Good morning, ladies and gentlemen. Welcome to the Third Quarter 2021 Matador Resources Company Earnings Conference Call. My name is Grace, and I'll be serving as the operator for 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 November 30, 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, Grace. Good morning, everyone. And thank you for joining us for Matador's third 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 third 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. I just have a very brief comment or two before you begin the question and answer. First, I just want to say, it's been very exciting for us this year and gratifying. Our themes were to pay down debt, find a way to increase our dividend, and set ourselves up for another good year in 2022. Coming into the fourth quarter as we have, I believe those objectives have been attained, and we're excited about the outlook going forward. That 2022 is shaping up to be a good year. All areas of the company are doing well. The team is performing, they're working together, and they're reaching some outstanding results, which is reflected in our current stock price and gives me great pleasure. Just to note, that in the last month or so, really since the end of August, we've been attaining one all-time record high after another. We appreciate the support we've received from you and from the market and from our shareholders, and especially a shout out to our field staff who work through the cold and in icy conditions, sleeping in their trucks, doing whatever it took to keep the wells running through the night, getting up and checking it every few hours. From the capital efficiency gains that each of the groups have contributed, three years ago we drilled one well that was over a mile and a half long. This year, every well we drill will be two miles or longer except for one. This great change has added to the performance of the company, and we appreciate all the extra effort that our staff, both here and in the field, have done to bring about this really high performance execution. And so with that, I'd like to turn it back to you for questions.

Your first question comes from the line of Scott Hanold from RBC Capital. Please go ahead.

Yes. Good morning, y'all. Congrats on the strong quarter again. I'm kind of wondering, in this commodity price environment, then in the path that you all are going down, it looks like you're going to have a fair amount of free cash flow going forward. And it looks like you're going to have enough free cash flow generation to pay off the revolver very early next year. So, I know it's maybe sort of a bit too early to kind of spend money that you don't have right now. But can you give us a sense of how you think about free cash flow big picture moving forward? What are your priorities? And how should investors think about Matador and what you do with it?

Scott, it's a great question and it's a very worthy question. We talk about that every day. What should we do with the expectancy of so much more free cash flow? Different people have ideas, and we work our way through them. I would say those plans are still evolving. At the very core, we want to ensure this is a once-in-10-year opportunity that we make the most of it. We're ahead, so we don't have to take a bunch of chances; we can be cautious but effective. We're looking at a range of ideas open to us. We have our basic ground game with our drilling rigs and prospects that will go forward. Tom and his group have a drill schedule with a lot of A-plus locations. The midstream is growing; we've been attracting third-party companies to participate in that, and we're very pleased with how that's going. Our land group has a number of ideas, and we're weighing those against the relative certainty of some of the wells that we have scheduled to drill. We've accomplished what we wanted to do, which was pay down the debt, but we're now in a position. We've lowered our debt over the past year, down to $100 million today from $475 million. We have room there to have some money available for either expanding the drilling program or looking at relatively small acquisitions. We prefer not company to company, but rather bolt-on transactions to our existing leases, because there's less risk due to our familiarity with those areas. We’re also focused on getting that debt down and being good to our shareholders who have stayed with us all this time, including a potential dividend increase. Although the timing is uncertain, we did increase the dividend a quarter early to signal that they are a priority in our plans moving forward. We will finalize our plans in January or early February, and I think you will like what you see because the choices are strong, and we're very excited by them.

I'm not sure you left out anything, Joe. I guess, Scott, the only other thing we’ve talked about a little bit was that there could be an opportune time in 2022 to look at restructuring the bonds a little once we have the revolver paid off. We might consider that; it's something we've chatted about but haven't made any final decisions. We think there's an opportunity if we want to buy some in and restructure the bonds a little to push out the maturities. We've received upgrades from S&P and Moody's, and I think our bonds have been trading around 104, yielding about 4.5% these days. So we feel that if we wanted to do something, we could significantly reduce the coupon from where we are now. We have a lot of options for us going forward.

Yes. I'd just like to indicate that the way the teams are working together and the leadership is emerging from those teams is allowing us, as an executive team, more time to study these options, which we appreciate. Our measurement groups and the commodity verification groups are doing their part too. So everybody's working together, and it's pleasing to see the new leadership emerging.

I appreciate the color there, and my follow-up question is — I'm not going to push you on 2022 guidance because I know that will come early next year. But given the fourth quarter production cadence where you're shutting in a few more wells to bring forward some completions, could you give us a sense of the progression as you get into Q1 2022? It seems like there could be a pretty significant step up, maybe in that sequential 15 plus percent into Q1. Can you give us a little color on where you see that going?

I'm not trying to avoid it, but I'm going to hand it over to David.

Yes, Scott. Thanks. Look, we expect to see a meaningful increase in production in Q1 2022. Why is that? The wells that we will have shut in at Stateline, the Voni Frac on the next 11 wells should all finish by the end of the year, which is our expectation. Once they do, we'll start drilling out plugs and begin to restore production online. Those wells are going to come back on, and by mid-February, during the latter part of February, we're expecting 11 new Voni wells to come online. Additionally, we're currently fracking the remaining nine wells at Stebbins, and we expect to complete them before long. We aim to turn them to sales before the end of the year, so they will start to impact production toward the end of the year. We have two more wells at Uncle Chess to finish by the end of the year, along with three wells in Wolf that will probably come on sometime in Q1. All that together suggests that in the course of Q1, our production will begin to grow meaningfully. With the nine wells we are drilling at Rodney, those will probably start to come on in mid to late March, further boosting our prospects. We believe this bodes well for the second quarter as well, sustaining that growth throughout the year. We'll provide precise numbers during our next conference call and guidance release.

All right. I appreciate that. Thank you.

Thank you. Your next question comes from the line of Neal Dingmann from Truist Securities. Your line is open, sir.

Good morning. My first question today is just curious about some shred information. You all mentioned about going directly to artificial lift on five of those 13 Boros wells, as well as plans to shut in more for a longer period ahead of the Voni completion. Can you expand on what you saw in terms of pressure changes that caused you to move to artificial lift? How do you think about offsetting production concerning that?

Hey, Neal, it's David. You packed a lot into that question. Let me unpack it. Regarding the shut-ins planned for the fourth quarter on the Voni wells, we expect to shut in a few more of the existing producing wells from Voni and Boros as we complete these Voni wells. We plan to shut them in longer than anticipated. The biggest reason is that as we were fracking the Boros wells, we realized there was more frac communication with some of the existing wells than we had anticipated. But I want to clarify that there are no adverse effects on reservoir effects or drainage; it's just communication during the frac. We have currently 26 and now 39 producing wells at Stateline, and we want to protect those high-value wells. If that means slightly lower production in the fourth quarter than we expected, that's okay, because we feel it's more important to preserve that value. Regarding the artificial lift on the first Bone Spring in the Avalon, the reservoir pressure in these zones was not abnormally low. By definition, they have lower reservoir pressures than those in deeper layers. When we're flowing back wells, wells in the first Bone Spring or Avalon generally have lower flowing pressure, because their absolute reservoir pressure is lower. In this particular case, those couple of wells took longer to start producing hydrocarbons than others at Stateline, but this doesn't imply a problem. We had similar cases in the first Bone Spring positive outcomes. I'm not concerned about the performance of these wells; installing artificial lift will help speed cleanup and maximize production output.

Sounds like you are right on plan there. Great job. My second question is on San Mateo specifically. We've seen strong midstream deals recently like we did previously. Given the enormous value you have at San Mateo, where do you sit with that now? Any thoughts on types of transactions you're considering?

I'm going to comment slightly and then turn it over to Matt. We're pleased with the way San Mateo is performing. The work with our partner has been strong, and we're considering how to best add value to it. This involves extensions and connections to our existing system and potential new drilling in other areas. San Mateo not only adds financial value but has operational value, as our plant was one of only 5% that kept operating during a storm. This ability to maintain operational timelines enhances our marketing efforts. We're seeing multiple repeat customers, and we think there are many opportunities to explore. Matt, what would you add to that?

Joe, you said it well. I would underscore the advantages of operating this business, not only for us but for our third-party customers. When Matador says we have wells to turn on in various locations, we have pipelines ready to go. This has attracted multiple customers who are interested in utilizing our services. Relative to the value of the midstream company and current commodity prices, we're seeing an increase. If the rig count goes back up in our good operating areas, there will likely be even more third-party opportunities. We’re in a very good position.

Absolutely, guys. Love the optionality there. Thank you.

Your next question comes from the line of John Freeman of Raymond James. Your line is open, sir.

Good morning.

Good morning, John.

You all are doing a terrific job continuing to drive costs down. I see you've reduced your D&C basis from $730 to $680 per foot for the full year guidance. The first nine months averaged at $655, implying a big step up to $750 in Q4, which seems conservative. Are there any assumptions to clarify?

The savings here come from two parts. One is working with vendors to improve efficiencies without just driving costs down. The reductions in drilling and fracking days have significantly contributed to saved costs. Both Billy's and Chris's groups have managed to drill wells faster while implementing various efficiencies. This sustainability continues to improve our numbers.

For 2021, we're set on costs, and we anticipate a 10% to 12% increase in 2022 due to rising service prices. Nonetheless, efficiencies we created should help to offset that increase. For instance, the last quarter set new lateral records for drilling and completing faster wells, and that continues to drive down our costs significantly.

That's great. I appreciate the color on that topic. It seems like as leverage falls, you're becoming more comfortable with a lower hedge position for the upcoming year.

Yes, we're having these discussions, and right now we have a lot of backwardation in the market. Craig, would you like to add anything?

No, Joe, you hit it perfectly regarding current market conditions that don't support doing anything right now. We'll keep monitoring the market conditions to be ready to make strategic moves.

Thank you, guys.

Your next question comes from the line of Zach Parham from JPMorgan. Your line is open.

Thanks for taking my question. You mentioned balance sheet capacity for expanding the drilling program. Can you talk about the decision to add the fifth rig? Why now? What is the plan moving forward?

The decision to add the fifth rig is due primarily to our drilling non-operating interest. To maintain the same amount of drilling, we needed the additional rig. This fifth rig will be essential for assuring better response time for our operations.

Initially, the primary goal was to drill a saltwater disposal well in the Stebbins area that was budgeted for this year. We felt like additional capacity was necessary due to the number of new wells this year. We are flexible about where the rig will go post-Stebbins operations depending on operational needs.

Can you talk about your future development plans at Stateline? With strong results, how many additional packages are you expecting to develop?

Once we get the next batch of 11 Voni wells online, that will bring us to about 50 producing wells at Stateline. Originally, we had permitted around 96 wells there. I suspect we'll explore additional targets such as Wolfcamp Bs and possible Bone Spring wells in the future.

At Eastern Antelope Ridge, we'll be looking to drill in zones like Wolf Bone. We have 3D seismic data that indicates positive results. We're confident about the quality of the rock in that area and look forward to the results of forthcoming wells.

I had a question on natural gas. Your third quarter production was significantly stronger than expected. Was that a coincidence or part of a deliberate strategy? Additionally, how do returns from some of your gas assets compare with oilier assets given current prices?

We made some adjustments to increase our gas production due to rising prices as well as showcasing our excellent gas opportunities. This is a great time to leverage good gas wells in our inventory.

The third quarter production bump was also due to unexpected mineral interest from Haynesville that generated production this quarter. We acquired working interest in some Delaware wells that helped boost our production numbers as well.

Regarding potential small acquisitions, can you quantify that? Are we talking about acquisitions in the range of $20-50 million, or are we considering larger deals similar to the 2015 Heco deal?

Our focus isn’t purely based on size for acquisitions; the screening process is focused on the quality of the rock first. If smaller tracks offer that, they'll get our attention. Quality and fit are our priorities.

Regarding LOE, while we made remarkable improvements in cost management for 2020 with innovative strategies, we expect LOE to trend down as we see significant additional production next year. Our production team has streamlined many costs, contributing positively to LOE.

We've achieved significant efficiencies that probably outweigh any potential increases from outside inflation. Though there might be unknowns in service costs, we foresee improved efficiencies reducing LOE even with higher production.

The innovative coordination between production and completion groups has enabled reduced days in the field, which benefits our overall production efforts.

From 2019 to 2020, we saw a year-over-year decrease of around 20% in our total greenhouse gas emissions intensity.

Thank you all for your time and attention. We appreciate your interest and support, along with your candid questions. We encourage further engagement, and we're eager for a successful 2022. Thank you.

Thank you, presenters. Ladies and gentlemen, thank you for your joining. That concludes today's conference call.