Matador Resources (MTDR) Valuation Update - Oct 17

[dan_s]

At the time of this post MTDR was trading at $64.78.
Since October 11th 4 respected energy sector analysts have adjusted their price targets to $70, $76, $81 and $83< JP Morgan.

I have made a few minor adjustments to my model, which increase my valuation by $0.50 to $84.00 per share.

Key things to keep in mind:
> None of Matador's oil production is hedged.
> They report natural gas & NGLs on a combined basis, making it hard for me to estimate their realized gas price.
> It is a pure play on the Permian Basin and IMO a prime takeover target.
> It is an "Aggressive Growth Company" that has consistently increased production by more than 20% YOY.
> This year Matador should generate more than $1.8 billion of operating cash flow and close to $500 million of free cash flow.
> It recently started paying dividends, which I expect them to increase in 2024.
> If WTI averages $90 in 2024, the Company should generate over $2.7 billion of operating cash flow next year. My WAG is that capex will be $1.5 billion in 2024. Free cash flow should be able to pay off most of the $1.6 billion of debt they took on to close the Advance Energy Acquisition on 4/13/2023.

Note from KeyBanc received this morning: Note that they are using a very low oil price for 2024, but a higher gas price than I'm using.
Matador Resources Company (MTDR)
Based on our 2024 commodity price deck of $76.50/b WTI and $3.90/mcf Henry Hub gas, MTDR shares
trade at a 2024E EV/EBITDA multiple of 4.2x, vs. the group average of 4.2x, and at a 2024E FCF yield
of 8.0%, vs. the group average of 9.0%. Our $76 price target reflects a target 4.9x EV/EBITDA multiple
and 6.9% FCF yield. We define FCF yield as discretionary cash flow less capex, relative to EV.

Risks that could impede shares from reaching our price target include:
● Commodity price risk – Declines in the price of oil or natural gas would negatively impact the value
of Matador’s unhedged production and inventory.
● Cost inflation risk – Matador operates in the Delaware Basin, which exposes the Company to
cost inflation and takeaway capacity constraints, which could impede its ability to grow, even with
midstream control on some of its acreage.
● Integration risk – Matador is integrating its $1.6B Advance Energy acquisition, which it closed on
earlier this year. Matador is also integrating the $75M Pronto Midstream acquisition it made last year.
Challenges with integration could impact production and FCF for Matador.