Why Matador Resources Earns Considerably More Than It Reports

In the June quarter Matador Resources sold its oil for $98.16 a barrel and kept $83.19 . The $14.97 difference went to derivative counterparties holding call options the company itself wrote — $171.8 million of realized loss on oil collars in a single quarter . Over the same three months the company's natural gas realized negative $0.79 per Mcf before hedges , because West Texas gas at the Waha hub was worth less than nothing and Matador shut in wells rather than pay to produce them.

That is the accounting through which the market is currently reading a business that, physically, is doing the opposite of struggling. Matador is a pure-play Delaware Basin producer — southeast New Mexico and West Texas, 58% oil, with residual legacy acreage in the Haynesville and Cotton Valley — organised into two reporting segments: exploration and production, which generated $541.4 million of the June quarter's segment operating income, and midstream, which generated $71.3 million, with $35.4 million of unallocated corporate cost bridging to the $577.3 million consolidated figure . At roughly $61.08 intraday on September 9, the equity is capitalised at $7.58 billion, up about 44% year to date and some 9% below its $66.84 fifty-two-week high, having rallied roughly 30% off the $47 area it traded in the first week of August .

The argument here is narrow and dateable. Three things carry it: the hedge book that is suppressing reported earnings expires on December 31 and is not being replaced at scale; the gas realisation that went negative is being fixed by infrastructure Matador secured without spending capital; and the resulting cash-flow step-up is not in the multiple, which sits at a wide discount to the closest listed comparable. What the argument requires is that a levered balance sheet gets through a fourth quarter in which it visibly gets worse before it gets better.

The June Quarter Was an Operating Beat Reported as an Accounting Mess

Strip the derivatives out and the second quarter was the strongest operating print in the company's history. Oil production averaged a record 126,106 barrels per day against a guided...