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Matador, Five Point New JV to Boost Permian Midstream Assets

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Matador Resources Company (MTDR - Free Report) recently announced the creation of a second partnership in the Delaware Basin with a private equity firm, Five Point Energy LLC. The joint venture (JV), San Mateo II, is expected to enhance natural gas gathering and processing, along with salt water gathering and disposal operations in the Delaware formation of the Permian Basin.

The new JV is also expected to boost oil gathering operations in the region. Similar to the previous JV structure, Matador will own 51% in San Mateo II, while a subsidiary of Five Point Energy will hold the rest.

The midstream JV is expected to almost double the processing capacity in the region on the back of a cryogenic natural gas processing plant in New Mexico, near the existing Black River Processing Plant that has a designed natural gas inlet capacity of 60 million cubic feet per day (Mcf/d). The facility came online in August 2016. Following the creation of the first JV (San Mateo I) between Matador and Five Point in February 2017, the capacity of the facility was ramped up to 260 Mcf/d.

Due to rising production in the Permian Basin, the Black River Processing Plant is almost fully subscribed. The latest expansion plan will bring its capacity to 460 Mcf/d, which is expected to come online by mid-2020.

The JV intends to enhance its natural gas pipeline system via building a large-diameter pipeline, which will move north from the Black River Processing Plant to serve the Stebbins leasehold of Matador, and south to the company's new Stateline asset. Notably, Matador acquired the Stateline property in September 2018 from an oil and gas lease sale. The JV also plans to create at least two saltwater disposal wells in the Stebbins and Stateline asset areas, along with related facilities. Following the completion of the facilities, San Mateo II is anticipated to have a water disposal capacity of 80,000 barrels per day.

Matador dedicated a total of around 25,500 gross acres to San Mateo under 15-year fixed-fee contracts, which are expected to pave way for creating economies of scale and facilitate the transaction. In exchange, Matador will receive a capital carry, due to which the company will only have to invest $25 million of the first $150 million in expansion-related construction costs. Most importantly, the capital carry along with the expected cash flows from the existing operations of San Mateo will likely cover most of the company’s anticipated capital obligations for San Mateo during this year.

As the Delaware Basin lacks in-basin infrastructures, the transaction will enable Matador’s midstream operations to climb to a favorable position compared to peers. It will also provide the exploration and productions companies operating in the Permian Basin with more options.

Zacks Rank and Stocks to Consider

Currently, Matador carries a Zacks Rank #3 (Hold). Investors interested in the energy sector can opt for some better-ranked stocks as given below:

Austin, TX-based Jones Energy, Inc. (JONE - Free Report) is an exploration and production company. For 2019, its bottom line, which has witnessed one upside revision over the past 60 days, is expected to grow 19% year over year. The company currently holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Madrid, Spain-based Repsol, S.A. (REPYY - Free Report) is an integrated energy company. Its bottom line for 2019 is expected to increase 13.7% year over year. The company delivered average positive earnings surprise of 9% in the trailing four quarters. The stock currently has a Zacks Rank #2.

Enbridge Inc. (ENB - Free Report) is a Calgary, Canada-based energy infrastructure provider. The company delivered average positive earnings surprise of 33.2% in the trailing four quarters. It currently has a Zacks Rank #2.

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