Good morning, everyone, and thank you for joining the Second Quarter 2022 Matador Resources Company Earnings Conference Call. My name is Norma, and I'll be serving as the operator for today. As a reminder, this conference is being recorded for replay purposes, and the replay will be available on the company's website for one year as discussed in the company's earnings press release issued yesterday. I would now turn the call over to Mr. Mac Schmitz, Vice President, Investor Relations for Matador. Mr. Schmitz, you may proceed.

Thank you, Norma, and good morning, everyone, and thank you for joining us for Matador's Second 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 and quarterly report on Form 10-Q. In addition to our earnings press release issued yesterday, I would like to remind everyone that you can find a slide presentation in connection with the second quarter 2022 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. I appreciate your help very much. I just wanted to do a sound check with everybody to make sure we're not cutting out. In the pre-test, there was some indication that someone is being cut out. But if you are, please let the operator know, and I want to be sure we're coming in loud and clear. Where I'd like to start is this: this is the best quarter that we've had in company history. Actually, the first quarter was originally the last quarter, but this quarter has been even better, and we're proud of that. It reflects the team effort here, and we feel we've gained strength in all areas, and the outlook forward is strong, and we like our chances. Operationally, the big difference makers are first the capital efficiency that you'll note in a lot of our activities; and second, the strong relationships that we've had with our vendors and outside contractors. We have avoided many of the problems of the supply chain. They've been there, and we've worked with them for many years with our vendors. We appreciate very much all the different elements that go into the well and our contractors and our field people who are the unsung heroes in keeping things going and helping out to add to that capital efficiency. Much of the capital efficiency comes from the conversion from drilling 1-mile laterals to 2-mile laterals. As you'll hear later on, we're making preparations to move to some 3-mile laterals. That's been the big difference maker even in this time of higher prices, having that extra measure of capital efficiency. Finally, the financial strength of Matador has continued to grow through the years, and we feel we've reached a new inflection point as our production has climbed to over 100,000 barrels of oil or gas equivalent per day, which puts us in the strongest position in our history from a financial or operating point of view. During this time, we've had a lot of debt paydown, so we've completely retired our commercial bank lending. We still have a borrowing base there, but we've paid all of that off, and we've also paid down our bond debt. This has given us, of course, more options, more cash flow, and set us up for a different level that we won't have the risk profile that you have with debt. The leverage ratio has declined from 2.9 in the third quarter of 2020 to where we are now at 0.5. So proud of that, and we're ready for your questions and what else we can tell you about Matador and our outlook and progress going forward.

Our first question comes from Neal Dingmann with Truist.

Let me address maybe what I call the attractive development in the room, and that is my estimate. I think you all could have negative net debt. You mentioned the great leverage. By my estimate, you all could potentially have negative net debt next year and, depending on the prices, generate over $1.5 billion of free cash flow. So I know you all always talk about wanting to keep your options open and boosting the base dividend. The general question is, what do you do with all the cash piling up? And maybe, Joe, I'm thinking management would love a big dividend, so maybe this would be a better question for her.

I'm sorry, I didn't quite hear. Would you repeat that, please?

Did you hear my question, Joe?

No, it came across as garbled. I mean try again.

Let me try again. My point is that based on my estimates regarding the debt, you could potentially have negative net debt by next year. Depending on prices, you might also generate over $1.5 billion in free cash flow. I understand you have been open about keeping options available and increasing your base dividend, but could you discuss what to do with the accumulating cash? Lastly, Joe, I thought that Nancy would probably appreciate a substantial dividend, so perhaps this question would be more suitable for her.

It’s possible. That's why we have a Board of Directors to guide us in the right direction. This would give us some excellent options. However, when we launched Matador 40 years ago, we started with $270,000 and later sold it for $388 million, which was quite successful. We then began the new Matador with $6 million. When starting with limited funds, it's essential to be careful about spending because there's no guarantee of additional capital later on. We have plans, but we need to proceed cautiously. If we generate that much cash flow next year and prices increase, we know we'll have opportunities. A recent example is the purchase of Summit Midstream, which we closed in just 36 days. This opportunity arose unexpectedly, but we could act quickly because we had cash available and didn’t need to tap into our credit line. I anticipate we will pursue more acquisitions in Midstream or enhance our existing acreage. Our geological team, led by Ned, has some promising ideas, and we are hopeful about prospects that could match the Rodney Robinson wells or our Stateline and Stebbins Areas that we're analyzing closely. There are exciting opportunities ahead. Should that cash flow materialize, investors can expect a reasonable increase in the dividend, which we've doubled three times in the past two years. We appreciate dividends, especially as substantial shareholders, although our priority is maintaining a strong financial position. We will continue to retire bonds and likely retain some debt for the sake of the rating agencies to demonstrate our financial prudence. We don’t typically budget far ahead; instead, we prefer to be opportunistic and respond to what arises. For instance, we didn’t plan on adding a seventh rig at the start of the year, but special circumstances led us to acquire one. This rig is essential for drilling three-mile laterals, which we plan to begin soon. It will be in operation for about 90 days and will aid in drilling the Rodney Robinson wells, of which we currently have 19. As we expand by another eight wells, we may need to temporarily shut in approximately 15 of the existing wells for safety reasons while we work on drilling and completing these new ones. Having this additional rig will allow us to manage our progress better, particularly since one of our rigs will be occupied by a saltwater disposal well, limiting its availability for about 60 days. We are diligent about managing our finances because this money belongs to us, our friends, and our families. We prioritize careful and responsible use of these funds. I hope this clarifies our approach and provides you with some examples, Neal.

It does. Great details. Regarding the capital spending update, could you clarify how we should think about CapEx? Specifically, would it be appropriate to consider it in terms of dollars per foot? I understand there are several factors involved, including Midstream. Should we think of it as $1 per foot and factor in some inflation, or is there a different approach we should take when considering CapEx moving forward? I know you don't want to delve into the 2023 budget yet, but I'm looking for a broader perspective on how to interpret the budget.

Yes, Neal, this is Chris Calvert. I think looking at it at a D&C cost per foot is a good way to look at it. We came out with $845 per foot in the fourth quarter of 2021. We had projected about a 10% to 15% increase versus our fourth quarter number. With this revised CapEx, it did bump it up to about $890 per foot. That is highly related to timing, which is also influenced by inflation that we are seeing, particularly from components such as sand, steel, and fuel. While we are seeing inflation, that big jump is really related to timing and when we're bringing these wells online. We control what we can control when it comes to sand, steel, and fuel. On the sand side, we maintain long-standing solid relationships with our vendors, ensuring we have visibility to procure supplies without interruptions to operations. On the fuel side, the completions team has implemented dual fuel frac fleets. Therefore, 100% of our wells will have dual fuel capabilities for the remainder of the year, saving approximately $100,000 to $150,000 per well. We're also spending less time on wells. In Rustler Breaks, we initially budgeted about 20 days to drill some of these wells, and we're drilling some of these now right around 10 days. The completions team has also implemented simul frac, remote frac, which saves about $250,000 per well. Our operations team is doing a fantastic job mitigating those inflationary pressures with sustainable efficiencies.

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

Could you walk through the thoughts on adding the seventh rig and how you see that creating shareholder value over time? And I think implicitly, you all see some strong value opportunity and investment into the business. Can you give us a sense of the types of returns you expect to see from that rig in the wells that you'll be drilling?

Sure, Scott, this is Tom. Our teams are doing a wonderful job on the cost front, as Chris just mentioned. When we're talking about adding an additional rig, the first thing we're looking at is the rock. We want to ensure that we're drilling the best targets available. Ned and the geoscience team with MAXCOM are doing a great job placing these wells right in the target zone. We believe that these wells can earn 4x their cost over their life. When you have 2-mile-long laterals going through great rock with an 87.5% net revenue interest and with facilities and pads that are already built, that's a good formula for long-term value creation.

Great. Appreciate that. And my follow-up question is regarding spending trajectory into next year, which I think is going to be very topical for many companies. Understanding it's early in the plans that are laid out for next year, but can you give us a sense on where you foresee lateral lengths moving forward? I think on Page 29, you demonstrate how that's stepped up nicely through 2021 and held relatively constant through 2022. How do you see that progressing as you look at 2023 and beyond based on your opportunity set and plans to drill some more 3-mile laterals?

Sure, Scott. We're definitely big believers in these longer laterals. As Joe mentioned, the teams are working toward getting further out to the 3-mile mark. We've executed very well at the 2.5-mile lateral length down at Stateline, as you know, and we're excited to push the boundaries out even further. Not every well we drill will be the long laterals. We'll have some wells that we need to drill that will remain between two existing wells. We still think those wells will have excellent returns and will certainly compete for capital. Executionally, as Chris, Billy, and all the operations teams have made significant improvements on some aspects of drilling, these changes have made operations safer, faster, and more efficient and give us confidence to drill these longer laterals.

I appreciate that. So it sounds like staying around 10,000 feet on average is a reasonable assumption when you look at the relative mix going forward?

I think that's pretty reasonable. We still have a ways to go before we finalize our plans for next year, but I think that's in the ballpark.

Our next question comes from John Freeman with Raymond James.

My first question is about the slide in your presentation on Slide 26, which is quite helpful. It illustrates the positive and negative aspects of your updated guidance. The most significant positive in the first half of the year was the improved well performance, particularly the 11 Voni wells and the 9 Rodney Robinson wells you mentioned. I'm trying to understand, moving forward, if the better well performance you've experienced will impact the additional wells you plan to drill in those areas or elsewhere. Is there any potential for further upside from what you originally anticipated at the beginning of the year? Are you still utilizing the same type curve assumptions you had going into the year, despite the improved well performance?

Good question, John. We try to put our projections down the middle of the fairway. We pride ourselves on looking at the wells closely, and we want to be as accurate as we can. As shown on that slide, we had outperformance in many of our wells in the first half of the year, and we're very happy with that. Sometimes the wells outperform expectations, and sometimes they underperform. Overall, I think we've done a nice job forecasting our wells, and things like spacing and placing the wells in the right zone, as well as good execution and fracking modifications, all contribute to these types of performances.

Yes, John, I'd like to add. This is a good point to highlight the efficiency of our MAXCOM group. That is a 24/7 team that measures in real time where that wellbore is going horizontally. Before we had that, if a horizontal well went out of zone, it might be a little while before it was recognized. Now that time has been reduced to a matter of minutes before you realize what's happened, and you can redirect immediately, enabling greater zone accuracy. We estimate that we've improved from being in zone roughly 85% of the time to over 95% now, sometimes even close to 100%. When you consider the size of the wells we are drilling, that's a significant increase in efficiency. The collaboration between Chris, Ned, and the team has been effective in refining our fracking programs, and we've seen notable outperformance as a result. We're still testing new techniques, and we're drilling in areas of good rock. Because we got ahead of the curve on outperformance, we have accelerated the Rodney Robinson wells, bringing forward 8 more wells. We have federal permits due to expire next year, so we want to get them drilled promptly. We strive to be nimble and capitalize on opportunities as they arise, similar to previous deals like Pronto.

You covered it well, Joe. My follow-up question is on the seventh rig, which you've characterized as a special rig that will allow you to ultimately drill some 3-mile laterals. Just to clarify, none of those initial eight wells getting accelerated are planned to be 3-mile laterals, correct? That is something you would plan to do after these eight wells?

That's right. There are 19 wells currently on the Rodney Robinson. These will add 8, but while you drill the 8, you'll likely need to shut in three-quarters of those while drilling and completing those wells for safety's sake. With our current momentum, now seems the ideal time to drill them. Billy, can you explain why this rig is particularly suited for 3-mile laterals?

Yes, John, this is Billy. We do not want to jump right into 3-mile wells with a new rig; we want to ensure the crew is familiar. In the future, we will be drilling some 3-mile wells. This rig, in particular, is capable of drilling 3-mile laterals due to its high torque top drive and the good rig structure for handling your wellhead BOP equipment, saving time in that process. This rig was available and needed to be secured quickly as high-spec, high-tech rigs are in demand. All of our rigs are capable of drilling 3-mile laterals, but this one is better suited for it.

Our next question comes from Gabe Daoud with Cowen.

Joe, I was hoping maybe we could just revisit the seventh rig. Can you help us think about how that impacts volume growth for 2023? The release indicated that it obviously accelerates those completions into late Q1 and early Q2. I'm curious if you can quantify the volume impact on 2023?

I'll do my best. I want to mention a couple of things about the seventh rig. First, remember, we've announced that we want to drill another saltwater disposal well with one of the other rigs, which will cut production back a bit. There are also uncertain timings that may affect our production rate. We’re optimistic that our production will be more next year, but it’s not guaranteed due to potential downturns in prices or a recession impacting the number of non-operating well proposals we received. This past year, we had 105 such proposals that resulted in 8 net wells for us. If those proposals drop due to external influences, it would affect our saltwater disposal as well. We felt this rig was needed, and it wasn't a hard decision to pick it up. We could have ordered it for early in the year, but it was offered to us at the end of September, and we had to seize the opportunity. Other companies want it, and if we didn’t take it, it would have gone to someone else. Thus we believe it is essential for maintaining our current production levels.

Yes, that's helpful. If I could follow up on asset allocation of the rigs across your Delaware asset base or maybe into 2022 but more specifically into 2023. Should we expect a return to Stateline? Is that still part of the plan to finish the remainder of the wells you have permitted there? Also, could you tell me if you're seeing any differences in getting permit approvals?

Gabe, this is Tom. We're still very excited about our Stateline acreage. In fact, we currently have a rig drilling there right now. We have 50 wells producing at Stateline, and we're ensuring that we have adequate takeaway for oil, gas, and water with the excellent job that San Mateo has done across these phases. Regarding rig allocations, we have excellent targets throughout the basin. We’ve been making investments in drilling wells in Ranger, the original site of the Bone Spring formation, and we're also pushing the Wolfcamp play further north into Ranger and Arrowhead areas. We are drilling the necessary saltwater disposal well now to allow more drilling in the Greater Stebbins area next year. Our teams have been drilling very effectively in Wolf and Rustler Breaks.

Our next question comes from Zach Parham with JPMorgan.

First, just on the balance sheet. You all bought back $158 million in bonds during the quarter and into July. Can you discuss your balance goals? I know, Joe, you mentioned earlier on the call about not wanting to go to zero debt, but do you have a target debt level you'd like to achieve?

That's a good question, Zach. We don't typically set specific targets for the number of wells or a certain debt level. We aim for profitable growth at a measured pace, rather than growth purely for the sake of it. We're aware we need to pay down our obligations as they come due, and we felt the opportunity to buy bonds at a discount made sense. A few years ago, our bonds fell to a very low level, creating opportunities for purchasing at favorable prices. We’ve strengthened our company through this buyback, which is more beneficial for shareholders than simply executing stock buybacks. When buying back stock, the sellers often leave the scene, whereas buying debt creates a more lasting benefit and improves our financial standing. It's about balance; we focus on ensuring we can continue to drill and grow the company while rewarding our long-term shareholders. Our shareholders support our vision of strengthening the company financially and operationally to drive value.

A big part of it is that we continually seek out the A+ rock locations to match with our A+ staff. The vendor relationships we've built have helped us maintain operations throughout good and bad times. Those connections are instrumental in navigating periods where securing resources like sand, rigs, and casing can be challenging.

It measures how we collaborate with our vendors and operational teams which has set many records in drilling performance. Our production growth is not simply from increased spending but largely from better rock and improved execution with greater capital efficiency. I'm proud of our operations group, and I look forward to them continuing to drive our success.

Got it. I appreciate that color. Just one follow-up. I know you all don't have a 2023 guide out there yet, but with the seventh rig running later this quarter, should our assumption be that at the strip, that seventh rig will continue running into 2023 and beyond?

Yes, Zach. I would assume so; we can be profitable at $80 a barrel of oil. Our gas production is roughly 60% oil and 40% gas, and gas prices have been very strong recently. We have two valuable assets that often get overlooked: the value of our Midstream and the reserves behind pipe in Haynesville. We're currently focused on growth at a measured pace rather than rapid expansion. We believe we've achieved a significant growth path since going public, and we continue to evaluate opportunities based on excellent rock locations.

Just to clarify, the Cotton Valley would be in addition, and we don't currently have those booked as reserves.

And our next question comes from Michael Scialla with Stifel.

Joe, you discussed how being nimble and maintaining optionality has been key to the company's ability to create value. You mentioned last quarter that you were evaluating a variable dividend. Considering what we’ve seen from competitors allocating more than half of their future free cash flow to dividends, am I reading too much into your comments that a variable might not be suitable for you? Any updated thoughts on the concept of a variable dividend?

No, Mike, you're not reading too much into it; it's an open-minded process. We've not ruled it out or in yet. The most important part of any dividend is ensuring it can be sustained. Even in a variable dividend model, if set too high, it could limit our options and potential for value creation. Our existing shareholders come first, and they seem to prefer a consistent and sustainable growth in dividends over time rather than accelerated payments that may not hold stability. We value the prospect of dividends while ensuring our company continues to grow and strengthen its financial position. We are open to any ideas that can add value for our shareholders, and we're studying this variable model carefully. Yet, I think we currently have better uses for the funds than executing buybacks. Our focus is on growth, reserves, and enhancing overall shareholder value.

Thank you. Yes, I believe you were correct. We will see a higher percentage paid in cash taxes next year as we roll through our net operating loss carryforwards. I would expect to approach a 15% to 20% range of our net income.

That would suggest, Robert, closer to 100 million or so for this year, and if prices remain strong, could reach a couple of hundred million considering commodity fluctuations.

This concludes the Q&A portion of this morning's conference call. I'd like to hand the conference back over to management for closing remarks.

Thank you to everybody who listened in. We appreciate the insightful questions. I want to extend an invitation to come visit us and see the MAXCOM room, 24/7. We also have a measurement room that's automated to verify the hydrocarbons we're producing. We'd love for you all to see those operations and meet our team who contribute to our success. We're always available for phone calls and eager to assist with any inquiries. Thank you for your time, and I look forward to connecting with you.

Thank you for participating in today's conference. You may now disconnect. Everyone, have a wonderful day.