What: Shares of Matador Resources (NYSE:MTDR) gained as much as 17% today and ended the trading session up 12.4% on the announcement that it had sold some of its gathering and processing pipelines to pipeline operator EnLink Midstream Partners (NYSE:ENLK).
So what: As part of the deal, Matador will sell a 35 million-cubic-feet-per-day natural gas processing facility located in the Permian Basin along with a high-pressure gathering pipe that delivers gas from Matador's central gas gathering hub in the Permian to the processing facility for a total of $143 million. Matador has also agreed to sign a 15-year agreement where it will pay a fixed fee to EnLink for use of the pipe and facility with a set volume commitment for those services.
This is not the first kind of deal like this to happen this year, as many oil and gas producers have been selling off these midstream pipe and processing assets to pipeline operators for cash in order to shore up balance sheets and provide enough cash to fund capital development. According to Matador's management, the sale of these assets as well as the remaining room on its borrowing capacity is enough to fund its capital expenditures for the rest of the year and the entirety of 2016.
Now what: Matador, like all other oil and gas producers today, is likely preparing for a long slog of low oil prices. The company has a stronger balance sheet than many of its exploration and production peers, but its exploration spending is still woefully outpacing its ability to generate operational cash flow. This is also a very good time to have a bit of extra cash on the balance sheet, because many banks will look to reevaluate those borrowing capacity levels in the coming weeks.
Long term, though, this doesn't really change much about the investing thesis on Matador. It still remains a smaller exploration and production company with some promising acreage positions in the Permian and Eagle Ford and a decent financial position, but one that has tapped the equity market multiple times since its IPO in 2012 to fund its development. Until the company can generate enough cash from operations to pay for a significant portion of its capital budget, it will remain on the risky side that it will need to resort to deals like this to keep it going.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.