Matador Resources: Profitable Oil Growth, Raising Target

seekingalpha04-09

Matador Resources has seen strong oil-focused production growth, ranking it in the top tier of its peers.The company's acquisition of Advance Energy Partners has proven to be a good move, addressing ...

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GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4682852-matador-resources-profitable-oil-growth-raising-target-mtdr-stock><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Matador Resources has seen strong oil-focused production growth, ranking it in the top tier of its peers.The company's acquisition of Advance Energy Partners has proven to be a good move, addressing ...</p>\n\n<a href=\"https://seekingalpha.com/article/4682852-matador-resources-profitable-oil-growth-raising-target-mtdr-stock\">Source 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concerns about inadequate drilling locations and boosting production.My model suggests MTDR could generate over $750 million in free cash flow in 2024, and $1.1billion in '25 supporting a target price of over $85 per share.MTDR's \"brick-by-brick\" profitable growth strategy tends to outperform in strong commodity price environments.   grandriver Last summer, I wrote a piece covering Matador Resources (NYSE:MTDR) titled “Matador Resources: Oil Growth with a Near-Term Upside Catalyst,” rating the stock a strong buy. My thesis was straightforward. Last April, MTDR acquired privately held Advance Energy Partners for $1.6 billion, increasing its acreage in the northern Delaware Basin, the western part of the Permian Basis that includes acreage in both west Texas and New Mexico. I expected that deal, plus organic growth from its existing operations, to power strong oil-focused production growth for MTDR, maintaining its position as one of the fastest-growing shale producers in the US. Last July I also expected MTDR to continue to outperform its guidance in terms of production growth, costs and capital efficiency. Finally, I created a discounted cash flow (DCF) model of free cash flows for the stock over the next few years, using this model to derive my price target of $66, up about 25% from the trading price at the time. Overall, my bullish cash for MTDR proved prescient:   MTDR Total Return Compared to Peers (Bloomberg) According to Bloomberg, MTDR is up 34.3% on a dividends-reinvested basis from the article’s publication on July 17, 2023, through the close on Friday, April 5th compared to a total return of 26.12% for the widely followed SPDR S&P Oil & Gas Exploration & Production ETF (XOP), around 16.4% for the S&P 500 and 23.5% for the S&P 500 Energy Index. With the stock performing well and trading above my erstwhile target price, it’s time to update my model and reassess MTDR’s prospects. Let’s start with this: An Oil Growth Leader MTDR remains a standout in terms of overall production growth, particularly when it comes to crude oil. Take a look:   2023 Oil Production Growth Select E&Ps (Bloomberg) This chart shows total 2023 oil production growth – crude oil, not barrels of oil equivalent – for MTDR and 15 of its peers. To choose the peer group, I examined exploration and production (E&Ps) companies with a current market capitalization over $4 Billion, more than half of total production from liquids and full-year 2022 production of 50,000 bbl/day of oil or more. As you can see, MTDR’s 2023 oil production growth of 25.5% ranks it in the top tier of its peer group. Moreover, as I’ll explain in just a moment, the midpoint of MTDR’s latest guidance for 2024, included as part of the company’s Q4 2023 earnings results and conference call presentation on February 20th anticipates 2024 oil production growth of 23.2%. Advance Skepticism MTDR announced the Advance acquisition on January 24, 2023, and investors initially cheered the move. Take a look:   Total Return MTDR and XOP in Q1 2023 (Bloomberg) This chart shows the performance of both MTDR and the industry-benchmark XOP exchange-traded fund through the first quarter of 2023 (last year). As you can see, both MTDR and XOP performed well through January; however, MTDR handily outperformed its peers, rising as much as 20% early in the year. Also note that MTDR’s strong performance accelerated following management’s announcement of the Advance deal on January 24th. After January 2023, MTDR began to see some serious selling pressure due, in part to weakness across the energy industry visible in the pullback in XOP. There’s no denying the selling pressure in MTDR accelerated after the company reported Q4 2022 earnings on February 21, 2023 and issued more detailed guidance for the year ahead that included a first look at the financial impact of the Advance deal, assuming the deal closed in Q2 2023 (the deal did close in April 2023). According to Bloomberg, MTDR shares plummeted almost 9.8% in the trading day following MTDR’s first look at 2023 guidance, on a session where the industry was flat overall with XOP declining just over 0.1%. A skim of MTDR’s Q4 2022 Conference Call reveals analysts on the call were clearly skeptical of the company’s plan to ramp up capital spending in H1 2023 to support the integration of the Advance acreage. In particular, on the Q&A portion of the call, several analysts asked about the big increase in MTDR’s midstream CAPEX budget; midstream spending includes the build out of infrastructure such as gathering pipelines – small diameter pipes that connect individual wells -- and gas processing plants used to separate natural gas liquids like ethane, propane and butane from the raw gas stream. Other analysts asked about the company’s production guidance for 2023, including the perceived lack of growth excluding Advance. In response to one such question, here’s what the CEO had to say:  Well, Leo, I can understand that, because you're not taking into account that when we're doing the Advance deal, we are shifting some of our staff resources and rigs, and other ways that we would have production. If we weren't doing the Advance deal, it wouldn't be flattish. You would have -- our staff will be fully operated on drilling some of our inventory, which the quality of the rock in our inventory is outstanding and we got over a decade worth of inventory. So when we've been on the road, we've gotten inventory questions, and we have plenty and we could've -- we would be addressing that instead of Advance, and connecting up the pipeline our Midstream system. So, we rate, again, but I think it's important to look the quality of rock that we're obtaining. And if we don't obtain it now, we will never have a chance to add on adjacent to our acreage that kind of quality rock. So, it would be like calling a football coach, hey, your running back only gained 50 yards this game, because you're through five touchdown passes. If the passes weren't working, you would've used the running game more. And we're in that situation. Fortunately, we got Advance, so have a choice to do in Advance or some of our own properties. Our properties are HBP, where we're going to work in the Advance, particularly where they have DUCs, because that will accelerate production coming off of that. And so, looking at our asset base and our options, it made sense to focus more on Advance and bringing in less of our inventory. But if we didn't have Advance, you'd see growth much better than the 3% that you're talking about, and -- but you take out a couple of rigs, puts your focus on the new properties and taking advantage of that opportunity to connect up your pipeline, we think that's a better program.  Source: Matador Resources Q4 2022 Conference Call Transcript Simply put, MTDR’s CEO, Joe Foran, notes that management had been receiving “inventory questions” from Wall Street. Essentially, that means some were concerned MTDR didn’t have adequate drilling locations in its core Permian Basin play to support drilling activity and production growth for long enough to sustain free cash flow over the longer haul. The Advance deal was one way to address that perceived shortfall – MTDR was acquiring high-quality acreage in the northern Delaware Basin. As the CEO noted, if MTDR didn’t make this deal at that time, they might lose the opportunity. That comment proved prescient as M&A activity did heat up across the Permian through 2023 including Exxon Mobil’s (XOM) deal to acquire Pioneer Natural Resources (PXD) last fall, Occidental’s acquisition of CrownRock in December and Diamondback Energy’s deal to buy privately held Permian operator Endeavor in February 2024. However, integrating a deal of this size requires capital spending (CAPEX) both on drilling wells in the new acreage as well as spending on midstream infrastructure. And, as the CEO intimates, when you divert spending from existing assets to new acreage, there’s likely to be some near-term hit to production. The upside was expected to be a strong ramp in production and improving capital efficiency – the amount of CAPEX per BOE produced – into the second half of 2023 and early 2024. This is a pattern I’ve noticed on several occasions over the past few years -- investors, and Wall Street analysts, are hostile to any hint that an energy firm might be losing discipline, overpaying for acquisitions or facing deteriorating capital efficiency. However, in this case, the Advance deal looks like a good, even transformational, move for MTDR: The Deal Proves Out Like most producers, MTDR updates its full-year guidance as part of each quarterly earnings call as well as providing additional color on the outlook for the quarter ahead. So I examined each of MTDR’s calls and earnings presentations from Q4 2022 through Q4 2023 – the call just hosted in February 2024 – to stitch together this table showing the evolution of guidance through 2023:   MTDR's Guidance Changes Through 2023 (MTDR Guidance Q4 2022 through Q4 2023 Earnings Presentations) This table is divided into two color-codes parts from top to bottom. The blue-shaded top piece shows the evolution of MTDR’s guidance on production from the time of their Q4 2022 call hosted on February 21, 2023, through the actual results for last year provided as part of their Q4 2023 call on February 20, 2024. MTDR is a two-stream producer, meaning that management reports crude oil production and natural gas production; the company’s production of natural gas liquids (NGLs) like ethane, propane and butane is included in the natural gas figure. As I’ll explain in a bit, this has the effect of boosting MTDR’s price realization on natural gas, because some of those natural gas volumes are actually higher-value NGLs. So, I’ve reported management’s guidance for both 2023 oil and natural gas as well as on a barrels of oil equivalent (BOE) basis throughout last year. The bottom part of the table, shaded in red, presents the company’s guidance on costs through last year. The term D&C CAPEX refers to capital spending (CAPEX) on drilling and completing new wells. Completing is the process of fracturing a shale well and putting that well into production. Meanwhile, Midstream CAPEX simply represents money spent on building out midstream infrastructure like gathering pipelines – total CAPEX is just the sum of these two figures. One of the items I watch most closely for all producers is capital efficiency, which I’ve reported here as capital spending (CAPEX) per barrel of oil equivalent production. This is the amount of money a producer spends on CAPEX – mainly spending on drilling new wells – to produce a single barrel of oil equivalent. The lower the better – lower numbers imply a company is spending capital more efficiently, producing more oil while spending less. I’ve included both D&C CAPEX/BOE as well as total CAPEX per BOE. Lease Operating Expenses (LOE) are the operating costs of maintaining production from existing wells. This distinction is important – CAPEX primarily represents money spent on new drilling activity while LOE is money spent to maintain production from existing wells. MTDR provides guidance on LOE in terms of $/BOE, which I’ve presented here. Finally, production taxes, transport and processing per BOE represent the costs of moving oil and gas volumes via pipeline, processing raw gas to remove NGLs and paying production taxes based on the volumes of oil and gas produced. Again, MTDR reports this on a $/BOE basis, which I’ve included here. Two points are interesting in my view. First, the company beat its initial February 2023 guidance on every one of the line items I’ve presented. For example, production of oil ended up about 1,900 bbl/day higher through 2023 than MTDR initially projected. That’s almost 700,000 extra barrels of oil on an annual basis worth about $60 million at the current quote. Even more important, the CAPEX efficiency concerns that plagued MTDR through the first half of 2023 proved overblown – D&C CAPEX came in some $90 million below management’s initial guidance while midstream CAPEX was about $27 million lower than their original plan. The Total CAPEX per BOE line provides a great summary of the financial impact of both higher-than-forecast production and lower-than-expected costs through 2023 – CAPEX efficiency was some $4.23/BOE better than that February 2023 guidance which catalyzed a near 10% sell-off in the stock. That adds up to significant additional free cash flow. Indeed, if we multiply $4.23/BOE in savings by the company’s total 2023 production of roughly 48.2 million BOE (131.8 MBOE/day on the table) the positive impact comes to over $200 million for 2023 relative to management’s initial outlook. The other interesting point to note in this table the timing of the shift in MTDR’s guidance. As I already explained, MTDR’s shares sold off following management’s initial guidance for 2023 in February. And, per Bloomberg, MTDR shares sold off 3.55% following their Q1 2023 guidance update on April 25, 2023 mainly because the company did not revise its 2023 guidance significantly. Specifically, look at my table above and you’ll see that in April of last year management provided no updates to its February cost guidance though it did say it expected overall production on a BOE basis to be near the top of the guided range. Indeed, it wasn’t until the July and October earnings calls that management began to revise its outlook, raising production forecasts and cutting CAPEX and cost estimates. That likely explains why according to Bloomberg the stock fell through the first 7 months of 2023, underperforming the XOP fund by over 9%. Then, only following the company’s positive guidance revisions in late July 2023 – something I anticipated in my article on MTDR on July 17th, the stock has performed well in absolute terms and has outperformed the XOP. This also underlines two key points about MTDR. First, the company’s management team tends to guide conservatively and then adjusts their outlook over time as they gain additional confidence in the outlook. Simply put, they like to underpromise and overdeliver. Second, as I outlined right at the beginning of this piece, MTDR is far more growth-focused than most of its peers. The company certainly targets profitable growth in production – MTDR generated about $460 million in adjusted free cash flow in 2023 – however, their strategy of opportunistically reinvesting capital to grow output over time differs from many of their peers. And that brings me to this: A 2024 Free Cash Flow Model I follow a simple approach to valuing E&Ps like MTDR. First, I create a basic free cash cost and production model based on management’s latest guidance and I use that model, and conservative commodity price assumptions, to estimate the potential for that producer to generate free cash flow over time. I then use those free cash flow estimates to derive a discounted cash flow (DCF) target for the stock. That’s how I derived my $66 target price for MTDR in my piece on MTDR last July. More recently, I used a similar approach to valuing EOG Resources (EOG) in “EOG Resources: Organic Growth at a Discount” as well as Devon Energy (DVN) in “Devon Energy: Turnaround Underway, Time to Buy (Rating Upgrade).” So, here’s my model for MTDR this year:   Production and Cash Flow Model 2024 (MTDR 2024 Guidance, Bloomberg) This model can be divided into four parts from top to bottom. The top part shows MTDR’s production guidance for 2024. As I noted earlier, MTDR is a two-stream producer, offering guidance for oil production and gas production; volumes of NGLs produced are included in the gas portion of guidance. Since MTDR is primarily a liquids producer (oil is about 60% of expected 2024 production) the company also reports production in barrels of oil equivalent terms (BOE) using the industry-standard conversion ratio of 6,000 cubic feet of natural gas equals 1 barrel of crude oil. All of the numbers presented here represent the mid-point of management’s guidance for 2024 in their Q4 2023 earnings presentation. The second section here is costs. I covered some of the main cost line items in my discussion of the evolution of MTDR’s guidance through 2023. However, the CAPEX listed here of $1.425 billion is the total figure, including both drilling and completions (D&C) as well as midstream. I also covered LOE earlier as well as production taxes, transport and processing while general and administrative (G&A) costs, interest expense and cash income taxes are familiar to many investors as they’re common to most industries. MTDR does have a midstream business including assets it owns outright as well as a 51% interest in a joint venture called San Mateo. Much of the throughput through these assets is attributable to MTDR, though the company does process and transport volumes for third-party operators, generating some incremental revenue and cash flow from its midstream business. In the cost section, I included a line item for “Plant and Midstream Services,” which represents the costs associated with operating these assets. All cost line items are quoted in terms of $/BOE unless otherwise labeled. The third section represents my commodity price estimates for 2024. For oil, I am using the average daily closing price for WTI year-to-date as well as the calendar strip for the remainder of 2024 -- this is simply the average price of NYMEX WTI futures for delivery in the months of May through December 2024. In Q1 2024, management indicated it expects to sell its oil roughly in line with WTI – their actual guidance was $-0.50 to +$0.50/bbl compared to NYMEX WTI. So, my realized pricing estimate of $81 is simply the strip for WTI this year, as I just outlined. Natural gas production includes NGLs volumes; which explains why management guidance for gas price realizations looks high – Q1 2024 guidance is for MTDR to earn +$0.50/mcf more than the Nymex Henry Hub benchmark for gas. By convention 1,000 cubic feet of gas (1 mcf) is equivalent to 1 million BTUs (MMBtu), which is the pricing standard for NYMEX Henry Hub Gas Futures. So, to calculate my estimate for gas price realizations, I simply used the average daily close for gas year-to-date and the current calendar strip for the months of May to December 2024. That’s a simple average of the current price of gas for delivery in every month from May to December 2024. Then I added $0.50/MMBtu to that estimate to reflect MTDR’s realization premium, yielding an estimate of $2.85/MMBtu (also $2.85/mcf). As you can see, we can create a pricing estimate for MTDR on a $/BOE basis by multiplying these commodity pricing estimates by their share of MTDR’s production at the midpoint of 2024 guidance (the first part of the table). Prices for natural gas are converted to BOE using the industry standard 6-to-1 conversion I outlined earlier. The result: $55.20 per barrel of oil equivalent production in 2024. The line item labeled “Breakeven per BOE” is simply the sum of all the per BOE costs I outlined in the costs section. The realized margin of $13.06 is my realized price estimate of $55.20 per BOE less the $42.14 in total costs per BOE – this is the estimated profit margin MTDR can earn per BOE produced this year. Finally, I brought all these estimates together in the final section of the model. Multiplying that margin per barrel of oil equivalent by the midpoint of management’s 2024 production guidance yields total free cash flow for 2024 of about $744 million. Note that my estimate is significantly higher than the Wall Street mean and median estimate per Bloomberg of about $529 and $540 million respectively. It’s slightly less than the highest estimate on the Street of $755 million in free cash flow for 2024. The main reason for this appears to be commodity price estimates. Back at the time management issued its guidance in late February, West Texas Intermediate prices were lower than they are today, hovering in the mid to upper $70’s barrel compared to around $86/bbl right now. According to Bloomberg, the 12-month calendar strip – average price of WTI futures for delivery over the next year – was $75.11 when MTDR released its quarterly results compared to over $81/bbl today. If I reduce my WTI price estimate from $81/bbl to $75/bbl, and hold all production and cost estimates constant, my free cash flow estimate would fall to $540 million right in line with the Wall Street consensus. One more point to note. MTDR generates incremental income from its midstream unit as well as through marketing operations – basically buying and selling commodities on behalf of third parties. I’m ignoring this added tailwind in favor of a focus on the core E&P business and because I tend to favor a more conservative approach to valuation – this midstream/marketing cash flow uplift would be in addition to the cash flows I have modeled above. Longer-Term Cash Flows and Target As MTDR’s management team noted in the wake of their Advance acquisition one year ago, the company has solid production and capital efficiency momentum as we head into 2024. A quick glance at the mid-point of estimates I’ve provided shows expected 2024 production growth of 18.4% on a BOE basis (156,000 BOE/day in 2024 vs. 131,800 in 2023) led by 23.2% growth in oil barrels (93,000 bbl/day in 2024 vs. 75,500 bbl/day in 2023). What’s even more important is the bugbear for Wall Street last year, namely capital efficiency. The mid-point of MTDR’s total CAPEX guidance for this year is $1.425 billion, up about 8.8% from the $1.31 billion they spent in 2023. However, since overall production is growing at a faster pace than CAPEX, their total CAPEX per BOE is projected to come in a little over $25/BOE in 2024 compared to $27.23/BOE in 2023. Like most E&Ps, MTDR hasn’t offered guidance for 2025 yet. However, according to Bloomberg, the consensus on Wall Street is penciling in further production upside of about 8.6% in 2025 for oil and 5.1% for natural gas. That’s logical. After all, the midpoint of management’s guidance for Q1 2024, presented alongside Q4 2023 results and full-year 2024 guidance, was for total production of 145,750 BOE/day. Further, Q1 output was expected to be constrained to the tune of 5,500 BOE/day due to short-term maintenance issues with third-party midstream infrastructure. Adding back that production yields an ex-constraint Q1 2024 production level of 151,250 BOE/day. Management also estimated a year-end 2024 exit rate of production in the 161,000 BOE/day range. So, the picture here is clear – MTDR expects steady quarterly growth in production sequentially through 2024, to a full year average rate of 156,000 BOE/day from 131,800 last year. That’s because we’re starting 2024 well below the expected full-year average (even excluding temporary constraints) and growing to exit the year well above the full-year production average on a BOE/day basis. That, in turn, implies solid upward momentum to production into early 2025. Further, MTDR continues to be active in pursuing small bolt-on deals to add to its acreage and production within its core Delaware Basin play. During the Q&A portion of MTDR’s last quarterly conference call, CEO Joe Foran had this to say:  Yes. Neal, thank you for asking that question is, yes, the answer is yes. Last year, of course, Advance was our biggest deal ever and has drawn a lot of attention but our land group, our business development group did another 200 transactions. Most of them are -- some of them were very, very small. Some of them were a little larger. But they're out there, our land men, in particular out there all the time making deals, what the deals last couple of years have grown increasingly. It's just a rationalization of assets between companies. We -- you trade out of your non-op for somebody else's non-occupant that you operate. And so things like that are a little orphans out by themselves. So I think those will come along. Companies are being very cooperative with each other. And these are small transactions that don't have that kind of by themselves a big material impact. But in the aggregate, they add up and they make your operations that much more efficient. So there's a real rationale to do that. And then at the same time, some of the bigger outfits are wanting to concentrate their assets in one area or another. So those opportunities come up. And then you have private equity has always got a few things coming out. So I think it will continue and Van's group may want to say a word, but he has them out there on the road a lot. And -- and they've -- they're building relationships and just trying to do things that make sense for both sides.  Source: Q4 2023 Conference Call Transcript The company sometimes refers to this as their “brick-by-brick” approach. Simply put, in addition to the big deals like Advance, the company makes a lot of smaller deals to pick up acreage in its core plays. Many of these deals are tiny; however, taken together, they add significantly to production each year. CEO Joe Foran also noted the frequency of these deals has been picking up in the last few years. So, based solely on momentum exiting 2024 and the company’s longstanding strategic of making numerous smaller deals to enhance production, the consensus outlook for additional growth in production of 8.6% for oil and 5.1% for natural gas looks reasonable. So, let’s look at what that might mean for 2025 free cash flow:   MTDR Rough 2025 Free Cash Flow Estimates (Bloomberg, Author's Estimates) This is a rough estimate because there’s a lot of uncertainty about costs and CAPEX efficiency over time – in this case, I’ve held the CAPEX/BOE constant at the 2024 guidance level ($25/BOE produced) while raising my production estimates for oil and gas by 8.6% and 5.1% respectively per Wall Street consensus. The result is $1.526 billion in CAPEX for 2025. For my realized pricing estimates, I’m using $85/bbl WTI oil and NYMEX natural gas at $3.46/MMBtu. While the latter might seem elevated given the current price of gas sub-$2, per Bloomberg the 2025 calendar strip – the average price of gas for delivery in the months of January through December 2025 is $3.46/MMBtu. I’m adding $0.50/mcf to that price realization to reflect NGLs volumes in line with 2024 expectations and guidance. The end result is free cash flow over $1.1 billion in 2025. So, let’s take a shot at a price target for MTDR based on these estimates:   DCF Price Targets for MTDR (Author's Estimates) I’m using two different methodologies to calculate a price target for MTDR based on my free cash flow estimates. The top DCF valuation technique uses a 2024 free cash flow estimate of $750 million for MTDR as calculated earlier as well as my $1.1 billion estimate for 2026. I’ve assumed 2025 is right in the middle of 2024 and 2026, implying it takes MTDR one extra year to step up to that $1.1 billion free cash flow run rate. I’m making that assumption just to render the target a bit more on the conservative side. I then assume a $1.1 billion per year free cash flow estimate in perpetuity and I calculate the present value all these cash flows using a 9% discount rate. That 9% rate is based on the Bloomberg calculation of MTDR’s weighted average cost of capital (WACC), which incorporates the actual cost of outstanding debt, and an equity cost based on the historic volatility of MTDR stock to the S&P 500. The end result is a target price of $75.19, a small premium to the current quote. The second DCF target is derived using a terminal multiple calculation. The cash flow estimates are identical; however, the terminal value is based on an enterprise value to EBITDA multiple of 5.7 times the consensus Wall Street estimate for EBITDA in 2026 of about $2.5 billion. I’m using the 2026 consensus rather than 2028 for the simple reason that there aren’t many analysts publishing estimates for 2028 EBITDA for MTDR. An EV to EBITDA multiple of 5.7 times is a premium to MTDR’s current 4.9 times based on Bloomberg’s blended forward 12-month EBITDA estimates. However, it’s a discount to EOG near 6 times, in line with FANG and only a slight premium to DVN at 5.5 times. MTDR is exposed to the Permian just like DVN, FANG and EOG and its production growth rate is higher. So, I believe a multiple more in line with peers is logical, if not conservative. And take a look at this:   MTDR Resources EV/EBITDA 2012 to 2014 (Bloomberg) In the 2013 to mid-2014 era – the last time oil prices held above $80 to $85/bbl for a prolonged period – MTDR frequently traded at valuations well above my 5.7x EV/EBITDA multiple. So, based on my second DCF calculation, I calculate a target of more than $85 for MTDR, a roughly 20% to 25% premium to the current price. I’d regard that first $75 target as a valuation floor for MTDR and the higher $85 valuation as more reasonable. The main reason is that when commodity prices are stable or rising – particularly oil – MTDR tends to be able to fetch higher valuations as investors seek an unhedged production growth story. As I explained in my recent article on the US Oil Fund (USO) I continue to have a constructive outlook for WTI oil prices over the next few years. And As I explained in my recent piece on natural gas producer EQT Corp. (EQT) back in February, the outlook for US natural gas prices looks poised to brighten into 2025. Indeed, as noted earlier, the 2025 calendar strip price for gas is just shy of $3.50/MMBtu, a significant premium to the current front-month price. Conclusion and Risks As with all E&Ps, the primary risks to MTDR involve lower-than-expected commodity prices. My realized pricing estimates for MTDR over the longer-term are based on $85/bbl WTI oil prices – actually a discount to the current quote – and the current natural gas calendar strip price (actual current futures prices). So, I see that as conservative on both counts. That said, commodity prices are volatile and, as I illustrated earlier, even a $5 or $6/bbl move in oil prices over the course of the year can have a significant impact on free cash flow estimates -- that's the main reason my 2024 free cash flow estimates are higher than the Wall Street consensus prior to the recent surge in oil. From a company-specific perspective, I think the biggest risk for MTDR remains its differentiated strategy. Most of MTDR’s peers have adopted a slow production growth and capital return strategy in recent years. For example, DVN pays a significant variable dividend based on free cash flow generated each quarter; according to Bloomberg, the payout over the past 12 months tops 4.5%. And EOG Resources (EOG) has a stated plan to return 70% or more of adjusted free cash flow to shareholders via dividends and share buybacks as I explain here. MTDR is different. The company’s current dividend is $0.20 per quarter, equivalent to a yield of about 1.2% at the current price. While the company has increased its base dividend significantly since it was established at $0.025 per quarter in 2021, and I’d expected more increases later this year, that’s still well below the peer-average yield. And MTDR also hasn’t repurchased shares in recent quarters; indeed, on March 25th, the company actually issued 5.25 million shares raising almost $350 million in capital in part to repay debt on its revolving credit facility. MTDR has deployed free cash flow to repay debt, including debt taken on to fund the Advance acquisition last year, but it’s also reinvesting free cash flow to grow via its \"brick-by-brick\" acquisition program. It’s important to understand that MTDR’s growth strategy differs from the growth-at-any-cost, debt-fueled shale drilling binge of the 2010 to 2018 era. As I outlined earlier, MTDR generates free cash flow even with oil and gas prices well below the current quote – above I calculated that on a $/BOE basis, MTDR would need just over $42/BOE to “breakeven” on a free cash flow basis. However, MTDR’s conscious decision to invest in profitable, free cash flow positive growth is a different approach than most of its peers. This approach will not appeal to all investors – those interested primarily in dividend yields, for example, would be far better off considering some of the other names I’ve profiled here lately, including EOG and DVN referenced earlier. However, in a strengthening commodity price environment, MTDR’s profitable growth strategy has tended to outperform. Consider that, according to Bloomberg, MTDR shares were up over 200% in 2021 compared to a 67% gain in the XOP ETF while in 2022 the stock jumped an additional 56%, beating the XOP by 10.5 percentage points.  MTDR is up significantly since I first profiled the stock on Seeking Alpha last July and the stock has handily outperformed its peers. However, following the successful integration of Advance and the recent rise in crude oil prices, I see more upside to $85 per share.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2426193520"}