Matador Resources Not Prioritizing Investor Returns

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About: Matador Resources Company (MTDR), Includes: APA, CDEV, CPE, ECA, OAS, XEC
by: Laura Starks
Summary

At a time when the mantras are free cash flow and returns to investors, Matador continues to outspend cash receipts and offer no investor yield.

Matador owns a majority stake in Permian midstream assets that have become important as production is bottlenecked by a lack of processing and takeaway capacity.

The company is selling noncore assets and upgrading operations; however, it is stymied in some respects by its lack of critical mass.

In terms of exploration and production, Matador Resources Company (MTDR) could be considered more a novillos (a novice, in bull-fighting terms) in its competition with the other Permian producers rather than a star bullfighter (matador).

It has nonetheless grown its New Mexico-focused operations and made good use of its much-needed San Mateo midstream assets, from which it also collects third-party revenue.

But competition in the Permian and globally will only get more serious. Chevron (CVX) and ExxonMobil (XOM) continue to ramp up in the Permian. In terms of sating any investor hunger for energy company, Saudi Aramco is exploring an initial public offering.

And in light of its proposed 2019 capital outspend and the remoteness of its production (a factor is shared with Apache (APA)), potential investors may want to first see some free cash flow.

I suggest keeping Matador on a watch list pending evidence of better investor friendliness.

Brief Company Summary

Matador Resources was founded in 2003, is headquartered in Dallas, Texas and employs 260 people full-time. It operates in two segments: exploration and production, and midstream.

The company explores for oil and gas primarily in the Permian Basin (Delaware sub-basin), with much smaller operations in the southern and eastern parts of Texas and northwestern Louisiana.

At a closing price of $16.58/share on September 11, 2019, its market capitalization is $1.96 billion.

Credit: Federal Reserve Economic Data, Federal Reserve Bank of St. Louis

Oil Prices and Production

The September 11 closing oil price was $55.96 per barrel for West Texas Intermediate (WTI) crude oil and $2.54/million British Thermal Units ((MMBTUs)) for natural gas.

The Energy Information Administration (EIA) expects WTI prices will average $54.50/barrel for the last quarter of 2019 and $56.50/barrel for 2020. Illustrating the effect of cumulative volatility, the 5-95 confidence interval is about $30-$90/barrel for December 2020.

West Texas Intermediate (<span>WTI</span>) crude oil price

Current U.S. oil production for the week ending September 6, 2019 was 12.4 million barrels per day (BPD).

September 2019 oil production from the Permian (West Texas-Eastern New Mexico) is projected at 4.4 million BPD and gas at 14.9 billion cubic feet/day (BCF/D), up substantially from last year and more oil and gas than many entire countries produce. Much of the Permian gas is “associated,” that is, it is produced with oil.

Second Quarter Results

Second quarter 2019 net income was $36.8 million, $0.31/share. This represented an increase from the first quarter’s -$16.9 million net loss, but a decrease from 2018’s second quarter net income of $59.8 million.

Total production was 61,300 BOE/D, 60% oil, or 36,800 BPD. Most of the oil production, 32,800 BPD was from the Delaware sub-basin. Average oil price for the quarter was $56.51/barrel and average natural gas price was $1.64/thousand cubic feet (MCF).

With low and sometimes negative Permian basin natural gas prices, Matador sensibly cut back its natural gas production in the second quarter by 8%.

The bulk of the company’s revenues were from its oil and gas production--$211 million--with only $14.4 million coming from its third-party midstream services.

Matador Resources’ Reserves and Production

At the end of 2018, Matador Resources’ total proved reserves were 215 million barrels of oil equivalent (BOE), about 57% oil. Its proved developed producing reserves were 92 million BOE, also about 57% oil. It owned 132,000 net acres in the Delaware sub-basin of the Permian, mainly in Eddy and Lea counties in New Mexico and nearby Loving County in west Texas.

The Securities and Exchange Commission (SEC) value at a 10% discount rate (PV-10), a standard measure of comparison for reserves, is $2.25 billion for year-end 2018, or more the company’s current market capitalization of $1.96 billion.

However, note that this PV-10 value is calculated on the basis of a higher-than-current $62.04/barrel for oil and $3.10/MMBTU (or $18.60/BOE) for natural gas.

These numbers also remind investors that a barrel of oil equivalent is not the same as a barrel of oil. It is lower-valued because it includes lower-valued natural gas and natural gas liquids.

The company’s second quarter 2019 production was 61,300 BOE/D, 60% oil. The table below summarizes.

Proved

Net

Reserves

Acreage

2Q Prod

MMBOE

Position

MBOE/D

% Oil

Delaware

191.5

132700

51.8

63

Eagle Ford

12.2

28600

4.7

83

Haynesville

11.6

21900

4.8

0

Total

215.3

183200

61.3

60

Midstream Operations

The company owns 51% of San Mateo Midstream; the other owner is private equity firm Five Points Energy. This division provides natural gas processing, oil transportation, gathering for oil, gas and salt water, and salt water disposal services for itself and third parties in the Delaware sub-basin. Since Permian companies face bottlenecks in oil and gas takeaway capacity—especially natural gas—midstream capability, or at least access, has become more valuable.

Competitors

Among the companies Matador Resources lists in its 10-K used to determine performance results, are Centennial Resource Development (CDEV), Cimarex Energy (XEC), Encana (ECA), Oasis Petroleum (OAS). In day-to-day operations, Matador competes with dozens of large and small oil and gas producers since most have a foothold in the Delaware sub-basin of the Permian, ranging from ExxonMobil to small private companies like Henry Petroleum.

Fierce Permian competition extends throughout, most notably now for oil and gas pipeline transport capacity, but also for hiring executives and expert professionals, competing for service contractors, and selling oil and gas to end-use refiners, utilities, and for export.

Governance

As of July 29, 2019, Institutional Shareholder Services ranks Matador’s overall governance as a 5, with sub-scores of Audit (1), Board (6), Shareholder Rights (7), and Compensation (2). In this ranking a 1 indicates lower governance risk and a 10 indicates higher governance risk.

As of August 14, 2019, shorts are a large 25.3% of floated shares.

Insiders own 9% of shares.

Strategy and Capital Expenditures

Matador affirmed it plans $640 million-$680 million of 2019 drilling, completion, and well equipment capital spending and $70 million-$90 million on midstream (2Q link). Its focus in the second quarter was on the Antelope Ridge area.

As noted, Matador is focusing on its Delaware Basin operations in three counties. To this end, in 2018, the company was notable as the biggest bidder in the Bureau of Land Management’s New Mexico auction, spending an average of $46,000/acre for 8400 acres, including bids up to $95,000/acre, for leases in Lea and Eddy Counties.

Past and projected future cash outspend does not appear sustainable. Critically, in the first six months of 2019, cash from operations was $194 million and cash used was $394 million; the affirmed budget (and likely similar oil and gas prices) for the remainder of the year look similar.

Matador Operations

Credit: matadorresources.com

Financial and Stock Highlights

Matador’s trailing twelve months’ earnings per share is $1.49, giving a price-earnings ratio of 11. Its forward price-earnings ratio is 10, using the mean analysts’ 2020 earnings per share estimate of $1.64. Its trailing twelve-month return on assets is 5.9% with a return on equity of 11.6%.

The 52-week price range is $13.42-$34.91 per share, so its September 11th, 2019 closing price of $16.58 is 47% of the one-year high. The company’s one-year target price is $24.22/share; its closing price is 68% of that level.

Chart Data by YCharts

On June 30, 2019, the company had $1.91 billion in liabilities and $3.75 billion in assets, giving Matador Resources a less-than-flexible (especially for an independent producer) liability-to-asset ratio of 51%. Moreover, 82% of the liabilities are long term, including a +$1 billion senior unsecured note payable. Still, its ratio of current assets divided by current liabilities is 0.81, not far off the desirable minimum of 1.0.

Matador Resources’ market capitalization is $1.96 billion at a September 11, 2019 stock closing price of $16.58 per share.

Matador’s trailing 12 months’ operating cash flow was $548 million and its levered free cash flow was -$952 million.

Matador Resources does not pay a dividend. The company’s beta is 2.35, making it considerably more volatile than the overall stock market.

Overall, the company’s mean analyst rating is a 2.1, or “buy,” from the 19 analysts who follow it. Since May 2019, two analysts have upgraded their ratings and one has downgraded.

As of June 29, 2019, the seven largest institutional holders of Matador Resources’ stock were Blackrock (10.7%), Vanguard (8.8%), T. Rowe Price (4.9%), Dimensional Fund Advisors (4.85%), Millennium Management (4.8%), State Street (4.75%), and Neuberger Berman (4.2%).

Notes on Valuation

With an enterprise value (EV) of $3.42 billion, its EV/EBITDA ratio is 5.7, well below the preferred ratio of 10 or less and so suggesting a bargain.

The company’s book value per share of $14.89 is near its market price, implying neutral sentiment.

Matador Resources’ market capitalization gives it a valuation of about $32,000 per flowing BOE, similar to that recently measured for Callon Petroleum (CPE).

Positive and Negative Risks

Potential investors should consider their Permian oil and gas price expectations as the factor most likely to affect Matador Resources.

Given the need for natural gas, oil (and water) takeaway capacity in the Permian Basin, Matador is well-served with its 51% interest in San Mateo Midstream’s operations.

Recommendations for Matador Resources

Matador Resources is not recommended for dividend-seekers as the company doesn’t pay a dividend.

Matador is proving its Delaware drilling and midstream efficacy but is doing so with first-six-months capital outspend of $200 million and similar projected outspend for the second half of the year.

Without a sector-wide uplift from higher oil and gas prices, and with its less-than-flexible 51% liability-to-asset ratio, its short-sellers representing 25% of floated stock, and its SEC reserve value (calculated at higher-than-current oil and gas prices) only slightly above market capitalization, there appears little opportunity for Matador’s stock price to appreciate.

Both local and global oil competition will increase even further as Chevron and ExxonMobil expand in the Permian and Saudi Aramco hunts investors in what could be the largest-ever initial public offering.

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Disclosure: I am/we are long CVX, CPE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.