Matador Resources Co. (NYSE: MTDR) expanded its Delaware Basin midstream operations in a deal on Feb. 25 that analysts believe could help minimize outspend as the company looks into selling assets outside its core Permian position.

The Dallas-based oil and gas company formed a second midstream joint venture (JV) in the Delaware with private-equity firm Five Point Energy LLC to be named San Mateo Midstream II LLC. The agreement is the second midstream JV between Matador and Five Point after the pair initially linked up in 2017 to form San Mateo Midstream LLC.

Similar to the original JV, San Mateo II will be owned 51% by Matador and 49% by Five Point and be responsible for expanding current gathering, processing and saltwater disposal capacity for Matador’s Northern Delaware Basin operations.

As part of the agreement, Matador will dedicate roughly 25,500 gross acres of its Arrowhead and Stateline asset areas to San Mateo II. In return, the company will receive a capital carry where it is expected to pay $25 million of the initial $150 million capital costs related to the expansion.

Matador will also receive firm capacity service for its Arrowhead and Stateline asset areas, up to $150 million of performance incentives over five years plus retain operational control of the midstream assets.

Pure-Play Outlook

Following announcement of the JV on Feb. 25, analysts with Tudor, Pickering, Holt & Co. (TPH) said the deal should help Matador management minimize outspend in 2019.

Matador had previously highlighted efforts to manage near-term outspend during its third-quarter earnings call in early November where management said it would consider any “really serious offer” for its Eagle Ford, Haynesville, minerals, royalty interests and midstream assets.

However, Matador CEO Joseph Foran indicated on the call that the company would not be pursuing the pure-play path several of its contemporaries have recently gone down.

“We have said for some time we’re not a company that says we are a single basin company and we are going to reduce ourselves down to whatever basin is most important,” Foran said, according to a transcript of the company’s earnings call by Seeking Alpha. “Clearly, the most important [basin] right now is the Delaware, but as you can see being in several basins has shown to be good strategy and that diversification leads to more options. ... It doesn’t matter so much whether you are a single basin or multibasin; the point of it is to get into the best rock that you can with the best economics and that's what our primary focus is.”

The TPH analysts see the monetization of Matador’s noncore assets as steps in the right direction with the “Eagle Ford as the most impactful monetization candidate in the near term.”

“While the current A&D market is certainly tough, we expect management to take a surgical approach to a sale via many small packages vs. pursuing one large deal,” TPH analysts said in a research note on Feb. 22.

The analysts estimate a sale of Matador’s Eagle Ford position could generate aggregate proceeds of roughly $300 million.

San Mateo II Plans

San Mateo II initially plans to construct a new cryogenic natural gas processing plant near Carlsbad, N.M., in Matador’s Rustler Breaks asset area. The new plant will increase San Mateo’s total capacity to 460 million cubic feet per day (MMcf/d) from the current, almost fully subscribed, 260 MMcf/d of capacity available from the nearby Black River Processing Plant built in 2016.

In addition, gas pipelines will be expanded north into the Arrowhead area and south into the Stateline area, which was recently acquired during a Bureau of Land Management sale in September 2018. Additional oil and saltwater disposal infrastructure will also be built in Eddy County, N.M., which TPH analysts believe could support Antelope Ridge development.

David Capobianco, CEO and managing partner of Five Point Energy, said the Houston-based firm has been proactively identifying management teams to partner with and build out world-class midstream infrastructure companies in the Delaware Basin.

“The Delaware remains one of the most promising producing basins in North America, yet it lacks sufficient permanent ‘in-basin’ midstream infrastructure,” Capobianco said in a statement on Feb. 25. “Five Point’s portfolio companies, including San Mateo Midstream, WaterBridge, EVX and Twin Eagle, are providing critical midstream infrastructure solutions for third-party producers, with unparalleled offerings and innovation.”

The new cryogenic plant is expected online in mid-2020. Matador intends to provide its 2019 operational and financial outlook and initial 2019 guidance, including additional details surrounding the development plan for the midstream assets and San Mateo, in conjunction with its fourth quarter and full-year 2018 earnings release scheduled for Feb. 26.

Emily Patsy can be reached at epatsy@hartenergy.com.

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