Matador Resources (MTDR) went public at the beginning of February, 2012, and the stock hovered around the $12.00 mark for its first month of trading. In March, it started flirting with $11.00, and April brought a dip below $10.50. Then came the drop in oil prices, and a corresponding drop in May to levels below $9.00. Did this new entrant to the energy sector deserve to be knocked down 27%, or do investors just not know about a potential gem? Let's take a closer look.
Matador is an oil and gas exploration and production company, with a focus on unconventional shale plays. With a market cap of around $0.5 billion, its largest acreage is in Texas' Eagle Ford shale, with smaller operations in the Haynesville shale and Cotton Valley on the Texas / Louisiana border, west Texas, New Mexico, Wyoming, Idaho, and Utah. A robust 85% of its Eagle Ford acreage is located in the oil and liquids window, rather than the dry gas fairway.
Matador saw remarkable production increases in 2011. Overall oil and gas production increased 79%, driven by a 360% increase in oil production. These production increases, and shift towards oil, led to an 89% increase in revenue and a 111% increase in cash flow over 2010. It also boasted reserves that were more than double those of the prior year.
If Matador's 2011 growth looks impressive, you'll really like its projections for 2012. Matador plans to allocate 94% of its 2012 spending to increase oil production, primarily from its properties in the Eagle Ford shale. It plans to see an increase of over 800% in oil production in 2012. Many companies are making the shift from natural gas to oil, some project a 3% increase in oil this year, some project a more impressive 10% shift. However, Matador is taking this production shift to an entirely different level. It is shifting from 78% of revenue from natural gas in 2011, to 78% of revenue from oil in 2012.
First Quarter 2012 Update
The company reported on May 14th that it was solidly on pace with these growth estimates at the end of the first quarter, 2012, and it announced that producing Eagle Ford oil wells had nearly doubled from the prior quarter. In fact, Matador produced more oil in the first quarter than in all of 2011 and 2010 combined. Oil and gas revenue increased 95% from the prior quarter, with adjusted EBITDA up 73%. Proven oil reserves increased an additional 50% from the end of 2011. Revenue from oil had already reached 74%.
In addition to the stellar growth projected for 2012, Matador's growth should be able to continue into the future. Its south Texas producing wells in 2011 only represent 4% of its identified drilling locations there, and it has only identified drilling locations on 75% of its Eagle Ford acreage. If natural gas prices should stage a comeback at any time down the road, Matador also has ample opportunities for gas growth by shifting capital spending towards its Haynesville and Cotton Valley acreage, where only one-third of identified drilling locations have begun producing.
In conclusion, Matador shares many of the same risks you'll find with most oil and gas companies, but further research may lead you to believe that the recent price drop in MTDR might be overdone. Matador appears to be a company with bright growth prospects and a strategic plan to get there quickly.
Disclosure: I am long MTDR.