Marlan And Black River Will Expand Gas Processing Amid Uncertainty

Key Takeaways

• Increased gas processing capacity and production growth are expected to drive substantial revenue and market reach for Matador.
  
• Strategic financial management, including debt reduction and share repurchases, positions Matador favorably for future earnings and shareholder value creation.
  
• A conservative approach to growth amid macroeconomic uncertainty could impact long-term revenues, with strategic financial allocations dependent on volatile market conditions and commodity prices.

Catalysts

An independent energy company, engages in the acquisition, exploration, development, and production of oil and natural gas resources in the United States.

• The launch and operation of the Marlan plant, along with the Black River plant, will significantly increase Matador's gas processing capacity to 720 million cubic feet per day. This increased capacity is expected to drive substantial revenue growth through higher production volumes and larger market reach.
  
• Matador's management expects a production growth of 17% by the end of 2025, despite a slight production slowdown earlier in the year due to maintenance and strategic operational decisions. This signals potential future revenue growth as production volumes increase.
  
• The potential IPO or other strategic options for the midstream segment could unlock significant value for Matador, enhancing future earnings and possibly improving net margins by better monetizing their midstream assets.
  
• The company’s strong focus on reducing debt, repayment of $190 million, alongside strategic use of hedges, provides financial flexibility. This positions Matador favorably to optimize capital expenditures or pursue acquisitions, potentially leading to enhanced earnings and shareholder returns through efficient capital management.
  
• Share repurchases are authorized, demonstrating management’s confidence in the company’s undervaluation. This can drive shareholder value creation and improve earnings per share (EPS) by reducing the total number of outstanding shares, especially as they anticipate future economic growth and better commodity prices.

Matador Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matador Resources's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 27.1% today to 16.5% in 3 years time.
• Analysts expect earnings to reach $693.7 million (and earnings per share of $6.31) by about May 2028, down from $931.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.2 billion in earnings, and the most bearish expecting $463.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, up from 5.4x today. This future PE is greater than the current PE for the US Oil and Gas industry at 11.3x.
• Analysts expect the number of shares outstanding to grow by 0.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.96%, as per the Simply Wall St company report.

Matador Resources Future Earnings Per Share Growth

Risks

• The company has reduced activity levels in response to macroeconomic uncertainty, which could lead to lower production and potentially impact future revenues and earnings.
  
• There is concern over production fluctuations, with short-term decreases due to maintenance and market conditions, which could affect revenue stability.
  
• Current commodity prices have prompted a maintenance level strategy, potentially leading to a conservative growth outlook and impacting long-term revenues and earnings.
  
• Decisions around share buybacks, dividends, and potential acquisitions are contingent on market conditions, which introduces uncertainty regarding the company's strategic financial allocations and potential impact on future earnings.
  
• There is significant reliance on external market conditions and commodity prices for strategic decisions, which introduces risk and potential variability in revenue and net margins.

Valuation

• The analysts have a consensus price target of $63.529 for Matador Resources based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $86.0, and the most bearish reporting a price target of just $46.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.2 billion, earnings will come to $693.7 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 7.0%.
• Given the current share price of $40.33, the analyst price target of $63.53 is 36.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.