Matador’s Midstream JV Plugs Delaware Capex Hole

Matador Resources Co. (NYSE: MTDR) said Feb. 17 it dished a portion of its Delaware Basin midstream assets to clear the path for its upstream production growth in 2017 at a value nearly double what some analysts expected.

Matador and Houston’s Five Point Capital Partners LLC agreed to form a midstream joint venture (JV), called San Mateo Midstream LLC, the companies said. The JV will own, operate and expand Matador’s Delaware midstream assets—though with the Dallas-based company still firmly at the helm.

The deal answers two essential questions for Matador: how to jumpstart its capex and what the midstream assets were worth. The company can now hit the gas on drilling activity and even deploy an additional rig in the basin. Five Point said the JV’s implied value at closing will be about a half billion dollars.

Matador’s midstream interests commanded $171.5 million cash upfront for a 49% stake in the infrastructure while retaining operational control with its 51% interest.

Five Point’s investment in the San Mateo JV could eventually reach $245 million, including $176.4 million cash and an additional $73.5 million in incentives paid to Matador.

The deal value far outpaced some analysts’ value assumptions for the San Mateo assets.

“The partial monetization occurred at 40% above our expectations and could be double our expected value with performance incentives,” said Scott Hanold, an analyst with RBC Capital Markets LLC. “We think this was a highly accretive transaction that allows MTDR to accelerate drilling value.”

The $73.5 million in deferred compensation paid to Matador over the next five years suggests a $500 million implied value for the infrastructure, Hanold said in a Feb. 17 report. He originally estimated the assets were worth $250 million.

Matador has invested about $70 million to $80 million into its midstream assets, he added.

Matador contributed the following assets to the San Mateo JV:

• The Black River Cryogenic Processing Plant in the company's Rustler Breaks asset area in Eddy County, N.M.;
• One saltwater disposal well and a related commercial saltwater disposal facility in the Rustler Breaks asset area;
• Three saltwater disposal wells and a related commercial saltwater disposal facility in the Wolf asset area in Loving County, Texas; and
• All related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas.

As part of the JV, Matador dedicated its current and future leasehold interests in the Rustler Breaks and Wolf asset areas in 15-year fixed fee gathering and processing agreements.

The company plans to add a fifth operated rig to its Delaware drilling program using proceeds from the monetization. The rig is set to begin drilling in Matador's Rustler Breaks area during the second quarter.

The new San Mateo JV has committed an incremental $150 million to expand processing capacity to as much as 260 million cubic feet per day (MMcf/d) from 60 MMcf/d and accelerate the build-out of oil, natural gas, and water gathering lines in both its Rustler Breaks and Wolf areas.

“We firmly believe that the joint venture will create significant value, as the Delaware is one of the most promising producing basins in North America, yet currently lacks sufficient permanent 'in-basin' midstream infrastructure,” Joseph Wm. Foran, chairman and CEO of Matador, said in a statement.

The transaction recognizes the significant value created by its midstream assets in the Delaware, Foran added.

“We had many opportunities to make a deal on these assets with a number of different companies over the past year, and we are confident that Five Point is the right joint venture partner for Matador,” he said.

The company launched its midstream initiatives in the Delaware in 2014.

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