Matador Resources Co.'s ( MTDR) stock decline on Thursday has given investors a great opportunity to buy this mid-cap oil and gas exploration and production company focused on the Permian Basin. Shares fell 7% yesterday as the company was reported to be the higher bidder for a record sale by the Bureau of Land Management in New Mexico's Permian Basin. Shares were up slightly at $31.14 on Friday afternoon.
The company spent more than $387 million in last week's federal New Mexico Permian lease sale, picking up 8,400 gross acres in Lea and Eddy counties, or a weighted average cost of approximately $46,000 per net acre. The recent BLM lease sale was the largest in the last 10 years and Matador did not waste any time picking up the premium acreage.
We think short sellers seized the opportunity on the back of this big news as there's no reason to fundamentally sell the stock. We attribute the sell-off mainly to the value of the acquisition, which amounts to about 10% of Matador's $3.7 billion market value, the fact that it will use bank debt to acquire assets and that the acreage is undeveloped, which will demand further capital expenditures down the line.
Matador shares have outperformed the S&P 500 by more than 12% over the last 12 months, 28.91% vs. 18.27% respectively, as crude oil has given a boost to the sector. We expect this trend to continue near term. MTDR is the third largest holding in the SPDR S&P Oil & Gas Exploration & Production ETF ( XOP) , at 2.20%, right below peers: SM Energy ( SM) and Centennial Resource Development ( CDEV) .
Matador management is comfortable with the price they paid as they believe it is some of the best acreage in New Mexico. The leases are for a 10-year term and a royalty of 12.5%, which are better terms than neighboring Texas properties, where leases typically last up to five years with about 25% royalties.
From a location perspective, around 50% of the acquired position offsets existing Matador acreage in the Antelope Ridge area in Lea County, New Mexico, while the other half is concentrated amid the well-established and very prolific Stateline area of the Permian Basin in Eddy County, New Mexico.
In addition, all of the acquired acreage is undeveloped and have potential for multiple geologic targets in areas where operators have already achieved strong well results. Let us remember that this is a long-term, value-added transaction, where the large majority of the acquired acreage is believed to be conducive to drilling longer laterals of up to two miles or more, utilizing central facilities and multi-well pad development, which should reduce well costs and further improve well returns and economics.
However, the purchases will not be drilled until late next year and will not affect MTDR's 2018 capital budget. Despite the hefty price tag, Matador estimates these properties should immediately add an incremental 16.3 million barrels of oil equivalent (BOE), or 10%, in proved undeveloped reserves.
The positive effects of this acquisition on Matador's production and on potential additional midstream opportunities should begin to be realized in late 2019, 2020 and beyond and that's why we believe this stock is a long-term buy.
Matador has increased its production and capital spending targets after crude output from the Delaware Basin exceeded the company's expectations so far this year. After this transaction Matador's total leasehold and mineral position in the Delaware Basin will be 217,400 gross (123,800 net) acres, greatly positioning its footprint versus peers.
