- The coronavirus epidemic and the oil price war between the Saudis and the Russians have pummelled Matador's share price.
- The firm has excellent growth prospects for the year ahead, a solid balance sheet, and consistently rising revenues.
- It is trading at a 432% discount to fair value.
Even in the context of the massive sell-off in the oil markets yesterday, Matador Resources Company's (NYSE:MTDR) fall of 64.2% in share price was notable - and unjustified, in light of the underlying quality of the business itself. In my view, the sell-off has created a real value opportunity and one I am taking advantage of.
At close of market on 03/09/2020, Matador Resources Company was trading at $2.35 per share. Chart generated by FinViz.
The oil markets experienced a real hammering on 03/09/2020, a direct consequence of Saudi Arabia's response to the breakdown of OPEC negotiations last week regarding production cuts, which Russia opposed. Launching a price war to undercut Russia, Saudi Arabia lowered its own prices and hiked up its oil production.
The Saudi response to the breakdown of OPEC negotiations has tanked the oil markets. Image provided by Upnewsinfo.com.
The particular issue here is the coronavirus epidemic. With the global economy - and China in particular - stalled as a consequence of the outbreak, demand for crude oil has dwindled, and prices had already been falling before the Saudi announcement. The kingdom's decision to flood the market with oil at a time when supply is already outstripping demand has only exacerbated the issue.
Saudi Arabia's decision to flood the market with oil has sent prices into freefall. Chart generated by FinViz.
This situation is not one that is likely to last - it is likely a move by the Saudis to force the Russians back to the negotiating table. Financially, it is not a situation that would benefit either the Saudis or the Russians to prolong, as Jonathan Barratt, CIO of Probis Group, observed:
Saudis and other Middle Eastern producers have their budgetary constraints [and] Russia is starved for cash...So the dynamics of all those put together will mean they will come to an agreement somewhere.
As to the coronavirus epidemic, the other key factor contributing to the oil price fall, when it will be contained is a question no-one is in a position to definitively answer at this time. President Trump has said he wants a Covid-19 vaccine to be delivered within months, but he was rebutted on this by Anthony Fauci, the National Institute of Allergies and Infectious Diseases director, who stated:
A vaccine that you make and start testing in a year is not a vaccine that's deployable.
Fauci went on to say that the earliest one could deploy such a vaccine is:
...in a year to a year and a half, no matter how fast you go.
In time, I do believe the coronavirus will be contained, or that we will be able to navigate our way around it, but I cannot say how or when this will happen. The key catalyst for oil prices to rise in the short-term, then, will be a resolution to the price war between the Saudis and the Russians, which is likely to occur sooner rather than later.
It is in this light that I look favorably on Matador Resources Company as a prospective value opportunity. Its huge drop in share price can only be seen in the context of the oil price war and the coronavirus outbreak, as this independent energy company has not performed in a manner that would justify a 64.2% drop in share price. Indeed, its recent Q4 2019 results reported strong figures, with earnings-per-share of $0.39 beating estimates by $0.09, and revenue of $258.6 million beating estimates by $2.61 million. This capped off five years of consecutively increasing revenue figures, as illustrated in the table below.
Figures collated from annual reports available on Matador Resources Company's investor relations page.
The profitability of the firm, borne out by its 23.94% operating margin, looks set to continue in the coming year despite current headwinds. Matador expects to have six drilling rigs in the Delaware basin - which include 69 gross operated wells - completed and turned to sales during 2020, and a further 101 gross operated wells in progress during 2020. A further 76 gross non-operated wells in the Delaware basin should also be completed and turned to sales during 2020. Small wonder that earnings-per-share growth over the next year is projected to be 46.70%.
Matador's projected capital expenditure for drilling, completing, and equipping wells is estimated to be between $690 million and $750 million, including a further $32 million for general expenses, administrative expenses, and interest expenses. Capital expenditure for its San Mateo Midstream business is estimated to be between $85 million and $105 million. However, Matador is well capitalized to deal with this: long-term debt of $1.62 billion is offset by a net worth of $1.97 billion, and total current liabilities of $399.77 million are offset by total current assets of $278.49 million, cash-on-hand worth $65.13 million, and total accounts receivable of $189.41 million. The firm is financially robust to meet both its capital expenditure requirements and any headwinds coming its way.
The headwinds that Matador (and the oil markets in general) is currently experiencing have pushed the share price down at close of market on 09/03/2020 to $2.35 at a price-to-earnings ratio of 3.14, which is a significant discount to the stock's five-year average P/E of 18.09. By every metric, the stock is trading at a discount to the oil and gas extraction sub-sector and to the S&P 500 (SPY).
|Metric||Matador Resource Company||Sub-Sector||Index|
Figures collated from Morningstar and TheStreet.
It is clear, then, that Matador is likely trading at a significant discount to fair value - but what is fair value for Matador?
To determine fair value, I will first divide the current P/E by the historical market average of 15 to get a valuation ratio of 0.21 (3.14 / 15 = 0.21) and divide the current share price by this valuation ratio to get a first estimate for fair value of $11.19 (2.35 / 0.21 = 11.19). Then I will divide the current P/E by the five-year average P/E to get a valuation ratio of 0.17 (3.14 / 18.09 = 0.17) and divide the current share price by this valuation ratio to get a second estimate for fair value of $13.82 (2.35 / 0.17 = 13.82). Finally, I will average out these estimates to get a final estimate for fair value of $12.51 (13.82 + 11.19 / 2 = 12.51). On the basis of this estimate, the stock is currently undervalued by 432%.
It is my contention that Matador's share price will rally once the current price war is resolved, and may well rise higher if the coronavirus outbreak is contained - though I am less certain on the latter occurring in the short-term than I am on the former. In consequence, I started a position with Matador yesterday, as I see this as a speculative value play in the current environment.
This article was written by
Analyst’s Disclosure: I am/we are long MTDR. 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.
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