Matador Resources: A Junior Oil Stock Set To Cash In

| About: Matador Resources (MTDR)
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There's been a lot of chatter about the natural gas glut lately (and the best stocks to buy that will survive the low-price environment).

I'm here to chime-in and say nat gas investors could see a very bullish boost in the near future. That's because the supply glut may soon begin to ease in a big way.

No, I'm not talking about how the recent approval of two liquefied natural gas plants will soon open up new markets overseas.

I'm talking about a market much closer to home -- one that's accessible via pipeline. And one whose demand for US natural gas has grown 92% over the last five years.

I'm talking about our neighbor to the south: Mexico.

Viva la Gas Natural!

Expectations are that Mexico could generate an extra 5 bcf/d demand in the coming three years.

To compare, an extra 5 bcf/d demand from the power sector in 2012 sent natural gas prices doubling in the U.S. from $2 to $4/mcf in one year.

Now, as the saying goes, a rising tide lifts all boats. So we can expect all gas producers to benefit from increased Mexican demand.

But there's one batch of companies that stand to benefit far more than others. Those are the players in southern Texas shale plays. And here's why...

Since 2009, exports from south Texas exit points have grown by 600%. At the same time, exports from all other U.S. exit points increased by only 15%.

What's more, there are two new Texas-Mexico pipelines set to go operational in the next couple years -- and as I see it, this could really going to kick south Texas producers into high gear.

First, Pemex's $3.3 billion cross-border pipeline project is expected to come online by the end of 2014.

It will stretch 750 miles from Agua Dulce, Texas - the heart of the Eagle Ford shale - to the central Mexican state of Guanajuato - the heart of Mexico's auto industry. In 2015, when the final phase of the 750-mile pipeline is completed, the network will boost Mexico's gas import capacity from approximately 1.3 billion cubic feet per day (Bcf/d) to 3.4 Bcf/d

And second, NET Midstream announced this past February it will build a 124-mile pipeline from Agua Dulce to the Texas/Mexico bordertown of Rio Grande City. This is expected to provide a further 2.1 Bcf/d of capacity.

In total, US gas exports to Mexico are expected to more than TRIPLE when these new pipelines come online. It will account for 10% of our export market, up from 3% currently.

Anytime a new market opens up and rampant growth like this is expected in a few short years, there will be opportunities to profit. So what are the best stocks to buy if you want to gain from the "Great Mexican Gas Migration"?

While you could consider a couple of the larger players, Matador Resources (NYSE:MTDR) is an explosive junior that deserves a good, hard look.

A Small Producer With Explosive Growth

Matador Resources has locked up a 165,486 gross acres (41,302 of which are in south Texas' Eagle Ford). It has proven reserves of 23.6 million barrels of oil equivalent. And the company has grown production exponentially over the past five years.

In 2008, the company produced an average of 1,506 barrels of oil equivalent a day. In 2011, that shot to 7,049 boe/d. And in 2012, production increased to an average of 9,000 boe/d.

That's an annual growth rate of 99.5%.

But perhaps more impressive is that the company shows no signs of slowing down.

In 2013, Matador expects to increase oil production 50% to a total of 2.0 million barrels. It also expects to pump out a whopping 12 billion cubic feet of gas.

On an oil equivalent basis, that amounts to about 11,000 barrels a day.

At that rate, Matador will have increased its production 630% since 2008 -- explosive growth by any standards.

A top factor I look at when evaluating a junior oil stock is how quickly the company can ramp-up production. Matador is one of the most impressive growth stories I've seen in a long time.

Solid Financial Discipline

Another factor I look at is how junior manages its finances while growing production. Here again, Matador has performed admirably.

Revenues for the most recent quarter jumped to $230 million from $156 million in 2012.

Likewise, EBITDA for the first quarter of 2013 was $40.7 million, nearly twice the $21.3 million in Q1 2012.

Management is also estimating an EBITDA of $165 million for the full year of 2013, representing a 40% increase year-over-year.

Furthermore, the company is funding 2013 capital expenditures 50% through operating cash flows and 50% through borrowings under revolving credit facility. Current borrowings are less than 2x estimated 2013 operational cash flows -- a very manageable number.

To me this shows management is prudent and exercising financial discipline.

Growing in the Right Place

Opportunely, most of Matador's growth is concentrated in the south Texas Eagle Ford formation (with easy access to the Mexican market).

Of the 31.3 wells it plans to drill this year, 27.4 are planned here.

In total, Matador has 14.5 million boe of proved reserves in the Eagle Ford and will spend $242.7 million this year alone to tap that wealth.

The company also has an additional 274 potential drilling locations - which means we can expect strong growth to continue for years to come.

And while the company plans to focus more on building its oil production in the coming years (with prices over $100/barrel, who can blame them), it will still produce huge amounts of gas (approximately 12 billion cubic feet this year alone), which benefits directly from the new pipelines.

In total, explosive growth, financial prudence and increased access to a gas-thirsty market next-door make Matador Resources one of the best stocks to buy today.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.