Matador Resources Co.’s (NYSE: MTDR) purchase of Permian Basin acreage sets up the company to be a natural consolidator, said Irene O. Haas, analyst, Wunderlich Securities Inc, in a Jan. 20 report.

Matador said it would buy about 18,200 net acres in the northern Delaware Basin in Lea and Eddy Counties, N. M., from privately-held Harvey E. Yates Co. (HEYCO).

Matador will pay $37.4 million in cash, including assumed debt.

Haas said the deal sets up Matador for future buys.

“We like the way the deal is structured, which will enable MTDR to keep its debt ratio low and powder dry,” she said. “The longer crude prices stay low, the even better position MTDR will be in to become a natural consolidator of smaller private companies in the basin. We like where management is going and we reiterate our Buy rating on MTDR.”

Matador said the company has the potential to double or triple the existing production program on the acquired properties at a modest net expenditure of up to $8 million.

The deal sets up the two companies to work more as a partnership than as a merger.

The deal would put Matador’s total Permian acreage position at 84,300 net acres or about 28%, the company and Tudor, Pickering, Holt and Co. said. The deal should increase operating efficiencies and spending flexibility given proximity to Matador’s Ranger and Rustler Breaks prospects.

Haas said the acquired acreage is one-third operated, one-third nonoperated, and one-third up for grabs.

While 95% of the acreage is on federal lands, HEYCO has up to 10 permits ready on the new acreage.

“Matador may shuffle around its drilling schedule a bit to get to some of these locations early on in 2015,” Haas said. “The net revenue interests (NRIs) are great, with most above 80% and with some as high as 87.5%.”

In addition, the net proved developed producing (PDP) oil and natural gas reserves are 1.3 million barrels of oil equivalent (60% oil), valued at $27 million for the purposes of the transaction.

Matador previously said it would reduce its capex budget to $325-375 million in 2015, down about 34-43% from 2014. The company most recently reported operating five rigs, with two in the Eagle Ford and three in the Permian. The company plans to cut its Eagle Ford program over the next few months as acreage is now HBP.

After the close of the transaction in February, George M. Yates, CEO of HEYCO Energy, will become a board member and one of Matador's largest stockholders at about 6% of equity.

On a conference call, Yates said he faced a choice between taking attractive private equity offers and building up an organization with the scope and scale to tackle horizontal drilling or join forces with Matador, which already has the organization in place.

“In a sense, he is not looking at this as a sale of his property but rather a joining of forces with Matador for the long haul,” Haas said, adding that Matador plans to incorporate HEYCO's employees into its organization.

Upon completion, Matador is expected to hold the largest Delaware Basin acreage position among small and mid-cap publicly traded energy companies.

HEYCO, headquartered in Roswell, N.M., is privately owned by members of the Yates family of southeastern New Mexico. The family has been active in the upstream oil and natural gas business in this area since the inception of production in the Delaware Basin in the 1920s.

KLR Group LLC acted as adviser to HEYCO and BMO Capital Markets acted as adviser to Matador.