U.S. Markets close in 4 hrs 13 mins

Edited Transcript of MTDR earnings conference call or presentation 27-Feb-19 3:00pm GMT

Q4 2018 Matador Resources Co Earnings Call

Dallas Apr 22, 2019 (Thomson StreetEvents) -- Edited Transcript of Matador Resources Co earnings conference call or presentation Wednesday, February 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Bradley M. Robinson

Matador Resources Company - Senior VP of Reservoir Engineering & CTO

* Craig N. Adams

Matador Resources Company - EVP of Land, Legal & Administration

* David E. Lancaster

Matador Resources Company - Executive VP & CFO

* Joseph Wm. Foran

Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary

* Mac Schmitz

Matador Resources Company - Capital Markets Coordinator

* Matthew V. Hairford

Matador Resources Company - President

================================================================================

Conference Call Participants

================================================================================

* Andrew Jay Lipke

Stephens Inc., Research Division - Exploration and Production Analyst

* Gabriel J. Daoud

Cowen and Company, LLC, Research Division - Senior Analyst

* Irene Oiyin Haas

Imperial Capital, LLC, Research Division - MD & Senior Research Analyst

* Jeffrey Scott Grampp

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Kevin Moreland MacCurdy

Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Sameer Hyderali Panjwani

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research

* Scott Michael Hanold

RBC Capital Markets, LLC, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good morning, ladies and gentlemen. Welcome to the Fourth Quarter and Full Year 2018 Matador Resources Company Earnings Conference Call. My name is Carmen, and I will be serving as the operator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes, and the replay will be available on the company's website through March 31, 2019, 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.

--------------------------------------------------------------------------------

Mac Schmitz, Matador Resources Company - Capital Markets Coordinator [2]

--------------------------------------------------------------------------------

Thank you, Carmen. Good morning, everyone, and thank you for joining us for Matador's Fourth Quarter and Full Year 2018 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.

Finally, in our earnings press release and our 2019 operating plan and market guidance press release issued yesterday, I would like to remind everyone that you can find short slide presentations summarizing the highlights of these press releases on our website on the Events and Presentations page under the Investor Relations tab.

And with that, I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [3]

--------------------------------------------------------------------------------

Thank you, Mac, and good morning to everyone on the line, and thank you for participating in today's call. We appreciate your time and interest in Matador very much. And I'd like to introduce you to the executive committee who has joined me this morning, along with our other VPs and other key staff members, who are standing by to take all your questions, and we'll stand by as long as you all want. These are Matt Hairford, President; David Lancaster, EVP and Chief Financial Officer; Craig Adams, EVP of Land, Legal and Administration; Billy Goodwin, EVP and Head of Operations; Van Singleton, Executive Vice President of Land; Brad Robinson, EVP, Reservoir Engineering and Chief Technology Officer.

As outlined in our earnings yesterday, 2018 was the best year in Matador's history. And we are going to address any questions that you might have on the outspend, as that seems to be a key issue on everybody's mind, but also want to commend the staff for what has really been an excellent year and the extra effort that so many have put in to making these good results come about. And as I said, we will address the outspend, but would like to take a few moments and talk about what we accomplished over these last 2 years.

We have doubled reserves and we have doubled production. And we have added 55,000 acres, which is approximately a 50% increase in our land position out in the Delaware, the most prolific area. That's been primarily on a brick-by-brick method and engaging in various trades with other companies.

And in addition, you've got your third midstream project. The first 2 have resulted in us receiving $330 million in hand. This third one, we think is going to be another great deal where we're going to receive a carry and performance incentive. So it's a good deal for both sides in the sense that we're not paid until we accomplish something, the construction of the pipeline and the processing plant, and we're not paid unless we deliver the volumes that we have indicated. But the way 1 and 2 have worked much the same way that we have performed on that, so we're confident this will work out just as well.

So and to put it on a proportionate basis, down to the individual shareholder, 2 years ago, you would have owned 1/2 a barrel of oil and today you own a full barrel of oil as well as 4 or 5 Mcf, plus your proportionate share of the processing plant and your proportionate share of an acreage base that's increased 50%, while maintaining a weighted average price of approximately $11,000.

So I understand and appreciate the concern many of you have for the outspend, but our shareholders have gotten plenty of bang for their buck. And then I also want to share with each of you that this management group is very sensitive to and very aware of keeping a strong balance sheet, and, on the outspend, to making sure that it is selective and low risk and that we will invest in those things that have a compelling rate of return or to invest in. And in that regard, we're still working all the numbers and double-checking. But it appears to us at the first, at the initial review, that of the monies that we've spent this year, 85% of our capital expenditures have gone into projects or wells whose rate of return is going to approach 50%. And of the remaining 15%, they're in projects going to have a weighted average of approximately 20%.

So the money has been well spent and we have continued to do various things as the pipelines, releasing a rig in the Eagle Ford, converting non-core assets to cash to add to the balance sheet and even our past midstream deal is continuing to add performance incentives to us last year, this year and 3 years to come.

Now addressing the outspend. We're all proponents of being very careful with the money. We treat it like it's our own, because, as you all know, our management group has a lot of skin in the game. All of our net worths are largely in the form of stock. And recently, I bought another 200,000 shares. So we put our money where our mouth is. And we think this is the best thing for this stage of our growth.

But we are moving cautiously in all areas and keeping a clean eye on the balance sheet. And yet, we're faced with some opportunities where we believe and history suggests that we can earn a 50% rate of return, it's hard to pass those up when you won't get another chance at them, such as acreage in the unit that you're growing, some of these mineral properties that we've talked about and the midstream.

So we hope to continue to submit these results to you so that you can see that we've been accurate in our projections, we've earned a good return and that we've been a good steward.

One final statistic I'd submit to you, and then we'll open it up for questions, is that on the day we went public, we were making net to Matador 400 or 500 barrels of oil a day. And today, with just our minerals alone, we're producing approximately 1,000 barrels a day. So we're making more from the minerals we have than the day we went public on the working interest.

So good growth, and it's been profitable growth. And our earnings per share and our cash flow per share has exceeded the industry consensus by a good margin. So what we're doing is trying to make money and add value and do it in a reasonable, appropriate way for this stage of growth in Matador.

So with that, let me open up the floor to questions. Mac?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) And our first question is from Scott Hanold with RBC Capital Markets.

--------------------------------------------------------------------------------

Scott Michael Hanold, RBC Capital Markets, LLC, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Congratulations on the quarter. My first question is on the midstream agreement that you all signed earlier this week or released. Could you provide some details on that, such as some of the MVC targets? What kind of price is in that contract, implied in the contract? And if you can give us a sense of maybe the timing and size of when those performance payments could hit?

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [3]

--------------------------------------------------------------------------------

I'm going to start off, and there is a confidentiality agreement. So I have to be careful about what we talk about on this. But what I can tell you, the payments, of course, are, as I said, are based on performance. It's carrying our construction costs upfront for the $25 million, and David will go into details. I like the way he's described it. But the other thing I wanted to emphasize, it's multiyear. So we're going to earn money from that this year. We're going to defer the construction, some of the construction costs. But in future years, as we meet these performance incentives, we're going to continue to receive additional monies combined with the monies from the San Mateo 1, that will make a significant impact on our operations and that help provide better rates of return. David?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Scott, it's David. Just to add to what Joe said. Certainly, he's correct there that we do have confidentiality in the agreements that keeps us from being able to disclose what the actual rates and MVCs are. We can certainly tell you confidently that the rates that were negotiated are market rates, and we feel very comfortable with that. Second, we feel very comfortable with the volume commitments. I think that given both our projections for the Stateline and the Stebbins area, we feel very comfortable in our ability to meet or even exceed those projections, so over the next several years. So I don't think that's really a concern at all.

With regard to the performance incentives, as we noted in the release, there are, in addition to the capital carry, which Joe talked about, which basically means of the first $150 million of capital that's going to be spent on the San Mateo expansion, Matador will pay $25 million and Five Point has agreed to pay $125 million. So certainly this expansion at San Mateo is something that is very capital-advantaged for Matador, particularly in 2019 here. When we exceed the $150 million, we'll be on a heads-up basis with them. And there will be additional capital expended in 2020 to get to where we want to be with the expansion. In addition, the $150 million in performance incentives, we would think would probably begin to be realized toward the end of next year as we meet certain hurdles that have been set up in the agreements. We don't really expect the plant, as we noted, to be even in service until about the midpoint of 2020. So but that's okay because that coincides very well with when we'll start to see first production off the Stateline acreage as we forecast things now.

But I think that it's very exciting to know that we have that additional $150 million in incentives, not to mention there's still about $45 million, or really $60 million that haven't been realized to this point. I think as we pointed out in the note, we earned the performance incentives under San Mateo 1 for last year, and that additional approximately $15 million will be paid to Matador in the next few days by Five Point. So that's a real plus. There's another $45 million then under that agreement, too. So really, we have about $200 million in future performance incentives that we can see, in addition to the capital carry in return for doing this deal with Five Point and dedicating the acreage that we did. So we think it's very much a win-win for both sides. We think it gives us a chance to really, I think have a very integrated strategy for both our E&P assets and our midstream assets over the next several years. And I didn't have a whole lot to do with it. So I'll just commend Joe, Matt Spicer, the entire midstream team, Brian Willey, Michael Frenzel. Forget everybody just like on the Oscars. So if I do, I'll give you (inaudible). But I just will say that I think the team and our partners, Five Point, did a marvelous job at putting the deal together. And with that, I'll shut up and let you talk again.

--------------------------------------------------------------------------------

Scott Michael Hanold, RBC Capital Markets, LLC, Research Division - Analyst [5]

--------------------------------------------------------------------------------

That's great color, David. I thought you had done the contract all by yourself for a minute.

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [6]

--------------------------------------------------------------------------------

I'm a reasonably quick study.

--------------------------------------------------------------------------------

Scott Michael Hanold, RBC Capital Markets, LLC, Research Division - Analyst [7]

--------------------------------------------------------------------------------

For my follow-up, you all talk about moving to larger pad development. Could you talk about how -- so maybe a little bit about like remind us where you were in '18, what that's going to go to, on average, like in that pad development in '19? And as far as like the progression of kind of production growth, will that create a little bit of lumpiness that we just need to be aware of?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [8]

--------------------------------------------------------------------------------

Yes. So the answer to that last part is yes. And I think as we tried to write into the release, we think that our production will grow a little slower in the first 2 quarters, then you'll see a pretty big bump in the third quarter. And then a little bit flatter into the fourth quarter. And frankly, Scott, I think that's the way it's going to be for the next 2 or 3 years as we go forward. As we pointed out in the release, last year there was about 9% of our wells that were longer laterals. By 2020, we think that we'll be drilling 70% that are greater than a mile. So it's quite a year of transition for us. I would say in 2018, certainly, it's not like we weren't doing any multi-pad drilling; we certainly were. It was very common that we would've been doing 2 wells a pad, sometimes 3 wells a pad. But there were a few ones here and there as we were working to hold particular leases. I think as you go forward into this year, there's just a larger percentage of wells that are going to be threes, and we're going to start with some fours. And once we get to 2020, that's just going to continue to increase. I think as we said in the release, we see the first wells we drill on Stateline will all be 4-well pads. There'll be 2 of them running at the same time. So as a result of that, Scott, as we start to do those kind of things, and it will just result in both the capital expenditures and the production, in particular, being a little bit lumpier going forward. But we'll do our best to try to keep everybody informed just to how we see that going forward.

--------------------------------------------------------------------------------

Matthew V. Hairford, Matador Resources Company - President [9]

--------------------------------------------------------------------------------

Scott, this is Matt. I'll just jump in here, Scott, and just kind of build on what David's saying in regards to this batch drilling and drilling these longer laterals. I think the interesting thing is the result is going to be that we're going to be able to drill more lateral feet per rig day throughout the year. So it's definitely a move in the right direction for efficiencies. And Billy and his team, they're very, very good at getting better and better at things. And so we start drilling these longer laterals, they're going to be picking better bits, they're going to be picking better bottomhole assemblies. They're going to be drilling faster. So I think it's definitely a step in the right direction for efficiencies.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

Our next question is from Neal Dingmann with SunTrust.

--------------------------------------------------------------------------------

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

--------------------------------------------------------------------------------

My question, guys, you did a fantastic job of really breaking out the minerals. And Joe, your comment's well taken as far as how much production, just the minerals and all these net royalties. My question around that is how do you all think of the return benefit of these, the uplift they provide on returns on wells versus the tremendous amount of cash you could obviously get if you decided to monetize those near term? I mean, obviously, it's a sort of a nice quandary to have.

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Neal, it's David. I don't know how specific or how quantitative I can be on that. I mean, certainly, we know that having the mineral interest does result in improvement to the returns. One thing I can say is, I know that when we were doing the BLM deal back in the fall, that we felt like pretty much really about 1/3 of what the price paid or that you could afford to pay a significant amount more. So if you paid $60,000 an acre, probably $20,000 of that was attributable to the advanced royalty kind of thing. So that kind of gives you an idea of the significance that we felt like that it had. And it seems like there was one other thing I was going to say, but I kind of lost my train of thought there. That's what I'll say. And if you got another point, maybe I'll think of it while you ask the other question.

--------------------------------------------------------------------------------

Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

--------------------------------------------------------------------------------

Sure. My second one, just on Slide 9, how do you all think about total locations and spacing? Specifically, you all continue to forecast I think a couple of the -- looking at this Slide 9, a couple Wolfcamp A and a couple Wolfcamp B landing targets. And I guess my question is, do still believe about the 4 wells per section in the Wolfcamp A-XY and the 4 wells per section in the Wolfcamp A-Lower as being the most economical way to develop those plays? So really just on spacing there, guys.

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [14]

--------------------------------------------------------------------------------

Yes. I think we've, I think, been on the conservative side of this argument sort of right from the beginning. I think our location counts that we published are all based on 160 acres, except for the occasional interval like the Wolfcamp B, which is extremely thick and where we've found 2 or 3 benches that we already know work in those intervals. And even at that, we've only put those wells in at 80-acre spacing, kind of wine-racked or staggered. So I think we continue to be comfortable with the spacing assumptions that we have. And I would expect that we'll stay with that for the foreseeable future.

--------------------------------------------------------------------------------

Bradley M. Robinson, Matador Resources Company - Senior VP of Reservoir Engineering & CTO [15]

--------------------------------------------------------------------------------

Neal, this is Brad. I would just, to your first question, and David's right, it varies the higher net royalty interests. But bear in mind, having the higher net royalty interest from the BLM tracks essentially increases your production 17%. And so obviously that's like having 17% better wells everywhere you drill. So it's going to definitely increase your rates of return and economics on those wells.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question is from Irene Haas with Imperial Capital.

--------------------------------------------------------------------------------

Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [17]

--------------------------------------------------------------------------------

I'm happy to see that you have utilized San Mateo’s revolver which is about $250 million right now with $220 million drawn. And what needs to happen for this to be increased? And what's your net share of the actual borrowing? Is it half of that?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Yes, Irene. Again, this is David. So the facility, the way that it works, the initial commitment under the facility by the lenders was $250 million. But it has what's called an accordion feature associated with it, which enables us to go back to the lenders and enables them to raise their commitments to up to $400 million. It's not exactly a borrowing base kind of a -- but it's sort of a similar concept to that. But I think as long as we go back to them and they feel good about where we're going with San Mateo, it would be pretty easy to get that additional commitment from the lender group. I will say we are very excited by the fact that all the lenders under our revolver, our E&P revolver, we're participants in the midstream revolver. So I think it just goes to show that the entire bank group was very solidly behind what we're doing with San Mateo. It is true that the total borrowing was $220 million, and that's what you'll see on the financial statements because of the way that we consolidate San Mateo. Of that, roughly half of that ultimately was then distributed to Matador. However, the note itself is actually nonrecourse to Matador.

--------------------------------------------------------------------------------

Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [19]

--------------------------------------------------------------------------------

Okay. That's super helpful. And I have one more follow-up question. Any plans for asset sale in the upstream? You talk about Eagle Ford and Haynesville. And that's all I have for you today.

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [20]

--------------------------------------------------------------------------------

Irene, as we've said for a long time, at first Matador we sold out to Tom Brown. And second Matador, we sold good part of our Haynesville to Chesapeake. And then we've done now 3 midstream deals. So when the price is right, we sell. And we've announced for several years here that the Eagle Ford and the Haynesville were available if people paid. We weren't under any pressure to sell. It's been good cash flow, good returns. But we've been open. And in the Eagle Ford, it seems like it's been more successful to sell in bits and pieces because some people are interested in LaSalle County and some people want to be over there to the east in DeWitt or Karnes County. So we're open, but were not selling it for PDP. It's got to be plus the full value including the undeveloped acreage. Last year drilling 5 wells, we doubled production. So there's still gas in the tank down there. And we're also growing one Austin Chalk well as an exploration project down there. So it has good potential and we'd like to make a deal, but we want it to be good for both sides. That answer your question?

--------------------------------------------------------------------------------

Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [21]

--------------------------------------------------------------------------------

Yes, yes. This is perfect.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

Our next question comes from Gabe Daoud with Cowen and Company.

--------------------------------------------------------------------------------

Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [23]

--------------------------------------------------------------------------------

Maybe just starting with San Mateo. You gave some operating stats for the quarter. Looks like you gathered and processed amounts which were a little bit below what I was thinking and below the capacity of 260 million cubic feet a day. So just thinking, how does that number change as you move throughout 2019? And I guess a similar question on the water disposal side. I think initially you anticipated disposing about 200,000 barrels a day on the exit basis. And so how does that number change throughout the year? Just honestly trying to get a sense of what San Mateo EBITDA looks like for 2019, relative to previous expectations.

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [24]

--------------------------------------------------------------------------------

Yes. This is David, Gabe. So as far as the throughput volumes, really pretty much when you looked at all the throughput volumes on San Mateo, everything just doubled pretty much year-over-year, whether you're talking gathering, processing, water disposal. Of course, oil gathering went up quite a bit more than double. But any event, we felt like it was a very successful year as far as those things went. The plant itself, as we've said is actually 80%-plus of its volumes are currently subscribed. We have one large commercial producer that we expect to continue to increase the volumes that it's going to be delivering over the next several months. But they've just sort of been in a ramp-up mode. And the same thing a little bit on the water side, the large customer we have has been sort of gradually just increasing their volumes all along. I was, myself, pretty excited by some of the things that we were able to put into the release with regard to even how in the first month of the year things have popped up. I mean, the processing volumes, the gathering volumes, particularly the oil gathering volumes now that we have everything online with Plains, all the Rustler Breaks and Wolf oil. So I think you can certainly see those things are turning in the right direction. I think that what we had actually said was we thought we might get up to pretty close to 200,000 barrels of water in the first quarter of this year as opposed to an exit rate. I'd have to go back and look at that for sure. But we certainly are above 150,000 at this point. And I think on a spot basis, we've been pretty close to that 200,000 number here in the first quarter. So I think we feel like things are all trending in the right direction.

--------------------------------------------------------------------------------

Matthew V. Hairford, Matador Resources Company - President [25]

--------------------------------------------------------------------------------

Gabe, this is Matt. I'll just build on what David said. I think everything he said is exactly right. I think the thing that I like is on a go-forward basis. We've got this midstream business to a point where the initial footprint is very nice. It's in good spots. They're good volumes. And so for us to add even doing this expansion we're talking about at San Mateo, that's adding another 200 million cubic feet there. And that again is a need-based, it's opportunity rich. So not only for Matador volumes but as we build that system out up into Stebbins and down into Stateline, that gives us lots of opportunities to add third-party volumes. And as far as the disposal deal goes, we've kind of got our system built out there at Rustler Breaks, and we'll be building out the same system at Stateline and Stebbins, where as more volumes become available, we can just drill additional saltwater disposal wells to handle that capacity issue, too.

--------------------------------------------------------------------------------

Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [26]

--------------------------------------------------------------------------------

That's great color. Definitely some impressive operating stats on the midstream side. And just I guess follow-up, maybe, Joe, high-level question. Just obviously investors are kind of focused on reigning in outspends, and you hit on this in the remarks. But just curious if you can just give us a sense of philosophically how you think the appropriate way to run a SMID cap E&P company is. And ultimately, what's the right level of outspend? When ultimately do you think that should convert to like free cash flow generation? And what's the appropriate timeline for that? Just any color around like high-level thoughts on how to run the business would be helpful.

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [27]

--------------------------------------------------------------------------------

Well, Gabe, this is something we talk about nearly every day, what is the right level and should we spend this dollar or save this dollars or whatever. But it's a very good question. It's a very strategic question. We talk about it all the time not only internally, but with our board, with our shareholders. And we welcome your thoughts and questions on it. Is that it's evolving and it's complex and that you have a number of circumstances. What is the commodity price? What is the outlook for that commodity price? And then how good is the opportunity? Obviously, if it's a mineral interest in a track that we operate that adds to the return significantly, that's an easier question. If it's a midstream deal that's once every couple of years-type question, and you want to be sure that it's good for you. We couldn't have done that if we hadn't done the BLM. So when we got the pushback, which was understandable on the BLM, why did we do that, there's 2 factors that really went into it that we haven't been able to say until now. One is that we were able to book $286 million in PUDs off of that $410 million purchase, 75%. And the rest of it, we feel like we got back in the value of the midstream deal, because, without Stateline down there, and it wouldn't have carried the day. I mean, that was vital because that's such great rock. And we have already indicated we think there are going to be at least 9 producing zones down there. So that's some of the best rock in the country to tie into our processing, which helped attract -- made Five Point comfortable and us comfortable that we could deliver the volumes and perform as agreed, as both of us hoped because it was tied to incentives and performance. And so doing that deal was announced then, but look where it has put us. It's really enhanced, and we will grow our two-mile laterals from 10% just in 2018 to 30% in 2019, and maybe as much as 70% in 2020 year. So that's kind of what you mean, that was announced then. We anticipated there'd be some pushback. But I think it's clearly paying off.

So we kind of look at it on a case-by-case, trying to be very selective, and, at the same time, we cut back or release the rig in the Eagle Ford after drilling just those wells that validated virtually all the acreage. So we didn't keep on, even though that was going to produce good rates of return. It's HBP now. We'll take our time, see if we can't make a deal. And so goes everything else. And I've got to commend our operating staff for helping us stretch the dollar and some of these things. Billy's group, on the drilling and completion side, are going to nearly double their footage drilled for the same amount of CapEx. So it's a deal that you take up. And I'd rather not have an outspend. And we're watching the net debt to EBITDA number very carefully. And we appreciate the support from our bond group. The bonds are trading above par. We appreciate the support we've had from the bank group, is that they've made clear they would be happy to increase the borrowing base if necessary. We're about 10% drawn or maybe slightly more on the borrowing base. And we're making some great strides, as I said, that you got to have -- we feel we're a growth company. And if we cut back our growth below 10%, then we would suffer for it. So when we meet with our shareholder group, I think people understand why we're doing it. And I think they know that we have so much skin in the game, friends and relatives if this doesn't work out, I don't have anywhere to live, you know. So, and so does Matt. Matt has his mother and mother-in-law it. And so trust me, we are looking at that and trying to make every bullet count. But it's a very good strategic question. And there have been people in the industry that have destroyed value, we admit that, and hold us to a high standard. But so far, we feel the money that's been spent has resulted in added value for the shareholders.

--------------------------------------------------------------------------------

Operator [28]

--------------------------------------------------------------------------------

And our next question comes from Jeff Grampp with Northland Capital.

--------------------------------------------------------------------------------

Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [29]

--------------------------------------------------------------------------------

I had a question on the drilling inventory, I guess kind of two-parted question. Was curious if you guys could maybe, from a high level, talk about kind of if you had to split the inventory up into, say PV-10 breakeven at 50 or 40, or pick your number, but what would you say of your inventory would you put in that kind of tier 1 type of quality? And then, I guess just conceptually given the depth of the inventory, you're all's interest in maybe peeling off some of the lower return, maybe less strategic assets in any kind of divestiture program or any opportunistic things on that side as well.

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [30]

--------------------------------------------------------------------------------

Yes. I think one thing that's difficult in answering your question, Jeff, if I get too much into the detail of what I think is tier 1 and tier 2, and then we're going to peel off all the tier 2, I may disadvantage ourselves in terms of what we can get for it. So I'm not sure that I want somebody else to decide what they think on some of these things. But I will just say, look, that I think that some of it depends on area as well. So I think that there are intervals that are going to work well on Stateline that don't work maybe up in Arrowhead. And there's stuff that works well in Arrowhead that may not work as well in Wolf. So I would say for the most part, in particular areas, the Second Bone Spring and the Third Bone Spring, for example, I think is absolutely tier 1 up in Ranger and Arrowhead. It may be somewhat less so in a different interval. It might require a little bit different strategy in a different one of the asset areas. But overall, I think that most of the plays will work in those areas where they will work and where we've assigned locations to them, I think that we feel like the returns will be really good.

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [31]

--------------------------------------------------------------------------------

One other thing Jeff that I just remind, is that things change. New zones are discovered in different areas that change completely the economics. There was a time early as we were IPO, putting together the Rustler Breaks that people didn't want to give us any value on the Rustler Breaks. They didn't think it'd work. And we didn't even get our cost. But Matt and his group was right, and that's turned out to be a good deal. Similarly, as you learn to drill these wells faster, for example, you can change the economics on them so that like down in the Eagle Ford, some of the lateral wells we drilled that wasn't necessarily in as prime a rock, actually had better rates of return because Billy and his group had brought drilling costs and cut days on wells from 20 days to 6 days, which changes the economics. And then the same thing, commodity price can shift from area to area to have a big effect. And sand cost. I mean, there are just a lot of factors that go into it. And so you're constantly -- it's just like a football poll or the national poll, some teams are going up and some are coming down. And sometimes our teams have put together some good creative deals that really enhance the economics. So to make the list, it isn't that we just put everything down there that would earn a 11% rate of return. We've got a stiffer criteria than that, and that we are trying in good faith not to put any on the location list that we don't think we've actually got, are interested in drilling either this year or over the next couple of years.

So when we first were going public, we got a lot of pushback because we had 6 or 7 years of inventory, and now maybe it's 20 or more, 20, 25 easily, because in the Stateline prospect, even though we have booked a lot of PUDs, Brad feels that's a tiny part of what's the oil there. But the vast majority of oil hadn't even been put in there as a location. So but when we first went public, we got pushback for not having enough inventory and now we're kind of getting some pushback because we have 20 years of inventory, and we only get maybe the -- some of that might not be [real] rate of return. We try to be very consistent. It can't make the list unless it's something that we would consider drilling today or in the next couple of years. So we could really puff that up, but there's no sense in gilding the lily, if 20 years is not enough, then making it 30 years isn't going to help our costs any. But there is a stiff standard. And that's what I want you to take from this answer, that not everything makes a list, even though it's technically viable and could earn some return. It's got to be something that we're serious about drilling.

--------------------------------------------------------------------------------

Matthew V. Hairford, Matador Resources Company - President [32]

--------------------------------------------------------------------------------

Jeff, this is Matt. I'll just underscore what Joe's saying there. And I think one thing that does factor into this is the notion that the land team has done such a fantastic job at putting this position together for -- or a way to process about $11,000 an acre. And then the technical team, they continue to figure out things and make things work and different things work, and we've got additional tools. We as well as others are using seismic in a lot of our exploration efforts. And that's been really beneficial. So I think as time goes along, if you're talking 20 years, that acreage is not going to change, but the ability to make money on that acreage may. So I'm kind of like Joe and David. I'm not sure that I would consider any of it tier 2.

--------------------------------------------------------------------------------

Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [33]

--------------------------------------------------------------------------------

Got it. That's helpful really. Really helpful comments. For my follow-up, was curious on the release referenced you guys incorporating in-basin sand a little bit more in '19, and maybe some additional downside to CapEx if you utilize that more. Was just kind of curious what you guys need to see to pull that lever. Is it any particular, I guess usage by zone or area that you're waiting for some additional results on before getting more aggressive there? Just kind of what are the checkboxes that you guys need to get more aggressive with the use of in-basin sand?

--------------------------------------------------------------------------------

Matthew V. Hairford, Matador Resources Company - President [34]

--------------------------------------------------------------------------------

Jeff, this is Matt. And I think it's kind of a continuation of what we've been talking about in the prior quarters. We are getting more and more confident that in-basin sand is going to work in most of our reservoirs. So that being said, we can save a bunch of money. We again want to just make sure that we understand long-term effects. So we've got a number of wells that we have completed that we've used in-basin sand, including a couple of the most recent ones down at Wolf, the 206 and 208 wells, that have done very, very well and will continue to do well. So I think as we progress through the year, our confidence will increase and I think our use of in-basin sand will increase. I'm not sure that we're going to get to 100% utilization by the end of the year, but we very well may.

--------------------------------------------------------------------------------

Operator [35]

--------------------------------------------------------------------------------

Our next question is from Drew Lipke with Stephens.

--------------------------------------------------------------------------------

Andrew Jay Lipke, Stephens Inc., Research Division - Exploration and Production Analyst [36]

--------------------------------------------------------------------------------

Just maybe circling back to the outspend and the greater investor focus on the eventual path to sustainable free cash flow. When you look at your current compensation incentives, I believe the target incentives are largely based on absolute production growth, the net acreage growth, cash operating cost, EBITDA and total shareholder returns. Has there been any consideration to changing incentive targets to maybe address the progression to sustainable free cash flow?

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [37]

--------------------------------------------------------------------------------

Drew, that's a good question. Our compensation committee has been studying that, and it'll come out in the proxy statement. And you will see that I've taken a substantial salary cut. I think you'll see some trimming of all the officers. And the compensation committee has broadened its criteria for looking at things to make a better appreciation for the quality of earnings. And part of that message is to let people know we've heard what they've said. And then, we make more money from our stock going up than we do from compensation. And I clearly wanted to send a message. I'm no saint, as you know. But I clearly wanted to send a message that, look, we care about the stock value and it going up and not trying to pad my compensation. We don't look at any one statistic, but try to use them all. Just like in a football game, you take the statistics, and time of possession is an important number, but it doesn't determine the winner; same thing, first downs, all of those. But when you look at all those statistics, you get a better sense on the quality of the performance. And that's where we're really headed is trying to make sure that it's the best we can make it. We have a very strong compensation team with strong individuals on it. And we're all substantial stakeholders and we're all trying to make sure it's right. But I appreciate the executive team's investments in Matador. I appreciate their willingness to take a little haircut. I'm willing to do it, too, for the long-term good. There was no problem with it. I think it was the right move to make to make it clear that we pay for performance around here. And when performance is good, we reward; and when it is it, we take less.

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [38]

--------------------------------------------------------------------------------

I might just add one thing, Drew. And that is, I think what you certainly will see, I think the numbers you're quoting are based on the last -- or the statistics are based on the last proxy statement, which of course they would be, that's all you would have to go on. But I think what you'll find when this proxy statement is released, is that actually there were more shareholder-focused type of criterion in the 2018 plan and that there will be even more as you move into 2019. So I think that the board and the compensation committee, in particular, has definitely moved in that direction over the last several years, and I think you'll see that as the next proxies come out.

--------------------------------------------------------------------------------

Andrew Jay Lipke, Stephens Inc., Research Division - Exploration and Production Analyst [39]

--------------------------------------------------------------------------------

That's helpful. Thanks for that. And then just as a follow-up. With the 6 rig program in the Delaware throughout '19 and then dropping the rig in the Eagle Ford, is there any color you can give us on maybe corporate decline rates and how we should think about 2020 production growth and rig additions as we look to 2020?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [40]

--------------------------------------------------------------------------------

Well, I think that it's probably a little early to talk, I think, about specifics on 2020, and what we think that production growth could be. Production growth in 2020 is going to be, I think, heavily influenced by some of the new areas that we're drilling that we required in the BLM acreage, for example, in the western part of Antelope Ridge, in the Stateline area, particularly as you go through the latter part of that year. Also, it's going to be pretty heavily influenced by the results that we're seeing from some of the longer laterals we're going to be drilling up in the Stebbins area over the next several years. So I'm very optimistic about what our growth profile will be going into 2020. But it's probably -- I think we feel like it's just a little early, particularly since we're going to be drilling in some newer areas, probably would prefer to have a few of those wells under our belt before we come out with a lot more with regard to what we expect in 2020. But we certainly would expect to have continued growth in 2020.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

Our next question is from Kevin MacCurdy with Heikkinen Energy.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [42]

--------------------------------------------------------------------------------

You referenced a $500 million value for the midstream business. I was wondering if that value is based on a forecasted EBITDA or maybe some color on what method you used to come up with that number.

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [43]

--------------------------------------------------------------------------------

Yes. Kevin, this is David. Well, I think historically you know that we base that on having a kind of a 10 multiple on an EBITDA that was plus or minute $100 million on an annualized basis. I don't know whether 10's the right multiple or 12's the right multiple or what it is. But I think when we put that out there before, that's been pretty much what it's based on. And I think that our expectations for 2019 put us squarely in that range. And of course, that's only just what we have going now. It doesn't include how we expect the value to grow over the next couple of years as we build out the additional assets associated with the expansion that we announced on Monday.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [44]

--------------------------------------------------------------------------------

Great. So it doesn't include San Mateo 2 yet?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [45]

--------------------------------------------------------------------------------

It does not, no.

--------------------------------------------------------------------------------

Kevin Moreland MacCurdy, Heikkinen Energy Advisors, LLC - Partner and Exploration and Production Research Analyst [46]

--------------------------------------------------------------------------------

Okay. Thanks for that. And on the asset sales, you highlighted that you have $50 million to $55 million in sales that could be clarified in the near term. I wonder if you could put that $50 million in broad context compared to your goals for the year.

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [47]

--------------------------------------------------------------------------------

Well, I want to make clear that the $50 million, $55 million is not all sales in Eagle Ford or the Haynesville. There are other categories there where we have obligations that's under contract. We've mentioned some of the performance incentives on San Mateo 1. Those have been paid. And then there have been some sales and the like. So as far as what we feel today is that we're real pleased with the interest that we have received. Over the last few months, the interest has been real good. We've talked to some people. There are a number of properties that are undergoing negotiations. But we're not going to go much beyond that, simply for the confidentiality which occurred. But when you add all that up little bit here, little bit there, that's what it's come to. And there's more to come. So we're real pleased with the job that land is doing, and the evaluation work. And we'll have a further update at the next conference call.

--------------------------------------------------------------------------------

Operator [48]

--------------------------------------------------------------------------------

And our next question is from Sameer Panjwani with Tudor, Pickering, Holt.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [49]

--------------------------------------------------------------------------------

So first off, I think there was some earlier commentary regarding lateral lengths expansion. So can you share the average lateral length for the 2019 program, and how that compares to 2018?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [50]

--------------------------------------------------------------------------------

Yes. I think in rough terms that last year, the vast majority of everything was pretty much ones mile lateral. So I think we had kind of an average of about 4,700 feet is what I recall. I think this year, that number grows to around 6,000 feet. And I think by next year, we think it could approach 8,000 feet.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [51]

--------------------------------------------------------------------------------

Okay, great. And then you also mentioned some timing issues with midstream throughput that led to San Mateo EBITDA coming in below expectations for 2018. So is it possible to quantify what you're expecting for San Mateo's EBITDA in Q1 relative to Q4?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [52]

--------------------------------------------------------------------------------

Well, I think that your point's well taken. We reported about $62 million for San Mateo EBITDA for the year. I think the range we had hoped to hit was somewhere between $65 million and $75 million. But again, I think a lot of that had to do with just timing on a couple of things. One in particular being we thought we were going to be hooked up to the Plaines, interconnect there in Rustler Breaks, probably in the September time frame; it ended up being more or less December. So but it's a great thing now, I'll tell you. So and as I mentioned earlier, I think we've taken our oil gathering from about 10,000 barrels a day in the fourth quarter up to, I think it was 26,000 barrels a day in January. So all the metrics are up in January. I don't know that I have a good handle on the -- I will say the fourth quarter if you looked at the slide, we did just under $20 million in the fourth quarter alone. And I know by the time we got to December, that that number I think was about $8 million in the quarter -- I mean in the month. So I would think, Sameer, we will probably be somewhere in the $20 million, maybe $22 million, something like that for the quarter. But I think that's a pretty good estimate of where it'll come out. And I think we would see that hopefully ramping as we go through the year.

--------------------------------------------------------------------------------

Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [53]

--------------------------------------------------------------------------------

Okay. Appreciate that color. And then lastly, I'm just trying to think about how far along you are in the midstream development lifecycle. And correct me if I'm wrong. But I think Antelope Ridge and Ranger are the 2 key areas that have yet to be committed to San Mateo. So how should we expect midstream build-out into those areas in 2020 or beyond? And in that context, how large do you think San Mateo can get to in terms of gross EBITDA? And how large do you think it needs to be in order to become a sustainable standalone business?

--------------------------------------------------------------------------------

David E. Lancaster, Matador Resources Company - Executive VP & CFO [54]

--------------------------------------------------------------------------------

Well, maybe we can answer those questions in reverse. First of all, I think it is a sustainable standalone business pretty much today. I think if you look at, let's just go with the $22 million annualized, you'd be talking about $90 million of EBITDA associated with San Mateo 1, the existing San Mateo. And we, I believe are anticipating that we will have investments of about $80 million on that for the year, $80 million, $85 million. So to me, what we would expect to earn from San Mateo pretty well accounts for what we would be investing in San Mateo. So I feel like that San Mateo as it is, is and continue to be a sustainable business. We have elected, along with Five Point, to invest an additional round of capital to even further enhance the value of San Mateo. And I think that's going to work out for us every bit as well, if not better, than the investment that we made in San Mateo 1. So you are correct that we do not have Antelope Ridge or Ranger currently dedicated, nor Twin Lakes. So and really it's not even all of Arrowhead. It's a portion of Arrowhead in the western part of Arrowhead. But it is certainly Wolf, Rustler Breaks, the Stateline acreage and a good chunk of Arrowhead that's now dedicated.

So we'll be continuing to looking for solutions as to what we want to do in Antelope Ridge or Ranger. Those may not be San Mateo solutions. But I think that's to come. We've got plenty to focus on with the expansion that we've just announced. How big can San Mateo get? I don't know, Sameer. I mean, how big can we dream? I mean I feel like it's already bigger than I thought it'd be when Matt and Greg came in and said, here's what we're going to do. So clearly, they've been able to go beyond what I expected. And every time they come in, I'm like, well, wow, that's awesome. So I don't know how big it can get. But you also got to remember, I was here when we drilled the first well in Matador. So if you would've told me that day that Matador would be producing 55,000 Boe a day, I probably would've gone, oh, I don't know, you know. So I don't know how big is big.

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [55]

--------------------------------------------------------------------------------

Sameer, I'd just like to add on this. Over in Antelope Ridge, in particular, there's some real nice options other than just physically building the pipe, for us, that we're interested in. So if you're in a capital-constrained deal, some of those options look really good, where we don't have to invest so much capital upfront. So we want to thoroughly look at those and overall determine what's best. But Greg's good about generating some things, and we're real serious. And those are some things that could happen quicker instead of waiting until 2020 and make things happen there real interesting to us and appealing. So a lot going on. And I don't want to get into we're going to run the same play every time. But look at some of these other ways that are maybe even more capital efficient. Craig, have we covered it?

--------------------------------------------------------------------------------

Craig N. Adams, Matador Resources Company - EVP of Land, Legal & Administration [56]

--------------------------------------------------------------------------------

Yes, absolutely, Joe. I think that covers it. One thing about the Antelope Ridge area is you have a lot of optionality over there. And that's kind of the name of the game on the E&P side is to have options. And we're evaluating all those options at this point.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Ladies and gentlemen, this ends our Q&A portion of today's conference. I would like to turn the call over to management for any closing remarks.

--------------------------------------------------------------------------------

Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [58]

--------------------------------------------------------------------------------

Thank you all. I thought this is one of our more productive earnings call. Really appreciate your questions. I thought there were some really good ones. We look forward to meeting operational and financial challenges of the coming year and keep positioning Matador for further growth and value, prosperity, achieving our goals and balance sheet strength this year and beyond. I do want to emphasize the slide presentation. There are some very good slides on that, that really give you not just the last quarter but a whole trend multiyear of where we're headed, which I think you can see. And finally, we really would like to have you visit us. All the people on the call, come visit us so we can meet in person and take all your questions and let you meet some of the people. Because our business, much like yours, it comes down to people and judgment, and we'd like for you to meet this team. Over the years since being public, one of the big advantages, it's helped us attract some really outstanding people who are growing in their roles and helping us meet these results. So please come see us. That's not a trite thing. We really mean it, and we'll even buy lunch if you come. So with that, we'll sign off and hope to see you somewhere soon.

--------------------------------------------------------------------------------

Operator [59]

--------------------------------------------------------------------------------

And ladies and gentlemen, thank you for your participation today. This concludes the program.