Energy Prospectus

(Bloomberg) -- Oil producer Matador Resources Co. agreed to buy assets in the Permian Basin from a portfolio company of EnCap Investments LP for $1.9 billion cash, the latest in a series of shale industry tie-ups.

I am updating my forecast/valuation model and should post it to the EPG website this afternoon.

DALLAS, June 12, 2024--(BUSINESS WIRE)--Matador Resources Company (NYSE: MTDR) ("Matador" or the "Company") today announced that a wholly-owned subsidiary of Matador has entered into a definitive agreement to acquire a subsidiary of Ameredev II Parent, LLC ("Ameredev"), including certain oil and natural gas producing properties and undeveloped acreage located in Lea County, New Mexico and Loving and Winkler Counties, Texas (the "Ameredev Acquisition"). The Ameredev Acquisition also includes an approximate 19% stake in Piñon Midstream, LLC ("Piñon"), which has midstream assets in southern Lea County, New Mexico. The consideration for the Ameredev Acquisition will consist of a cash payment of $1.905 billion, subject to customary closing adjustments. Ameredev is a portfolio company of EnCap Investments L.P. ("EnCap").

The Ameredev Acquisition is subject to customary closing conditions and is expected to close late in the third quarter of 2024 with an effective date of June 1, 2024. A short slide presentation summarizing the Ameredev Acquisition is also included on the Company’s website at www.matadorresources.com on the Events and Presentations page under the Investor Relations tab. Matador’s management will host a live conference call to discuss the Ameredev Acquisition on Wednesday, June 12, 2024 at 10:00 am Central Time. Further details are provided at the end of this press release.

Joseph Wm. Foran, Matador’s Founder, Chairman and CEO, commented, "Matador is very excited to work with EnCap again on this strategic bolt-on opportunity (see Exhibit A). As with the successful Advance Energy deal we completed in April of 2023, we view the Ameredev transaction as another unique opportunity to work with EnCap and another value-creating opportunity for Matador and its shareholders. We evaluated this opportunity based on the high rock quality, the strong existing production and cash flow profile, the significant reserves additions, the high-quality inventory, the strategic fit within our existing portfolio of properties and the expansion of our midstream footprint with an ownership interest in Piñon. The equity and debt securities offerings and the revolving credit facility amendment we completed earlier this year, together with our historical balance sheet conservatism, have provided Matador with the opportunity to acquire these high-quality assets and continue Matador’s consistent history of profitable growth at a measured pace."

Transaction Highlights

On a pro forma basis following closing of the acquisition, Matador expects to have over 190,000 net acres in the Delaware Basin, approximately 2,000 net locations, production of over 180,000 barrels of oil and natural gas equivalent ("BOE") per day, proved oil and natural gas reserves of over 580 million BOE and an enterprise value in excess of $10 billion (see Exhibit B)

Expected to generate forward one-year Adjusted EBITDA1 of approximately $425 to $475 million at strip prices as of late May 2024, which represents an attractive purchase price multiple of 4.2x for the upstream assets:

Strip prices for the remainder of 2024 averaged $77 per barrel of oil and $2.76 per MMBtu of natural gas.

Accretive to relevant key financial and valuation metrics

Significant increase in high quality pro forma drilling locations in primary development zones (see Exhibit C)

PV-10 (present value discounted at 10%)2 at May 31, 2024 of $1.46 billion on total proved oil and natural gas reserves utilizing strip pricing as of late May 2024. The PV-10 of $1.46 billion does not include the interest in Piñon or certain undeveloped but prospective locations included in Matador’s valuation of the Ameredev assets:

PV-10 of proved developed (PD) oil and natural gas reserves at May 31, 2024 of $1.20 billion, or approximately $47,100 per flowing BOE, utilizing strip pricing as of late May 2024.

Preserves Matador’s strong balance sheet with pro forma leverage expected to be approximately 1.3x at closing and back below 1.0x by the middle of 2025 based upon current commodity prices, allowing Matador to maintain operational and financial flexibility while continuing to return value to shareholders through its fixed quarterly dividend and protecting cash flows through its appropriate commodity hedges

Expanding Matador’s midstream footprint with an approximate 19% stake in Piñon, which allows for increased coordination between Matador and Piñon in gathering, transporting and treating natural gas from the Ameredev properties

Gabriele Sorbara at Siebert Williams Shank & Co (Rated 4.5 Stars by TipRanks) just increased his price target for MTDR to $90.00

Done

Thanks. My mouse and my brain are not always on the same page.

At the time of this post, MTDR was trading for $59.41 down $0.20 on the day.

My current valuation increases by $2 to $90/share.
Assuming 2025 oil and gas prices of $80/bbl and $3.75/mcfe for natural gas & NGLs, my 12-month price target would be $105/share.

The Ameredev Acquisition should be immediately accretive to all financial measures. It is an all-stock asset purchase, so per share revenues, proved reserves, net income and operating cash flow go up. < At December 31, 2024 my "WAG" is that the PV10 Net Asset Value based just on the Company's proved reserves (1P) will exceed $60/share.

My 2025 forecast is based on 200,000 Boepd of production split 61% crude oil and 39% natural gas & NGLs, which Matador reports on a combined basis.
Revenues of $4.387 billion, including midstream services revenue of $160 million.
Net Income of $1.329 billion ($10.68/share)
Operating cash flow of $2.757 billion ($21.88/share)
Free cash flow of $1.200 billion ($9.50/share) < I expect Matador to hold their dividend at $0.20/Quarter, so over $1 billion of free cashflow can be used to pay down debt. Matador has promised to get their leverage ratio back below 1.0 X. Once they reach that goal, I expect them to raise dividends.

Matador is an "Aggressive Growth" company. They plan to run nine company operated rigs going forward, so my production forecast for 2025 is probably going to be too low.

Matador announced today the Mederev acquisition. I think the acquisition is one of mixed blessings.

Summary
• The normalized acquisitioncosts appears be a bit high.
• The effects of the acquisition on reserves, production and years of production are positive. Also, profits and the eps in 2025/2026 and onwards will get a boost.
• On the negative side: the balance sheet will deteriorate and will requires reinforcement. As a consequence the shareholder returns will stay lowish for 3-4 years to come.

Acquisition price
• On face value the normalized acquisition does not appear to be cheap. Costs of $ 1.905 B and 25.5 K BoE/d normalize to 1,905/25.5= $74.7 M/K BOE/d.
• Recent acquisitions (Diamondback - Endeavor, Oxy - Crownrock went for $ 70-71.7 M/K BoE/d.
• Of course, there are many factors which influence an acquisition price and I do not want to draw too many conclusions from this.

Reserves and production
• The impact on reserves and production is positive
• The acquisition will boost reserves by 25.5% from 462 M BoE to 580 M BoE
• Production will be boosted by 15% from 160 K BoE/d to 185 K BoE/d
• Reserves equivalent to 2025 production grows from 7.8 to 8.3 years.

Balance sheet
• The impact on the balance sheet is negative.
• Long term debt will almost double from $ 1.972 B to $ 3.877 B.
• The EBITDA increases (50%) but less than the debt. As such the debt/EBITDA ratio will fall.
• Solvency drops from a good 56.4% to a weak 45.8%.
• I think the balance sheet needs to be reinforced with about $ 900-1,000 M. With $ 250-300 M/year from the free cash flow this can take 3-4 years.
• Until the balance sheet is reinforced, shareholder returns will have to be limited.

Profitability
• Net profits will increase.
• I think the impact in 2024 will almost be nil. The costs of the transaction will offset the gains after the transaction is closed.
• In 2025/2026 I think the eps will increase with approx. $ 0.70-0.80.
• With WTI at $ 80/bbl net profit is 2025 can increase to $ 555 M (eps $ 2.65, PE =5.8) and in 2026 to $ 670 M (eps=$ 3.45, PE= 5.4)
• The PE is moving to lower regions.

Shareholder returns
• Matador pays interim dividends of $ 0.20 for an annular total of $ 0.80. This is equivalent to a low yield of 1.3%. Even is the interim dividend is boosted a bit (say to $ 0.35) than the yield will only be 2.3%.
• With no substantial increases to come for 3-4 year due to the balance sheet, shareholder returns will be limited until 2027/2028. Thereafter they can be returned to decent levels (7-8%).

They are getting a lot of high-quality "Running Room". There is a lot of value in the "Probable Reserves" that will be acquired. If WTI averages around $80/bbl, Matador will pay down debt quickly.

Matador's management team is committed to "Aggressive Growth", so I doubt that it will ever be in our High Yield Income Portfolio.
If oil prices do go higher, it will definitely be a "Screaming Takeover Target".

A merger with Permian Resources (PR) would put it up there with Diamondback Energy (FANG).