Matador Resources (MTDR) has made a significant move over the past couple of months. In Q2, it beat for the fourth time in as many quarters. Matador has beat EPS estimates by at least 30% and done in escalating fashion. In Q2, it beat on the bottom line by 175%, coming in at 33 cents/share versus the Street's 12 cents.
Its top line number was $58.4 million versus estimates of $56.8 million. Year over year oil production was up 57%. Oil production decreased 3% from Q1. Keep in mind, it had 10% to 12% of its production shut in as offset wells were drilled. This production will return after pad operations are concluded. Oil and natural gas revenues were down 2% from Q1. This past quarter Matador had a realized oil price of $99.77/bbl. In Q2 of 2012 it realized price was $105.72.
Natural gas pricing was up year over year from $3.41/Mcf in Q2 of 2012 to $4.38/Mcf in Q2 of this year. Matador attributes this to a better frac design. Year over year crude production was also up with respect to resource mix. Year over year it improved to 46% versus 36%. Over the same time frame, natural gas production was essentially flat. The natural gas resource mix has also changed, now 36% comes from the liquids rich Eagle Ford compared to just 13% in Q2 of 2012. There is a big difference in price realizations from the Eagle Ford when compared to the Haynesville play.
The Eagle Ford averages $6.38/Mcf versus $3.39/Mcf. In June and July, Matador has seen a large increase in pad well production. Keep in mind, some current producers will have to be shut in, but will return after the pad producing. Q2 expenses were in line if not better than estimates. LOEs were up year over year, but mostly on increased production and higher percentages of oil. Quarter over quarter LOEs decrease. Year over year DD&A reduced on unit of production basis.
In the first half of 2013, Matador focused on the Eagle Ford. It brought 11 net operated wells and .8 net non-operated wells to production. It also participated in .4 net non-operated wells in the Haynesville shale and a non-operated test of the Buda formation in south Texas. In Q1 of 2013, Matador had two rigs running in the Eagle Ford. In the beginning of Q2, it moved one rig to southeast New Mexico. This was done to test its new acreage in the Delaware Basin. It has drilled pilot holes into the Wolfcamp intervals, and found that both wells have multiple intervals of interest. It is now drilling a horizontal into the 2nd Bone Springs. We should get well results in Q3 and Q4 of this year. This year, Matador has added acreage in Southeast New Mexico and West Texas. It now has 28,300 net acres in the Permian. Matador's Eagle Ford down spacing has gone well, with good results on 40 to 50 acre spacing. It has not seen any degradation to production at this proximity.
Matador is currently spending 80% of its capital in the Eagle Ford. Its wells average a 90% oil mix. It will be adding a second rig in the Eagle Ford. This is a high spec 1500 horsepower walking rig. This rig is considerably faster, and should decrease drilling costs by 10%. Current well costs are $6 to $7 million in the west. Its Eagle Ford Central has average costs of $7 to $8 million. In the east, it is $9 to $10 million. Keep in mind the Eagle Ford gets deeper to the east and north, so well costs will increase in that direction. Currently, the new rig has cut costs greater than 10%, but it is waiting to get more data before providing a new well cost. In the fourth quarter, management is stating production could be flat. It will be drilling Martin Ranch pad wells and the completions may not be done until Q1 of 2014. In Q3 it plans 4 to 5 completions, with 6 to 8 in Q4. Half of the Q4 wells will be completed either later in Q4 or early Q1. Keep in mind, the offset wells will be shut in and that will also hurt production. Also, be prepared for "chunky" production numbers. Smaller, faster growing oil and gas operators could miss top and bottom line numbers if operations are not completed on time. Pay close attention as this could create swings in stock price. Matador states it will see 20% to 25% production growth every six months and year over year between 50% and 60%.
Matador also has Buda upside near is Glasscock Ranch. Dan Hughes has done a very good job of de-risking the Buda formation. Below is a table of Dan Hughes' wells and its production history.
|Well||IP Rate||Cumulative Production||Months In Production|
|Buchanan 1H||756 Bbls/d and 556 Mcf/d||38348 Bbls and 16 MMcf||2|
|Heitz/Fehrenbach 1H||85 Bbls/d and 200 Mcf/d||4215 Bbls and 210 MMcf||6|
|Heitz 302 5H||125396 Bbls and 152 MMcf||10|
|Heitz 302 3H||350 Bbls/d and 500 Mcf/d||215772 Bbls and 147 MMcf||13|
|Heitz 303 2H||351 Bbls/d and 665 Mcf/d||180445 Bbls and 168 MMcf||14|
|Heitz 1H||200 Bbls/d and 150 Mcf/d||204817 Bbls and 251 MMcf||14|
As you can see these are good results, but still not as good as the Eagle Ford. What it does offer is another interval, and a possible addition to locations per section. The Buda does have upside, but I would guess it could be a few quarters before we have a handle on it. Other operators have drilled the Buda in this area including Crimson (CXPO). We will know more when Matador gets its 3D seismic. In the mean time, Dan Hughes will do the heavy lifting.
Its DD&A reduced this quarter due to a higher realized price in natural Gas. This enabled Matador to book more reserves. It's also important to note Matador's success using gas lift towards the end of the flowing life of the well. To date, it has used this on 19 wells and has seen a total additional growth of 3,000 barrels. I would also point out that EOG Resources (EOG) has started doing this in the Bakken. I don't have concrete numbers as of yet, but Matador has non-operated interest in EOG wells in the Eagle Ford. It is possible Matador has seen this used successfully in that partnership, and is now successfully doing it as well.
In the Permian, Matador believes it will have results from its first well completed in late August or early September. Its second Permian well results will be reported at the end of the third quarter. This well is in the same area as Anadarko (APC) and Energen (EGN), which should provide well results in the short term. Matador has been spending between $1500 and $2000/acre. It will continue to add acreage as long as prices remain reasonable. Keep in mind, some people believe areas of the Delaware Basin are better than the Eagle Ford. This is due to the Permian being a stacked play, while the Eagle Ford is currently the only target in many areas. I know there has been talk of deeper formations, but not a lot of de-risking. The Delaware Basin has targets of the Leonard, Avalon, Bone Springs and Wolfcamp. Although, not one of the Permian shales will outperform the Eagle Ford, together it will produce more barrels of oil equivalent per section.
In summary, Matador has come a long way in a short period of time. It has been beating analyst estimates, and management has done a very good job in its transition to the Eagle Ford. Production growth has also been good and I believe this will continue going forward. It has made a good move acquiring acreage in the Permian. This area is prospective of several different source rock intervals. This specific area could see significantly higher EURs and tighter spacing in upcoming quarters, as operators add locations. The main worry is cost containment. Matador seems to be doing a good job in this department, but the re-booking of reserves did skew Q2 results.
It is always challenging for a management team to keep costs down and production up when there are several different areas of operation. This may not be an issue as its focus is the Eagle Ford and it is not trying to grow any meaningful production from the Haynesville Shale or Cotton Valley. SE New Mexico is in its infancy, so I wouldn't guess there will be a big ramp for a couple of quarters in the Permian. Well costs should continue lower as EURs increase. The Buda could add locations to an already good area. I would not currently buy this stock, nor would I sell it. Jumping in on names that have had this type of a short term move could really cause some pain if there was a correction or worse bad news. If I had already owned Matador , I don't think I would sell it, but would take some profits. If I get a pullback I will be a buyer.