2019 Guidance Primer: Will Matador Resources Downsize?

Matador Resources (NYSE: ) had been in trouble over 2018 thanks to a decline in West Texas Intermediate (WTI) crude oil prices, but the stock has been in turnaround mode this year thanks to an oil price recovery.

With that said, the company isn’t getting carried away by the recent improvement in oil prices and plans to keep a lid on its drilling activity according to the latest update issued at the end of January.

Matador Mindful of Costs Due to Unpredictable Oil Prices

In the Delaware Basin, Matador intends to continue with its exploration and production activities this year thanks to the profitable nature of those assets. However, with the uncertain oil pricing scenario in mind, the company will scale down its operated drilling program by releasing its rig in South Texas this month upon completion of the ongoing program.

Additionally, the company is planning to divest some of its non-core assets in South Texas and Haynesville so that it can fill any potential gap in capital funding that arises out of weak energy prices. In all, Matador intends to run a tight ship this year, focusing on increasing capital efficiency by reducing service costs and increasing the number of wells with longer laterals to boost productivity.

Analysts expect the company’s tight-fisted approach to weigh on its financial performance this year. Its revenue is expected to grow 11% in 2019, while earnings are expected to decline from $1.56 per share last year to $1.27 in the current fiscal year.

Now, the company hasn’t released its fourth-quarter and full-year results just yet, which are scheduled for Feb. 26, so investors will get more clarity about the company’s detailed 2019 production and capital plan in a few days.

Balance Sheet Woes Create Need for Smart Capital Expenditure Plan

Matador Resources was on track to boost its production big time last year. According to the last production guidance issued by the company at the end of October 2018, its total oil production was supposed to increase 41% over the entire year to a range of 11-11.1 million barrels. Natural gas production, on the other hand, was on track to increase 24% to a range of 47-47.4 billion cubic feet.

Matador was on track to deliver such massive production growth on the back of a 34% annual increase in the capital expenditure to a range of $645-680 million. In fact, the company had bumped up its capital spending forecast during late 2018 in a bid to take advantage of higher oil prices. Matador had decided to start a short-term drilling program to drill 10 wells in South Texas in October last year to benefit from rising oil and gas prices.

But it looks like the recent uncertainty in the oil pricing scenario has made it dovish this year. In our opinion, that’s wise given its debt-laden balance sheet. The company has just $46 million in cash and total debt of $1.07 billion. As such, lower oil and gas prices will negatively impact its cash flow profile and force it to reduce capital spending so that it can avoid taking on more debt.

Investors shouldn’t be surprised to see a massive cut in Matador’s production and spending guidance for 2019 when it releases its complete results later this month.