Matador Resources Company MTDR is likely to gain from the huge acreage position in the Permian Basin. However, its high debt level is a concern.
The stock has popped 134.5% in the past three months compared with 12.8% rise of the industry it belongs to.
Headquartered in Dallas, TX, Matador Resources is among the leading oil and gas explorers in the shale and unconventional plays in the United States. The company’s upstream operations are primarily concentrated in the Delaware and Midland basins — two sub-basins of Permian — and South Texas’ Eagle Ford shale. The company, with a market cap of $1 billion, has an expected earnings growth rate of 10.4% for the next five years.
Earnings estimate revisions have the greatest impact on stock prices. Over the past two months, the Zacks Consensus Estimate for Matador Resources’ earnings for the current year has improved 43.5%. During this time period, the stock has witnessed five upward revisions and no downward movement.
Positive Earnings Surprise History
Matador Resources outpaced the Zacks Consensus Estimate in all the trailing four quarters. It delivered a four-quarter average earnings surprise of 92.4%.
Matador Resources’ upstream operations are mainly concentrated in the Permian Basin, which is among the country’s most prolific oil and gas plays. Since 2011, the company has been boosting its Permian acreage drastically. From 7,500 net acres in 2012, the company’s operation now covers 128,000 net acres in the Permian Basin. Moreover, the company has an Eagle Ford presence of 28,400 net acres.
It expects 2020 oil equivalent production within 25.4-26.5 million barrels, indicating an increase from 24.2 million barrels of oil equivalent (boe) in 2019. Total oil production will likely be in the range of 15.1-15.5 million barrels, indicating an increase from the 2019 level of 14 million barrels. Also, the company has almost 90% of its expected crude production hedged, which will help it to navigate through the weak price environment. Notably, the company expects to record a $44.1 million realized net gain on derivatives in second-quarter 2020.
There is high demand for midstream infrastructures like oil and gas transportation, as well as gathering assets in the U.S. shale plays like the Permian Basin. As such, through 2020, the company allocated $85-$105 million toward midstream operations. In first-quarter 2020, its San Mateo operations gathered an average of 201 million cubic feet of natural gas per day in the Wolf and Rustler Breaks asset regions, reflecting a 12% year-over-year rise.
There are some negative factors that are holding back the company from attaining its growth potential.
Matador Resources’ free cash flows have been negative over the past few years, reflecting weakness in operations. This has increased the probability of more reliance on debt and equity capital for funding future growth projects.
The company has significant reliance to debt. Matador’s balance sheet weakness is reflected by the fact that it has a cash balance of only $56.8 million, with total long-term debt of $1,662.3 million. Its debt to capitalization of 43.6% is much higher than industry average of 35.9%. This can make it difficult for the company to finance growth projects.
Matador Resources’ rising annual total expenses are also concerning. The company’s total operating expenses per boe have risen for three consecutive years. This trend can hurt Matador’s bottom line. On top of that, since oil contributes nearly 58% to its production volumes, the prevailing volatility in oil prices has been affecting the company’s upstream businesses.
To Sum Up
Despite significant production growth opportunities, debt burden and volatile commodity prices are concerns. Nevertheless, we believe that its systematic and strategic plan of action will drive long-term growth.
Stocks to Consider
Some better-ranked players in the energy space include NGL Energy Partners LP NGL, Antero Resources Corporation AR and Centennial Resource Development, Inc. CDEV, each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
NGL Energy Partners’ bottom line for second-quarter 2020 is expected to rise 92.7% year over year.
Antero Resources’ bottom line for second-quarter 2020 is expected to rise 28.6% year over year.
Centennial Resource’s second-quarter earnings estimates have improved over the past 30 days, with two upward estimate revisions and no downward movement.
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