What happened

Shares of U.S. exploration and production (E&P) company Matador Energy (MTDR 0.52%) dropped sharply in early trading on Wednesday. By 10:30 a.m. EDT, they had lost as much as 13.5% of their value following the energy company's after-hours earnings release on Tuesday, even though the numbers weren't all bad.  

So what

On the positive side of the ledger, the E&P company was able to beat its earlier production guidance by 5.5%. Year-over-year production, meanwhile, was up 5%. This was largely related to the completion of a key development project that has been performing better than originally expected. Add in Matador's success in containing costs, and the company is confident that it can become cash flow positive by the end of 2020. This is all pretty positive news.  

A woman in protective gear in front of oil wells.

Image source: Getty Images.

The problem is that Matador's top and bottom lines are still driven by oil and natural gas prices. Although energy prices showed sequential improvement between the second and third quarters, they were lower year over year. And with coronavirus cases on the rise again, energy prices are again under pressure. So despite good operational news, Matador continues to face a very notable headwind. Adjusted earnings per share, meanwhile, came in at $0.10 compared to $0.32 in the same quarter of 2019. Based on the stock's performance, investors appear to be focusing more on the negatives today.

Now what

Oil and gas prices need to see a sustained recovery in order for Matador to see a sustained business upturn. While the driller appears to be doing a reasonably good job muddling through the current downturn, investors aren't likely to give it much credit for its efforts until higher energy prices result in improved top and bottom lines. In the meantime, volatility here is likely to remain high.