Energy Prospectus

Third Quarter 2019 Financial and Operational Highlights

Record Oil, Natural Gas and Oil Equivalent Production

Third quarter 2019 average daily oil equivalent production increased 14% sequentially to a record quarterly high for the Company of 69,600 barrels of oil equivalent (“BOE”) per day (57% oil), as compared to 61,300 BOE per day in the second quarter of 2019. < My forecast was Q3 production of 63,800 BOE per day.

Average daily oil production increased 8% sequentially to a record quarterly high for the Company of 39,800 barrels per day, significantly above the Company’s expectations for the third quarter, and as compared to 36,800 barrels of oil per day in the second quarter of 2019. This increase in average daily oil production was primarily attributable to (i) the initial performance of certain wells in the Rustler Breaks and Antelope Ridge asset areas exceeding expectations and (ii) several wells being completed and turned to sales earlier than anticipated during the third quarter of 2019.

Average daily natural gas production increased 22% sequentially to a record quarterly high for the Company of 179.2 million cubic feet per day, significantly above the Company’s expectations for the third quarter, and as compared to 147.1 million cubic feet per day in the second quarter of 2019. This increase in average daily natural gas production was primarily attributable to (i) the initial performance from two non-operated Haynesville shale wells exceeding expectations, (ii) several wells being completed and turned to sales earlier than anticipated in the third quarter of 2019 and (iii) improved natural gas prices in the Delaware Basin, which obviated the need to defer natural gas production from certain wells, as occurred in the second quarter of 2019.

Increased Net Income, Earnings Per Share and Adjusted EBITDA

Third quarter 2019 net income (GAAP basis) was $44.0 million, or $0.38 per diluted common share, a 20% sequential increase from net income of $36.8 million in the second quarter of 2019, and a 2.5-fold year-over-year increase from net income of $17.8 million in the third quarter of 2018.

Third quarter 2019 adjusted net income (a non-GAAP financial measure) was $37.9 million, or $0.32 per diluted common share, a 10% sequential increase from $34.6 million in the second quarter of 2019, and a year-over-year decrease from $55.7 million in the third quarter of 2018. < My forecast was EPS of $0.19 in Q3.
Third quarter 2019 adjusted earnings before interest expense, income taxes, depletion, depreciation and amortization and certain other items (“Adjusted EBITDA,” a non-GAAP financial measure) was $160.8 million, a 12% sequential increase from $144.1 million in the second quarter of 2019, and a 3% year-over-year increase from $155.4 million in the third quarter of 2018.
In-Line Capital Expenditures and Improved Capital Efficiency

Matador has increased its full year 2019 oil and natural gas production and Adjusted EBITDA guidance

Management Comments

Third Quarter Highlights

Joseph Wm. Foran, Matador’s Chairman and CEO, commented, “As highlighted throughout this earnings release, the third quarter of 2019 was simply the best quarter in our Company’s history. During the third quarter, we significantly exceeded our estimates for both oil and natural gas production as a result of continued improvements in operating efficiency and better-than-expected well results from a number of wells across our various asset areas. We have continued to maintain our commitment to capital discipline throughout the third quarter and realized an additional aggregate savings of approximately $5 million on those wells completed and turned to sales during the third quarter. In addition, we continued to see our unit operating costs improve, as both our lease operating and general and administrative expenses declined during the third quarter. San Mateo delivered record results in the third quarter as well, highlighted by all-time highs for third-party revenues, natural gas gathering and processing volumes, water gathering and disposal volumes and Adjusted EBITDA. The Board and I congratulate the staff for its continued consistent and professional execution across all departments throughout the organization.

Longer Laterals Leading to Improved Capital Efficiency

“As we enter the fourth quarter of 2019, our transition to longer laterals across our various asset areas in the Delaware Basin is well underway, and we anticipate that just over half of the wells we complete and turn to sales during the remainder of 2019 will be laterals longer than one mile, with about 30% of the total being two-mile laterals. As examples, we recently completed and turned to sales our first two-mile laterals in the Antelope Ridge asset area and are very pleased with the early performance from both wells. One of these wells, the Jeff Hart State Com #134H well, a Third Bone Spring completion, has produced approximately 70,000 barrels of oil in just its first 30 days of production, marking the highest 30-day oil production from any well in Matador’s history, including our prolific Mallon wells in the Ranger asset area, also Third Bone Spring completions. Equally important, drilling and completion costs on the Jeff Hart State Com #134H well were just under $1,000 per lateral foot, about 20 to 25% below the drilling and completion costs per lateral foot associated with one-mile laterals recently drilled in the Antelope Ridge asset area. As we look forward to 2020, this transition to longer laterals and the improved capital efficiency associated with these wells should continue.

Asset Sales

“Our efforts to convert certain non-core assets to cash, and in particular, the divestment of portions of our non-core assets, have progressed well during the first nine months of 2019. We continue to receive interest in our various properties in South Texas and are actively working to complete one or more of these opportunities before the end of the year. We remain confident that our deliberate approach to divesting of our non-core assets should result in increased value being obtained for these properties for Matador and its shareholders.

Assets Behind Each Share of Matador Stock

“In these times of volatile market conditions, the Board and I take comfort in the outstanding performance of our staff, in the steadily improving fundamentals of our businesses and in the hard assets that stand behind each share of Matador stock. For example, each Matador share represents more than one barrel of oil and approximately five thousand cubic feet of natural gas reserves. Further, Matador owns a 51% interest in a significant, rapidly growing, and we believe, underappreciated group of oil, natural gas and water midstream assets in the Delaware Basin. In addition, we have accumulated approximately 183,000 net acres of leasehold in three of the best oil and natural gas plays in the country, including 132,700 net acres in the prolific Delaware Basin. We have also acquired approximately 11,200 net royalty acres of strategically located mineral interests. Finally, of course, each Matador share is also backed by approximately 300 talented technical, land and financial professionals, who are, we contend, among Matador’s most valuable assets.

“In summary, we are very pleased with the excellent operating and financial performance that both our exploration and production and midstream businesses have delivered through the first three quarters of 2019. We expect to finish 2019 on a strong note and look forward to 2020, as we fully transition to drilling and completing longer laterals, continue to improve the capital efficiency of our exploration and production operations and complete the ongoing expansion of San Mateo. We are very excited about the opportunities that lie ahead, and we like our chances as we continue to grow and build the value of both of our highly complementary exploration and production and midstream businesses.”

Matador has a habit of grossly under-estimating their production in their guidance, so they can over-deliver. That is great, but it often gives the impression that they expect well results in the next quarter to be under the pre-drill type curve. In my forecast model, I will use Q4 production that keeps full-year production under the top of their guidance, but my guess that they will exceed guidance several thousand Boepd in Q4.

I have finished updating my forecast/valuation model. It will be posted to the EPG website this afternoon.

Things to focus on:
> Matador's production is on-track to increase by more than 25% YOY in 2019.
> They are outspending cash flow from operations, but cash from non-core assets sales should fill the gap.
> My production forecast for 2020 now looks too conservative, but they have not provided production guidance for next year.
> Matador reports natural gas & NGLs on a combined basis. Natural gas prices really sucked in Q2 (1.64/mcfe), improved slightly to $1.91/mcfe in Q3. They expect a larger increase in Q4.
> Their production mix is approximately 57% crude oil and 43% ngas+ngls. In 2018 their ngas+ngls price was $3.46/mcfe, so there is significant upside potential there as more pipeline access comes online in the Delaware Basin.
> First Call's target price of $22.32 s/b going up soon.

In the last 3 months, 6 ranked analysts set 12-month price targets for MTDR of $22 to $26 per share. The average price target among the analysts is $24.00.