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. 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 will 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. 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 are contained in the company's earnings release and its most recent quarterly report on Form 10-Q. Finally, in addition to our earnings release issued yesterday, I would like to remind everyone that you can find a slide presentation in connection with the third quarter 2020 earnings release under the Investor Relations tab of our corporate website. With that, I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?

Thank you, Mac. Good morning to everyone, and thank you for joining today's call. We appreciate your time and interest in Matador. Similar to last quarter, we have five slides as mentioned, and we are here to answer any questions for as long as needed. I've prepared some remarks as part of the earnings release, but to save time for questions and discussion, I will skip those and go directly to the slides. They are designed not only to report on the quarter but also to illustrate how well we've met our goals and metrics for the year. If you look at the slides, you'll recall that at the beginning of the year, we outlined a series of wells to drill – starting with the six Rodney Robinson wells in January and February, followed by the Ray wells in April and May, the Leatherneck wells in June and July, and the San Mateo expansion along with the first 13 wells in the Boros area at Stateline in September. We have successfully completed all these projects on time, on budget, and in many cases, even under budget. Additionally, we have focused on improving our balance sheet. We reduced our rig count from six to three and took various steps to lower capital costs, general and administrative expenses, and lease operating expenses. You might remember that Matador was the first company to implement salary cuts. I reduced my salary by 25%, and when I informed the Board, they also voluntarily took 25% cuts. This extended down the line, with Executive Vice Presidents taking 20% cuts, Regular Vice Presidents 10%, and each staff member 5%. We also rotated young engineers into the field to replace many contract personnel, which resulted in capital cost and G&A savings. This year, we're emphasizing efficiency; in 2018, we drilled 1% longer laterals, 29% in 2019, and now this year, we're in the high 80%. This shift from 1-mile to 2-mile laterals greatly enhances our capital efficiency. We've restructured our hedge portfolio to safeguard our balance sheet and maintain favorable leverage ratios for our bank covenants. The San Mateo project continues to improve, and with a 43-mile line crossing some of the best areas in the Delaware, we expect stronger performance in upcoming quarters. Our marketing team has worked diligently to secure the best possible prices, and while we completed several non-core asset divestitures, we performed strongly enough elsewhere that we didn’t need to rely on them to bolster the balance sheet. We are making progress, and our balance sheet will improve. We're thankful to the banks for their support and the reaffirmation of our credit line. The San Mateo project was completed on time and under budget, thanks to our field team’s effort. As shown on Slide 8, our capital efficiency has significantly improved, with drilling and completion costs nearly halved compared to last year. Slide B indicates our debt situation is better than initially projected, with further savings anticipated in this fourth quarter. Lastly, Slide E illustrates our steady production growth, particularly in the Delaware, now nearing 70,000 BOEs, and we're excited about our fourth-quarter lineup. In closing, I remain optimistic about our future, and I now welcome your questions.

Our first question comes from Scott Hanold with RBC Capital Markets.

Joe, you all 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? Is that a sustainable change you think is going to occur? And maybe around some of the moving parts around that.

Thank you, Scott. It's really a question of what's most important under all the circumstances to create value. Last year, at this time, we realized that 1-mile laterals were okay. They were profitable, but they weren't going to be as profitable or as helpful as a 2-mile lateral. We saw to get the pathway for us was first to get to the hurdle where we were capital-efficient. That saves money and makes better wells. The 2-mile laterals have less declines and are more profitable. There's a lot of value in being more capital efficient. To do that, we saw an opportunity in the BLM lease. We paid a premium for it and took criticism for it. But we've already doubled our money on it and added value to our asset base. We have many more wells to drill and a lot more oil and gas to harvest. That project needed to get started. Now that we've done that, free cash flow is an option, and it's time for the banks to get some back and improve our leverage ratio. Once we do some of that, we can look at the options to return some to shareholders. However, there's no definite plan, as the first priority is to get the bank debt down and then consider other options. We have consistently paid money back over our 40 years of business, and we will do so again. We respect our shareholders, and they have ideas. They've agreed with us to first achieve capital efficiency, and we're on that line. I hope this answers your question, but if not, feel free to follow up, Scott.

Yes. Just to confirm, I mean, this is a plan. I mean, you talked to your 2021, but this is sort of like a go for plan at this point, right? It's not necessarily just through 2020 – 2021 plan?

No. Historically, we prefer our leverage ratio down closer to 2% or below. It's not that we have a debt problem; it's just under EBITDA because of price. When we went public, oil was at close to $100, and now we're working at $40. We're going to produce about 15 million barrels, which allows for considerable firepower to get the debt down to two or below—where we'd like to be. The critical thing is to consider what builds value, and the most important factor now is capital efficiency. David, would you add anything to that?

No, I don't think so. I think, Scott, we feel like the plan we have going forward can be sustainable and generate cash not only next year but in the future as well. That's the path we're trying to embark upon.

Okay. I appreciate that clarification. As my follow-up question, consolidation has hit the energy space. Where do you fit into that conversation? You all are in a unique position where, again, from a SMID cap perspective, there are not many peers aligned with you. Does it make sense for you to consider consolidation going forward?

At this present time, I don't see much advantage. Look, we're achieving production growth, costs are coming down, and we're thankful for our bank support. We grew from a start where we publicly began in 2012 with no production in New Mexico to probably currently being in the top 10 in both gas and oil, moving up as consolidation happens. We think we're competing effectively. We don't feel the need for a partner, and if we receive a serious offer, we'll consider it seriously. However, we have significant ownership in Matador, and our primary interest is in getting the price up.

From my perspective, we're continuing to create value. We're not opportunity poor; we're opportunity-rich. We have many options ahead of us. If the right deal comes along and is accretive to what we're doing, we would certainly consider it.

Our next question comes from the line of Gail Nicholson with Stephens.

You guys had a really strong growth; wells that came online. When you look at your actual performance of those wells versus your predrill expectations, how do things compare? Also, specifically, the Lower Wolfcamp B well looks a little bit gassier than your normal Wolfcamp B mix. Can you talk about what you saw there?

Yes, sure. Hi, Gail, it's David. We're very pleased with the wells that we turned to sales this quarter, especially the Boros wells. Uniformly, they came out better than we anticipated. The results of both the Wolfcamp B wells are satisfactory. The Upper Wolfcamp B had around 37% oil cut, which is in line with expectations. The Lower B well is somewhat gassier, but those wells have extremely high pressure, making 15 million cubic feet of natural gas per day with high liquids content. Wolfcamp B continues to be a very important target for us, and we're excited about our developments going forward.

Our completion group had 750 separate fracs over 24 hours a day for 2 months with no issues—great performance. It demonstrated our team's capability to handle large-scale projects, proving we can develop more options moving forward.

I think sometimes, as sell-side analysts, we don't fully appreciate everything that goes into bringing on a project like Boros. Can you talk through how you see San Mateo underpinning and helping free cash flow generation?

Yes, Gail, this is Matt. The financial contribution of San Mateo to free cash flow is exciting. If San Mateo throws off $130 million in EBITDA next year, we'll get half of that, which brings us down to about $60 million after expenses. Added to that will be incentives, possibly totaling $70-75 million in free cash flow that San Mateo will generate for us in 2021. The synergy between drilling new wells and plant expansion is significant.

Absolutely right, Matt. It's an underappreciated asset that will provide value for years because we are synergistically developing it alongside new drilling projects, creating value across both units.

Our next question comes from the line of Gabe Daoud with Cowen.

I wanted to start a little bit on CapEx and understood that there's a timing difference between accrual and cash CapEx. If I look through 3Q, it looks like there's about $140 million difference between cash and accrual, so should we expect that to reverse moving forward?

As you know, the CapEx numbers we report are the accrued CapEx, which reflects operations completed by the end of the quarter. The cash flow always reflects 100% of the San Mateo capital spend; however, Matador has been responsible for less than 50% due to carried interests negotiated previously. Going forward, we expect less in CapEx due to our 3 rig program.

Just curious if we should expect a mid-single-digit oil growth number year-over-year at capital that's about $100 million or so less than 2020?

We expect mid-single-digit production growth across oil and gas in 2021 with lower CapEx of approximately $100 million. At $40 oil, we believe we can generate free cash flow.

Next question comes from the line of Jeff Grampp with Northland Capital Markets.

Could you touch on the leverage focus and how big a focus it is to get back to historical leverage targets? How do you balance opportunistically selling some assets and accelerating deleveraging?

It's a complex balance in this business to create value. Maintaining strong reserves and addressing the right timing for asset sales is critical. We don’t have a debt issue; it’s an EBITDA problem in this low-price environment. We’re making deliberate moves to ensure long-term strength. We don't want to cut off options to do something that doesn't make long-term sense.

For my follow-up on San Mateo, are there any operational benefits of merging the entities?

The merger really creates efficiencies, allowing us to combine the operations and generate synergies without needing to operate as two separate entities, which streamlines our processes overall.

Our next question comes from the line of Neal Dingmann with Truist.

Now that you've passed the critical inflection point with San Mateo and you haven't given guidance yet for next year, does this give you more optionality for the upstream?

The E&P drives our strategy. We don’t drill wells to accommodate San Mateo; we drill to maximize profits. It’s crucial we maintain momentum to support appraisal programs. Stopping drilling risks losing our talent, and we have kept our operations efficient, emerging from this volatile period more substantial.

We've achieved remarkable efficiencies and flexibility. If oil prices rise, we'll be positioned to respond positively. We are investing in our competencies and capacities.

Our next question comes from the line of John Freeman with Raymond James.

Is there a strong conviction that the non-op number will be there in light of recent oil price weakness? Any color on this would be helpful.

Most of the non-op costs are already spoken for in the fourth quarter. Some partners have accelerated completions and the general sentiment is positive regarding incurred Capital Expenditures.

Can you share any insights on how the regulatory permits received will impact drilling over the next couple of years?

We've received all the needed federal permits for future projects and expect to drive significant activity based on these approvals. We have more permits than we plan to drill over the next few years, providing strategic options for us.

Our next question comes from the line of Noel Parks with Coker & Palmer.

Can you provide insight on service costs and expectations for vendor components moving forward?

We see favorable pricing for service costs presently, and expect that to continue into next year. Our goal with vendors is to create value—working together for the best efficiency rather than just the lowest price.

Could you talk about the Leatherneck and its performance relative to expectations?

We're satisfied with Leatherneck's performance. It has exceeded expectations; the Wolfcamp B is performing well. We're pleased with the results so far.

Just one last question on your hedges, particularly the gas side for the first quarter of 2022, could you explain the rationale behind having such a wide margin between the floor and ceiling?

That was simply an opportunity to add to our hedging position, which we felt offered a good mix of security and potential upside, enhancing our weighted average price outlook.

Our next question comes from the line of Michael Scialla with Stifel.

Is the $790 per foot number a good baseline for next year? And how does it compare to previous years?

It's a fair comparison. The $790 figure shows our push for efficiency, and we expect to maintain it or operate slightly above that as we drill more wells. We've improved efficiency across the board without sacrificing quality.

Our focus on operational efficiency has yielded fantastic results. With better execution than we've seen in years past, our growth continues, presenting exciting opportunities ahead. Thank you all for participating. We appreciate the engagement and good questions. We are proud of our progress and are optimistic that we will continue to demonstrate success in the upcoming quarters. We are committed to growing the company and ensuring we create value for our shareholders.

Ladies and gentlemen, thank you for your participation today. This concludes the program. You may now disconnect.