Good morning, ladies and gentlemen and welcome to the Second Quarter 2021 Matador Resources Company Earnings Conference Call. My name is Tina, and I'll be serving as the operator for today. 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, 2021, 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, Tina, and good morning, everyone. And thank you for joining us for Matador's second quarter 2021 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 is contained in the company's earnings release and its most recently quarterly report on Form 10-Q. Finally, in addition to our earnings press release issued yesterday, I would like to remind everyone that you can also find a slide presentation in connection with the second quarter 2021 earnings release under the Investor 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. It's a pleasure to be here today to provide this kind of report. Normally, I would mention two or three key highlights, but there is so much to cover. I believe Matador has reached an inflection point; it's been an exceptional quarter, with great efforts by our staff, both in the office and in the field. I think the results are sustainable because of many improvements in our processes and wells that will produce for years at record low costs. I invite you all to read the prepared remarks; they are a bit long, but I hope you'll take the time to review them along with the included slides on our website. If you look at slide A, you'll see record EBITDA and free cash flow, all above expectations. Our production was higher, and our costs were lower. Each group contributed to these results. Also exciting is that we repaid another $100 million on our debt, cutting our debt in half. Last year, we had nearly a leverage ratio of 3; it's now down to 1.8. I prefer being in the ones. The balance sheet is stronger as we predicted, thanks to the BLM properties coming online. Quarterly production exceeded expectations, and those BLM wells many of which will produce between 1 million to 2 million barrels each. We have more zones than we originally anticipated, and crucially, our capital efficiency has improved significantly. Now in 2018, we grew one well to over two miles; this year, every well we drill will be two miles or more, except one. Our efficiency has jumped from about 2% to 98%. Our max calm room has increased our time in zone from 70% to 100%, which means a significant boost for reserves and production, increasing our productive footage by nearly a third. Our efforts to enhance capital efficiency extend across our operations, we've focused on being responsible operators to maximize the use of shareholder capital. We've already exceeded second quarter 2021 guidance. This has given us flexibility to advance some projects as we prepare for 2022. Slide B illustrates the increasing contributions of our midstream asset. Not only does it have significant financial contributions, it also enhances our operations. These assets minimize emissions and ensure operational efficiency. Additionally, I want to emphasize our outstanding borrowings. Prior to the BLM deal, we had a leverage ratio of 1.8. As we completed that project, our borrowings reached a high of $520 million in Q3 2020, but we've now reduced it to $240 million, returning to a leverage ratio of 1.8. Good planning by our financial group and effective cost control from our operations team have resulted in record production levels, exceeding our original estimates for cumulative production. Our goals were focused on delivering free cash flow, reducing debt, initiating a dividend, and improving capital efficiency. These priorities have all been achieved, including the performance incentives from San Mateo and our proactive hedging strategy. As for capital efficiency, we have cut costs significantly, and the San Mateo EBITDA has grown. Moving forward, we’re in a strong position to accelerate the Voni completions and set ourselves up for a very productive 2022. We are excited for the opportunities ahead. With that, I'd like to turn it back to Tina for the first question.

First question is from Scott Hanold with RBC.

Joe, you indicated that the operational change really sets up for a good 2022. Can you all provide a little bit of color on what pulling forward these wells means? We can see what happens in 2021 based on your guidance, but can you talk through what that might look like in 2022 at a high level? Based on our numbers, it looks like you all should be able to get firmly above 100 a day in 2022 at this point.

Yes, good morning, Scott. This is David. We expect to see quite a bit of improvement next year due to what we're doing here. As Joe mentioned, we'll turn these Boros and Stebbins wells in the fourth quarter, some of which we will share the end, the Boros well, some of them for a little bit. But we'll also benefit from turning these mining wells to sales probably in February, as opposed to April or May as originally planned. That alone should significantly help our expectations for 2022. I don’t want to comment on hitting 100,000 BOE a day at this point. I think it’s too early to say, but we are very optimistic about how 2022 is shaping up and I certainly think the first quarter of 2022 will start off very well for us.

Fair enough. Can you give us an update on your federal acreage? Obviously, you have secured a number of permits, and I think you have some extensions that we are looking to obtain.

Yes, sure. We feel that things are going very well with BLM and the office in Carlsbad, and we appreciate all of our colleagues there for their help in pushing through the various approvals we need. Recently, we've focused more on getting approvals for the sundries, which are essentially amendments to existing permits. This approach has allowed us to modify our drilling and completion designs that we initially proposed. We've received all the sundries we've requested, and changes are progressing smoothly. We did receive our first extension and our process looks like it’s working well. We haven’t faced significant impediments this year to drill, complete, and operate our wells, so everything continues to move forward just fine.

Your next question comes from Neal Dingmann with Truist Securities.

Sorry about that, I couldn't help but notice the upside we're seeing on San Mateo. You all have been laying that out for quite some time, and it's really coming to fruition. I'm just wondering, you're talking about $70 million already in EBITDA potential this year. What type of growth could we see there? Could that go commensurate with what you might see on the upside?

Yes, Neal, this is Matt. Where we stand right now, we've built the bigger components of our midstream business there, and we're kind of in the add-on stage. We are looking forward to continuing to service Matador as our anchor tenant, but also adding third-party volumes. This year, we’ve added oil, water, and gas; thus, if we get a large customer with enough volume, it won’t require a significant investment to accommodate that. We can expand quickly if needed and that’s the plan.

Yes, I'd like to add to that. Matt and his group have done an excellent job of attracting quality third-party business with A rated companies, and the list reflects diverse long-time operators, which lowers the risk significantly. It’s encouraging to note that most of the firms on that list are now repeat customers, indicating we provide a valuable service. We're ready to expand as needed.

Yes, Joe, you know us well enough that we are taking a brick-by-brick approach, and no deal is too small; we want to ensure we make money on every deal. We’ve been able to build this business gradually, just like we did in the past.

I just want to follow up on what you guys are doing with the operations and completions. I'm just wondering, qualitatively, what you think gets you more excited about moving the program? I’d love to hear more on qualitative improvements beyond this year.

I'll start, and others can build off it. On the Boros well, there were over 800 frac stages completed without any significant downtime; likewise, with the Voni wells. We’ve chosen to keep our crews rather than release them, maintaining this efficiency. They are well-trained for these tasks, and it’s crucial for us to retain them to minimize costs and improve performance. The performance we’ve seen with 1,500 frac stages speaks volumes about our crew and their ability.

Absolutely, Joe. The efficiencies from running operations consistently are substantial. Our complete cycle times have gone from about 45 days in 2018 to 24 days in the first half of this year. That's significant savings on supervision, renting equipment, and other costs. This ongoing practice improves efficiencies and production simultaneously. We just completed our first simul frac, achieving impressive results with over 2,000 feet laterally completed per day; that's more than double our 2018 performance. We expect 60% of our wells in the later half of 2021 to be simul frac wells, which has already saved us about $250,000 per well, representing a 6% reduction in completion costs.

I would add that by eliminating casing strings, we improve cycles and save between $0.5 million to $1 million depending on the string. About every additional 300 feet we improve reflects a $75,000 saving per well; definitely meaningful efficiencies.

Looks like we might be able to reduce well costs by about a million bucks moving forward. I’d love to hear that.

Your next question is from John Freeman with Raymond James.

I want to follow up regarding the cost per foot guidance. Given your success in the first half this year, I'm trying to gauge the adjustments made for the second half and how it's reflected in your guidance for 2022.

Yes, John, this is Matt. We anticipated some cost increases heading into the year, but largely, we haven’t seen these in the first half. The back half of the year, we are beginning to see some increases, driven by crude prices and diesel rates as much as 20% on pre-drilling costs. So when we incorporate everything, we could see 4% to 6% increases in drilling and completion costs. But with operational efficiencies continuing to improve, we are confident in our 695 guidance.

I'd agree with Matt. The reduction reflects a mark-to-market expectation based on first half performance while original estimations created a buffer for third and fourth quarter inflation. If we can mitigate costs, it may improve our second half dramatically.

Your next question comes from Gabe Daoud with Cowen.

Just curious about the incremental business from San Mateo; how much does that impact volumes this year and next? Will that require additional build-out beyond what’s already planned?

Yes, Gabe, the things we have in hand are in the budget, which accounted for the increase in CapEx for San Mateo. Additional success would require further plans we cannot assess just yet.

Thanks, Matt. What are your latest thoughts on M&A? Are there any interesting prospects you guys are looking at?

We aim to play a straight game, being public. When a serious offer arises, we handle it seriously. Matador has performed well in past deals, and we remain keen on potential acquisitions, especially smaller, privately-owned operators where there’s a cultural fit. We prioritize good deals for our shareholders, and our executive team, being large shareholders themselves, drives this focus. We pursue bolt-on acreage to minimize risk since we know those areas well. We are open to deals but focus on A-plus opportunities and have plenty of choices to maximize value.

Your next question comes from Michael Scialla with Stifel.

Joe, you mentioned your comfortable leverage ratio under 2x. What's your thought on further debt reduction versus increasing dividends? Is there a target leverage level you want to achieve before you consider ramping that up?

We support further debt reduction; the pace depends on various factors. Shareholders can expect additional debt reduction, and we hope to increase dividends over time. Though we aren’t sure about timing, we aim to be prudent as dividend increases are important for our shareholders and our executives. This topic is under regular consideration at board meetings.

It's fair to assume that the February first quarter 2022 production should sharply rise due to the 11 Voni wells coming online. Regarding rigs, we remain flexible in our plans; we always consider what adjustments yield the best value.

Your next question comes from Jake Roberts with Tudor, Pickering, and Holt.

Can you provide commentary on the CapEx guide, particularly for non-operated work which won’t see higher activity until year-end?

We expect to participate in all non-operated wells, though there have been shifts due to our operating partners’ modified programs which have pushed activity to 2022. The updates are to keep shareholders informed; we expect to move forward with these wells as planned.

Curious about the Haynesville asset with improved gas prices; what's your thoughts on activity? Any consideration for M&A in Louisiana?

The Haynesville is performing excellently for us. Our partnership with Chesapeake has allowed us to reserve additional resources, which we are keen to develop when opportune. We continue to prioritize our Delaware and Eagle Ford assets while keeping our options open with Haynesville, and we’re pleased with the additional reserves we have.

And our final question comes from Gail Nicholson with Stephens.

Your free cash flow profile is robust, and I'm impressed by your debt repayment progress. Regarding the 2016 year notes, any thoughts on retiring versus prolonging those maturities at lower rates?

We have considered options for the callable notes; however, there are no immediate plans for action. It's definitely something we evaluate and will keep the board informed.

LOE was another solid quarter for us. We are experiencing cost increases, much like completion costs, due to rising diesel and workover costs. While we manage those, I trust our team to maintain good cost control despite some pressures we've seen.

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

Thank you, Tina. We appreciate everyone listening and taking the time for us today. I want to express gratitude to the staff; it’s gratifying to see the results from each group's efforts. I'm excited about not only the second half of 2021 but about all of 2022 as we aim to continue generating free cash flow, reducing costs, paying dividends, and grow the value of our assets. We're pleased with the improvement in our operational efficiency, and we believe this will greatly enhance value creation for all of Matador's stakeholders. Since starting Matador back in 1983 with $270,000, it’s incredible to see our growth to nearly $4 billion in value today. It’s been an exciting journey, and we are optimistic about the future ahead. Thank you again.

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