Matador Resources’ Weakness Could Be Temporary

Matador Resources stock has fallen off a cliff in the past few weeks, erasing all the gains that it had recorded in the earlier part of the year. The high-flying oil stock was dealt a big blow at the beginning of May when it missed Wall Street’s revenue estimates.

Matador stock hasn’t recovered since as the U.S.-China trade war has cast a pall of gloom on the oil industry, raising concerns regarding demand. In such a scenario, is Matador capable enough of staging a comeback? Let’s find out.

Matador is in a Tight Spot Despite Rising Production

Matador managed to beat Wall Street’s estimates comprehensively on the bottom line, thanks to lower expenses.

Matador Resources’ first-quarter oil production averaged 34,517 barrels per day, a nice jump from the year-ago period’s average output of 26,465 barrels per day. The company’s natural gas output came in at 152.5 MMcf/day, which represents a nice jump from the prior-year period’s output of 112.9 MMcf/day.

The increase in the company’s output was a result of a strong performance in the Delaware Basin. But the increase in production at Matador was offset big time by lower pricing. Including derivatives, Matador’s average realized price of oil came in at $50.72 per barrel. This represents a massive drop from the prior-year period’s oil price of $60.40 per barrel.

On top of the oil price decline, Matador had to contend with lower natural gas prices as well. Its average realized natural gas price fell from $3.33 per thousand cubic feet a year ago to $2.84 this time. Not surprisingly, the company’s top line fell steeply year over year.

Matador’s revenue fell to $173.9 million during the quarter as compared to $191.2 million a year ago. Its earnings per share fell to $0.19 per share as compared to $0.36 during the same quarter a year ago.

Matador managed to beat Wall Street’s estimates comprehensively on the bottom line, thanks to lower expenses. The company’s transportation and processing costs fell from $4.37 per barrel of oil equivalent a year ago to $3.65 per BOE this time. There was a slight increase in lease operating expenses and a few other line items, but on an overall basis, Matador’s operating expenses per BOE fell just slightly year over year.

But even then, Matador’s adjusted net income fell year over year to $21.9 million as compared to $39.1 million a year ago. Not surprisingly, Matador stock has taken a tumble in recent weeks despite a nice increase in the company’s output.

What Next for Matador?   

In a weak oil pricing scenario, Matador will continue to keep a handle on its costs. The company plans to reduce the gap between its spending and the funds flow it generates from operations it generates this year.

But if there’s an uptick in oil prices, Matador has promised investors that it could generate stronger cash flow. However, even if oil prices remain at the current levels, Matador’s focus on higher well efficiency will be a tailwind.

According to the company:

As a result of our continuing land efforts to make small acreage acquisitions and execute strategic acreage trades, Matador now expects that approximately 85% of the wells we plan to complete and turn to sales in 2020 will have lateral lengths greater than one mile.

So, don’t be surprised to see Matador enjoy an improvement in its operational performance if oil prices start gathering momentum.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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