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Why You Should Hold Matador Resources in Your Portfolio Now

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We initiated a research report on Matador Resources Company (MTDR - Free Report) on Jun 20. The company’s strong presence in the prospective oil and gas plays in the United States will back its production growth. However, rising operating cost is a concern.

Matador currently carries a Zacks Rank #3 (Hold). This implies that the stock will perform in line with the broader U.S. equity market over the next one to three months.

Matador’s upstream operations are mainly concentrated in the Permian Basin, which is among the country’s most prolific oil and gas plays. Since 2011, the company has boosted Permian Acreage drastically. The company’s operation now covers 115,000 net acres in the Permian Basin, up from 6,700 net acres in 2011.

The firm is planning to invest 99% of its 2018 capital spending in the range of $600-$660 million, for operations in the Delaware Basin — the sub-basin of the Permian. This is likely to back Matador’s plan of boosting oil production through 2018 by 26% and natural gas production by 19%.  

Higher spending for the upstream and midstream operations, especially when the business scenario is favorable, is likely to help Matador to achieve its guidance of 31% higher adjusted operating profit in 2018. Moreover, in the past year, the stock has gained 21%, outperforming the 17.9% cumulative gain of the stocks belonging to the industry.  

 

However, Matador’s free cashflows have been negative over the past few years, in spite of oil and gas prices recovering from multiyear-low marks in 2016. Negative free cashflows over the years have marred the company’s possibility of returning cash to shareholders in the coming quarters.

Matador is expecting its total operating cost to increase through 2018 by almost 5%. The rise in cost is mainly supported by the company’s expectation of nearly 22% surge in expenses related to midstream activities. This could hurt the firm’s bottom-line.

Also, the company has hedged its projected 1,920,000 barrels of oil for 2018 within the price range of $44.27-$60.29 per barrel. Additional 480,000 barrels of expected crude volumes for 2018 were hedged within the range of $45.00-$63.05 per barrel. Since, crude price is hovering around $65 per barrel, the company is losing money from this hedged position.

Stocks to Consider

Prospective players in the energy space are Anadarko Petroleum Corp. , Eclipse Resources Corp. and Wildhorse Resource Development Corp. . While Anadarko carries a Zacks Rank #2 (Buy), Eclipse and Wildhorse sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

We expect Anadarko Petroleum to witness year-over-year earnings growth of 229.6% in 2018.

Eclipse is expected to record revenue growth of 13.5% through 2018.

Wildhorse will likely see year-over-year earnings growth of 309.3% in 2018.

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