Matador Resources Company

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Matador Resources Company is an independent energy company engaged in the exploration, development, production, and acquisition of oil and natural gas resources in the United States, primarily in the Delaware Basin and Eagle Ford shale regions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

Matador Resources Company is primarily involved in the exploration, development, production, and acquisition of oil and natural gas resources, with operations mostly concentrated in the Delaware Basin and Eagle Ford shale regions. The company generates revenue through:

Oil and Natural Gas Sales: The primary source of revenue is the sale of crude oil, natural gas, and natural gas liquids (NGLs) extracted from their properties.
Midstream Operations: While a smaller portion of revenues compared to direct sales, Matador also engages in midstream activities, including gathering and processing natural gas.

Matador operates primarily as an upstream producer, meaning that its revenue is primarily generated from the extraction and sale of hydrocarbons, not from processing, distributing or selling finished products.

Industry Trends and Competitive Landscape:

The oil and gas industry is inherently cyclical, with price fluctuations heavily influencing revenues and profitability. The industry is also heavily regulated.

Commodity Prices: Prices of oil and gas directly affect Matador’s profitability, and prices are incredibly volatile. The oil and gas industry often faces periods of boom and bust, which require companies to have a resilient balance sheet. The ongoing war in Ukraine and geopolitical instability has led to an increase in global oil prices, although some factors have limited how high prices can go.
Technological Advancements: The application of new drilling techniques has increased the efficiency of oil and gas production. This favors large players that can make large capital expenditures.
Regulatory Landscape: The industry faces increasing regulations, including environmental restrictions on flaring and emissions. There have also been changes to how leases are made and what tax benefits are included. Companies that can quickly adapt and optimize their operations will perform the best in the industry.
Competition: The oil and gas industry is highly competitive, with a significant number of producers vying for market share. Companies compete on cost, efficiency, and ability to produce at a high rate. They must also be able to secure financing for operations.

The oil and gas industry is experiencing significant price fluctuations due to geopolitical issues and global economic concerns, particularly because of the war between Ukraine and Russia. This volatility creates added risk to revenues and profit.

What Makes Matador Different?: Matador distinguishes itself through a strategic focus on resource-rich basins, such as the Delaware and Eagle Ford, which allows for scalability. They also employ advanced technology and techniques for enhanced production.

Focus on Low-Cost Basins: By concentrating on high-return, cost-effective basins, Matador has been able to secure higher profitability.
Efficient Operations: Focus on innovative techniques to maximize production and minimize operating costs through automation and optimized well spacing.

Matador has been actively focusing on long-lateral drilling and well completions in the Delaware basin to increase profitability. It also is trying to use multi-well pad operations to keep costs low.

Financials:

Matador’s financial health is subject to market prices. Its financial structure is fairly normal.

Revenue: Matador’s revenue is driven by hydrocarbon prices. A significant portion of the revenue comes from oil sales and the other from natural gas. The company has been growing revenues at a consistent rate.
Margins: The company’s operating and net income margins vary greatly depending on pricing. This can be both a positive and negative factor. Due to volatile hydrocarbon prices, the margins can wildly fluctuate, which is why the company needs a fairly resilient balance sheet.
Capital Expenditures: Matador spends heavily on new wells. These are mainly aimed at production volume expansion. This should allow it to increase future cash flows, but requires the company to maintain a good credit rating to allow for continuous funding.
Debt: Matador had total debt of $3.69 billion, with senior notes making a large proportion of this figure. The debt to equity is a bit above 1, but is not high enough to be a major concern.
Liquidity: As of late, the company has $1.1 billion of available borrowing capacity and also has a high cash balance of $246 million. This gives it enough of a buffer if prices go down, and also the option to repurchase more stock. The company intends to use this excess cash flow to reduce its debt to equity ratio.

Matador has a good level of liquidity to deal with any changes to the market or its operations.

Moat Assessment:

Matador has a narrow moat. While the company has certain competitive advantages, it still operates in a sector that has high competition.

Intangible Assets: Matador does not have a valuable brand name. Its patents are limited due to the nature of the industry.
Switching Costs: The costs for customers to change providers of oil and gas are minimal. This means that Matador cannot charge a premium compared to the competition.
Network Effects: There are no network effects in the oil and gas industry.
Cost Advantage: Matador is located in high quality oil and gas reserves, which should lead to higher-than average profit margins. These reserves can produce and supply large amounts at a cheaper cost.

Moat Rating: 2 / 5. The company has some factors leading to a sustainable competitive advantage, but is still exposed to many threats. The main moat is the company’s focus on low-cost oil basins, and it still needs to prove that it can maintain that cost advantage to build a wide moat.

Risks to the Moat and Business Resilience:

Commodity Price Volatility: Highly reliant on oil and gas prices, which are volatile and influenced by market conditions. A significant decrease in prices will make profits decline considerably.
Regulatory Changes: Increasing regulations (environmental or labor laws) can limit production or increase costs, which could threaten operations.
Technological Obsolescence: The industry is always prone to technological disruption, such as new technologies used for extraction and production. Therefore, the company must constantly innovate or face the threat of losing its profitability.
Competition: The oil and gas industry is highly competitive, and the increase in output from multiple suppliers can pressure prices and margins, which would affect profitability.

Business Resilience: The company is still fairly resilient due to its focus on high quality wells. It has good liquidity which should make it through any down turn. The company has also been lowering the cost of its operations, which helps mitigate pricing pressures.

Understandability:

The business model is fairly simple, as they extract oil and natural gas, then sell it. The risk comes from volatile pricing, but the company’s operations are easy to understand. However, all oil and gas companies have complex financials, with many different lines and complex math equations, which makes a deeper understanding more challenging. Understandability: 3 / 5

Balance Sheet Health:

The company has a net cash position of $246 million, implying that it has more cash than debt. There is an additional $1.1 billion credit available to borrow, which puts its balance sheet in good position for taking advantage of a bear market. However, the company’s liabilities are mostly made up of long term debt obligations. The company has very high debt to equity, which may be dangerous in a downturn. Balance Sheet Health: 4 / 5

Recent Concerns/Controversies:

Inflation and Rising Costs: The company has noted an increase in labor and services costs that may result in an increase in operating expenses. The management is hoping that efficiency gains will be able to mitigate this, and they have so far been doing this well.
Volatility of Natural Gas Prices: The recent decrease in the natural gas prices has led to questions on whether the company can maintain a decent return on its equity. The company is trying to mitigate this by focusing on oil drilling.
Increased Interest Rates: Increased interest rates have the potential of making debt harder to refinance. The company is trying to deleverage itself as much as possible to reduce this impact.
The war in Ukraine: The impact on the global market for oil is significant and may lead to prices rising or falling. Matador will need to watch the political situation closely and make changes to their strategy accordingly.
Increased Regulatory Scrutiny: The current administration is placing more scrutiny on the oil and natural gas industry and will seek to regulate it more and more. This will likely make operations costlier and can limit production potential.

The Management has stated that they are focused on maintaining liquidity and reducing debt levels, which is a positive sign.

The company is trying to deal with these issues by reducing costs, improving operations, and focusing on areas that have lower break even rates. It is still an ongoing process, and more needs to be seen.