IPO Preview: Matador Resources

Jan.31.12 | About: Matador Resources (MTDR)

Based in Dallas, Texas, Matador Resources (NYSE:MTDR) scheduled a $200 million IPO with a market capitalization of $885 million at a price range mid-point of $15 for Thursday, February 2, 2012.

MTDR is one of eight IPOs scheduled for this week (see our IPO calendar).

BUSINESS

MTDR is an independent energy company engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States, with most of its proved reserves in natural gas, which is a negative to us in this market, see below.

NEGATIVE ON COMPANIES FOCUSED ON NATURAL GAS

Announced January 23 and 24th

  • Natural gas, the worst-performing commodity this year, rebounded from a 10-year low in New York after Chesapeake Energy Corp., the second-largest U.S. producer, said it will cut production and reduce spending. Natural Gas, Bloomberg, January 23
  • Chesapeake Energy (NYSE:CHK) Pulls Back Amid Natural-Gas Glut

"So much gas-rich shale has been found, however, that federal and private forecasters predict an oversupply will last for years.

The glut partly stems from the U.S. energy industry's success with new techniques to recover oil and gas-notably horizontal drilling and hydraulic fracturing, or fracking, of shale formations.

The company said Monday it will cut spending on gas drilling by more than $2 billion this year and divert that money to chase more profitable oil, which is trading near $100 a barrel." Wall Street Journal, January 23

"The Energy Information Administration notes that the working gas in storage is near a record high, and thanks to a warm winter it's not falling as fast as it usually does, meaning prices are likely to remain low."

Yes, it's best now to concentrate on 'oils & liquids' which is where MTDR's capital budget is focused, but that's the unproven future.

CONCLUSION

MTDR based on the recent downturn in the natural gas exploration business it seems prudent to avoid MTDR on the IPO because "most of our current proved reserves are classified as natural gas."

Although MTDR has made significant progress recently, see 'recent developments' below/

BUSINESS

Matador Resources 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 a particular emphasis on oil and natural gas shale plays and other unconventional resource plays.

"Although most of our current proved reserves are classified as natural gas, we have been evaluating various oil plays to find and execute upon opportunities that would fit well with our exploration and operating strategies." S-1, page 7

CURRENT OPERATIONS

Current operations are located primarily in the Eagle Ford shale play in south Texas and the Haynesville shale play in northwest Louisiana and east Texas. In addition to these primary operating areas, MTDR has acreage positions in southeast New Mexico and west Texas and in southwest Wyoming and adjacent areas in Utah and Idaho where MTDR continue to identify new oil and natural gas prospects.

MTDR is active both as an operator and as a co-working interest owner with larger industry participants including affiliates of Chesapeake Energy Corporation [$15 billion market cap], EOG Resources (NYSE:EOG) [$28 billion market cap], Inc., Royal Dutch Shell plc (NYSE:RDS.B) [$229 billion market cap] and others.

Of the 213 gross wells CHK has drilled or participated in drilling, CHK drilled approximately half of these wells as the operator. At September 30, 2011, CHK was the operator for 80% of its Eagle Ford and 70% of its Haynesville acreage, including 22% of acreage in what MTDR believes is the core area of the Haynesville play.

A large portion of MTDR's acreage in that core area is operated by a subsidiary of Chesapeake Energy Corporation. MTDR also operate all of its acreage in southwest Wyoming and the adjacent areas of Utah and Idaho, as well as the vast majority of MTDR's acreage in southeast New Mexico and west Texas.

RECENT RESULTS

At January 16, 2012, MTDR had drilled an aggregate of 11 Eagle Ford horizontal wells as operator. Seven of these wells have been completed and are producing.

For the month of December 2011, daily production averaged 43.4 MMcfe per day, including 39.8 MMcf of natural gas per day and 600 Bbl of oil per day. During the first 11 days of January 2012, daily production averaged 53.2 MMcfe per day, including 42.4 MMcf of natural gas per day and 1,800 Bbl of oil per day.

In December 2011, four of Eagle Ford wells, the Martin Ranch #2H, #3H and #5H in La Salle County, Texas and the Lewton #1H in DeWitt County, Texas, began producing. In January 2012, MTDR estimated that these four wells and six associated proved undeveloped locations increased MTDR's proved oil and natural gas reserves by 2.8 million barrels of oil and 4.2 Bcf of natural gas as of December 31, 2011.

CAPITAL BUDGETING

MTDR plans to dedicate about 94% of its 2012 anticipated capital expenditure budget of $313 million to prospective opportunities for oil and liquids production.

USE OF PROCEEDS

MTDR expects to net $160 million from its IPO. The proceeds are allocated as follows:

  • $113 million to repay debt
  • $47 million for capital expenditures

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.