Matador Resources Co Q4 FY2021 Earnings Call

Good morning, ladies and gentlemen. Welcome to the Fourth Quarter and Full Year 2021 Matador Resources Company Earnings Conference Call. My name is Kirby 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 March 30, 2022, 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, Kirby. Good morning, everyone, and thank you for joining us for Matador's fourth quarter and full year 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 recent annual report on Form 10-K and quarterly report on Form 10-Q. Finally, in addition with our earnings press release, I would like to remind everyone that you can find a slide presentation in connection with our fourth quarter and full year 2021 earnings release under the Investor Relations tab on our website. And with that, I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?

Thank you, Mac, and thank all of you for listening in on this call and taking the time. I'd like to simply begin by noting this is actually our 10th anniversary from going public in February of 2012. And this is a good high watermark for us at this time. Last year, we considered the best year we ever had in all areas and in particular, just execution and the teamwork that we had between our various disciplines. I want to thank the staff, both in the office and the field for this good performance. We certainly understand that it was a record-setting year and that past performances are no guarantee of future performances, but we feel it's not a bad indicator to have, and we like our chances going forward. We think the outlook is the best that it's ever been. And hope that you'll see in the documents that we're sharing with you, how far that we've come in the last 10 years. As a measure you see in here, the production records, the reserve numbers, the free cash flow, all records being, but I'd also just like to note that if you bought on the IPO, you're up basically four times, as we came public at $12 and we're approaching $48 now. If you had to be an original shareholder in this Matador, you were at $30. So you're up a little over 15 times in that period. As I said, I know that past performance is no guarantee of future performance, but we like our chances and we'd rather be having that kind of progress than the other way around. With March Madness coming up, just because Duke and Kentucky and those are not guaranteed anything, it's certainly the way to pick your bracket with teams that have been there and have showed some progress. Again, I commend the teams and the staff for their operational and financial progress. We're looking at more free cash flow and more EBITDA than we ever have. Some of the slides to my remark note that, and the picture sometimes tells a thousand more words. The forward look is promising. The BLM acreage that we bought has really come through. I know at the time there were some question marks about whether we were paying too much for it. But as I think you'll see, it made a complete change for us and our capital efficiency. We went from drilling 1% of our wells at two as longer than one mile to where we drilled 98%, 99% of our wells that were a mile and a half or longer. Some this year have been as long as 2.3 miles, so we're handling that change and that made such a difference in our overall capital efficiency. A lot of shales don't pay out, but two to one, three to one, in many of the wells that we drilled this year, they'll be payouts as large as six to one. So glad that worked out, and glad everything has progressed with the team continuing to get better. Our young people gaining skills and experience in this and the innovations they brought here have been very helpful at the execution, the commitment to get to the field, to make things happen better have all come together to make this year possible. I know we can't look back. We're going to discuss the fourth quarter, which was the best quarter ever. But after this call, it'll be forgotten and we need to look forward to what's going to happen in the second, third, and fourth quarters of this year. But very confident they'll turn in another first-rate performance and we appreciate your interest and are now ready to get to your questions. Kirby?

And the first question comes from Neal Dingmann from Truist Securities. Neal, your line is now open.

Joe, congrats on a nice quarter. Joe, my first question centers on the financial upside we’ll continue to see from you all, just typically maybe for you or Dave, it seems to me a lot of investors are just looking for primarily cash flow growth. I’m just wondering, I guess it’s another way to tackle a sort of shareholder return. How do you all see the best way to achieve the shareholder growth? Is it some production growth? Is it buying back shares, all the above, or when you all think about cash flow growth, what's the best way to deliver that?

Yes. Good morning, Neal. This is David. So thanks for the question. I think that Neal we've been pretty consistent in our response there. Over the course of the past year, true to what we said we would do, we focused very laser-like on paying down debt and on initiating a dividend and beginning to return capital to shareholders. We were pleased. I know Joe and the board were very pleased to double the dividend in December of last year. We’ve stayed consistent with that here in the first quarter. I’m sure that they will look through the course of this year to an appropriate point where they may choose to raise the dividend again. We certainly are going to stay focused on getting the rest of the debt paid off. We ended the year with about $100 million in borrowings outstanding on the RBL. We’re going to pay down another $25 million here in the next few days. That’ll leave us about $75 million to go. I think we'll get, in short order, the rest of that paid down and then we'll have our bank facility paid down. We've talked about the potential later on in the year of perhaps looking at doing some kind of a bond restructuring and maybe paying down a little bit of the bonds, maybe putting a couple of towers in place. We'll see how that goes. I think that would be in the latter part of the year if we did something like that. Certainly we've talked about continuing to look at bolt-on opportunities and acquisitions of the sort that we have done in the last six months and may continue to do again. But only if we find what we think are the right things. I think the company continues to evaluate other vehicles for shareholder return, be increases to the base dividend or some sort of a special dividend if that should be appropriate later on in the year. For the moment, we feel like the best thing is for us to maintain our optionality and flexibility. But certainly if things go the way that we anticipate they will this year, you're quite correct. We’ll have a significant amount of free cash with which to work. Jon, I don’t know if you have anything you’d like to add to that, but that’s how we see it.

Well, I agree with everything that you've said. The one thing I would add is the operational group has made a concerted effort to find ways to drill better wells for less money. That seems quaint but it's the truth with some of the innovations that they've done in frac design, the administration of the fracs, the marketing of the oil and gas product, working with our key vendors to find better ways to do it. As an example, when you cut down the number of days on a well, those are very sustainable achievements that lead to more cash flow that aren't tied to commodity prices. They have been resourceful in getting this done; the oil and gas business is like making the train run on time. We can't do it all from here, but just appreciate the gains and experience and expertise our operating staff have and bringing about these better wells and working with our vendors to find more efficient ways to develop these properties.

Neal, maybe I would just also add that the company has had a very good track record over the years of being good allocators of capital and good stewards of the capital. Our shareholders can count on us to continue doing just that going forward.

No, absolutely, David. I want to say, before my next question, congrats to you and Matt obviously for the great work with y'all. Just secondly, Joe, maybe for you or Matt, seems to me the market is still not giving you for whatever reason appropriate value on San Mateo. You guys have done just a tremendous job building that up, a lot of cash flow there, great assets there. I'm just wondering on a go forward, is there anything else you can do, you think to have the market better recognize that, or maybe just any comments you have on San Mateo?

I'll go first to clean up. One of the other things that's really missing is the operational enhancements that San Mateo brings us is that they're able to get there when we're ready to turn these wells on. We're not waiting to turn on the lines and missing days of production. Second, in this day of ESG, the environmental advantages that they bring that they're there to hook up so you don't have trucks on the highway, hauling oil or water or causing emissions problems, and that really improves our environmental profile. The options that having that three-pipe system on where you market your product also gives us an advantage. So Matt – I commend Matt and Matt Spicer and James Myers, the whole group over there have done a fantastic job, as well as Gregg Krug, working through this midstream and our partner Five Point. Again, just another good team effort where people working together to make better things happen.

Yes, Joe, I think you said it well. I'll just add to that, Neal. I think for San Mateo, there's a couple of points here and Joe hit on one that's very important: how these two business lines work together. If you've got an EMP company that doesn't have a midstream company that's serving their needs, that's a problem and vice versa. So it's still, and we've said this on other calls, it's still really nice to walk down the hall and say, we've got four wells at such and such asset that we want hooked up on whatever date, and that happens. There's a tremendous amount of value there. I think what's happened over the course of time, we are kind of at the point now where we’ve got close to half a million BCF processing capacity. Our water volumes are up to where we could handle at least 370,000. The oil system is on that same acreage. We're at a point now where for us to go out and spend additional capital, we can ensure that we can get a return on that investment prior to doing it. We’ve never been about building the company. Any of the capital expenditures going forward will be certainly based on either minimum volume commitments for acreage dedication. And the other thing I wanted to say was, Matt and Todd and the business development team have done a really nice job going out and securing either minimum volume commitments to assure that we're going to get a rate of return or an acreage dedication. As rig counts back up over 600, those acreage dedications become even more valuable because other operators come back to drill additional wells on the assets they have dedicated. Those are volumes to San Mateo. The business is in a really good spot right now.

Well said, Matt. Joe, thanks again, guys.

Thanks, Neal.

Thanks, Neal.

Thanks. Good morning. And David, Matt, on this, I guess 10th anniversary of going public, I'm going to congratulate you guys on what you've done for the company and hopefully you'll enjoy your retirement if Joe doesn't pull you back enough, right? But congrats.

Thank you, Scott.

I've got an ankle bracelet on these.

They're not going very far, not far, not bad.

I guess, good to hear from some respects, but yes, I’m going to push a little bit more on the free cash flow – uses of free cash flow because based on our numbers, the quantum of free cash flow is going to be quite extraordinary this year for you all, this year, and potentially next year. I know you all have not necessarily specifically done what everybody else has done, just to be like everyone else. You've looked at things like moderated growth if it gives better returns, bolt-on acquisitions if it makes sense. I mean, we think you're going to have somewhere in excess of $1 billion this year of free cash flow. If that quantum of free cash flow actually occurs, can you give us your thoughts around like how you think about your pecking order between variable dividends, buybacks, fixed dividend increases, and potentially growth in bolt-on acquisitions? Just, I mean, there's a lot of things there, but the quantum could be quite large and we know you all do things to define what's best for shareholders.

Thank you, Scott. I’ll try. And both Matt and David be large shareholders, that will be listening in on these calls next year. They can let us know what their thoughts are. But the main one is I think it's unquestionable. We are aligned with all the shareholders, I'm the largest individual shareholder; David and Matt are very large shareholders. The staff are large shareholders, virtually everybody who worked for Matador owns some shares. During the worst part of the pandemic, over 200 of the employees, which is about 80% of the staff were buying shares. So we're very shareholder long-term oriented. We're not trying to do some immediate whatever's fashionable today but what's tried and true to build long-term value. The main one is the financial discipline to restrain during a time of high prices from drilling what I consider somewhat marginal wells but to continue focusing on drilling eight plus location and developing more of that. That's the first thing. The same thing is the fixed rate dividend we know works. We will certainly continue down that path. David and I, and everybody on the executive team has debated from time-to-time the efficacy of some of these other return-to-shareholder type mechanisms. I'm not particularly high on having an open mind on everything and we have a saying we reserve the right to get smarter, but I'm not particularly high on the buybacks because you buy back stocks from somebody, they go away. We'd rather invest that and build the value of Matador. The second one, the special dividend, you don't have a history, so people don’t know when a special dividend might be; it is a weakness of that proposition. The variable dividend has some pros to it. We've looked at that, but I think at this time, raising the dividend may be the more optimal approach but nothing's been decided, and we're going to get further into the year where we can see how things are going, because we know it could change overnight. We're attuned to the shareholder because we're one of them; we’re not – we make more from our shareholder returns than we do from our salaries. When the stock goes up, we make more than we do from the compensation in many of the staff, the key members and the executive committee do the same. So very much, but don’t want to do something because it’s fashionable today and won’t have lasting positive effects. We’re very open on this free cash flow. We've always said we look for opportunities more than first of year we're going to dedicate so much to acquisitions. We'll just see what opportunities may come our way. I think there are more of them coming up now than they were a few years ago. We’re looking at them, but we’re trying to be selective, so David, I'll turn that to you.

Joe, I think you answered very well. The only thing I might add Scott again is just to reiterate the fact that I think that we're entering this phase, right? We still want to get the rest of the RBL paid off, right? We're just about there. I hope your model's right. That'll be a very high-class problem for the company to begin to think about. I would just say, having been a part of the company for so many years and having had the pleasure of working with Joe and seeing how the board functions, that I'm very confident that they're going to make the right decisions in terms of what’s best for both the shareholders and the long-term value of our company. Other than that, I think Joe laid things out very well.

Appreciate that color. And as a follow up, can we talk a little bit on the operation side? I mean, obviously, the Stateline has been a big focus area for the last year or two and perform quite outstandingly. You all move into some of the other areas, we'll call it more the legacy matter areas or the areas pre-Stateline, but can you talk about like what you think about that mix shifting back to those other areas and the potential impact on returns if any at all?

Scott, I'm going to take the first part, and Matt or Billy or Tom can follow up. The first thing is when we really started the development, you had the pandemic hit and you had the Russian-Saudi oil price war and what that those circumstances called for was doing something to scale. We had cut back the three rigs in a lot of what was happening and where it made a compelling case was on the Rodney Robinson and the Stateline area because you could do things at scale off of one pad, and so that was more efficient for that time. We still like the other areas, the lazy areas. A lot of them had the same or as good or better returns. They just didn't lend themselves to doing the big pad drilling with number of wells at one time. We focused on that. It was also necessary to get those going to earn some of the incentives on the midstream project. That was what made the most economic sense at the time. But Tom, Billy, and Matt are eager to get back to some of those other areas where the returns have been just as robust. They just didn’t have the scale at the time that the Stateline and Rodney Robinson had.

That's right. Joe, the team's been working very hard on these other assets while we've been focusing down Stateline and learning so much from being able to drill 50 wells down at Stateline and just over and over getting better, getting faster, getting more efficient, and we're taking those learnings out through the other parts of the basin and the teams are already off to a great start breaking drilling records, getting wells ready to produce in the San Mateo back in Rustler Breaks. We can't say how excited we are to get to work on Ranger and Antelope Ridge and back in Rustler Breaks and Wolf this year. We're very excited to be back drilling two-mile laterals in Antelope Ridge and really kind of before Rodney Robinson, most of the projects we’ve been doing in Antelope Ridge were one mile. We are very, very proud of the progress we've made, and the number of targets keeps getting higher and better. Ned and his team are always looking at new and better places to land wells. We're just very excited to get back to these other areas.

Tom, you said that well too. I just want to go back to what you said about drilling 50 wells in one spot. If you want to put together a recipe to figure out how to be efficient, that’s how you do it. You do the same type well over and over in the same type place. You learn which bottom hole assemblies work, which bits it is, the motors, MWDs. Just the longest run we've had out there in the field, which is a record, is a little over 13,000 feet. That is two to two and a half miles. You can’t drill any farther than what we've already drilled there. So, you take those learnings to the new place. By doing this, by coming back to Stateline periodically, we are able to optimize our production facilities so that we can flow wells back to a certain level and then let them trail off a little bit, come back and drill another set. We're not leaving forever; we're just going back to drill some of these assets that we're very excited to be operating on.

Just following on to what Matt was saying there, we get better and better at what we're doing there. While geology and reservoirs are looking at different zones, we are finding more as we're drilling these wells and getting that opportunity and lands blocking up the land around it. Everybody's busy doing their thing. The drilling guys went in there to Stateline and started out and had to run a fourth casing string in there. You heard us talking in the past about cutting out a casing string, how that saves you $300,000 to $500,000 for each point where you do that. Starting out, they drilled the first three or four wells and had to set that extra string, but they worked that and figured it out. Then we followed up with over 40 wells without having to run that string. Saved a lot of money there. Those are the kinds of things we'll do as we get into these other areas and start working with them. Joe mentioned earlier working with our vendors; they keep us going and we work with them to do these things and B&L Pipeco and Patterson and Universal and Halliburton, they work really well with us to save all of these dollars here. We have more to keep drilling new zones there. Along with that, the drilling side and Matt mentioned bit technology and BHAs. Cutting out trips, that saves like $100,000, excuse me, a little more. The completion guys get in there, get after it, and they've done the remote frac. We talked about that here today, I think, and I know it's in the release there, and that's saving $250,000 a well. That was six wells, so that saved us $1.5 million right there. They started looking at the dual fuel, and that's already moved up to where we're thinking maybe we'd save $20,000 or $30,000 a well. We're saving $60,000 a well now, looking at adding fuel gas to that; that would save us $100,000 a well. These are just some of the things we'll be doing as we move to these different areas and start figuring them out. It's going to make us a lot more money for us and the shareholders, and it's good all around. Glenn, you want to jump on the production part of that?

Yes, I think on the – excuse me, Scott; this is Glenn Stetson on the LOE side and the production side. We are forecasting the growth to be seen in 2022 and a slight growth to LOE. However, we are, the same as drilling and completions, working on ways to be more efficient, getting more water and oil on pipe, more sites on grid power, reducing compression where we can, and all those things kind of add up. Maybe we're forecasting a 6% increase to LOE for 2022 over 2021, but we're working on ways to mitigate that in every way.

Great. I appreciate all that color, guys. Thank you.

Thank you, Scott.

Thanks, Scott.

Thanks, Scott.

Hey guys. Thanks for taking my question. First, I guess, could you talk about the decision to add the rig on the acquired acreage? Does that have to do with HBP requirements or just the returns you see from drilling that are compelling? Maybe talk about how you expect those returns to fit into the portfolio?

Yes. Hi Zach, it’s David. First of all, I’d say that of course we wouldn’t have bought it in the first place if we weren’t quite excited by the opportunity that we have. We think it’s a great area, great rock. We like the high oil cut. We like the lower water cut in a lot of those wells up in that area. It sort of is in an area that's between the Rodney and it's a little north of the Rodney's, a little west of the Mallon. So, it's a nice area for rock there in the Delaware basin. We’re very excited about that. I think we feel like the returns are going to fit in very well. As we mentioned in the release this past year, we drilled four wells in Ranger, not too far away on a track we call Uncle Chess, and we've delivered four very strong wells. I think the two we turned on in mid-2021 have already paid out, so we're very enthusiastic about this area. It also just so happened that there are a number of federal permits that are available and ready to go. It didn’t seem like there was any sense to wait around and not get right on those. We’ve moved to rig out there and we’re going to get busy and looking forward to it.

Got it. Thanks for that color. I guess, just one follow up on the operational side, we've heard a lot of talk in the industry about Simul-Frac. In the slide deck, you mentioned using remote Simul-Frac. Could you talk a little bit about how that's done from an operational perspective?

Yes. Hi Zach, this is Chris Calvert. That’s a great question. The process on this is very similar to Simul-Frac; you have a set of wells that you are stimulating, two wells at the same time. It's kind of zipper frac 2.0, if you will. You have one frac crew that’s treating two wells at the same time, while you have two wireline crews that are working on two other wells on the same pad. On remote frac, however, what that does is that opens up the opportunity to Simul-Frac wells that wouldn’t otherwise set themselves up for the Simul-Frac process, be it an odd number pad layout, or just wells on nearby pads. It could be stimulated at the same time. With remote frac, what the group did was set up the Simul-Frac crew on one pad and then basically ran hardline seven-inch steel from one pad to the next. So we had two wireline crews – or excuse me, one wireline crew on one pad, one wireline crew on a second pad, one Simul-Frac crew on one pad, and then we were treating two wells on two separate pads at the same time. It really allows for Simul-Frac on multiple pads throughout our assets.

Zach, this is David again. Look, I just – I cannot add anything to the great description that Chris just added to Simul-Frac and remote frac. But I will say this, I got to give props to the completions team, for their learning about this technology and adopting it very quickly. I don’t think hardly anybody else is doing that or has been doing that out in the basin. It fit very well with a couple of recent opportunities that we’ve had. I just think it’s a testament to the way that our company and our technical teams really stay on top of what the latest innovations are out there and take advantage of it. A lot of things that Billy was enumerating in his comments to Scott's question, I think reflect that, whether it’s on the drilling side or the completion side or the production side. I have to compliment all our teams for their use of technology. I’ve always said that I think we’re a team that punches above its weight for its size. I truly believe that.

I’d like to pile on too. We’re recognizing Cliff Humphreys on doing this. This is what I’m talking about, that Billy and I have been trying since this group of young people have gained experience and expertise; they’re coming to Billy and Matt more often to propose something like this. I didn’t think of it. None of us thought of it. Cliff and Chris came up and said, we ought to give this a try. Matt and Billy pressure tested the idea and said, let’s give it a try. You can imagine how much extra production you get out of that 20 days, not counting the cost savings and little differences like that. There’s all sorts of ideas that they’ve had. They have gone through Billy and his technical group, and what a difference they’re making. Thank you all and the guys in the field who are really having to scramble to keep up with their ideas.

We don’t want to forget while we’re on operations here in the Maxcom room. They do a great job and not only help us drill faster, the faster we go, the more we need people all day long, all night long, middle of the night, making those decisions, keeping us in the preferred rock. That makes us so much money. It’s hard to quantify, but we know it’s important to stay in the best rock and his team’s all about that. What we're doing is a big thing. On top of that, we have our max ops and max pro programs too. We bring engineers in and they get out wearing a lot of hats, like we’ve been talking about. They're out there getting experience, and we have extra engineering help out there, location and in the field and in the Maxcom room. So, all good things.

Yes, Billy, some of these Maxcom rooms are 24/7. We also have a measurement room that does our control room. We have measurement guys in the field that have all been in addition since we went public 10 years ago. These are just examples of the many improvements that have occurred. Kind of like the old Volkswagen ads, it may look the same on the outside, but you remember, they’d say under the hood, there are a thousand improvements to the Volkswagen Bug. At our 10-year anniversary, I think it’s important to recognize how far we’ve come. Even though we may look the same at the executive level, there’ve been plenty of positive changes.

Got it. Thanks, guys. That’s great color.

One last thing while I got this, is that when we went out to the Permian, if you remember our history, we were in the Hazel like that great gas, but on an oil leg, went down to the Eagleford to prove up that through horizontals and the fracking, you get the oil molecule through the shell. Then we went out to New Mexico and that was going to be our third leg of the stool. How much? We went out there with a view that there were three or four zones that we were interested in and hemi zone, the different zones are you producing from right now? I think we’re in the 18 unique zone range right now, we kind of joke about geologists, their lumpers and their splitters, whether we want to be granular or we want to amalgamate those. I think a conservative number is north of 18 right now. The teams have done a really good job of bringing new targets forward and bringing new and exciting and profitable zones. Billy and Chris and the operations group and Maxcom make it look easy, but I want to tell you, it’s really not; this is still a complicated basin. There’s over the course of a two-and-a-half-mile lateral, a lot of variability, and these guys keep putting these wells down as fast as possible, staying in zone almost all the time. We couldn’t be happier with how the team’s executing. It’s really a combination of great rock and great operational execution. It’s fun to watch right now. Thank you, Dan. Back to you, Zach for the next question.

Hi guys. Congratulations on the tenure anniversary and again, earlier comments congrats to Matt, David, and Billy on a terrific career. The first question I had I just want to follow up a little bit on the prior discussion on Simul-Frac just quickly. So if last year you all mentioned that you did 23 Simul-Fracs, what's the plan in the budget for this year? How many Simul-Fracs are you all planning?

This is David, John. I don’t know exactly how many that there are. I think it’ll be at least a third of our locations will be eligible for Simul-Frac. But as we go through the course of the year, we’re going to be looking to do things like Simul-Frac, remote frac, and any other flavor of frac that we can do to continue to be more efficient. I expect we’ll be talking about some other kind of frac six months from now that you guys have come up with. Today, it’ll probably be at least a third of the locations we’ll be able to do it on.

Okay. And then just to make sure that I understand what’s kind of already embedded in the guidance. When you mention on that, that Slide 9, the one that highlights the remote Simul-Frac? When you say I know it’s not just the Simul-Frac, but there’s some other things as well. When you highlight that you could reduce drilling and completion costs by 5% or more in 2022, that’s not currently in the budget, right? That’s 5% more savings relative to the budget you all got out there.

Yes, that is correct, John. We haven’t built that into the budget. We’re just saying that those are some things we think we may do as we work on mitigating some of the cost increases. But the budget number does not include that.

If you look back historically, John, with what the operations team has done, it’s like quarter after quarter, they find ways to drill these wells faster, complete the more efficiently, and save money. We think going forward, the expectation would be that we’re just going to continue to push those guys and I think they’ll be able to deliver.

Yes, their track record on beating guidance is pretty phenomenal. The other question I had on San Mateo, I know last year it was a priority, and again, this year you all listed a priority on focus on adding more third-party customers. Can you just remind us what percent of San Mateo right now is third-party?

John, it’s – I’ll make a comment here and then I’ll ask Brian to add some comments too. We typically strive for round of third, maybe as high as 40% at times, but I think right now we’re kind of in that 30%, 33% range. That feels pretty good to us. We do have a situation now where as we've talked about before, we’re large enough, we have enough volumes, particularly at the plan and well, actually all three pipes, we’ve got volumes to bring on third-party customers. Looking several years ahead, those volumes may be spoken for, but that gives us a chance to bring them on in the short-term, and then add these projects we’ve talked about to generate a rate of return. So, Brian, is that accurate?

Yes, Matt, this is Brian. Exactly right. I think those numbers are close. We’re really pleased with third-party opportunities we’ve had in 2021. We were able to add a number of customers, not just new customers. One of the things we pride ourselves on is we were able to add some additional volumes from existing customers. We shout out to those guys in the field that are providing great service due to the BD team that continue those relationships. We look forward in 2022 to continuing to build those relationships and have additional contracts with third-parties. We already have some that we’ve signed up and look forward to continuing to do that. Those numbers, as Matt said, is accurate, and hopefully in the future, those numbers continue to increase as we build third-party opportunities.

Sounds good, guys. Appreciate all the answers.

Thank you, John.

Next question comes from the line of Subash Chandra of Benchmark. Subash, your line is now open.

Thank you. Good morning, everybody. First question is on acquisition. Trying to handicap your appetite. You talked in-depth about the benefits of scale, and then we saw tuck-in deals like this which is easily covered by your liquidity and free cash flows. But what do you think you need for a transformative deal if it comes along and the metrics are okay?

Now, Subash, we’ll look at whatever somebody generally suggests, but now we don’t need one. We’ve entered a different inflection point now than back when we were $300 million; we’re over a $5 billion company, approaching $6 billion, and while we’ll look at things, we’re at a pretty good size where we have scale with our vendors and we’re growing at a good pace. You don’t want to grow so fast that you don’t have the people or systems to populate it. We don’t prefer the company to company because it can be distracting. As David often says, we want to be a better company, not just a bigger company. So that’s why we’re as selective as we are in what we do to ensure it fits and we have the people that can attend to it. We have a large inventory right now. If you’re going to make an acquisition, you would like to get right on it. That would involve another rig, and we don’t want to upset the capital expenditure plan. I wouldn’t say that has a high probability. Our first one is these continued bolt-ons that we did last year. Those opportunities we could fit right into the drilling program. We had the people, it was seamless. To the extent we can find those, that’s probably what we look for first. Matador has primarily grown through organic growth and it’s been a way to grow. We feel like it’s earned a higher rate of return, and it’s been something that’s been easier to fit into our capital plans and the capital efficiency. I don’t think just because you get bigger, you’re necessarily better. Most of the opportunities presented to us would dilute some of our quality. We’re going to continue to be selective. We are working with other companies on trading acreage. This has been a period where the majors have traded acreage for people to get to the longer laterals. We trade a section for another section. We get a 2-mile and they get a 2-mile lateral; we think that makes a lot of sense and they’re small but efficient and good economics. Does that help? Matt, you want to say something?

Just want to build on what you were saying about bigger and better. For us, the focus has always been on better. We’re to the size that I think we’ve got the scale that we’re talking about. As part of our strategy, we’ve built this company to establish relationships with good vendors. We’ve done that with Patterson, both on the drilling side and with Universal on the pressure pumping. We’ve been partners for a very long time and through the good times of partners, through not so good times. We’ve just made it work. When times get bad, we talk to our vendors and say, look, we’re not trying to run you in the ground. The last thing we want is for you guys not to be here. We want you to help us create value. They’ve done that throughout the good times and the bad. The focus absolutely is on better.

Thanks, guys. Appreciate it. The second question is on permitting lease sales back in the headlines because of the litigation on the social capital cost to carbon issue. Have you seen any disruptions in the Permian? It might have more to do with future lease sales and it might have to do with permits? What are you seeing on the ground there?

Yes. Subash, it’s David, and Tom, if you want to chime in. The simplest and most distinct answer is no. We have not encountered any problems or concerns. Our team has a good working relationship, works very hard with folks out in Carlsbad. They’re very helpful; they've been very good through the last several years with all the pandemic and working from home and everything. Those folks have been very good to help us along and to respond to our needs. I hope us to them as well. That process has proceeded just fine, and we have what we need to prosecute our current drilling plans and we’ll continue to work forward. The Christmas answer to the question is no; we’re doing good.

Yes. I think the BLM has been very professional, and with the restrictions they’ve had on the pandemic, it has been really remarkable getting out and being responsive, returning phone calls when you’re communicating with them. Making sure to look after the bill ends has been very fair. Whatever additional information or requests they made of us, we feel they’ve been very reasonable.

All that’s correct. David and Joe both said it correctly, and I think we even got a few final signatures we needed yesterday afternoon. Banks continued to advance and we’ve gotten a whole bunch of approvals and extensions, so we’re ready to go for 2022.

If I failed to say it, certainly appreciate the efforts of those on our team, our land team that have worked very hard over the last couple of years to keep the pipeline full. We’re very grateful for all their efforts.

Thanks, guys.

Yes. Hi guys. I’d like to echo everybody else in offering my congratulations to Matt and David on their great careers and as Scott said, good luck trying to hide from Joe during your retirement.

We’re not even going to try to hide, Mike.

Probably suggest some sort of restraining order personally, but I just wanted to ask on Slide 14, you showed you’ve got about a quarter this year’s production hedged with basis swaps. I’m just wondering if you do anything there for next year and any concern about takeaway capacity out of the basin for next year on the gas side?

Of course, the basis swaps – this is David, Mike. The basis swaps that we have in place are for oil, and we put most of those hedges in two or three years ago, as I recall. With regard to oil, no, we haven’t added any additional ones going forward. With regard to gas, I don’t believe we had any basis swaps in place. I don’t think we ever have had. We certainly are aware of some of the concerns that are being expressed about the takeaway at Waha. I can assure you that Gregg Krug and Anton and our marketing group are already very proactively looking at how we will meet that challenge if and when it does manifest itself. I feel confident that we’re out in front of it and working to try to mitigate any impact that it may have going forward.

I guess, without trying to front-run anything you’re doing there, it’s firm transportation consideration there.

Well, we have had for the last several years. We were one of the first people to get on GCX, right? So we’ve had quite a bit of our gas with firm transportation to the Gulf. The guys have done a very good job over the years of finding alternative markets to kind of diversify us away from Waha. We go to other parts of the country at different times of the year. Our marketing team is looking at other avenues to continue to diversify takeaway away from Waha. I have my hat off to them for being conscious of what’s going on and being kind of proactive. I feel confident in our abilities to mitigate that problem.

Good. And then I just wanted to follow up a little bit more on the recent acquisitions. Can you talk about how you see the full-cycle returns on those acquisitions? You gave a PB10 number for the proved reserves you acquired. Can you give any sort of split on how much of the proved reserves are developed versus undeveloped?

I think Mike that it was probably from a – from the PB10 side, of course it was a little heavier weighted toward developed, PDP is supposed to undeveloped. In terms of volumes, it may have been a little like 50-50 or so. But of course, we only booked a very small amount of what we would anticipate to be future reserves, as current; we tend to be fairly conservative in our reserves bookings, and this was no exception. While we did book a few PUDs to some of the existing producing wells, it’s not a case to where we putted up the whole thing. There will still be, as we mentioned in the release, quite a lot of future value to be added as a result of the drilling activities that we undertake.

And in terms of the kind of full cycle returns on acquisitions versus maybe just drilling more of your legacy inventory?

I think that this is an area that’s going to have very strong returns and that’s going to compete favorably for capital with others of our legacy areas. I’m confident that we’re going to be pleased with the long-term returns that we get out there. I think we paid a very good price for the acreage relative to what we have done in that area previously. For a company that came in eight to ten years ago, I think we felt like we had one of the lowest entry points on a dollar-per-acre basis of almost anybody out there unless you were just sort of a legacy company that was sitting on a lot of PDP acreage. We thought our brick-by-brick approach has been very cost-effective in terms of what we had to pay to acquire the position that we did. That’s a tribute to just a lot of good work by our land team. Our philosophy is that no acre should be left behind; if it’s something that – if it’s something we want, they go get it. I remember in the beginning, looking at our map and going, gosh, it seems like that’s a little scattered, don’t you think? I’m like, nope, sure don’t. I think it’s in a lot of good spots and just watch it all get drilled up. If you’re sitting here this morning like I am looking at a map across the wall of that much of HPP, I think people would be shocked to see how much of that we have either operated into development or participated in really good non-op wells over the years because the rock was good. I couldn’t be more complimentary of our land staff and the asset they put together and our geologic team that helped to direct us there in the first place. It’s been a great team effort; these guys know how to do it, and they do.

Thanks, Mike.

Thanks for taking the question. Just thinking back a year ago, y’all went from three rigs to four rigs, and now you’re at six. It kind of got ahead of what we’re hearing is an ever-tightening service environment. You picked up the sixth rig, some operators talking about four to six months to secure tubulars and the like. So how long ago did you start working on, the plan to add the sixth rig and can you kind of talk through the pinch points in the process you've highlighted your service providers working with you? Where do you think the limits are in the services space today if we’re thinking about other operators adding activity?

Well, David, this is Matt. The short answer is it’s about relationships. When we’re talking to Patterson, we’ve got optionality on both sides of this thing. We’ve got contracts that we stagger in; if we want to go down a rig, it makes it easy to go down a rig. We have this ongoing conversation with Patterson, and we call them and say, hey, we might add one. When there are 250 rigs running in the country, that’s not hard. To your point, when the high-tech rigs start getting more and more hard to find, Patterson tells us, don’t worry, we’ve got a rig for you. That’s the way we do it. In regards to the pipe, the pinch point is the same kind of thing. Forster Smith is our representative at B&L, and we sit down and talk about what we’re doing for the next three months, for the next six months, for the next year. We act accordingly – the same thing with the services with Chris and Cliff; when they’re contracting these frac crews, we look at what the drill schedule is for at least a year out. That’s how we put that stuff together.

Yes. So really when you think about the doubling of activity year-over-year, you’ve been working on this like rolling three-month, six-month, 12-month, almost, maybe even two-year plan to gear up to this six-rig program that as I think about it. There are these pinch points that are emerging, but you kind of have this rolling activity level that allowed you to add the sixth.

From a planning standpoint, we try to think far enough ahead. We scenario plan and it’s like if this is – if conditions are this way and the opportunity might present itself, what do we need to do to be ready for that? Likewise, if things go the other way, how do we need to plan our business so that we can react quickly in that way too. We try to think through as much of it as we can so that we’re prepared as much as we can be.

Every bit of our business, we try to build a lot of optionality into. We typically have lots of different directions we can go depending on what the environment is.

That’s definitely helpful. Congratulations, David, Matt, Billy, and Van. I was thinking about it; I don’t think you can make retirement look too good for Joe to step out but do your best.

Thanks, Dave.

Thanks, David.

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

My only closing remarks are to thank all of y'all for participating in this. I want to say again, our standing invitation: please come see us if you’re in the area and have breakfast or lunch or some sort of meeting. We’d like for you to get to know more of these young people who are really making a difference in our business. They’re turning to more all the time for guidance and direction and recommendations on what we ought to be doing. Thank them and everybody else for the – and really thank you for the questions. We believe going public has made us a better company and that every quarter, whenever so often we’re in front of you, you’re asking us questions, keeping us sharp. I often tell the story on the IPO where we got the idea for midstream. It was on the IPO. When we kept being asked about how we were getting our gas out of the Eagleford, we weren’t having a problem. By the questions, we realized others were and we recruited Greg to rejoin – there he is, he was missing from his thought. That’s an example of getting with y’all. Y’all made us a better company. Ideas and having to report every quarter have inspired us to do longer range planning, getting good people. I found it easier to get people to work with us because they know how we’re doing. It’s more transparent. We’re excited by the 10 years and we look forward to the next 10 years; we really do appreciate y’all. Hope y’all come see us.

Thank you so much, and ladies and gentlemen, thank you for your participation today. This concludes the program. Have a great day.