10-Q 1 mtdr-2013930x10q.htm 10-Q MTDR-2013.9.30-10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________________________________ 
FORM 10-Q
 _________________________________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 001-35410
 _________________________________________________________  
Matador Resources Company
(Exact name of registrant as specified in its charter)
  _________________________________________________________ 
 
Texas
27-4662601
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
5400 LBJ Freeway, Suite 1500
Dallas, Texas
75240
(Address of principal executive offices)
(Zip Code)
(972) 371-5200
(Registrant’s telephone number, including area code)
 _________________________________________________________  
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.     x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
¨
 
Accelerated filer
 
x
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
As of November 7, 2013, there were 65,633,487 shares of the registrant’s common stock, par value $0.01 per share, outstanding.



MATADOR RESOURCES COMPANY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2013
INDEX
 
Page



Part I – FINANCIAL INFORMATION
Item 1. Financial Statements
Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands, except par value and share data)
 
September 30,
2013
 
December 31,
2012
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
6,330

 
$
2,095

Certificates of deposit
40

 
230

Accounts receivable
 
 
 
Oil and natural gas revenues
26,722

 
24,422

Joint interest billings
2,600

 
4,118

Other
1,077

 
974

Derivative instruments
1,037

 
4,378

Deferred income taxes
1,948

 

Lease and well equipment inventory
687

 
877

Prepaid expenses
3,250

 
1,103

Total current assets
43,691

 
38,197

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
951,736

 
763,527

Unproved and unevaluated
213,084

 
149,675

Other property and equipment
29,219

 
27,258

Less accumulated depletion, depreciation and amortization
(445,193
)
 
(349,370
)
Net property and equipment
748,846

 
591,090

Other assets
 
 
 
Derivative instruments
995

 
771

Deferred income taxes

 
411

Other assets
2,288

 
1,560

Total other assets
3,283

 
2,742

Total assets
$
795,820

 
$
632,029

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
20,280

 
$
28,120

Accrued liabilities
50,048

 
59,179

Royalties payable
10,352

 
6,541

Derivative instruments
4,178

 
670

Advances from joint interest owners
10

 
1,515

Income taxes payable
980

 

Deferred income taxes

 
411

Other current liabilities
87

 
56

Total current liabilities
85,935

 
96,492

Long-term liabilities
 
 
 
Borrowings under Credit Agreement
145,000

 
150,000

Asset retirement obligations
6,147

 
5,109

Deferred income taxes
3,609

 

Other long-term liabilities
2,463

 
1,324

Total long-term liabilities
157,219

 
156,433

Commitments and contingencies (Note 10)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 80,000,000 shares authorized; 66,927,261 and 56,778,718 shares issued; and 65,625,418 and 55,577,667 shares outstanding, respectively
670

 
568

Additional paid-in capital
548,051

 
404,311

Retained earnings (deficit)
14,710

 
(15,010
)
Treasury stock, at cost, 1,301,843 and 1,201,051 shares, respectively
(10,765
)
 
(10,765
)
Total shareholders’ equity
552,666

 
379,104

Total liabilities and shareholders’ equity
$
795,820

 
$
632,029


The accompanying notes are an integral part of these financial statements.
3


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Oil and natural gas revenues
$
81,868

 
$
38,008

 
$
199,367

 
$
103,250

Realized (loss) gain on derivatives
(1,165
)
 
3,371

 
(519
)
 
11,147

Unrealized loss on derivatives
(9,327
)
 
(12,993
)
 
(6,626
)
 
(1,149
)
Total revenues
71,376

 
28,386

 
192,222

 
113,248

Expenses
 
 
 
 
 
 
 
Production taxes and marketing
6,559

 
2,822

 
15,107

 
7,605

Lease operating
8,569

 
6,491

 
29,608

 
17,511

Depletion, depreciation and amortization
26,127

 
21,680

 
74,593

 
52,799

Accretion of asset retirement obligations
86

 
59

 
248

 
170

Full-cost ceiling impairment

 
3,596

 
21,229

 
36,801

General and administrative
5,395

 
3,439

 
14,146

 
11,321

Total expenses
46,736

 
38,087

 
154,931

 
126,207

Operating income (loss)
24,640

 
(9,701
)
 
37,291

 
(12,959
)
Other income (expense)
 
 
 
 
 
 
 
Net loss on asset sales and inventory impairment

 

 
(192
)
 
(60
)
Interest expense
(2,038
)
 
(144
)
 
(4,919
)
 
(453
)
Interest and other income
66

 
55

 
181

 
157

Total other expense
(1,972
)
 
(89
)
 
(4,930
)
 
(356
)
Income (loss) before income taxes
22,668

 
(9,790
)
 
32,361

 
(13,315
)
Income tax provision (benefit)
 
 
 
 
 
 
 
Current
902

 
188

 
980

 
188

Deferred
1,661

 
(781
)
 
1,661

 
(1,430
)
Total income tax provision (benefit)
2,563

 
(593
)
 
2,641

 
(1,242
)
Net income (loss)
$
20,105

 
$
(9,197
)
 
$
29,720

 
$
(12,073
)
Earnings (loss) per common share

 

 

 

Basic

 

 

 

Class A
$
0.35

 
$
(0.17
)
 
$
0.53

 
$
(0.23
)
Class B
$

 
$

 
$

 
$
(0.03
)
Diluted

 

 

 

Class A
$
0.35

 
$
(0.17
)
 
$
0.53

 
$
(0.23
)
Class B
$

 
$

 
$

 
$
(0.03
)
Weighted average common shares outstanding

 

 

 

Basic

 

 

 

Class A
58,016

 
55,271

 
55,766

 
53,379

Class B

 

 

 
140

Total
58,016

 
55,271

 
55,766

 
53,519

Diluted

 

 

 

Class A
58,152

 
55,271

 
55,889

 
53,379

Class B

 

 

 
140

Total
58,152

 
55,271

 
55,889

 
53,519


The accompanying notes are an integral part of these financial statements.
4


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED
(In thousands)
For the Nine Months Ended September 30, 2013
 
Common Stock
 
Additional
Paid-In Capital
 
Retained (Deficit) Earnings
 
Treasury Stock
 
 
 
Shares
 
Amount
 
 
 
Shares
 
Amount
 
Total
Balance at January 1, 2013
56,779

 
$
568

 
$
404,311

 
$
(15,010
)
 
1,201

 
$
(10,765
)
 
$
379,104

Issuance of common stock
9,778

 
98

 
148,971

 

 

 

 
149,069

Cost to issue equity

 

 
(7,389
)
 

 

 

 
(7,389
)
Common stock issued to Board advisors
16

 

 
38

 

 

 

 
38

Stock options expense related to equity based awards

 

 
882

 

 

 

 
882

Liability based stock option awards settled

 

 
114

 

 

 

 
114

Restricted stock issued
354

 
4

 
(4
)
 

 

 

 

Restricted stock forfeited

 

 
(22
)
 

 
101

 

 
(22
)
Restricted stock and restricted stock units expense

 

 
1,150

 

 

 

 
1,150

Current period net income

 

 

 
29,720

 

 

 
29,720

Balance at September 30, 2013
66,927

 
$
670

 
$
548,051

 
$
14,710

 
1,302

 
$
(10,765
)
 
$
552,666


The accompanying notes are an integral part of these financial statements.
5


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
 
Nine Months Ended 
 September 30,
 
2013
 
2012
Operating activities

 

Net income (loss)
$
29,720

 
$
(12,073
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities

 

Unrealized loss on derivatives
6,626

 
1,149

Depletion, depreciation and amortization
74,593

 
52,799

Accretion of asset retirement obligations
248

 
170

Full-cost ceiling impairment
21,229

 
36,801

Stock-based compensation expense
2,763

 
(223
)
Deferred income tax provision (benefit)
1,661

 
(1,430
)
Net loss on asset sales and inventory impairment
192

 
60

Changes in operating assets and liabilities

 

Accounts receivable
(886
)
 
(8,718
)
Lease and well equipment inventory
198

 
(285
)
Prepaid expenses
(2,148
)
 
179

Other assets
(728
)
 
(650
)
Accounts payable, accrued liabilities and other current liabilities
(10,702
)
 
6,105

Royalties payable
3,812

 
4,065

Advances from joint interest owners
(1,505
)
 
1,782

Income taxes payable
980

 
188

Other long-term liabilities
1,139

 
406

Net cash provided by operating activities
127,192

 
80,325

Investing activities

 

Oil and natural gas properties capital expenditures
(257,216
)
 
(212,702
)
Expenditures for other property and equipment
(3,058
)
 
(5,297
)
Purchases of certificates of deposit
(61
)
 
(416
)
Maturities of certificates of deposit
251

 
1,485

Net cash used in investing activities
(260,084
)
 
(216,930
)
Financing activities

 

Repayments of borrowings under Credit Agreement
(130,000
)
 
(123,000
)
Borrowings under Credit Agreement
125,000

 
116,000

Proceeds from issuance of common stock
149,069

 
146,510

Swing sale profit contribution

 
24

Cost to issue equity
(6,933
)
 
(11,599
)
Proceeds from stock options exercised

 
2,660

Taxes paid related to net share settlement of stock-based compensation
(9
)
 

Payment of dividends - Class B

 
(96
)
Net cash provided by financing activities
137,127

 
130,499

Increase (decrease) in cash
4,235

 
(6,106
)
Cash at beginning of period
2,095

 
10,284

Cash at end of period
$
6,330

 
$
4,178

Supplemental disclosures of cash flow information (Note 11)
 
 
 

The accompanying notes are an integral part of these financial statements.
6


Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS
Matador Resources Company (“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 Eagle Ford shale play in South Texas and the Wolfcamp and Bone Spring plays in the Permian Basin in Southeast New Mexico and West Texas. The Company also operates in the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. In addition, the Company has a large exploratory leasehold position in Southwest Wyoming and adjacent areas of Utah and Idaho where it is testing the Meade Peak shale.
On November 22, 2010, the company formerly known as Matador Resources Company, a Texas corporation founded on July 3, 2003, formed a wholly-owned subsidiary, Matador Holdco, Inc. Pursuant to the terms of a corporate reorganization that was completed on August 9, 2011, the former Matador Resources Company became a wholly-owned subsidiary of Matador Holdco, Inc. and changed its corporate name to MRC Energy Company, and Matador Holdco, Inc. changed its corporate name to Matador Resources Company.
MRC Energy Company holds the primary assets of the Company and has four wholly-owned subsidiaries: Matador Production Company, MRC Permian Company, MRC Rockies Company and Longwood Gathering and Disposal Systems GP, Inc. Matador Production Company serves as the oil and natural gas operating entity. MRC Permian Company conducts oil and natural gas exploration and development activities in Southeast New Mexico and West Texas. MRC Rockies Company conducts oil and natural gas exploration and development activities in the Rocky Mountains and specifically in the states of Wyoming, Utah and Idaho. Longwood Gathering and Disposal Systems GP, Inc. serves as the general partner of Longwood Gathering and Disposal Systems, LP, which owns a majority of the pipeline systems and salt water disposal wells used in the Company’s operations, transports limited quantities of third-party natural gas and disposes of limited quantities of third-party salt water.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements, Basis of Presentation, Consolidation and Significant Estimates
The unaudited condensed consolidated financial statements of Matador and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) but do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC (the “Annual Report”). All intercompany accounts and transactions have been eliminated in consolidation. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair presentation of the Company’s consolidated financial position as of September 30, 2013, consolidated results of operations for the three and nine months ended September 30, 2013 and 2012, consolidated changes in shareholders’ equity for the nine months ended September 30, 2013 and consolidated cash flows for the nine months ended September 30, 2013 and 2012. Certain reclassifications have been made to prior period items to conform to the current period presentation. These reclassifications had no effect on previously reported results of operations, cash flows or retained earnings. Amounts as of December 31, 2012 are derived from the audited consolidated financial statements in the Annual Report.
Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown in this report are not necessarily indicative of results to be expected for the full year due in part to volatility in oil, natural gas and natural gas liquids prices, global economic and financial market conditions, interest rates, access to sources of liquidity, estimates of reserves, drilling risks, geological risks, transportation restrictions, oil, natural gas and natural gas liquids supply and demand, market competition and interruptions of production.

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 and the reported amounts of revenues and expenses during the reporting period. The Company’s consolidated financial statements are based on a number of significant estimates, including accruals for oil and natural gas revenues, accrued assets and liabilities primarily related to oil and natural gas operations, stock-based compensation, valuation of derivative instruments 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

7

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

accruals. 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.
 
Property and Equipment
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 exploration and development activities, but do not include any costs related to production, selling or general corporate administrative activities. The Company capitalized approximately $2.3 million and $1.7 million of its general and administrative costs for the nine months ended September 30, 2013 and 2012, respectively. The Company capitalized approximately $1.2 million and $1.0 million of its interest expense for the nine months ended September 30, 2013 and 2012, respectively.
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, with any excess above the cost center ceiling charged to operations as a full-cost ceiling impairment. The need for a full-cost ceiling impairment is assessed on a quarterly basis. The cost center ceiling is defined as the sum of (a) the present value discounted at 10 percent of future net revenues of proved oil and natural gas 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) income tax effects related to the properties involved. Future net revenues from proved non-producing and proved undeveloped reserves are reduced by the estimated costs for developing these reserves. The fair value of the Company’s derivative instruments is not included in the ceiling test computation 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 on the commodity prices used in these estimates. These estimates are determined in accordance with guidelines established by the SEC for estimating and reporting oil and natural gas reserves. 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.
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 October 2012 through September 2013, these average oil and natural gas prices were $91.69 per Bbl and $3.605 per MMBtu (million British thermal units), respectively. For the period from October 2011 through September 2012, these average oil and natural gas prices were $91.48 per Bbl and $2.826 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 adjusted by property for quality, transportation and marketing fees and regional price differentials, and the average natural gas prices were adjusted by property for energy content, transportation and marketing fees and regional price differentials. At September 30, 2013 and 2012, the Company’s oil and natural gas reserves estimates 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.

Using the average commodity prices, as adjusted, to determine the Company’s estimated proved oil and natural gas reserves at September 30, 2013, the Company’s net capitalized costs less related deferred income taxes did not exceed the full-cost ceiling. As a result, the Company recorded no impairment to its net capitalized costs for the three months ended September 30, 2013. At March 31, 2013, the Company’s net capitalized costs less related deferred income taxes exceeded the full-cost ceiling by $13.7 million. The Company recorded an impairment charge of $21.2 million to its net capitalized costs and a deferred income tax credit of $7.5 million for the three months ended March 31, 2013. These charges are reflected in the Company’s unaudited condensed consolidated statement of operations for the nine months ended September 30, 2013. Using the average commodity prices, as adjusted, to determine the Company’s estimated proved oil and natural gas reserves at June 30, 2012 and September 30, 2012, the Company’s net capitalized costs less related deferred income taxes exceeded the full-cost ceiling by $21.3 million and $2.3 million, respectively. The Company recorded an impairment charge of $33.2 million and $3.6 million to its net capitalized costs and a deferred income tax credit of $11.9 million and $1.3 million, related to the full-cost

8

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

ceiling limitation at June 30, 2012 and September 30, 2012, respectively. These charges are reflected in the Company's unaudited condensed consolidated statement of operations for the nine months ended September 30, 2012. Changes in oil and natural gas production rates, reserves estimates, future development costs and other factors will determine the Company’s actual ceiling test computation and impairment analyses in future periods.
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 sheet, as well as the corresponding consolidated shareholders’ equity, but it has no impact on the Company’s consolidated net cash flows as reported.
 
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. Dry holes are included in the amortization base immediately upon determination that the well is not productive.

Earnings Per Common Share
The Company reports basic earnings per common share, which excludes the effect of potentially dilutive securities, and diluted earnings per common share, which includes the effect of all potentially dilutive securities, unless their impact is anti-dilutive.
Prior to the consummation of the Company’s initial public offering in February 2012, the Company had issued two classes of common stock, Class A and Class B. The holders of the Class B shares were entitled to be paid cumulative dividends at a per share rate of $0.26-2/3 annually out of funds legally available for the payment of dividends. These dividends were accrued and paid quarterly. Dividends declared during the nine months ended September 30, 2013 and 2012 totaled zero and $27,643, respectively. Class B dividends declared during the fourth quarter of 2011 and the first quarter of 2012 were paid during the first quarter of 2012 totaling $96,356. As of September 30, 2013, the Company had not paid any dividends to holders of the Class A shares. Concurrent with the completion of the Company’s initial public offering, all 1,030,700 shares of the Company’s Class B common stock were converted to Class A common stock on a one-for-one basis. The Class A common stock is now referred to as the common stock.
The following are reconciliations of the numerators and denominators used to compute the Company’s basic and diluted distributed and undistributed earnings (loss) per common share as reported for the three and nine months ended September 30, 2013 and 2012 (in thousands, except per share data).

9

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
2013
 
2012
 
2013
 
2012
Net income (loss) - numerator
 
 
 
 
 
 
 
Net income (loss)
$
20,105

 
$
(9,197
)
 
$
29,720

 
$
(12,073
)
Less dividends to Class B shareholders - distributed earnings

 

 

 
(28
)
Undistributed earnings (loss)
$
20,105

 
$
(9,197
)
 
$
29,720

 
$
(12,101
)
Weighted average common shares outstanding - denominator
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Class A
58,016

 
55,271

 
55,766

 
53,379

Class B

 

 

 
140

Total
58,016

 
55,271

 
55,766

 
53,519

Diluted
 
 
 
 
 
 
 
Class A
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic earnings


 


 
 
 
 
                             (loss) per share
58,016

 
55,271

 
55,766

 
53,379

Dilutive effect of options and restricted stock units
136

 

 
123

 

Class A weighted average common shares outstanding - diluted
58,152

 
55,271

 
55,889

 
53,379

Class B
 
 
 
 
 
 
 
Weighted average common shares outstanding - no associated


 
 
 
 
 
 
                             dilutive shares

 

 

 
140

Total diluted weighted average common shares outstanding
58,152

 
55,271

 
55,889

 
53,519

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
2013
 
2012
 
2013
 
2012
Earnings (loss) per common share
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
Class A
 
 
 
 
 
 
 
Distributed earnings
$

 
$

 
$

 
$

Undistributed earnings (loss)
$
0.35

 
$
(0.17
)
 
$
0.53

 
$
(0.23
)
Total
$
0.35

 
$
(0.17
)
 
$
0.53

 
$
(0.23
)
Class B
 
 
 
 
 
 
 
Distributed earnings
$

 
$

 
$

 
$
0.20

Undistributed loss
$

 
$

 
$

 
$
(0.23
)
Total
$

 
$

 
$

 
$
(0.03
)
Diluted
 
 
 
 
 
 
 
Class A
 
 
 
 
 
 
 
Distributed earnings
$

 
$

 
$

 
$

Undistributed earnings (loss)
$
0.35

 
$
(0.17
)
 
$
0.53

 
$
(0.23
)
Total
$
0.35

 
$
(0.17
)
 
$
0.53

 
$
(0.23
)
Class B
 
 
 
 
 
 
 
Distributed earnings
$

 
$

 
$

 
$
0.20

Undistributed loss
$

 
$

 
$

 
$
(0.23
)
Total
$

 
$

 
$

 
$
(0.03
)
A total of 1,085,152 options to purchase shares of the Company’s Class A common stock and 151,051 restricted stock units were excluded from the calculations above for the three and nine months ended September 30, 2012, because their effects were anti-dilutive. Additionally, 233,349 restricted shares, which are participating securities, were excluded from the calculations above for the three and nine months ended September 30, 2012, as these security holders do not have the obligation to share in the losses of the Company.

10

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Fair Value Measurements
The Company measures and reports certain 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). The Company follows Financial Accounting Standards Board (“FASB”) guidance establishing a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value.
Recent Accounting Pronouncements
Balance Sheet. In January 2013, the FASB issued Accounting Standards Update, or ASU, 2013-01, Balance Sheet. The ASU clarifies the scope of ASU 2011-11 to limit the application of ASU 2011-11 to derivatives accounted for in accordance with Accounting Standards Codification, or ASC, 815, Derivatives and Hedging, including bifurcated embedded derivatives, repurchase and reverse repurchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with ASC 210-20-45 or ASC 815-10-45 or subject to an enforceable master netting arrangement or similar agreement. The Company adopted ASU 2013-01 effective January 1, 2013, together with the adoption of ASU 2011-11. The adoption of ASUs 2013-01 and 2011-11 did not have a material effect on the Company’s consolidated financial statements but did require certain additional disclosures (see Note 8).
Balance Sheet. In December 2011, the FASB issued ASU 2011-11, Balance Sheet. The requirements amend the disclosure requirements related to offsetting in ASC 210-20-50. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative instruments that are either (1) offset in accordance with either ASC 210-20-45 or ASC 815-10-45 or (2) subject to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with either ASC 210-20-45 or ASC 815-10-45. The Company adopted ASU 2011-11 effective January 1, 2013, together with the adoption of ASU 2013-01. The adoption of ASUs 2011-11 and 2013-01 did not have a material effect on the Company’s consolidated financial statements but did require certain additional disclosures (see Note 8).

11

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 3 - COMMON STOCK
On September 10, 2013, the Company completed a public offering of 9,775,000 shares of its common stock, including 1,275,000 shares issued pursuant to the underwriters' exercise of their option to purchase additional shares. After deducting underwriting discounts, commissions and direct offering costs totaling approximately $7.4 million, the Company received net proceeds of approximately $141.7 million. The Company used a portion of the net proceeds to repay $130.0 million in outstanding borrowings under its Credit Agreement (see Note 5) in September 2013, which amounts may be reborrowed in accordance with the terms of that facility. The remaining $11.7 million of the offering net proceeds was used to fund working capital requirements.

NOTE 4 - ASSET RETIREMENT OBLIGATIONS
The following table summarizes the changes in the Company’s asset retirement obligations for the nine months ended September 30, 2013 (in thousands).
 
 
Beginning asset retirement obligations
$
5,769

Liabilities incurred during period
417

Liabilities settled during period
(57
)
Revisions in estimated cash flows
533

Accretion expense
248

Ending asset retirement obligations
6,910

Less: current asset retirement obligations(1)
(763
)
Long-term asset retirement obligations
$
6,147

 _______________
(1) 
Included in accrued liabilities in the Company’s unaudited condensed consolidated balance sheet at September 30, 2013.
NOTE 5 - REVOLVING CREDIT AGREEMENT
On September 28, 2012, the Company amended and restated its revolving credit agreement. This third amended and restated credit agreement (the “Credit Agreement”) increased the maximum facility amount from $400.0 million to $500.0 million. The Credit Agreement matures December 29, 2016. MRC Energy Company is the borrower under the Credit Agreement. Borrowings are secured by mortgages on substantially all of the Company’s oil and natural gas properties and by the equity interests of all of MRC Energy Company’s wholly-owned subsidiaries, which are also guarantors. In addition, all obligations under the Credit Agreement are guaranteed by Matador Resources Company, 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 the 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. During the first quarter of 2013, the lenders completed their review of the Company’s proved oil and natural gas reserves at December 31, 2012, and on March 11, 2013, the borrowing base was increased from $215.0 million to $255.0 million. In connection with this borrowing base redetermination, the conforming borrowing base was increased to $220.0 million. At that time, the Company also amended the Credit Agreement to include Capital One, N.A., BMO Harris Financing, Inc. (Bank of Montreal) and IberiaBank in the Company’s lending group, which also includes RBC, as administrative agent, Comerica Bank, Citibank, N.A., The Bank of Nova Scotia and SunTrust Bank. This March 11, 2013 redetermination constituted the regularly scheduled May 1 redetermination. In late April 2013, the Company requested an unscheduled redetermination of the borrowing base, and on June 4, 2013, the borrowing base was increased from $255.0 million to $280.0 million.

On August 7, 2013, the borrowing base under the Credit Agreement was increased to $350.0 million and the conforming borrowing base was increased to $275.0 million. At that time, the Company amended the Credit Agreement to provide that the borrowing base will automatically be reduced to the conforming borrowing base at the earlier of (i) June 30, 2014 or (ii) concurrent with the issuance by the Company of senior unsecured notes in an amount greater than or equal to $10.0 million.

12

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 5 - REVOLVING CREDIT AGREEMENT - Continued


This August redetermination constituted the regularly scheduled November 1 redetermination. The Company may request one additional unscheduled redetermination of its borrowing base prior to the next scheduled redetermination.
In the event of a borrowing base increase, 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. If, upon a redetermination or the automatic reduction of the borrowing base to the conforming borrowing base, the borrowing base were to be less than the outstanding borrowings under the Credit Agreement at any 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.
 
In connection with the March, June and August 2013 borrowing base redeterminations, the Company incurred $1.1 million of additional deferred loan costs. These costs were included with the remaining unamortized balance of the deferred loan costs incurred previously. As a result, total deferred loan costs were $2.3 million at September 30, 2013, and these costs are being amortized over the term of the agreement, which approximates the amortization of these costs using the effective interest method. On September 12, 2013, using a portion of the net proceeds from its public equity offering, the Company repaid $130.0 million of its outstanding borrowings under the Credit Agreement. At September 30, 2013, the Company had $145.0 million in borrowings outstanding under the Credit Agreement and approximately $0.3 million in outstanding letters of credit issued pursuant to the Credit Agreement. At September 30, 2013, the outstanding borrowings bore interest at an effective interest rate of approximately 4.0% per annum. Subsequent to September 30, 2013, the Company borrowed an additional $15.0 million to fund a portion of its working capital requirements and the acquisition of additional leasehold interests. At November 7, 2013, the Company had $160.0 million in borrowings outstanding under the Credit Agreement and approximately $0.3 million in outstanding letters of credit issued pursuant to the Credit Agreement.
If the Company borrows funds as a base rate loan, such borrowings will bear interest at a rate equal to the higher of (i) the prime rate for such day or (ii) the Federal Funds Effective Rate on such day, plus 0.50% or (iii) the daily adjusting LIBOR rate plus 1.0% plus, in each case, an amount from 0.75% to 3.00% of such outstanding loan depending on the level of borrowings under the agreement. If the Company borrows funds as a Eurodollar loan, such borrowings will bear interest at a rate equal to (i) the quotient obtained by dividing (A) the LIBOR rate by (B) a percentage equal to 100% minus the maximum rate during such interest calculation period at which RBC is required to maintain reserves on Eurocurrency Liabilities (as defined in Regulation D of the Board of Governors of the Federal Reserve System) plus (ii) an amount from 1.75% to 4.00% of such outstanding loan 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. A commitment fee of 0.375% to 0.50%, depending on the unused availability 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 as interest expense and in its interest rate calculations and related disclosures. Key financial covenants under the Credit Agreement require the Company to maintain (1) a current ratio, which is defined as consolidated total current assets plus the unused availability under the Credit Agreement divided by consolidated total current liabilities, of 1.0 or greater measured at the end of each fiscal quarter beginning June 30, 2014 and (2) a debt to EBITDA ratio, which is defined as total debt outstanding divided by a rolling four quarter EBITDA calculation, of 4.0 or less.
Subject to certain exceptions, the Credit Agreement contains various covenants that limit the Company’s ability to take certain actions, including, but not limited to, the following:
incur indebtedness or grant liens on any of its 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; and
engage in certain asset dispositions, including a sale of all or substantially all of its assets.
 


13

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 5 - REVOLVING CREDIT AGREEMENT - Continued


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:
failure to pay any principal or interest on the notes 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; and
a change of control, as defined in the Credit Agreement.
At September 30, 2013, the Company believes that it was in compliance with the terms of its Credit Agreement.
NOTE 6 - INCOME TAXES
The Company had an effective tax rate of 11.3% and 8.2% for the three and nine months ended September 30, 2013, respectively. Total income tax expense for the three and nine months ended September 30, 2013 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to the reversal of a valuation allowance of approximately $6.7 million on the Company's federal deferred tax assets at September 30, 2013, as the Company's federal deferred tax liabilities exceeded its federal deferred tax assets at September 30, 2013, and the impact of permanent differences between book and taxable income. The Company had a net loss for the three and nine months ended September 30, 2012.
NOTE 7 - STOCK-BASED COMPENSATION
In March 2013, the Company granted awards of options to purchase 507,500 and 284,292 shares of the Company’s common stock at exercise prices of $8.21 per share and $8.18 per share, respectively, to certain of its employees. The fair value of these awards was approximately $2.8 million. The Company also granted awards of 324,771 shares of restricted stock to certain of its employees in March 2013. The fair value of these restricted stock awards was approximately $2.4 million. All of these awards vest over a term of three or four years.
In February 2013, options to purchase 408,000 shares of the Company’s common stock at $10.00 per share expired unexercised or were forfeited.
NOTE 8 - 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 liquids prices. These instruments consist of put and call options in the form of costless collars and swap contracts. The Company records derivative financial instruments in its consolidated balance sheet 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 statement of operations as an unrealized gain or loss. The fair value of the Company’s derivative financial instruments is determined using purchase and sale information available for similarly traded securities. Comerica Bank, The Bank of Nova Scotia and RBC (or affiliates thereof) were the counterparties for the Company's commodity derivatives at September 30, 2013. The Company has considered the credit standings of the counterparties in determining the fair value of its derivative financial instruments.
 
The Company has entered into various costless collar contracts to mitigate its exposure to fluctuations in oil prices, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss pursuant to any of these transactions 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. 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 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 volume.

14

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The Company has also entered into various swap contracts to mitigate its exposure to fluctuations in oil prices, each with an established fixed price. For each calculation period, the specified price for determining the realized gain or loss pursuant to any of these transactions 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. 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 oil 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 oil volume.
The Company has entered into various costless collar transactions for natural gas, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss to the Company pursuant to any of these transactions 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 last day 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 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 natural gas volume.
The Company has entered into various swap contracts to mitigate its exposure to fluctuations in natural gas liquids (“NGL”) prices, each with an established fixed price. For each calculation period, the settlement price for determining the realized gain or loss to the Company pursuant to any of these transactions is the arithmetic average of any current month for delivery on the nearby month futures contracts of the underlying commodity, except for purity ethane, as stated on the “Mont Belvieu Spot Gas Liquids Prices: NON-TET prop” on the pricing date. The settlement price for purity ethane is the arithmetic average of any current month for delivery on the nearby month futures contracts as stated on the “Mont Belvieu Spot Gas Liquids Prices” on the pricing date. 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 NGL 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 NGL volume.
At September 30, 2013, the Company had various costless collar 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. Each contract is set to expire at varying times during 2013, 2014 and 2015.
At September 30, 2013, the Company had various swap contracts open and in place to mitigate its exposure to oil and NGL price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and fixed price. Each contract is set to expire at varying times during 2013 and 2014.
 

15

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The following is a summary of the Company’s open costless collar contracts for oil and natural gas and open swap contracts for oil and natural gas liquids at September 30, 2013.
Commodity
Calculation Period
 
Notional
Quantity
(Bbl/month)
 
Price  Floor
($/Bbl)
 
Price
Ceiling
($/Bbl)
 
Fair Value of
Asset
(Liability)
(thousands)
Oil
10/01/2013 - 12/31/2013
 
20,000

 
85.00

 
102.25

 
$
(131
)
Oil
10/01/2013 - 12/31/2013
 
20,000

 
85.00

 
108.80

 
(22
)
Oil
10/01/2013 - 12/31/2013
 
20,000

 
85.00

 
110.40

 
(13
)
Oil
10/01/2013 - 12/31/2013
 
20,000

 
90.00

 
102.80

 
(105
)
Oil
10/01/2013 - 12/31/2013
 
20,000

 
90.00

 
115.00

 
13

Oil
10/01/2013 - 06/30/2014
 
8,000

 
90.00

 
114.00

 
101

Oil
10/01/2013 - 06/30/2014
 
12,000

 
90.00

 
115.50

 
163

Oil
10/01/2013 - 12/31/2014
 
12,200

 
85.00

 
100.40

 
(249
)
Oil
01/01/2014 - 12/31/2014
 
15,000

 
85.00

 
97.50

 
(399
)
Oil
01/01/2014 - 12/31/2014
 
30,000

 
85.00

 
98.00

 
(767
)
Oil
01/01/2014 - 12/31/2014
 
12,000

 
85.00

 
100.00

 
(154
)
Oil
01/01/2014 - 12/31/2014
 
15,000

 
87.00

 
97.00

 
(357
)
Oil
01/01/2014 - 12/31/2014
 
20,000

 
88.00

 
95.60

 
(593
)
Oil
01/01/2014 - 12/31/2014
 
20,000

 
90.00

 
97.00

 
(294
)
Oil
01/01/2014 - 12/31/2014
 
12,000

 
90.00

 
97.90

 
(97
)
Oil
01/01/2014 - 12/31/2014
 
15,000

 
90.00

 
97.90

 
(124
)
Oil
01/01/2014 - 12/31/2014
 
15,000

 
90.00

 
98.00

 
(135
)
Oil
01/01/2014 - 12/31/2014
 
15,000

 
90.00

 
101.15

 
133

Total open oil costless collar contracts
 
 
 
 
 
 
 
(3,030
)
Commodity
Calculation Period
 
Notional
Quantity
(MMBtu/month)
 
Price Floor
($/MMBtu)
 
Price
Ceiling
($/MMBtu)
 
Fair Value of
Asset
(Liability)
(thousands)
Natural Gas
10/01/2013 - 12/31/2013
 
100,000

 
3.00

 
3.83

 
(16
)
Natural Gas
10/01/2013 - 12/31/2013
 
100,000

 
3.00

 
4.95

 
1

Natural Gas
10/01/2013 - 12/31/2013
 
100,000

 
3.00

 
4.96

 
1

Natural Gas
10/01/2013 - 12/31/2013
 
150,000

 
3.00

 
4.24

 
(5
)
Natural Gas
10/01/2013 - 12/31/2013
 
100,000

 
3.25

 
4.41

 
3

Natural Gas
10/01/2013 - 12/31/2013
 
100,000

 
3.25

 
4.44

 
3

Natural Gas
10/01/2013 - 12/31/2013
 
100,000

 
3.50

 
4.37

 
15

Natural Gas
10/01/2013 - 12/31/2013
 
80,000

 
3.75

 
4.57

 
54

Natural Gas
01/01/2014 - 12/31/2014
 
100,000

 
3.00

 
5.15

 
(2
)
Natural Gas
01/01/2014 - 12/31/2014
 
100,000

 
3.25

 
5.21

 
59

Natural Gas
01/01/2014 - 12/31/2014
 
100,000

 
3.25

 
5.22

 
60

Natural Gas
01/01/2014 - 12/31/2014
 
100,000

 
3.25

 
5.37

 
76

Natural Gas
01/01/2014 - 12/31/2014
 
100,000

 
3.25

 
5.42

 
79

Natural Gas
01/01/2014 - 12/31/2014
 
100,000

 
3.50

 
4.90

 
118

Natural Gas
01/01/2014 - 12/31/2014
 
100,000

 
3.75

 
4.77

 
227

Natural Gas
01/01/2015 - 12/31/2015
 
200,000

 
3.75

 
5.04

 
331

Total open natural gas costless collar contracts
 
 
 
 
 
 
 
1,004


16

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

Commodity
Calculation Period
 
Notional Quantity
(Bbl/month)
 
Fixed Price
($/Bbl)
 
Fair Value  of
Liability
(thousands)
Oil
10/01/2013 - 12/31/2013
 
10,000

 
90.20

 
(341
)
Oil
10/01/2013 - 12/31/2013
 
10,000

 
90.65

 
(327
)
Total open oil swap contracts
 
 
 
 
 
 
(668
)
Commodity
Calculation Period
 
Notional Quantity
(Gal/month)
 
Fixed Price
($/Gal)
 
Fair Value of Asset (Liability)
(thousands)
Purity Ethane
10/01/2013 - 12/31/2013
 
110,000

 
0.335

 
28

Purity Ethane
10/01/2013 - 12/31/2013
 
110,000

 
0.355

 
35

Propane
10/01/2013 - 12/31/2013
 
53,000

 
0.953

 
(20
)
Propane
10/01/2013 - 12/31/2013
 
106,000

 
0.960

 
(37
)
Propane
10/01/2013 - 12/31/2013
 
53,000

 
1.001

 
(12
)
Propane
10/01/2013 - 12/31/2013
 
150,000

 
1.103

 
16

Propane
01/01/2014 - 12/31/2014
 
116,000

 
0.950

 
(87
)
Propane
01/01/2014 - 12/31/2014
 
116,000

 
1.003

 
8

Propane
01/01/2014 - 12/31/2014
 
60,000

 
1.015

 
13

Normal Butane
10/01/2013 - 12/31/2013
 
14,700

 
1.455

 
3

Normal Butane
10/01/2013 - 12/31/2013
 
14,700

 
1.560

 
8

Normal Butane
10/01/2013 - 12/31/2013
 
21,000

 
1.575

 
12

Normal Butane
10/01/2013 - 12/31/2013
 
117,000

 
1.575

 
63

Normal Butane
01/01/2014 - 12/31/2014
 
17,500

 
1.540

 
57

Normal Butane
01/01/2014 - 12/31/2014
 
45,500

 
1.550

 
143

Isobutane
10/01/2013 - 12/31/2013
 
7,000

 
1.515

 
2

Isobutane
10/01/2013 - 12/31/2013
 
7,000

 
1.625

 
4

Isobutane
10/01/2013 - 12/31/2013
 
43,500

 
1.675

 
34

Isobutane
10/01/2013 - 12/31/2013
 
23,000

 
1.675

 
18

Isobutane
01/01/2014 - 12/31/2014
 
22,000

 
1.640

 
87

Isobutane
01/01/2014 - 12/31/2014
 
37,000

 
1.640

 
156

Natural Gasoline
10/01/2013 - 12/31/2013
 
12,000

 
2.025

 
(3
)
Natural Gasoline
10/01/2013 - 12/31/2013
 
12,000

 
2.085

 

Natural Gasoline
10/01/2013 - 12/31/2013
 
12,000

 
2.102

 

Natural Gasoline
10/01/2013 - 12/31/2013
 
36,000

 
2.105

 
1

Natural Gasoline
10/01/2013 - 12/31/2013
 
90,500

 
2.148

 
20

Natural Gasoline
01/01/2014 - 12/31/2014
 
30,000

 
1.970

 
(7
)
Natural Gasoline
01/01/2014 - 12/31/2014
 
41,000

 
2.000

 
6

Total open NGL swap contracts
 
 
 
 
 
548

Total open derivative financial instruments
 
 
 
 
 
$
(2,146
)
These derivative financial instruments are subject to master netting arrangements within specific commodity types, i.e., oil, natural gas and natural gas liquids, by counterparty. Derivative financial instruments with Counterparty A are not subject to master netting across commodity types, while derivative financial instruments with Counterparties B and C allow for cross-commodity master netting provided the settlement 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 sheet.
 

17

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The following table presents the gross asset balances of the Company’s derivative financial instruments, the amounts subject to master netting arrangements, the amounts that the Company has presented on a net basis, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of September 30, 2013 (in thousands).
Derivative Instruments
Gross
amounts of
recognized
assets
 
Gross amounts
netted in the
consolidated
balance sheet
 
Net amounts of
assets
presented in the
consolidated
balance sheet
 
Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
 
 
 
 
 
 
 
Current assets
$
2,104

 
$
(2,104
)
 
$

 
$

Other assets
1,034

 
(909
)
 
125

 

Counterparty B

 

 

 
 
Current assets
1,741

 
(1,289
)
 
452

 
138

Other assets
1,553

 
(1,039
)
 
514

 

Counterparty C

 

 

 
 
Current assets
2,874

 
(2,289
)
 
585

 
301

Other assets
1,478

 
(1,122
)
 
356

 

Total
$
10,784

 
$
(8,752
)
 
$
2,032

 
$
439

The following table presents the gross liability balances of the Company’s derivative financial instruments, the amounts subject to master netting arrangements, the amounts that the Company has presented on a net basis, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of September 30, 2013 (in thousands). 
Derivative Instruments
Gross
amounts of
recognized
liabilities
 
Gross amounts
netted in the
consolidated
balance sheet
 
Net amounts of
liabilities
presented in the
consolidated
balance sheet
 
Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
 
 
 
 
 
 
 
Current liabilities
$
3,329

 
$
(2,104
)
 
$
1,225

 
$

Long-term liabilities
909

 
(909
)
 

 

Counterparty B

 

 

 

Current liabilities
2,749

 
(1,289
)
 
1,460

 
138

Long-term liabilities
1,039

 
(1,039
)
 

 

Counterparty C

 

 

 

Current liabilities
3,782

 
(2,289
)
 
1,493

 
301

Long-term liabilities
1,122

 
(1,122
)
 

 

Total
$
12,930

 
$
(8,752
)
 
$
4,178

 
$
439

 

18

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The following table presents the gross asset balances of the Company’s derivative financial instruments, the amounts subject to master netting arrangements, the amounts that the Company has presented on a net basis, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of December 31, 2012 (in thousands).
Derivative Instruments
Gross
amounts  of
recognized
assets
 
Gross amounts
netted in the
condensed
consolidated
balance sheet
 
Net amounts of
assets
presented in the
consolidated
balance sheet
 
Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
 
 
 
 
 
 
 
Current assets
$
6,445

 
$
(2,373
)
 
$
4,072

 
$

Other assets
1,096

 
(370
)
 
726

 

Counterparty B

 

 

 
 
Current assets
530

 
(224
)
 
306

 
82

Other assets
384

 
(339
)
 
45

 

Total
$
8,455

 
$
(3,306
)
 
$
5,149

 
$
82

The following table presents the gross liability balances of the Company’s derivative financial instruments, the amounts subject to master netting arrangements, the amounts that the Company has presented on a net basis, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of December 31, 2012 (in thousands).
 
Derivative Instruments
Gross
amounts of
recognized
liabilities
 
Gross amounts
netted in the
condensed
consolidated
balance sheet
 
Net amounts of
liabilities
presented in the
condensed
consolidated
balance sheet
 
Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
 
 
 
 
 
 
 
Current liabilities
$
2,373

 
$
(2,373
)
 
$

 
$

Long-term liabilities
370

 
(370
)
 

 

Counterparty B

 

 

 
 
Current liabilities
894

 
(224
)
 
670

 
82

Long-term liabilities
339

 
(339
)
 

 

Total
$
3,976

 
$
(3,306
)
 
$
670

 
$
82


19

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - 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).
 
 
 
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
Type of Instrument
Location in Condensed Consolidated Statement of Operations
 
2013
 
2012
 
2013
 
2012
Derivative Instrument
 
 
 
 
 
 
 
 
 
Oil
Revenues: Realized (loss) gain on derivatives
 
$
(1,519
)
 
$
374

 
$
(1,984
)
 
$
1,093

Natural Gas
Revenues: Realized gain on derivatives
 
161

 
2,996

 
790

 
10,053

NGL’s
Revenues: Realized gain on derivatives
 
193

 
1

 
675

 
1

Realized (loss) gain on derivatives
 
(1,165
)
 
3,371

 
(519
)
 
11,147

Oil
Revenues: Unrealized loss on derivatives
 
(8,132
)
 
(9,053
)
 
(6,818
)
 
(7,364
)
Natural Gas
Revenues: Unrealized gain (loss) on derivatives
 
57

 
(3,985
)
 
(132
)
 
6,170

NGL’s
Revenues: Unrealized (loss) gain on derivatives
 
(1,252
)
 
45

 
324

 
45

Unrealized loss on derivatives
 
(9,327
)
 
(12,993
)
 
(6,626
)
 
(1,149
)
Total
 
 
$
(10,492
)
 
$
(9,622
)
 
$
(7,145
)
 
$
9,998

 
NOTE 9 - 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 in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

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 using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, 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. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources.
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 September 30, 2013 and December 31, 2012, the carrying values reported on the unaudited condensed consolidated balance sheets for accounts receivable, prepaid expenses, accounts payable, accrued liabilities, royalties payable, advances from joint interest owners, income taxes payable and other current liabilities approximate their fair values due to their short-term maturities and are classified at Level 1.
At September 30, 2013 and December 31, 2012, the carrying value of borrowings under the Credit Agreement approximates fair value as it is subject to short-term floating interest rates that reflect market rates available to the Company at the time and is classified at Level 2.

20

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 9 - FAIR VALUE MEASUREMENTS - Continued

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 September 30, 2013 and December 31, 2012 (in thousands). 
 
Fair Value Measurements at
September 30, 2013 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
40

 
$

 
$
40

Oil, natural gas and NGL derivatives

 
2,032

 

 
2,032

Oil, natural gas and NGL derivatives

 
(4,178
)
 

 
(4,178
)
Total
$

 
$
(2,106
)
 
$

 
$
(2,106
)
 
Fair Value Measurements at
December 31, 2012 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Certificates of deposit
$

 
$
230

 
$

 
$
230

Oil, natural gas and NGL derivatives

 
5,149

 

 
5,149

Oil, natural gas and NGL derivatives

 
(670
)
 

 
(670
)
Total
$

 
$
4,709

 
$

 
$
4,709

Additional disclosures related to derivative financial instruments are provided in Note 8. For purposes of fair value measurement, the Company determined that certificates of deposit and derivative financial instruments (e.g., oil, natural gas and NGL derivatives) should be classified at Level 2.
The Company accounts for additions to asset retirement obligations and lease and well equipment inventory when adjusted for impairment at fair value on a non-recurring basis. The following tables summarize the valuation of the Company’s assets and liabilities that were accounted for at fair value on a non-recurring basis for the periods ended September 30, 2013 and December 31, 2012 (in thousands).
  
Fair Value Measurements at
September 30, 2013 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Asset retirement obligations
$

 
$

 
$
(951
)
 
$
(951
)
Total
$

 
$

 
$
(951
)
 
$
(951
)
 
Fair Value Measurements at
December 31, 2012 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Asset retirement obligations
$

 
$

 
$
(1,243
)
 
$
(1,243
)
Lease and well equipment inventory

 

 
34

 
34

Total
$

 
$

 
$
(1,209
)
 
$
(1,209
)
For purposes of fair value measurement, the Company determined that additions and revisions to asset retirement obligations should be classified at Level 3. The Company recorded additions to asset retirement obligations and revisions of estimated cash flows of approximately $1.0 million for the nine months ended September 30, 2013 and $1.2 million for the year ended December 31, 2012.


21

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 9 - FAIR VALUE MEASUREMENTS - Continued

For purposes of fair value measurement, the Company determined that lease and well equipment inventory should be classified at Level 3 when adjusted for impairment. No impairment to any equipment was recorded during the three months ended September 30, 2013. In 2012, the Company recorded an impairment to some of its equipment held in inventory consisting primarily of drilling rig parts of $425,000 and pipe and other equipment of $60,464. The Company periodically obtains estimates of the market value of its equipment held in inventory from an independent third-party contractor or seller of similar equipment and uses these estimates as a basis for its measurement of the fair value of this equipment.

22

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Office Lease
The Company’s corporate headquarters are located at One Lincoln Centre, 5400 LBJ Freeway, Suite 1500, Dallas, Texas. In April 2013, the Company entered into the fifth amendment to its office lease agreement. This amendment increased the square footage of its corporate headquarters to 40,071 square feet effective July 1, 2013. The lease expires on June 30, 2022.
Natural Gas and NGL Processing and Transportation Commitments
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 firm 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. The Company believes that its current and anticipated production from the wells covered by this agreement is sufficient to meet 80% of the maximum thermal quantity transportation and processing commitments under this agreement. The Company’s remaining aggregate undiscounted minimum commitments under this agreement are $12.2 million at September 30, 2013. The Company paid approximately $2.0 million and $3.8 million in processing and transportation fees under this agreement during the three and nine months ended September 30, 2013.
 
Other Commitments
From time to time, the Company enters into contracts with third parties for 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 are typically for one year or less. Should the Company elect to terminate a contract and if the drilling contractor were unable to secure work for the contracted drilling rigs or if the drilling contractor were unable to secure 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 would incur termination obligations. The Company’s maximum outstanding aggregate termination obligations under its drilling rig contracts were approximately $7.7 million at September 30, 2013.
At September 30, 2013, the Company had agreed to participate in the drilling and completion of various non-operated wells. If all of these wells are drilled and completed, the Company will have minimum outstanding aggregate commitments for its participation in these wells of approximately $16.7 million at September 30, 2013, which it expects to incur within the next few months.
Legal Proceedings
Cynthia Fry Peironnet, et al. v. MRC Energy Company f/k/a Matador Resources Company. The Company was involved in a dispute over a mineral rights lease involving certain acreage in Louisiana. The dispute regarded an extension of the term of a lease in Caddo Parish, Louisiana (the “Lease”) where the Company had drilled or participated in the drilling of both Cotton Valley and Haynesville shale wells. At issue were the deep rights below the Cotton Valley formation on approximately 1,805 gross acres where the Company has the right to participate for up to a 25% working interest, and also retains a small overriding royalty interest, in Haynesville shale wells drilled in units that include portions of the acreage. The Company’s total net revenue and overriding royalty interests in several non-operated Haynesville shale wells previously drilled on this acreage range from approximately 2% to 23%, and only portions of these interests are attributable to this acreage. The sum of the Company’s overriding royalty and net revenue interests attributable to this acreage from Haynesville wells previously drilled on this acreage comprises less than one net well.

The plaintiffs brought this claim against the Company on May 15, 2008 in the First Judicial District Court, Caddo Parish, Louisiana (the “Trial Court”). The plaintiffs sought (i) reformation or rescission of the lease extension, (ii) an accounting for additional royalty, (iii) monetary damages and (iv) attorney’s fees. During the pendency of the case in the Trial Court, the

23

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued

Company settled with one lessor who owned a 1/6th undivided interest in the minerals. The Trial Court rendered multiple rulings in favor of the Company, including a unanimous jury verdict in favor of the Company in the fall of 2010. Final judgment of the Trial Court was rendered in favor of the Company on June 6, 2011. On August 1, 2012, the Louisiana Second Circuit Court of Appeal (the “Court of Appeal”) affirmed in part and reversed in part the judgment of the Trial Court and remanded the case to the Trial Court for determination of damages. The Court of Appeal affirmed the Trial Court with respect to the 1/6th royalty owner that settled and also affirmed that the Company’s lease extension was unambiguous. Nonetheless, the Court of Appeal reformed the lease extension to cover only approximately 169 gross acres, holding that the deep rights covering the remaining 1,636 gross acres had expired. The Court of Appeal denied the Company’s motion for rehearing, and the Company and certain other defendants filed an appeal with the Louisiana Supreme Court. The Louisiana Supreme Court granted the requests to hear an appeal of the Court of Appeal’s decision, and in June 2013, the Louisiana Supreme Court reversed the decision of the Court of Appeal and reinstated the Trial Court judgment in its entirety. The plaintiffs filed an application for rehearing with the Louisiana Supreme Court, which was denied on August 30, 2013.

MRC Energy Company f/k/a Matador Resources Company v. Orca ICI Development, J.V. The Company and Orca, a non-operator working interest owner, had various disputes regarding certain of the Company’s Eagle Ford shale wells and properties. Among other things, issues arose with respect to the rights and obligations of the Company and Orca under various agreements between the parties, and Orca sought the Company’s consent to Orca’s proposed assignment of its 50 percent working interest in the Cowey #3H and #4H wells to a non-industry person, despite the presence of a uniform maintenance of interest provision. On April 2, 2013, Orca brought suit against the Company in the 57th Judicial District Court of Bexar County, Texas and sought injunctive relief. The court denied Orca’s demand for injunctive relief, and on April 5, 2013, the Company moved to enforce arbitration provisions in the agreements between the parties. On April 22, 2013, the Company initiated an arbitration against Orca, seeking, among other things, a declaration that the Company could withhold its consent to Orca’s putative assignment of these interests. Pursuant to agreements reached between the parties in May and June 2013, Orca and the Company agreed to resolve all outstanding issues between the parties regarding the respective rights and obligations of the parties under the agreements between them. In addition, the Company agreed to bear 100% of the costs to drill, complete and equip the Cowey #3H and #4H wells. Until such time as the Company has recovered 100% of the costs to drill, complete and equip the wells, all revenues generated by production from these two wells will be attributable to the Company. Following the Company’s recovery of these amounts, Orca would participate in the wells for a 25% working interest. The Company has returned $8.7 million submitted by Orca’s putative assignee. The agreements also included a mutual release of claims between the Company and Orca and provided for the dismissal of the Bexar County litigation. Orca filed a notice of non-suit on August 7, 2013.
The Company is a defendant in several other lawsuits encountered in the ordinary course of its business. In the opinion of management, it is remote that these lawsuits will have a material adverse impact on the Company’s financial position, results of operations or cash flows.


24

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 11 - SUPPLEMENTAL DISCLOSURES
Accrued Liabilities
The following table summarizes the Company’s current accrued liabilities at September 30, 2013 and December 31, 2012 (in thousands).
 
 
September 30, 
 2013
 
December 31,
2012
Accrued evaluated and unproved and unevaluated property costs
$
38,879

 
$
45,592

Accrued support equipment and facilities costs
228

 
1,382

Accrued cost to issue equity
456

 

Accrued stock-based compensation

 
65

Accrued lease operating expenses
5,656

 
5,218

Accrued interest on borrowings under Credit Agreement
117

 
255

Accrued asset retirement obligations
763

 
660

Accrued partners’ share of joint interest charges
890

 
3,597

Other
3,059

 
2,410

Total accrued liabilities
$
50,048

 
$
59,179


Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the nine months ended September 30, 2013 and 2012 (in thousands).
 
Nine Months Ended 
 September 30,
 
2013
 
2012
Cash paid for interest expense, net of amounts capitalized
$
2,110

 
$
442

Asset retirement obligations related to mineral properties
889

 
405

Asset retirement obligations related to support equipment and facilities
4

 
54

(Decrease) increase in liabilities for oil and natural gas properties capital expenditures
(6,288
)
 
19,067

(Decrease) increase in liabilities for support equipment and facilities
(1,100
)
 
482

Increase (decrease) in liabilities for accrued cost to issue equity
456

 
(332
)
Issuance of restricted stock units for Board and advisor services
186

 
34

Issuance of common stock for advisor services
25

 
71

Stock-based compensation expense recognized as liability
715

 
(930
)
Transfer of inventory from oil and natural gas properties
201

 
(91
)
NOTE 12 - SUBSIDIARY GUARANTORS
Matador filed a registration statement on Form S-3 with the SEC, which became effective May 9, 2013, and registered, among other securities, debt securities. The subsidiaries of Matador (the “Subsidiaries”) are co-registrants with Matador, and the registration statement registers guarantees of debt securities by the Subsidiaries. As of September 30, 2013, the Subsidiaries are 100 percent owned by Matador and any guarantees by the Subsidiaries will be full and unconditional (except for customary release provisions). Matador has no assets or operations independent of the Subsidiaries, and there are no significant restrictions upon the ability of the Subsidiaries to distribute funds to Matador. In the event that more than one of the Subsidiaries provide guarantees of any debt securities issued by Matador, such guarantees will constitute joint and several obligations.
 

25

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 13 - SUBSEQUENT EVENTS
In October and November 2013, the Company acquired approximately 9,100 gross (4,800 net) acres prospective for the Wolfcamp and Bone Spring formations in Southeast New Mexico and West Texas and approximately 900 gross (900 net) acres in the Haynesville shale play in Northwest Louisiana. The Company paid approximately $9.7 million to acquire this acreage.




26


Item 2. 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 notes thereto contained herein and in our Annual Report on Form 10-K for the year ended December 31, 2012 (the “Annual Report”) filed with the Securities and Exchange Commission ("SEC"), along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report. The Annual Report is accessible on the SEC’s website at www.sec.gov and on our website at www.matadorresources.com. Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with the “Risk Factors” section of the Annual Report and in conjunction with “Cautionary Note Regarding Forward-Looking Statements” below for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
In this Quarterly Report on Form 10-Q (the “Quarterly Report”), references to “we,” “our” or “the Company” refer to Matador Resources Company and its subsidiaries as a whole and references to “Matador” refer solely to Matador Resources Company.
Unless the context otherwise requires, the term “common stock” refers to shares of our common stock after the conversion of our Class B common stock into Class A common stock upon the consummation of our initial public offering on February 7, 2012, as the Class A common stock became the only class of common stock authorized, and the term “Class A common stock” refers to shares of our Class A 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.
For certain oil and natural gas terms used in this report, please see the “Glossary of Oil and Natural Gas Terms” included with the Annual Report.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report constitute “forward-looking statements” within the meaning of applicable U.S. securities legislation. 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,” “intend,” “may,” “might,” “potential,” “predict,” “project,” “should” or other similar 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: changes in oil or natural gas prices, the success of our drilling program, the timing of planned capital expenditures, availability of acquisitions, 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 and capacity of transportation facilities, 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 Quarterly Report and in other documents that we file with or furnish to the SEC, all of which are difficult to predict. Forward-looking statements may include statements about:
our business strategy;
our reserves;
our technology;
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;

27


government regulation and taxation of the oil and natural gas industry;
our marketing of oil and natural gas;
our exploitation projects or property acquisitions;
our costs of exploiting and developing our properties and conducting other operations;
general economic conditions;
competition in the oil and natural gas industry;
the effectiveness of our risk management and hedging activities;
environmental liabilities;