Good morning, ladies and gentlemen. Welcome to the First Quarter 2022 Matador Resources Company Earnings Conference Call. My name is Shannon, 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 May 31, 2022 as discussed in the company's earnings press release issued yesterday. I will now turn the call over to Mr. Mac Schmitz, Vice President, Investor Relations from Matador. Mr. Schmitz, you may proceed.

Thank you, Shannon. Good morning, everyone, and thank you for joining us for Matador's First Quarter 2022 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. In addition to our earnings press release, I would like to remind everyone that you can find a slide presentation in connection with the first quarter 2022 earnings release under the Investor Relations tab on our website. Finally, I would like to introduce the Management team joining me this morning. They are Joe Foran, Founder, Chairman and CEO; Billy Goodwin, President, Operations; Van Singleton, President, Land Acquisitions, Divestitures and Planning; Craig Adams, Executive Vice President, Co-Chief Operating Officer and Chief of Staff; Gregg Krug, Executive Vice President, Marketing and Midstream Strategy; Michael Frenzel, Executive Vice President and Treasurer; Tom Elsener, Executive Vice President, Reservoir Engineering and Senior Asset Manager; Rob Macalik, Executive Vice President and Chief Accounting Officer; Glenn Stetson, Executive Vice President of Production; Brian Willey, President of San Mateo Midstream; and Chris Calvert, Senior Vice President, Operations. Other members of the senior staff are also present and available to answer your questions. And with that, I would now like to turn the call over to Mr. Joe Foran, our Founder, Chairman and CEO. Joe?

Thank you, Mac. And good morning to everyone, and thank you for participating in today's earnings call. We very much appreciate your time and interest in Matador. To begin this conference, I'd like to point out three things. First is that we are celebrating, since February, our 10 years of being a public company. So this is the 10-year anniversary of our first earnings call. I hope we do better than we did then. Second, I'd like to point out that we retired one-third of our aggregate debt, and we are now producing 100,000 barrels of oil or gas equivalent. And number three, this growth that we've had, particularly this year, has not come from spending that much more on CapEx, but from better-than-expected growth from our various drilling programs and capital efficiency. And with that, I turn to your questions. And Mac, why don't you lead off?

Sounds great. Thanks, Shannon. If you would turn it over to questions, that would be great.

First question is from Scott Hanold of RBC Capital Markets. Your line is now open.

Thank you all, and congratulations on the 10-year anniversary of being public. For my first question, I was hoping we could discuss inflation. It's a significant topic in the industry related to both operating expenses and capital expenditures. It seems you have managed it quite well thus far. Could you share what measures you have been taking and your expectations for progress through the remainder of this year, particularly as we look towards the latter half of the year and into 2023, when many in the industry appear to be more receptive to service price inflation?

Scott, this is Tom Elsener. Thanks for the question. We are seeing a little inflation, but it's still early in the year. So it's just hard to say exactly where things are going to be. But we're really proud of all of our operations teams, and I'm going to hand it off to Billy and Chris to talk about some of the detailed work they're doing on completions and drilling and production. But certainly, we think we can mitigate some of these cost increases later on in the year. Chris?

Scott, this is Chris Calvert. That's a great question. When we consider service cost inflation, the main factors are the cost of steel, fuel, and sand. Regarding the cost of steel, we are actively working to reduce or eliminate a casing stream. We discussed Stateline previously, and we plan to implement this as we return to Rustler Breaks and move into Lea County. On the fuel side, using less fuel minimizes our exposure to rising fuel prices. We are utilizing dual fuel by sourcing field gas from our San Mateo partner or using CNG, which helps decrease our reliance on diesel. Lastly, we aim to spend less time on wells, as day rate and rental costs contribute to overall expenses. By reducing the time spent drilling, we have achieved record wells in our Maxcom room, reaching up to 162 records. We're simply drilling those wells more efficiently, Scott.

Billy is President, have you all been processing this in other departments?

This is Billy Goodwin, President, Matador. We've been working with our vendors, long-time vendors like BNL Pico, and they handle all of our casing and tubular goods, and they keep us supplied and stay out in front of everything. We talk with them and we're covered for the rest of the year. We also worked with Patterson Drilling. They've drilled almost every well Joe's ever drilled, I think, in first and second Matador. So that's been good and good relationship. They work for us and work with us to ensure that we can get rigs and highest technology equipment on those rigs, and so we can drill wells faster and faster. Along with our other long-term vendors, Halliburton and Universal, they both helped us out, like Chris was talking about, ensuring we've got plenty of sand and they stay out in front of that, and have agreements in place so we don't have any issues there. So all of those things together help us drill better wells faster. And like Chris also mentioned Maxcom. A shout out to those guys in keeping us in zone 90% to 100% of the time that creates better wells and more cash flow for the company, more reserves.

Yes. Ned Frost, Senior Vice President of Geoscience. The Maxcom group has really done a good job. And Scott, I know you're familiar with them, but that's geoscientists and drilling engineers working around the clock together in our control room. They've done a great job of staying in zone. And as Billy said, the implications of staying in zone really lead to better well productivity, better efficiency, drilling these wells faster. Every hour you save turns into days that you save, and that really impacts the bottom line in a very favorable sense. But that room has done a great job for really helping Matador achieve the growth that we're seeing right now.

And then I'd like to follow up some of that, Ned. This is Joe again. I said about the Maxcom group. Those 162 records that we tallied, on some checking, we thought that added up to approximately $23 million in savings. We've improved our time in the reservoir zones to 95% or more, which again leads to better-than-expected results. This, Scott, is what we're trying to emphasize that a lot of the things that Billy and his group are doing are sustainable because there are time savings and productivity increases and innovation. So we're, of course, trying to address the effects that there will be inflationary pressure, but our guys are also finding ways to mitigate it and improve well results without spending more money.

This is Billy Goodwin again. I'd also like to throw in that with Maxcom working with the drilling program, we've also started seeing more and more 100-foot an hour drilling. Where we used to be trying to drill a whole lateral with one assembly, now we're drilling curves and laterals and have seen this in each hole size or 6, 6.75 quarters inch hole size, 8.75, 8.5-inch hole sizes, all doing equally as well and getting up over 13,000 feet with one BHA. So that's great. Vendors out there are improving technology and making the motors and bits better, so we can do that, drill the curve and lateral with the same BHA. Hats off to all those guys as well.

It's great to hear that there's some durability in what we've been seeing so far. As my follow-up and Joe, maybe this one's for you, but obviously, even since when you just reported fourth quarter earnings, the quantum of potential free cash flow for you all continues to increase based on your operations. Frankly, a big part of that is also commodity prices have risen. The way we see it right now, you may have maybe another $1 billion plus of free cash flow even after paying down revolver over the balance of the remainder part of the year. As you start looking at that and think about 2023, can you just give us a sense of like how do you look at utilizing that free cash flow and just give us a sense of like where the priorities are and what are the likely outlets of that?

That's a significant question, Scott. We are examining it from various perspectives. The team is collaborating effectively, gathering insights from different teams and departments on how to best utilize the situation. Conceptually, our main plan is to continue reducing debt. We believe our business has evolved to make it beneficial to minimize debt as much as possible without disrupting operations. Therefore, our first priority is to keep reducing debt. We view this as a positive path forward. If high prices persist, we will continue to lower debt, not only this year but into 2023 as well. Additionally, as you may know, we are all significant shareholders of Matador. We appreciate dividends and aim to increase them, but we want to do so responsibly. It’s too early to predict how much, if any, increase in dividends will happen this year. If prices remain stable in this range, we certainly intend to establish a steady and consistent dividend policy that enhances returns to shareholders over the years. That is our primary direction. We will not rush and will maintain the same disciplined approach regarding our drilling expenditures and potential land acquisitions. We recognize this as a significant opportunity and want to maximize it in a disciplined manner that appeals to our shareholders and strengthens the company financially. With these criteria in mind, we are exploring several options and are receiving valuable ideas. We see this as a great opportunity that provides us with numerous options, but we want to ensure that we carefully consider all aspects before moving forward, allowing us to continue increasing the value of Matador for our shareholders.

Yes. As you think about the fixed dividend and the return to shareholders in that matter, if you all have some context on where you'd like to see that? Is there like a particular yield you think that's appropriate for a company of your size and growth potential? Or is it a percent of past forward? Or is that still some of the decisions you're trying to figure out right now?

We believe strongly in maintaining the fixed dividend and ensuring its steady growth. However, once we've increased it, we don't want to reverse that decision. We are currently engaging with shareholders and the Board to determine the timing and amount of future dividend increases, as well as the factors that will influence those decisions. For example, if peace were to be declared between Ukraine and Russia, it could create a different scenario. It's a bit premature to specify our exact plans, but generally speaking, we intend to consistently raise the dividend as long as cash flow allows. Our goal is also to pay down debt responsibly while aligning with our cash flow. As demonstrated this year, we have been able to not only maintain our drilling programs but also make some acquisitions, all without borrowing, by operating within our cash flow.

I appreciate that. Thanks, Joe and team.

Our next question is from Neal Dingmann with Truist Securities. Your line is now open.

Good morning all. Thanks for the details. Joe, maybe my first question is for Billy or Tom, on the op side. I want to maybe tap the stats a little bit different way. I'm looking at Slide 5 where you guys very nicely show the 2022 milestones, the timelines that you show for the wells. So again, everybody talks about the inflation. But I guess my question around that, it doesn't appear like you guys are having any delays or anything of that nature regarding any of the services out there, right? Is that fair to say? Maybe if you could just talk about that timeline a little bit and based on what may be the tightness of services, are there any challenges? It doesn't appear you're seeing any delays in it such, but I just want to double check that.

Sure. Neal, this is Tom. On our timeline for the year, we still feel really good about our plan and the major milestones that we've got set up for the year. We have a busy second quarter with Rustler Breaks bringing online 11 wells. We're going to be back in Antelope Ridge, bringing on 16 wells later in the year in Q3. We have a big tranche of Ranger wells coming up in Q4. Things are looking good. As Billy will mention here in a minute, the teams are all working together. We're doing a great job transferring knowledge between these different asset groups, like some of the warnings we've had at Stateline, reducing casing strings and wondering how to install some better production systems and targeting better with Ned's group. We're firing on all cylinders, and things are going well; we just want to remain cautious for the year.

Neal, this is Billy. I'll just back up what Tom is saying there. Everyone is excited here. We're all working together. The land and geology finding our A+ rock there and bolting it up, our land positions and more opportunities for 2-mile and looking at 3-mile wells. We're drilling faster and getting better. All our vendors are excited. New ideas, new technology. Some of that extra money we're spending there is getting a return to us and helping us to drill wells faster and mitigate the costs. So it's all good.

No, that's what it sounds like. I don't see any delays. And then maybe just one follow-up on midstream, maybe for Greg. I know part of your priorities you talked about or if you could discuss San Mateo. I know in your priorities you all talked about adding some new San Mateo customers and achieving some of those performance incentives. Could you just elaborate on the nice upside you're seeing on San Mateo?

Neal, this is Brian Willey, the President of San Mateo. I'm glad to answer your question. It's a good one, so thank you for asking. Regarding third-party opportunities, we continue to see potential in the market right now with both new and existing customers. The ability to engage with existing clients reflects the excellent work of our business development and operations teams, both in the office and in the field. Their coordination has helped us secure repeat business. Specifically, we discussed Maxcom earlier. Additionally, on the San Mateo side, we have a commodity control room that allows us to monitor our systems and pressures, ensuring everything runs smoothly. One of our third-party customers mentioned that we are the best controller they've ever worked with, which is fantastic feedback. As for incentives, we announced in the press release that Matador received $23 million in incentives last quarter. We expect to continue earning incentives as we operate in the San Mateo areas. There’s $15 million remaining in San Mateo incentives that we anticipate receiving in the first quarter next year, along with the others we are working towards, which is a priority for us.

Yes, Neal, while we're discussing this topic, I want to express how pleased I am with the repeat business we're seeing in the midstream sector. Customers have entered into agreements with us to gather or collect their gas, water, or oil, and they are renewing for further commitments. I want to commend the efforts of Matt Spicer, his team, and James on the operations side for providing excellent service. We believe this approach is making a difference, especially when customers choose to renew or expand their commitments. It feels like a significant achievement for us, and it's one of the long-term metrics we've been focusing on. Brian?

Thank you, Joe. One other thing on that point is we also have a 3-pipe system, which I think is really unique out there in the Delaware right now. We've had customers that have been on one of the commodities, whether it be water, oil, or gas, and performed well. Because of that, we've had opportunities to be able to service them on different commodities. I think that's a real good advantage for us as well with these repeat customers is having the different commodities; we serve all three and we're able to take care of everything that our customers need.

Another follow-up point when you’re talking about the commodity control room, that goes 24/7. So you're watching it night so you can give a quicker response. And that's been well received as well as a measurement room to be sure that the quantities are being paid right.

Thanks gentlemen. Thanks for the details.

Our next question is from Zach Parham with JPMorgan. Your line is now open.

Hey guys, thanks for taking my questions. Just following up on the earlier question on capital allocation. As you think about reducing debt further, what do you believe is the prudent level of debt to have at the company? Because with the free cash flow you're going to generate at strip this year, you could push debt to very low levels.

Zach, that's a very good question. We're not really ready to present a plan to you or to the market or to our shareholders exactly what the right amount of debt is because it always depends on circumstances. I'm not trying to dodge your question by saying it depends on circumstances, but you could have a very different economy here in six months. There's a wide array of opinions on that. Same thing on the international situation. Paying down debt will be our default area. If we're not sure or don't feel strongly on putting it somewhere else, it'll be used to pay down debt because we will still have the options. What is exactly the end number, I can't tell you at this time. We're reviewing a number of different scenarios. The Board plans to take it up this summer and early fall, and we'll have more detailed plans at those times as we see how long the situation gets. We want to get that to a level where we think we'll be in good shape always if and when the commodity prices turn the other way. This is a great opportunity to take advantage of that. We think we have reached a new inflection point with our size. We've been traded up there when we were in the higher 50s approaching $7 billion. We just don't have to take the chances that we once did when we were under $1 billion. We think that gives us an operational advantage, and we want to be known as such. We think stronger financial shape should make us more attractive to the generalists coming back into the market. When you pay down debt, the advantage it has over just buying back stock is when you buy back stock, whoever sells you the stock generally exits your company as a shareholder, it goes on to another deal. Paying down debt helps all shareholders, particularly your long-term shareholders, and strengthens the company and increases the opportunities you have. That's good for everyone. That's why it's our default. We'll look at other uses of money, but certainly, at the time, we reduce debt to be sure we're allocating some for the shareholders and the growth of the return to the shareholders. We want to grow that return to shareholders, and we want to reduce debt; we think we can do both at the same time and still maintain our active drilling program with these very good locations that the teams put together and presented to the Board and senior staff. It's an exciting period for us, and we see this as a time to make the most of these opportunities and help push us to the next steps for Matador's growth and value plan.

Got it. I wanted to follow up on your earlier comments about reducing debt and raising the dividend with free cash flow. Are you considering anything else, such as potential special dividends or variable dividends?

Zach, those, of course, are in the conversation. Right now, we probably lean in the direction of first taking care of existing shareholders through increasing dividends, allocating for increasing the fixed dividend, and taking care of debt. But special dividends and variable dividends are in the conversation. We're studying other companies that are doing that to see how well it works for them. We don't mind following the practices of other companies if they seem to be working better than what we're doing. We have a saying around here: we always reserve the right to get smarter. At this time, the focus is on fixed dividends and repaying debt. But certainly, if that seems to be working for other companies, we'll be quick to adopt it.

And maybe just one quick follow-up. You all paid a little bit in cash taxes this quarter. Can you talk about how that should trend through the rest of the year?

Yes, we operate transparently here. If we owe taxes, we will gladly pay them and ensure compliance, which we view as a positive challenge. We were somewhat surprised to find ourselves in a taxable position, as we had initially believed we would not incur taxes for 2022. However, our profitability exceeded our conservative estimates. This tax situation is indeed a positive challenge. It's important to clarify that the mentioned $15 million does not represent actual cash outflow; rather, it's an estimated share of what we might owe if oil prices stay around $100 a barrel this year. This figure will fluctuate based on how the remainder of the year unfolds. Rob, could you provide additional insights on this?

Yes. This is Rob Macalik. I think you said it well, Joe. That is just the proportionate share, and the amount of cash that actually went out the door is something much lower than that. There are a lot of variables when you're looking at deductions, and we're, like Joe said, we play a straight game. We're going to take all the deductions that we're allowed to take and continue to monitor the situation throughout the year.

Yes. But we're not going to do any exotic plans or execution to try to avoid dividends. It's better to — I mean, to avoid taxes. We're going to — it's better just to pay the taxes and go on and do what you're supposed to do. I would like to ask Michael just to comment on the debt and the dividend plans and that they were considering other things. But that's your...

Hey Zach, this is Michael Frenzel. One thing I wanted to add, Joe, we've said it consistently before; a potential use of free cash as we have used our cash in the past is to try to find some accretive bolt-on opportunities just like the one that we talked about or the ones that we talked about last quarter up in Lea County, where we were able to put a rig to work. From your nice note that you put out on the Uncle Ches wells, it's pretty obvious why we ought to be excited about that area and getting to work there. I know Tom could certainly comment on why we're excited about that area. It's something, as we've done throughout our history, that we'd consider as a potential good use of cash.

Yes. Just to back up what Michael said, when our geoscience and other teams come up with new ideas to try this one or that zone that may open up areas just like they did on Uncle Ches well, we're going to give that serious consideration and have it in the conversation as well. We always reserve the right to get smarter. Again, we're shareholders, so it's spending our own money, and we're going to be careful with that and take advantage of what I think is an unusual time in our business and keep it cash policy.

Thanks for the answers.

Thanks, Zach. Call anytime if you want further updates. I say that to you and to Neal and to Scott and others that, look, we're open and ready to visit with you anytime you have a curiosity or want to know more about what we're planning to do.

Our next question is from Michael Scialla with Stifel. Your line is now open.

Hi, good morning guys. Most of my questions have been asked, but just wanted to follow up on, Michael, you mentioned Uncle Ches wells that looked like a very strong performance out of those wells. Just curious if you do anything differently with the completion design there? Is that just a result of very good geology? Any opportunities to — I know you got a couple of more wells you're drilling in that area, but to, as you mentioned, acquire additional properties there or move — accelerate in that area?

Mike, this is Tom Elsener. Yes, as Michael alluded, we are very proud of our Uncle Ches wells. We think that those types of wells show off why we're excited to be putting a rig to work in the Ranger area and why we continue to look at opportunities up there. Certainly, the very, very high oil cut is something that really stands out, but also the very low water cuts are certainly something that we think are important to us. We're always looking at ways to get better though. We're always looking at ways to complete the wells with good stimulation jobs, good profit, and good fluid. We work closely with the geology team to put our wellbores in the best possible rock. My hat is off to Ned and the geoscience team and to Maxcom for constantly looking at ways to make the most of the opportunity we have in front of us. We are running our sixth rig up in that area, and we'll be active there for many years to come.

That’s all I had.

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.

Right. Two other points I'd just like to end this where I didn't get a question on it, but we have two other assets that sometimes don't give necessarily a lot of mention. The first one is just the value of the Midstream, not only from the capacity of taking away from our deal but enabling us to predict the time when we would complete those, and how that affects cash flow. And second, for the environmental purposes that it has of that reducing. I'd like Glenn just to say a few words on the improvement and perhaps, Cliff, on the environmental area, how much we’re recycling and how much we cut down on emissions.

Yes, we are very focused on minimizing our environmental footprint through our production and completion efforts. We released our first sustainability report at the end of last year, which demonstrated a 19% decrease in greenhouse gas emissions from 2019 to 2020. We are committed to improving this figure each year and are currently working on our 2021 report, led by Shelly Appel. In terms of production, our main priority is to maximize our pipeline usage. Currently, we have 98% of our gross operated water and over 80% of our oil transported via pipeline, which is beneficial for flow assurance and helps mitigate the impacts of labor shortages by reducing truck dependency. The increased utilization of vapor recovery units is advantageous for both production and minimizing gas flaring. As natural gas prices remain high, this is particularly beneficial. Our current flaring rate is around 1%, and we have seen improvements year-over-year since 2019, continuing into 2021. We will release our next report later this year. Additionally, I would like to highlight the contribution of San Mateo in reducing flaring, as their involvement from the start of our well operations, combined with their capacity for firm transport and effective communication, ensures we consistently have options for our gas.

Thanks, Glenn. This is Cliff Humphreys, SVP of Completions. I just wanted to comment on Joe's note on the increased recycled water usage. Since 2015, the completions group has really tried to exercise every avenue to use more recycled produced water in our fracs. Our partnership with San Mateo allows us to do that, and the infrastructure in New Mexico expands. For example, this quarter, we used just under 5 million barrels of recycled produced water in our completions, which is the most we've ever done in any quarter. We see that continuing to increase, and it's a great cost-saving as well as a significant ESG effort, resulting from the good partnership we have with San Mateo.

Obviously, the Midstream is increasingly important to us. The second asset is our remaining gas assets in Northwest Louisiana. We've been drilling non-op wells with various operators, most recently with Chesapeake, who brought on a well producing 25 million a day, which we had a quarter. There's still a lot of Haynesville to be drilled over there. When we made the deal with Chesapeake, we reserved all the uphole rights, including the Cotton Valley. We believe there are over 200 Bcf, billion cubic feet of reserves there. They're all held by production. They're just waiting for a consistent gas price that would stay so we could easily set up a drilling program there. Right now, it’s HBP. It’s not going anywhere. It is a valuable gas bank for future activity sometime. I wanted to mention those assets. Again, I invite everyone to come see us. We'll be happy to meet with you. We'll be happy to answer your questions and appreciate all your support and participation with us.

Ladies and gentlemen, thank you for your participation today. This concludes today's call.