Matador Resources Company

Good morning, ladies and gentlemen, and welcome to the third quarter 2020 Matador Resources Company earnings conference call. My name is Sarah, and I'll be serving as the operator for today. At this time, all participant lines are in a listen-only mode. We will facilitate a question-and-answer session at the end of the company's remarks. As a reminder, this conference call is being recorded for replay purposes. and the replay will be available on the company's website through November 30, 2020, as discussed in the company's earnings press release issued yesterday. I would now turn the call over to Mr. Mac Schmitz, Capital Markets Coordinator for Matador. Mr. Schmitz, you may proceed.

Thank you, Sarah, and good morning, everyone, and thank you for joining us for Matador's third quarter 2020 earnings conference call. Some of the presenters today will reference certain non-GAAP financial measures regularly used by Matador Resources in measuring the company's financial performance. Reconciliations of such non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP are contained at the end of the company's earnings press release. As a reminder, certain statements included in this morning's presentation may be forward-looking and reflect the company's current expectations or forecasts of future events based on the information that is now available. Thank you for joining us. With that, I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?

Thank you, Mac, and good morning to everyone, and thank you for participating in today's call. We appreciate your time and interest in Matador very much. Similar to last quarter, we have the five slides, as Mac mentioned, and we want you to know that we'll stay and answer any questions you have for as long as you all want to talk. I have prepared remarks as part of the earnings release. In the interest of time, to give more time for questions and discussion, I'm going to skip over that and go directly to the slides. The slides are aimed at not just reporting on the quarter, but to give you a feel how well we've done with our goals and metrics for the year. On there, if you look at that slide, in particular you may remember at the very first of the year we said that we had a series of wells to do that we were going to drill the six Rodney Robinson wells in January and February and bring them online and then in April and May that we would have the Ray wells and then June and July we'd have the Leatherneck wells and then in September we'd We would have both the San Mateo expansion online and operating and drill the first 13 wells in the Boris area at state line. We've accomplished all of those projects on time, on budget, and in the drilling case, better than under budget. So that happened, as we said. We also resolved to improve the balance sheet, which we had. We went down from six rigs to three rigs and took other steps, reducing capital costs, G&A, and LOE. And you may remember that Matador was the very first company to take salary cuts. And I took a 25% pay cut. The board, when I told them what I was doing, voluntarily took 25% pay cuts, too. And we went all down the line. The executive vice presidents took 20%, regular vice presidents took 10%, and each of the staff took 5%. We also rotated young engineers out into the field to take the place of a lot of contract people, which led to capital cost savings and G&A savings. And And then this is the year we were really going to stress. In 2018, we drilled 1% longer laterals. In 2019, it was 29%. And this year, it's in the high 80%. And that was a very important step for us to move from one-mile laterals to two-mile laterals because in doing so, you really improve your capital efficiency as shown. So to step up into what we... Foran, Van Singleton, Bryan Erman, George Gregg Krug, We're anticipating stronger quarters by quarter and that's worked out as well. Our marketing group has worked hard to get the best possible prices and we've done a number of non-core asset divestitures on more or less a brick by brick. We have not One of our options was monetizing mineral interest or even part of San Mateo. Fortunately, our performance was strong enough in other areas that we didn't need to turn to those options to improve the balance sheet. We're on our way. The balance sheet will get better. We're delighted that the banks have approved, reaffirmed, Our bank line of credit and we thank RBC and Comerica and the other lead banks in the group for their support and it means a lot to us and we really value that relationship. Then as we mentioned the San Mateo got its pipeline and its right of way and its all the various equipment done on time and under budget. It's operational and we really appreciate the extra work that our field people did on that and on production this year and really put in the extra time to make it all come together, a very complex project. And down in the lower corner of slide A, you see the capital efficiency, the better drilling and completion costs, which are Not quite, but almost half of what they were a year ago. On slide B, it just shows that our guidance for our debt picture will be better than we had originally projected, and we'll continue to work on that in 2021 as one of our very important for the most important projects. Slide C just reflects the drilling accomplishments that we appreciate Billy and Chris and Glenn and Cliff for getting that done. That's been a major achievement and really improves the well economics. Many people ask why you still keep three rigs running. Why not reduce to two or one or none? And at these prices, Over the years, I've been out here 40 years, and the wells you drill when oil is down will be the most profitable wells that you will have because when you earn an extra dollar of revenue, the royalty owner takes a big chunk of it, the state takes a big chunk, and you're left with 55% or 65%, something like that. But when you lower a cost, that whole dollar can go to your bottom line. And we want to express appreciation for our operations group. You may hear more about this if you ask the question, but working with the relationships that we have with Patterson, with Halliburton, or with Slumber J, or Patterson International, their frat group, We really don't try, our approach is not to try to beat them down so much on price, but ask them where and how we can improve efficiencies. And they've been good. And so a lot of the savings here are not from beating them down on price at all, but the way they've worked with us, which we very much appreciate, how to be more efficient. And so we're getting better. But they're getting better too. They're getting more work done in a single day. And I want them to know how much we appreciate working with this hand-in-hand. Slide D simply tells you where we've had some very substantial savings, $360 million, more than we expected and where it came from. And our expectancy that we'll have further 328 year-to-date but we still expect more savings in this fourth quarter. And the final slide E is just how it's all turning out but going back to fourth quarter of 2016 which was a difficult challenging time too you can see the steady progress that we've made on our production and particularly in the Delaware that now we're We're up there approaching 70,000 BOEs and are excited about the lineup for this fourth quarter. The EBITDA goes up and down with price, but we've still managed increases relative to the price that has been hard work, but this The teams, the various departments, really work really well together, and I think I'm as proud of these numbers as I am in easier times when prices were higher. And then the last, you can see the progress San Mateo is making, and particularly ramping up now that we have this expansion. Thank you. To ask a question, you will need to press star then one on your telephone. To withdraw your question,

Please press the pound key. Due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and one follow-up until all have had the chance to ask the question, after which we would welcome additional questions from you. Our first question comes from the line of Scott Pannell with RBC Capital Markets. Your line is now open.

Thanks. Good morning, guys. Joe, you all had made a noticeable pivot to look at free cash flow going forward and made a comment through 2021. Can you just give us a sense of how has your mind changed given everything that's happened over the last year or so on the strategy of Matador? And is that a sustainable change you think is going to occur and maybe around some of the moving parts around that?

Thank you, Scott. You know, it's just really a question of what's most important under all the circumstances to create value. And last year at this time or a little earlier, we realized that one-mile laterals were okay. They were profitable, but they weren't going to be as profitable or as helpful as a two-mile lateral. So we saw to get the pathway for us was first get to the hurdle where we were capital efficient. You know, that saves money and makes better wealth. The two monolaterals have less declines. They're more profitable. I mean, there's just a lot of value getting to be more capital efficient. And to do that... We saw the opportunity in the BLM lease. We paid up for it. We took flak for it. But we've already doubled our money on it in adding value to our asset base. And we have a lot more wells to drill and a lot more oil and gas to harvest. So that needed to be to act on that and to get that project going and and at least the first step in that completed put us in an entirely, going from 1% longer laterals to upper 80s, almost 90%. You can see what a difference that made. Now having done that and having gone into debt to acquire that, that was temporary debt. We weren't going to do that. Having accomplished that in the expansion of San Mateo, which is a no-decline business, That put us in a deal with lower declines on our oil wells and lower declines on our overall cash flow because San Mateo is cash flowing and now that we have the merger, it'll do even better. So that had to be done first. Now that we've done that and free cash flow is an option, We've appreciated our bank support all through this, and it's time for them to get some back and improve our leverage ratio. And they've worked with us, but it's now their turn. And once we do some of that, then we can look at the options we have to return some or more to the shareholders. There's no definite plan. because the first thing is get the bank debt down and then we can consider other options. The pivot, as you know, you've known us for a long, long time. Early days in Matador, we didn't have any debt. But it came along that to run the business as a public company, a little leverage was helpful to the overall business. The overall growth. In 40 years of the business, we've always paid money back and we're proud of our credit ratings. But it's timely to make a little change and also listen to our shareholders some who who we respect and think they have ideas and they've been in agreement with us to do this first to achieve capital efficiency so you're modern but also take care of your other obligations and so we're on that line and I hope that answers your question but if not give me a follow up Scott

Yeah, yeah, and just to confirm, I mean, this is, so this is a plan, I mean, you talked to your 2021, but this is sort of like, you know, a go-for plan at this point, right? It's not necessarily just a through 2020 plan, 2021 plan.

No, I mean, I think that historically we like having our leverage ratio down there at closer to two or below, and it's not that we have a debt problem. It's just under EBITDA because of price. Foran, Van Singleton, That gives you a lot of firepower to get the debt down there to two or below, but that's where we'd like to be. But the first step is to think about what builds value, and we thought the really most critical thing would get to where you could achieve this capital efficiency that would build the long-term value.

David, would you add to that on that? No, I don't think so. I think, you know, Scott, we do feel like that, you know, the plan that we have going forward can be sustainable and one that will generate cash not only next year but, you know, in the future as well. So I think that's the path that we're trying to embark upon.

Okay. Well, I appreciate that clarification. And as my follow-up question, consolidation obviously has hit the energy space. And particularly, you know, you all are in a position where there, you know, a lot of the SMIDCAP counterparts are going away. Where do you fit into that conversation? And, you know, obviously you're in a unique position where, you know, again, from a SMIDCAP perspective, there are not many and other close peers aligned with you. Does it make sense for you to be part of the consolidation going forward?

Scott, you know, at this present time, I don't see much of an advantage. Look, we're achieving what everybody wants to have, which is, you know, production's going up, you know, costs are coming down, we're starting to return things to the banks. We have grown from a standing start. You remember when we went public in 2012, we had no production in New Mexico, and now we're probably going to be, we're currently in the top ten in both gas and oil, and as this consolidation happens, we'll probably move up to five or six. We're at seven, I think, currently, so we're ahead of WPX and some of these, you know, and some of these other much bigger companies. So we think we're playing with them and that our numbers or returns are as strong as anybody. Now, having said that we don't think we need a partner, we also recognize we're a public company and we play a straight game. So if someone were to make a... Thank you for joining us. We make far more from our stock going up than we do from our salary. So our primary interest is getting the price up. The no premium deals don't have much. We don't see the appeal. The staff is complete. The others don't have a midstream, which again gives us a big advantage operationally and financially. And That's built out pretty well in our areas. But again, as you've heard us say often, we reserve the right to get smarter. And if some opportunity is presented in front of us that is good for our shareholders, we'll do it. But we're shareholders too. That's the thing about it. We have a big ownership, so we're We just haven't seen any deals that would be a good fit culturally or financially or from a property asset base. And we think we have a really good path ahead of us now that we've proved up Stateline, Rodney, other deals, and have the midstream. Does that... Matt, would you add anything to that?

No, I think you said it well, Joe. I think for my perspective, I think the notion just that we're continuing to create value. You know, we're not opportunity poor. We're opportunity rich, so we've got a lot of things that we can do. That being said, like you said, if the right deal comes along and it's accretive to what we're doing, we certainly would be willing to look into it and do what's best for the shareholders.

Appreciate the call. Thanks, guys.

Thank you. Our next question comes from the line of Gail Nicholson with Stevens. Your line is now open.

Good morning. You guys had really strong Burroughs wells that came online. When you look at the actual performance of those wells versus your pre-jill expectations, how do things compare? And then also specifically, The lower Wolf Can't Be well looks a little bit gasser than your normal Wolf Can't Be mix. Can you just talk about what you saw there?

Yeah, sure. Hi, Gail. It's David. Well, first of all, I think clearly we were very pleased with all the wells that we turned to sales this quarter, in particular the Boros wells. I think, as we mentioned in the release, they They uniformly came out better than we anticipated. We knew they were going to be very good wells. We knew when we bought that two years ago, it was going to be an excellent area. I think these first wells have certainly borne that out in a big way. With regard specifically to the Wolf Camp B, first of all, I think we were very pleased with the results of both of the Wolf Camp B wells. The upper Wolf Camp B, I believe, had around 37% oil cut, which honestly is quite very close in line with sort of what our Wolf Camp B wells have been at rest of the break. So I think that was certainly in line with the expectation. And then even though the lower B well is a little bit gassier, those wells have extremely high pressure That well was making 15 barrels a day. I mean, 15 million cubic feet of natural gas per day and a whole bunch of oil. And the gas itself is very liquids rich. So you're probably talking 1,300, 1,400 BTU gas there. So I think that it's a very strong natural gas well along with a lot of liquids content. And from the midstream standpoint, it's even – Thank you for joining us. and Ned Frost, who's sitting at my right this morning, probably has got two or three more just in the Wolf Camp Bee itself that we might consider testing before this is all over. So I think what we've demonstrated is the bee continues to be a very important target for us and we're excited about the opportunities to develop it going forward. I will just add, I think there was one of the notes out this morning that Thank you for joining us. was rather than testing the B on the Bonnie side, we chose to test the first bone spring on the Bonnie side. So I think right now everything is going very much according to plan or better with the state line development. I will say I could not have foreseen that we would be able to bring those wells in under $800 a foot. So I think that not only the results... Foran, Van Singleton, Bryan Erman, George Gregg Krug,

Just to give you a feel is our completion group had 750 separate fracks. So for 24 hours a day for two months, they were out there fracking those wells and no hitches. Unbelievable great performance by them. Just think of that, the magnitude of 750 fracks 24-7 for two months. and the same thing to our production group and our guys in the field, Jason and Doug, for coordinating the three-pipe system, getting to the Rodney Robinsons because you couldn't produce them if you weren't on pipe. You couldn't get trucks up that road that would have handled it. So coordinating, having all three pipes, gas, water and oil, there at the same time, getting them online, bring them on with just a great feed and... That's why I mentioned that our group really moved up steps, getting to the point where they could do a project of this scale, proving that they could, gives us a lot more options to do. And the number of zones here gives us a lot of options. So we're still in the appraisal phase of both projects. That's exciting in itself. So thank you for the question.

Thank you for all that color. I think sometimes us Excel junkies don't really fully appreciate everything that goes into bringing on a massive project like Boros. San Mateo gives you a huge financial benefit, and I feel like sometimes the market does not appreciate the kind of turning of the free cash generation on the San Mateo side as well as the incentive benefits. Can you just kind of talk through 21 and how you see San Mateo kind of underpinning and helping that free cash flow generation outside of the commodity price environment.

Yeah, Gail, this is Matt. Good morning. Kind of walk you through a little bit of that. And thank you for the question. We're really excited about San Mateo and how it contributes to the free cash flow discussion for Maduro in the aggregate. So if we just contemplate that – Joe said we'll use simple numbers here. If San Mateo throws off $130 million in EBITDA next year, we'll get half that, so we'll get about $65 million. We anticipate there'll be maybe $5 million that will go towards interest expense, so that gets us down to $60 million. We also think that the maintenance capex for San Mateo for the year will probably be around $40 million, so we'll be responsible for half of that. Thank you for joining us today. and additional third-party volumes that would get even better than that. So we're very excited about the free cash flow story with San Mateo.

And Matt, you're exactly right. It's not fully appreciated how doing these in tandem, drilling the wells, expanding the plant, works for a win-win situation because we've gotten the drilling incentives both for San Mateo 1, San Mateo 2, even though it's merged, and you provide... The oil, gas, and water, the midstream business to San Mateo, so they prosper as well. And I think you're exactly right that it's an underappreciated asset and that, again, will provide value for years to come.

Yeah, Gail, if I put on my San Mateo hat, what I'm really looking for as a midstream company is a An anchor tenant that's going to do what they say they're going to do, and we've got that with Matador. When we did the expansion, the only volumes we contemplated in the economics were Matador volumes, so that project works if we don't get any third party. On the Matador side, the wells that we're drilling in the state line and up in the Stebbins area, and even at Russell Breaks, are wells that we would drill with or without a drilling incentive. Like Joe said, it's just a really nice way to work up both business units together.

It's a great app that I really appreciate the caller. Thank you so much.

Thank you, Gil. Thank you, Gil.

Thank you. Our next question comes from the line of Gabe Dowd with Cowan. Your line is now open.

Hey, good morning, guys. Thanks for all the callers so far. Maybe wanted to start a little bit on CapEx and understand there's timing differences between accrual and cash, CapEx, but I kind of look at the financials through 3Q. It looks like there's maybe about $140 million difference between cash and accrual if I look at total upstream capital and then 100% of San Mateo CapEx. So I guess I was just curious if we should expect to see that reverse in 4Q or moving forward.

Well, you know, Gabe, this is David. Look, you know, all I can say is that the, you know, the As you know, the CapEx numbers that we report each quarter are the accrued CapEx. Whether that cash has actually gone out the door or not, we're required to report it or we do report it on an accrual basis. Every operation that's been completed by the end of the quarter is included in that accrued CapEx number. You're very correct that because we consolidate San Mateo, that the cash flow always reflects 100% of the San Mateo capital spend, the cash flow statement does. And in this past year, Matador has been responsible for less than 50% of that because of the fact that we still had some portion of the carried interest that we had negotiated. So really in 2019 and 2020, Matador had much less than its ownership. I think if you went back and looked at the for the San Mateo II expansion that we probably ended up with paying about a third of the expansion cost, maybe 35%, and we ended up with 51% ownership in the expansion. Of course, if you have, I think, quarters where you've had higher accrued capex, that may show up then in the next quarter and then it rolls itself off as you as you go through. So there's always going to be a little bit of a disconnect between the accrual and the cash flow capex. I think the other thing too to point out is as we've rolled from six rigs to three rigs, just the general both capital spend and cash flow spend that you'll see will go down and continue to stay down as we go forward. Thanks, David. That's helpful.

Then just as a follow-up, maybe try to get a little more detail on 21. I think I asked this last quarter, too, but I guess just curious if we should still expect a mid-single-digit oil growth number year-over-year at capital that's about $100 million or so less than 2020, and does that program still deliver free cash flow at $40 oil? Yeah.

I think that we do expect that with the three-rig program that we'll be able to generate mid-single-digit production growth. Oil, gas, total, I think they'll all be fairly similar for 2021. Obviously, we haven't finalized our plan or put out guidance, but that's the way that it's looking to us. I think that we would expect to see... Foran, Van Singleton, Bryan Erman, George Gregg Krug, Thank you for joining us. Very confident in our abilities to generate free cash going forward, even down to levels of $40. Great. Thanks so much, David. Very helpful.

Thank you. This question comes from the line of Jeff Gramp with Northland Capital Markets. Your line is now open.

Good morning, guys. Hey, David, I'm here. Morning. I don't know if this is a question for you, David, or maybe anyone willing to hop on it here. On the topic of leverage, and Joe, you'd mentioned kind of historically, you know, two times, maybe a little bit better spin, kind of what you guys have operated at, obviously with prices that's hard to get at. How big of a focus is it to get back to that historical leverage target? It sounded like, you know, maybe asset sales weren't super interesting in this type of environment. So, How do you guys really look to balance, you know, maybe opportunistically looking at selling some assets and accelerating the leveraging versus maybe, you know, being more opportunistic on asset sales, maintain a little bit, you know, higher leverage than you have historically, but, you know, not being forced to sell something when maybe you guys don't want to? Just touch on how you balance that.

Well, Jeff, you know, this is a complex situation. As well know, a very complex business, and you've got to balance those things. It's like flying a plane. I mean, you've got different factors to consider. One is the overall thing is, are we creating value? And we believe we are, is that you have now reserves that have grown from... You know, 250 million barrels of oil or gas equivalent. That's almost from a standing start when we went public. So you've had growth up there where that's going to be moderated a little bit. At the same time, you're trying to build for the future. We got a lot of pushback when we went public. We didn't, quote, you know, have... 20 years of inventory. We thought we had a reasonable amount, but as time goes along, we've bolstered that. We've got plenty of A-plus locations. I'd like to note that during this time, we've also built up a plan B in case there's problems with with the federal acreage that we have, 26%. So we have hundreds of A-plus locations that are not federal leases. Last year we drilled 58 wells. So, you know, that's plenty of years' supply. And then the same thing on people. You don't want to get too many people. You don't want to have too few people. And then the addition of the midstream. That was... Some that most people didn't do. But when we moved out to the Delaware, the infrastructure was old. And we approached somebody about hooking up some gas. He says, I can, but you won't like it. It's kind of leaky now. You really need to replace the pipe. So we did. And the first project we sold. And we've... Pretty good sum of money. We've been pretty much playing with house money ever since as we built that out and we saw the operational advantages of that pipe getting there when our well was ready to come on so we weren't flaring. That was good for ESG besides good economics and financially it's been great because it We ended up with, I think it was $175 million in carries on our midstream. And that was just like cash infusion, but you didn't dilute your stock any. We thought that was the right thing to do. And not to do the project as we were drilling in those areas to have that wouldn't have been the right timing. And that's why you want A strong balance sheet as we had going in to this time of low commodity prices that can tide you over or even out some of the slumps. And I feel there's been way too much focus on debt. Again, I don't think we have a debt problem. The amount of debt compared to the amount And so, you know, it's of importance, but we're not going to Foran, Van Singleton, Foran, Van Singleton, Robert Macalik, that we have with the drilling of these BLM leases and others and building out the plant. And so you will see us having our cash flow continue to grow. And as it grows, we're going to allocate more to repayment of debt and to shareholder concerns and yet not hurt the long-time and I think that's reflected in the bank's actions is they approved us in February and increased our commitment on that loan, approved us unanimously in February and this time they approved us without any change. So Hemi Oil Companies can point to no change in their bank agreement. And we just got a great group, and everybody's working. They fully understand what we're trying to accomplish, and we have accomplished it. So we've done what we said we're going to do. They have confidence in us, and the staff has the same thing. You know, last open period, I think 200 of the staff of 300, two-thirds, bought stocks. So the people that know the company best and the banks know You know, they get it all into every aspect of it, all have confidence. And I think the market has just not fully weighted the value of the midstream or the importance of the capital efficiency going from 1% two years ago to 90%. So I think time will tell. We've had 26 quarters where we've met or exceeded guidance, so We're not missing on our numbers. We're steadily achieving it, and I think we rate a little more confidence that these are the right moves to make, and we're headed on a good path. And so that's why we're happy to get out and talk to people and show them that we are accomplishing what we said, and if we keep doing that, This is going to work out to some big values. And if you look at the assets behind each share of stock, I'm not going to try to go into it. You can take our reserves and divide by number of shares and see that everybody has a couple of barrels behind each share of stock and multiple MCF. And then to boot, you've got 43 miles of big pipe going through some of the best areas and and plants, efficient plants.

So I like our chances.

And it's been a collaborative effort by everybody here. So I hope that gives you some further color behind our strategy, which is working. We said we'd do this in January, and it all came about just as we said and planned. And I give a lot of credit to the whole staff for pitching in as they have.

I appreciate that, Joe. Comprehensive answer. For my follow-up, I want to touch on San Mateo and the merger of the two entities there. Are there any financial or kind of operational field-level type of benefits of merging those entities, or is that just kind of streamlined, you know, kind of back office internal processes, or how should we think about that maybe, you know, altering the, you know, value proposition or what have you of the entities?

Jeff, I think this is Matt and Maureen, by the way. The merger for us really makes things have more synergy. So if we were to keep those two separate, we would have to operate them as separate. We couldn't combine the plants. Right now we've got 160 million train, one 260 and one 200. So we can move gas from San Mateo 1 over to San Mateo 2. And it just creates a lot of synergies there. Additionally, it allows us to contribute more of the assets to the borrowing base, so there may be some advantages there, but mostly it just creates a lot of synergy.

Got it. Thanks for the time, guys. I appreciate it.

Thank you. Our next question comes from the line of Neil Dingman with Truist. Your line is now open.

Joe, my first question for you and the team is you talk a lot on San Mateo and it certainly seems like it's now past that, if you want to call it a critical inflection point. Now that it's past this, you all haven't given detailed guidance yet for next year, but it certainly seems to be nicely free cash flowing. By having this benefit or having San Mateo like it is now, Does this give you more optionality for the upstream, or do you all think about perhaps maybe asking that another way? Would you think about changing any part of the upstream strategy now that you have San Mateo, really that backstop, if you will?

That's a good question, Neal. I guess the way we think about it is that the E&P – drives what we do. And we don't drill wells to accommodate San Mateo. We drill the best wells, you know, the most profitable wells we can. And if they fall into an area, San Mateo, San Mateo will hook up. But we started San Mateo not going into unknown areas, but that pipe always went to places where we were drilling and we weren't satisfied with the midstream offerings in that area. There either wasn't enough of them, or as I mentioned in the first instance, some of it is old pipe, old leaky pipe, and we preferred bringing it up to a higher standard in a lot of those areas, and that we also felt that, particularly with the gas processing, you were going to get More of the NGLs, and they have a favorable price today. They had a favorable price back then, and it gave us more options on where to send the gas and oil by these central delivery points and interconnects. And so what we try to do is build as many options into Matador's business plan as we can. and you have a lot more options when you have a capital efficient E&P process and a capital efficient midstream to work hand in hand. We've been accused of drilling wells just to help Sam Mateo and I can tell you nothing has been further from the truth and to our partner's credit they've never leaned on us to drill more wells in a certain area. That it's done on a Capital Efficient Basis. Where does it make most sense? And as we go forward, it gives us an option in areas like Antelope Ridge. If we want to build some over there, I'm sure we could, and we'd know how to operate it. But right now, we plan to have first claim on that cash flow is get the debt down some. Matt, what am I missing?

Yeah, Neil, I was just going to add to what Joe said. You know, the way we've approached the midstream business, if you'll remember, we started very small. And, you know, our first project was a $35 million a day cryo plant down in Leaven County. And that's, like Joe was talking about, that was because we didn't have a great option to process our gas. And so we built a small plant. We planned for an expansion. And, you know, obviously we sold that to Enlink. And then we built a $60 million a day plant. up at the Black River plant. And so both those volumes were relative to the expected volumes for Matador. So when we started at the Black River plant, we thought we had about 30 million a day. And so we built a 60 million a day plant, which gave us some room to add some third-party volumes. And we've just done that at each step. So when we went from 60 to 260, we had about half the volumes committed. And now we're at 460 now. So we're at a point where we can bring third-party volumes on. But before we have to do any additional big capital expenditure, say, to add another train or to drill another saltwater disposal well or whatever that might be, we'll be able to go get those volumes contracted likely on an MVC commitment where we've got assurance that the payout will be there and it will be profitable. So we're in a nice spot where we can not have to build something and hope they come.

Great details. And then, Joe, just one follow-up. Your comments earlier were interested. You talked about even the benefits of drilling in sort of times like today when prices are relatively weak. And I'm just wondering, for you or David or Matt, I mean, I'm just, again, curious how you think about that given you definitely don't have any obligations. We know that you guys are in a great place on the leases. So I'm just thinking, you know, as prices, especially as they fall down again this morning, you know, again, maybe just if you could get more color in this, why not go to zero rigs and just Thank you for joining us.

If you were to stop, then your appraisal program that we're in currently would come to a stop, and you really wouldn't know what you have. And the third, and this is one of the most important, is if you stop drilling altogether, your good drillers, your good technical people, your good geologists aren't going to hang around. They're going to go find somebody who is drilling and go work for them. So if you want to keep your organization together, and we feel we've got a lot of A players here, we want to keep them working, particularly when they're working and making money for us. If we were drilling, losing money, but you saw this year, I mean this quarter, our adjusted earnings per share was a profit. And the value added in reserves Foran, Van Singleton, It goes up. The share value will go up a dollar. So there's a lot of upside to being in Matador and as prices recover, activity recovers, which means more opportunity for the midstream because they're already there. You don't have to wait for somebody to build a line. We're already there and we have a history and we're developing relations with other producers out there and trying to give them good service and and build on that so that they deal with somebody they know as opposed to somebody new coming in that isn't a proven quality. So I've been out here 40 years and I've found that if you stop, you go nowhere. I mean, you just fade away. You've got to keep going Foran, Van Singleton, Robert Macalik, in New Mexico for being the large producers. So that gives you advantage, and landowners know that you're drilling, and it all works to the good. I mean, you don't see businesses just shutting down, and then when they reopen, that they work better. You've lost people, which is a rebuilding effort, and that's always the hardest thing is finding really good people and We just feel like we've got a really strong staff that's working hard together and trying to get better every day, and this is the right pace for us. Matt?

Yeah, Joe, we've made a tremendous amount of progress, Neal, during these last several months. I mean, we initially, at the beginning of the year, we put the plan together to drill these boros wells, and the operations team actually drilled them about 10 days faster. for welding than we had anticipated, driving those costs down under $800 a foot. And so there's just a ton of these efficiencies that we wouldn't be able to realize if we weren't in the game. We've gone from multiple bottom hole assemblies to dual lateral to where we've gone over 12,000 foot with a single bit, single motor, and single MWD. So there's just a ton of progress. And even at these reduced rates, we're looking at probably $50,000 per day for Rig Day. And so if oil goes back up and costs go back up to where they once were, you're looking about double that. So you certainly want to be realizing these efficiencies sooner than later so that if prices do go back up, that you're not behind the eight ball. Great.

Last thing, Neal. I just want to emphasize the importance of people, that for all the capital and all the technology this business requires, it ultimately is a judgment business. and it comes down to people and we really have a, feel like a strong group of people that can take us to a much bigger company. David likes to say we hit above our weight but the projects we've done, you know, I think compare it well with any company of any size and just the fact that we're growing to say the number five producer in New Mexico, it isn't that we've gone out and bought Our production from some other company, it's organic and it's controlled and we could go down to two rigs if we wanted to. And, you know, we'd consider it if prices were down there in the 20s. I mean, it's not like we're married to three, but for this price at this time, the three is the right number. We'll just have to trust that the market begins to see the value of the components and the value of going ahead. As Matt says, you don't want to lose the ability to drill these wells faster. That's a big part of the capital savings. So continuing ahead has increased assets and increased cash flow, and there really hadn't been a downside except... The debt may not have gone down as fast as some want, but the EBITDA is going up, and a little better price, I think, is likely to happen. And as competition is reduced, prices will go up. David, anything to that?

No, I don't think I have anything to add to what you and Matt have said. I think I've covered it as well.

Okay.

Joe, thanks. I just say thanks and congrats, you guys. You've hit all your sort of timelines out there, and you're one of the few that continues to do that.

Thanks, Neal. Thanks, Neal.

Thank you. Our next question comes from the line of John Freeman with Raymond James. Your line is now open.

Good morning, guys.

Good morning.

The first question, you had sort of an interesting dynamic where it looks like during the third quarter, you said that at least some of the savings were related to some of the non-op activity that slipped from the third quarter to the fourth quarter. And at the same time, you mentioned the additional $10 million in CapEx that you'll expect to incur in the fourth quarter. Some of that non-op activity that was supposed to happen in early 2021 gets moved. forward to 4Q and I guess I'm curious just given the weakness we've seen in oil prices here the last couple of weeks if there's I guess how strong a conviction there is that non-op number is going to be there like is that stuff that was supposed to be occurring late in 4Q which is still maybe up in the air given the commodity price just any color on how we should think about that potentially that moving to the right The math is what I'm focused on.

Yeah. Hey, John, it's David. Well, I think that there's a pretty good chunk of it that's already spoken for in the fourth quarter. Some of it related to the fact that some of our partners have decided to go ahead and frack wells toward the end of the year that they had originally indicated they might postpone into the first quarter of 2021 or beyond. I would venture to say that probably reflects the fact that as we've been talking, it's a good time to crack wells. Costs have been low and so I think that they may have chosen to accelerate some of those completions into the fourth quarter. Some of the wells that are going to take up portions of those costs are just wells where maybe partners have decided to start the drilling of the wells before the end of the year but still don't expect them to come on until the fourth quarter. So there may be a little of it that might get further delayed, but I think it's reasonable to expect that most of that is going to be incurred as we've indicated.

Okay. And then just a follow-up question. You all did a good job of updating us on where you all stand on The federal drawing permits, which y'all have done a remarkable job getting as many of those approved and received. Obviously, y'all expect to have almost another 100 approved and received before year-end. And I guess I'm trying to get a sense of, like, how much we should think of just the nature of these permits where, you know, basically they're good for two years and you have to, you know, get them renewed for another two years. How much of the federal permits that y'all have approved and received It's going to drive a lot of the drilling activity for y'all the next two years. I mean, y'all are fortunate that obviously it lines up a lot with where some of your very best acreage is, so it's probably where a lot of the drilling activity would have been skewed to anyway. But if you can just sort of speak to kind of how much we need to focus on kind of these federal permits and how much that's going to drive that activity here the next few years.

Well, I think, John, you know, the plans that we have had, have and have had, are to run a couple of the rigs at the state line, and the other rig will run, you know, in the Stebbins area, in Rustler Breaks, and in Rodney Robinson. You know, all the wells at the state line require federal permits, of which we have received, I think, the table in the earnings release statement, Thank you for joining us. in Rodney Robinson. I think Rodney Robinson, there's only three or four that are still left out standing at this point. Many are in hand up in the Stebbins area. Occasionally we'll need one in the rest of the breaks area. And I think, you know, so over the next couple of years, I think we're, you know, we're certainly, look, we've got more permits than we'll probably drill in the next couple of years. But over the next couple of years, we're, you know, these things are pretty much already in hand for anything that we currently have on the schedule. So I think we feel very good about that.

Thanks, David. I appreciate it.

Thanks, John.

Thank you. Our next question comes from the line of Noel Parks with Coker and Palmer. Your line is now open.

Good morning. Good morning, Noel. I just had a couple questions. Wanted to talk about service costs. You touched on them a good bit. But last quarter, I remember you saying that you had pretty much locked in a lot of your completion costs for the rest of the year. And as you look into next year, and I guess maybe even further heading towards 2022, just curious what your assumptions are for... For what you expect the vendor component to be of service costs?

Sure, Noel. This is Matt. We continue to see favorable service cost pricing, particularly throughout the rest of this year. We're looking into the first quarter or so in the next year and are seeing comparable prices. I do think that our expectation is as long as this rig count is and many more. Thank you for joining us. Thank you. And one other item that we talked about last quarter I think was

At Leatherneck, and in the release, you did indicate that the costs were better than expected and the production results were better than expected. I do recall that you were, I think, doing your first Wolf Camp B test there. I just wondered if you had any sense of how that was performing.

Yeah. Hi, Neil. It's David. You know, look, I think that... I think we're satisfied with the way the well has performed. I would say that it's still early and we're still looking at it, but I think we're pleased with the result of that well and I think it's interesting as a Wolf Camp Bee. and that, you know, it probably has a little bit higher oil cut than some of the Wolf Camp bees that we've seen. So, but, you know, no worries.

Great. And I just had one housekeeping question. I could not but notice in the hedges that on the gas side for first quarter 2022, you had a collar with a 260 floor and a $4.22 ceiling. which, given the strip, seemed like a really sort of wide margin you had there. So I was just curious if you could talk anything about that. And I was just wondering if there were net costs at settlement with those or something.

No, that was just simply an opportunity that we had to add to our hedging position there. I believe, if I'm correct, that we had the opportunity to add some hedges after the first quarter of 2021 on into the first quarter of 2022. That was a hedge that we put on throughout that period. It improved the and many more. Great. Thanks a lot. You bet. Thanks.

Thank you. Our next question comes from the line of Michael Sciallo with Steeple. Your line is now open.

Hi. Good morning, guys. I just wanted to ask on your capital efficiency slide C, a lot of competitors have been showing similar slides. I think your savings have been probably more significant than most. It looks like more than 40% on a per foot basis over the last two years. Is that 790 per foot number a good number to baseline for next year? And I'm curious, too, if that number is a fair comparison to the 1,500 per foot number or even higher slightly for 2018. Have you changed anything in the design of the wells other than, obviously, the lateral lengths longer, but anything else that... has changed over the last two years in the design of the wells.

Yeah, Mike, this is Matt. I'll take the last part of that question first. We've been able to, in some instances on some of the wells, eliminate an intermediate casing string. So those costs are built in there too. But on the whole, I think it's pretty comparative. The $1,500 two years ago, the $1,200 last year, and the goal this year was for $900. And we've driven that down below $800. I'm not going to bet against the guys that they're going to have a reversal and go back even to the $900 number. So I think that somewhere probably between the $790 we talked about and $850 probably is a good number.

I think we're certainly very pleased, Mike. I am. and I think everybody here is over the course of the last couple of years. As we've moved to these longer laterals, I think that the teams have executed on them very well. We have our MaxCom room that I think has been where we have 24-7 monitoring of every well that we're drilling. I think that we've got geologists and engineers watching every well being drilled every day. I think that we've just seen continuous improvement in terms of the execution on on the drilling side, and particularly in terms of staying right in the zones that we want to be in throughout the entirety of the laterals, whether they've been one mile, two, and now approaching two and a half mile laterals at Bonney. So there's a lot positive there. Along the way, over the last few years, they've eclipsed our own internal records almost 100 times for Thank you for joining us. Thank you very much. Thank you for joining us. The way that we are calculating and reporting those numbers has not changed a bit. So that's all very consistent across the last three years. That's good to hear.

Joe, you mentioned now is not really the time to be considering, the market's not there to be considering selling down your interest or selling, flat out selling some of your assets. But I wanted to see if you could maybe talk a little bit about Your Haynesville, is there much there left to be developed? I realize the operator's in Chapter 11 now, but how do you see maybe the returns in that play competing with, say, the Permian, and then anything you can say on your mineral interest to sort of frame up the potential size of a package once that market returns to where that could be sold?

Thank you for your question, Michael. We've actually sold a few properties in the Hainesville here and there. Not the major properties, but we have done some. Again, when we get a serious offer, we give it serious consideration. One of the angles of the Hainesville is when we made the deal with Chesapeake, we reserved all of the Cotton Valley rights. So there's probably $200 billion are more in gas in the Cotton Valley behind pipe that we could access if and when we wanted to. So it's a nice gas bank to have. It doesn't cost us anything. It's held by production. And then on the Hainesville itself, I'll give Chesapeake some credit. They've done a good job drilling those wells and cost. And last year they drilled a couple of wells that had very high rates of and we were glad we kept it. And they came in producing $40 million a day and we had 49% so that worked out well for us. It's a different gas market up there which blends with what we have coming out of the Permian and we think that's advantageous and if gas prices become the order of the day as they could return That'd be a good area for us to expand our footprint. And we've had some decent offers, but none that want to make us give up that gas bank that we have there in the Cotton Valley. And we have drilled the Cotton Valley, and we had good results. and you can certainly launch a drilling program there if gas prices get up and then if they're sustainable at a higher price. In the Eagleford, we've sold off a number of properties, different people down there and it's been on kind of a track by track basis. So we're open To that, we're just not in a hurry and don't want to do a garage sale where you just package them all up and sell them at a discount to somebody because they're cash flowing well to us and it's a higher oil price and it's a higher gas price down there on the coast. So there are reasons to keep them. But we're Play a straight game. I sold first Matador, and we sold some of our interest in the Hazel to Chesapeake, and we've sold interest from time to time. We sold our first gas plant to Inlink. So we'll do it when the prices arrive, but we just try to avoid the fire sales and let them cash flow. and that strategy has worked out pretty well for us not to just rush into one thing or another. So I hope that answers your question. If not, I've got a whole room full of people eager to respond, Mike.

No, that was perfect. Thanks, Joe.

Do you have a follow-up?

Thank you.

Ladies and gentlemen, this is the Q&A portion of this morning's conference call.

I'd like to turn the call over to management for any closing remarks.

This is Joe again. I just want to thank all of you for participating. We really appreciate it. I thought there were some very good questions. If you want to follow up or have further visits, we are available. We're proud of the quarter we have. As good as it was, we think it will be better next quarter. Things are coming together for us that we're going to emerge better. From this COVID and low-price deal, stronger than we were when we went into it. You know, this is a great business. We think it has plenty of room to grow. And we appreciate the support that we've received. But I want you to know we're available and we like these discussions. So thank you and come see us.

Thank you for your participation today. This concludes the program. You may now disconnect.