May 15, 2018, by Liam Denning
“Matador seeks bulls” sounds a tad too “dog bites man,” I know. But oil watchers should read on anyway.
Matador Resources Co., an exploration and production company focused mainly on the Permian shale basin, did something Monday evening that was simultaneously unusual and par for the course: It announced a stock offering. This is just something E&P companies do — but also something they’ve done much less recently:
E&P companies habitually overspent during the initial shale boom prior to 2014. High oil prices were a given, and growth was all that mattered, so selling stock or high-yield bonds wasn’t a problem. Then the crash hit and selling bonds was kind of a problem, especially in early 2016. Surprisingly, though, selling equity still wasn’t much of a problem, so companies did just that. Since then, however, as oil prices have risen and investors have demanded more discipline on cash flow and returns, equity issuance has slowed to a trickle.
Matador’s sale doesn’t change that to a gusher; it raised $229 million before fees. What’s notable is that the company chose to dilute the share count by about 6 percent to buy more acreage in the Permian basin, less than a week after reporting first-quarter capital expenditure was about 32 percent higher than expected. Despite this flouting of the fashion for discipline, the new shares priced at a discount of merely 3 percent — on a stock trading close to an all-time high:
Are investors eyeing $80-ish oil prices and letting the leash slip a little? It’s too early to say. Matador may simply be one of those E&P companies that’s regarded well enough to get a pass (like Diamondback Energy Inc.) when it comes to tapping the market. In its analyst presentation, Matador makes a point of showing its production and reserves are rising on a per-share basis, not just in absolute terms.
Still, with OPEC seemingly happy to try for ever-higher oil prices, it stands to reason that the impulse for austerity among E&P investors could soften. Matador’s move is a notable development that bucks the received wisdom — but isn’t completely out of context.