ | 66,970 |
| | $ | 11,757 |
|
| Accrued liabilities | | 101,460 |
| | 92,369 |
| | 170,855 |
| | 174,348 |
|
| Royalties payable | | 23,988 |
| | 16,493 |
| | 64,776 |
| | 61,358 |
|
| Amounts due to affiliates | | 8,651 |
| | 5,670 |
| | 13,052 |
| | 10,302 |
|
| Derivative instruments | | 24,203 |
| | — |
| | — |
| | 16,429 |
|
| Advances from joint interest owners | | 1,700 |
| | 700 |
| | 10,968 |
| | 2,789 |
|
| Deferred gain on plant sale | | — |
| | 4,830 |
| |
| Amounts due to joint ventures | | 4,251 |
| | 2,793 |
| | 2,373 |
| | 4,873 |
|
| Income taxes payable | | — |
| | 2,848 |
| |
| Other current liabilities | | 578 |
| | 161 |
| | 1,028 |
| | 750 |
|
| Total current liabilities | | 169,505 |
| | 136,830 |
| | 330,022 |
| | 282,606 |
|
| Long-term liabilities | | | | | | | | |
| Borrowings under Credit Agreement | | | 40,000 |
| | — |
|
| Borrowings under San Mateo Credit Facility | | | 220,000 |
| | — |
|
| Senior unsecured notes payable | | 573,924 |
| | 391,254 |
| | 1,037,837 |
| | 574,073 |
|
| Asset retirement obligations | | 19,725 |
| | 15,166 |
| | 29,736 |
| | 25,080 |
|
| Derivative instruments | | 751 |
| | — |
| | 83 |
| | — |
|
| Amounts due to joint ventures | | 1,771 |
| | 3,956 |
| |
| Deferred gain on plant sale | | — |
| | 102,506 |
| |
| Deferred income taxes | | | 13,221 |
| | — |
|
| Other long-term liabilities | | 7,544 |
| | 2,190 |
| | 4,962 |
| | 6,385 |
|
| Total long-term liabilities | | 603,715 |
| | 515,072 |
| | 1,345,839 |
| | 605,538 |
|
| Commitments and contingencies (Note 13) | |
| |
| |
| |
|
| Shareholders’ equity | | | | | | | | |
| Common stock — $0.01 par value, 120,000,000 shares authorized; 99,518,764 and 85,567,021 shares issued; and 99,511,931 and 85,564,435 shares outstanding, respectively | | 995 |
| | 856 |
| |
| Common stock — $0.01 par value, 160,000,000 shares authorized; 116,374,503 and 108,513,597 shares issued; and 116,353,590 and 108,510,160 shares outstanding, respectively | | | 1,164 |
| | 1,085 |
|
| Additional paid-in capital | | 1,325,481 |
| | 1,026,077 |
| | 1,924,408 |
| | 1,666,024 |
|
| Accumulated deficit | | (636,351 | ) | | (538,930 | ) | | (236,277 | ) | | (510,484 | ) |
| Treasury stock, at cost, 20,913 and 3,437 shares, respectively | | | (415 | ) | | (69 | ) |
| Total Matador Resources Company shareholders’ equity | | 690,125 |
| | 488,003 |
| | 1,688,880 |
| | 1,156,556 |
|
| Non-controlling interest in subsidiaries | | 1,320 |
| | 956 |
| | 90,777 |
| | 100,990 |
|
| Total shareholders’ equity | | 691,445 |
| | 488,959 |
| | 1,779,657 |
| | 1,257,546 |
|
| Total liabilities and shareholders’ equity | | $ | 1,464,665 |
| | $ | 1,140,861 |
| | $ | 3,455,518 |
| | $ | 2,145,690 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Matador Resources Company and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
| | | | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Revenues | | | | | | | | | | | | |
| Oil and natural gas revenues | | $ | 291,156 |
| | $ | 278,340 |
| | $ | 367,712 |
| | $ | 800,700 |
| | $ | 528,684 |
| | $ | 291,156 |
|
| Third-party midstream services revenues | | 5,218 |
| | 1,864 |
| | 1,213 |
| | 21,920 |
| | 10,198 |
| | 5,218 |
|
| Realized gain on derivatives | | 9,286 |
| | 77,094 |
| | 5,022 |
| |
| Unrealized (loss) gain on derivatives | | (41,238 | ) | | (39,265 | ) | | 58,302 |
| |
| Sales of purchased natural gas | | | 7,071 |
| | — |
| | — |
|
| Lease bonus - mineral acreage | | | 2,489 |
| | — |
| | — |
|
| Realized gain (loss) on derivatives | | | 2,334 |
| | (4,321 | ) | | 9,286 |
|
| Unrealized gain (loss) on derivatives | | | 65,085 |
| | 9,715 |
| | (41,238 | ) |
| Total revenues | | 264,422 |
| | 318,033 |
| | 432,249 |
| | 899,599 |
| | 544,276 |
| | 264,422 |
|
| Expenses | | | | | | | | | | | | |
| Production taxes, transportation and processing | | 43,046 |
| | 35,650 |
| | 33,172 |
| | 76,138 |
| | 58,275 |
| | 43,046 |
|
| Lease operating | | 56,202 |
| | 54,704 |
| | 49,945 |
| | 92,966 |
| | 67,313 |
| | 56,202 |
|
| Plant and other midstream services operating | | 5,389 |
| | 3,489 |
| | 1,408 |
| �� | 24,609 |
| | 13,039 |
| | 5,389 |
|
| Purchased natural gas | | | 6,635 |
| | — |
| | — |
|
| Depletion, depreciation and amortization | | 122,048 |
| | 178,847 |
| | 134,737 |
| | 265,142 |
| | 177,502 |
| | 122,048 |
|
| Accretion of asset retirement obligations | | 1,182 |
| | 734 |
| | 504 |
| | 1,530 |
| | 1,290 |
| | 1,182 |
|
| Full-cost ceiling impairment | | 158,633 |
| | 801,166 |
| | — |
| | — |
| | — |
| | 158,633 |
|
| General and administrative | | 55,089 |
| | 50,105 |
| | 32,152 |
| | 69,308 |
| | 66,016 |
| | 55,089 |
|
| Total expenses | | 441,589 |
| | 1,124,695 |
| | 251,918 |
| | 536,328 |
| | 383,435 |
| | 441,589 |
|
| Operating (loss) income | | (177,167 | ) | | (806,662 | ) | | 180,331 |
| |
| Operating income (loss) | | | 363,271 |
| | 160,841 |
| | (177,167 | ) |
| Other income (expense) | | | | | | | | | | | | |
| Net gain on asset sales and inventory impairment | | 107,277 |
| | 908 |
| | — |
| |
| Net (loss) gain on asset sales and inventory impairment | | | (196 | ) | | 23 |
| | 107,277 |
|
| Interest expense | | (28,199 | ) | | (21,754 | ) | | (5,334 | ) | | (41,327 | ) | | (34,565 | ) | | (28,199 | ) |
| Other (expense) income | | (4 | ) | | 616 |
| | 132 |
| |
| Total other income (expense) | | 79,074 |
| | (20,230 | ) | | (5,202 | ) | |
| (Loss) income before income taxes | | (98,093 | ) | | (826,892 | ) | | 175,129 |
| |
| Income tax provision (benefit) | | | | | | | |
| Prepayment premium on extinguishment of debt | | | (31,226 | ) | | — |
| | — |
|
| Other income (expense) | | | 1,551 |
| | 3,551 |
| | (4 | ) |
| Total other (expense) income | | | (71,198 | ) | | (30,991 | ) | | 79,074 |
|
| Income (loss) before income taxes | | | 292,073 |
| | 129,850 |
| | (98,093 | ) |
| Income tax (benefit) provision | | | | | | | |
| Current | | (1,036 | ) | | 2,959 |
| | 133 |
| | (455 | ) | | (8,157 | ) | | (1,036 | ) |
| Deferred | | — |
| | (150,327 | ) | | 64,242 |
| | (7,236 | ) | | — |
| | — |
|
| Total income tax (benefit) provision | | (1,036 | ) | | (147,368 | ) | | 64,375 |
| |
| Net (loss) income | | (97,057 | ) | | (679,524 | ) | | 110,754 |
| |
| Net (income) loss attributable to non-controlling interest in subsidiaries | | (364 | ) | | (261 | ) | | 17 |
| |
Net (loss) income attributable to
Matador Resources Company shareholders | | $ | (97,421 | ) | | $ | (679,785 | ) | | $ | 110,771 |
| |
| Total income tax benefit | | | (7,691 | ) | | (8,157 | ) | | (1,036 | ) |
| Net income (loss) | | | 299,764 |
| | 138,007 |
| | (97,057 | ) |
| Net income attributable to non-controlling interest in subsidiaries | | | (25,557 | ) | | (12,140 | ) | | (364 | ) |
| Net income (loss) attributable to Matador Resources Company shareholders | | | $ | 274,207 |
| | $ | 125,867 |
| | $ | (97,421 | ) |
| Earnings (loss) per common share | | | | | | | | | | | | |
| Basic | | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.58 |
| | $ | 2.41 |
| | $ | 1.23 |
| | $ | (1.07 | ) |
| Diluted | | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.56 |
| | $ | 2.41 |
| | $ | 1.23 |
| | $ | (1.07 | ) |
| Weighted average common shares outstanding | | | | | | | | | | | | |
| Basic | | 91,273 |
| | 81,537 |
| | 70,229 |
| | 113,580 |
| | 102,029 |
| | 91,273 |
|
| Diluted | | 91,273 |
| | 81,537 |
| | 70,906 |
| | 113,691 |
| | 102,543 |
| | 91,273 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Matador Resources Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
For the Years Ended December 31, 2016, 20152018, 2017 and 20142016
| | | | | | | | | | | | | | | | | | | | | Total shareholders’ equity attributable to Matador Resources Company | | | | | | | | | | | | | | | | | | Total shareholders’ equity attributable to Matador Resources Company | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additional paid-in capital | | Retained earnings (deficit) | | Treasury Stock | | Non-controlling interest in subsidiaries | | Total shareholders’ equity | | | Additional paid-in capital | | Accumulated deficit | | Treasury Stock | | Non-controlling interest in subsidiaries | | Total shareholders’ equity |
| | | Common Stock | | Preferred Stock | | Total shareholders’ equity attributable to Matador Resources Company | | Common Stock | | Total shareholders’ equity attributable to Matador Resources Company |
| | | Shares | | Amount | | Shares | | Amount | | Shares | | Amount | | | Shares | | Amount | | Shares | | Amount | |
| Balance at January 1, 2014 | | 66,959 |
| | $ | 670 |
| | — |
| | $ | — |
| | $ | 548,935 |
| | $ | 30,084 |
| | 1,306 |
| | $ | (10,765 | ) | | $ | 568,924 |
| $ | — |
| $ | 568,924 |
| |
| Issuance of common stock | | 7,500 |
| | 75 |
| | — |
| | — |
| | 181,800 |
| | — |
| | — |
| | — |
| | 181,875 |
| — |
| 181,875 |
| |
| Cost to issue equity | | — |
| | — |
| | — |
| | — |
| | (590 | ) | | — |
| | — |
| | — |
| | (590 | ) | — |
| (590 | ) | |
| Issuance of common stock pursuant to directors’ and advisors’ compensation plan | | 30 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | — |
| | — |
| | 16 |
| | — |
| | 16 |
| |
| Stock options expense related to equity-based awards | | — |
| | — |
| | — |
| | — |
| | 2,279 |
| | — |
| | — |
| | — |
| | 2,279 |
| | — |
| | 2,279 |
| |
| Stock options exercised, net of options forfeited in net share settlements | | 8 |
| | — |
| | — |
| | — |
| | 43 |
| | — |
| | — |
| | — |
| | 43 |
| | — |
| | 43 |
| |
| Liability-based stock option awards settled | | — |
| | — |
| | — |
| | — |
| | 84 |
| | — |
| | — |
| | — |
| | 84 |
| | — |
| | 84 |
| |
| Restricted stock issued | | 212 |
| | 2 |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Restricted stock forfeited | | — |
| | — |
| | — |
| | — |
| | (17 | ) | | — |
| | 60 |
| | — |
| | (17 | ) | | — |
| | (17 | ) | |
| Restricted stock and restricted stock units expense | | — |
| | — |
| | — |
| | — |
| | 3,023 |
| | — |
| | — |
| | — |
| | 3,023 |
| | — |
| | 3,023 |
| |
| Cancellation of treasury stock | | (1,335 | ) | | (13 | ) | | — |
| | — |
| | (10,752 | ) | | — |
| | (1,335 | ) | | 10,765 |
| | — |
| | — |
| | — |
| |
| Capital contributed to less-than-wholly-owned subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 150 |
| | 150 |
| |
| Current period net income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | 110,771 |
| | — |
| | — |
| | 110,771 |
| | (17 | ) | | 110,754 |
| |
| Balance at December 31, 2014 | | 73,374 |
| | 734 |
| | — |
| | — |
| | 724,819 |
| | 140,855 |
| | 31 |
| | — |
| | 866,408 |
| | 133 |
| | 866,541 |
| |
| Issuance of common stock | | 10,329 |
| | 104 |
| | — |
| | — |
| | 260,148 |
| | — |
| | — |
| | — |
| | 260,252 |
| | — |
| | 260,252 |
| |
| Issuance of preferred stock | | — |
| | — |
| | 150 |
| | 1 |
| | 32,489 |
| | — |
| | — |
| | — |
| | 32,490 |
| | — |
| | 32,490 |
| |
| Cost to issue equity | | — |
| | — |
| | — |
| | — |
| | (1,151 | ) | | — |
| | — |
| | — |
| | (1,151 | ) | | — |
| | (1,151 | ) | |
| Conversion of preferred stock to common stock | | 1,500 |
| | 15 |
| | (150 | ) | | (1 | ) | | (14 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Stock-based compensation expense related to equity-based awards | | — |
| | — |
| | — |
| | — |
| | 9,333 |
| | — |
| | — |
| | — |
| | 9,333 |
| | — |
| | 9,333 |
| |
| Stock options exercised, net of options forfeited in net share settlements | | 25 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
| |
| Liability-based stock option awards settled | | 25 |
| | — |
| | — |
| | — |
| | 446 |
| | — |
| | — |
| | — |
| | 446 |
| | — |
| | 446 |
| |
| Restricted stock issued | | 429 |
| | 4 |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Restricted stock forfeited | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 138 |
| | — |
| | — |
| | — |
| | — |
| |
| Vesting of restricted stock units | | 52 |
| | 1 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Cancellation of treasury stock | | (167 | ) | | (2 | ) | | — |
| | — |
| | 2 |
| | — |
| | (167 | ) | | — |
| | — |
| | — |
| | — |
| |
| Capital contributed from less-than-wholly-owned subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 562 |
| | 562 |
| |
| Current period net (loss) income | | — |
| | — |
| | — |
| | — |
| | — |
| | (679,785 | ) | | — |
| | — |
| | (679,785 | ) | | 261 |
| | (679,524 | ) | |
| Balance at December 31, 2015 | | 85,567 |
| | 856 |
| | — |
| | — |
| | 1,026,077 |
| | (538,930 | ) | | 2 |
| | — |
| | 488,003 |
| | 956 |
| | 488,959 |
| |
| Balance at January 1, 2016 | | | 85,567 |
| | $ | 856 |
| | $ | 1,026,077 |
| | $ | (538,930 | ) | | 2 |
| | $ | — |
| | $ | 488,003 |
| | $ | 956 |
| | $ | 488,959 |
|
| Issuance of common stock pursuant to public offerings | | 13,500 |
| | 135 |
| | — |
| | — |
| | 288,375 |
| | — |
| | — |
| | — |
| | 288,510 |
| | — |
| | 288,510 |
| | 13,500 |
| | 135 |
| | 288,375 |
| | — |
| | — |
| | — |
| | 288,510 |
| | — |
| | 288,510 |
|
| Issuance of common stock pursuant to employee stock compensation plan | | 471 |
| | 4 |
| | — |
| | — |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 471 |
| | 4 |
| | (4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock pursuant to directors’ and advisors’ compensation plan | | 51 |
| | 1 |
| | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 51 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cost to issue equity | | — |
| | — |
| | — |
| | — |
| | (1,190 | ) | | — |
| | — |
| | — |
| | (1,190 | ) | | — |
| | (1,190 | ) | | — |
| | — |
| | (1,190 | ) | | — |
| | — |
| | — |
| | (1,190 | ) | | — |
| | (1,190 | ) |
| Stock-based compensation expense related to equity-based awards | | — |
| | — |
| | — |
| | — |
| | 11,958 |
| | — |
| | — |
| | — |
| | 11,958 |
| | — |
| | 11,958 |
| | — |
| | — |
| | 11,958 |
| | — |
| | — |
| | — |
| | 11,958 |
| | — |
| | 11,958 |
|
| Stock options exercised, net of options forfeited in net share settlements | | 36 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
| | 36 |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | 10 |
| | — |
| | 10 |
|
| Liability-based stock option awards settled | | 10 |
| | — |
| | — |
| | — |
| | 255 |
| | — |
| | — |
| | — |
| | 255 |
| | — |
| | 255 |
| | 10 |
| | — |
| | 255 |
| | — |
| | — |
| | — |
| | 255 |
| | — |
| | 255 |
|
| Restricted stock forfeited | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 120 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 120 |
| | — |
| | — |
| | — |
| | — |
|
| Cancellation of treasury stock | | (116 | ) | | (1 | ) | | — |
| | — |
| | 1 |
| | — |
| | (116 | ) | | — |
| | — |
| | — |
| | — |
| | (116 | ) | | (1 | ) | | 1 |
| | — |
| | (116 | ) | | — |
| | — |
| | — |
| | — |
|
| Current period net (loss) income | | — |
| | — |
| | — |
| | — |
| | — |
| | (97,421 | ) | | — |
| | — |
| | (97,421 | ) | | 364 |
| | (97,057 | ) | | — |
| | — |
| | — |
| | (97,421 | ) | | — |
| | — |
| | (97,421 | ) | | 364 |
| | (97,057 | ) |
| Balance at December 31, 2016 | | 99,519 |
| | $ | 995 |
| | — |
| | $ | — |
| | $ | 1,325,481 |
| | $ | (636,351 | ) | | 6 |
| | $ | — |
| | $ | 690,125 |
| | $ | 1,320 |
| | $ | 691,445 |
| | 99,519 |
| | 995 |
| | 1,325,481 |
| | (636,351 | ) | | 6 |
| | — |
| | 690,125 |
| | 1,320 |
| | 691,445 |
|
| Issuance of common stock pursuant to public offering | | | 8,000 |
| | 80 |
| | 208,640 |
| | — |
| | — |
| | — |
| | 208,720 |
| | — |
| | 208,720 |
|
| Issuance of common stock pursuant to employee stock compensation plan | | | 530 |
| | 5 |
| | (5 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock pursuant to directors’ and advisors’ compensation plan | | | 77 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cost to issue equity | | | — |
| | — |
| | (280 | ) | | — |
| | — |
| | — |
| | (280 | ) | | — |
| | (280 | ) |
| Stock-based compensation expense related to equity-based awards including amounts capitalized | | | — |
| | — |
| | 19,594 |
| | — |
| | — |
| | — |
| | 19,594 |
| | — |
| | 19,594 |
|
| Stock options exercised, net of options forfeited in net share settlements | | | 514 |
| | 5 |
| | (1,189 | ) | | — |
| | — |
| | — |
| | (1,184 | ) | | — |
| | (1,184 | ) |
| Restricted stock forfeited | | | — |
| | — |
| | — |
| | — |
| | 123 |
| | (1,658 | ) | | (1,658 | ) | | — |
| | (1,658 | ) |
| Purchase of non-controlling interest of less-than-wholly-owned subsidiary | | | — |
| | — |
| | (1,250 | ) | | — |
| | — |
| | — |
| | (1,250 | ) | | (1,403 | ) | | (2,653 | ) |
| Contributions related to formation of Joint Venture (see Note 5) | | | — |
| | — |
| | 116,622 |
| | — |
| | — |
| | — |
| | 116,622 |
| | 54,878 |
| | 171,500 |
|
| Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 44,100 |
| | 44,100 |
|
| Distributions to non-controlling interest owners of less-than wholly-owned subsidiaries | | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10,045 | ) | | (10,045 | ) |
| Cancellation of treasury stock | | | (126 | ) | | (1 | ) | | (1,588 | ) | | — |
| | (126 | ) | | 1,589 |
| | — |
| | — |
| | — |
|
| Current period net income | | | — |
| | — |
| | — |
| | 125,867 |
| | — |
| | — |
| | 125,867 |
| | 12,140 |
| | 138,007 |
|
| Balance at December 31, 2017 | | | 108,514 |
| | 1,085 |
| | 1,666,024 |
| | (510,484 | ) | | 3 |
| | (69 | ) | | 1,156,556 |
| | 100,990 |
| | 1,257,546 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Total shareholders’ equity attributable to Matador Resources Company | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | Additional paid-in capital | | Accumulated deficit | | Treasury Stock | | | Non-controlling interest in subsidiaries | | Total shareholders’ equity |
| | | Common Stock | | | | | | |
| | | Shares | | Amount | | | | Shares | | Amount | | | |
| Issuance of common stock pursuant to employee stock compensation plan | | 759 |
| | 8 |
| | (8 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of common stock pursuant to public offering | | 7,000 |
| | 70 |
| | 226,542 |
| | — |
| | — |
| | — |
| | 226,612 |
| | — |
| | 226,612 |
|
| Cost to issue equity | | — |
| | — |
| | (204 | ) | | — |
| | — |
| | — |
| | (204 | ) | | — |
| | (204 | ) |
| Issuance of common stock pursuant to directors’ and advisors’ compensation plan | | 81 |
| | 1 |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Stock-based compensation expense related to equity-based awards including amounts capitalized | | — |
| | — |
| | 22,660 |
| | — |
| | — |
| | — |
| | 22,660 |
| | — |
| | 22,660 |
|
| Stock options exercised, net of options forfeited in net share settlements | | 179 |
| | 2 |
| | (1,269 | ) | | — |
| | — |
| | — |
| | (1,267 | ) | | — |
| | (1,267 | ) |
| Restricted stock forfeited | | — |
| | — |
| | — |
| | — |
| | 176 |
| | (4,384 | ) | | (4,384 | ) | | — |
| | (4,384 | ) |
| Contributions related to formation of Joint Venture (see Note 5) | | — |
| | — |
| | 14,700 |
| | — |
| | — |
| | — |
| | 14,700 |
| | — |
| | 14,700 |
|
| Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 85,750 |
| | 85,750 |
|
| Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (121,520 | ) | | (121,520 | ) |
| Cancellation of treasury stock | | (158 | ) | | (2 | ) | | (4,036 | ) | | — |
| | (158 | ) | | 4,038 |
| | — |
| | — |
| | — |
|
| Current period net income | | — |
| | — |
| | — |
| | 274,207 |
| | — |
| | — |
| | 274,207 |
| | 25,557 |
| | 299,764 |
|
| Balance at December 31, 2018 | | 116,375 |
| | $ | 1,164 |
| | $ | 1,924,408 |
| | $ | (236,277 | ) | | 21 |
| | $ | (415 | ) | | $ | 1,688,880 |
| | $ | 90,777 |
| | $ | 1,779,657 |
|
The accompanying notes are an integral part of these consolidated financial statements.
Matador Resources Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| | | | | For the Years Ended December 31, | | For the Years Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Operating activities | | | | | | | | | | | | |
| Net (loss) income | | $ | (97,057 | ) | | $ | (679,524 | ) | | $ | 110,754 |
| |
| Adjustments to reconcile net (loss) income to net cash provided by operating activities | | | | | | | |
| Unrealized loss (gain) on derivatives | | 41,238 |
| | 39,265 |
| | (58,302 | ) | |
| Net income (loss) | | | $ | 299,764 |
| | $ | 138,007 |
| | $ | (97,057 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | | | | | | | |
| Unrealized (gain) loss on derivatives | | | (65,085 | ) | | (9,715 | ) | | 41,238 |
|
| Depletion, depreciation and amortization | | 122,048 |
| | 178,847 |
| | 134,737 |
| | 265,142 |
| | 177,502 |
| | 122,048 |
|
| Accretion of asset retirement obligations | | 1,182 |
| | 734 |
| | 504 |
| | 1,530 |
| | 1,290 |
| | 1,182 |
|
| Full-cost ceiling impairment | | 158,633 |
| | 801,166 |
| | — |
| | — |
| | — |
| | 158,633 |
|
| Stock-based compensation expense | | 12,362 |
| | 9,450 |
| | 5,524 |
| | 17,200 |
| | 16,654 |
| | 12,362 |
|
| Deferred income tax (benefit) provision | | — |
| | (150,327 | ) | | 64,242 |
| |
| Prepayment premium on extinguishment of debt | | | 31,226 |
| | — |
| | — |
|
| Deferred income tax benefit | | | (7,236 | ) | | — |
| | — |
|
| Amortization of debt issuance cost | | 1,148 |
| | 852 |
| | — |
| | 1,357 |
| | 468 |
| | 1,148 |
|
| Net gain on asset sales and inventory impairment | | (107,277 | ) | | (908 | ) | | — |
| |
| Net loss (gain) on asset sales and inventory impairment | | | 196 |
| | (23 | ) | | (107,277 | ) |
| Changes in operating assets and liabilities | | | | | | | | | | | | |
| Accounts receivable | | (14,259 | ) | | 3,633 |
| | (13,318 | ) | | (4,934 | ) | | (82,549 | ) | | (14,259 | ) |
| Lease and well equipment inventory | | (700 | ) | | (180 | ) | | (211 | ) | | (12,176 | ) | | (3,623 | ) | | (700 | ) |
| Prepaid expenses | | (124 | ) | | (544 | ) | | (783 | ) | |
| Prepaid expenses and other assets | | | (1,770 | ) | | (2,960 | ) | | (124 | ) |
| Other assets | | 490 |
| | (552 | ) | | 1,212 |
| | 3,418 |
| | (6,425 | ) | | 490 |
|
| Accounts payable, accrued liabilities and other current liabilities | | 6,611 |
| | 1,375 |
| | 607 |
| | 68,647 |
| | 33,559 |
| | 6,611 |
|
| Royalties payable | | 7,495 |
| | 1,654 |
| | 6,663 |
| | 3,418 |
| | 37,370 |
| | 7,495 |
|
| Advances from joint interest owners | | 1,000 |
| | 700 |
| | — |
| | 8,179 |
| | 1,089 |
| | 1,000 |
|
| Income taxes payable | | (2,848 | ) | | 2,405 |
| | 39 |
| | — |
| | — |
| | (2,848 | ) |
| Other long-term liabilities | | 4,144 |
| | 489 |
| | (187 | ) | | (353 | ) | | (1,519 | ) | | 4,144 |
|
| Net cash provided by operating activities | | 134,086 |
| | 208,535 |
| | 251,481 |
| | 608,523 |
| | 299,125 |
| | 134,086 |
|
| Investing activities | | | | | | | | | | | | |
| Oil and natural gas properties capital expenditures | | | (1,357,802 | ) | | (699,445 | ) | | (379,067 | ) |
| Expenditures for midstream and other property and equipment | | | (165,784 | ) | | (120,816 | ) | | (74,845 | ) |
| Proceeds from sale of assets | | 5,173 |
| | 139,836 |
| | 79 |
| | 8,333 |
| | 977 |
| | 5,173 |
|
| Oil and natural gas properties capital expenditures | | (379,067 | ) | | (432,715 | ) | | (560,849 | ) | |
| Expenditures for other property and equipment | | (74,845 | ) | | (64,499 | ) | | (9,152 | ) | |
| Business combination, net of cash acquired | | — |
| | (24,028 | ) | | — |
| |
| Restricted cash | | 43,098 |
| | (43,098 | ) | | — |
| |
| Restricted cash in less-than-wholly-owned subsidiaries | | 1 |
| | (650 | ) | | (609 | ) | |
| Net cash used in investing activities | | (405,640 | ) | | (425,154 | ) | | (570,531 | ) | | (1,515,253 | ) | | (819,284 | ) | | (448,739 | ) |
| Financing activities | | | | | | | | | | | | |
| Repayments of borrowings | | (120,000 | ) | | (476,982 | ) | | (180,000 | ) | | (370,000 | ) | | — |
| | (120,000 | ) |
| Borrowings under Credit Agreement | | 120,000 |
| | 125,000 |
| | 320,000 |
| | 410,000 |
| | — |
| | 120,000 |
|
| Borrowings under San Mateo Credit Facility | | | 220,000 |
| | — |
| | — |
|
| Cost to enter into or amend credit facilities | | | (3,077 | ) | | — |
| | — |
|
| Proceeds from issuance of senior unsecured notes | | | 1,051,500 |
| | — |
| | 184,625 |
|
| Cost to issue senior unsecured notes | | | (14,098 | ) | | — |
| | (2,734 | ) |
| Purchase of senior unsecured notes | | | (605,780 | ) | | — |
| | — |
|
| Proceeds from issuance of common stock | | 288,510 |
| | 188,720 |
| | 181,875 |
| | 226,612 |
| | 208,720 |
| | 288,510 |
|
| Proceeds from issuance of senior unsecured notes | | 184,625 |
| | 400,000 |
| | — |
| |
| Cost to issue equity | | (847 | ) | | (1,158 | ) | | (590 | ) | | (204 | ) | | (280 | ) | | (847 | ) |
| Cost to issue senior unsecured notes | | (2,734 | ) | | (9,598 | ) | | — |
| |
| Proceeds from stock options exercised | | 100 |
| | 10 |
| | 43 |
| | 815 |
| | 2,920 |
| | 100 |
|
| Capital commitments from non-controlling interest owners of less-than-wholly-owned subsidiaries | | — |
| | 562 |
| | 150 |
| |
| Contributions related to formation of Joint Venture | | | 14,700 |
| | 171,500 |
| | — |
|
| Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries | | | 85,750 |
| | 44,100 |
| | — |
|
| Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries | | | (121,520 | ) | | (10,045 | ) | | — |
|
| Taxes paid related to net share settlement of stock-based compensation | | (1,948 | ) | | (1,610 | ) | | (308 | ) | | (6,466 | ) | | (5,763 | ) | | (1,948 | ) |
| Purchase of non-controlling interest of less-than-wholly-owned subsidiary | | | — |
| | (2,653 | ) | | — |
|
| Net cash provided by financing activities | | 467,706 |
| | 224,944 |
| | 321,170 |
| | 888,232 |
| | 408,499 |
| | 467,706 |
|
| Increase in cash | | 196,152 |
| | 8,325 |
| | 2,120 |
| |
| Cash at beginning of year | | 16,732 |
| | 8,407 |
| | 6,287 |
| |
| Cash at end of year | | $ | 212,884 |
| | $ | 16,732 |
| | $ | 8,407 |
| |
| (Decrease) increase in cash and restricted cash | | | (18,498 | ) | | (111,660 | ) | | 153,053 |
|
| Cash and restricted cash at beginning of year | | | 102,482 |
| | 214,142 |
| | 61,089 |
|
| Cash and restricted cash at end of year | | | $ | 83,984 |
| | $ | 102,482 |
| | $ | 214,142 |
|
Supplemental disclosures of cash flow information (Note 14)
The accompanying notes are an integral part of these consolidated financial statements.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 20152018, 2017 and 20142016
NOTE 1 — NATURE OF OPERATIONS
Matador Resources Company, a Texas corporation (“Matador” and, collectively with its subsidiaries, the “Company”), is an independent energy company engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States, with an emphasis on oil and natural gas shale and other unconventional plays. The Company’s current operations are focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company also operates in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. Additionally, the Company conducts midstream operations, primarily through its midstream joint venture, San Mateo Midstream, LLC (“San Mateo” or the “Joint Venture”), in support of itsthe Company’s exploration, development and production operations and provides natural gas processing, oil transportation services, oil, natural gas oil and salt water gathering services and salt water disposal services to third parties on a limited basis.parties.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of Matador Resources Company and its wholly-owned and majority-owned subsidiaries. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). Accordingly, the Company consolidates certain subsidiaries that are less-than-wholly-owned and the net income and equity attributable to the non-controlling interest in these subsidiaries have been reported separately. The Company proportionately consolidates certain joint ventures that are less-than-wholly-owned and are involved in oil and natural gas exploration. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years’ financial statements to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations, cash flows or retained earnings. As a result of the growth of the Company’s midstream operations, these operations met the required threshold for segment reporting at December 31, 2016. As a result, $1.8 million and $1.2 million for the years ended December 31, 2015 and 2014, respectively, were reclassified from other income to third-party midstream services revenues. In addition, $3.5 million and $1.4 million related to midstream operating costs for the years ended December 31, 2015 and 2014, respectively, were reclassified from lease operating expenses to plant and other midstream services operating expenses. These reclassifications had no effect on previously reported results of operations, cash flows or retained earnings.
Change in Accounting Principles
During the second quarter of 2016, the Company adopted Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718),which simplifies several aspects of the accounting for employee share-based payment transactions, including accounting for income tax, forfeitures, statutory tax withholding requirements, classifications of awards as either equity or liability and classification of taxes in the statement of cash flows, requiring either retrospective, modified retrospective or prospective transition. The amended guidance also requires an entity to record excess tax benefits and deficiencies in the income statement. The adoption of this ASU had no impact on any period presented for (i) the Company’s financial position or statements of operations, as the Company currently has a valuation allowance against its net deferred tax assets, or (ii) the Company’s statements of cash flows, as the Company has historically accounted for taxes paid for net share settlement as a financing activity as required under this ASU. In addition, the Company uses historical forfeiture rates to estimate future forfeitures attributable to the service-based vesting requirements not being met and has continued to do so upon adoption of this ASU.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements, purchase price allocations and the reported amounts of revenues and expenses during the reporting period. While the Company believes its estimates are reasonable, changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
The Company’s consolidated financial statements are based on a number of significant estimates, including oil and natural gas revenues, accrued assets and liabilities, stock-based compensation, valuation of derivative instruments, deferred tax assets and liabilities, purchase price allocations and oil and natural gas reserves. The estimates of oil and natural gas reserves quantities and future net cash flows are the basis for the calculations of depletion and impairment of oil and natural gas properties, as well as estimates of asset retirement obligations and certain tax accruals. The Company’s oil and natural gas reserves estimates, which are inherently imprecise and based upon many factors that are beyond the Company’s control, including oil and natural gas prices, are prepared by the Company’s engineering staff in accordance with guidelines established by the Securities and Exchange Commission (“SEC”) and then audited for their reasonableness and conformance with SEC guidelines by Netherland, Sewell & Associates, Inc., independent reservoir engineers.
Change in Accounting Principles — Revenue Recognition
During the first quarter of 2018, the Company adopted Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASC 606”), which specifies how and when to recognize revenue. This standard requires expanded disclosures surrounding revenue recognition and is intended to improve and converge with international standards, the financial reporting requirements for revenue from contracts with customers. The Company adopted the new guidance using the modified retrospective approach. The adoption did not require an adjustment to opening accumulated deficit for any cumulative effect adjustment and did not have a material impact on the Company’s consolidated balance sheets, statements of operations, statement of shareholders’ equity or statements of cash flows.
Prior to the adoption of ASC 606, the Company recorded oil and natural gas revenues at the time of physical transfer of such products to the purchaser. The Company followed the sales method of accounting for oil and natural gas sales, recognizing revenues based on the Company’s actual proceeds from the oil and natural gas sold to purchasers.
The Company enters into contracts with customers to sell its oil and natural gas production. With the adoption of ASC 606, revenue from these contracts is recognized in accordance with the five-step revenue recognition model prescribed in
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
ASC 606. Specifically, revenue is recognized when the Company’s performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production.
The majority of the Company’s oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the oil has been transferred to the purchaser. The majority of the oil produced is sold under contracts using market-based pricing, which price is then adjusted for differentials based upon delivery location and oil quality. To the extent the differentials are incurred at or after the transfer of control of the oil, the differentials are included in oil sales on the statements of operations as they represent part of the transaction price of the contract. If the differentials, or other related costs, are incurred prior to the transfer of control of the oil, those costs are included in production taxes, transportation and processing expenses on the Company’s consolidated statements of operations, as they represent payment for services performed outside of the contract with the customer.
The Company’s natural gas is sold at the lease location, at the inlet or outlet of a natural gas processing plant or at an interconnect near a marketing hub following transportation from a processing plant. The majority of the Company’s natural gas is sold under fee-based contracts. When the natural gas is sold at the lease, the purchaser gathers the natural gas via pipeline to natural gas processing plants where, if necessary, natural gas liquids (“NGL”) are extracted. The NGLs and remaining residue gas are then sold by the purchaser, or if the Company elects to take in-kind the natural gas or the NGLs, the Company sells the natural gas or the NGLs to a third party. Under the fee-based contracts, the Company receives NGL and residue gas value, less the fee component, or is invoiced the fee component. To the extent control of the natural gas transfers upstream of the gathering and processing activities, revenue is recognized as the net amount received from the purchaser. To the extent that control transfers downstream of those services, revenue is recognized on a gross basis, and the related costs are included in production taxes, transportation and processing expenses on the Company’s consolidated statements of operations.
The Company recognizes midstream services revenues at the time services have been rendered and the price is fixed and determinable. Third-party midstream services revenues are those revenues from midstream operations related to third parties, including working interest owners in the Company’s operated wells. All midstream services revenues related to the Company’s working interest are eliminated in consolidation. Since the Company has a right to payment from its customers in amounts that correspond directly to the value that the customer receives from the performance completed on each contract, the Company applies the practical expedient in ASC 606 that allows recognition of revenue in the amount for which there is a right to invoice the customer without estimating a transaction price for each contract and allocating that transaction price to the performance obligations within each contract.
The Company periodically enters into natural gas purchase transactions with third parties whereby the Company processes the third party’s natural gas at San Mateo’s Black River cryogenic natural gas processing plant in Eddy County, New Mexico (the “Black River Processing Plant”) and then purchases, and subsequently sells, the residue gas and NGLs to other purchasers. Revenues and expenses from these transactions are presented on a gross basis on the Company’s consolidated statements of operations as the Company acts as a principal in the transactions by assuming the risk and rewards of ownership, including credit risk, of the natural gas purchased and by assuming the responsibility to deliver and process the natural gas volumes to be sold.
From time to time, the Company, as an owner of mineral interests, may enter into or extend a lease to a third-party lessee to develop the oil and natural gas attributable to certain of its mineral interests in return for a specified payment or lease bonus. In those instances, revenue is recognized in the period when the lease is signed and the Company has no further obligation to the lessee. The Company records these payments as “Lease bonus - mineral acreage” revenues on its consolidated statements of operations.
The Company determined the impact on its consolidated financial statements as a result of adoption of ASC 606 was a $10.6 million decrease in oil and natural gas revenues and a $10.6 million decrease in production taxes, transportation and processing expenses for the year ended December 31, 2018, respectively, which was not material. As a result of adoption of this standard, the Company is now required to disclose the following information regarding total revenues and revenues from contracts with customers on a disaggregated basis for the year ended December 31, 2018 (in thousands).
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
|
| | | |
| | Year Ended
December 31, 2018 |
| Revenues from contracts with customers | $ | 829,691 |
|
| Lease bonus - mineral acreage | 2,489 |
|
| Realized gain on derivatives | 2,334 |
|
| Unrealized gain on derivatives | 65,085 |
|
| Total revenues | $ | 899,599 |
|
|
| | | |
| | Year Ended
December 31, 2018 |
| Oil revenues | $ | 635,554 |
|
| Natural gas revenues | 165,146 |
|
| Third-party midstream services revenues | 21,920 |
|
| Sales of purchased natural gas | 7,071 |
|
| Total revenues from contracts with customers | $ | 829,691 |
|
The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical expedient in accordance with ASC 606. The expedient, as described in ASC 606-10-50-14(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
Change in Accounting Principles — Cash Flows
During the first quarter of 2018, the Company adopted Accounting Standards Update (“ASU”) 2016-18, Statement of Cash Flows (Topic 230), which specifies that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. The Company adopted ASU 2016-18 effective January 1, 2018 and determined that the adoption of this ASU changed the presentation of its beginning and ending cash balances and eliminated the presentation of changes in restricted cash balances from investing activities in its consolidated statements of cash flows. The Company adopted the new guidance using the retrospective transition method; as a result, approximately $6.0 million, $1.3 million and $44.4 million of restricted cash was added to the beginning cash balance for the years ended December 31, 2018, 2017 and 2016, respectively.
Change in Accounting Principles — Business Combinations
During the first quarter of 2018, the Company adopted ASU 2017-01, Business Combinations (Topic 805), which specifies the minimum inputs and processes required for an integrated set of assets and activities to meet the definition of a business. The Company adopted ASU 2017-01 prospectively, which did not have a material impact on its consolidated financial statements.
Restricted Cash
Restricted cash represents a portion of the cash paid for the Loving County Processing System by EnLink (as described in Note 5) directly to a qualified intermediary to facilitate like-kind-exchange transactions for federal income tax purposes as well as cash held byassociated with the Company’s less-than-wholly-owned subsidiaries. Not all of the cash deposited with the qualified intermediary was used for like-kind-exchange transactions and, in January 2016, the remaining balance of $42.1 million was returned to the Company by the qualified intermediary to be used for general corporate purposes.subsidiaries, primarily San Mateo. By contractual agreement, the cash in the accountaccounts held by the Company’s less-than-wholly-owned subsidiaries is not to be commingled with other Company cash and is to be used only to fund the capital expenditures and operations of these less-than-wholly-owned subsidiaries.
Accounts Receivable
The Company sells its operated oil, natural gas and natural gas liquidsNGL production to various purchasers (see “ —Revenue(See “—Change in Accounting Principles—Revenue Recognition” below). Due to the nature of the markets for oil, natural gas and natural gas liquids, the Company does not believe that the loss of any one purchaser would significantly impact operations.above.) In addition, the Company may participate with industry partners in the drilling, completion and operation of oil and natural gas wells. Substantially all of the Company’s accounts receivable are due from either purchasers of oil, natural gas and natural gas liquidsNGLs or participants in oil and natural gas wells for which the Company serves as the operator. Accounts receivable are due within 30 to 60 days of the production date and 30 days of the billing date and are stated
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
at amounts due from purchasers and industry partners. Amounts are considered past due if they have been outstanding for 60 days or more. No interest is typically charged on past due amounts.
The Company reviews its need for an allowance for doubtful accounts on a periodic basis and determines the allowance, if any, by considering the length of time past due, previous loss history, future net revenues of the debtor’s ownership interest in oil and natural gas properties operated by the Company and the debtor’s ability to pay its obligations, among other things. The Company has no allowance for doubtful accounts related to its accounts receivable for any reporting period presented.
For the year ended December 31, 2018, four significant purchasers accounted for 60% of the Company’s total oil, natural gas and NGL revenues: Plains Marketing, L.P. (19%), BP America Production Company (15%), Occidental Energy Marketing, Inc. (14%) and Western Refining Crude Oil (12%). For the year ended December 31, 2017, four significant purchasers accounted for 60% of the Company’s total oil, natural gas and NGL revenues: Occidental Energy Marketing, Inc. (23%), Plains Marketing, L.P. (14%), Shell Trading (US) Company (12%), and Western Refining Crude Oil (11%). For the year ended December 31, 2016, three significant purchasers accounted for 48% of the Company’s total oil, natural gas and NGL revenues: Plains Marketing, L.P. (18%), Shell Trading (US) Company (17%) and Occidental Energy Marketing, Inc. (13%). If the Company lost one or more of these significant purchasers and were unable to sell its production to other purchasers on terms it considers acceptable, it could materially and adversely affect the Company’s business, financial condition, results of operations and cash flows. At December 31, 2018, 2017 and 2016, approximately 34%, 43% and 38%, respectively, of the Company’s accounts receivable, including joint interest billings, related to these purchasers.
Lease and Well Equipment Inventory
Lease and well equipment inventory is stated at the lower of cost or market and consists entirely of materials or equipment scheduled for use in future well or midstream operations.
Oil and Natural Gas Properties
The Company uses the full-cost method of accounting for its investments in oil and natural gas properties. Under this method of accounting, all costs associated with the acquisition, exploration and development of oil and natural gas properties and reserves, including unproved and unevaluated property costs, are capitalized as incurred and accumulated in a single cost center representing the Company’s activities, which are undertaken exclusively in the United States. Such costs include lease acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, costs of drilling both productive and non-productive wells, capitalized interest on qualifying projects and general and administrative expenses directly related to acquisition, exploration and development activities, but do not include any costs related to production, selling or general corporate administrative activities. The Company capitalized $15.7$29.9 million, $6.9$23.1 million and $6.4$15.7 million of its general and administrative costs in 2016, 20152018, 2017 and 2014,2016, respectively. The Company capitalized $3.7$8.8 million, $3.9$7.3 million and $2.8$3.7 million of its interest expense for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively.
Capitalized costs of oil and natural gas properties are amortized using the unit-of-production method based upon production and estimates of proved reserves quantities. Unproved and unevaluated property costs are excluded from the amortization base used to determine depletion. Unproved and unevaluated properties are assessed for possible impairment on a
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
periodic basis based upon changes in operating or economic conditions. This assessment includes consideration of the following factors, among others: the assignment of proved reserves, geological and geophysical evaluations, intent to drill, remaining lease term and drilling activity and results. Upon impairment, the costs of the unproved and unevaluated properties are immediately included in the amortization base. Exploratory dry holes are included in the amortization base immediately upon determination that the well is not productive.
Sales of oil and natural gas properties are accounted for as adjustments to net capitalized costs with no gain or loss recognized, unless such adjustments would significantly alter the relationship between net capitalized costs and proved reserves of oil and natural gas. All costs related to production activities and maintenance and repairs are expensed as incurred. Significant workovers that increase the properties’ reserves are capitalized.
Ceiling Test
The net capitalized costs of oil and natural gas properties are limited to the lower of unamortized costs less related deferred income taxes or the cost center “ceiling.” The cost center ceiling is defined as the sum of:
(a) the present value, discounted at 10%, of future net revenues of proved oil and natural gas reserves, reduced by the estimated costs of developing these reserves, plus
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
(b) unproved and unevaluated property costs not being amortized, plus
(c) the lower of cost or estimated fair value of unproved and unevaluated properties included in the costs being amortized, if any, less
(d) any income tax effects related to the properties involved.
Any excess of the Company’s net capitalized costs above the cost center ceiling as described above is charged to operations as a full-cost ceiling impairment. The fair value of the Company’s derivative instruments isare not includedconsidered in the ceiling test computationcomputations as the Company does not designate these instruments as hedge instruments for accounting purposes.
The estimated present value of after-tax future net cash flows from proved oil and natural gas reserves is highly dependent upon the quantities of proved reserves, the estimation of which requires substantial judgment. The associated commodity prices and the applicable discount rate used in these estimates are in accordance with guidelines established by the SEC. Under these guidelines, oil and natural gas reserves are estimated using then-current operating and economic conditions, with no provision for price and cost changes in future periods except by contractual arrangements. Future net revenues are calculated using prices that represent the arithmetic averages of the first-day-of-the-month oil and natural gas prices for the previous 12-month period, and a 10% discount factor is used to determine the present value of future net revenues. For the period from January through December 2018, these average oil and natural gas prices were $62.04 per Bbl and $3.10 per MMBtu, respectively. For the period from January through December 2017, these average oil and natural gas prices were $47.79 per Bbl and $2.98 per MMBtu, respectively. For the period from January through December 2016, these average oil and natural gas prices were $39.25 per Bbl and $2.48 per MMBtu, respectively. For the period from January through December 2015, these average oil and natural gas prices were $46.79 per Bbl and $2.59 per MMBtu, respectively. For the period from January through December 2014, these average oil and natural gas prices were $91.48 per Bbl and $4.35 per MMBtu, respectively. In estimating the present value of after-tax future net cash flows from proved oil and natural gas reserves, the average oil prices were further adjusted by property for quality, transportation and marketing fees and regional price differentials, and the average natural gas prices were further adjusted by property for energy content, transportation and marketing fees and regional price differentials.
During the years ended December 31, 2018 and December 31, 2017, the Company’s full-cost ceiling exceeded the net capitalized costs less related deferred income taxes. As a result, the Company recorded no impairment to its net capitalized costs during the years ended December 31, 2018 and 2017.
During the year ended December 31, 2016, the Company’s net capitalized costs less related deferred income taxes periodically exceeded the full-cost ceiling. As a result, in the first six months of 2016, the Company recorded an impairment charge of $158.6 million, exclusive of tax effect, to its consolidated statement of operations with the related deferred income tax credit recorded net of a valuation allowance (see Note 7).
During the year ended December 31, 2015, the Company’s net capitalized costs less related deferred income taxes exceeded the full-cost ceiling. As a result, throughout 2015, the Company recorded an impairment charge of $801.2 million, exclusive of tax effect, to its consolidated statement of operations for December 31, 2015 with the related deferred income tax credit recorded net of a valuation allowance (see Note 7).
During the year ended December 31, 2014, the Company’s full-cost ceiling exceeded the net capitalized costs less related deferred income taxes. As a result, the Company recorded no impairment to its net capitalized costs during the year ended December 31, 2014.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
allowance.
As a non-cash item, the full-cost ceiling impairment impacts the accumulated depletion and the net carrying value of the Company’s assets on its consolidated balance sheets, as well as the corresponding shareholders’ equity, but it has no impact on the Company’s net cash flows as reported. Changes in oil and natural gas production rates, oil and natural gas prices, reserves estimates, future development costs and other factors will determine the Company’s actual ceiling test computation and impairment analyses in future periods.
Midstream and Other Property and Equipment
OtherMidstream and other property and equipment are recorded at historical cost and include midstream equipment and facilities, including the Company’s pipelines, processing facilities and salt water disposal systems, and corporate assets, including furniture, fixtures, equipment, land and leasehold improvements. Midstream equipment and facilities are depreciated over a 30-year useful life using the straight-line, mid-month convention method. Leasehold improvements are depreciated over the lesser of their useful lives or the term of the lease. Software, furniture, fixtures and other equipment are depreciated over their useful life (five to 30 years) using the straight-line method. Maintenance and repair costs that do not extend the useful life of the property or equipment are expensed as incurred. See Note 3 for a detail of midstream and other property and equipment.
Asset Retirement Obligations
The Company recognizes the fair value of an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. The asset retirement obligation is recorded as a liability at its estimated present value, with an offsetting increase recognized in oil and natural gas properties or supportmidstream and other property and equipment and facilities on the consolidated balance sheets. Periodic accretion of the discounted value of the estimated liability is recorded as an expense in the consolidated statements of operations.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
Derivative Financial Instruments
From time to time, the Company uses derivative financial instruments to mitigate its exposure to commodity price risk associated with oil, natural gas and natural gas liquidsNGL prices. The Company’s derivative financial instruments are recorded on the consolidated balance sheets as either an asset or a liability measured at fair value. The Company has elected not to apply hedge accounting for its existing derivative financial instruments, and as a result, the Company recognizes the change in derivative fair value between reporting periods currently in its consolidated statements of operations. The fair value of the Company’s derivative financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Realized gains and realized losses from the settlement of derivative financial instruments and unrealized gains and unrealized losses from valuation changes in the remaining unsettled derivative financial instruments are reported under “Revenues” in the consolidated statements of operations. See Note 11 for additional information about the Company’s derivative instruments.
Revenue Recognition
The Company follows the sales method of accounting for its oil, natural gas and natural gas liquids revenues, whereby it recognizes revenue, net of royalties, on all oil, natural gas and natural gas liquids sold to purchasers regardless of whether the sales are proportionate to its ownership in the property. Under this method, revenue is recognized at the time oil, natural gas and natural gas liquids are produced and sold, and the Company accrues for revenue earned but not yet received. The Company recognizes midstream services revenue at the time services have been rendered and the price is fixed and determinable.
For the year ended December 31, 2016, three significant purchasers accounted for 48% of the Company’s total oil, natural gas and natural gas liquids revenues: Plains Marketing, L.P. (18%), Shell Trading (US) Company (17%) and Occidental Energy Marketing, Inc. (13%). For the year ended December 31, 2015, three significant purchasers accounted for 59% of the Company’s total oil, natural gas and natural gas liquids revenues: Shell Trading (US) Company (33%), Enterprise Crude Oil LLC (14%) and Sequent Energy Management, L.P. (12%). For the year ended December 31, 2014, three significant purchasers accounted for approximately 68% of the Company’s total oil, natural gas and natural gas liquids revenues: Shell Trading (US) Company (45%), Enterprise Crude Oil LLC (12%) and Enterprise Products Operating LLC (11%). Due to the nature of the markets for oil, natural gas and natural gas liquids, the Company does not believe the loss of any one purchaser would have a material adverse impact on the Company’s financial condition, results of operations or cash flows for any significant period of time. At December 31, 2016, 2015 and 2014, approximately 38%, 39% and 44%, respectively, of the Company’s accounts receivable, including joint interest billings, related to these purchasers.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
Stock-Based Compensation
The Company grantsmay grant equity-based and liability-based common stock, stock options, restricted stock, and restricted stock units, performance stock units and other awards permitted under any long-term incentive plan of the Company then in effect to members of its Board of Directors and selected employees.certain employees, contractors and advisors. All suchequity-based awards are measured at fair value on the date of grant and are generally recognized as a component of general and administrative expenses in the accompanyingconsolidated statements of operations on a straight-line basis over the awards’ vesting periods. Awards that are expected to be settled in cash are liability-based awards, which are measured at fair value at each reporting date and are generally recognized as a component of general and administrative expenses in the consolidated statements of operations on a straight-line basis over the awards’ vesting periods. The Company accounts for all outstanding stock options granted under the Company’s 2003 Stock and Incentive Plan (as described and defined in Note 8)(the “2003 Plan”) as liability instruments as a result of the Company purchasing shares from certain of its employees to assist them in the exercise of outstanding options. As the stock options accounted for as liability-based awards are fully vested, changes in the fair value of the Company’s common stock.awards are generally recognized as a component of general and administrative expenses in the consolidated statements of operations until the awards are settled.
The Company uses the Black Scholes Merton option pricing model to measure the fair value of stock options, the closing stock price on the date of grant to measure the fair value of restricted stock and restricted stock unit awards and the Monte Carlo simulation method to measure the fair value of performance units.
The Company’s consolidated statements of operations for the years ended December 31, 2016, 20152018, 2017 and 20142016 include a stock-based compensation (non-cash) expense of $12.4$17.2 million, $9.5$16.7 million and $5.5$12.4 million, respectively. This stock-based compensation expense includes common stock issuances and restricted stock units expense totaling $1.6 million, $3.0 million and $1.0 million $0.9 millionin 2018, 2017 and $0.3 million in 2016, 2015 and 2014, respectively, paid to independent members of the Board of Directors and advisors as compensation for their services to the Company.
Income Taxes
The Company accounts for income taxes using the asset and liability approach for financial accounting and reporting. The Company evaluates the probability of realizing the future benefits of its deferred tax assets and records a valuation allowance for the portion of any deferred tax assets when it is more likely than not that the benefit from the deferred tax asset will not be realized.
The Company recognizes the tax benefit of an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the position. For tax positions meeting the more likely than not threshold, the amount recognized in the financial statements is the benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. At December 31, 2016, 20152018, 2017 and 2014,2016, the Company had not established any reserves for, nor recorded any unrecognized tax benefits related to, uncertain tax positions.
When necessary, the Company would include interest assessed by taxing authorities in “Interest expense” and penalties related to income taxes in “Other expense” on its consolidated statements of operations. The Company did not record any interest or penalties related to income taxes for the years ended December 31, 2016, 20152018, 2017 and 2014.2016.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act. The legislation significantly changed U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Tax Cuts and Jobs Act reduced the U.S. corporate income tax rate from a maximum of 35% to a flat rate of 21% effective January 1, 2018.
Allocation of Purchase Price in Business Combinations
As part of the Company’s business strategy, it periodically pursues the acquisition of oil and natural gas properties. The purchase price in a business combination is allocated to the assets acquired and liabilities assumed based on their fair values as of the acquisition date, which may occur many months after the announcement date. Therefore, while the consideration to be paid may be fixed, the fair value of the assets acquired and liabilities assumed is subject to change during the period between the announcement date and the acquisition date. The most significant estimates in the allocation typically relate to the value assigned to proved oil and natural gas reserves and unproved and unevaluated properties. As the allocation of the purchase price is subject to significant estimates and subjective judgments, the accuracy of this assessment is inherently uncertain.
Earnings (Loss) Per Common Share
The Company reports basic earnings (loss) attributable to Matador Resources Company shareholders per common share, which excludes the effect of potentially dilutive securities, and diluted earnings (loss) attributable to Matador Resources Company shareholders per common share, which includes the effect of all potentially dilutive securities, unless their impact is anti-dilutive.
The following are reconciliations of the numerators and denominators used to compute the Company’s basic and diluted earnings per common share as reported for the years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands, except per share data).
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Net income (loss) attributable to Matador Resources Company shareholders — numerator | | $ | 274,207 |
| | $ | 125,867 |
| | $ | (97,421 | ) |
| | | | | | | |
| Weighted average common shares outstanding — denominator | | | | | | |
| Basic | | 113,580 |
| | 102,029 |
| | 91,273 |
|
| Dilutive effect of options and restricted stock units | | 111 |
| | 514 |
| | — |
|
| Diluted weighted average common shares outstanding | | 113,691 |
| | 102,543 |
| | 91,273 |
|
Earnings (loss) per common share attributable to
Matador Resources Company shareholders | | | | | | |
| Basic | | $ | 2.41 |
| | $ | 1.23 |
| | $ | (1.07 | ) |
| Diluted | | $ | 2.41 |
| | $ | 1.23 |
| | $ | (1.07 | ) |
F-11
Matador Resources Company1.6 million and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
1.0 million shares of the Company’s common stock were excluded from the calculations above for the years ended December 31, 2016, 20152018 and 20142017, respectively, because their effects were anti-dilutive.
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 |
| Net (loss) income attributable to Matador Resources Company shareholders — numerator | | $ | (97,421 | ) | | $ | (679,785 | ) | | $ | 110,771 |
|
| | | | | | | |
| Weighted average common shares outstanding — denominator | | | | | | |
| Basic | | 91,273 |
| | 81,537 |
| | 70,229 |
|
| Dilutive effect of options, restricted stock units and preferred shares | | — |
| | — |
| | 677 |
|
| Diluted weighted average common shares outstanding | | 91,273 |
| | 81,537 |
| | 70,906 |
|
Earnings (loss) per common share attributable to
Matador Resources Company shareholders | | | | | | |
| Basic | | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.58 |
|
| Diluted | | $ | (1.07 | ) | | $ | (8.34 | ) | | $ | 1.56 |
|
AOptions to purchase a total of 2.9 million options to purchase shares of the Company’s common stock and 0.1 million restricted stock units were excluded from the calculations above for the year ended December 31, 2016 because their effects were anti-dilutive. Additionally, 1.0 million restricted shares, which are participating securities, were excluded from the calculations above for the year ended December 31, 2016 as the security holders do not have the obligation to share in the losses of the Company.
A total of 2.4 million options to purchase shares of the Company’s common stock and 0.1 million restricted stock units were excluded from the calculations above for the year ended December 31, 2015 because their effects were anti-dilutive. Additionally, 0.9 million restricted shares, which are participating securities, were excluded from the calculations above for the year ended December 31, 2015 as the security holders do not have the obligation to share in the losses of the Company.
Credit Risk
The Company’s cash is held in financial institutions and at times these amounts exceed the insurance limits of the Federal Deposit Insurance Corporation. Management believes, however, that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.
The Company uses derivative financial instruments to mitigate its exposure to oil, natural gas and natural gas liquidsNGL price volatility. These transactions expose the Company to potential credit risk from its counterparties. The Company manages counterparty credit risk through established internal derivatives policies that are reviewed on an ongoing basis. Additionally, all of the
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
Company’s commodity derivative contracts at December 31, 20162018 were with Comerica Bank, The Bank of Nova Scotia BMO Harris Financing (Bank of Montreal) and SunTrust Bank (or affiliates thereof), parties that are lenders (or affiliates thereof) under the Company’s Credit Agreement.revolving credit agreement.
Accounts receivable constitute the principal component of additional credit risk to which the Company may be exposed. The Company attempts to minimize credit risk exposure to counterparties by monitoring the financial condition and payment history of its purchasers and joint interest partners.
Recent Accounting Pronouncements
Revenue from Contracts with CustomersLeases.In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which specifies how and when to recognize revenue. This standard requires expanded disclosures surrounding revenue recognition and is intended to improve, and converge with international standards, the financial reporting requirements for revenue from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-11, which rescinds guidance from the SEC on accounting for gas balancing arrangements and will eliminate the use of the entitlements method. Entities have the option of using either a full retrospective or modified approach to adopt the new standards. In December 2016, the FASB issued ASU 2016-20, which clarifies disclosure requirements in ASU 2014-09. The Company will adopt the new guidance effective January 1, 2018. The Company is evaluating the new guidance, including (i) identification of revenue streams, (ii) review of contracts and procedures currently in place and (iii) which adoption method it will use.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued
Recognition and Measurement of Financial Assets and Financial Liabilities. In January 2016, the FASB issued 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which changes certain guidance related to the recognition, measurement, presentation and disclosure of financial instruments. This update is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is not permitted for the majority of the update, but is permitted for two of its provisions. We do not anticipate the adoption of this ASU will have a material impact on our consolidated financial statements.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. This ASU will become effective for fiscal years beginning after December 15, 2018 with early adoption permitted. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which is a land easement practical expedient. The Company plans to use this practical expedient, and as a result, the Company will evaluate new or modified land easements under this ASU beginning at the date of adoption. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which is currently evaluatinga targeted improvement for comparative reporting requirements for initial adoption of ASU 2016-02. The Company plans to use the optional transition method to adopt ASU 2016-02, and the amendments provided for in ASU 2018-11 will allow the Company to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of accumulated deficit in the period of adoption. Adoption of ASU 2016-02 will result in increased reported assets and liabilities. The Company has evaluated the impact of the adoption of this ASUthese ASUs on its consolidated financial statements.statements, including identifying all leases as defined under the new lease standards, and estimates that adoption of these standards will result in assets and liabilities related to leases of approximately $55 million to $65 million to be reflected on the Company’s consolidated balance sheet. The Company adopted these ASUs as of January 1, 2019.
Statement of Cash Flows.Stock Compensation.In November 2016,June 2018, the FASB issued ASU 2016-18,2018-07, Statement of Cash FlowsCompensation - Stock Compensation (Topic 230)718): Improvements to Nonemployee Share-Based Payment Accounting, which specifies that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents.. This ASU extends the scope of Topic 718 to include share-based payment transactions related to the acquisition of goods and services from nonemployees. Currently, the Company accounts for stock-based awards to special advisors and contractors under ASC 505-50 as liability instruments, and the fair value of the awards is recalculated each reporting period. Upon adoption, all such awards will become effective for fiscal years beginning after December 15, 2017,be measured at fair value on the grant date and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interimthe resulting expense will be recognized on a straight-line basis over the awards’ vesting period. The update should be applied using a retrospective transition methodtransitional guidance requires entities to each period presented.remeasure all unvested awards that are being accounted for under ASC 505-50 as liability instruments as of the beginning of the year in which this ASU is adopted. The Company believes that the impactadopted this ASU as of the adoptionJanuary 1, 2019. Adoption of this ASU will changenot have a material impact on the presentation of its beginning and ending cash balances on its Consolidated Statements of Cash Flows and eliminate the presentation of changes in restricted cash balances from investing activities on its Consolidated Statements of Cash Flows.
Clarifying the Definition of a Business. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which specifies the minimum inputs and processes required for an integrated set of assets and activities to meet the definition of a business. This ASU will become effective for fiscal years beginning after December 15, 2017 with early adoption permitted. Entities are required to apply guidance prospectively upon adoption. The Company is currently evaluating the impact of the adoption of this ASU on itsCompany’s consolidated financial statements.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 3 — PROPERTY AND EQUIPMENT
The following table presents a summary of the Company’s property and equipment balances as of December 31, 20162018 and 20152017 (in thousands).
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Oil and natural gas properties | | | | | | | | |
| Evaluated (subject to amortization) | | $ | 2,408,305 |
| | $ | 2,122,174 |
| | $ | 3,780,236 |
| | $ | 3,004,770 |
|
| Unproved and unevaluated (not subject to amortization) | | 479,736 |
| | 387,504 |
| | 1,199,511 |
| | 637,396 |
|
| Total oil and natural gas properties | | 2,888,041 |
| | 2,509,678 |
| | 4,979,747 |
| | 3,642,166 |
|
| Accumulated depletion | | (1,850,882 | ) | | (1,574,040 | ) | | (2,273,010 | ) | | (2,021,169 | ) |
| Net oil and natural gas properties | | 1,037,159 |
| | 935,638 |
| | 2,706,737 |
| | 1,620,997 |
|
| Other property and equipment | | | | | |
| Midstream and other property and equipment | | | | | |
| Midstream equipment and facilities | | 145,662 |
| | 78,564 |
| | 424,480 |
| | 258,725 |
|
| Furniture, fixtures and other equipment | | 5,487 |
| | 2,918 |
| | 7,184 |
| | 6,109 |
|
| Software | | 3,206 |
| | 2,193 |
| | 8,039 |
| | 7,942 |
|
| Land | | 1,437 |
| | 1,539 |
| | 4,192 |
| | 2,892 |
|
| Leasehold improvements | | 5,003 |
| | 1,173 |
| | 6,171 |
| | 5,428 |
|
| Total other property and equipment | | 160,795 |
| | 86,387 |
| |
| Total midstream and other property and equipment | | | 450,066 |
| | 281,096 |
|
| Accumulated depreciation | | (13,429 | ) | | (9,619 | ) | | (33,939 | ) | | (20,637 | ) |
| Net other property and equipment | | 147,366 |
| | 76,768 |
| |
| Net midstream and other property and equipment | | | 416,127 |
| | 260,459 |
|
| Net property and equipment | | $ | 1,184,525 |
| | $ | 1,012,406 |
| | $ | 3,122,864 |
| | $ | 1,881,456 |
|
The following table provides a breakdown of the Company’s unproved and unevaluated property costs not subject to amortization as of December 31, 20162018 and the year in which these costs were incurred (in thousands).
| | | Description | | 2016 | | 2015 | | 2014 | | 2013 and prior | | Total | | 2018 | | 2017 | | 2016 | | 2015 and prior | | Total |
| Costs incurred for | | | | | | | | | | | | | | | | | | | | |
| Property acquisition | | $ | 126,857 |
| | $ | 236,507 |
| | $ | 55,258 |
| | $ | 23,654 |
| | $ | 442,276 |
| | $ | 602,117 |
| | $ | 212,846 |
| | $ | 116,389 |
| | $ | 223,656 |
| | $ | 1,155,008 |
|
| Exploration wells | | 19,017 |
| | 3,375 |
| | 34 |
| | — |
| | 22,426 |
| | 12,361 |
| | 1,235 |
| | 712 |
| | 204 |
| | 14,512 |
|
| Development wells | | 13,086 |
| | 1,218 |
| | 730 |
| | — |
| | 15,034 |
| | 29,399 |
| | 391 |
| | 159 |
| | 42 |
| | 29,991 |
|
| Total | | $ | 158,960 |
| | $ | 241,100 |
| | $ | 56,022 |
| | $ | 23,654 |
| | $ | 479,736 |
| | $ | 643,877 |
| | $ | 214,472 |
| | $ | 117,260 |
| | $ | 223,902 |
| | $ | 1,199,511 |
|
Property acquisition costs primarily include leasehold costs paid to secure oil and natural gas mineral leases, but may also include broker and legal expenses, geological and geophysical expenses and capitalized internal costs associated with developing oil and natural gas prospects on these properties. Property acquisition costs are transferred into the amortization base on an ongoing basis as these properties are evaluated and proved reserves are established or impairment is determined. Unproved and unevaluated properties are assessed for possible impairment on a periodic basis based upon changes in operating or economic conditions.
Property acquisition costs incurred that remain in unproved and unevaluated property at December 31, 20162018 are related primarilyalmost entirely to the Company’s leasehold and mineral acquisitions in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas during the past fourfive years. These costs include, in particular, the cost of the acreage acquired as part of the HEYCO Merger (as described and defined in Note 5) in 2015. These costs are associated with acreage for which proved reserves have yet to be assigned. A significant portion of these costs are associated with properties whichthat are held by production or have automatic lease renewal options. As the Company drills wells and assigns proved reserves to these properties or determines that certain portions of this acreage, if any, cannot be assigned proved reserves, portions of these costs are transferred to the amortization base.
On September 12, 2018, the Company announced the successful acquisition of 8,400 gross and net leasehold acres in Lea and Eddy Counties, New Mexico for approximately $387 million in the Bureau of Land Management New Mexico Oil and Gas Lease Sale on September 5 and 6, 2018 (the “BLM Acquisition”). The BLM Acquisition was responsible for a significant portion of the Company’s property acquisition costs in 2018.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 3 — PROPERTY AND EQUIPMENT — Continued
Costs excluded from amortization also include those costs associated with exploration and development wells in progress or awaiting completion at year-end. These costs are transferred into the amortization base on an ongoing basis as these wells are completed and proved reserves are established or confirmed. These costs totaled $37.5$44.5 million at December 31, 2016.2018. Of this
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 3 — PROPERTY AND EQUIPMENT — Continued
total, $22.4$14.5 million was associated with exploration wells and $15.0$30.0 million was associated with development wells. The Company anticipates that most of the $37.5$44.5 million associated with these wells in progress at December 31, 20162018 will be transferred to the amortization base during 2017.2019.
NOTE 4 — ASSET RETIREMENTRETIRMENT OBLIGATIONS
In general, the Company’s asset retirement obligations relate to future costs associated with plugging and abandonment of its oil, and natural gas and salt water disposal wells, removal of pipelines, equipment and facilities from leased acreage and returning such land to its original condition. The amounts recognized are based on numerous estimates and assumptions, including future retirement costs, future recoverable quantities of oil and natural gas, future inflation rates and the Company’s credit-adjusted risk-free interest rate. Revisions to the liability can occur due to changes in these estimates and assumptions or if federal or state regulators enact new plugging and abandonment requirements. At the time of the actual plugging and abandonment of its oil and natural gas wells, the Company includes any gain or loss associated with the operation in the amortization base to the extent the actual costs are different from the estimated liability.
The following table summarizes the changes in the Company’s asset retirement obligations for the years ended December 31, 20162018 and 20152017 (in thousands).
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Beginning asset retirement obligations | | $ | 15,420 |
| | $ | 11,951 |
| | $ | 26,256 |
| | $ | 20,640 |
|
| Liabilities incurred during period | | 1,791 |
| | 4,508 |
| | 3,566 |
| | 2,920 |
|
| Liabilities settled during period | | (375 | ) | | (588 | ) | | (708 | ) | | (430 | ) |
| Revisions in estimated cash flows | | 2,622 |
| | (1,185 | ) | | 442 |
| | 1,836 |
|
| Accretion expense | | 1,182 |
| | 734 |
| | 1,530 |
| | 1,290 |
|
| Ending asset retirement obligations | | 20,640 |
| | 15,420 |
| | 31,086 |
| | 26,256 |
|
Less: current asset retirement obligations (1) | | (915 | ) | | (254 | ) | | (1,350 | ) | | (1,176 | ) |
| Long-term asset retirement obligations | | $ | 19,725 |
| | $ | 15,166 |
| | $ | 29,736 |
| | $ | 25,080 |
|
__________________
| |
(1) | Included in accrued liabilities in the Company’s consolidated balance sheets at December 31, 20162018 and 2015.2017. |
NOTE 5 — BUSINESS COMBINATIONS AND DIVESTITURES
Business CombinationsJoint Venture
On February 27, 2015,17, 2017, the Company completedcontributed substantially all of its midstream assets located in the Rustler Breaks (Eddy County, New Mexico) and Wolf (Loving County, Texas) asset areas in the Delaware Basin to San Mateo, a business combinationjoint venture with Harvey E. Yates Company (“HEYCO”), a subsidiary of HEYCOFive Point Energy Group, Inc., throughLLC (“Five Point”). The midstream assets contributed to San Mateo include (i) the Black River Processing Plant; (ii) one salt water disposal well and a merger of HEYCO with and into a wholly-owned subsidiary of Matador (the “HEYCO Merger”). Inrelated commercial salt water disposal facility in the HEYCO Merger, the Company obtained certain oil and natural gas producing properties and undeveloped acreage located in Lea and Eddy Counties, New Mexico, consisting of approximately 58,600 gross (18,200 net) acres strategically located between the Company’s existing acreage in its Ranger and Rustler Breaks asset areas. HEYCO, headquarteredarea; (iii) three salt water disposal wells and related commercial salt water disposal facilities in Roswell, New Mexico,the Wolf asset area; and (iv) substantially all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas (collectively, the “Delaware Midstream Assets”). The Company continues to operate the Delaware Midstream Assets and San Mateo’s other assets. The Company retained its ownership in certain midstream assets owned in South Texas and Northwest Louisiana, which are not part of San Mateo.
The Company and Five Point own 51% and 49% of San Mateo, respectively. Five Point provided initial cash consideration of $176.4 million to San Mateo in exchange for its 49% interest. Approximately $171.5 million of this cash contribution by Five Point was privately-owned priordistributed by San Mateo to the transaction.
As consideration for the business combination, Matador paid approximately $33.6Company as a special distribution. The Company earned $14.7 million in cashperformance incentives effective January 31, 2018, which was paid by Five Point in the first quarter of 2018. Through January 31, 2019, the Company had earned an additional $14.7 million in performance incentives expected to be paid by Five Point in the first quarter of 2019 and assumed debt obligations and issued 3,300,000 shares of Matador common stock and 150,000 shares of a new series of Matador Series A Convertible Preferred Stock (“Series A Preferred Stock”) to HEYCO Energy Group, Inc. (convertible into ten shares of common stock for each one share of Series A Preferred Stock uponmay earn an additional $44.1 million in performance incentives over the effectiveness of an amendmentnext three years. These performance incentives are recorded as additional contributions related to the Company’s Amended and Restated Certificate of Formation to increase the number of authorized shares of common stock; the Series A Preferred Stock converted to common stock on April 6, 2015). Matador incurred an additional $4.5 million for customary purchase price adjustments, including adjusting for production, revenues and operating and capital expenditures from September 1, 2014 to closing. The consideration paid and the liabilities assumed, including deferred tax liabilities of approximately $76.8 million and other liabilities of approximately $4.5 million, represent a total purchase price of $223.5 million. The HEYCO Merger was accounted for using the acquisition method under ASC Topic 805, “Business Combinations,” which requires the assets acquired and liabilities assumed to be recorded at fair value asformation of the respective acquisition date.Joint Venture as
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 5 — BUSINESS COMBINATIONS AND DIVESTITURES — Continued
they are received. The majority ofCompany contributed the assets acquiredDelaware Midstream Assets and $5.1 million in cash to San Mateo in exchange for its 51% interest. San Mateo is consolidated in the HEYCO Merger wereCompany’s financial statements with Five Point’s interest in San Mateo being accounted for as a non-controlling interest.
The Company dedicated its current and future leasehold interests in the formRustler Breaks and Wolf asset areas to San Mateo pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements, effective as of non-producing acreage. The producing wells acquiredFebruary 1, 2017. In addition, the Company dedicated its current and future leasehold interests in the HEYCO Merger did not haveRustler Breaks asset area to San Mateo pursuant to a material impact on the Company’s revenues or results of operations for the year ended December 31, 2015. During the year ended December 31, 2015, the Company incurred approximately $2.5 million of transaction costs associated with the HEYCO Merger, which were included in “General and administrative” costs in the consolidated statement of operations.15-year, fixed-fee natural gas processing agreement (see Note 13).
Divestitures
On October 1, 2015, the Company completed the sale of its wholly-owned subsidiary that owned certain natural gas gathering and processing assets in the Delaware Basin in Loving County, Texas (the “Loving County Processing System”) to an affiliate of EnLink Midstream Partners, LP (“EnLink”). The Loving County Processing System included a cryogenic natural gas processing plant with approximately 35 MMcf per day of inlet capacity (the “Wolf Processing Plant”) and approximately six miles of high-pressure gathering pipeline which connects the Company’s gathering system to the Wolf Processing Plant.
Pursuant to the terms of the transaction, EnLink paid approximately $143.4 million, and the Company received net proceeds of approximately $139.8 million after deducting customary purchase price adjustments of approximately $3.6 million. In conjunction with the sale of the Loving County Processing System, the Company dedicated a significant portion of its leasehold interests in Loving County as of the closing date pursuant to a 15-year fixed-fee natural gas gathering and processing agreement and provided a volume commitment in exchange for priority one service. See Note 13 for more information related to this agreement.
Due to the terms of the agreement, the transaction was accounted for as a sale and leaseback transaction; the carrying value of the net assets sold of approximately $31.0 million was removed from the consolidated balance sheet as of December 31, 2015 and the resulting difference of approximately $108.4 million between the net proceeds received less closing costs of $0.4 million and the basis of the assets sold was recorded as deferred gain on plant sale and was to be recognized as a gain on asset sales over the 15-year term of the gathering and processing agreement.
During the fourth quarter of 2016, EnLink completed construction of another processing plant in Loving County, Texas. Upon completion and successful testing of this new plant, as allowed under the gathering and processing agreement, EnLink is nowbegan processing the Company’s natural gas produced in this area at the new plant. As such, the gathering and processing agreement the Company entered into with EnLink iswas no longer considered a lease, and accordingly, the Company recognized the unamortized gain on the sale of $107.3 million in the consolidated statement of operations for the year ended December 31, 2016.
The Company can, at its option and upon mutual agreement with EnLink, dedicate any future leasehold acquisitions in Loving County to EnLink. In addition, the Company retained its natural gas gathering system up to a central delivery point and its other midstream assets in the area, including oil and water gathering systems and salt water disposal wells. On February 17, 2017, these assets were contributed to the Joint Venture (as described and defined in Note 18).San Mateo.
NOTE 6 — DEBT
Credit AgreementAgreements
MRC Energy Company
On September 28, 2012, the Company amended and restated its revolving credit agreement with the lenders party thereto, led by Royal Bank of Canada (“RBC”) as administrative agent (the “Credit Agreement”), which increased the maximum facility amount from $400.0 million to $500.0 million.. MRC Energy Company, which is a subsidiary of Matador andthat directly or indirectly holds the ownership interests in the Company’s other operating subsidiaries, other than its less-than-wholly-owned subsidiaries, is the borrower under the Credit Agreement. Borrowings are secured by mortgages on at least 80% of the Company’s proved oil and natural gas properties and by the equity interests of certain of MRC Energy Company’s wholly-owned subsidiaries, which are also guarantors. San Mateo and its subsidiaries are not guarantors of the Credit Agreement. In addition, all obligations under the Credit Agreement are guaranteed by Matador, the parent corporation. Various commodity hedging agreements with certain of the lenders under the Credit Agreement (or affiliates thereof) are also secured by the collateral of and guaranteed by certain eligible subsidiaries of MRC Energy Company.
The borrowing base under the Credit Agreement is determined semi-annually as of May 1 and November 1 by the lenders based primarily on the estimated value of the Company’s proved oil and natural gas reserves at December 31 and June 30 of each year, respectively. Both the Company and the lenders may request an unscheduled redetermination of the borrowing base once each between scheduled redetermination dates. On October 31, 2016, the borrowing base was increased from $300.0 million to $400.0 million based on the lenders’ review of the Company’s proved oil and natural gas reserves at June 30, 2016
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 6 — DEBT — Continued
using commodity price estimates prescribed byeach year, respectively. The Company and the lenders. Thislenders may each request an unscheduled redetermination of the borrowing base increase was primarily attributable to increases in bothonce between scheduled redetermination dates. During the Company’sfirst quarter of 2018, the lenders completed their review of our proved reserves volumes and increases in oil and natural gas pricesreserves at December 31, 2017. As a result, in March 2018, the latter partlenders increased the borrowing base from $525.0 million to $725.0 million. In October 2018, the lenders completed their review of 2016. All other provisions ofthe Company’s proved oil and natural gas reserves at June 30, 2018. In connection with that review, the Company amended the Credit Agreement remained unchanged.to, among other items, increase the borrowing base from $725.0 million to $850.0 million, increase the maximum facility amount to $1.5 billion, increase the elected borrowing commitment to $500.0 million, extend the maturity to October 31, 2023, reduce the borrowing rates by 0.25% per annum and set the maximum leverage ratio at 4.00 to 1.00. This October 20162018 redetermination constituted the regularly scheduled November 1 redetermination. TheBorrowings under the Credit Agreement matures on October 16, 2020.are limited to the lowest of the borrowing base, the maximum facility amount and the elected borrowing commitment.
In the event of a borrowing basean increase in the elected commitment, the Company is required to pay a fee to the lenders equal to a percentage of the amount of the increase, which is determined based on market conditions at the time of the borrowing base increase. Total deferred loan costs were $1.3$2.0 million at December 31, 2016,2018, and these costs are being amortized over the term of the Credit Agreement, which approximates amortization of these costs using the effective interest method. If, upon a redetermination of the borrowing base, the borrowing base were to be less than the outstanding borrowings under the Credit Agreement at anysuch time, the Company would be required to provide additional collateral satisfactory in nature and value to the lenders to increase the borrowing base to an amount sufficient to cover such excess or to repay the deficit in equal installments over a period of six months.
During the year ended December 31, 2016, using a portion of the net proceeds from the December 2016 senior unsecured notes offering and the public offering of our common stock discussed herein, the Company repaid a total of $120.0 million of its outstanding borrowings under the Credit Agreement. At December 31, 2016,2018, the Company had no$40.0 million in borrowings outstanding under the Credit Agreement and approximately $0.8$3.0 million in outstanding letters of credit issued pursuant to the Credit Agreement. At February 22, 2017,26, 2019, the Company continued to have nohad $80.0 million in borrowings outstanding under the Credit Agreement and approximately $0.8$13.7 million in outstanding letters of credit issued pursuant to the Credit Agreement.
Borrowings under the Credit Agreement may be in the form of a base rate loan or a Eurodollar loan. If the Company borrows funds as a base rate loan, such borrowings will bear interest at a rate equal to the highergreatest of (i) the prime rate for such day, or (ii) the Federal Funds Effective Rate (as defined in the Credit Agreement) on such day, plus 0.50% orand (iii) the daily adjusting LIBOR rate (as defined in the Credit Agreement) plus 1.0% plus, in each case, an amount ranging from 0.50%0.25% to 1.50% of such outstanding loan1.25% per annum depending on the level of borrowings under the Credit Agreement. If the Company borrows funds as a Eurodollar loan, such borrowings will bear interest at a rate equal to (i)(x) the quotient obtained by dividing (A) thereserve adjusted LIBOR rate by (B) a percentage equal to 100% minus the maximum rate during such interest calculation period at which Royal Bank of Canada (“RBC”) is required to maintain reserves on Eurocurrency LiabilitiesRate (as defined in Regulation D of the Board of Governors of the Federal Reserve System)Credit Agreement) plus (ii)(y) an amount ranging from 1.50%1.25% to 2.50% of such outstanding loan2.25% per annum depending on the level of borrowings under the Credit Agreement. The interest period for Eurodollar borrowings may be one, two, three or six months as designated by the Company. If the Company has outstanding borrowings under the Credit Agreement and interest rates increase, so will the Company’s interest costs, which may have a material adverse effect on the Company’s results of operations and financial condition.
A commitment fee of 0.375% to 0.50%, per annum, depending on the unused availabilitylevel of borrowings under the Credit Agreement, is also paid quarterly in arrears. The Company includes this commitment fee, any amortization of deferred financing costs (including origination, borrowing base increase and amendment fees) and annual agency fees, if any, as interest expense and in its interest rate calculations and related disclosures. The Credit Agreement requires the Company to maintain a debt to EBITDA ratio, which is defined as total debt outstanding (net of up to $50 million of cash or cash equivalents) divided by a rolling four quarter EBITDA calculation, of 4.254.00 or less.
Subject to certain exceptions, the Credit Agreement contains various covenants that limit the Company’s and its restricted subsidiaries’ ability to take certain actions, including, but not limited to, the following:
incur indebtedness or grant liens on any of the Company’s assets;
enter into commodity hedging agreements;
declare or pay dividends, distributions or redemptions;
merge or consolidate;
make any loans or investments;
engage in transactions with affiliates;
engage in certain asset dispositions, including a sale of all or substantially all of the Company’s assets; and
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 6 — DEBT — Continued
take certain actions with respect to the Company’s senior unsecured notes.
If an event of default exists under the Credit Agreement, the lenders will be able to accelerate the maturity of the borrowings and exercise other rights and remedies. Events of default include, but are not limited to, the following events:
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 6 — DEBT — Continued
failure to pay any principal or interest on the outstanding borrowings or any reimbursement obligation under any letter of credit when due or any fees or other amounts within certain grace periods;
failure to perform or otherwise comply with the covenants and obligations in the Credit Agreement or other loan documents, subject, in certain instances, to certain grace periods;
bankruptcy or insolvency events involving the Company or its subsidiaries; and
a change of control, as defined in the Credit Agreement.
The Company believes that it was in compliance with the terms of the Credit Agreement at December 31, 2016.2018.
San Mateo Midstream, LLC
On December 19, 2018, San Mateo entered into a $250.0 million credit facility led by The Bank of Nova Scotia, as administrative agent (the “San Mateo Credit Facility”), and including all lenders party to the Credit Agreement. The San Mateo Credit Facility, which matures December 19, 2023, includes an accordion feature, which could expand lender commitments to up to $400.0 million. The San Mateo Credit Facility is non-recourse with respect to Matador and its wholly-owned subsidiaries but is guaranteed by San Mateo’s subsidiaries and secured by substantially all of San Mateo’s assets, including real property.
Total deferred loan costs were $1.9 million at December 31, 2018, and these costs are being amortized over the term of the San Mateo Credit Facility, which approximates amortization of these costs using the effective interest method. At December 31, 2018 and February 26, 2019, San Mateo had $220.0 million in borrowings outstanding under the San Mateo Credit Facility and zero and $16.2 million, respectively, in outstanding letters of credit issued pursuant to the San Mateo Credit Facility.
Borrowings under the San Mateo Credit Facility may be in the form of a base rate loan or a Eurodollar loan. If San Mateo borrows funds as a base rate loan, such borrowings will bear interest at a rate equal to the greatest of (i) the prime rate for such day, (ii) the Federal Funds Effective Rate (as defined in the San Mateo Credit Facility) on such day, plus 0.50% and (iii) the Adjusted LIBO Rate (as defined in the San Mateo Credit Facility) plus 1.0% plus, in each case, an amount ranging from 0.50% to 1.50% per annum depending on San Mateo’s Consolidated Total Leverage Ratio (as defined in the San Mateo Credit Facility). If San Mateo borrows funds as a Eurodollar loan, such borrowings will bear interest at a rate equal to (x) the Adjusted LIBO Rate for the chosen interest period plus (y) an amount ranging from 1.50% to 2.50% per annum depending on San Mateo’s Consolidated Total Leverage Ratio. If San Mateo has outstanding borrowings under the San Mateo Credit Facility and interest rates increase, so will San Mateo’s interest costs, which may have a material adverse effect on San Mateo’s results of operations and financial condition.
A commitment fee of 0.30% to 0.50% per annum, depending on the unused availability under the San Mateo Credit Facility, is also paid quarterly in arrears. The Company includes this commitment fee, any amortization of deferred financing costs (including origination and amendment fees) and annual agency fees, if any, as interest expense and in its interest rate calculations and related disclosures. The San Mateo Credit Facility requires San Mateo to maintain a debt to EBITDA ratio, which is defined as total consolidated funded indebtedness outstanding (as defined in the San Mateo Credit Facility) divided by a rolling four quarter EBITDA calculation, of 5.00 or less, subject to certain exceptions. The San Mateo Credit Facility also requires San Mateo to maintain an interest coverage ratio, which is defined as a rolling four quarter EBITDA calculation divided by San Mateo’s consolidated interest expense, of 2.50 or more.
Subject to certain exceptions, the San Mateo Credit Facility contains various covenants that limit San Mateo’s and its restricted subsidiaries’ ability to take certain actions, including, but not limited to, the following:
incur indebtedness or grant liens on any of San Mateo’s assets;
enter into hedging agreements;
declare or pay dividends, distributions or redemptions;
merge or consolidate;
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 6 — DEBT — Continued
make any loans or investments;
engage in transactions with affiliates;
engage in certain asset dispositions, including a sale of all or substantially all of San Mateo’s assets; and
issue equity interests in San Mateo or its subsidiaries.
If an event of default exists under the San Mateo Credit Facility, the lenders will be able to accelerate the maturity of the borrowings and exercise other rights and remedies. Events of default include, but are not limited to, the following events:
failure to pay any principal or interest on the outstanding borrowings or any reimbursement obligation under any letter of credit when due or any fees or other amounts within certain grace periods;
failure to perform or otherwise comply with the covenants and obligations in the San Mateo Credit Facility or other loan documents, subject, in certain instances, to certain grace periods;
bankruptcy or insolvency events involving San Mateo or its subsidiaries; and
a change of control, as defined in the San Mateo Credit Facility.
The Company believes that San Mateo was in compliance with the terms of the San Mateo Credit Facility at December 31, 2018.
Senior Unsecured Notes
On April 14, 2015, Matador issued $400.0 million of 6.875% senior notes due 2023 (the “Original 2023 Notes”) in a private placement. The Original Notes are Matador’s senior unsecured obligations, are redeemable as described below and were issuedplacement at par value. The net proceedsOriginal 2023 Notes were used to pay down a portion of the outstanding borrowings under the Credit Agreement and the debt assumed in connection with the HEYCO Merger. The Original Notes mature on April 15, 2023 and interest is payable semi-annually in arrears on April 15 and October 15 of each year.
On October 21, 2015, and pursuant to a registered exchange offer, the Companylater exchanged all of the privately placed Original Notes for a like principal amount of 6.875% senior notes due 2023 (the “2023 Exchange Notes”) that have been registered under the Securities Act of 1933, as amended (the “Registered Notes”“Securities Act”). The terms of such Registered Notes are substantially the same as the terms of the Original Notes except that the transfer restrictions, registration rights and provisions for additional interest relating to the Original Notes do not apply to the Registered Notes.
, at par value. On December 9, 2016, Matador issued $175.0 million of 6.875% senior notes due 2023 (the “Additional 2023 Notes” and, collectively with the Registered Notes, the “Notes”) in a private placement, (the “Notes Offering”). The Additional Notes were issued pursuant to and are governed by the same indenture governing the Original Notes (the “Indenture”). The Additional Notes were issued at 105.5% of par, plus accrued interest from October 15, 2016, resulting in an effective interest rate of 5.5%. WeThe Company received net proceeds from the Notes Offering of approximately $181.5 million, including the issue premium, but after deducting the initial purchasers’ discounts and estimated offering expenses and excluding accrued interest paid by buyers of the Additional 2023 Notes. AThe Additional 2023 Notes were later exchanged for a like principal amount of 6.875% senior notes due 2023 that have been registered under the Securities Act (together with the 2023 Exchange Notes, the “2023 Notes”).
On August 21, 2018, the Company issued $750.0 million of 5.875% senior notes due 2026 (the “Original 2026 Notes”) in a private placement at par value (the “2026 Notes Offering”). The Company received net proceeds of approximately $740.0 million, after deducting the initial purchasers’ discounts and offering expenses. In conjunction with the 2026 Notes Offering, in August and September 2018, respectively, the Company completed a tender offer to purchase for cash and subsequent redemption of all of the 2023 Notes (the “2023 Notes Tender Offer and Redemption”). The Company used a portion of the net proceeds from the 2026 Notes Offering to fund the 2023 Notes Tender Offer and Redemption. In connection with the 2023 Notes Tender Offer and Redemption, the Company incurred a loss of $31.2 million, including total payments of $30.4 million to holders of the 2023 Notes Offering, along withas a result of the tender premium and the required 105.156% redemption price payable pursuant to the 2023 Notes indenture.
On October 4, 2018, the Company issued an additional $300.0 million of 5.875% senior notes due 2026 (the “Additional 2026 Notes”). The Additional 2026 Notes were issued pursuant to, and are governed by, the same indenture governing the Original 2026 Notes (the “Indenture”). The Additional 2026 Notes were issued at 100.5% of par, plus accrued interest from August 21, 2018. The Company received net proceeds from the December 2016 publicthis offering of our common stock, have beenapproximately $297.3 million, including the issue premium, but after deducting the initial purchasers’ discounts and estimated offering expenses and excluding accrued interest from August 21, 2018 paid by the initial purchasers of the Additional 2026 Notes. The proceeds from this offering were used to partially fund certain acreage acquisitions and midstream asset development, to repay a portion of the outstanding borrowings under the Credit Agreement, and for general corporate purposes, including capital expenditures associatedwhich were incurred in connection with the additionBLM Acquisition.
In December 2018, the Company exchanged substantially all of the Original 2026 Notes and Additional 2026 Notes for a fourth drilling rig.like principal amount of 5.875% senior notes due 2026 that have been registered under the Securities Act (the “Notes”). The terms of the Notes are substantially the same as the terms of the Original 2026 Notes and Additional 2026 Notes except that the transfer restrictions, registration rights and provisions for additional interest relating to the Original 2026 Notes and Additional 2026 Notes do not apply to the Notes. The Notes are our senior unsecured obligations and are redeemable as described below. The Noteswill mature on AprilSeptember 15, 2023,2026, and interest is payable semi-annuallyon the Notes semi-
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 6 — DEBT — Continued
annually in arrears on Aprileach March 15 and October 15September 15. The Notes are guaranteed on a senior unsecured basis by certain subsidiaries of each year.the Company (the “Guarantors”). San Mateo and its subsidiaries are not Restricted Subsidiaries under the Indenture or Guarantors of the Notes (see Note 16).
On or after AprilSeptember 15, 2018, Matador2021, the Company may redeem all or a portionpart of the Notes at any time or from time to time at the following redemption prices (expressed as percentages of the principal amount) plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the 12-monthtwelve-month period beginning on AprilSeptember 15 of the years indicated.indicated below:
|
| | |
| Year | | Redemption Price |
| 2018 | | 105.156% |
| 2019 | | 103.438% |
| 2020 | | 101.719% |
| 2021 and thereafter | | 100.000% |
|
| | |
| Year | | Redemption Price |
| 2021 | | 104.406% |
| 2022 | | 102.938% |
| 2023 | | 101.469% |
| 2024 and thereafter | | 100.000% |
At any time prior to AprilSeptember 15, 2018, Matador2021, the Company may redeem up to 35% of the aggregate principal amount of the Notes with net proceeds from certain equity offerings at a redemption price of 106.875%105.875% of the principal amount of the Notes,thereof, plus accrued and unpaid interest, if any, to the redemption date;date, provided that (i) at least 65% in aggregate principal amount of the Notes (including any additional notes) originally issued remains outstanding immediately after the occurrence of such redemption (excluding Notes held by Matadorthe Company and its subsidiaries) and (ii) each such redemption occurs within 180 days of the date of the closing of the related equity offering.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 6 — DEBT — Continued
In addition, at any time prior to AprilSeptember 15, 2018, Matador2021, the Company may redeem all or part of the Notes at a redemption price equal to the sum of of:
(i) the principal amount thereof, plus
(ii) the excess, if any, of (a) the present value at such time of (1) the redemption price of such Notes at AprilSeptember 15, 20182021 plus (2) any required interest payments due on such Notes through AprilSeptember 15, 20182021, discounted to the redemption date on a semi-annual basis using a discount rate equal to the Treasury Rate (as defined in the Indenture) plus 50 basis points, over (b) the principal amount of such Notes, plus
(iii) accrued and unpaid interest, if any, to the redemption date.
Subject to certain exceptions, the Indenture contains various covenants that limit the Company’s ability to take certain actions, including, but not limited to, the following:
incur or guarantee additional debt or issue certain types of preferred stock;indebtedness;
sell assets;
pay dividends on capital stock or redeem, repurchase or retire its capital stock or subordinated indebtedness;
transfer or sell assets;
make certain investments;
create certain liens;liens that secure indebtedness;
enter into agreements that restrict dividends or other payments from its Restricted Subsidiaries (as defined in the Indenture) to the Company;
consolidate, merge or transfer all or substantially all of its assets;
engage in transactions with affiliates; and
create unrestricted subsidiaries.merge or consolidate with another company.
In the case of an event of default arising from certain events of bankruptcy or insolvency with respect to Matador, any Restricted Subsidiary (as defined in the Indenture) that is a Significant Subsidiary (as defined in the Indenture) or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable immediately without further action or notice. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Events of default include, but are not limited to, the following events:
default for 30 days in the payment when due of interest on the Notes;
default in the payment when due of the principal of, or premium, if any, on the Notes;
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 6 — DEBT — Continued
failure by Matadorthe Company to comply with its obligations to offer to purchase or purchase Notes when requirednotes pursuant to the change of control or asset sale provisionscovenants of the Indenture or Matador’s failure to comply with the covenant relating to merger, consolidation or sale of assets;mergers;
failure by Matadorthe Company for 180 days after notice to comply with its reporting obligations under the Indenture;
failure by Matadorthe Company for 60 days after notice to comply with any of the other agreements in the Indenture;
payment defaults and accelerations with respect to other indebtedness of Matadorthe Company and its Restricted Subsidiaries in the aggregate principal amount of $25.0$50.0 million or more;
failure by Matadorthe Company or any Restricted Subsidiary to pay certain final judgments aggregating in excess of $25.0$50.0 million within 60 days;
any subsidiary guarantee by a guarantor ceasingGuarantor ceases to be in full force and effect, beingis declared null and void in a judicial proceeding or beingis denied or disaffirmed by its maker; and
certain events of bankruptcy or insolvency with respect to Matadorthe Company or any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary.
The outstanding borrowings of $40.0 million at December 31, 2018 under the Credit Agreement mature on October 31, 2023. The outstanding borrowings of $220.0 million at December 31, 2018 under the San Mateo Credit Facility mature on December 19, 2023. The $1.05 billion of outstanding Notes at December 31, 2018 mature on September 15, 2026.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 7 — INCOME TAXES
Deferred tax assets and liabilities are the result of temporary differences between the financial statement carrying values and the tax bases of assets and liabilities. The Company’s net deferred tax position as of December 31, 20162018 and 2015, respectively,2017 is as follows (in thousands).
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Deferred tax assets | | | | | | | | |
| Unrealized loss on derivatives | | $ | 8,734 |
| | $ | — |
| | $ | — |
| | $ | 3,200 |
|
| Net operating loss carryforwards | | 137,757 |
| | 79,208 |
| | 116,374 |
| | 118,134 |
|
| Alternative minimum tax carryforward | | 8,633 |
| | 9,785 |
| |
| Percentage depletion carryover | | 2,595 |
| | 2,442 |
| | 1,624 |
| | 1,582 |
|
| Property and equipment | | 44,391 |
| | 42,757 |
| |
| Deferred gain on sale leaseback transaction | | — |
| | 32,831 |
| |
| Basis increase related to the San Mateo transaction | | | — |
| | 18,382 |
|
| Other | | — |
| | 7,396 |
| | 9,115 |
| | — |
|
| Total deferred tax assets | | 202,110 |
| | 174,419 |
| | 127,113 |
| | 141,298 |
|
| Valuation allowance on deferred tax assets | | (190,255 | ) | | (154,320 | ) | | (6,519 | ) | | (89,482 | ) |
| Total deferred tax assets, net of valuation allowance | | 11,855 |
| | 20,099 |
| | 120,594 |
| | 51,816 |
|
| Deferred tax liabilities | | | | | | | | |
| Unrealized gain on derivatives | | (3,800 | ) | | (5,699 | ) | | (10,468 | ) | | — |
|
| Property and equipment | | | (100,634 | ) | | (40,568 | ) |
| Other | | (8,055 | ) | | (14,400 | ) | | (2,256 | ) | | (11,248 | ) |
| Total deferred tax liabilities | | (11,855 | ) | | (20,099 | ) | | (113,358 | ) | | (51,816 | ) |
| Net deferred tax liabilities | | $ | — |
| | $ | — |
| |
| Net deferred tax assets | | | $ | 7,236 |
| | $ | — |
|
At December 31, 2016,2018, the Company had net operating loss carryforwards of $375.9$511.3 million for federal income tax purposes and $6.2$156.4 million for state income tax purposes available to offset future taxable income, as limited by the applicable provisions, and which expire at various dates beginning December 31,in 2027 for the federal net operating loss carryforwards. The state net operating loss carryforwards beganbegin expiring at various dates beginning December 31, 2013 for the State of New Mexico;in 2024; however, the significant portion of the Company’s state net operating loss carryforwards expire beginning in 2027.
As a result of the net capitalized costs of the Company’s oil and natural gas properties less related deferred income taxes exceeding the full-cost ceiling during the years ended December 31, 2016 and 2015, the Company recorded an impairment charge of $158.6 million and $801.2 million, respectively, exclusive of tax effect, to the net capitalized costs of its oil and natural gas properties. At December 31, 20162017 and 2015,2016, the Company’s deferred tax assets exceeded its deferred tax liabilities due to the deferred tax assets generated by the impairment charges recorded in 20152016 and 2016.2015. As a result, at December 31, 2016 and 2015, the Company maintainedestablished a valuation allowance against most of the Company’s federaldeferred tax assets beginning in the third quarter of 2015 and stateretained a full valuation allowance at December 31, 2017 due to uncertainties regarding the future utilization of its deferred tax assets. The valuation allowance will continueDue to be recognized until the realization of future tax benefits are more likely than not to be utilized.
a variety
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 7 — INCOME TAXES — Continued
of factors, including the Company’s significant net income in 2017 and 2018, the Company’s federal valuation allowance and a portion of the Company’s state valuation allowance were reversed at December 31, 2018 as the deferred tax assets were determined to be more likely than not to be utilized. As a portion of the Company’s state net operating loss carryforwards are not expected to be utilized before expiration, a valuation allowance will continue to be recognized until the state deferred tax assets are more likely than not to be utilized.
The current income tax (benefit) provision and the deferred income tax (benefit) provision for the years ended December 31, 2018, 2017 and 2016 2015 and 2014, respectively, waswere comprised of the following (in thousands).
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 |
| Current income tax provision | | | | | | |
| State income tax | | $ | 108 |
| | $ | 371 |
| | $ | — |
|
| Federal alternative minimum tax | | (1,144 | ) | | 2,588 |
| | 133 |
|
| Net current income tax (benefit) provision | | $ | (1,036 | ) | | $ | 2,959 |
| | $ | 133 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Current income tax (benefit) provision | | | | | | |
| Federal income tax | | $ | (455 | ) | | $ | (8,178 | ) | | $ | (1,144 | ) |
| State income tax | | — |
| | 21 |
| | 108 |
|
| Net current income tax benefit | | $ | (455 | ) | | $ | (8,157 | ) | | $ | (1,036 | ) |
| Deferred income tax (benefit) provision | | | | | | |
| Federal income tax | | $ | (20,457 | ) | | $ | — |
| | $ | — |
|
| State income tax | | 13,221 |
| | — |
| | — |
|
| Net deferred income tax benefit | | $ | (7,236 | ) | | $ | — |
| | $ | — |
|
Reconciliations of the tax expense (benefit) expense computed at the statutory federal rate to the Company’s total income tax (benefit) provisionbenefit for the years ended December 31, 2016, 20152018, 2017 and 2014, respectively,2016 is as follows (in thousands).
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
Federal tax (benefit) expense at statutory rate (1) | | $ | (34,333 | ) | | $ | (289,412 | ) | | $ | 61,301 |
| |
Federal tax expense (benefit) at statutory rate (1) | | | $ | 61,543 |
| | $ | 45,447 |
| | $ | (34,333 | ) |
| State income tax | | 539 |
| | (13,215 | ) | | 2,707 |
| | 16,181 |
| | 368 |
| | 539 |
|
Permanent differences (2) | | (499 | ) | | 698 |
| | 397 |
| | (2,488 | ) | | (4,740 | ) | | (499 | ) |
| Federal alternative minimum tax | | 1,144 |
| | (2,588 | ) | | (133 | ) | | — |
| | — |
| | 1,144 |
|
| AMT credit refundable | | | 455 |
| | 8,178 |
| | — |
|
| Tax Cuts and Jobs Act rate change | | | — |
| | 51,525 |
| | — |
|
| Change in federal valuation allowance | | 33,688 |
| | 145,777 |
| | — |
| | (80,003 | ) | | (101,917 | ) | | 33,688 |
|
| Change in state valuation allowance | | (539 | ) | | 8,413 |
| | (30 | ) | | (2,924 | ) | | 1,139 |
| | (539 | ) |
| Net deferred income tax (benefit) provision | | — |
| | (150,327 | ) | | 64,242 |
| |
| Net current income tax (benefit) provision | | (1,036 | ) | | 2,959 |
| | 133 |
| |
| Total income tax (benefit) provision | | $ | (1,036 | ) | | $ | (147,368 | ) | | $ | 64,375 |
| |
| Net deferred income tax benefit | | | (7,236 | ) | | — |
| | — |
|
| Net current income tax benefit | | | (455 | ) | | (8,157 | ) | | (1,036 | ) |
| Total income tax benefit | | | $ | (7,691 | ) | | $ | (8,157 | ) | | $ | (1,036 | ) |
__________________
| |
| (1) | The statutory federal tax rate was 21% for the year ended December 31, 2018 and 35% for the years ended December 31, 2016, 20152017 and 2014. |
| |
(2) | Amount is primarily attributable to stock-based compensation.2016. |
The Company files a United States federal income tax return and several state tax returns, a number of which remain open for examination. The earliest tax year open for examination for the federal, the State of New Mexico and the State of Louisiana tax returns is 2012.2015. The earliest tax year open for examination byfor the State of Texas is 2009. During the year ended December 31, 2016, the Company’s 2009 and 2010 franchise tax returns were under examination by the State of Texas. This examination has been completed with no additional tax due; however, the examination has not been formally closed. In addition, as of December 31, 2016, the Company’s 2013 federal income tax return was under examination by the Internal Revenue Service. This examination has been completed with no additional tax due; however, the examination has not been formally closed.is 2014.
The Company has evaluated all tax positions for which the statute of limitations remains open and believes that the material positions taken would more likely than not be sustained by examination. Therefore, at December 31, 2016,2018, the Company had not established any reserves for, nor recorded any unrecognized benefits related to, uncertain tax positions.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the Tax Cuts and Jobs Act, the Company revalued its deferred tax assets and liabilities at December 31, 2017, which resulted in a $51.5 million tax provision. As the Company maintained a valuation allowance against its federal and state deferred tax assets at December 31, 2017, a corresponding reduction in the valuation allowance was recorded against this
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 7 — INCOME TAXES — Continued
tax provision; therefore, there was no net impact to the Company’s consolidated statement of operations for the year ended December 31, 2017 as a result of this corporate income tax rate change.
Corporate alternative minimum taxes were also repealed under the Tax Cuts and Jobs Act; therefore, corporate alternative minimum tax carryforwards are expected to be refunded. As a result, the Company recorded $0.5 million and $8.2 million, respectively, as a current income tax benefit in its consolidated statements of operations for the years ended December 31, 2018 and 2017.
NOTE 8 — STOCK-BASED COMPENSATION
Stock Options, Restricted Stock, Restricted Stock Units, Stock and Performance Awards
In 2003, the Company’s Board of Directors and shareholders approved the 2003 Stock and Incentive Plan (the “2003 Plan”).Plan. The 2003 Plan, as amended, provided that a maximum of 3,481,569 shares of common stock in the aggregate could be issued pursuant to options or restricted stock grants. The persons eligible to receive awards under the 2003 Plan included employees, directors, contractors or advisors of the Company.
In 2012, the Board of Directors adopted and shareholders approved the 2012 Long-Term Incentive Plan (as subsequently amended and restated, the “2012 Incentive Plan”). As of December 31, 2016,2018, the 2012 Incentive Plan provided for a maximum of 8,700,000 shares of common stock in the aggregate that may be issued by the Company pursuant to grants of stock options, restricted stock, stock appreciation rights, restricted stock units or other performance awards. The persons eligible to receive awards under the 2012 Incentive Plan include employees, directors, contractors or advisors of the Company. The primary purpose of the 2012 Incentive Plan is to attract and retain key employees, keydirectors, contractors and outside directors andor advisors of the Company. With the adoption of the 2012 Incentive Plan, the Company does not plan to make any future awards under the 2003 Plan, but the 2003 Plan will remain in place until all awards outstanding under that plan have been settled.
The 2003 Plan and the 2012 Incentive Plan are administered by the independent members of the Board of Directors, which, upon recommendation of the Compensation Committee of the Board of Directors, determine the number of options, restricted shares or other awards to be granted, the effective dates, the terms of the grants and the vesting periods. The Company typically uses newly issued shares of common stock to satisfy option exercises or restricted share grants. AllAt December 31, 2018, all stock-based compensation awards granted since 2012 have been granted under the 2012 Incentive Plan and substantially all are equity-based awards for which the fair value is fixed at the grant date, while all stock-based compensation awards granted prior to January 1, 2012 were granted under the 2003 Plan and are liability-based awards for which the fair value is remeasured at each reporting period.
Stock Options
Historically, stock option awards have been granted to purchase the Company’s common stock at an exercise price equal to the fair market value on the date of grant, a typical vesting period of three or four years and a typical maximum term of five, six or ten years.
The fair value of the 67,500, 75,000 and 77,500 stock option awards outstanding under the 2003 Plan at December 31, 2018, 2017 and 2016, respectively, was estimated using the following weighted average assumptions at December 31, 2016, 2015 and 2014.assumptions.
|
| | | | | | |
| | | 2016 | | 2015 | | 2014 |
| Stock option pricing model | | Black Scholes Merton | | Black Scholes Merton | | Black Scholes Merton |
| Expected option life | | 3.14 years | | 0.39 years | | 1.51 years |
| Risk-free interest rate | | 1.70% | | 0.64% | | 0.74% |
| Volatility | | 47.07% | | 91.98% | | 55.14% |
| Dividend yield | | —% | | —% | | —% |
| Estimated forfeiture rate | | —% | | —% | | —% |
The weighted average grant date fair value for stock option awards outstanding under the 2012 Incentive Plan was estimated using the following weighted average assumptions during the years ended December 31, 2016, 2015 and 2014. | | | | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Stock option pricing model | | Black Scholes Merton | | Black Scholes Merton | | Black Scholes Merton | | Black Scholes Merton | | Black Scholes Merton | | Black Scholes Merton |
| Expected option life | | 3.96 years | | 4.00 years | | 3.99 years | | 1.14 years | | 2.14 years | | 3.14 years |
| Risk-free interest rate | | 1.08% | | 1.15% | | 1.21% | | 2.48% | | 1.98% | | 1.70% |
| Volatility | | 45.68% | | 56.89% | | 51.47% | | 37.94% | | 43.60% | | 47.07% |
| Dividend yield | | —% | | —% | | —% | | —% | | —% | | —% |
| Estimated forfeiture rate | | 1.16% | | 3.21% | | 4.28% | | —% | | —% | | —% |
| Weighted average fair value of stock option awards granted during the year | | $5.65 | | $9.90 | | $9.45 | |
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 8 — STOCK-BASED COMPENSATION — Continued
The weighted average grant date fair value for stock option awards granted under the 2012 Incentive Plan was estimated using the following weighted average assumptions during the years ended December 31, 2018, 2017 and 2016.
|
| | | | | | |
| | | 2018 | | 2017 | | 2016 |
| Stock option pricing model | | Black Scholes Merton | | Black Scholes Merton | | Black Scholes Merton |
| Expected option life | | 4.00 years | | 4.00 years | | 3.96 years |
| Risk-free interest rate | | 2.51% | | 1.77% | | 1.08% |
| Volatility | | 45.17% | | 47.00% | | 45.68% |
| Dividend yield | | —% | | —% | | —% |
| Estimated forfeiture rate | | 2.24% | | 3.66% | | 1.16% |
| Weighted average fair value of stock option awards granted during the year | | $12.64 | | $10.49 | | $5.65 |
The Company estimated the future volatility of its common stock using the historical value of its stock for a period of time commensurate with the expected term of the stock option. The expected term was estimated using the simplified method outlined in Staff Accounting Bulletin Topic 14. The risk-free interest rate is the rate for constant yield U.S. Treasury securities with a term to maturity that is consistent with the expected term of the award.
Summarized information about stock options outstanding at December 31, 20162018 under the 2003 Plan and the 2012 Incentive Plan is as follows.
| | | | | Number of options (in thousands) | | Weighted average exercise price | | Number of options (in thousands) | | Weighted average exercise price |
| Options outstanding at December 31, 2015 | | 2,363 |
| | $ | 15.40 |
| |
| Options outstanding at December 31, 2017 | | | 3,064 |
| | $ | 21.14 |
|
| Options granted | | 668 |
| | $ | 15.51 |
| | 563 |
| | $ | 29.68 |
|
| Options exercised | | (114 | ) | | $ | 10.12 |
| | (383 | ) | | $ | 13.84 |
|
| Options forfeited | | (28 | ) | | $ | 19.73 |
| | (18 | ) | | $ | 26.33 |
|
| Options expired | | (2 | ) | | $ | 22.66 |
| | (1 | ) | | $ | 26.86 |
|
| Options outstanding at December 31, 2016 | | 2,887 |
| | $ | 15.59 |
| |
| Options outstanding at December 31, 2018 | | | 3,225 |
| | $ | 23.48 |
|
|
| | | | | | | | | | | | | | | | |
| | | Options outstanding at December 31, 2016 | | Options exercisable at December 31, 2016 |
| Range of exercise prices | | Shares outstanding (in thousands) | | Weighted average remaining contractual life | | Weighted average exercise price | | Shares exercisable (in thousands) | | Weighted average exercise price |
| $8.18 - $9.55 | | 816 |
| | 1.30 | | $ | 8.30 |
| | 484 |
| | $ | 8.35 |
|
| $10.49 - $17.80 | | 925 |
| | 2.87 | | $ | 13.55 |
| | 302 |
| | $ | 10.58 |
|
| $18.77 - $22.70 | | 862 |
| | 3.05 | | $ | 21.84 |
| | 65 |
| | $ | 21.21 |
|
| $23.40 - $27.33 | | 284 |
| | 2.26 | | $ | 24.22 |
| | 112 |
| | $ | 23.49 |
|
|
| | | | | | | | | | | | | | | | |
| | | Options outstanding at December 31, 2018 | | Options exercisable at December 31, 2018 |
| Range of exercise prices | | Shares outstanding (in thousands) | | Weighted average remaining contractual life | | Weighted average exercise price | | Shares exercisable (in thousands) | | Weighted average exercise price |
| $9.00 | | 68 |
| | 1.14 | | $ | 9.00 |
| | 68 |
| | $ | 9.00 |
|
| $13.22 - $15.00 | | 615 |
| | 2.13 | | $ | 14.98 |
| | 3 |
| | $ | 13.22 |
|
| $19.71 - $22.70 | | 727 |
| | 1.10 | | $ | 21.92 |
| | 706 |
| | $ | 21.93 |
|
| $23.40 - $29.68 | | 1,815 |
| | 3.91 | | $ | 26.79 |
| | 556 |
| | $ | 24.65 |
|
At December 31, 2016,2018, the aggregate intrinsic value was $29.4$0.8 million for outstanding options and $13.6$0.4 million for exercisable options, based on the Company’s quoted closing market price of $25.76$15.53 per share on that date. The remaining weighted average contractual term of exercisable options at December 31, 20162018 was 1.192.88 years.
The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 2015 and 2014 was $1.6$7.0 million, $1.3$13.2 million and $0.2$1.6 million, respectively. The tax related benefit realized from the exercise of stock options totaled $0.5$5.7 million, $0.3$5.0 million and $0.1$0.5 million for the years ended December 31, 2016, 20152018, 2017 and 2014, respectively.
During the years ended December 31, 2016, 2015 and 2014, the Company recognized $5.9 million, $4.7 million and $2.5 million, respectively, in stock-based compensation expense attributable to stock options. At December 31, 2016, 2015 and 2014, the Company had recorded $1.4 million, zero and $1.4 million of long-term liabilities and zero, $1.0 million and zero of current liabilities, respectively, related to its outstanding liability-based stock options. The Company did not settle any liability-based awards in cash for the years ended December 31, 2016, 2015 and 2014, respectively.
At December 31, 2016,2018, the total remaining unrecognized compensation expense related to unvested stock options was approximately $6.9$9.3 million and the weighted average remaining requisite service period (vesting period) of all unvested stock options was 1.901.65 years.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 8 — STOCK-BASED COMPENSATION — Continued
The fair value of options vested during 2018, 2017 and 2016 2015 and 2014 was $3.0$11.8 million, $1.3$2.1 million and $1.5$3.0 million, respectively.
Restricted Stock, Restricted Stock Units and Common Stock
The Company has granted stock, restricted stock and restricted stock unit awards to employees, outside directors and advisors of the Company under the 2003 Plan and the 2012 Incentive Plan. The stock and restricted stock are issued upon grant, with the restrictions, if any, being removed upon vesting. The restricted stock units are issued upon vesting, unless the recipient
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 8 — STOCK-BASED COMPENSATION — Continued
makes an election to defer issuance for a set term after vesting. One current director elected to defer the issuance of his awards in 2015, 2014Restricted stock and 2013. All awardsrestricted stock units granted in 2016, 20152018, 2017 and 20142016 were service based awards and vest over the service period, which is one to four years. All restricted stock and restricted stock unit awards outstanding at December 31, 20162018 were granted under the 2012 Incentive Plan.
A summary of the non-vested restricted stock and restricted stock units as of December 31, 20162018 is presented below (in thousands, except fair value).
| | | | | Restricted Stock | | Restricted Stock Units | | Restricted Stock | | Restricted Stock Units |
Non-vested restricted stock and restricted stock units | | Shares | | Weighted average fair value | | Shares | | Weighted average fair value | | Shares | | Weighted average fair value | | Shares | | Weighted average fair value |
| Non-vested at December 31, 2015 | | 854 |
| | $ | 17.64 |
| | 68 |
| | $ | 21.89 |
| |
| Non-vested at December 31, 2017 | | | 1,104 |
| | $ | 22.59 |
| | 65 |
| | $ | 23.36 |
|
| Granted | | 472 |
| | $ | 18.55 |
| | 66 |
| | $ | 19.44 |
| | 759 |
| | $ | 29.45 |
| | 64 |
| | $ | 27.69 |
|
| Vested | | (225 | ) | | $ | 16.05 |
| | (52 | ) | | $ | 19.67 |
| | (475 | ) | | $ | 23.87 |
| | (71 | ) | | $ | 23.90 |
|
| Forfeited | | (62 | ) | | $ | 20.49 |
| | — |
| | — |
| | (32 | ) | | $ | 27.20 |
| | — |
| | — |
|
| Non-vested at December 31, 2016 | | 1,039 |
| | $ | 18.23 |
| | 82 |
| | $ | 21.32 |
| |
| Non-vested at December 31, 2018 | | | 1,356 |
| | $ | 25.87 |
| | 58 |
| | $ | 27.48 |
|
At December 31, 2016,2018, the aggregate intrinsic value for the restricted stock and restricted stock units outstanding was $28.9$22.0 million as calculated based on the maximum number of shares of restricted stock and restricted stock units vesting, using the Company’s quoted closing market price of $25.76$15.53 per share on that date.
During the years ended December 31, 2016, 2015 and 2014, the Company recognized approximately $6.6 million, $4.7 million and $3.0 million, respectively, in stock-based compensation expense attributable to restricted stock and restricted stock units.
At December 31, 2016,2018, the total remaining unrecognized compensation expense related to unvested restricted stock and restricted stock units was approximately $12.5$22.0 million and the weighted average remaining requisite service period (vesting period) of all non-vested restricted stock and restricted stock units was 1.80.90 years.
The fair value of restricted stock and restricted stock units vested during 2018, 2017 and 2016 2015was $13.0 million, $9.9 million and 2014 was $4.6 million, $0.8respectively.
Summary
During the years ended December 31, 2018, 2017 and 2016, the total expense attributable to stock options was $6.3 million, $7.1 million and $0.9$5.9 million, respectively. At December 31, 2018, 2017 and 2016, the Company recorded a decrease of $1.1 million and increases of $0.4 million and $1.4 million to long-term liabilities, respectively, related to its outstanding liability-based stock options. The Company did not settle any liability-based awards in cash for the years ended December 31, 2018, 2017 and 2016, respectively.
During the years ended December 31, 2018, 2017 and 2016, the total expense attributable to restricted stock and restricted stock units was $15.3 million, $12.9 million and $6.6 million, respectively. During the year ended December 31, 2018, the Company capitalized $4.4 million related to stock-based compensation and expensed the remaining $17.2 million.
The total tax benefit recognized for all stock-based compensation was $4.3$4.8 million, $3.4$6.8 million and $1.9$4.3 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively.
In mid-February 2017,February 2019, the Company granted awards of 228,174 shares of restricted stock and options to purchase 590,128 shares of the Company’s common stock at an exercise price of $27.26 per share to certain of its employees.employees of 428,005 service-based restricted stock units to be settled in cash, which are liability instruments, and 428,005 performance-based stock units, which are equity instruments. The fair value of these awards was approximately $12.4 million. All of these awardsperformance-based stock units vest in an amount between zero and 200% based on the Company’s relative total shareholder return over the three-year period ending December 31, 2021, as compared to a designated peer group. The service-based restricted stock units vest ratably over three years.
In mid-February 2017,years, and the Company also granted awards of 174,561 shares of restrictedperformance-based stock and options to purchase 444,491 sharesunits vest after completion of the Company’s common stock at an exercise pricethree-year performance period.
Matador Resources Company and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 9 — EMPLOYEE BENEFIT PLANS
401(k) Plan
All full-time Company employees are eligible to join the Company’s defined contribution retirement plan the first day of the calendar month immediately following their date of employment. Each employee may contribute up to the maximum allowable under the Internal Revenue Code. Each year, the Company makes a contribution to the plan which equals 3% of the employee’s annual compensation, referred to as the Employer’s Safe Harbor Non-Elective Contribution, which totaled approximately$1.1 million, $0.9 million and $0.7 million $0.6 millionin 2018, 2017 and $0.4 million in 2016, 2015 and 2014, respectively. In addition, each year, the Company may make a discretionary matching contribution, as well as additional contributions. The Company’s discretionary matching contributions totaled $0.9$1.4 million, $0.8$1.1 million and $0.50.9 million in 2016, 20152018, 2017 and 2014,2016, respectively. The Company made no additional discretionary contributions in any reporting period presented.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 10 — EQUITY
Common Stock
On May 17, 2018, the Company completed a public offering of 7,000,000 shares of its common stock. After deducting offering costs totaling approximately $0.2 million, the Company received net proceeds of approximately $226.4 million. The proceeds from this offering were used to acquire additional leasehold and mineral acres in the Delaware Basin, to fund certain midstream initiatives in the Delaware Basin and for general corporate purposes, including to fund a portion of the Company’s capital expenditures. Pending such uses, the Company used a portion of the proceeds from the offering to repay the $45.0 million in borrowings then outstanding under the Credit Agreement.
Stock Offerings, RetirementOn October 10, 2017, the Company completed a public offering of 8,000,000 shares of its common stock. After deducting offering costs totaling approximately $0.3 million, the Company received net proceeds of approximately $208.4 million.
On June 1, 2017, the shareholders of the Company approved an amendment to the Company’s Amended and IssuancesRestated Certificate of Formation that authorized an increase in the number of authorized shares of common stock from 120,000,000 to 160,000,000 shares.
On December 9, 2016, the Company completed a public offering of 6,000,000 shares of its common stock. After deducting offering costs totaling approximately $0.4 million, the Company received net proceeds of approximately $145.8 million. A portion of the net proceeds of the public offering, along with the proceeds from the Notes Offering (see Note 6), have been used to partially fund certain acreage acquisitions and midstream asset development, to repay outstanding borrowings under the Credit Agreement and for general corporate purposes, including capital expenditures associated with the addition of a fourth drilling rig.
On March 11, 2016, the Company completed a public offering of 7,500,000 shares of its common stock. After deducting offering costs totaling approximately $0.8 million, the Company received net proceeds of approximately $141.5 million, which were used for general corporate purposes, including to fund a portion of the Company’s 2016 capital expenditures.
As discussed in Note 5, the Company issued 3,300,000 shares of common stock and 150,000 shares of a new series of Series A Preferred Stock to HEYCO Energy Group, Inc. in connection with the HEYCO Merger. Pursuant to the statement of resolutions, each share of Series A Preferred Stock would automatically convert into ten shares of Matador common stock, subject to customary anti-dilution adjustments, upon the vote and approval by Matador’s shareholders of an amendment to Matador’s Amended and Restated Certificate of Formation to increase the number of shares of authorized Matador common stock.
On April 2, 2015, the shareholders of the Company approved an amendment to the Company’s Amended and Restated Certificate of Formation that authorized an increase in the number of authorized shares of common stock from 80,000,000 shares to 120,000,000 shares. Following such approval, the 150,000 outstanding shares of Series A Preferred Stock converted to 1,500,000 shares of common stock on April 6, 2015. Pursuant to the terms of the HEYCO Merger, 166,667 of the 1,500,000 shares were being held in escrow at December 31, 2016 to satisfy certain conditions under the merger agreement.
On April 21, 2015, the Company completed a public offering of 7,000,000 shares of its common stock. After deducting offering costs totaling approximately $1.2 million, the Company received net proceeds of approximately $187.6 million.
On May 29, 2014, the Company completed a public offering of 7,500,000 shares of its common stock. After deducting direct offering costs totaling approximately $0.6 million, the Company received net proceeds of approximately $181.3 million.
Treasury Stock
On October 27, 2016, October 30, 201525, 2018, November 1, 2017, and October 31, 2014,27, 2016, Matador’s Board of Directors canceled all of the shares of treasury stock outstanding as of September 30, 2016, September 30, 20152018, 2017 and September 30, 2014,2016, respectively. These shares were restored to the status of authorized but unissued shares of common stock of the Company.
The shares of treasury stock outstanding at December 31, 2016, 20152018, 2017 and 20142016 represent forfeitures of non-vested restricted stock awards and forfeitures of fully vested restricted stock awards due to net share settlements with employees.
Preferred Stock
The Company’s Amended and Restated Certificate of Formation authorizes 2,000,000 shares of preferred stock. Before any such shares are issued, the Board of Directors shall fix and determine the designations, preferences, limitations and relative rights, including voting rights of the shares of each such series.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 11 — DERIVATIVE FINANCIAL INSTRUMENTS
From time to time, the Company uses derivative financial instruments to mitigate its exposure to commodity price risk associated with oil, natural gas and natural gas liquidsNGL prices. The Company records derivative financial instruments on its consolidated balance sheets as either assets or liabilities measured at fair value. The Company has elected not to apply hedge accounting for its existing derivative financial instruments. As a result, the Company recognizes the change in derivative fair value between reporting periods currently in its consolidated statements of operations as an unrealized gain or loss. The fair value of the Company’s derivative financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. The Company has evaluated and considered the credit standings of its counterparties in determining the fair value of its derivative financial instruments.
The Company typically uses costless (or zero-cost) collars and/or swap contracts to manage risks related to changes in oil, natural gas and natural gas liquids prices. Costless collars provide the Company with downside price protection through the purchase of a put option which is financed through the sale of a call option. Because the call option proceeds are used to offset the cost of the put option, these arrangements are initially “costless” to the Company. In the case of a costless collar, the put option and the call option have different fixed price components. In a swap contract, a floating price is exchanged for a fixed price over a specified period, providing downside price protection.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 11 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued
At December 31, 2016, we had entered into various costless collar contracts to mitigate our exposure to fluctuations in oil and natural gas prices, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss to us pursuant to any oil contract is the arithmetic average of the settlement prices for the NYMEX West Texas Intermediate oil futures contract for the first nearby month corresponding to the calculation period’s calendar month, and for any natural gas contract is the settlement price for the NYMEX Henry Hub natural gas futures contract for the delivery month corresponding to the calculation period’s calendar month for the settlement date of that contract period.
When the settlement price is below the price floor established by one or more of these collars, the Company receives from the counterparty an amount equal to the difference between the settlement price and the price floor multiplied by the contract oil or natural gas volume. When the settlement price is above the price ceiling established by one or more of these collars, the Company pays to the counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract oil or natural gas volume. When the settlement price is below the fixed price established by one or more of these swaps, the Company receives from the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract natural gas liquids volume. When the settlement price is above the fixed price established by one or more of these swaps, the Company pays to the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract natural gas liquids volume
At December 31, 2016,2018, the Company had various costless collar and swap contracts open and in place to mitigate its exposure to oil and natural gas price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and price floor and ceiling.ceiling and fixed price for the swaps. Each contract is set to expire at varying times during 20172019 and 2018.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 11 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued
2020.
The following is a summary of the Company’s open costless collar contracts for oil and natural gas at December 31, 2016.2018.
| | | | | Notional Quantity (Bbl or MMBtu) | | Weighted Average Price Floor ($/Bbl or
$/MMBtu) | | Weighted Average Price Ceiling ($/Bbl or
$/MMBtu) | | Fair Value of Liabilities (thousands) | | Notional Quantity (Bbl or MMBtu) | | Weighted Average Price Floor ($/Bbl or
$/MMBtu) | | Weighted Average Price Ceiling ($/Bbl or
$/MMBtu) | | Fair Value of Asset (Liability)
(thousands) |
| | | |
| Commodity | | Calculation Period | | | Calculation Period | |
| Oil | | 01/01/2017 - 12/31/2017 | | 2,760,000 |
| | $ | 41.39 |
| | $ | 51.88 |
| | $ | (18,316 | ) | | 01/01/2019 - 12/31/2019 | | 3,720,000 |
| | $ | 53.55 |
| | $ | 72.22 |
| | $ | 31,531 |
|
| Oil | | 01/01/2018 - 12/31/2018 | | 720,000 |
| | $ | 43.75 |
| | $ | 63.90 |
| | (751 | ) | |
| Natural Gas | | 01/01/2017 - 12/31/2017 | | 16,860,000 |
| | $ | 2.40 |
| | $ | 3.59 |
| | (5,887 | ) | | 01/01/2019 - 12/31/2019 | | 2,400,000 |
| | $ | 2.50 |
| | $ | 3.80 |
| | 164 |
|
| Total open derivative financial instruments | | | | | | | | $ | (24,954 | ) | |
| Total open costless collar contracts | | Total open costless collar contracts | | | | | | | | $ | 31,695 |
|
Subsequent to December 31, 2016,The following is a summary of the Company entered into various costless collar contracts for oil. TheCompany’s open three-way costless collar contracts for oil included approximately 1,890,000 Bbl in 2017 withat December 31, 2018. Open three-way costless collars consist of a weighted average floor price of $50.00 per Bbllong put (the floor), a short call (the ceiling) and a weighted average ceiling pricelong call that limits losses on the upside.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Commodity | | Calculation Period | | Notional Quantity (Bbl) | | Weighted Average Price Floor ($/Bbl) | | Weighted Average Price, Short Call ($/Bbl) | | Weighted Average Price, Long Call ($/Bbl) | | Fair Value of Asset (Liability) (thousands) |
| Oil | | 01/01/2019 - 12/31/2019 | | 1,320,000 |
| | $ | 60.00 |
| | $ | 75.00 |
| | $ | 78.85 |
| | $ | 18,114 |
|
| Natural Gas | | 01/01/2019 - 12/31/2019 | 2.50 |
| 4,800,000 |
| | $ | 2.50 |
| | $ | 3.00 |
| | 3.24 |
| 120 |
| 120 |
|
| Total open three-way costless collar contracts | | | | | | | | $ | 18,234 |
|
The following is a summary of $60.75 per Bbl.the Company’s open basis swaps contracts for oil at December 31, 2018.
From time-to-time we enter into |
| | | | | | | | | | | | | |
| Commodity | | Calculation Period | | Notional Quantity (Bbl or Gal) | | Fixed Price ($/Bbl or $/Gal) | | Fair Value of Asset (Liability)
(thousands) |
| Oil Basis Swaps | | 01/01/2020 - 12/31/2020 | | 1,200,000 |
| | $ | (0.15 | ) | | $ | (83 | ) |
| Total open swap contracts | | | | | | | | $ | (83 | ) |
At December 31, 2018, the Company had an aggregate asset value for open derivative financial instruments with certain counterparties. Theseof $49.8 million.
The Company’s derivative financial instruments are subject to master netting arrangements; all but one counterpartyarrangements, and the Company’s counterparties allow for cross-commodity master netting provided the settlementssettlement dates for the commodities are the same. The Company does not present different types of commodities with the same counterparty on a net basis in its consolidated balance sheets.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 11 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued
The following table presents the gross asset and liability fair values of the Company’s commodity price derivative financial instruments and the location of these balances in the consolidated balance sheets as of December 31, 20162018 and December 31, 20152017 (in thousands).
| | | Derivative Instruments | Gross amounts recognized | | Gross amounts netted in the consolidated balance sheets | | Net amounts presented in the consolidated balance sheets | | Gross amounts recognized | | Gross amounts netted in the consolidated balance sheets | | Net amounts presented in the consolidated balance sheets |
| December 31, 2016 |
| |
| |
| |
| Current liabilities | $ | (24,203 | ) | | $ | — |
| | $ | (24,203 | ) | |
| Other liabilities | (751 | ) | | — |
| | (751 | ) | |
| December 31, 2018 | | |
| |
| |
|
| Current assets | | | $ | 53,136 |
| | $ | (3,207 | ) | | $ | 49,929 |
|
| Long-term liabilities | | | (83 | ) | | — |
| | (83 | ) |
| Total | $ | (24,954 | ) | | $ | — |
| | $ | (24,954 | ) | | $ | 53,053 |
| | $ | (3,207 | ) | | $ | 49,846 |
|
| December 31, 2015 |
| |
| |
| |
| December 31, 2017 | | |
| |
| |
|
| Current assets | $ | 16,767 |
| | $ | (483 | ) | | $ | 16,284 |
| | $ | 131,092 |
| | $ | (129,902 | ) | | $ | 1,190 |
|
| Current liabilities | (483 | ) | | 483 |
| | — |
| | (146,331 | ) | | 129,902 |
| | (16,429 | ) |
| Total | $ | 16,284 |
| | $ | — |
| | $ | 16,284 |
| | $ | (15,239 | ) | | $ | — |
| | $ | (15,239 | ) |
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 11 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued
The following table summarizes the location and aggregate fair value of all derivative financial instruments recorded in the consolidated statements of operations for the periods presented (in thousands). These derivative financial instruments are not designated as hedging instruments.
| | | | | | | Year Ended December 31, | | | | Year Ended December 31, |
| Type of Instrument | Location in Statement of Operations | 2016 | | 2015 | | 2014 | Location in Statement of Operations | 2018 | | 2017 | | 2016 |
| Derivative Instrument | | | | | | | | | | | | |
| Oil | | Revenues: Realized gain on derivatives | | $ | 5,851 |
| | $ | 62,259 |
| | $ | 5,221 |
| | Revenues: Realized gain (loss) on derivatives | | $ | 3,741 |
| | $ | (3,657 | ) | | $ | 5,851 |
|
| Natural Gas | | Revenues: Realized gain (loss) on derivatives | | 3,435 |
| | 12,653 |
| | (718 | ) | | Revenues: Realized (loss) gain on derivatives | | (1,407 | ) | | (608 | ) | | 3,435 |
|
| Natural Gas Liquids (NGL) | | Revenues: Realized gain on derivatives | | — |
| | 2,182 |
| | 519 |
| |
| Realized gain on derivatives | | 9,286 |
| | 77,094 |
| | 5,022 |
| |
| NGLs | | | Revenues: Realized loss on derivatives | | — |
| | (56 | ) | | — |
|
| Realized gain (loss) on derivatives | | | 2,334 |
| | (4,321 | ) | | 9,286 |
|
| Oil | | Revenues: Unrealized (loss) gain on derivatives | | (18,969 | ) | | (31,897 | ) | | 47,178 |
| | Revenues: Unrealized gain (loss) on derivatives | | 65,991 |
| | 2,638 |
| | (18,969 | ) |
| Natural Gas | | Revenues: Unrealized (loss) gain on derivatives | | (22,269 | ) | | (5,440 | ) | | 9,087 |
| | Revenues: Unrealized (loss) gain on derivatives | | (906 | ) | | 7,077 |
| | (22,269 | ) |
| Natural Gas Liquids (NGL) | | Revenues: Unrealized (loss) gain on derivatives | | — |
| | (1,928 | ) | | 2,037 |
| |
| Unrealized (loss) gain on derivatives | | (41,238 | ) | | (39,265 | ) | | 58,302 |
| |
| Unrealized gain (loss) on derivatives | | Unrealized gain (loss) on derivatives | | 65,085 |
| | 9,715 |
| | (41,238 | ) |
| Total | | $ | (31,952 | ) | | $ | 37,829 |
| | $ | 63,324 |
| | $ | 67,419 |
| | $ | 5,394 |
| | $ | (31,952 | ) |
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 12 — FAIR VALUE MEASUREMENTS
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Fair value measurements are classified and disclosed in one of the following categories.
| |
| Level 1 | Unadjusted quoted prices for identical, unrestricted assets or liabilities in active markets. |
| |
| Level 2 | Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that are valued with industry standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace. |
| |
| Level 3 | Unobservable inputs that are not corroborated by market data which reflect a company’s own market assumptions. |
Financial and non-financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
At December 31, 2016 and 2015, the carrying values reported on the consolidated balance sheets for accounts receivable, prepaid expenses, accounts payable, accrued liabilities, royalties payable, amounts due to affiliates, advances from joint interest owners, amounts due to joint ventures, income taxes payable and other current liabilities approximate their fair values due to their short-term maturities.
At December 31, 2016 and 2015, the fair value of the Company’s Notes was $605.2 million and $381.0 million, respectively, based on quoted market prices, which represents Level 1 inputs in the fair value hierarchy.
The following tables summarize the valuation of the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis in accordance with the classifications provided above as of December 31, 20162018 and 20152017 (in thousands).
| | | | | Fair Value Measurements at
December 31, 2016 using | | Fair Value Measurements at
December 31, 2018 using |
| Description | | |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets (Liabilities) | | | | | | | | | | | | | | | | |
| Oil and natural gas derivatives | | $ | — |
| | $ | (24,954 | ) | | $ | — |
| | $ | (24,954 | ) | |
| Oil derivatives and basis swaps | | | $ | — |
| | $ | 49,562 |
| | $ | — |
| | $ | 49,562 |
|
Natural gas derivatives
| | | — |
| | 284 |
| | — |
| | 284 |
|
| Total | | $ | — |
| | $ | (24,954 | ) | | $ | — |
| | $ | (24,954 | ) | | $ | — |
| | $ | 49,846 |
| | $ | — |
| | $ | 49,846 |
|
| | | | | Fair Value Measurements at
December 31, 2015 using | | Fair Value Measurements at
December 31, 2017 using |
| Description | | |
| | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets (Liabilities) | | | | | | | | | | | | | | | | |
| Oil and natural gas derivatives | | $ | — |
| | $ | 16,284 |
| | $ | — |
| | $ | 16,284 |
| |
| Oil derivatives and basis swaps | | | $ | — |
| | $ | (16,429 | ) | | $ | — |
| | $ | (16,429 | ) |
| Natural gas derivatives | | | — |
| | 1,190 |
| | — |
| | 1,190 |
|
| Total | | $ | — |
| | $ | 16,284 |
| | $ | — |
| | $ | 16,284 |
| | $ | — |
| | $ | (15,239 | ) | | $ | — |
| | $ | (15,239 | ) |
Additional disclosures related to derivative financial instruments are provided in Note 11. For purposes of fair value measurement, the Company determined that derivative financial instruments (e.g., oil, natural gas and NGL derivatives) should be classified asat Level 2 in the fair value hierarchy.
Other Fair Value Measurements
At December 31, 2018 and 2017, the carrying values reported on the consolidated balance sheets for accounts receivable, prepaid expenses and other assets, accounts payable, accrued liabilities, royalties payable, amounts due to affiliates, advances from joint interest owners, amounts due to joint ventures and other current liabilities approximate their fair values due to their short-term maturities.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 12 — FAIR VALUE MEASUREMENTS — Continued
At December 31, 2018, the carrying values of the borrowings under the Credit Agreement and the San Mateo Credit Facility approximated their fair value as both are subject to short-term floating interest rates that reflect market rates available to the Company at the time and are classified at Level 2 in the fair value hierarchy.
At December 31, 2018 and 2017, the fair value of the Notes and the 2023 Notes was $968.9 million and $614.1 million, respectively, based on quoted market prices, which represents Level 1 inputs in the fair value hierarchy.
Certain assets and liabilities are measured at fair value on a nonrecurring basis, including assets and liabilities acquired in a business combination, (see Note 5), lease and well equipment inventory when the market value is determined to be lower than the cost of the inventory and other property and equipment that are reduced to fair value when they are impaired or held for
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 12 — FAIR VALUE MEASUREMENTS — Continued
sale. The Company recorded no impairment to its lease and well equipment inventory or other property and equipment in 20162018 and 2015. The Company determined the value of the lease and well equipment inventory using Level 3 inputs and assumptions.2017.
NOTE 13 — COMMITMENTS AND CONTINGENCIES
Office Lease
The Company’s corporate headquarters are located at One Lincoln Centre, 5400 LBJ Freeway, Suite 1500, Dallas, Texas 75240. The lease for the Company’s corporate headquarters expires during 2026. The base rate escalates during the course of the lease; however, the Company recognizes rent expense ratably over the term of the lease.
From time to time, the Company also enters into leases for field offices in locations where it has active field operations. These leases are typically for terms of less than five years and are not considered principal properties.
The following is a schedule of future minimum lease payments required under all office lease agreements as of December 31, 20162018 (in thousands).
| | | Year Ending December 31, | | Amount | | Amount |
| 2017 | | $ | 2,443 |
| |
| 2018 | | 2,495 |
| |
| 2019 | | 2,528 |
| | $ | 3,091 |
|
| 2020 | | 2,602 |
| | 3,914 |
|
| 2021 | | 2,660 |
| | 3,877 |
|
| 2022 | | | 4,009 |
|
| 2023 | | | 4,141 |
|
| Thereafter | | 12,335 |
| | 9,921 |
|
| Total | | $ | 25,063 |
| | $ | 28,953 |
|
Rent expense, including fees for operating expenses and consumption of electricity, was $2.7 million, $2.6 million and $2.9 million $1.7 million,for 2018, 2017 and $0.9 million for 2016, 2015 and 2014, respectively.
Natural GasProcessing, Transportation and NGL Processing and TransportationSalt Water Disposal Commitments
Eagle Ford
Effective September 1, 2012, the Company entered into a firm five-year natural gas processing and transportation agreement whereby the Company committed to transport the anticipated natural gas production from a significant portion of its Eagle Ford acreage in South Texas through the counterparty’s system for processing at the counterparty’s facilities. The agreement also includes firm transportation of the natural gas liquids extracted at the counterparty’s processing plant downstream for fractionation. After processing, the residue natural gas is purchased by the counterparty at the tailgate of its processing plant and further transported under its natural gas transportation agreements. The arrangement contains fixed processing and liquids transportation and fractionation fees, and the revenue the Company receives varies with the quality of natural gas transported to the processing facilities and the contract period.
Under this agreement, if the Company does not meet 80% of the maximum thermal quantity transportation and processing commitments in a contract year, it will be required to pay a deficiency fee per MMBtu of natural gas deficiency. Any quantity in excess of the maximum MMBtu delivered in a contract year can be carried over to the next contract year for purposes of calculating the natural gas deficiency. During certain prior periods, the Company had an immaterial natural gas deficiency, and the counterparty to this agreement waived the deficiency fee. The Company paid approximately $3.0 million and $5.5 million in processing and transportation fees under this agreement during the years ended December 31, 2016 and 2015, respectively. The future undiscounted minimum payment under this agreement as of December 31, 2016 is $1.2 million in 2017.
Delaware Basin
As part of the sale of the — Loving County, Texas Natural Gas Processing System (see Note 5),
In late 2015, the Company entered into a 15-year, fixed-fee natural gas gathering and processing agreement whereby the Company committed to deliver the anticipated natural gas production from a significant portion of its Loving County, Texas acreage in West Texas through the counterparty’s gathering system for processing at the counterparty’s facilities. Under this agreement, if the Company does not meet the volume
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 13 — COMMITMENTS AND CONTINGENCIES — Continued
commitment for transportation and processing at the facilities in a contract year, it willmay be required to pay a deficiency fee per MMBtu of natural gas deficiency. At the end of each year of the agreement, the Company can elect to have the previous year’s actual transportation and processing volumes be the new minimum commitment for each of the remaining years of the contract. As such, the Company has the ability to unilaterally reduce the gathering and processing commitment if the Company’s production in the Loving County area is less than the Company’s currently projected production. If the Company ceased operations in this area at December 31, 2016,2018, the total deficiency fee required to be paid would be approximately $11.7$7.6 million. In addition, if the Company elects to reduce the gathering and processing commitment in any year, the Company has the ability to elect to increase the committed volumes in any future year to the originally agreed gathering and processing commitment. Any quantity in excess of the volume commitment delivered in a contract year can be carried over to the next contract year for purposes of calculating thethat year’s natural gas deficiency. The Company paid approximately $9.8$15.4 million and $1.8$14.4 million in processing and gathering fees under this agreement during the years ended December 31, 20162018 and 2015,2017, respectively. The Company can elect to either sell
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 13 — COMMITMENTS AND CONTINGENCIES — Continued
the residue gas to the counterparty at the tailgate of its processing plants or have the counterparty deliver to the Company the residue gas in-kind to be sold to third parties downstream of the plants.
Delaware Basin — Eddy County, New Mexico Natural Gas Transportation
In late 2017, the Company entered into an 18-year, fixed-fee natural gas transportation agreement whereby the Company committed to deliver a portion of the residue gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline. Under this agreement, if the Company does not meet the volume commitment for transportation in a contract year, the Company will owe the fees to transport the committed volume whether or not the committed volume is utilized. The minimum contractual obligation at December 31, 2018 was approximately $20.1 million. The Company paid approximately $3.3 million and $0.2 million in transportation fees, which included no deficiency fees, under this agreement during the years ended December 31, 2018 and 2017, respectively.
In late 2017, the Company also entered into a fixed-fee NGL transportation and fractionation agreement whereby the Company committed to deliver its NGL production at the tailgate of the Black River Processing Plant. The Company is committed to deliver a minimum volume of NGLs to the counterparty upon construction and completion of a pipeline expansion and a fractionation facility by the counterparty, which is currently expected to be completed in 2020. The Company has no rights to compel the counterparty to construct this pipeline extension or fractionation facility. If the counterparty does not construct the pipeline extension and fractionation facility, then the Company does not have any minimum volume commitments under the agreement. If the counterparty constructs the pipeline extension and fractionation facility on or prior to February 28, 2021, then the Company will have a commitment to deliver a minimum volume of NGLs for seven years following the completion of the pipeline extension and fractionation facility. If the Company does not meet its NGL volume commitment in any quarter during the seven-year commitment period, it will be required to pay a deficiency fee per gallon of NGL deficiency. Should the pipeline extension and fractionation facility be completed on or prior to February 28, 2021, the minimum obligation during the seven-year period would be approximately $132.3 million.
In April 2018, the Company entered into a short-term natural gas transportation agreement whereby the Company committed to deliver a portion of the residue gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline. Under this short-term agreement, the Company will owe the fees to transport the committed volume whether or not the committed volume is transported through the counterparty’s pipeline. The minimum contractual obligation under this short-term contract at December 31, 2018 was approximately $2.7 million. This short-term agreement ends on September 30, 2019. The Company paid approximately $1.9 million in transportation fees under this agreement during the year ended December 31, 2018.
In April 2018, the Company also entered into a 16-year, fixed-fee natural gas transportation agreement that begins on October 1, 2019, whereby the Company committed to deliver a portion of the residue gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline. The Company will owe the fees to transport the committed volume whether or not the committed volume is transported through the counterparty’s pipeline. The minimum contractual obligation at December 31, 2018 was approximately $56.8 million.
In May 2018, the Company also entered into a 10-year, fixed-fee natural gas sales agreement whereby the Company committed to deliver residue gas through the counterparty’s pipeline to the Texas Gulf Coast beginning on the in-service date of such pipeline, which is expected to be operational in late 2019. If the Company does not meet the volume commitment specified in the natural gas sales agreement, it may be required to pay a deficiency fee per MMBtu of natural gas deficiency. The minimum contractual obligation at December 31, 2018 was approximately $200.6 million.
Delaware Basin — San Mateo
In February 2017, the Company dedicated its current and future leasehold interests in the Rustler Breaks and Wolf asset areas pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements with subsidiaries of San Mateo. In addition, the Company dedicated its current and future leasehold interests in the Rustler Breaks asset area pursuant to a 15-year, fixed-fee natural gas processing agreement (collectively with the gathering and salt water disposal agreements, the “Operational Agreements”). San Mateo provides the Company with firm service under each of the Operational Agreements in exchange for certain minimum volume commitments. The minimum contractual obligation under the Operational Agreements at December 31, 2018 was approximately $221.1 million.
During the first quarter of 2018, a subsidiary of San Mateo entered into agreements for additional field compression and an amine gas treatment unit to maximize the operation of the Black River Processing Plant. Since inception, San Mateo’s
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 13 — COMMITMENTS AND CONTINGENCIES — Continued
commitments under these agreements totaled $24.9 million. The subsidiary of San Mateo paid approximately $21.3 million under these agreements during the year ended December 31, 2018. As of December 31, 2018, the remaining obligations under these agreements were $3.6 million, which are expected to be paid during 2019.
Other Commitments
The Company does not own or operate its own drilling rigs, but instead enters into contracts with third parties for such drilling rigs. These contracts establish daily rates for the drilling rigs and the term of the Company’s commitment for the drilling services to be provided, which have typically been for two years or less.provided. The Company would incur a termination obligation if the Company elected to terminate a contract and if the drilling contractor were unable to secure replacement work for the contracted drilling rigs or if the drilling contractor were unable to secure replacement work for the contracted drilling rigs at the same daily rates being charged to the Company prior to the end of their respective contract terms. The Company’s undiscounted minimum outstanding aggregate termination obligations under its drilling rig contracts were approximately $46.3$28.4 million at December 31, 2016.2018.
At December 31, 2016,2018, the Company had outstanding commitments to participate in the drilling and completion of various non-operated wells. If all of these wells are drilled and completed as proposed, the Company’s minimum outstanding aggregate commitments for its participation in these non-operated wells were approximately $11.1$24.3 million at December 31, 2016.2018. The Company expects these costs to be incurred within the next year.
Legal Proceedings
The Company is a party to several lawsuits encountered in the ordinary course of its business. While the ultimate outcome and impact to the Company cannot be predicted with certainty, in the opinion of management, it is remote that these lawsuits will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 14 — SUPPLEMENTAL DISCLOSURES
Accrued Liabilities
The following table summarizes the Company’s current accrued liabilities at December 31, 20162018 and 20152017 (in thousands).
| | | | | December 31, | | December 31, |
| | | 2016 | | 2015 | | 2018 | | 2017 |
| Accrued evaluated and unproved and unevaluated property costs | | $ | 54,273 |
| | $ | 54,586 |
| | $ | 86,318 |
| | $ | 105,347 |
|
| Accrued support equipment and facilities costs | | 15,139 |
| | 17,393 |
| |
| Accrued midstream properties costs | | | 16,808 |
| | 14,823 |
|
| Accrued lease operating expenses | | 16,009 |
| | 7,743 |
| | 12,705 |
| | 12,611 |
|
| Accrued interest on debt | | 6,541 |
| | 5,806 |
| | 22,448 |
| | 8,345 |
|
| Accrued asset retirement obligations | | 915 |
| | 254 |
| | 1,350 |
| | 1,176 |
|
| Accrued partners’ share of joint interest charges | | 5,572 |
| | 4,565 |
| | 17,037 |
| | 27,628 |
|
| Other | | 3,011 |
| | 2,022 |
| | 14,189 |
| | 4,418 |
|
| Total accrued liabilities | | $ | 101,460 |
| | $ | 92,369 |
| | $ | 170,855 |
| | $ | 174,348 |
|
Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands).
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 |
| Cash paid for income taxes | | $ | 2,895 |
| | $ | 506 |
| | $ | 94 |
|
| Cash paid for interest expense, net of amounts capitalized | | 27,464 |
| | 16,154 |
| | 5,269 |
|
| Increase in asset retirement obligations related to mineral properties | | 3,817 |
| | 2,510 |
| | 3,843 |
|
| Increase in asset retirement obligations related to support equipment and facilities | | 222 |
| | 383 |
| | 120 |
|
| Increase (decrease) in liabilities for oil and natural gas properties capital expenditures | | 1,775 |
| | (30,683 | ) | | 32,972 |
|
| (Decrease) increase in liabilities for support equipment and facilities | | (588 | ) | | 12,076 |
| | 4,290 |
|
| Issuance of restricted stock units for Board and advisor services | | 992 |
| | 584 |
| | 444 |
|
| Stock-based compensation expense recognized as liability | | 569 |
| | 79 |
| | 223 |
|
| Increase in liabilities for accrued cost to issue equity | | 343 |
| | — |
| | — |
|
| Transfer of inventory to oil and natural gas properties | | 395 |
| | 615 |
| | 216 |
|
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Cash paid for income taxes | | $ | — |
| | $ | — |
| | $ | 2,895 |
|
| Cash paid for interest expense, net of amounts capitalized | | $ | 29,474 |
| | $ | 32,760 |
| | $ | 27,464 |
|
| Increase in asset retirement obligations related to mineral properties | | $ | 2,614 |
| | $ | 4,385 |
| | $ | 3,817 |
|
| Increase (decrease) in asset retirement obligations related to midstream properties | | $ | 686 |
| | $ | (60 | ) | | $ | 222 |
|
| (Decrease) increase in liabilities for oil and natural gas properties capital expenditures | | $ | (16,802 | ) | | $ | 48,929 |
| | $ | 1,775 |
|
| Increase (decrease) in liabilities for midstream properties capital expenditures | | $ | 2,499 |
| | $ | (955 | ) | | $ | (588 | ) |
| Issuance of restricted stock units for director and advisor services | | $ | — |
| | $ | — |
| | $ | 992 |
|
| Stock-based compensation (benefit) expense recognized as liability | | $ | (1,069 | ) | | $ | 362 |
| | $ | 569 |
|
| (Decrease) increase in liabilities for accrued cost to issue equity | | $ | — |
| | $ | (343 | ) | | $ | 343 |
|
| Increase in liabilities for accrued cost to issue debt | | $ | 232 |
| | $ | — |
| | $ | — |
|
| Transfer of inventory from (to) oil and natural gas properties | | $ | 409 |
| | $ | (374 | ) | | $ | 395 |
|
| Transfer of inventory to midstream and other property and equipment | | $ | — |
| | $ | (317 | ) | | $ | — |
|
The following table provides a reconciliation of cash and restricted cash recorded in the consolidated balance sheets to cash and restricted cash as presented on the consolidated statements of cash flows (in thousands).
|
| | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | 2018 | | 2017 | | 2016 |
| Cash | | $ | 64,545 |
| | $ | 96,505 |
| | $ | 212,884 |
|
| Restricted cash | | 19,439 |
| | 5,977 |
| | 1,258 |
|
| Total cash and restricted cash | | $ | 83,984 |
| | $ | 102,482 |
| | $ | 214,142 |
|
NOTE 15 — SUBSIDIARY GUARANTORS
Matador filed a registration statement on Form S-3 with the SEC in 2013, which became effective on May 9, 2013, and a registration statement on Form S-3 with the SEC in 2014, which became effective upon filing on May 22, 2014, registering, in each case, among other securities, senior and subordinated debt securities and guarantees of debt securities by certain subsidiaries of Matador (the “Shelf Guarantor Subsidiaries”). On April 14, 2015, the Company issued the Original Notes and on December 9, 2016, the Company issued the Additional Notes (see Note 6), which are jointly and severally guaranteed by certain subsidiaries of Matador (the “Notes Guarantor Subsidiaries” and, together with the Shelf Guarantor Subsidiaries, the “Guarantor Subsidiaries”) on a full and unconditional basis (except for customary release provisions). At December 31, 2016, the Guarantor Subsidiaries were 100% owned by Matador, and any subsidiaries of Matador other than the Guarantor Subsidiaries were minor. Matador is a parent holding company and has no independent assets or operations, and there are no significant restrictions on the ability of Matador to obtain funds from the Guarantor Subsidiaries by dividend or loan.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 16 — RELATED PARTY TRANSACTIONS
In June 2015, the Company entered into two joint ventures to develop certain leasehold interests held by certain affiliates (the “HEYCO Affiliates”) of HEYCO Energy Group, Inc., the former parent company of HEYCO. The HEYCO Affiliates are owned by George M. Yates, who is a member of the Company’s Board of Directors, and certain of his affiliates. Pursuant to the terms of the transaction, the HEYCO Affiliates contributed an aggregate of approximately 1,900 net acres, primarily in the same properties previously held by HEYCO, to the two newly-formed entities in exchange for a 50% interest in each entity. The Company has agreed to contribute an aggregate of approximately $14 million in exchange for the other 50% interest in both entities. As of December 31, 2016, the Company had contributed an aggregate of approximately $2.1 million to the two entities. The Company’s contributions will be used to fund future capital expenditures associated with the interests being acquired as well as to fund acquisitions of other non-operated acreage opportunities.
NOTE 17 — SEGMENT INFORMATION
The Company operates in two business segments: (i) exploration and production and (ii) midstream. The exploration and production segment is engaged in the acquisition, exploration and development of oil and natural gas properties and is currently focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company also operates in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. During the third quarter of 2016, our midstream business became a reportable segment under U.S. GAAP. The midstream segment conducts midstream operations in
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 15 — SEGMENT INFORMATION — Continued
support of the Company’s exploration, development and production operations and provides natural gas processing, oil transportation services, oil, natural gas oil and salt water gathering services and salt water disposal services to third parties on a limited basis.parties. Substantially all of the Company’s midstream operations in the Rustler Breaks and Wolf asset areas in the Delaware Basin are conducted through San Mateo (see Note 5).
The following tables present selected financial information for the periods presented regarding the Company’s operatingbusiness segments on a stand-alone basis, corporate expenses that are not allocated to a segment and the consolidation and elimination entries necessary to arrive at the financial information for the Company on a consolidated basis (in thousands). On a consolidated basis, midstream services revenues consist primarily of those revenues from midstream operations related to third parties, including working interest owners in the Company’s operated wells. All midstream services revenues associated with Company-owned production are eliminated in consolidation. In evaluating the operating results of the exploration and production and midstream segments, the Company does not allocate certain expenses to the individual segments, including general and administrative expenses. Such expenses are reflected in the column labeled “Corporate.” |
| | | | | | | | | | | | | | | | | | | |
| | Exploration and Production | | | | | | Consolidations and Eliminations | | Consolidated Company |
| | | Midstream | | Corporate | | |
| Year Ended December 31, 2018 | | | | | | | | | |
| Oil and natural gas revenues | $ | 794,261 |
| | $ | 6,439 |
| | $ | — |
| | $ | — |
| | $ | 800,700 |
|
| Midstream services revenues | — |
| | 86,737 |
| | — |
| | (64,817 | ) | | 21,920 |
|
| Sales of purchased natural gas | 902 |
| | 6,169 |
| | — |
| | — |
| | 7,071 |
|
| Lease bonus - mineral acreage | 2,489 |
| | — |
| | — |
| | — |
| | 2,489 |
|
| Realized gain on derivatives | 2,334 |
| | — |
| | — |
| | — |
| | 2,334 |
|
| Unrealized gain on derivatives | 65,085 |
| | — |
| | — |
| | — |
| | 65,085 |
|
Expenses (1) | 487,539 |
| | 44,098 |
| | 69,508 |
| | (64,817 | ) | | 536,328 |
|
Operating income (loss) (2) | $ | 377,532 |
| | $ | 55,247 |
| | $ | (69,508 | ) | | $ | — |
| | $ | 363,271 |
|
| Total assets | $ | 2,910,326 |
| | $ | 439,953 |
| | $ | 105,239 |
| | $ | — |
| | $ | 3,455,518 |
|
Capital expenditures (3) | $ | 1,335,690 |
| | $ | 166,407 |
| | $ | 2,562 |
| | $ | — |
| | $ | 1,504,659 |
|
| |
| (1) | Includes depletion, depreciation and amortization expenses of $252.3 million and $10.5 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $2.4 million. |
| |
| (2) | Includes $25.6 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment. |
| |
| (3) | Includes $656.9 million attributable to land and seismic acquisition expenditures related to the exploration and production segment and $80.2 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment. |
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 1715 — SEGMENT INFORMATION — Continued
|
| | | | | | | | | | | | | | | | | | | |
| | Exploration and Production | | | | | | Consolidations and Eliminations | | Consolidated Company |
| | | Midstream | | Corporate | | |
| Year Ended December 31, 2017 | | | | | | | | | |
| Oil and natural gas revenues | $ | 525,862 |
| | $ | 2,822 |
| | $ | — |
| | $ | — |
| | $ | 528,684 |
|
| Midstream services revenues | — |
| | 47,037 |
| | — |
| | (36,839 | ) | | 10,198 |
|
| Realized loss on derivatives | (4,321 | ) | | — |
| | — |
| | — |
| | (4,321 | ) |
| Unrealized gain on derivatives | 9,715 |
| | — |
| | — |
| | — |
| | 9,715 |
|
Expenses (1) | 333,923 |
| | 23,420 |
| | 62,931 |
| | (36,839 | ) | | 383,435 |
|
Operating income (loss) (2) | $ | 197,333 |
| | $ | 26,439 |
| | $ | (62,931 | ) | | $ | — |
| | $ | 160,841 |
|
| Total assets | $ | 1,768,393 |
| | $ | 257,871 |
| | $ | 119,426 |
| | $ | — |
| | $ | 2,145,690 |
|
Capital expenditures (3) | $ | 753,157 |
| | $ | 114,113 |
| | $ | 5,688 |
| | $ | — |
| | $ | 872,958 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Exploration and Production | | | | | | | | Consolidated Company |
| | | Midstream | | Corporate | | Eliminations | |
| Year Ended December 31, 2016 | | | | | | | | | |
| Oil and natural gas revenues | $ | 289,512 |
| | $ | 1,644 |
| | $ | — |
| | $ | — |
| | $ | 291,156 |
|
| Midstream services revenues | — |
| | 18,982 |
| | — |
| | (13,764 | ) | | 5,218 |
|
| Realized gain on derivatives | 9,286 |
| | — |
| | — |
| | — |
| | 9,286 |
|
| Unrealized gain on derivatives | (41,238 | ) | | — |
| | — |
| | — |
| | (41,238 | ) |
Expenses (1) | 391,098 |
| | 8,254 |
| | 56,001 |
| | (13,764 | ) | | 441,589 |
|
Operating (loss) income (2) | $ | (133,538 | ) | | $ | 12,372 |
| | $ | (56,001 | ) | | $ | — |
| | $ | (177,167 | ) |
| Total Assets | $ | 1,098,525 |
| | $ | 140,459 |
| | $ | 225,681 |
| | $ | — |
| | $ | 1,464,665 |
|
| Capital Expenditures | $ | 379,881 |
| | $ | 67,566 |
| | $ | 6,913 |
| | $ | — |
| | $ | 454,360 |
|
_____________________
(1) Expenses include depreciation, depletion and amortization expenses of $118.4 million, $2.7 million and $0.9 million for the exploration and production, midstream and corporate segments, respectively, and full-cost ceiling impairment expense of $158.6 million for the exploration and production segment.
(2) Includes $0.4 | |
| (1) | Includes depletion, depreciation and amortization expenses of $170.5 million and $5.2 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $1.7 million. |
| |
| (2) | Includes $12.1 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment. | | | | | | | | | | | | | | | | | | | | | | | Exploration and Production | | | | | | | | Consolidated Company | | | | Midstream | | Corporate | | Eliminations | | | Year Ended December 31, 2015 | | | | | | | | | | | Oil and natural gas revenues | $ | 277,844 |
| | $ | 496 |
| | $ | — |
| | $ | — |
| | $ | 278,340 |
| | Midstream services revenues | — |
| | 11,485 |
| | — |
| | (9,621 | ) | | 1,864 |
| | Realized gain on derivatives | 77,094 |
| | — |
| | — |
| | — |
| | 77,094 |
| | Unrealized loss on derivatives | (39,265 | ) | | — |
| | — |
| | — |
| | (39,265 | ) | Expenses (1) | 1,078,534 |
| | 5,178 |
| | 50,604 |
| | (9,621 | ) | | 1,124,695 |
| Operating (loss) income (2) | $ | (762,861 | ) | | $ | 6,803 |
| | $ | (50,604 | ) | | $ | — |
| | $ | (806,662 | ) | | Total Assets | $ | 1,000,075 |
| | $ | 75,980 |
| | $ | 64,806 |
| | $ | — |
| | $ | 1,140,861 |
| Capital Expenditures (3) | $ | 622,642 |
| | $ | 75,009 |
| | $ | 786 |
| | $ | — |
| | $ | 698,437 |
|
_____________________
(1) Expenses include depreciation, depletion and amortization expenses of $176.7 million, $1.6 million and $0.5 million for the exploration and production, midstream and corporate segments, respectively, and full-cost ceiling impairment expense of $801.2 million for the exploration and production segment.
(2) Includes $0.3 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3) In October 2015, the Company sold the Wolf Processing Plant to EnLink and the cost basis of $31.0 million for those assets was removed from the total midstream assets.
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 17 — SEGMENT INFORMATION — Continued
| | | | | | | | | | | | | | | | | | | | | | | Exploration and Production | | | | | | | | Consolidated Company | | | | Midstream | | Corporate | | Eliminations | | | Year Ended December 31, 2014 | | | | | | | | | | | Oil and natural gas revenues | $ | 366,191 |
| | $ | 1,521 |
| | $ | — |
| | $ | — |
| | $ | 367,712 |
| | Midstream services revenues | — |
| | 4,929 |
| | — |
| | (3,716 | ) | | 1,213 |
| | Realized gain on derivatives | 5,022 |
| | — |
| | — |
| | — |
| | 5,022 |
| | Unrealized loss on derivatives | 58,302 |
| | — |
| | — |
| | — |
| | 58,302 |
| Expenses (1) | 220,374 |
| | 2,703 |
| | 32,557 |
| | (3,716 | ) | | 251,918 |
| Operating (loss) income (2) | $ | 209,141 |
| | $ | 3,747 |
| | $ | (32,557 | ) | | $ | — |
| | $ | 180,331 |
| | Total Assets | $ | 1,388,261 |
| | $ | 35,100 |
| | $ | 11,129 |
| | $ | — |
| | $ | 1,434,490 |
| | Capital Expenditures | $ | 597,351 |
| | $ | 12,504 |
| | $ | 517 |
| | $ | — |
| | $ | 610,372 |
|
_____________________
(1) Expenses include depreciation, depletion and amortization expenses of $133.1 million, $1.2 million and $0.4 million for the exploration and production, midstream and corporate segments, respectively.
(2) Includes $17,000 in net loss attributable to non-controlling interest in subsidiaries related to the midstream segment.
|
| |
| (3) | Includes $54.9 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment. |
|
| | | | | | | | | | | | | | | | | | | |
| | Exploration and Production | | | | | | Consolidations and Eliminations | | Consolidated Company |
| | | Midstream | | Corporate | | |
| Year Ended December 31, 2016 | | | | | | | | | |
| Oil and natural gas revenues | $ | 289,512 |
| | $ | 1,644 |
| | $ | — |
| | $ | — |
| | $ | 291,156 |
|
| Midstream services revenues | — |
| | 18,982 |
| | — |
| | (13,764 | ) | | 5,218 |
|
| Realized gain on derivatives | 9,286 |
| | — |
| | — |
| | — |
| | 9,286 |
|
| Unrealized loss on derivatives | (41,238 | ) | | — |
| | — |
| | — |
| | (41,238 | ) |
Expenses (1) | 391,098 |
| | 8,254 |
| | 56,001 |
| | (13,764 | ) | | 441,589 |
|
Operating (loss) income (2) | $ | (133,538 | ) | | $ | 12,372 |
| | $ | (56,001 | ) | | $ | — |
| | $ | (177,167 | ) |
| Total assets | $ | 1,098,525 |
| | $ | 140,459 |
| | $ | 225,681 |
| | $ | — |
| | $ | 1,464,665 |
|
| Capital expenditures | $ | 379,881 |
| | $ | 67,566 |
| | $ | 6,913 |
| | $ | — |
| | $ | 454,360 |
|
_____________________
| |
| (1) | Includes depletion, depreciation and amortization expenses of $118.4 million and $2.7 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.9 million and full-cost ceiling impairment expense of $158.6 million for the exploration and production segment. |
| |
| (2) | Includes $0.4 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment. |
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 1816 — SUBSEQUENT EVENTSSUBSIDIARY GUARANTORS
Subsequent toThe Notes are jointly and severally guaranteed by certain subsidiaries of Matador (the “Guarantor Subsidiaries”) on a full and unconditional basis (except for customary release provisions). At December 31, 2016,2018, the Company acquired approximately 13,900 gross (8,200 net) leasedGuarantor Subsidiaries were 100% owned by Matador. Matador is a parent holding company and mineral acreshas no independent assets or operations, and approximately 1,000 BOE per daythere are no significant restrictions on the ability of related productionMatador to obtain funds from various lessors and other operators, mostly in and around its existing acreage in the Delaware Basin. The cost of these acquisitions was approximately $111 million.
On February 17, 2017, the Company contributed substantially all of its midstream assets located in the Rustler Breaks and Wolf asset areas toGuarantor Subsidiaries by dividend or loan. San Mateo Midstream, LLC (“San Mateo” or the “Joint Venture”), a joint venture with a subsidiary of Five Point Capital Partners LLC (“Five Point”). The midstream assets contributed to San Mateo include (i) the Black River cryogenic natural gas processing plant in the Rustler Breaks asset area (“Black River Processing Plant”); (ii) one salt water disposal well and a related commercial salt water disposal facility in the Rustler Breaks asset area; (iii) three salt water disposal wells and related commercial salt water disposal facilities in the Wolf asset area; and (iv) substantially all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas (collectively, the “Delaware Midstream Assets”). The Company will continue to operate the Delaware Midstream Assets. The Company retained its ownership in certain midstream assets owned in South Texas and Northwest Louisiana, whichsubsidiaries (the “Non-Guarantor Subsidiaries”) are not partguarantors of the Joint Venture.
The Company and Five Point own 51% and 49% of the Joint Venture, respectively. Five Point provided initial cash consideration of $176.4 million to the Joint Venture in exchange for its 49% interest. Approximately $171.5 million of this cash contribution by Five Point was distributed by the Joint Venture to the Company as a special distribution. The Company may earn an additional $73.5 million in performance incentives over the next five years. The Company contributed the Delaware Midstream Assets and $5.1 million in cash to the Joint Venture in exchange for its 51% interest. The parties to the Joint Venture have also committed to spend up to an additional $140 million in the aggregate to expand the Joint Venture’s midstream operations and asset base.
In connection with the Joint Venture, the Company dedicated its current and future leasehold interests in the Rustler Breaks and Wolf asset areas pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements, effective as of February 1, 2017. In addition, the Company dedicated its current and future leasehold interests in the Rustler Breaks asset area pursuant to a 15-year, fixed fee natural gas processing agreement (when combined with the gathering and salt water disposal agreements, the “Operational Agreements”). The Joint Venture will provide the Company with firm service under each of the Operational Agreements in exchange for certain minimum volume commitments. The minimum contractual obligation under the Operational Agreements at inception was approximately $273.5 million.Notes.
The following unaudited pro formapresents condensed consolidating financial information of the issuer (Matador), the Non-Guarantor Subsidiaries, the Guarantor Subsidiaries and all entities on a consolidated basis (in thousands). Elimination entries are necessary to combine the entities. This financial information is presented to illustratein accordance with the effect on the historical operatingrequirements of Rule 3-10 of Regulation S-X. The following financial information may not necessarily be indicative of results andof operations, cash flows or financial position ofhad the Company of (a) the formation of San Mateo and the transactions associated with the Joint Venture and (b) the Company’s acquisition on February 14, 2017 of the remaining non-controlling interest in Fulcrum Delaware Water Resources, LLC (“Fulcrum Delaware Water Resources”) not previously owned by the Company for approximately $2.6 million (collectively, the “Transactions”).Guarantor Subsidiaries operated as independent entities.
The Unaudited Pro Forma Consolidated Statement of Operations for the year ended December 31, 2016, if presented, would contain an adjustment of $4.5 million to increase the net income attributable to non-controlling interest in subsidiaries from $0.4 million to $4.9 million, which would increase the net loss attributable to Matador Resources Company shareholders from $97.4 million to $102.0 million, and an adjustment of $0.05 per diluted common share to increase the net loss per diluted common share attributable to Matador Resources Company shareholders from $1.07 to $1.12.The following Unaudited Pro Forma Consolidated Balance Sheet as of December 31, 2016, presented for illustrative purposes, is based on the historical financial statements of the Company as of December 31, 2016, after giving effect to the Transactions as if they had occurred on December 31, 2016. |
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Balance Sheet
December 31, 2018 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| ASSETS | | | | | | | | | | |
| Intercompany receivable | | $ | 1,244,405 |
| | $ | 29,816 |
| | $ | — |
| | $ | (1,274,221 | ) | | $ | — |
|
| Current assets | | 4,109 |
| | 34,027 |
| | 267,549 |
| | — |
| | 305,685 |
|
| Net property and equipment | | — |
| | 379,052 |
| | 2,743,812 |
| | — |
| | 3,122,864 |
|
| Investment in subsidiaries | | 1,490,401 |
| | — |
| | 95,346 |
| | (1,585,747 | ) | | — |
|
| Long-term assets | | 23,897 |
| | 1,479 |
| | 11,095 |
| | (9,502 | ) | | 26,969 |
|
| Total assets | | $ | 2,762,812 |
| | $ | 444,374 |
| | $ | 3,117,802 |
| | $ | (2,869,470 | ) | | $ | 3,455,518 |
|
| LIABILITIES AND EQUITY | | | | | | | | | | |
| Intercompany payable | | $ | — |
| | $ | — |
| | $ | 1,274,221 |
| | $ | (1,274,221 | ) | | $ | — |
|
| Current liabilities | | 22,874 |
| | 27,988 |
| | 279,884 |
| | (724 | ) | | 330,022 |
|
| Senior unsecured notes payable | | 1,037,837 |
| | — |
| | — |
| |
| | 1,037,837 |
|
| Other long-term liabilities | | 13,221 |
| | 230,263 |
| | 73,296 |
| | (8,778 | ) | | 308,002 |
|
| Total equity attributable to Matador Resources Company | | 1,688,880 |
| | 95,346 |
| | 1,490,401 |
| | (1,585,747 | ) | | 1,688,880 |
|
| Non-controlling interest in subsidiaries | | — |
| | 90,777 |
| | — |
| | — |
| | 90,777 |
|
| Total liabilities and equity | | $ | 2,762,812 |
| | $ | 444,374 |
| | $ | 3,117,802 |
| | $ | (2,869,470 | ) | | $ | 3,455,518 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Balance Sheet
December 31, 2017 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| ASSETS | | | | | | | | | | |
| Intercompany receivable | | $ | 585,109 |
| | $ | 2,912 |
| | $ | — |
| | $ | (588,021 | ) | | $ | — |
|
| Third-party current assets | | 2,240 |
| | 9,334 |
| | 245,596 |
| | — |
| | 257,170 |
|
| Net property and equipment | | — |
| | 223,178 |
| | 1,658,278 |
| | — |
| | 1,881,456 |
|
| Investment in subsidiaries | | 1,147,295 |
| | — |
| | 111,077 |
| | (1,258,372 | ) | | — |
|
| Third-party long-term assets | | 6,425 |
| | — |
| | 3,642 |
| | (3,003 | ) | | 7,064 |
|
| Total assets | | $ | 1,741,069 |
| | $ | 235,424 |
| | $ | 2,018,593 |
| | $ | (1,849,396 | ) | | $ | 2,145,690 |
|
| LIABILITIES AND EQUITY | | | | | | | | | | |
| Intercompany payable | | $ | — |
| | $ | — |
| | $ | 588,021 |
| | $ | (588,021 | ) | | $ | — |
|
| Third-party current liabilities | | 8,847 |
| | 19,891 |
| | 254,142 |
| | (274 | ) | | 282,606 |
|
| Senior unsecured notes payable | | 574,073 |
| | — |
| | — |
| | — |
| | 574,073 |
|
| Other third-party long-term liabilities | | 1,593 |
| | 3,466 |
| | 29,135 |
| | (2,729 | ) | | 31,465 |
|
| Total equity attributable to Matador Resources Company | | 1,156,556 |
| | 111,077 |
| | 1,147,295 |
| | (1,258,372 | ) | | 1,156,556 |
|
| Non-controlling interest in subsidiaries | | — |
| | 100,990 |
| | — |
| | — |
| | 100,990 |
|
| Total liabilities and equity | | $ | 1,741,069 |
| | $ | 235,424 |
| | $ | 2,018,593 |
| | $ | (1,849,396 | ) | | $ | 2,145,690 |
|
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 2015 and 2014
NOTE 18 — SUBSEQUENT EVENTS — Continued
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
|
| | | | | | | | | | | | |
| | | December 31, 2016 |
| | | As Reported | | Adjustment | | Pro Forma |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash | | $ | 212,884 |
| | $ | 164,340 |
| (1) | $ | 377,224 |
|
| Restricted cash | | 1,258 |
| | 9,407 |
| (2) | 10,665 |
|
| Accounts receivable | | | | | | — |
|
| Oil and natural gas revenues | | 34,154 |
| | — |
| | 34,154 |
|
| Joint interest billings | | 19,347 |
| | — |
| | 19,347 |
|
| Other | | 5,167 |
| | — |
| | 5,167 |
|
| Lease and well equipment inventory | | 3,045 |
| | — |
| | 3,045 |
|
| Prepaid expenses and other assets | | 3,327 |
| | — |
| | 3,327 |
|
| Total current assets | | 279,182 |
| | 173,747 |
| | 452,929 |
|
| Property and equipment, at cost | | | | | |
|
| Oil and natural gas properties, full-cost method | | | | | |
|
| Evaluated | | 2,408,305 |
| | — |
| | 2,408,305 |
|
| Unproved and unevaluated | | 479,736 |
| | — |
| | 479,736 |
|
| Other property and equipment | | 160,795 |
| | — |
| | 160,795 |
|
| Less accumulated depletion, depreciation and amortization | | (1,864,311 | ) | | — |
| | (1,864,311 | ) |
| Net property and equipment | | 1,184,525 |
| | — |
| | 1,184,525 |
|
| Other assets | | 958 |
| | | | 958 |
|
| Total assets | | $ | 1,464,665 |
| | $ | 173,747 |
| | $ | 1,638,412 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | |
|
| Current liabilities | | | | | |
|
| Accounts payable | | $ | 4,674 |
| | $ | — |
| | $ | 4,674 |
|
| Accrued liabilities | | 101,460 |
| | — |
| | 101,460 |
|
| Royalties payable | | 23,988 |
| | — |
| | 23,988 |
|
| Amounts due to affiliates | | 8,651 |
| | — |
| | 8,651 |
|
| Derivative instruments | | 24,203 |
| | — |
| | 24,203 |
|
| Advances from joint interest owners | | 1,700 |
| | — |
| | 1,700 |
|
| Amounts due to joint ventures | | 4,251 |
| | — |
| | 4,251 |
|
| Other current liabilities | | 578 |
| | — |
| | 578 |
|
| Total current liabilities | | 169,505 |
| | — |
| | 169,505 |
|
| Long-term liabilities | | | | | | |
| Senior unsecured notes payable | | 573,924 |
| | — |
| | 573,924 |
|
| Asset retirement obligations | | 19,725 |
| | — |
| | 19,725 |
|
| Derivative instruments | | 751 |
| | — |
| | 751 |
|
| Amounts due to joint ventures | | 1,771 |
| | — |
| | 1,771 |
|
| Other long-term liabilities | | 7,544 |
| | — |
| | 7,544 |
|
| Total long-term liabilities | | 603,715 |
| | — |
| | 603,715 |
|
| Commitments and contingencies (Note 13) | | | | | |
|
| Shareholders’ equity | | | | | |
|
| Common stock — $0.01 par value, 120,000,000 shares authorized; 99,518,764 and 85,567,021 shares issued; and 99,511,931 and 85,564,435 shares outstanding, respectively | | 995 |
| | — |
| | 995 |
|
| Additional paid-in capital | | 1,325,481 |
| | 124,871 |
| (3) | 1,450,352 |
|
| Accumulated deficit | | (636,351 | ) | | — |
| | (636,351 | ) |
| Total Matador Resources Company shareholders’ equity | | 690,125 |
| | 124,871 |
| | 814,996 |
|
| Non-controlling interest in subsidiaries | | 1,320 |
| | 48,876 |
| (4) | 50,196 |
|
| Total shareholders’ equity | | 691,445 |
| | 173,747 |
| | 865,192 |
|
| Total liabilities and shareholders’ equity | | $ | 1,464,665 |
| | $ | 173,747 |
| | $ | 1,638,412 |
|
______________________
| |
(1) | Represents $176.4 million of cash contributed by Five Point in connection with the formation of San Mateo less (i) approximately $2.6 million paid by the Company to acquire the non-controlling interest in Fulcrum Delaware Water Resources that the Company did not previously own and (ii) $10.0 |
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
NOTE 1816 — SUBSEQUENT EVENTSSUBSIDIARY GUARANTORS — Continued
|
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2018 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| Total revenues | | $ | — |
| | $ | 98,665 |
| | $ | 865,725 |
| | $ | (64,791 | ) | | $ | 899,599 |
|
| Total expenses | | 4,935 |
| | 46,236 |
| | 549,948 |
| | (64,791 | ) | | 536,328 |
|
| Operating (loss) income | | (4,935 | ) | | 52,429 |
| | 315,777 |
| | — |
| | 363,271 |
|
| Net loss on asset sales and inventory impairment | | — |
| | — |
| | (196 | ) | | — |
| | (196 | ) |
| Interest expense | | (40,994 | ) | | (333 | ) | | — |
| | — |
| | (41,327 | ) |
| Prepayment penalty on extinguishment of debt | | (31,226 | ) | | — |
| | — |
| | — |
| | (31,226 | ) |
| Other income | | 565 |
| | 62 |
| | 924 |
| | — |
| | 1,551 |
|
| Earnings in subsidiaries | | 343,106 |
| | — |
| | 26,601 |
| | (369,707 | ) | | — |
|
| Income before income taxes | | 266,516 |
| | 52,158 |
| | 343,106 |
| | (369,707 | ) | | 292,073 |
|
Total income tax benefit
| | (7,691 | ) | | — |
| | — |
| | — |
| | (7,691 | ) |
| Net income attributable to non-controlling interest in subsidiaries | | — |
| | (25,557 | ) | | — |
| | — |
| | (25,557 | ) |
| Net income attributable to Matador Resources Company shareholders | | $ | 274,207 |
| | $ | 26,601 |
| | $ | 343,106 |
| | $ | (369,707 | ) | | $ | 274,207 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2017 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| Total revenues | | $ | — |
| | $ | 47,883 |
| | $ | 531,508 |
| | $ | (35,115 | ) | | $ | 544,276 |
|
| Total expenses | | 5,610 |
| | 21,260 |
| | 391,680 |
| | (35,115 | ) | | 383,435 |
|
| Operating (loss) income | | (5,610 | ) | | 26,623 |
| | 139,828 |
| | — |
| | 160,841 |
|
| Net gain on asset sales and inventory impairment | | — |
| | — |
| | 23 |
| | — |
| | 23 |
|
| Interest expense | | (34,565 | ) | | — |
| | — |
| | — |
| | (34,565 | ) |
| Other income | | 27 |
| | 37 |
| | 3,487 |
| | — |
| | 3,551 |
|
| Earnings in subsidiaries | | 157,589 |
| | — |
| | 14,251 |
| | (171,840 | ) | | — |
|
| Income before income taxes | | 117,441 |
| | 26,660 |
| | 157,589 |
| | (171,840 | ) | | 129,850 |
|
Total income tax (benefit) provision
| | (8,426 | ) | | 269 |
| | — |
| | — |
| | (8,157 | ) |
| Net income attributable to non-controlling interest in subsidiaries | | — |
| | (12,140 | ) | | — |
| | — |
| | (12,140 | ) |
| Net income attributable to Matador Resources Company shareholders | | $ | 125,867 |
| | $ | 14,251 |
| | $ | 157,589 |
| | $ | (171,840 | ) | | $ | 125,867 |
|
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 16 — SUBSIDIARY GUARANTORS — Continued
|
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statement of Operations
For the Year Ended December 31, 2016 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| Total revenues | | $ | — |
| | $ | 17,302 |
| | $ | 257,828 |
| | $ | (10,708 | ) | | $ | 264,422 |
|
| Total expenses | | 5,319 |
| | 7,031 |
| | 439,947 |
| | (10,708 | ) | | 441,589 |
|
| Operating (loss) income | | (5,319 | ) | | 10,271 |
| | (182,119 | ) | | — |
| | (177,167 | ) |
| Net gain on asset sales and inventory impairment | | — |
| | — |
| | 107,277 |
| | — |
| | 107,277 |
|
| Interest expense | | (28,199 | ) | | — |
| | — |
| | — |
| | (28,199 | ) |
| Other expense | | — |
| | — |
| | (4 | ) | | — |
| | (4 | ) |
| (Loss) earnings in subsidiaries | | (64,349 | ) | | — |
| | 9,810 |
| | 54,539 |
| | — |
|
| (Loss) income before income taxes | | (97,867 | ) | | 10,271 |
| | (65,036 | ) | | 54,539 |
| | (98,093 | ) |
| Total income tax (benefit) provision | | (446 | ) | | 97 |
| | (687 | ) | | — |
| | (1,036 | ) |
| Net income attributable to non-controlling interest in subsidiaries | | — |
| | (364 | ) | | — |
| | — |
| | (364 | ) |
| Net (loss) income attributable to Matador Resources Company shareholders | | $ | (97,421 | ) | | $ | 9,810 |
| | $ | (64,349 | ) | | $ | 54,539 |
| | $ | (97,421 | ) |
|
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2018 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| Net cash (used in) provided by operating activities | | $ | (657,860 | ) | | $ | 35,119 |
| | $ | 1,231,264 |
| | $ | — |
| | $ | 608,523 |
|
| Net cash used in investing activities | | — |
| | (162,147 | ) | | (1,310,776 | ) | | (42,330 | ) | | (1,515,253 | ) |
| Net cash provided by financing activities | | 658,030 |
| | 140,205 |
| | 47,667 |
| | 42,330 |
| | 888,232 |
|
| Increase (decrease) in cash and restricted cash | | 170 |
| | 13,177 |
| | (31,845 | ) | | — |
| | (18,498 | ) |
| Cash and restricted cash at beginning of year | | 286 |
| | 5,663 |
| | 96,533 |
| | — |
| | 102,482 |
|
| Cash and restricted cash at end of year | | $ | 456 |
| | $ | 18,840 |
| | $ | 64,688 |
| | $ | — |
| | $ | 83,984 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2017 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| Net cash (used in) provided by operating activities | | $ | (307,982 | ) | | $ | 21,308 |
| | $ | 585,799 |
| | $ | — |
| | $ | 299,125 |
|
| Net cash provided by (used in) investing activities | | 33 |
| | (114,852 | ) | | (597,870 | ) | | (106,595 | ) | | (819,284 | ) |
| Net cash provided by (used in) financing activities | | 208,440 |
| | 96,307 |
| | (2,843 | ) | | 106,595 |
| | 408,499 |
|
| Decrease in cash and restricted cash | | (99,509 | ) | | 2,763 |
| | (14,914 | ) | | — |
| | (111,660 | ) |
| Cash and restricted cash at beginning of year | | 99,795 |
| | 2,900 |
| | 111,447 |
| | — |
| | 214,142 |
|
| Cash and restricted cash at end of year | | $ | 286 |
| | $ | 5,663 |
| | $ | 96,533 |
| | $ | — |
| | $ | 102,482 |
|
|
| | | | | | | | | | | | | | | | | | | | |
Condensed Consolidating Statement of Cash Flows
For the Year Ended December 31, 2016 |
| | | Matador | | Non-Guarantor Subsidiaries | | Guarantor Subsidiaries | | Eliminating Entries | | Consolidated |
| Net cash (used in) provided by operating activities | | $ | (45,215 | ) | | $ | 6,694 |
| | $ | 172,607 |
| | $ | — |
| | $ | 134,086 |
|
| Net cash used in investing activities | | (324,724 | ) | | (64,999 | ) | | (443,817 | ) | | 384,801 |
| | (448,739 | ) |
| Net cash provided by financing activities | | 469,654 |
| | 60,110 |
| | 322,743 |
| | (384,801 | ) | | 467,706 |
|
| Increase in cash and restricted cash | | 99,715 |
| | 1,805 |
| | 51,533 |
| | — |
| | 153,053 |
|
| Cash and restricted cash at beginning of year | | 80 |
| | 1,095 |
| | 59,914 |
| | — |
| | 61,089 |
|
| Cash and restricted cash at end of year | | $ | 99,795 |
| | $ | 2,900 |
| | $ | 111,447 |
| | $ | — |
| | $ | 214,142 |
|
Matador Resources Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
December 31, 2018, 2017 and 2016
NOTE 17 — SUBSEQUENT EVENTS
On February 25, 2019, the Company announced the formation of San Mateo Midstream II, LLC (“San Mateo II”), a strategic joint venture with a subsidiary of Five Point designed to expand the Company’s midstream operations in the Delaware Basin, specifically in Eddy County, New Mexico. San Mateo II is owned 51% by the Company and 49% by Five Point. In addition, Five Point has committed to pay $125 million of cash restrictedthe first $150 million of capital expenditures incurred by San Mateo II to operationsdevelop facilities in the Stebbins area and the Stateline asset area. The Company has the ability to earn up to $150 million in deferred performance incentives over the next five years, plus additional performance incentives for securing volumes from third-party customers.
In connection with the formation of San Mateo. Also reflects $0.6 million released from restriction uponMateo II, the purchaseCompany dedicated to San Mateo II acreage in the Stebbins area and the Stateline asset area pursuant to 15-year, fixed-fee agreements for oil, natural gas and salt water gathering, natural gas processing and salt water disposal (collectively, the “San Mateo II Operational Agreements”). San Mateo II will provide the Company with firm service under each of the non-controlling interestSan Mateo II Operational Agreements in Fulcrum Delaware Water Resources not previously owned byexchange for certain minimum volume commitments. The minimum contractual obligation under the Company.San Mateo II Operational Agreements at inception was approximately $363.8 million and begins in 2020.
| |
(2) | Represents $10.0 million in cash contributed to San Mateo less $0.6 million released from restriction upon the purchase of the non-controlling interest in Fulcrum Delaware Water Resources that the Company did not previously own. |
| |
(3) | Reflects the purchase of the non-controlling interest in Fulcrum Delaware Water Resources that the Company did not previously own and the amount received in connection with the formation of San Mateo. |
| |
(4) | Represents the adjustment required to reflect the purchase of the non-controlling interest in Fulcrum Delaware Water Resources that the Company did not previously own and Five Point’s 49% non-controlling interest in San Mateo. |
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION
December 31, 2016, 20152018, 2017 and 20142016
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES
Costs Incurred
The following table summarizes costs incurred and capitalized by the Company in the acquisition, exploration and development of oil and natural gas properties for the years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands).
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Property acquisition costs | | | | | | | | | | | | |
| Proved | | $ | — |
| | $ | 16,524 |
| | $ | 2,728 |
| | $ | 4,788 |
| | $ | 45,270 |
| | $ | — |
|
| Unproved and unevaluated | | 108,206 |
| | 253,923 |
| | 78,484 |
| | 633,502 |
| | 214,662 |
| | 108,206 |
|
| Exploration costs | | 113,562 |
| | 122,495 |
| | 156,178 |
| | 229,974 |
| | 167,213 |
| | 113,562 |
|
| Development costs | | 158,113 |
| | 229,700 |
| | 359,961 |
| | 467,426 |
| | 326,012 |
| | 158,113 |
|
Total costs incurred (1) | | $ | 379,881 |
| | $ | 622,642 |
| | $ | 597,351 |
| | $ | 1,335,690 |
| | $ | 753,157 |
| | $ | 379,881 |
|
__________________
| |
| (1) | Excludes midstream-related development and corporate costs of approximately $74.5$169.0 million, $75.8$119.8 million and $13.0$74.5 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. |
Property acquisition costs are costs incurred to purchase, lease or otherwise acquire oil and natural gas properties, including both unproved and unevaluated leasehold and purchases of reserves in place. For the years ended December 31, 2016, 20152018, 2017 and 2014,2016, most of the Company’s property acquisition costs resulted from the acquisition of unproved and unevaluated leasehold positions.and mineral interests.
Exploration costs are costs incurred in identifying areas of these oil and natural gas properties that may warrant further examination and in examining specific areas that are considered to have prospects of containingbe prospective for oil and natural gas, including costs of drilling exploratory wells, geological and geophysical costs, and costs of carrying and retaining unproved and unevaluated properties. Exploration costs may be incurred before or after acquiring the related oil and natural gas properties. For the years ended December 31, 2018, 2017 and 2016, the Company capitalized $17.7 million, $1.8 million and $3.6 million, respectively, of geological and geophysical costs, which are included as exploration costs in the table above.
Development costs are costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing oil and natural gas. Development costs include the costs of preparing well locations for drilling, drilling and equipping development wells and acquiring, constructing and installing production facilities.
Costs incurred also include newnewly established asset retirement obligations, established, as well as changes to asset retirement obligations resulting from revisions in cost estimates or abandonment dates. Asset retirement obligations included in the table above were approximately $4.4$4.0 million, $3.3$4.8 million and $4.0$4.4 million for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively. Capitalized general and administrative expenses that are directly related to acquisition, exploration and development activities are also included in the table above. The Company capitalized $15.7$28.3 million, $6.9$23.1 million and $6.4$15.7 million of these internal costs infor the years ended December 31, 2018, 2017 and 2016, 2015respectively, excluding midstream-related capitalized general and 2014, respectively.administrative expenses. Capitalized interest expense for qualifying projects is also included in the table above. The Company capitalized $3.7$8.8 million, $3.9$7.3 million and $2.8$3.7 million of its interest expense for the years ended December 31, 2016, 20152018, 2017 and 2014,2016, respectively.
Oil and Natural Gas Reserves
Proved reserves are estimated quantities of oil and natural gas whichthat geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs using existing economic and operating conditions. Estimating oil and natural gas reserves is complex and inexact because of the numerous uncertainties inherent in the process. The process relies on interpretations of available geological, geophysical, petrophysical, engineering and production data. The extent, quality and reliability of both the data and the associated interpretations of that data can vary. The process also requires certain economic assumptions, including, but not limited to, oil and natural gas prices, drilling, completion and operating expenses, capital expenditures and taxes. Actual future production, oil and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable oil and natural gas most likely will vary from the Company’s estimates.
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION — CONTINUED
December 31, 2018, 2017 and 2016
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES — Continued
The Company reports its production and 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 Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas and the Eagle Ford shale in South Texas, the economic value
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION — CONTINUED
December 31, 2016, 2015 and 2014
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES — Continued
of the natural gas liquidsNGLs associated with the natural gas is included in the estimated wellhead natural gas price on those properties where
the natural gas liquidsNGLs are extracted and sold. The Company’s oil and natural gas reserves estimates for the years ended December 31, 2016, 20152018, 2017 and 20142016 were prepared by the Company’s engineering staff in accordance with guidelines established by the SEC and then audited for their reasonableness and conformance with SEC guidelines by Netherland, Sewell & Associates, Inc., independent reservoir engineers.
Oil and natural gas reserves are estimated using then-current operating and economic conditions, with no provision for price and cost escalations in future periods except by contractual arrangements. The commodity prices used to estimate oil and natural gas reserves are based on unweighted, arithmetic averages of first-day-of-the-month oil and natural gas prices for the previous 12-month period. For the period from January through December 2018, these average oil and natural gas prices were $62.04 per Bbl and $3.10 per MMBtu, respectively. For the period from January through December 2017, these average oil and natural gas prices were $47.79 per Bbl and $2.98 per MMBtu, respectively. For the period from January through December 2016, these average oil and natural gas prices were $39.25 per Bbl and $2.48 per MMBtu, respectively. For the period from January through December 2015, these average oil and natural gas prices were $46.79 per Bbl and $2.59 per MMBtu, respectively. For the period from January through December 2014, these average oil and natural gas prices were $91.48 per Bbl and $4.35 per MMBtu, respectively.
The Company’s net ownership in estimated quantities of proved oil and natural gas reserves and changes in net proved reserves are summarized as follows. All of the Company’s oil and natural gas reserves are attributable to properties located in the United States. The estimated reserves shown below are for proved reserves only and do not include any value for unproved reserves classified as probable or possible reserves that might exist for these properties, nor do they include any consideration that could be attributed to interests in unevaluated acreage beyond those tracts for which reserves have been estimated. In the tables presented throughout this section, natural gas is converted to oil equivalent using the ratio of one Bbl of oil to six Mcf of natural gas.
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES — Continued
| | | | | Net Proved Reserves | | Net Proved Reserves |
| | | Oil | | Natural Gas | | Oil Equivalent | | Oil | | Natural Gas | | Oil Equivalent |
| | | (MBbl) | | (MMcf) | | (MBOE) | | (MBbl) | | (MMcf) | | (MBOE) |
| Total at December 31, 2013 | | 16,362 |
| | 212,195 |
| | 51,729 |
| |
| Revisions of prior estimates | | (1,196 | ) | | 164 |
| | (1,169 | ) | |
| Purchases of minerals in-place | | 10 |
| | 433 |
| | 82 |
| |
| Extensions and discoveries | | 12,328 |
| | 69,566 |
| | 23,921 |
| |
| Production | | (3,320 | ) | | (15,303 | ) | | (5,870 | ) | |
| Total at December 31, 2014 | | 24,184 |
| | 267,055 |
| | 68,693 |
| |
| Revisions of prior estimates | | (2,609 | ) | | (75,433 | ) | | (15,181 | ) | |
| Purchases of minerals in-place | | 1,102 |
| | 2,927 |
| | 1,589 |
| |
| Extensions and discoveries | | 27,459 |
| | 70,054 |
| | 39,135 |
| |
| Production | | (4,492 | ) | | (27,702 | ) | | (9,109 | ) | |
| Total at December 31, 2015 | | 45,644 |
| | 236,901 |
| | 85,127 |
| | 45,644 |
| | 236,901 |
| | 85,127 |
|
| Revisions of prior estimates | | (6,440 | ) | | (28,481 | ) | | (11,187 | ) | | (6,440 | ) | | (28,481 | ) | | (11,187 | ) |
| Extensions and discoveries | | 22,869 |
| | 114,730 |
| | 41,992 |
| | 22,869 |
| | 114,730 |
| | 41,992 |
|
| Production | | (5,096 | ) | | (30,501 | ) | | (10,180 | ) | | (5,096 | ) | | (30,501 | ) | | (10,180 | ) |
| Total at December 31, 2016 | | 56,977 |
| | 292,649 |
| | 105,752 |
| | 56,977 |
| | 292,649 |
| | 105,752 |
|
| Revisions of prior estimates | | | 3,847 |
| | 34,395 |
| | 9,580 |
|
| Purchases of minerals-in-place | | | 5,257 |
| | 7,348 |
| | 6,482 |
|
| Extensions and discoveries | | | 28,513 |
| | 99,935 |
| | 45,169 |
|
| Production | | | (7,851 | ) | | (38,163 | ) | | (14,212 | ) |
| Total at December 31, 2017 | | | 86,743 |
| | 396,164 |
| | 152,771 |
|
| Revisions of prior estimates | | | 5,908 |
| | 32,497 |
| | 11,326 |
|
| Purchases of minerals-in-place | | | 446 |
| | 900 |
| | 596 |
|
| Extensions and discoveries | | | 41,445 |
| | 169,224 |
| | 69,646 |
|
| Production | | | (11,141 | ) | | (47,311 | ) | | (19,026 | ) |
| Total at December 31, 2018 | | | 123,401 |
| | 551,474 |
| | 215,313 |
|
| Proved Developed Reserves | | | | | | | | | | | | |
| December 31, 2013 | | 8,258 |
| | 53,458 |
| | 17,168 |
| |
| December 31, 2014 | | 14,053 |
| | 102,795 |
| | 31,185 |
| |
| December 31, 2015 | | 17,129 |
| | 101,447 |
| | 34,037 |
| | 17,129 |
| | 101,447 |
| | 34,037 |
|
| December 31, 2016 | | 22,604 |
| | 126,759 |
| | 43,731 |
| | 22,604 |
| | 126,759 |
| | 43,731 |
|
| December 31, 2017 | | | 36,966 |
| | 190,109 |
| | 68,651 |
|
| December 31, 2018 | | | 53,223 |
| | 246,229 |
| | 94,261 |
|
| Proved Undeveloped Reserves | | | | | | | | | | | | |
| December 31, 2013 | | 8,104 |
| | 158,737 |
| | 34,561 |
| |
| December 31, 2014 | | 10,131 |
| | 164,260 |
| | 37,508 |
| |
| December 31, 2015 | | 28,515 |
| | 135,454 |
| | 51,090 |
| | 28,515 |
| | 135,454 |
| | 51,090 |
|
| December 31, 2016 | | 34,373 |
| | 165,890 |
| | 62,021 |
| | 34,373 |
| | 165,890 |
| | 62,021 |
|
| December 31, 2017 | | | 49,777 |
| | 206,055 |
| | 84,120 |
|
| December 31, 2018 | | | 70,178 |
| | 305,245 |
| | 121,052 |
|
The following is a discussion of the changes in the Company’s proved oil and natural gas reserves estimates for the years ended December 31, 2018, 2017 and 2016.
The Company’s proved oil and natural gas reserves increased to 215,313 MBOE at December 31, 2018 from 152,771 MBOE at December 31, 2017. The Company’s proved oil and natural gas reserves increased by 81,568 MBOE and the Company produced 19,026 MBOE during the year ended December 31, 2018, resulting in a net increase of 62,542 MBOE. An increase of 69,646 MBOE in proved oil and natural gas reserves was a result of extensions and discoveries during the year, which was primarily attributable to drilling operations in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company’s proved oil and natural gas reserves increased by 11,326 MBOE during 2018 as a result of revisions of prior estimates, which were attributable to better-than-projected well performance from certain wells and higher weighted average oil and natural gas prices used to estimate proved reserves in 2018, as compared to 2017. The Company also added 596 MBOE in proved oil and natural gas reserves in 2018 as a result of purchases of minerals-in-place in the Delaware Basin. The Company’s proved developed oil and natural gas reserves increased to 94,261 MBOE at December 31, 2018 from 68,651 MBOE at December 31, 2017, primarily due to proved developed reserves added as a result of drilling operations in the Wolfcamp and Bone Spring plays in the Delaware Basin. At December 31, 2018, the Company’s proved reserves were made up of approximately 57% oil and 43% natural gas and were approximately 44% proved developed and approximately 56% proved undeveloped.
The Company’s proved oil and natural gas reserves increased to 152,771 MBOE at December 31, 2017 from 105,752 MBOE at December 31, 2016. The Company’s proved oil and natural gas reserves increased by 61,231 MBOE and the Company produced 14,212 MBOE during the year ended December 31, 2017, resulting in a net increase of 47,019 MBOE. An
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION — CONTINUED
December 31, 2018, 2017 and 2016
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES — Continued
increase of 45,169 MBOE in proved oil and natural gas reserves was a result of extensions and discoveries during the year, which was primarily attributable to drilling operations in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company’s proved oil and natural gas reserves increased by 9,580 MBOE during 2017 as a result of revisions of prior estimates, which were attributable to better-than-projected well performance from certain wells and higher weighted average oil and natural gas prices used to estimate proved reserves in 2017, as compared to 2016. The Company also added 6,482 MBOE in proved oil and natural gas reserves in 2017 as a result of purchases of minerals-in-place in the Delaware Basin. The Company’s proved developed oil and natural gas reserves increased to 68,651 MBOE at December 31, 2017 from 43,731 MBOE at December 31, 2016, 2015primarily due to proved developed reserves added as a result of drilling operations in the Wolfcamp and 2014.Bone Spring plays in the Delaware Basin. At December 31, 2017, the Company’s proved reserves were made up of approximately 57% oil and 43% natural gas and were approximately 45% proved developed and approximately 55% proved undeveloped.
The Company’s proved oil and natural gas reserves increased to 105,752 MBOE at December 31, 2016 from 85,127 MBOE at December 31, 2015. The Company’s proved oil and natural gas reserves increased by 30,805 MBOE and the Company produced 10,180 MBOE during the year ended December 31, 2016, resulting in a net increase of 20,625 MBOE. An increase of 41,992 MBOE in proved oil and natural gas reserves was a result of extensions and discoveries during the year, which was primarily attributable to drilling operations in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company’s proved oil and natural gas reserves decreased by 11,187 MBOE during 2016 as a result of the reclassification of proved undeveloped reserves to contingent resources, primarily due to the decline in weighted average commodity prices used to estimate proved reserves during 2016, as compared to 2015. The Company anticipates that these contingent resources may be reclassified to proved undeveloped reserves in future periods should the oil and natural gas prices used to estimate proved reserves improve from the prices at December 31, 2016. The Company’s proved developed oil and natural gas reserves increased to 43,731 MBOE at December 31, 2016 from 34,037 MBOE at December 31, 2015, primarily due to proved developed reserves added as a result of drilling operations in the Wolfcamp and Bone Spring plays in the Delaware Basin. At December 31, 2016, the Company’s proved reserves were made up of approximately 54% oil and 46% natural gas and were approximately 41% proved developed and approximately 59% proved undeveloped.
The Company’s proved oil and natural gas reserves increased to 85,127 MBOE at December 31, 2015 from 68,693 MBOE at December 31, 2014. The Company’s proved oil and natural gas reserves increased by 25,543 MBOE and the Company produced 9,109 MBOE during the year ended December 31, 2015, resulting in a net increase of 16,434 MBOE. An
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION — CONTINUED
December 31, 2016, 2015 and 2014
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES — Continued
increase of 39,135 MBOE in proved oil and natural gas reserves was a result of extensions and discoveries during the year, which was primarily attributable to drilling operations in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company’s proved oil and natural gas reserves decreased by 15,181 MBOE during the year as a result of revisions to previous estimates, primarily the removal of 1,935 MBbl of proved undeveloped oil reserves in the Eagle Ford shale play in South Texas in 2015, as well as the removal of approximately 64.3 Bcf, or 10,716 MBOE, of proved undeveloped natural gas reserves, primarily in the Haynesville shale in Northwest Louisiana, primarily resulting from the decline in commodity prices during 2015. The Company also purchased minerals in-place with proved reserves of 1,589 MBOE in 2015, primarily as part of the HEYCO Merger. The Company’s proved developed oil and natural gas reserves increased to 34,037 MBOE at December 31, 2015 from 31,185 MBOE at December 31, 2014, primarily due to proved developed reserves added as a result of drilling operations in the Wolfcamp and Bone Spring plays in the Delaware Basin and the Eagle Ford shale plus the conversion of previously undeveloped natural gas reserves in the Haynesville shale to proved developed reserves. At December 31, 2015, the Company’s proved reserves were made up of approximately 54% oil and 46% natural gas and were approximately 40% proved developed and approximately 60% proved undeveloped.
The Company’s proved oil and natural gas reserves increased to 68,693 MBOE at December 31, 2014 from 51,729 MBOE at December 31, 2013. The Company’s proved oil and natural gas reserves increased by 22,834 MBOE and the Company produced 5,870 MBOE during the year ended December 31, 2014, resulting in a net increase of 16,964 MBOE. An increase of 23,921 MBOE in proved oil and natural gas reserves was a result of extensions and discoveries during the year, which was primarily attributable to drilling operations in the Eagle Ford shale play in South Texas and in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas, plus additional proved undeveloped natural gas reserves identified on the Company’s properties in the Haynesville shale. The Company’s proved oil and natural gas reserves decreased by 1,169 MBOE during the year as a result of revisions to previous estimates, primarily downward revisions of proved undeveloped oil reserves on certain of the Company’s undeveloped locations in the Eagle Ford shale play in South Texas in 2014. The Company also purchased minerals in-place with proved reserves of 82 MBOE in 2014. The Company’s proved developed oil and natural gas reserves increased to 31,185 MBOE at December 31, 2014 from 17,168 MBOE at December 31, 2013, primarily due to proved developed reserves added as a result of drilling operations in the Eagle Ford shale and in the Wolfcamp and Bone Spring plays in the Delaware Basin plus the conversion of previously undeveloped natural gas reserves in the Haynesville shale to proved developed reserves. At December 31, 2014, the Company’s proved reserves were made up of approximately 35% oil and 65% natural gas and were approximately 45% proved developed and approximately 55% proved undeveloped.
Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Natural Gas Reserves
The standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves is not intended to provide an estimate of the replacement cost or fair market value of the Company’s oil and natural gas properties. An estimate of fair market value would also take into account, among other things, the recovery of reserves not presently classified as proved, anticipated future changes in prices and costs, potential improvements in industry technology and operating practices, the risks inherent in reserves estimates and perhaps different discount rates.
As noted previously, for the period from January through December 2016,2018, the unweighted, arithmetic averages of first-day-of-the-month oil and natural gas prices were $39.25$62.04 per Bbl and $2.48$3.10 per MMBtu, respectively. For the period from January through December 2015,2017, the comparable average oil and natural gas prices were $46.79$47.79 per Bbl and $2.59$2.98 per MMBtu, respectively. For the period from January through December 2014,2016, the comparable average oil and natural gas prices were $91.48$39.25 per Bbl and $4.35$2.48 per MMBtu, respectively.
Future net cash flows were computed by applying these oil and natural gas prices, adjusted for all associated transportation and gathering costs, gravity and energy content, and regional price differentials, to year-end quantities of proved oil and natural gas reserves and accounting for any future production and development costs associated with producing these reserves; neither prices nor costs were escalated with time in these computations.
Future income taxes were computed by applying the statutory tax rate to the excess of future net cash flows relating to proved oil and natural gas reserves less the tax basis of the associated properties. Tax credits and net operating loss carryforwards available to the Company were also considered in the computation of future income taxes. Future net cash flows after income taxes were discounted using a 10% annual discount rate to derive the standardized measure of discounted future net cash flows.
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
SUPPLEMENTAL OIL AND NATURAL GAS DISCLOSURES — Continued
The following table presents the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands).
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Future cash inflows | | $ | 2,684,877 |
| | $ | 2,461,131 |
| | $ | 3,197,317 |
| | $ | 8,822,004 |
| | $ | 5,249,116 |
| | $ | 2,684,877 |
|
| Future production costs | | (927,725 | ) | | (843,117 | ) | | (803,662 | ) | | (2,713,043 | ) | | (1,759,495 | ) | | (927,725 | ) |
| Future development costs | | (630,280 | ) | | (615,692 | ) | | (553,799 | ) | | (1,384,916 | ) | | (1,029,105 | ) | | (630,280 | ) |
| Future income tax expense | | (24,742 | ) | | (43,956 | ) | | (321,088 | ) | | (710,222 | ) | | (228,622 | ) | | (24,742 | ) |
| Future net cash flows | | 1,102,130 |
| | 958,366 |
| | 1,518,768 |
| | 4,013,823 |
| | 2,231,894 |
| | 1,102,130 |
|
| 10% annual discount for estimated timing of cash flows | | (527,087 | ) | | (429,185 | ) | | (605,449 | ) | | (1,763,210 | ) | | (973,248 | ) | | (527,087 | ) |
| Standardized measure of discounted future net cash flows | | $ | 575,043 |
| | $ | 529,181 |
| | $ | 913,319 |
| | $ | 2,250,613 |
| | $ | 1,258,646 |
| | $ | 575,043 |
|
The following table summarizes the changes in the standardized measure of discounted future net cash flows relating to proved oil and natural gas reserves for the years ended December 31, 2016, 20152018, 2017 and 20142016 (in thousands).
| | | | | Year Ended December 31, | | Year Ended December 31, |
| | | 2016 | | 2015 | | 2014 | | 2018 | | 2017 | | 2016 |
| Balance, beginning of period | | $ | 529,181 |
| | $ | 913,319 |
| | $ | 578,668 |
| | $ | 1,258,646 |
| | $ | 575,043 |
| | $ | 529,181 |
|
| Net change in sales and transfer prices and in production (lifting) costs related to future production | | (92,477 | ) | | (509,901 | ) | | 87,067 |
| | 574,381 |
| | 374,370 |
| | (92,477 | ) |
| Changes in estimated future development costs | | (74,142 | ) | | (145,861 | ) | | (150,447 | ) | | (347,038 | ) | | (298,504 | ) | | (74,142 | ) |
| Sales and transfers of oil and natural gas produced during the period | | (191,908 | ) | | (184,612 | ) | | (283,187 | ) | | (631,596 | ) | | (403,095 | ) | | (191,908 | ) |
| Purchases of reserves in place | | — |
| | 16,321 |
| | 1,838 |
| | 9,227 |
| | 97,225 |
| | — |
|
| Net change due to extensions and discoveries | | 360,033 |
| | 401,895 |
| | 537,472 |
| | 1,078,935 |
| | 677,681 |
| | 360,033 |
|
| Net change due to revisions in estimates of reserves quantities | | (95,917 | ) | | (285,823 | ) | | (26,263 | ) | | 175,440 |
| | 143,749 |
| | (95,917 | ) |
| Previously estimated development costs incurred during the period | | 84,519 |
| | 121,543 |
| | 187,459 |
| | 279,799 |
| | 151,974 |
| | 84,519 |
|
| Accretion of discount | | 51,779 |
| | 82,574 |
| | 65,518 |
| | 103,085 |
| | 54,623 |
| | 51,779 |
|
| Other | | (1,962 | ) | | 2,029 |
| | 5,492 |
| | 3,600 |
| | (3,929 | ) | | (1,962 | ) |
| Net change in income taxes | | 5,937 |
| | 117,697 |
| | (90,298 | ) | | (253,866 | ) | | (110,491 | ) | | 5,937 |
|
| Standardized measure of discounted future net cash flows | | $ | 575,043 |
| | $ | 529,181 |
| | $ | 913,319 |
| | $ | 2,250,613 |
| | $ | 1,258,646 |
| | $ | 575,043 |
|
Matador Resources Company and Subsidiaries
UNAUDITED SUPPLEMENTARY INFORMATION — CONTINUED
December 31, 2016, 20152018, 2017 and 20142016
SELECTED QUARTERLY FINANCIAL INFORMATION
The following table presents selected unaudited quarterly financial information for 20162018 (in thousands, except per share data).
|
| | | | | | | | | | | | | | | | |
| | | December 31 | | September 30 | | June 30 | | March 31 |
| 2016 | | | | | | | | |
| Oil and natural gas revenues | | $ | 94,815 |
| | $ | 83,079 |
| | $ | 69,336 |
| | $ | 43,926 |
|
| Third-party midstream services revenues | | 2,261 |
| | 1,566 |
| | 918 |
| | 473 |
|
| Realized (loss) gain on derivatives | | (1,127 | ) | | 885 |
| | 2,465 |
| | 7,063 |
|
| Unrealized (loss) gain on derivatives | | (10,977 | ) | | 3,203 |
| | (26,625 | ) | | (6,839 | ) |
Expenses (1) | | 76,753 |
| | 71,879 |
| | 146,705 |
| | 146,252 |
|
Other income (expense) (2) | | 96,196 |
| | (5,948 | ) | | (5,136 | ) | | (6,038 | ) |
| Income (loss) before income taxes | | 104,415 |
| | 10,906 |
| | (105,747 | ) | | (107,667 | ) |
| Income tax provision (benefit) | | 105 |
| | (1,141 | ) | | — |
| | — |
|
| Net income (loss) | | 104,310 |
| | 12,047 |
| | (105,747 | ) | | (107,667 | ) |
| Net (income) loss attributable to non-controlling interest in subsidiaries | | (155 | ) | | (116 | ) | | (106 | ) | | 13 |
|
Net income (loss) attributable to
Matador Resources Company shareholders | | $ | 104,155 |
| | $ | 11,931 |
| | $ | (105,853 | ) | | $ | (107,654 | ) |
| Earnings (loss) per common share | | | | | | | | |
| Basic | | $ | 1.10 |
| | $ | 0.13 |
| | $ | (1.15 | ) | | $ | (1.26 | ) |
| Diluted | | $ | 1.09 |
| | $ | 0.13 |
| | $ | (1.15 | ) | | $ | (1.26 | ) |
|
| | | | | | | | | | | | | | | | |
| | | December 31 | | September 30 | | June 30 | | March 31 |
| 2018 | | | | | | | | |
| Oil and natural gas revenues | | $ | 193,445 |
| | $ | 216,282 |
| | $ | 209,019 |
| | $ | 181,954 |
|
| Third-party midstream services revenues | | 8,636 |
| | 6,809 |
| | 3,407 |
| | 3,068 |
|
| Sales of purchased gas | | 7,071 |
| | — |
| | — |
| | — |
|
| Lease bonus - mineral acreage | | 2,489 |
| | — |
| | — |
| | — |
|
| Realized gain (loss) on derivatives | | 3,656 |
| | 5,424 |
| | (2,488 | ) | | (4,258 | ) |
| Unrealized gain (loss) on derivatives | | 74,577 |
| | (21,337 | ) | | 1,429 |
| | 10,416 |
|
| Expenses | | 141,811 |
| | 139,325 |
| | 137,374 |
| | 117,818 |
|
| Other expense | | (11,666 | ) | | (42,738 | ) | | (8,356 | ) | | (8,438 | ) |
| Income before income taxes | | 136,397 |
| | 25,115 |
| | 65,637 |
| | 64,924 |
|
| Income tax benefit | | (7,691 | ) | | — |
| | — |
| | — |
|
| Net income | | 144,088 |
| | 25,115 |
| | 65,637 |
| | 64,924 |
|
| Net income attributable to non-controlling interest in subsidiaries | | (7,375 | ) | | (7,321 | ) | | (5,831 | ) | | (5,030 | ) |
Net income attributable to
Matador Resources Company shareholders | | $ | 136,713 |
| | $ | 17,794 |
| | $ | 59,806 |
| | $ | 59,894 |
|
| Earnings per common share | | | | | | | | |
| Basic | | $ | 1.18 |
| | $ | 0.15 |
| | $ | 0.53 |
| | $ | 0.55 |
|
| Diluted | | $ | 1.17 |
| | $ | 0.15 |
| | $ | 0.53 |
| | $ | 0.55 |
|
__________________
| |
(1) | Expenses for June 30 and March 31, 2016 included full-cost ceiling impairment charges of $78.2 million, and $80.5 million, respectively. |
| |
(2) | Other income (expense) for December 31, 2016 included gain on the sale of the Loving County Processing System of $104.1 million. See Note 5. |
The following table presents selected unaudited quarterly financial information for 20152017 (in thousands, except per share data). | | | | | December 31 | | September 30 | | June 30 | | March 31 | | December 31 | | September 30 | | June 30 | | March 31 |
| 2015 | | | | | | | | | |
| 2017 | | | | | | | | | |
| Oil and natural gas revenues | | $ | 56,212 |
| | $ | 71,815 |
| | $ | 87,848 |
| | $ | 62,465 |
| | $ | 165,125 |
| | $ | 134,948 |
| | $ | 113,764 |
| | $ | 114,847 |
|
| Third-party midstream services revenues | | 480 |
| | 569 |
| | 464 |
| | 351 |
| | 3,326 |
| | 3,218 |
| | 2,099 |
| | 1,555 |
|
| Realized gain on derivatives | | 24,948 |
| | 19,862 |
| | 13,780 |
| | 18,504 |
| |
| Realized (loss) gain on derivatives | | | (3,145 | ) | | 485 |
| | 558 |
| | (2,219 | ) |
| Unrealized (loss) gain on derivatives | | (13,909 | ) | | 6,733 |
| | (23,532 | ) | | (8,557 | ) | | (11,734 | ) | | (12,372 | ) | | 13,190 |
| | 20,631 |
|
Expenses (1) | | 290,751 |
| | 367,633 |
| | 319,140 |
| | 147,171 |
| | 112,547 |
| | 99,730 |
| | 90,622 |
| | 80,536 |
|
| Other expense | | 5,599 |
| | 6,665 |
| | 5,786 |
| | 2,180 |
| | (6,741 | ) | | (8,570 | ) | | (7,302 | ) | | (8,378 | ) |
| Loss before income taxes | | (228,619 | ) | | (275,319 | ) | | (246,366 | ) | | (76,588 | ) | |
| Income tax provision (benefit) | | 1,677 |
| | (33,305 | ) | | (89,350 | ) | | (26,390 | ) | |
| Net loss | | (230,296 | ) | | (242,014 | ) | | (157,016 | ) | | (50,198 | ) | |
| Income before income taxes | | | 34,284 |
| | 17,979 |
| | 31,687 |
| | 45,900 |
|
| Income tax benefit | | | (8,157 | ) | | — |
| | — |
| | — |
|
| Net income | | | 42,441 |
| | 17,979 |
| | 31,687 |
| | 45,900 |
|
| Net income attributable to non-controlling interest in subsidiaries | | (105 | ) | | (45 | ) | | (75 | ) | | (36 | ) | | (4,106 | ) | | (2,940 | ) | | (3,178 | ) | | (1,916 | ) |
Net loss attributable to
Matador Resources Company shareholders | | $ | (230,401 | ) | | $ | (242,059 | ) | | $ | (157,091 | ) | | $ | (50,234 | ) | |
| Loss per common share attributable to Matador Resources Company shareholders | | | | | | | | | |
Net income attributable to
Matador Resources Company shareholders | | | $ | 38,335 |
| | $ | 15,039 |
| | $ | 28,509 |
| | $ | 43,984 |
|
| Earnings per common share | | | | | | | | | |
| Basic | | $ | (2.72 | ) | | $ | (2.86 | ) | | $ | (1.89 | ) | | $ | (0.68 | ) | | $ | 0.36 |
| | $ | 0.15 |
| | $ | 0.28 |
| | $ | 0.44 |
|
| Diluted | | $ | (2.72 | ) | | $ | (2.86 | ) | | $ | (1.89 | ) | | $ | (0.68 | ) | | $ | 0.35 |
| | $ | 0.15 |
| | $ | 0.28 |
| | $ | 0.44 |
|
__________________
| |
(1) | Expenses for December 31, September 30, June 30 and March 31, 2015 included full-cost ceiling impairment charges of $219.4 million, $285.7 million, $229.0 million and $67.1 million, respectively. |
