Energy Prospectus

Matador's Q3 production and cash flow from operations beat my forecast. I have updated my forecast/valuation model for MTDR and it will be posted to the EPG website in the afternoon on November 1. Based on the company's higher production guidance, I have raised my valuation by $2.00 to $44.00/share.

Third Quarter 2018 Financial and Operational Highlights

• Third quarter 2018 average daily oil equivalent production increased 3% sequentially to a record quarterly high for the Company of 54,600 barrels of oil equivalent (“BOE”) per day (59% oil) as compared to the second quarter of 2018. Average daily oil production increased 9% sequentially to 32,300 barrels per day and average daily natural gas production decreased 4% sequentially to 133.8 million cubic feet per day, each as compared to the second quarter of 2018.
< Compares to my forecast of 30,600 BOPD of oil and 129.6 million cfpd of natural.

• Third quarter 2018 net income (GAAP basis) was $17.8 million, or $0.15 per diluted common share, a decrease of $42.0 million, or 70%, from the second quarter of 2018, and a year-over-year increase of 18% from $15.0 million in the third quarter of 2017. On a GAAP basis, third quarter 2018 net income was negatively impacted by charges of $52.6 million associated with a non-cash unrealized loss on derivatives of $21.3 million and a prepayment premium of $31.2 million resulting from the redemption and refinancing of the Company’s senior unsecured notes during the third quarter.

• Third quarter 2018 adjusted net income (a non-GAAP financial measure) was $55.7 million, or $0.48 per diluted common share, a sequential increase of 21% from $46.1 million in the second quarter of 2018, and a year-over-year increase of 213% from $17.8 million in the third quarter of 2017. < Compares to my forecast of $40.6 million net income, or $0.35 EPS.

• Third quarter 2018 adjusted earnings before interest expense, income taxes, depletion, depreciation and amortization and certain other items (“Adjusted EBITDA,” a non-GAAP financial measure) were $155.4 million, a sequential increase of 13% from $137.3 million in the second quarter of 2018, and a year-over-year increase of 83% from $84.8 million in the third quarter of 2017.

• In September 2018, Matador successfully acquired approximately 8,400 gross/net leasehold acres for approximately $387 million, or a weighted average cost of approximately $46,000 per net acre, in Lea and Eddy Counties, New Mexico in the Bureau of Land Management New Mexico Oil and Gas Lease Sale (the “BLM Acquisition” or the “BLM Lease Sale”). The Company believes that portions of the BLM Acquisition include some of the most prospective acreage in the Delaware Basin, with the potential to develop as many as seven to nine different formations in certain tracts (please see Matador’s September 12, 2018 press release for additional information).

• In August 2018, Matador closed a private offering of $750 million of 5.875% senior unsecured notes due 2026. A portion of the net proceeds were used to purchase and redeem the entire $575 million aggregate principal amount of its 6.875% senior unsecured notes due 2023. In early October 2018, Matador closed a private offering of an additional $300 million of its 5.875% senior unsecured notes due 2026. The net proceeds were used to repay a portion of the borrowings under Matador’s revolving credit facility that were incurred to finance the BLM Acquisition.

• In mid-October 2018, a subsidiary of San Mateo Midstream, LLC (“San Mateo”), the Company’s midstream joint venture, entered into a long-term agreement with a producer in Eddy County, New Mexico for the gathering and processing of such producer’s natural gas. As a result of this agreement, along with others entered into by San Mateo with Matador and other customers, San Mateo has entered into contracts to provide firm gathering and processing for over 200 million cubic feet of natural gas per day, or over 80% of the designed inlet capacity of 260 million cubic feet of natural gas per day at its Black River cryogenic natural gas processing plant (the “Black River Processing Plant”) in the Rustler Breaks asset area in Eddy County, New Mexico (please see Matador’s October 16, 2018 press release for additional information).

• In late October 2018, Matador and its lenders amended the Company’s revolving credit agreement to, among other items, (i) increase the maximum facility size from $500 million to $1.5 billion, (ii) increase the borrowing base from $725 million to $850 million, (iii) increase the elected borrowing commitment from $400 million to $500 million, (iv) extend the maturity of the credit agreement from October 2020 to October 2023 and (v) reduce borrowing rates by 0.25% per annum.

Full-Year 2018 Guidance Updated, raised production guidance to 18.8 to 19.0 million Boe for 2018

As a result of the Company’s production and financial performance exceeding its expectations for the third quarter of 2018, effective October 31, 2018, Matador again increased its full-year 2018 guidance estimates as provided in the table below. Matador’s updated production guidance represents an increase of 12% at the midpoint of the range for both oil and natural gas production above its original 2018 guidance as provided on February 21, 2018. The Company’s updated Adjusted EBITDA guidance reflects an increase of 24% from its original 2018 guidance. Matador increased its estimated capital expenditures for drilling, completing and equipping (“D/C/E”) wells for 2018 on October 1, 2018 by $25 to $30 million, or 4%, with its announcement of a seventh operated drilling rig being deployed in South Texas to drill up to 10 wells, primarily in the Eagle Ford shale. At October 31, 2018, Matador made no further adjustments to its estimated D/C/E capital expenditures or to its estimated midstream capital expenditures for the remainder of 2018.

Read this to help you understand what is going in West Texas with realized oil, gas and NGL prices

Matador's realized prices, including cash settlement on hedges during each quarter.

Q2 2018
> $3.38/mcfe for natural gas & NGLs (reported on a combined basis)
> $60.52/bbl for crude oil

Q3 2018
> $3.77/mcfe for natural gas & NGLs
> $58.97/bbl for crude oil (lower prices in the Permian Basin were offset a bit by premium prices for their Eagle Ford oil)

Realized Commodity Prices

Matador’s weighted average realized oil price, excluding derivatives, decreased 7% sequentially from $61.44 per barrel in the second quarter of 2018 to $57.15 per barrel in the third quarter of 2018, due primarily to widening Midland-Cushing basis differentials. Average oil price differentials relative to the West Texas Intermediate benchmark widened from ($6.47) per barrel in the second quarter of 2018 to ($12.36) per barrel in the third quarter of 2018, inclusive of trucking costs. Although the Midland-Cushing basis differentials have narrowed recently, Matador still expects its weighted average realized oil price differential to be in the range of ($11.00) to ($13.00) per barrel in the fourth quarter of 2018. Matador estimates its realized oil price differential in October 2018 was approximately ($17.00) per barrel, inclusive of trucking costs, but given the recent narrowing in Midland-Cushing basis differentials, the Company anticipates improved realized oil price differentials of ($9.00) to ($10.00) per barrel, inclusive of trucking costs, in November and December. As of September 30, 2018, Matador had oil basis hedges in place to mitigate its exposure to oil price differentials on 45% to 50% of its anticipated Delaware Basin oil production for the fourth quarter of 2018, limiting Matador’s differential for this production to a weighted average price of ($1.02) per barrel.

Matador’s weighted average realized natural gas price, excluding derivatives, increased 12% sequentially from $3.38 per thousand cubic feet in the second quarter of 2018 to $3.77 per thousand cubic feet in the third quarter of 2018. Matador realized a primarily NGL-related uplift of $0.90 per thousand cubic feet above the average NYMEX Henry Hub natural gas price in the third quarter of 2018, as compared to $0.55 per thousand cubic feet in the second quarter of 2018.

Matador’s realized price for its Delaware Basin natural gas production is exposed to the Waha-Henry Hub basis differentials. These basis differentials were wider in the third quarter as compared to the second quarter of 2018 and have continued to widen further since the end of the third quarter. Nevertheless, Matador’s weighted average realized natural gas price was positively impacted by increasing NGL prices during the third quarter, which resulted in a 15% increase in revenues received for its NGL production in the third quarter as compared to the second quarter of 2018. Matador is a two-stream reporter, and the revenues associated with its NGL production are included in the weighted average realized natural gas price.