Matador Resources (MTDR) Q4 Results

[dan_s]

Average daily oil production increased 5% sequentially from approximately 23,500 barrels per day in the third quarter of 2017 to approximately 24,700 barrels per day in the fourth quarter of 2017. This 5% average daily oil production growth exceeded the Company’s expectations that oil production would be essentially flat in the fourth quarter, as compared to the third quarter of 2017. Matador’s fourth quarter 2017 average daily oil production was the best quarterly result in the Company’s history.

Average daily natural gas production increased 3% sequentially from approximately 110.5 million cubic feet per day in the third quarter of 2017 to approximately 114.3 million cubic feet per day in the fourth quarter of 2017. This 3% average daily natural gas production growth also exceeded the Company’s expectations of a small sequential decline in natural gas production in the fourth quarter of 2017. Matador’s fourth quarter 2017 average daily natural gas production was the best quarterly result in the Company’s history.

YOY production growth was just under 40%.

Matador’s net income (GAAP basis) increased 155% sequentially from $15.0 million, or earnings of $0.15 per diluted common share, in the third quarter of 2017, to net income (GAAP basis) of $38.3 million, or earnings of $0.35 per diluted common share, in the fourth quarter of 2017. This sequential increase in net income was primarily attributable to a significant increase in oil and natural gas revenues resulting from both increased oil and natural gas production and increased commodity price realizations in the fourth quarter of 2017, as compared to the third quarter of 2017. A portion of the sequential increase in net income was also attributable to an income tax benefit of $8.2 million, or approximately $0.08 per diluted common share, reflecting both actual and anticipated refunds of federal alternative minimum tax (“AMT”) paid in prior periods as a result of the recent enactment of the Tax Cuts and Jobs Act.

Matador’s adjusted net income (a non-GAAP financial measure) increased 53% sequentially from $17.8 million, or adjusted earnings of $0.18 per diluted common share, in the third quarter of 2017, to adjusted net income (non-GAAP) of $27.2 million, or adjusted earnings of $0.25 per diluted common share, in the fourth quarter of 2017. This sequential increase in adjusted net income was primarily attributable to a significant increase in oil and natural gas revenues resulting from both increased oil and natural gas production and increased commodity price realizations in the fourth quarter of 2017, as compared to the third quarter of 2017. Adjusted net income for the fourth quarter of 2017 did not include the federal AMT benefit of $8.2 million and was estimated using a federal statutory tax rate of 35%.

Adjusted EPS came in $0.02 above my forecast.

[dan_s]

In the last 3 months, 9 ranked analysts set 12-month price targets for MTDR. The average price target among the analysts is $36.25. Price targets range from $32 to $40.

I have updated my forecast/valuation model based on the company's guidance, which BTW is extremely detailed. My valuation increases by $1.00 to $40.00/share.

1. In 2018 Matador's production should be up approximately 20%. This company tends to "under-promise and over-deliver", so they will probably exceed their production guidance.
2. All their oil hedges are collars with ceiling of $60 to $67, so they have upside to the oil price I am using in the forecast periods.
3. Their natural gas volumes include NGLs, which is why their realized price ($4.12/mcf in Q4) is so high. Their percentage of NGLs is increasing, so the gas price I am using in the forecast periods may be too low.
4. The only negative that I see is that they are going to outspend their operating cash flow by $150 to $200 million this year. Wall Street keeps saying that they want upstream companies to "live within cash flow", but some companies that have announced cuts in their drilling programs have been hammered.

At $60 WTI, Matador has hundreds of low-risk drilling locations that will generate IRR's over 50%. Econ 101 tells me they should continue an aggressive drilling program.