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Matador Resources: Stellar Surprises

Times have been tough recently for oil and gas E&P (exploration and production) firms. This is especially true as the COVID-19 pandemic has raged on, with the crisis spurring uncertainty and creating weakened demand in the space. One company that continues to prove itself, though, is Matador Resources (MTDR). Amidst all the pain inflicted on the industry, Matador has managed to increase its own output expectations for the year, plus management continues to boast (rightfully so) its San Mateo operation. In all, investors should view the business as an interesting prospect to consider buying into, especially if recent progress persists into the future.

Recent developments are encouraging

It’s really difficult to find too much to dislike about Matador operationally. Consider the company’s recent guidance changes. This year, the expectation from management is for the firm to generate oil output of between 15.7 million barrels and 15.8 million barrels. This is up 1.6% (using the mid-point) over the prior range of 15.35 million barrels to 15.65 million. Not only is the amount of oil expected to be produced growing, the range, you’ll notice, has narrowed. This should happen as 2020 draws closer to an end, but the fact that the range is now so tight is indicative of management’s confidence in their projections.

*Taken from Matador Resources

Oil output is a significant source of revenue for Matador, but it’s important to keep in mind that natural gas output is integral to the business’ operations as well. This, too, is showing signs of improvement, with management forecasting production of between 68 Bcf (billion cubic feet) and 69 Bcf for this year. This fares favorably relative to the prior expected range of 65.5 Bcf to 68.5 Bcf. At the mid-point for each, this represents outperformance of 2.2%. Also, just as discussed already, the range here is narrowing as well. This, combined with oil output coming in stronger, has encouraged management to increase guidance for total output this year to between 27 million boe (barrels of oil equivalent) and 27.3 million boe. This compares to 26.3 million boe to 27.1 million boe previously. At the mid-point, this implies an improvement of 2.8%.

Higher output is one thing, but higher output with lower capex is another entirely. You might think that in order to achieve this excess growth that management would need to commit additional capital to its budget, but this is not the case. In fact spending will now be lower than originally anticipated. The prior drilling, completion, and exploration budget for Matador was set to range between $440 million and $500 million. That has now been reduced to between $455 million and $475 million, for a $5 million decrease at the mid-point. Its San Mateo capex budget also was reduced from between $85 million and $105 million to between $90 million and $100 million. That also represents a $5 million decrease at the mid-point.

*Taken from Matador Resources

The larger capex budget cut has been achieved not through a reduction in activity by the firm, but through a reduction in costs. In 2020, the expectation is for the company to spend $860 per foot of drilling and completion work. This compares to $1,165 per foot in 2019 and it’s far lower than the $1,528 per foot seen in the company’s 2018 fiscal year. What’s really exciting is that this cost continues to decline pretty much each quarter. As of the third quarter, it had fallen to just $790 per foot. At this level, the company could drill and complete as much of its assets as it did in 2018 while spending $142 million less than it would have in 2018.

*Taken from Matador Resources

Besides capex reductions, there are other cost-cutting plans management has been working on. Its goal for 2020 is to see its annual run-rate operating costs to decline by $360 million. Through the third quarter, management estimated that they had already achieved $328 million of that. $250 million of this will come from its capex budget, but the company also expects reduced costs from some of its other business activities. This includes $40 million from lower lease operating expenses and reduced general and administrative costs.

This is not to say that everything has been great for Matador. In the third quarter, for instance, the company’s EBITDA totaled $121 million. While this is a nice improvement over the $107.6 million seen one quarter earlier, it’s still quite a bit below its $160.8 million in EBITDA seen in the third quarter last year. Though there was underperformance there, the company’s San Mateo business fared well, reporting EBITDA of $28 million compared to $23.2 million a quarter earlier and $26.3 million the same time last year.

*Taken from Matador Resources

Moving forward, management has high hopes for San Mateo. For the fourth quarter, the company is forecasting EBITDA of $32.5 million. This would bring total 2020 EBITDA for the unit up to $109.9 million. This is 14.1% higher than the $96.3 million seen for all of 2019. On an annualized basis (using fourth quarter data), San Mateo should generate between $124 million and $136 million in EBITDA. Of this, between $63 million and $69 million would go to Matador itself. This shows that the unit can be a valuable asset for the company moving forward.

Takeaway

Based on the data provided, it seems clear to me that Matador seems to be doing well for itself. The oil and gas firm has managed to not only survive recent downturns in pricing, it seems to be thriving in the current environment. Sure, in some ways it’s not doing as well as it did in 2019, but between cost reductions, higher output than anticipated, and the flourishing of San Mateo, the firm is poised to do well in the long run.

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Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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