Matador Resources Co. (MTDR, Financial) is an up-and-coming energy stock that surged from below $3 in 2020 to the $45 handle in the first week of March. Matador has established itself as a respectable producer of oil and natural gas in the Delaware Basin, as well as Eagle Ford and Haynesville/Cotton Valley. However, it's the company's midstream expansion via its San Mateo Joint venture that I'm keeping an eye on as I believe it could be pivotal to its long-term success.
San Mateo developments
San Mateo is a midstream feature that contributed $79 million in Ebitda to Matador during 2021, which is a 37% increase from the previous year. It is seen as Matador's first breakthrough to a vertically integrated oil and natural gas company. Vertical integration is a massive value-add to any company because it allows it to curb costs much better as it essentially sets the price of its own supply as well as the wholesale price. I believe it's safe to say that future market share won't be an issue if we consider the company's vertical integration prospects linearly to the fact that it's already heavily exposed to low-cost production in Delaware and Eagle Ford.
Matador invested an additional $31 million into San Mateo during 2021, and it's expected to yield tangible results in 2022, with oil and gas prices surging amid the Russia-Ukraine conflict. In addition, San Mateo will likely build on its natural gas and water gatherings this year, with the entity now holding 14 commercial salt disposable wells and 460 million cubic feet per day of designed natural gas cryogenic processing capacity.
Valuation
From a broad-based vantage point, Matador stock remains undervalued, with its price-earnings ratio trading at a 46.56% discount relative to its five-year average, suggesting the market has yet to price in earnings. Additionally, it's forecasted that the company's earnings per share will grow at an annual rate of 135.59% for the next three to five years, suggesting we may well see the stock's intrinsic value appreciating exponentially for the foreseeable future.
Final word
Matador has established itself as a successful low-cost upstream producer and has started its trajectory toward vertical integration with a successful midstream joint venture in San Mateo. On a broader basis, the stock is undervalued and its projected earnings could see enormous gains come to fruition over the coming years.
