Matador’s Follow-On Offering ‘Good Sign’ For US Shale Producers

Defying conventional wisdom, Matador Resources Co. (NYSE: MTDR) successfully tapped equity markets in May for an acquisition and midstream improvements in the Delaware Basin—a sign that E&Ps frozen out of capital markets may finally see a spring thaw.

In 2017, equity offerings dropped 56% compared to 2016. In first-quarter 2018, just five equity offerings were announced, the lowest for a quarter in three years, according to Jefferies.

Increased volatility regarding free cash flow promises made by public E&Ps has been the focal point so far this year, despite a broader U.S. equity market rally throughout 2017, said Mark Sooby, managing director of Deutsche Bank.

“[The offering] is a good sign for obviously more follow-on offerings like that and, in addition, sets the stage for when things improve for the return of IPOs,” Sooby told attendees of Hart Energy’s DUG Permian conference and exhibition on May 22 in Fort Worth, Texas.

Dedicated investors have been frustrated with share price performance, he said. “It’s been tough time, but it’s really kind of turning around right now.”

For example, Matador issued about 7 million shares of its common stock in a public offering with roughly $229.3 million gross proceeds earmarked for acreage acquisitions and midstream development in the Delaware Basin. RBC Capital Markets was the sole underwriter for the offering, which closed on May 17.

Overall, Matador’s offering was successfully executed and received well, which Sooby said bodes well for public capital markets and U.S. shale producers.

Matador’s offering follows a recent trend by E&Ps to issue equity to fund A&D activity.

Sooby said almost all equity issuances since 2017 have been associated with acquisitions. That trend also continued with the most recent Permian E&P transaction by Callon Petroleum Co. (NYSE: CPE).

On May 24, Callon announced it had agreed to acquire Delaware Basin properties from Cimarex Energy Co. (NYSE: XEC) for $570 million, which the company plans to fund through an issuance of its common stock.

Matador said in regulatory filings that it intended to raise funds after entering agreements May 10 to acquire a 10,635 net leasehold and mineral acres in and around its acreage positions in the Delaware. The company expects to close the pending transactions in 2018. The acquisition will increase Matador’s capex by roughly $132.8 million, the filing said.

For 2018, Matador previously set a capex of $600 million to $660 million, according to the company’s analyst day presentation in March. Between $530 million and $570 million of its capex is set to for its drilling and completions budget with the remainder to be used for midstream development.

Year-to-date Matador has spent $45.6 million to bulk up its leasehold and add to its working interest, according to Seaport Global Securities.

“If successful, the anticipated acquisitions would boost Matador’s Delaware position to 125,000 net acres, while keeping the balance sheet in solid shape,” Mike Kelly, senior analyst for Seaport, said in a May 15 report.

In addition, Matador said proceeds from the equity offering will be used to fund a number of midstream initiatives in the Delaware by its joint venture San Mateo Midstream LLC.

The San Mateo midstream development, which is expected to cost the company between $30 million and $50 million of additional capital, includes:

• Expansion of the Black River cryogenic natural gas processing plant in Eddy County, N.M., to a designed inlet capacity of 260 MMcf/d of natural gas, which was completed in first-quarter 2018;
• Field compression, natural gas treating systems and an electrical substation in Eddy;
• At least three additional saltwater disposal wells, one of which was completed early in first-quarter 2018, and associated facilities and upgrades to certain existing saltwater disposal wells in Eddy;
• Expansion of the oil gathering system in Loving County, Texas, and the buildout of an oil transportation system in Eddy; and
• Continued expansion of San Mateo’s natural gas and water gathering systems in Eddy County, N.M., and Loving County, Texas, including associated well connects for Matador and additional customers.

Matador said it is also evaluating the buildout of gathering systems and related infrastructure in its Antelope Ridge asset area as a result of recent successful operating results.

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