Good morning, ladies and gentlemen, and welcome to the Second Quarter 2020 Matador Resources Company Earnings Conference Call. My name is Valerie, and I will be the operator today. At this time, all participants 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 is being recorded for replay purposes, and the replay will be available on the company's website through August 31, 2020, as discussed in the company's earnings press release issued yesterday. I will now turn the call over to Mr. Mac Schmitz, Capital Markets Coordinator for Matador. Mr. Schmitz, you may proceed.

Thank you, Valerie, and good morning, everyone, and thank you for joining us for Matador's Second 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 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. Actual results and future events could differ materially from those anticipated in such statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company's earnings release and its most recent quarterly report on Form 10-Q. Finally, in addition to our earnings press release, I would like to remind everyone that you can find a slide presentation in connection with the second quarter 2020 earnings release under the Investors Relations tab on our website. 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 prepared a set of 8 slides identified as the Chairman's remarks. Slides A through H, to add some color in detail, which many of you seem to indicate were helpful. So we're going to try it again. You can find these remarks on our website, and I'll begin with Slide A. The second quarter of 2020 has been much like that challenging and chaotic. But ultimately, we get to the results, and the results for the second quarter were better than expected, as we noted in Slide A. The Board and I would like to thank and commend the entire Matador team in the office and in the field for their continued strong execution and professionalism, despite all the recent challenges of the novel coronavirus and the abrupt decline in oil prices. Consistent with our updated plans for 2020 as provided in early March, we reduced our operated drilling program from five rigs to three rigs during the second quarter, and we continue to focus on capital discipline and operating cost control to further reduce our outspend. As a result, despite the challenges and chaos that we faced in the second quarter of 2020, Matador delivered record-high oil production, along with record-low unit operating expenses and drilling and completion costs per lateral foot, which should help us attain free cash flow by the end of the year. We were heartened by these promising results. Throughout the second quarter of 2020, capital efficiency, operating cost control, and increasing the number of our eight-plus locations were key objectives. Our operations group once again led the way in this effort by achieving better-than-anticipated capital cost and operating expenses. Our capital expenditures for drilling, completing, and equipping wells in the second quarter were $19 million less than our original estimates for the quarter. We estimate that $10 million of these savings were attributable to improved operational and capital efficiencies and lower than expected drilling and completion costs. Drilling and completion costs for all operated horizontal wells completed and turned to sales in the second quarter of 2020 averaged $881 per completed lateral foot, an all-time low for Matador as illustrated in Slide B. On the five Ray wells completed and turned to sales in the second quarter of 2020, all two-mile laterals, we did even better, averaging drilling and completion costs between $750 and $850 per completed lateral foot. Operating expenses in the second quarter of 2020 were also at all-time lows for Matador. Lease operating expenses on a unit of production basis declined to $3.92 and per BOE in the second quarter, resulting primarily from our continued efforts to reduce costs and improve efficiencies in the field. General and administrative expenses on a unit of production basis were $2.21 per BOE, also an all-time low for Matador as the salary and other cost reductions voluntarily implemented in the first quarter of 2020 were more fully realized during the second quarter of 2020. Furthermore, during the second quarter of 2020, we achieved the second of four important production milestones we set for Matador back in December of this year. When the five Ray state wells in the eastern portion of the Rustler Breaks asset area were turned to sales in May and in early June, slightly earlier than we had planned. As recently reported in a separate press release, the 24-hour initial potential aggregate test results for the five Ray state wells were approximately 7,600 barrels of oil per day and 29.5 million cubic feet of gas per day. As we all know, 24-hour tests can be a little erratic, but these wells have continued to perform very well. And I want to emphasize that they've led to better-than-expected results. After an average of about 55 days on production, these five wells have already produced an aggregate of 500,000 BOEs. The six Rodney Robinson wells also continue to exceed expectations, having already produced in aggregate more than 1.2 million BOEs in just over 100 days of production. The early outperformance of the Rodney Robinson and Ray state wells in the second quarter of 2020 contributed to Matador reporting record oil production in the quarter, even though 10% to 15% of our potential production was curtailed during the months of May and June. Matador believes it has hundreds of more of these eight-plus caliber wells in its drilling inventory, and building up this number of eight-plus wells is very important to our future, and it's a major company objective. Looking to the third quarter, we are very excited by the outlook for Matador going forward, as illustrated in Slide F. First, we expect to achieve the third and fourth of the key production milestones mentioned earlier for 2020, as we had projected. In late July or August, the five Leatherneck wells in the Greater Stebbins Area, all two-mile laterals, should be turned to sales. Then in September and early October, we expect to turn to sales the first 13 bore wells, also all two-mile laterals, in the Stateline asset area. Second, the San Mateo II expansion in Eddy County should also be completed in the third quarter of 2020, including the addition of an incremental 200 million cubic feet per day of design natural gas processing capacity in the large diameter pipelines connecting the Stateline asset area and the Greater Stebbins Area to San Mateo's Black River processing plant in Eddy County, New Mexico, covering 43 miles. These projects reflect the vision, planning, execution, and hard work of the Matador and San Mateo teams to achieve the goals Matador set as part of the Bureau of Land Management lease acquisition two years ago, in terms of production and reserves growth, midstream expansion, and improved capital efficiency. I want to emphasize that this has been a very active two years in planning these events, and it's very encouraging and satisfying to see that these events are coming off as planned or better than planned. Financially, we were pleased with the recent upgrades by Moody's Investor Service to our corporate credit rating, unsecured notes, and rating outlook. We have continued to protect our balance sheet and liquidity while achieving these plans. We ended the second quarter with outstanding borrowings that were $10 million less than anticipated and a leverage ratio of 2.5%, just as we had expected, and still well below our reserves-based loan covenant of 4 times. As shown in Slide G, we expect to generate free cash flow in the fourth quarter of 2020, and we plan to use the excess cash to reduce debt outstanding under our revolving credit facility. In addition, we continue to be pleased with the growth of our financial and operating results compared to our industry peers on Slide H. The Board, the staff, and I look back on the second quarter as yet another time when we came together, kept our focus, executed on a revised operating plan, and delivered strong results for our shareholders and bondholders in a very difficult operating environment. We appreciate the support of our shareholders during this time, and we remain confident the outlook for Matador is very bright. We look forward not only to completing 2020 on a high note but also in the years to come.

So with that, we'll turn it back over to Valerie to take the questions on the line. Thank you.

Thank you. Our question is from Scott Hanold of RBC Capital Markets. You may proceed.

Thanks and congratulations on the second quarter.

Yes. Hey Scott, this is David. We are quite optimistic about the Boros wells. I should mention that we started drilling these wells back in January, so several were drilled before the coronavirus pandemic and the subsequent decline in oil prices, as well as some anticipated decreases in service costs. However, they were all completed during a period when completion costs were notably low. We believe the wells performed well. The operations team led by Billy achieved several records for Matador during this period in terms of the speed and efficiency of drilling. In our current investor presentation, we noted that our drilling costs were slightly below our expectations for these wells. Therefore, we are hopeful they will yield good results. While I don't expect them to reach the performance levels of the Ray wells—given that the Ray wells are located in a shallower area in Rustler Breaks, whereas these are deeper—overall, we remain optimistic about seeing favorable numbers for the drilling and completion costs on these wells.

Yes, Scott, this is Matt. I want to add to what David mentioned. The operations team, along with land legal and others, did a great job preparing for these longer laterals. We discussed in previous quarters the enhancements we made to the rigs, such as the high torque and high horsepower top drives, and our collaboration with Patterson to get the rigs ready for these longer laterals is now paying off. Recently, we completed a bottom hole assembly run, drilling over 12,000 feet in one trip with one motor and one bit. That’s nearly 2.5 miles, which reflects the thorough preparation the team undertook to accommodate these longer laterals.

Scott, one other thing. Last year about this time in the fall conference that we went to, we emphasized that Matador was in the midst of a capital efficiency change and a capital efficiency story. I think you saw it come out last year when we boosted our number of wells that we were drilling more than a mile from like 29% to something like 83%. This is a continuation of that. And that's one thing; the Bureau of Land Management acquisition enabled us to do that to accelerate that. You're seeing the dramatic drop in cost per lateral foot and rise in productivity from being able to execute on that. The MaxCom room that we have here working with a combination of geologists and engineers going 24/7 has added to that efficiency and those cost reductions, while still improving the wells by staying in zone longer and being able to drill further and quicker than you were before. So all this seems to be working together, glad for it to be coming together, and I think you'll see that continue for the year ahead.

Okay. And just to clarify on the target of $900, is that a reasonable figure to consider moving forward for some of these future longer laterals or do you think it might face challenges?

You know, Scott, I think we'll do better. So I really do believe that you're going to see us continue to deliver strong results with regard to our capital efficiency in dollars per lateral foot going forward. So I think for the rest of this year, anyway, $900 is sort of the top end of things; I think we'll do better.

Now, Billy, I don't want you to feel any pressure from that remark. But we do, Scott, we expect to do better. I mean Matt does. All of us here are at comp, when the price of oil goes up, service costs are going to go up. But for the foreseeable future, I think Billy and his group and the MaxCom group will continue to improve on that.

Yes, Scott, I'm sorry, Billy.

Got ahead.

We're really excited about what we have coming up. Once we start drilling these two-mile laterals, Billy and his team will become increasingly efficient. They are setting records. Joe mentioned the MaxCom room, and other functions that team is working on include torque and drag models. Before drilling these wells, they run a model that predicts our torque and drag profile. We then monitor that throughout the drilling process and make adjustments as necessary. This preparation is all aimed at reaching $900 per foot. If you think about it, this involves a combination of service cost reductions and drilling efficiencies, with the drilling efficiencies remaining constant regardless of service price changes. If commodity prices rise, or it's likely more about activity, the rig count in the basin has dropped from a little over 400 rigs in March to about 125 now. There is plenty of room for rig activity where our service costs will remain stable. Additionally, we have locked in a significant portion of those costs; in fact, 70% to 80% of the completion costs are secured for the remainder of the year. Despite any increases in commodity prices and service costs, our revenues will rise as we'll maintain those efficiencies.

And Scott, one other thing I'd just like to point out, and I'm sure you're aware of it, but most of the shorter laterals in our program for 2020 are behind us now. We achieved the $881 in the second quarter with sort of like a mix of half two-mile laterals and half less than two-mile laterals, with the exception of just two wells going forward. Now every well we turn in line, it's going to be a two-mile lateral. And I think the two-mile laterals have all had a little extra dose of capital efficiency. Given that most of the turn-in-lines are going to be for the rest of the year, that's why I think we're optimistic you're going to continue to see good numbers.

Also to add on a little bit more. This is Billy Goodwin. We're doing things a lot more efficiently out there. We've got engineers out in the field now helping out with each part of the business that we moved out, and that's helping us out a lot. Those guys are getting better, right their hands-on in the field, close to the wellhead, making improvements, but also a shout-out to the service companies and vendors, contractors we're working with because they're also getting better at what they do and getting more efficient, improving technology. We just keep getting better and better. So as costs start coming up, we're getting better all the way around us and the people we're working with; a shout-out to Patterson, their frac company, Universal, Directional, MS Energy, and Halliburton, Schlumberger; all these companies have gotten better and better all across drilling, completion, and production departments to help us out and get everything better, including our LOE.

Great. I appreciate that information. As a follow-up, looking ahead, you have acquired many of the federal permits necessary to develop the Stateline area as well as the annual bridge for imports. Could you discuss the midstream aspect of the expansion and the pace at which you plan to develop it? Is there continued effort on the midstream front in the Stateline area?

David mentioned that the midstream operations are progressing very well. As noted in the recent release, the plant in Eddy County, owned by San Mateo, is nearing completion and is close to being ready for testing. We remain optimistic that it will be able to accept new gas from the Stebbins and Stateline areas by late August. The large pipeline in Stateline is also approaching completion, and we are constructing the remaining surface infrastructure in the area. We have secured all necessary permits for this project, and we are moving forward confidently. We expect to start turning the wells to sales in September and October as planned. The new plant will provide ample capacity to support the ongoing development in Stateline at our desired pace. Overall, everything is progressing well.

Scott, one other thing or everybody listening in, when the operator is speaking, and when you all are speaking, there's been an echo, and you're breaking up occasionally. So we may have to ask for a repeat of the question. We hope you're hearing our voices okay, but you all are breaking up, through no fault of your own. I'm just if we ask to repeat this, for no other reason, we want to be sure we understand what you're asking.

Yes. I appreciate that. You heard the feedback from when the operator was talking. So I understand. But your answers are clear. Thank you.

Thank you, Scott.

Thank you. Our next question comes from Gabe Daoud with Cowen. Your line is open.

Hey, good morning guys.

Hey, Gabe.

I was hoping to start with your liquidity position; you look so the fall, I guess, how do you think both the upstream and midstream credit facilities can change? And I guess, are you anticipating an increase to the San Mateo credit facility, just as you mentioned, on the back of the processing plant expansion starting up?

Well, this is David. Hi, Gabe. I'll start with that part of the question. I think that once the merger between San Mateo I and San Mateo II is complete, and that's getting pretty close now, then the assets that were a part of San Mateo II will become party to the existing credit facility. Once they do, that will provide a lot of additional assets backing that facility. I think we're optimistic that the lenders then who are party to that facility would entertain an increase. I mean, we've probably invested between Matador and San Mateo somewhere between $250 million and $300 million in additional assets that we've built that are going to greatly contribute to an increase in cash flow going forward. We feel like the bank group would be open to increasing the size of the credit facility. But we do need to complete the merger agreement so that those assets can flow into the San Mateo facility. Regarding the reserve-based borrowing agreement, I think that we remain optimistic that we'll hold on to our borrowing base in the fall. Certainly, prices have come back nicely. I think that, that will contribute to better decks being used by the bank group in the fall than were in the spring. In addition, we've got a number of very exciting wells that are coming on and that will be in a PDP status by the time we probably initiate the fall borrowing base review. In talking with our bank group, they've indicated that they certainly will take the initial results from those wells into consideration in looking at our borrowing base for the fall. I also expect that we'll probably be able to book a fair amount of additional proved undeveloped reserves off of the results of those wells also. So I think we feel pretty optimistic. A lot of it will depend, of course, as you know, on the bank price deck and where that is at the time. But, given where things are currently, I think we remain optimistic about the fall borrowing base.

Gabe, this is Joe. I want to highlight two important points. David provided a solid answer, but I’d like to emphasize that we were among the first to undergo a redetermination by the banks last February. It was unanimously approved by 11 different banks and their credit committees, as well as 11 different reservoir groups. Our loans were fully conforming down to $35. As David mentioned, we have since added more proved developed producing wells and proved undeveloped developments, with strong support from RBC and excellent cooperation from all involved. We are proud of our banking group and their professionalism. We don't foresee any issues, but we also recognize the importance of not taking their support for granted. We are pleased with the reductions in general and administrative expenses, lease operating expenses, and drilling costs, which positively impacted our borrowing base, and we also want to credit Scotia for their assistance with midstream expansion. While we aim for an increase in our midstream capacity to gain flexibility, our primary goal is to position ourselves to start reducing debt and enhancing free cash flow.

Great. Thanks, Joe and thank you, David. That's really helpful. I guess, just as a follow-up, just looking ahead to next year, you keep the three rig cadence, given the significant cost reductions that you guys have highlighted. How do you think capital trend next year? And then just alongside that, three rigs represent a maintenance-type program? Or does that equate to some oil production growth, either on an exit basis or on a year-over-year basis?

I believe that if we maintain three rigs throughout next year, we can still expect to grow our production, potentially in the low single digits, around 5%. We are optimistic about this growth on a year-over-year basis. Achieving our exit-to-exit targets seems feasible, although the fourth quarter of 2020 will be challenging to match due to strong performance from upcoming wells at Stebbins and especially at Stateline. The next set of wells at Stateline, particularly on the western side, is set to come online at the beginning of the second quarter, which we anticipate will also be a robust quarter in 2021. Overall, we are confident that our production can grow next year even with three rigs in operation. Regarding capital expenditures, we expect to be around $425 to $450 million for those three rigs; this could fluctuate depending on the mix of wells we choose to drill, but it seems reasonable. There may also be some additional non-operational expenditures which could slightly affect our CapEx and growth. When I mention the potential for 5% growth, it doesn't take much non-op drilling into account. If we do have some non-op projects, that could contribute to production growth as well. For San Mateo, we are planning for next year to be more of a maintenance CapEx year, estimating Matador's share to be around $15 to $20 million. Overall, we expect San Mateo to generate positive free cash flow next year. Considering San Mateo's contribution to free cash flow and the incentives we will earn, including around $15 million in the first quarter from San Mateo I, and additional payments from San Mateo II incentives once the BONI wells start producing, we anticipate an additional $25 to $30 million in incentive payments next year from Five Point. With those incentives and free cash flow from our exploration and production program approaching free cash flow, we believe we can generate cash flow in a $40 or low $40 oil price environment, with anything over $45 million or $50 million being even better. This should provide a good sense of our expectations moving forward, though there might be slight adjustments when we release our guidance. Yes. Gabe, just think that if you were at 50 instead of 40, we make the numbers work at 40, as we said, we're doing it now. But if we should be fortunate enough for it to grow to 50 times the 13 million to 14 million barrels well produce. That's an additional $130 million; $140 million would change everything around. Even half that would make a great difference. So I think that outlook is pretty good going forward, and we intend to make the most of it at three rigs, and we plan to stay there for the foreseeable future.

Yes, Gabe, this is Matt. Just a couple of points. One on the E&P side, David was talking about with three rigs. We did see some single-digit growth and some capital efficiencies we go along with that. I think we'll continue to get better drilling these wells. So you're going to get more bang for your buck. We're drilling these wells at a time where we're drilling them as efficiently as we ever have, likely ever will. So that's a good thing. I think when prices do go back up, like Joe said, to fix charge, we're going to be really glad we drilled these wells. And then just on the San Mateo side, once we get this expansion done, we'll be at almost half a BCF processing capacity there at the plant, and we're at 335,000 barrels of disposal capacity a day. As we go forward, once we get this expansion done, we've greatly expanded the footprint of San Mateo. So we're in a good position with San Mateo.

Great. Thanks so much, everyone for the color.

Thanks, Gabe.

Jeff Grampp of Northland Capital. Your line is open.

Good morning guys.

Hi, Jeff.

Good morning, Jeff.

I was curious, Joe, I think you might have just touched on it a minute ago. In regards to the free cash flow, kind of objectives that you guys might think about balancing spending levels. I'm wondering, how important do you guys view maintaining positive free cash flow as we look into 2021 and beyond? If there was a scenario where returns were just so good where you guys might think about adding activity levels is staying free cash flow positive, I guess, an overarching theme that you guys would look to maintain?

Jeff, we're a public company with public shareholders. We pay attention to them. If that's where the value creation is to be free cash flow that leads to a better evaluation, then we're going to be listening to that. We're not in a growth for growth's sake. As Matt Hairford likes to say, we're for profitable growth at a measured pace. We hope someday to go from three to four rigs, but we don't want to do it at the cost of evaluation or something that exposes us to too much debt. I think that we are always trying to be in balance. The situation now comes from absent a very compelling opportunity. We're going to work on reducing debt. The midstream doesn't need the capital. It's an important part of that free cash flow. The rock that we're drilling in, that's why we emphasize these A-plus locations, is strong enough to give us some growth without expanding beyond three rigs. The capital efficiencies we've achieved allow us to get more footage in without having to go to a fourth rig. So there's no hurry until I think you're in a stronger price and economic environment to really give that a whole lot of thought. What you're going to continue to see from us is finding these efficiencies, taking advantage of the midstream position, and keep drawing this good rock; we're adding A-plus locations all the time. An example, down there in Wolf, we drilled a third Bone Spring carbonate that has added double-digit growth in A-plus locations in and around it. We’ll have more detail on that at our next conference call or through these conferences. But we always said, I’ve been in the business 40 years. We’ve always been stable with a strong balance sheet, but we saw an opportunity, when we did the Bureau of Land Management lease acquisition to take Matador a step forward, to where it had more capital efficiency opportunities. Make it a capital efficiency story and convert ourselves from drilling 29% longer than two-mile laterals to 83%. Well, that couldn't happen without it. If we hadn't done that deal, we would have missed out on $175 million and incentives and capital contributions from Five Point, our midstream partner. That was a step-up for us and made us much more competitive, helped us grow to number eight in New Mexico in oil production. I think David has done a great job in navigating us through here, the technical team. I want to give a shout-out to Glenn Stetson and Tom for combining with David and coming up with these programs that not only save money but still increased production. We'll have some growth but now, it's the time to keep building up the balance sheet, not stopping in our track. I think they put together a good program. We're beginning to see the fruits of it. You'll have an even better report as we bring in those Stateline wells. We’ll be glad we did that at a time of low-cost because these will become some of the most profitable wells we’ll ever drill.

Great, I appreciate that, Joe. My follow-up, I touched on the eight-plus location. I'm glad you kind of ramped me there. Can you just talk about the opportunity set to kind of grow that, either through cornering up lower working interest areas, extended laterals? Or maybe like that third Bone Spring well you talked about where you're finding areas that are maybe better than you initially thought? I guess just generally wondering the level of servicing you guys baked in there? And the opportunity set to grow for that?

Well, hi Jeff, it's David. I think we're certainly optimistic that we can continue to grow that. I think you've kind of touched on some of the things that are important to be able to do that. One, I think, is just part of the continuing geologic effort that has always been a hallmark of Matador's work in the Delaware Basin. We've tried to continue to support the teams in geoscience and the asset teams, in their recommendations to step out here and there. Try to make yet another target work. The third Bone Spring was a case in point. We went ahead and did that and got a very strong result from it. I think the Wolfcamp B, up in the Stebbins area, is another case in point. That's a pretty big step-out relative to any horizontal well that's been drilled in the Wolfcamp B before. But our teams like the potential of that, and we decided to go ahead and include one of those in this group of five Stebbins wells that we drilled. That's a way we'll continue to work on that. I think as a result, we're optimistic that we can make that number grow.

Yes, Jeff, this is Matt, and Ned may want to add his thoughts as well. I believe our toolkit is continuously improving. We have seismic data covering most of our assets, and the team is effectively identifying and focusing on target areas. Regarding capital efficiency, staying on target enhances the performance of our wells. Generally speaking, success breeds further success. The more we can determine which zones are effective and identify top-tier locations, the more confident we become in our future endeavors. Referring back to the MAXCOM team, as we enhance our overall operational efficiencies and reduce costs, an increasing number of wells qualify as top-tier locations, particularly with a 15% return rate at $30 oil. I expect that figure to increase over time as we continue drilling.

Matt, your group really has done a great job, and I want to give you the opportunity to acknowledge it.

Well, I appreciate that. As Matt said, we do have a broadly increased toolkit between seismic and petrophysical work being done at Matador really is leaps and bounds beyond where it was a few years ago. Those tools really help us identify the best targets and hopefully grow that A-plus location count significantly. It also really helps on the execution. I know MAXCOM has been mentioned several times here, but having the geologists and the engineers working side by side, analyzing every well that gets drilled, relative to the seismic data, relative to the petrophysics, relative to the drilling performance, helps us go faster and stay in better rock.

Great detail, but working CapEx.

Thank you. Our next question comes from John Freeman of Raymond James.

Good morning, Dave. Good morning, Joe.

Hey, John.

Having the geologists and engineers collaborate closely, examining each well in relation to the seismic data, petrophysics, and drilling performance, enables us to expedite our efforts and ensure we are operating in optimal rock.

Yes, John, that's a great question. We've discussed it many times, and we're really proud of how quickly they're drilling and improving the capital efficiency of the wells. It's difficult to be very precise regarding capital expenditures, as drilling faster presents its own challenges. Completing the wells means increased spending, but it also translates to production. Overall, you don't want to slow down on that, but it's important to factor it into your budget. Historically, our production has had fluctuations as we bring wells online, and cash flow will similarly vary with this pad drilling. You don't want to hold back your team from being more capital-efficient just because of budget constraints. It's crucial to maintain some flexibility or a cushion to take advantage of your team's efficiency or engage in beneficial trades. Proper management is key, and the additional liquidity we have with our banks is essential as it allows us to adjust timing as needed. So, it's more about timing than anything else, and you want to ensure your team continues their great work. With someone like David on board, there's additional pressure to make it all work financially.

Well, look, I want to just echo what you said. I really think, John, it seemed like there might have been a little bit of concern that we didn't reduce our capital expenditures estimates for the rest of the year. That is correct. I'm optimistic it's going to go well, and there will be opportunities for us down the road. To reduce our numbers if it looks like it's going to come that way, but I do think that we're going to see that as the group is drilling these wells a little faster, but there will probably be a few more operated wells that get spud right at the end of the year that, we hadn't counted on. That could add some additional drilling dollars. In addition, I probably won't surprise you that we're seeing the non-op side of things, kind of beginning to tick up a little. Even though we took our turn-in-line count down slightly, what we're really seeing is that some of our operating partners that we're in wells with have decided to go ahead and initiate drilling in the latter part of the year on those wells but defer the completion into next year. There are a couple of wells that we thought would be completed this year; that we've kind of pushed into next year, but we still expect to have those wells getting drilled. In fact, we expect that we'll have two or three more wells that may get spud on a non-op basis. Maybe we didn't have a chance to get quite as clear on all that in the written release. I appreciate your question to kind of allow us to expand upon that in the call this morning.

No, that's very helpful. And then just my follow-up question on the acreage trades that happened during the quarter. Were those concentrated in any one specific operating area for you all?

I would say no. I would say that they are pretty well diversified across our acreage portfolio.

John, those were not just initiated by us, but other companies. One silver lining to this COVID-19 and the price war is that everybody is trying to work on their capital efficiency and improve it. There is a lot more cooperation on data and trades and non-op interest and the like during times like this because everybody is trying to get better, and people are helping. As you cooperate and help, it just gets better. This has made doing business a lot easier. You find a lot of help, people can be reached, returning calls because everybody knows that it's in everybody's interest to help each other improve their capital efficiencies.

Thanks a lot, guys. Well done.

Thank you, John.

Thanks, John.

Thank you. Our next question comes from Mike Scialla of Stifel. Your line is open.

Good morning, everybody.

Good morning, Mike.

If oil prices were to remain around $40 longer term, and you stay at three rigs. From a midstream perspective, with the 0.5 Bcf a day of processing capacity, is it fair to think that the $15 million to $20 million of San Mateo CapEx, as David mentioned, for 2021? Would that be a decent maintenance CapEx number for the midstream for the next few years? I guess if that is the case, Matt mentioned third-party volumes; is there enough visibility there to fill the Black River processing plant?

Okay. Mike, it's David. I’ll start, and Matt may want to chime in too. I would say with regard to is that a pretty good maintenance CapEx number for San Mateo? I think that it is. I think it's a pretty good maintenance number going forward. I also think that even with the three rigs, we had always anticipated having a couple of rigs running at the Stateline. As long as we have two rigs running at the Stateline, that has a big impact and doesn't change a whole lot, our outlook for San Mateo. Clearly, when we had six rigs in the program, we would have had a little more drilling probably in the Rustler Breaks area, for example. Some of that drilling was going to be in an Antelope Ridge; some of that drilling was going to be elsewhere, which wouldn't have had as big an impact on San Mateo anyway. I think that the San Mateo volume growth should continue to be good even as we run three rigs. In addition, bear in mind that when we design this 200 million a day plant expansion, we did so with the thought in mind that over time, Matador would need pretty much all of that additional capacity. I think that it's not going to be tomorrow or right away. But with the continued development of Stateline, we think that that capacity will be needed. I will say, regarding the latter part of your question, when you ask if the $15 million to $20 million includes third-party opportunities, the answer to that is mostly no. It might include some small ones here and there. If we had any sort of a significant third-party opportunity, what we've always said is that would probably entail some additional CapEx, but we wouldn't enter into that kind of a deal unless we felt like it was well supported by volume commitments, acreage dedications, whatever we needed to make us feel very comfortable with the return on that capital. The advantage of having all that now is that we can plan that way. If we make a bigger deal for a third-party customer, which I hope that we're able to do, it will entail some additional CapEx, but it will also be part of a very well-thought-out business decision.

Yes, Mike, this is Matt. David said it well; just I'll restate one of the things he said. When we put San Mateo II together, the only volumes we contemplated for the economics were Matador volumes. The idea was Matador is the anchor tenant will make this expansion fly, but we will have third-party opportunities on this greatly expanded footprint. One of the things we do have an advantage of is that Matador having most of the reserve capacity in the San Mateo II plant is if a laser, Brian Willey and their team are able to go out and find some third-party volumes that want to come on sooner than later, we can bring them into the plant; Matador can temporarily release some of that capacity to a third party. It gets to the point where we need to add another training, say, another $200 million; we would have the volumes again contracted before we’d ever start construction on that. We're in a really good spot on scale for San Mateo.

Great. And I wanted to ask on the federal locations that are permitted. I'm assuming the permits and progress are approved before a new administration were to make any changes; do you have an estimate of the percentage of your federal leasehold that could potentially go undrilled? And also, wondering about the exploration on those federal permits?

Federal format. Yes, we put in the news release a little information on that. The chances of them saying you can't drill on your leasehold are fairly slim because that probably will be taking in the form of constitution, which there is imminent domain or whatever they do, but they've got to pay for it. Particularly if there's a permit there, I think they're going to allow you to drill it. The Federal Government is going to need the money. For leases already granted or permits already issued, I don't see much of a problem. We put in the release that when we bring on just one of those BONI leases online, we will have HBP 70% of our federal acreage. The rest will soon follow in this next two-year period where you have all your permits that have been issued, you have two years to drill the wells. I don't see much risk there. But the other thing that we've been trying to note is that Matador's drilling program has a lot of A-plus wells that are not on federal leases. We explored the concept: what do we do if we had a whole year's drilling or two years drilling on all non-federal leases? You have no federal leases; what would our drilling program look like? That concept outline is already happening. You’ve got to feel, have confidence in your geoscience group that if that were to occur, there are still plenty of opportunities out there. This is a basin 5,000 feet thick. We're finding new zones all the time. When we came out here from the Eagle Ford, I spent almost my whole career out here; there were two or three zones that we were looking at. Now we're producing from 17 or 18 different zones. There's a lot of opportunity. One reason we were attracted to the federal leases at the time is our 87.5 net; the net is a lot better. But don't think they're going to go away for particularly the lands granted and the permits. Additive to that are a lot of other locations we have on fed leases that are HBP and state leases that are HBP. We see those continuing. We took that into account and have taken it into account. I don't see much reason in New Mexico; the Governor, while a Democrat, has been very supportive of the industry, which we appreciate. I think there will be some changes, but I think we're nimble enough to change with them and keep up the caliber of our drilling program.

Sounds good. Thank you, Joe.

Thank you. Our next question comes from Neal Dingmann of SunTrust. Your line is open.

Good morning, Joe. I just want to mention that you all issued an operations plan last quarter, and you have consistently met those targets. That's true until David added a comment about how you and your team have excelled in achieving all those goals. My first question is specifically about San Mateo. David noted that the additional section there might become operational in the mines. Can you elaborate on that, David and Joe? Are you considering bringing it closer to a potential sale transaction to reduce leverage, or could you discuss any M&A considerations for San Mateo once production ramps up?

Neal, I'll go first, and then David can provide further insights. I want to emphasize that as a public company, we aim to operate transparently. Looking at Matador’s 40-year history, we began by selling Matador, and subsequently, we sold a significant portion of our Painesville acreage to Chesapeake. We've also sold our first midstream plant to Enlink and partnered for half interest in the San Mateo II project. We have consistently operated with integrity. When offers come in, regardless of size, we've sold portions of our Eagle Ford on a case-by-case basis, and we will strongly consider any solid offers. Occasionally, certain properties in regions like Chesapeake or Haynesville or Eagle Ford may be better suited for other operators. We maintain a straightforward approach and aren’t actively seeking buyers because we recognize the advantages of having a midstream program that complements our exploration and production efforts. Our collaboration with Matt Spicer and his team ensures we have the necessary infrastructure in place when we’re ready to proceed. We’re not rushing; this midstream aspect provides fee-based income that supports our commodity-focused E&P. While we believe it currently enhances our operations, we remain open to opportunities. I advise those looking to engage with us to come prepared and serious; we are willing to listen, but we also understand the value of our existing setup. Our team collaborates closely to evaluate decisions. It’s not just up to me or David; we discuss the advantages and disadvantages thoroughly to find what benefits our shareholders the most. David?

I was reflecting a bit, Joe, as I listened to your answer, which I thought was great. Sitting here today, Greg Craig is across the table from me, just like he was about seven years ago when he was explaining his plans. I remember asking him what he meant by building midstream. Now, looking at him, Matt Spicer, James Meier, and all the others at Matador, I see the impact and vision they had to bring San Mateo together, and look at how it has developed. It's impressive—335,000 barrels a day of water disposal, 13 cutting-edge saltwater disposal wells, gas gathering, oil gathering, a significant water transportation system, and a major natural gas transportation system with almost 0.5 billion a day of natural gas processing capability. I doubt Greg envisioned it would become this back then. We are very proud of San Mateo and all the hard work that has gone into reaching this stage. I'm really looking forward to the next six weeks as we finalize everything—connecting all these pipes to the plant. It feels like everything is coming together, and we're about to get started. We're excited about that. We might consider selling it someday, but for now, it's our time to shine.

What you think is that we got serious about the idea of building the midstream during our IPO roadshow back in 2012. We received many questions about transportation processing. While we weren't facing issues at that time, it was evident that others were. This segment has grown and is now worth over $1 billion. Its value will only increase as we bring the second plant online, making it a very exciting asset for us.

I think, Neal, one final point to make is that it has given operational control to Matador as well. It has been crucial for us to expedite well completions and sales, allowing us to achieve our targets. The coordination between Matador teams, San Mateo teams, and the planning has been a vital aspect of our business.

Yes, Neal, this is Matt. I want to add a couple of points here. The way these two businesses operate together is unique for us. We didn't just gather a bunch of midstream assets and sell them; we progressed step by step. As David mentioned, we have reached a point where these two business lines collaborate effectively. Operational efficiencies are crucial, especially when initiating the 13 wells in Stateline, and it's vital that our midstream partner is reliable and fulfills their commitments. We have confidence in them. Although they function as an independent midstream company, we are the primary client and receive significant attention from them, which is important since we may require the volume. As Joe pointed out, we have increased from processing 400 barrels a day in 2012 to over 40,000 barrels a day now in midstream operations. Similarly, we have transitioned from only a small gas flow in the Eagle Ford to our current capacity. It has been a positive development for both sides.

No, it's definitely great to see all the progress. Go ahead, everyone.

No, go ahead. What are you going to say?

I would say definitely going to sell those bones connected, just as David said.

Thanks, but it has been interesting, and that's one that been one advantage of being public. As you go on the road, you get these good questions; why are you going to do this? What's happening here? You hear about other challenges, that have made, I think, our business plan sharper. We appreciate your questions. We appreciate your interest, and it's got a lot of value that isn't fully recognized in the market. It's like our Stateline and Rodney Robinson wells are really performing. We released that on the Rodney Robinson in the first 100 days, 1.2 million BOEs. This is good rock, and the teams are working together. The outlook is good in either area, but I want to emphasize whether it's Haynesville or Eagle Ford or a midstream project, we're going to do what's best for the shareholders. This management group has a lot more skin in the game than virtually any other public company. I'm the largest single shareholder. Most of the senior group owned about 5 to 10 times what their counterpart and other companies own. We’re shareholders too. When Matt has his mother-in-law involved, there's an added level of visibility. It gets tricky as Matt said it.

My quick follow-up on slide 8, you discussed the 8-plus locations. It's interesting to see how much activity is happening in different areas like Ranger and Arrowhead, and Joe has highlighted all the various formations that come with this diversification. Does this enable you to engage in much more development going forward and possibly achieve even lower costs because of it? Could you elaborate on the overall operational plan due to this diverse inventory base now?

Well, hey Neal, it's David. I think we are in a good position because we have many options and opportunities. Currently, we are focused on the work at Stateline, Robey Robinson, and Stebbins. There was a time two years ago when we concentrated more on the Rustler Breaks area, and we will likely do so again. We have known for a long time that parts of Arrowhead and Ranger are good areas for us. However, the acreage in that region has mostly been held by existing production, so there hasn’t been as much urgency to work through it compared to other acreage that was less restricted. Historically, that area has been the key region for the Bone Spring, and we anticipated having strong targets in both the second and Bone Spring. Remember our Mallon wells from a few years back; those are close to 2 million barrels a day of reserves each. There are excellent wells that can still be drilled in that part of the basin, and we are also starting to show that the Wolfcamp will be effective there as well. We will keep working through the basin, and I feel reassured that we have plenty of opportunities and good wells to drill. As we have often said, we do not see ourselves as a company limited by opportunities. I wish we could operate six rigs today because there are plenty of prime locations for them.

We have plenty of good spots, Neal, but I couldn't address all the questions we might have about how we plan to fund our growth. So, let's focus on our opportunities.

Very good. Thanks so much, guys. Congrats.

Thanks, Neal.

Thank you, ladies and gentlemen. This ends the Q&A portion of the morning's conference call. I’d turn the call back over to management for any closing remarks.

I have three quick points to share. First, I invite everyone listening to come visit us. We’d be happy to meet you in person, give you a tour of the office, introduce you to some of the teams, and show you the MaxCom room, which is truly impressive for collaboration with our drillers and others. A year ago, people questioned whether we could drill two-mile laterals, but we were confident and the team has successfully done it. I encourage you to meet them; they are friendly and very skilled in their jobs. Second, I want to express my gratitude to Moody's for upgrading our credit ratings and bonds. This recognition reflects the improvements we are making. Lastly, I want to acknowledge our accounting team, who have successfully completed the audit and managed the 10-Qs. They have been diligent in collecting accounts receivable and have proven to be invaluable. Despite the challenges posed by the pandemic, they consistently meet tight deadlines. Thank you, Rob, for your leadership in this area. That wraps up my remarks, but if you have more questions, please come see us and we’ll thoroughly address them. We appreciate your choice to tune into this conference call. Thank you again, and I look forward to seeing you soon.

Ladies and gentlemen, thanks for your participation today. This concludes the program.