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Matador Bullish on Permian's Bone Spring Results in New Mexico

Dallas-based Matador Resources Co. flagged initial test results from three Permian Basin wells in Lea County, NM, which in aggregate over 24 hours flowed 7,856 boe/d, consisting of 7,172 b/d of crude and 4.1 MMcf/d of natural gas.

The Ranger asset wells, Mallon 27 Federal Com No. 1H, 2H and 3H, are the first three Matador-operated wells drilled on acreage acquired from Harvey E. Yates Co. (HEYCO) two years ago. All the Lea County wells were completed in the Delaware sub-basin's Third Bone Spring sand.

The wells are considered "among the very best" drilled in the Delaware since the HEYCO merger, CEO Joseph Foran said. "These wells, in addition to other nonoperated wells in which we have participated since the HEYCO merger, highlight the prospectivity of our northern acreage," he said. "We are excited to further delineate and develop this portion of our Delaware Basin acreage."

The initial production (IP) for each well over the 24-hour period was at least 90% weighted to oil. The 1H well produced 2,780 boe, with 2,500 b/d of crude and 1,680 Mcf/d of gas; the 2H produced 2,658 boe, with 2,427 b/d and 1,387 Mcf/d; and 3H produced 2,418 boe, including 2,245 b/d and 1,035 Mcf/d.

Each of the Mallon wells are 7,300-foot horizontal laterals, with completed lateral lengths of about 7,000 feet. Each well was completed using 29 fracture stages, including 40 barrels of fluid and 3,000 pounds of primarily 20/40 mesh white sand/lateral foot.

"These were the largest fracture treatments pumped to date by Matador in a Bone Spring completion," management said.

Matador has a 70%-plus working interest in each of the Mallon wells. With a large portion of federal acreage comprising each unit, its royalty in each unit is about 18.5%, versus up to 25% on typical fee leasehold, which gives it an overall net revenue interest of around 58% in each well. The company expects to benefit from lesser royalty burdens on wells drilled on the former HEYCO acreage.

Matador is operating four rigs on its Delaware sub-basin acreage, including one rig in the Ranger/Arrowhead asset area, and it expects to keep one rig running in the Ranger area through the year as it begins to further delineate the Wolfcamp formation.

According to Wells Fargo Securities LLC, Matador has estimated it has 102 operated (209 gross) locations in the Third Bone Spring at the Ranger/Arrowhead area with well costs of $4.5-6.0 million for 4,700-foot laterals, 80-90% oil and 400,000-700,000 boe.

"Our model previously assumed well costs of $4.7 million, 80% oil, and 600,000 boe estimated ultimate recovery,  which translated to 88 cents/share in our net asset value is only giving them credit for 25% of their locations," analyst Gordon Douthat said Friday. Offset operators in the area, ExxonMobil Corp.'s XTO Energy Inc. and Cimarex Energy Co., "had previously drilled wells in nearby sections on 4,500- and 4,000-foot laterals that recorded 24-hour test results of 792 boe/d and 862 boe/d, or 176 boe/d and 215 boe/d per 1,000-feet of lateral."

Wolfcamp delineation is the "next step to unlocking full value," according to Tudor, Pickering, Holt & Co. (TPH).

"The wells appear to be significantly outperforming offset wells highlighted by the company, as New Mexico state data shows Cimarex's Cordoniz 28 Fed No. 4H well to the west had an IP-24 hour rate of 177 boe/d per 1,000 feet (85% oil), while XTO's Perla Negra Fed Com No. 1H well to the northeast had an IP-24 hour rate of 216 boe/d per 1,000 feet (89% oil).

"However, these are only initial rates, which can be variable," TPH analysts said. "While we're encouraged by the early results, we need longer term data to deem these test wells a success and will continue monitoring as it becomes available. Next up for Ranger is the Airstrip State Com No. 201H testing the Wolfcamp A, with results expected by the 2Q2017 call."

BMO Capital Markets Dan McSpirit said the Matador wells point to a "fine start" in the Ranger area, which has received little attention in the red-hot Permian. In the BMO 4Q2016/2017 outlook for Matador, "we commented that...more capital means more rigs means more growth," which related to the company's recent equity offerings.

"We show 30% exit rate oil growth in 2017 and 2018, on average" for Matador, McSpirit said. "The cash flow outspend over those same two years is much less pronounced than observed in prior periods, with leverage in the low-2.0 times range at each year end."

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