Good morning, ladies and gentlemen. Welcome to the Fourth Quarter and Full Year 2022 Matador Resources Company Earnings Conference Call. My name is Gerald, and I'll be serving you as the operator for today. I will now turn the call over to Mr. Mac Schmitz, Vice President, Investor Relations for Matador. Mr. Schmitz, you may proceed.

Thank you, Gerald, and good morning, everyone, and thank you for joining us for Matador's fourth quarter and full year 2022 earnings conference call. Some of the presenters today will be referencing 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 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 issued yesterday, I would like to take a moment to remind everyone that you can find a slide presentation in connection with the fourth quarter and full year 2022 earnings release under the Investor Relations tab on our corporate website. With that, I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?

Thank you, Mac. It's a pleasure to be here again and report to you our progress at Matador. I'd like to begin by celebrating what happened in the fourth quarter of 2022 first, and then we'll get to the outlook for 2023 and 2024. In the fourth quarter, we had over 100,000 BOEs per day, and we had records across performance metrics despite the bad weather and other complications. Having over 100,000 BOEs per day marks a significant step forward and puts us at a different inflection point. We also generated notable free cash flow of $249 million in the fourth quarter alone. Adjusted EBITDA for the year was $2.1 billion, and it was $460 million in the fourth quarter. This is important because when we went public, we weren't even valued at $460 million. Think about it; we generated that amount in one quarter alone. So while we look at quarters here, we prefer to look a little longer-term as well. Much of what we achieved in the fourth quarter helps set us up for the end of 2023 and all of 2024. We've got a total of 85 wells drilled across our Rodney Robinson, Boros, and Voni properties. Right now, we have eight wells flowing back, and we expect eight more this year and four at the end of the year. Remember, we acquired the Rodney Robinson and Boros leases over four years ago, and they continue to contribute positively. Looking at our strategic moves, there has been concern regarding the Advance deal, but I believe it's comparable to our previous acquisition of BLM. When we purchased BLM, our stock faced backlash, yet it turned out to be extremely beneficial. The same analysts who criticized that move failed to appreciate the quality of the rock we acquired with BLM, which ultimately transformed our drilling strategy. We transitioned from drilling 98% of our wells as one-mile laterals to 98% being two-mile laterals or longer. This improvement laid a strong foundation for the Advance deal, which has the potential to boost our value fourfold compared to BLM's acreage. We're genuinely excited about this and have included slides showing how it integrates with our acreage. Furthermore, we plan to invest additional capital to connect these properties to our pipeline systems, Pronto and Five Point, aiming for strategic value from these connections. In 2022, we drilled 64.5 net wells and we aim to turn on 49 net wells by the end of Q1 2024. Our approach is to conduct the first quarter completions strategically, allowing us to capture a full year's benefit. As some analysts pointed out, we are effectively setting up for 2024. Regarding CapEx, the higher expenditure in 2023 is mainly due to integrating the Advance properties into our system. We intend to connect our pipeline systems to cover the best areas of the Permian Basin. We believe the additional CapEx will yield returns several times over. Lastly, we've increased our dividend by 50% to $0.15 per share quarterly. As the largest individual shareholder, I value dividends, and our officers and staff feel the same. We have implemented a buying program resulting in over 90% participation from our team. Our goal is to keep increasing dividends over time as our financial situation improves, as we believe it is the fairest way to reward long-term shareholders. With that, I'd like to open the floor to questions.

Our first question is from Scott Hanold of RBC Capital Markets.

Joe, I appreciate some of the commentary upfront. The question I have is concerning your setup for 2024. It looks like you will have about 62 drilled and uncompleted wells by the back half of this year, which seems a little above your normal capacity. Can you give us a sense of how much of a tailwind this may provide you into 2024?

Yes, Scott, this is Tom. Those 49 net wells planned to be in progress at the end of the year nearly double the number of net wells we had compared to the same period last year, which greatly influences our production calendar for the following year. We are very excited about these wells, particularly those being drilled in the Advance area, which should exhibit high oil cut and low water cut. We can't wait to bring these online.

That makes sense. This should help with capital efficiency next year, right? I'd assume you would work that down to normal levels. Is that a fair outlook?

Yes, that’s correct.

Regarding Midstream, you touched upon the capital needed to connect various systems. Can you elaborate on what specifically you aim to accomplish with that capital? Is there a chance to connect San Mateo to Pronto? One is in a joint venture, while the other is fully owned.

Scott, this is Brian Willey. We are excited about the opportunities at Pronto, and yes, we do plan to connect the San Mateo system and the Pronto system. One system is a joint venture while the other is wholly owned, but we intend to integrate the two. We'll also focus on getting the wells in the Advance area into our system and explore additional opportunities for Matador and third-party operations. We're looking forward to spending that capital effectively. Our past investments in Midstream have proven beneficial with repeated customers, and we anticipate more of the same with Pronto.

We are now setting a question from Neal Dingmann of Truist.

I have a follow-up question regarding future production, not necessarily expecting a 2024 guide. It seems like you could achieve quite strong production growth through the end of the year into 2024. Can you provide any guidance on this compared to other years?

I would advise caution in focusing solely on quarterly metrics; my recommendation is to take a longer-term view. Whether in the fourth quarter or the first quarter of next year, our operations will dictate our performance. Tom, do you want to expand on that?

Certainly. We included a slide in our deck showing our production growth by quarter. As Joe mentioned, our focus is on long-term growth rather than short-term spikes, but in the fourth quarter, we anticipate reaching about 143,000 BOE per day.

I see. I like that ramp. My second question is about the frac shut-ins mentioned in the press release. Is Rodney Robinson the primary area for shut-ins or should we consider this as typical for future operations?

Neal, it's important to note that production can be affected significantly when several facilities are operating simultaneously and the offset operators are conducting fracking operations, as we have to shut in our wells temporarily. This may impact our production more than weather conditions, and we must make adjustments accordingly. Timing plays a crucial role in our operations.

To elaborate, Joe mentioned that we have 19 existing Rodney wells. The addition of the eight new Rodney wells required us to shut in 17 existing producers to conduct hydraulic fracturing operations on the new wells. This is part of our development process, and it affects timing. We started hydraulic fracturing operations on the new Rodney wells at the beginning of the year, and we are currently beginning flowback operations on them. Thus, it is a matter of timing and this does not negatively impact future production.

It’s worth mentioning that shutting in the wells does not impair our proved reserves or negatively affect future production. This has now become part of our operational process without any long-term consequences.

Our next question comes from Leo Mariani of Roth.

I’d like to get deeper into production guidance for 2023. I understand that you’re setting up for 2024, and it seems like you anticipate strong growth at the start of the year next year. But if I look at the numbers, it seems you added around 25,000 BOE per day from the Advance deals. If this closes early in Q2 2023 and I back out these volumes, it looks like production is essentially flattish compared to 2022, despite additional turn-in lines for the base property. Can you clarify this?

I understand your concern, Leo. It’s essential to recognize that by focusing on the Advance deal, we are reallocating some staff and rigs away from our inventory production, which would be normal. If we didn’t pursue the Advance deal, our growth would not be flat. Our inventory quality is excellent, with over a decade of potential. During discussions, many have expressed concerns about our inventory; however, we would have addressed that further had we not diverted resources to Advance. Focusing on quality rock at this opportunity is paramount. If we hadn’t acted now, we might miss the chance to add such quality rock adjacent to our acreage.

I appreciate that clarification. Regarding Midstream, your capital expenditures appear to be higher this year than last. Could you please clarify whether you expect Midstream expenses to remain elevated next year, or are these costs more of a short-term nature?

We haven’t shared much about 2024 yet, Leo, so it’s difficult to provide detailed projections. We are optimistic about 2023 and want to capitalize on any potential opportunities in 2024. As we move through the year, we’ll evaluate third-party opportunities and adapt accordingly.

I’d like to add, it’s prudent to remain open to opportunities as they arise, rather than adhering rigidly to a five-year plan. Our capacity to respond to favorable opportunities is essential. We’ve learned to build our financial strength to capitalize when good acquisitions arise, whether for oil properties, Midstream, or federal sales like the BLM.

Our next question comes from Gabe Daoud of Cowen.

With the 49 net wells expected to exit the year, as you exceed expectations on cycle times, what is the likelihood some of these wells could come online sooner, by the end of this year?

To Joe’s earlier point about keeping options open, we expect these wells to come online by the end of 2024. However, if our drilling and completion teams exceed expectations, there is a possibility some could be pulled forward, but it's still too early to determine.

Could you speak about LOE? It seems like the first quarter is low but is expected to rise following the Advance deal. Can you explain what’s driving that increase, and will there be a chance to reduce it over time?

The anticipated increase is primarily due to our drilling activities in Lea County, which is linked to the Advance acquisition. The fact that San Mateo isn’t servicing those properties has contributed to this as well. We are excited about Pronto connecting to the Advance properties, which is another reason to expect improvements in future LOE metrics.

Our next question comes from John Freeman of Raymond James.

I wanted to follow up on Leo's question about Midstream CapEx. I realize you cannot predict next year, but could you provide guidance on whether we should expect significant spending or if costs will be lower?

It’s hard to predict specifics for 2024. While there will likely be ongoing financing for connects between systems and third-party projects, it’s still uncertain. Give us some time, and we’ll have more clarity in the months ahead. We’d be pleased to welcome analysts to Dallas for further discussions.

Remember that San Mateo operates on a 51:49 basis. This means we’ll incur 51% of the capital costs for projects at San Mateo, whereas all costs at Pronto are 100% ours. This will be crucial as we expand operations into Lea County.

Understood. Also, regarding the cost inflation estimated at 10%, given the decline in commodity prices and rig counts, there seem to be indications that service cost inflation is losing momentum. How much of this conservatism is built into that number?

We gauge our inflation estimates conservatively. We prefer to exceed expectations rather than under deliver. While it might be a conservative estimation regarding market conditions, we think it still remains a fair estimate overall. We have a solid rig fleet and frac crews, and while there’s some sign of softening, it ultimately leads to more competition in the Permian. We are in the strongest regions and still face some upward pressures, though there has been slight stabilization.

As someone who started Matador with only $270,000, I am sensitive to capital expenditures. Hearing accusations of inefficiency is discouraging, especially given how hard our team works to manage costs wisely. We're committed to being capital efficient and maintaining accountability to our investors, and every nickel spent counts significantly.

We’ll be taking our last question from Tim Rezvan of KeyBanc Capital Markets.

I want to start with your drilling plans in the northern part of your acreage this year, as 42% of your net turn-in lines are allocated to Ranger and Arrowhead. Considering the stock price reaction, can you share your expectations in the North, and whether you view those wells as more developmental or exploratory?

In the North, we drilled wells in the Rodney Robinson area four or five years ago, and each of those in the Third Bone Spring has now produced over 1 million barrels of oil. The Advance acreage and the Northern Bridge are areas we know well. Thus, I wouldn’t designate it as exploration but rather as development.

Tom summarized it well. The Advance acreage is valuable, and we have been focused on this area for a long time due to its high-quality results. There are still plenty of opportunities that will add value to Matador and our shareholders. We’re optimistic about further developments in this area. We also plan to take a closer look at Arrowhead and spread our rigs across all our asset areas this year.

As a follow-up regarding the $1,125 per foot cost, do you anticipate an implied reduction over the year, especially with the observed softening in steel prices and rig count?

We aim to continuously uphold and improve our operational practices, targeting better efficiency this year than in prior periods. While it's tough to predict exact cost reductions, we look to past performances to guide our expectations.

I thank everyone for their participation and interest in Matador. We always invite you to visit us for a more in-depth discussion. We emphasize a long-term view in our planning, ensuring that we set ourselves up not just for a successful quarter but for sustained growth. With the strategies we're implementing, 2024 appears to be promising for us. While we recognize the elements of cost inflation, we are managing it well. Should we not have pursued the Advance deal, we believe our growth would have been greater than projected. The quality of our people and rock will guarantee continued success for Matador. Thank you, and please feel free to reach out.

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