Matador Resources Digs Outsized Oil And Natgas Return

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Surrounded by giants in the oil and natural-gas exploration business, Matador Resources is proving to be an especially nimble operator with a focus on unconventional plays.

With a market cap around $1.8 billion,Matador ( MTDR ) sits among the smaller companies in IBD's Oil & Gas-U.S. Exploration & Production industry group. But its foray into the Delaware Basin (part of the Permian Basin stretching from West Texas into Southeast New Mexico) puts the company on the same playing field asEOG Resources ( EOG ) andAnadarko Petroleum ( APC ) -- the largest names in the group, with market caps above $50 billion.

Executing on its strong strategic focus, Dallas-based Matador was able to boost its oil and natural-gas revenue 72% to $269 million last year, and it expects to boost oil production around 40% this year after 76% last year.

Little Footprint, Big Moves

Matador is "one of the few smaller companies in the Delaware Basin," said Scott Hanold, an analyst at RBC Capital Markets. Of those in the under-$3-billion market-cap range, it is basically the "only one I can think of in the core northern and central Delaware Basin that has a substantial foothold."

It has "in the last 12 to 18 months quietly accumulated a pretty large acreage position" of almost 40,000 net acres in the Twin Lakes and Permian, he said, "which for a company that size is meaningful."

Matador considers it a very promising area to drill, as company founder and CEO Joseph Foran described on a fourth-quarter 2013 conference call with analysts: "Not only do we consider this one of the best resource plays in the country, along with Eagle Ford (Shale Region)," he said, "but we consider the large majority of our acreage to be prospecting for multiple oil- and liquids-rich targets, including Wolfcamp and Bone Spring plays."

As of March, the company operates 50,100 net acres in the Permian Basin and has total acreage of 138,000 net acres, according to the most recent investor presentation. Its core acreage positions are in the Permian and Eagle Ford, with an established position in East Texas' Haynesville Shale Region.

Matador earned fourth-quarter profit of 25 cents per share ex items, according to Thomson Reuters, a penny shy of estimates and up 39% from a year earlier. Analysts polled expect EPS of 29 cents for the first quarter of 2014 and $1.30 for the year, flat with 2013, then rising to $1.75 in 2015.

Last year Matador's oil production totaled 2.133 million barrels. Output is expected to rise to between 2.8 million and 3.1 million barrels this year. Analysts polled by Thomson Reuters project total revenue to lift 33% to $359 million for 2014.

Daily oil and natural-gas production in 2013 averaged 11,740 barrels of oil equivalent per day. Natural-gas production totaled 12.9 billion cubic feet, up from 12.5 in 2012.

Matador has announced plans to drill 89 gross wells in 2014, with 49 in Eagle Ford and 12 gross wells in the Delaware Basin. Analyst Irene Haas of Wunderlich Securities notes of the latter move that "12 gross wells is a very strong program considering (Matador's) market cap." For comparison,Energen ( EGN ), with a much larger market cap around $5.6 billion, also plans to drill 12 gross wells in the Delaware Basin this year.

CEO Foran founded Matador in 2003 and took it public a little over two years ago. According to company reports, it had proved reserves of 27 million barrels of oil equivalent at the end of 2011, which have since grown to 51.7 at the end of 2013, with 32% reserves in oil.

More Brain Than Brawn

What has enabled Matador to move so deftly? Analysts attribute its recent successes to the expertise of Foran's management and geologic teams, calling them "impressive" and "disciplined."

"When you look at them in terms of pure intellect and brain cells, it's really, really tremendous -- for any market cap," said Haas. "I look at them as a miniature EOG, in terms of resourcefulness and ability to think outside of the box."

This resourcefulness included taking advantage of Haynesville early and monetizing the play during its peak in 2008. "They continuously find ways of shortening drilling time, increasing efficiency and lowering costs," said Haas.

A savvy combination of studiousness and speed also helps. Analyst Jeff Grampp of Northland Securities says the Matador team is "disciplined in their approach, standing behind their geologists and the research that they've done."

He said they also employ a "methodical, measured pace to really get a feel for where the good spots are in their acreage ... and then really (put) the pedal to the metal," as the company did in Eagle Ford, where it now has core acreage.

"They're really smart about picking the right leases," added Haas. "They do a lot of geologic analysis before they enter a play, so they try to correctly identify elements that would make a place successful or not."

Matador currently has three wells in the Permian that are performing well. Grampp of Northland notes that the diverse locations of those wells, plus the company's eye toward unexplored territory, are beneficial.

"If you look at their acreage position, a good chunk of it is in an area where there isn't a ton of development, at least to date," he said. "The Twin Lakes area, which is their biggest, is a little bit less developed, there's a little bit less history ... (it) helps going in an area where no one else has gone."

Risk Profile

As with any driller, a positive outlook still comes with cautions.

The results of Matador's venture into the Twin Lakes region are still on the horizon, and the move "carries a little bit more risk," said Grampp -- if Twin Lakes doesn't produce, "that takes a pretty big catalyst off the table."

However, he notes that the number of drilling locations in the Permian has thus far been "relatively conservative," and there's "a very real possibility that the location count can increase dramatically if they continue to drill and ... figure out what formation works."

According to analysts, other risks to the stock's performance include capital requirements, logistical delays, natural-gas liquids market dynamics and weaker than expected commodity prices.

Haas notes that it could be problematic if West Texas Intermediate oil prices fall below $60 a barrel, although a recent U.S. Energy Information Administration report predicts an average of $95.60 a barrel in 2014.

"I think they will continue to grow," she said. "They've got quite a bit of land to put to use, they're good at executing, they mind their balance sheets, and if natural gas comes back ... they still have quite a bit of land in the Haynesville play that they can put back to work."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: MTDR , EOG , APC , EGN

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