Advancing Drilling Technology Will Improve Future Operational Efficiency

Key Takeaways

• Successful integration of the Ameredev acquisition and active drilling could boost future revenue and operational efficiencies.
  
• Advancing drilling technology and cost reductions aim to improve margins and shareholder returns.
  
• Dependence on Ameredev assets, high capital expenditure, and infrastructural needs could strain margins and growth if costs aren't controlled and prices misalign.

Catalysts

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

• The successful integration of the Ameredev acquisition, which is ahead of schedule and performing better than expected, could lead to increased future revenue and operational efficiencies.
  
• Active drilling and exploration, including exciting newly drilled wells, suggest potential for increased future production and revenue growth.
  
• The company's strategy to potentially increase stock buybacks once leverage is under 1x indicates a future focus on enhancing earnings per share (EPS) and shareholder returns.
  
• The continued harnessing of Trimul-Frac technology to improve efficiency and reduce costs should positively impact net margins and operating expenses.
  
• Expanding use of produced water in hydraulic fracturing could reduce operational costs and enhance future net margins.

Matador Resources Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Matador Resources's revenue will grow by 16.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 29.9% today to 22.0% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $8.59) by about December 2027, up from $925.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $817 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.9x on those 2027 earnings, up from 7.5x today. This future PE is about the same as the current PE for the US Oil and Gas industry at 10.9x.
• Analysts expect the number of shares outstanding to grow by 0.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.05%, as per the Simply Wall St company report.

Matador Resources Future Earnings Per Share Growth

Risks

• The reliance on Ameredev assets, while integrated ahead of schedule, presents a dependency risk that could impact total revenue and profitability if these assets underperform in future quarters.
  
• The increase in capital expenditure for maintaining a nine-rig operation and further Ameredev development suggests potential challenges in controlling costs, affecting net margins if oil and gas prices do not align with anticipated returns.
  
• Potential reluctance to engage in substantial share buybacks indicates a preference for fixed dividends, which might not meet all shareholder expectations and could impact the company's market appeal and earnings per share growth.
  
• The ongoing need for midstream infrastructure spending, despite significant past investments, could limit cash available for other opportunities or impact net margins if not carefully managed.
  
• Operational expenses (OpEx) associated with newly acquired assets need optimization; failure to reduce these costs could affect operating income and overall earnings.

Valuation

• The analysts have a consensus price target of $74.6 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 $87.0, and the most bearish reporting a price target of just $62.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $4.9 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 10.9x, assuming you use a discount rate of 8.1%.
• Given the current share price of $55.69, the analyst's price target of $74.6 is 25.3% higher.
• 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.