Matador Resources (MTDR) Update - Oct 2

[dan_s]

My only concern with MTDR is that they are on-track to outspend cash flow from operations by about $100 million this year. CapEx budget of $525 to $605 million vs operating cash flow of $425 to $450 million. So, this report from RBC Capital is encouraging.
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RBC Capital Markets: October 1, 2020
Matador Resources Company (RBC price target of $13.00US)
Notes from Our Virtual NDR with Management

Our view: MTDR's pivot to sustainable FCF could be right around the
corner. Management was emphasizing a more deliberate 5-7% growth
rate and prioritizing debt reduction. This combination should appeal to
investors and rank above many SMid cap energy companies. FCF should
show up by 4Q20 and likely remains in place at $40-45/bbl (WTI). Our LT
model (through 2025) shows leverage below 2.0x by early 2023.

Key points:
We hosted a virtual non-deal roadshow with MTDR management. The
meetings included David Lancaster (EVP - CFO), Matt Hairford (President).

Investors won't have to wait that long for FCF generation. Management
emphasized its development strategy pivots to a more moderate 5-7%
production growth rate. We think this should provide sustainable FCF
generation in 2021 at $40-45/bbl. The midstream and drilling incentives
likely drive the FCF next year but the upstream business could get close as
well. The priority for FCF is bank debt reduction, which should reach ~$450
million at YE20. Once leverage is more comfortable, adding a rig could
occur but only with oil prices at least $45-50/bbl. We think this would
require leverage closer to 2.0x along with much lower bank debt.

Activity will be focused on the core federal acreage where MTDR has
ample permits in hand. Our detailed model (pages 6-7) shows that a
sustained three rig pace through 2021 generates 6% production growth
(YoY) with oil production flat from entry-to-exit.

Capital productivity improvements continue, benefiting from the
Stateline development. Efficiency gains and low service costs should get
well costs down to $800-850/foot in 2020 (on average), below the ~$900/
foot target. Part of the operation gains come from the Stateline area (100%
WI, 87.5% NRI) where long-lateral and development scale is occurring.
There are also benefits from the new San Mateo midstream. The first 13
Boros wells, all two-mile laterals, are online and the focus moves to the
Voni well. The Voni wells are 2.5-mile laterals on the adjacent block and
should be online by early 2Q21. < This should push Q4 production above what I now have in my forecast/valuation model - Dan.

Midstream shifts to maintenance mode providing meaningful FCF
generation. In 2021, San Mateo EBITDA growth should continue with the
ramp in production at the Stateline, while capital spend decreases to
maintenance levels of roughly $40 million gross. This should position it for
meaningful FCF generation in 2021.

Prepared for what lies ahead. Roughly 28% of the Delaware Basin acreage
is on federal lands, 70% of which should be HBP by year-end. MTDR has
220 approved federal permits and expects 300 by year-end. This is enough
for a focused 6-year development plan. Our 2020-21E EPS/CFPS increased
based on improved capital/operational performance per its 9/22 update.

RBC Capital's valuation:
Our $13/share price target is derived from a combination of evaluating forward EBITDA
multiples, relative FCF levels, and our Net Asset Value (NAV). Our price target, NAV upside
opportunity, and cash flow outlook supports our Outperform rating. MTDR has a large core
Permian position that contains more than a decade of drilling inventory and the company owns
a controlling position in a value accretive midstream entity.
Our target reflects,
• a 15% discount to our $15/share NAV, a premium to the 30% SMid cap peer average due to
relative operational execution, acreage quality, and the midstream advantage. Our NAV is a
risked assessment of 3P reserves using the long-term RBC commodity price outlook of $50/
bbl (WTI), $55/bbl (Brent), and $2.50/Mcf (HH);
• an 8x multiple our 2021 EBITDA estimate, a premium to the 6x peer average, warranted
given the depth of its inventory, midstream ownership, and higher growth rates.