Revolving Credit Agreement

9 Months Ended

Sep. 30, 2012

Revolving Credit Agreement [Abstract]

REVOLVING CREDIT AGREEMENT

NOTE 4 - REVOLVING CREDIT AGREEMENT

On September 28, 2012, the Company amended and restated its senior secured revolving credit agreement. This third amended and restated credit agreement (“Credit Agreement”) increased the maximum facility amount from $400 million to $500 million and named Royal Bank of Canada (“RBC”) as administrative agent. Under the Credit Agreement, the borrowing base was increased to $200 million from the previous borrowing base of $125 million. In addition, the Credit Agreement provides for a conforming borrowing base of $165 million. The borrowing base will automatically be reduced to the conforming borrowing base on the earlier of (i) December 31, 2013 or (ii) the closing of a secondary public offering of equity interests by the Company that results in net cash proceeds to the Company in an amount greater than or equal to $25 million. The Credit Agreement matures in December 2016. The Credit Agreement superseded the second amended and restated credit agreement which had been entered into by the Company on December 30, 2011. The second amended and restated credit agreement increased the maximum facility amount from $150 million to $400 million, and borrowings under the Credit Agreement were limited to the lower of $400 million or the borrowing base which was then set at $125 million.

MRC Energy Company is the borrower under the Credit Agreement, and 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 RBC and Comerica Bank (or affiliates thereof) are also secured by the collateral and guaranteed by Matador Resources Company and the 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, but also on external factors, such as the lenders’ lending policies and the lenders’ estimates of future oil and natural gas prices, over which the Company has no control. At December 31, 2011, the borrowing base was $125 million and the Company had $113 million in outstanding borrowings under the Credit Agreement. In January 2012, the Company borrowed an additional $10 million to finance a portion of its working capital requirements and capital expenditures, bringing the then outstanding revolving borrowings under the Credit Agreement to $123 million. Following the completion of the Initial Public Offering in February 2012, the Company used a portion of the net proceeds to repay the then outstanding $123 million under the Credit Agreement in full, at which time the borrowing base was reduced to $100 million. On February 28, 2012, the borrowing base was increased to $125 million pursuant to a special borrowing base redetermination made at the Company’s request. The borrowing base increase was determined by the lenders based upon, among other items, the increase in the Company’s oil and natural gas reserves at December 31, 2011.

Between March 1, 2012 and September 30, 2012, the Company borrowed $106 million under the Credit Agreement to finance a portion of its working capital requirements and capital expenditures. At September 30, 2012, the Company had $106 million in borrowings outstanding under the Credit Agreement, approximately $1.1 million in outstanding letters of credit issued pursuant to the Credit Agreement and approximately $92.9 million available for additional borrowings. At September 30, 2012, the Company’s outstanding borrowings bore interest at an effective rate of approximately 5.3% per annum as the borrowings were outstanding as a base rate advance. In early October, the borrowings were converted to a Eurodollar-based rate advance and bore interest at an effective rate of approximately 3.3% per annum.

Both the Company and the lenders may each request one unscheduled redetermination of the borrowing base between scheduled redetermination dates. 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 will be determined based on market conditions at the time of the borrowing base increase. If 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.

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 2.25% of such outstanding loan 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) 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 3.25% 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 and any loan amortization costs 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 March 31, 2013 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, along with its subsidiaries’, 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 the Company’s assets.

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 amount 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.

At September 30, 2012, the Company believes that it was in compliance with the terms of the Credit Agreement.