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Edited Transcript of MTDR earnings conference call or presentation 30-Apr-20 2:00pm GMT

Q1 2020 Matador Resources Co Earnings Call

Dallas May 16, 2020 (Thomson StreetEvents) -- Edited Transcript of Matador Resources Co earnings conference call or presentation Thursday, April 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Billy E. Goodwin

Matador Resources Company - Executive VP and COO of Drilling, Completions & Production

* 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

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Conference Call Participants

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* Gail Amanda Nicholson Dodds

Stephens Inc., Research Division - MD & 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

* John Christopher Freeman

Raymond James & Associates, Inc., Research Division - Research Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Noel Augustus Parks

Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s

* Richard Merlin Tullis

Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production

* Sameer Hyderali Panjwani

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

* Scott Michael Hanold

RBC Capital Markets, Research Division - MD of Energy Research & Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the First Quarter 2020 Matador Resources Company Earnings Conference Call. My name is Danielle, 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 May 31, 2020, 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.

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

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Thank you, Danielle. And good morning, everyone, and thank you for joining us for Matador's First Quarter 2020 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 company's 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 quarterly report on Form 10-Q.

Finally, 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 first quarter 2020 earnings release under the Investor Relations tab on our website.

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

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

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Thank you, Mac, and good morning to everyone out there, and thank you for participating in today's call. We appreciate your time and interest in Matador very much. Today, we're trying something new in this quarterly release. On both our website and on the webcast planned for today's earnings conference call is a set of 5 slides identified as Chairman's Remarks, Slides A through E, to add some color and detail.

Please let me know if this works -- this additional information works out to be helpful to you. If you'll begin by looking at Slide A, you'll see that first quarter of 2020 was another good quarter for Matador and a beat across the board. The Board of Directors and I would like to commend once again the Matador team for their focus and professional response to the dual crises of the novel coronavirus and the abrupt decline in oil prices. Since early March, we have worked together to identify ways that Matador can reduce capital spending and operating expenses while increasing revenues and cash flows to weather these challenging times.

The officers of Matador are in here with me, and they are available for your questions too and that we've all spent a lot of time up here together in the last 6 weeks. At a meeting of the Matador's Board on March 10, 2020, I volunteered to take a 25% pay cut. The Board joined me in taking a 25% pay cut too. Matador's President and the Executive Vice Presidents all then took a 20% pay cut. The other Vice Presidents took a 10% pay cut, and the rest of the staff took a 5% pay cut.

According to one prominent energy industry compensation study, Matador was the very first company, oil company, to announce any such cuts. Among the other first steps we took were to hedge 90% of our anticipated 2020 oil production, including all of our forecasted oil production in the second quarter, at oil prices ranging from $35 to $48 per barrel and to cut our capital spending by roughly 35% by reducing our rig count from 6 to 3. We are prepared to take additional steps to further reduce spending if necessary.

If you will now look at Slide B, throughout the first quarter, the operations group led the way to our goal of achieving lower-than-expected capital spending and operating expenses. Our capital expenditures for drilling, completing and equipping wells this past quarter was $25 million less than our original estimates for the first quarter of 2020, and we estimate that $15 million of these savings were attributable to improved operational efficiencies and lower-than-expected drilling and completion costs.

Drilling and completion costs for all operated horizontal wells completed and turned to sales averaged just over $1,000 per completed lateral foot, a decrease of 13% from average drilling and completion costs of $1,165 per lateral foot achieved in 2019. We expect drilling and completion cost per lateral foot to continue to decline throughout 2020, reflecting improved operational efficiencies, reduced service costs and the impact of drilling longer laterals with most being 2-mile laterals.

These results bring us to Slide C, which indicates by the fourth quarter of 2020, Matador could be approaching cash flow neutrality. And that's down there in the lower right-hand corner. You can see that we're steadily bringing those costs down, and we think the outlook is positive there.

At the end of this quarter, we achieved the first of 4 important production milestones we set for Matador in 2020. Matador had previously predicted in early 2020 we would incur a significant surge in production when the first 6 Rodney Robinson wells in the western portion of Antelope Ridge asset area were turned to sales. As recently reported in a separate press release, Robinson wells achieved record 24-hour initial potential test results for Matador from all 3 different formations tested, collectively testing at rates of approximately 15,000 barrels of oil per day and 25 million cubic feet of natural gas per day.

The other 3 production milestones should occur when the 5 Ray wells in the Rustler Breaks asset area and the 5 Leatherneck wells in the Greater Stebbins area are turned to sales during the summer and when the 13 Boros wells in the Stateline asset area are turned to sales beginning in September and October. These are objective measures of our progress. These Boros wells are likely to be even better than the Rodney Robinson wells, and there'll be twice as many of them. Collectively, these 4 groups of wells make up almost 60% of our expected completions in 2020 and should account for more than 60% of our incremental production this year.

As we move forward in 2020, our priorities are to protect our balance sheet and our liquidity and to strengthen our exploration and production and midstream businesses. We will do whatever is required to protect our balance sheet and preserve the necessary liquidity to meet our goals.

Many of you have wondered about our bank relationships. If you look at Slide D, you'll see that we had approximately $340 million of our elected commitment available at the end of the first quarter and another $200 million available under the total borrowing base of our reserves-based loan. We wish to express here our sincere appreciation for the support and encouragement we have always received from our bank rate and especially this year. These are obviously challenging times for all of us. But challenging times can bring about unexpected opportunities, and we will remain open to all such possibilities as we navigate the remainder of 2020 and position ourselves for 2021 and beyond.

We consider Matador's current stock price to be a good buying opportunity. Matador's assets include 2 successful businesses: one in exploration and production and one in midstream as well as 152 million barrels of oil and 646 Bcf approved oil and natural gas reserves, respectively, and 128,000 net acres in the Delaware Basin worth some 117 million shares outstanding.

Slide E shows the steady growth in our proved reserves and the amount of reserves each individual shareholder proportionately owns.

The Board, the staff and I remain confident that the outlook for Matador is very positive when you combine these assets with Matador's financial position, proven management team and operating staff. As I mentioned, our staff officers are here, I'm here, and we would be happy to take your questions at this point.

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Questions and Answers

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Operator [1]

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

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Scott Michael Hanold, RBC Capital Markets, Research Division - MD of Energy Research & Analyst [2]

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I think a lot of the narrative for the industry in the next couple of months is really going to pivot to the full storage in the U.S. and curtailment of production. You all obviously have factored some of that in to your guidance. Could you give us a sense of exactly how you see that progressing for Matador? And first question, have you guys shut-in production yet? When do you think it will start? And what is your sort of base case and maybe stretch case on what the shut-in levels could get to?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [3]

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Scott, it's David Lancaster. So let me try to take those in order. I think with regard to the question you're asking about, the percentage of shut-in, we've shut in some -- or will shut in some of our production in the Delaware and in the Eagle Ford in May and in June. We anticipate relative to what our expectations were for what that production could have been that well probably be in the 10% to 15% of our production in those months will be shut in on average. And with regard to your question of have we already started to, we are just beginning to shut in our production in the Eagle Ford in the last couple of days, and we'll proceed to shut in our production in the Delaware starting tomorrow.

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Scott Michael Hanold, RBC Capital Markets, Research Division - MD of Energy Research & Analyst [4]

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Okay. That's great. I appreciate that. And that 10% to 15%, I mean, do you guys -- with some of those obviously pretty strong wells coming on in the back half of the year, do you plan on -- how do you plan on managing those wells through the course of the back half of this year and into next year? Do you plan on managing the flow rates until prices improve? Or can you give us a sense of what that path is going to look like?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [5]

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Yes. I think, Scott, what we are thinking right now is the most likely thing we will do is probably something similar to what we did with the recent Rodney Robinson wells, in that we will go ahead and frac and get those wells drilled out and put online, get initial tests on them. And then if need be, we may trim the production back on some of those wells for a period of time.

I think that a lot of that will depend on how prices are looking as we go through the rest of the year. And those will be kind of game time decisions as we go along. But as things exist now and particularly with the Stateline wells and the other wells that Joe's talked about, in particular, the Rays and the Leathernecks, our plan is to go ahead and complete those wells, drill them out, get them tested, and then we'll make decisions as to the level of production on those wells as we go through the year.

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Matthew V. Hairford, Matador Resources Company - President [6]

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Scott, this is Matt. I just wanted to add to what David is saying there in regards to how we're shutting these wells in and which wells are getting shut in. And I think Glenn Stetson, who's our Head of Production, has done -- he and his team have done a really nice job of putting together all the wells that we operate and what the operating expense is on those wells and where they're economic and where they're not. And so we're kind of poised to react to whatever the market does in regards to increasing that amount or decreasing that amount. We've got all that stuff teed up and ready to go.

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Scott Michael Hanold, RBC Capital Markets, Research Division - MD of Energy Research & Analyst [7]

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Okay. Sounds good. And just to be clear on just -- maybe my question wasn't as clear, but in your guidance, do you assume there's continued curtailment through the rest of this year on the Rodney Robinson and with the Boros wells?

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

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I think it's fair to say, Scott, that we have assumed in the second half of the year that we will be able to return those wells to production at something closer to what their original rates are. I mean one reason that I think we were -- we said that we'd update again on third quarter expectations and fourth quarter expectations during next times earnings release was just to give us the opportunity to see how things go over the quarter.

But -- so I think, like I said, some of those things will probably be game time decisions. But in -- and I think we've made some allowance for that in the current guidance that we have. But for the most part, in what we've provided, I think we expect that we'll be able to produce those wells closer to what we would have originally anticipated in the second half of the year.

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Operator [9]

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Your next question comes from Jeff Grampp from Northland Capital Management.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [10]

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Great results. Wanted to -- sticking on the topic of shut-ins. Can you guys talk about any, I guess, expectations that you have or maybe drawing on past experiences you can draw on to kind of gauge expectations for how you guys see these shut-in wells kind of coming back? And is that a meaningful risk you guys can kind of think about or plan for as far as bringing these wells back on? Just kind of curious how you guys envision that playing out.

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Matthew V. Hairford, Matador Resources Company - President [11]

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I'm sorry. Joe, go ahead.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [12]

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Yes. Matt, I'll go first and if you'll finish up. But Jeff, the one thing that we do is we do multiple scenarios so that we don't have just one and go with it. But we look at a number of what-ifs and to try to build out a plan. So it's more than one variable. A lot of it's price. You also have lease terms. You also have your hedging to take into account. And so it could be multiple scenarios there of what we may do at different times.

The one thing I think that is we're trying to be consistent, we don't want to be -- turn the wells on full open and then shutting them back. We want to try to be consistent and methodical through the process, and also, where we're on pipe makes it easier than where you're on truck and a few circumstances like that. Matt?

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Matthew V. Hairford, Matador Resources Company - President [13]

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Yes, Joe. Joe, thanks. Jeff, I'll just add to what Joe is saying there. There are some mechanical issues around which wells we shut in that we do seriously contemplate, and I'll just give you a couple of examples. If we got a, say, a legacy vertical well that's on rod pump, and it's making -- let's say its making 20 or 30 barrels a day, that well is pretty easy to shut in. We go by and secure the -- or shut the pumping unit off, secure the wellhead, and we're ready to go on that one.

Another example is we've got -- and as we said, we got a well in the Delaware that has an ESP that's due for an overhaul. And so we talked about that earlier and just decide the appropriate thing to do is go ahead and pull that ESP out, do the inspection on the tubing, do the overhaul in ESP and then prepare to run back in the hole and be ready to do that. So that's kind of the opposite ends of the spectrum, but Glenn and his team have done a really nice job of identifying which wells we want to shut in and how we want to shut them in.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [14]

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Got it. Great details there. My follow-up on the midstream side. Release mentioned San Mateo going to a free cash flow positive position next year. I assume that the 2 likely decisions with that free cash flow is either to pay down that bank debt or maybe extract some cash back to the parent. So I was just kind of wondering how you guys look at the optionality of that free cash flow. And is that a Matador decision? Is that a conversation you have with your partner? And I guess just maybe reminding us how much control you have over what to do with that free cash?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [15]

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Jeff, it's David. Certainly, San Mateo has its own Board of Directors that's made up of representatives from Matador and from Five Point. And we have a very good working relationship with our partners at Five Point. And so I would expect that whatever we would decide would be a unanimous decision between the partnership and everything else has to this point. So I'm sure that they would be consulted. There are -- we can use that cash flow to pay down some of San Mateo's debt or we can also use it to enhance the distributions that are made to each party.

And it may be that the best thing that we decide, we'll just have to decide which way the partnership wants to go there. So -- but it wouldn't surprise me if -- that for the most part, we just increase the distributions made to each party and then each party can use those distributions as they see fit. I think in Matador's case, that would provide a significant part of free cash flow that we would use along with the incentives that we expect to be larger next year to defer any outspend we might have in the drilling and completions of wells for 2021.

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Operator [16]

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Your next question comes from Irene Haas from Imperial Capital.

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

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I was wondering, as you look towards fourth quarter, you have a D&C CapEx of $56 million, with 3 rigs probably likely no completion. Can you give us a little color as to how 2021 might unfold? How would you kind of step back into a more normal routine if oil were to stabilize like $40 or $50?

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

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Yes. Irene, it's David. Well, I think it's probably a little early yet to speculate on that. So I would be pleased for oil to be back at $40 or $50 in 2021. And if it were, then I'm sure we would probably consider perhaps adding a rig back. But at this point, we don't have any plans to do that. And I think certainly through the remainder of this year, we're going to stay with the 3 rigs. And I think our initial plans for going into next year would probably be similar. And I think we would be cautious as we always are in terms of when we decided to move forward with increasing activity.

I think that actually in the fourth quarter, if I recall correctly, you're right, the number of completions is down, but we still do have a few wells being completed even in the fourth quarter with the CapEx estimate that we have. And then we would have additional wells being completed in the first quarter of 2021 as well because I think most of our Voni wells at the Stateline would be beginning to complete a lot of those wells, and we'll have some additional Rodney Robinson wells by that time, too.

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

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Okay. May I have one follow-up? How's the G&A look on a per barrel basis? Should we kind of use the first quarter number in -- for the rest of the year? And that's all I have.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [20]

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Can you ask it again, Irene? I'm sorry, you kind of cut out, and I didn't understand it completely.

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

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G&A outlook for the rest of the year.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [22]

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Okay. I think if you'll kind of just look in the slide deck that we provided, we gave you a pretty good indication of what we see for G&A going forward for the rest of the year. I think we would expect that our G&A per BOE would be down some from what we reported in the first quarter because there are some additional G&A steps that we've taken, in particular, the pay cuts and things that Joe referenced just a few moments ago. Those actually didn't begin until the 1st of April. So they will be second quarter items.

And there are also some changes that we made. We've referenced in previous releases that some of the staff have moved into positions in the field or maybe in our measurement area in San Mateo that -- so we've had folks, I think, what did you say, Matt, 27 or something that.

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Matthew V. Hairford, Matador Resources Company - President [23]

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Approximately.

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

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That have actually gone from positions here in the Dallas office to other assignments. And I think that's all working out real well, but that's helped us to cut down on some of the contract expenses that we have, and we'll begin to see more of that begin to find its way into the G&A numbers going forward, Irene.

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

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Irene, this is Matt. I just wanted to tag on to what Dave was talking about, these folks transfer job responsibilities. A lot of them are people that have gone through our MAX ops and -- or Billy's MAX ops and MAXCOM programs, and they've been out in the field. That's where they learned. They spent the first 2 or 3 years in the field. And so we've asked them and they were very excited about being able to go back and run drilling rigs and run frac spreads and do all that.

So I think from a timing perspective, it's worked out really nice for us to have experienced field folks that we could bring into the office for a couple of years and then send them back out into the field. So will continue to gain experience and they'll be even better when they come back.

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Operator [26]

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Your next question comes from John Freeman from Raymond James.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [27]

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The -- not to belabor the shut-in theme, but I just want to verify, David, when you said that roughly 10% to 15% production shut-ins is kind of what you're assuming. When you say shut-in, does that include in that number what I would view as sort of your curtailments or these restricted flow rates like on the Rodney Robinson, is that included in that number? Or is the10 % to 15% just physical shut-ins?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [28]

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Yes, John. It's David. Yes, thank you for giving me a chance to clarify that because that is true. I mean when we say -- when we're saying -- when I said shut-ins, I'm thinking, shut-ins or curtailments are restricted flow. I've got that all sort of in the same bucket.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [29]

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Okay. And then is it possible, David, it may not be, but is it possible to sort of break out like how much of that you think is physical shut-ins versus sort of the curtailment like what's happening with Rodney Robinson?

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

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I would imagine that I would say probably maybe, John, half, maybe 2/3 of it is more physical shut-ins and the other is due to curtailments.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [31]

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Okay. Great. And then just my follow-up question, just to make sure that I've got the completion cadence right. So based on the details you all gave with the 5 Ray wells and the 5 Leatherneck wells, which you said summer of this year, if we take the prior guidance that had those coming on roughly around July, so assume you get those 10 in 3Q and then the 13 Florence wells, which you're basically straddle 3Q, 4Q with September, October, if you just take half of those Boros and put them in 3Q for right now and the other remaining half in 4Q?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [32]

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Yes. I think what's most likely to happen is that the Ray wells will end up being Q2 completions. And I think the Leathernecks will end up being Q3 completions. And the Boros wells, I think that maybe it will be more like 2/3 in September and 1/3 in October. But there's 13 of them, and they'll come on just a little bit at a time through those months.

I think we're going to put them on 3 or 4 wells at a time during September and early October for several reasons: number one, just don't want to swamp the facilities initially; number two, to get a feel for what the volumes are going to be; number three, it will be the first flows that are headed north on the new pipeline up to San Mateo. So I think we just want to kind of stage things in rather than go out on day 1 and just open all the wells immediately.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [33]

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That's great. I appreciate, Dave, and congratulations to everybody on a great quarter.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [34]

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Thank you, John.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [35]

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Thanks, John.

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Operator [36]

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And your next question comes from Neal Dingmann from SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [37]

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My first question just for -- probably for David or Matt. I'm just wondering, David, when you think about -- we haven't heard too much you mention the curtailments and shut-ins. I'm just wondering what's the time or cost needed to bring that back? It sounds like or at least appears like on your press release, there's really not too much timing or cost involved, but I just want to sort of double check that from the experts.

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Matthew V. Hairford, Matador Resources Company - President [38]

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So Neal, on -- I didn't exactly understand your question. Are you just asking about...

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [39]

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How difficult it would be to bring the level back on everybody might recall.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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Yes. Just really, Matt, from the shut-in that is there, we've heard Schlumberger talk about a lot of stimulation needed to bring things back. And again, I get it if you're curtailing, I'm just wondering about cost or timing. You all don't appear like there's too much involved, and I just wanted to sort of double check that.

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Matthew V. Hairford, Matador Resources Company - President [41]

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Yes, Neal, I think it will vary from well to well. But I think for the most part, let's just take the legacy wells that are on pumping units. I think, like I said earlier, I think that's pretty simple. You turn the unit off, close the valves, and when you're ready to come back on, you go back out and open them up.

I think some of the wells that have different type of artificial lifts. It may be a little bit different cost structure. One of the things that we'll do -- we'll just talk about gas lift. We haven't talked about that yet. So when we'll shut a gas lift -- a well that's on gas lift, and we'll just go ahead and shut the well in and leave the gas lift valves in place. We'll put the compressor on standby for that time period. And then when we're ready to go back to work there, we go back out, open the well up. If it's built enough pressure to start flowing on its own, it will. If not, then we'll just start-up the gas compressor and start gas lifting.

If you move forward to wells that are flowing, which are probably very few of the wells that we would shut in that would flow, I think those would build up natural pressure and kick off on their own. So I don't think we anticipate a whole lot. There are a few wells that we probably will take this to be an opportunity to change out the artificial lift system or overhaul what we've got in place.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

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Very good details. And then my second question is for David. David, around the CARES Act and tax credit. I'm just wondering if you all might be eligible for any AMT tax credits in 2021 and if you could look to potentially accelerate these into 2020.

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

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Yes, Neal, the answer is yes to that. I think but we never had a lot of AMT credits even with the passing of the new Tax Act. But yes, I believe there's about -- probably about $3 million that we have applied or have requested be accelerated into 2020 as a function of the CARES Act. And I think there's another $3 million that we're awaiting just on kind of the more normal cycle coming in, in 2020. So altogether, maybe something like $6 million.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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Very good. And Joe, I just want to say nice job leading by example with the salary reduction. And I think you guys really stand out.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [45]

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Thanks, Neal. I appreciate. My feelings were hurt here a little bit because I wasn't getting a question.

But no, we really appreciate you. I mean, it's the right thing to do it. And I'm not heroic by any means. It just was the right thing to do. We were looking at prices going from 1st of the year at $62 a barrel down to $20. And we've got shareholders that had in this -- the shares lost 90% of their value. I mean, what else could you do? And we're ready to -- we were ready to take a second cut, but it appears that things have been turning around and maybe that won't have to be done. But we're -- we want our alignment with the shareholders to be clear. And I don't want anybody to think I'm a saint because I'm not. It's just the right thing.

A really nice thing was without any prompting, our Board immediately -- one raised his hand, our Audit Committee Chair, and said, "I want to volunteer a 25% pay cut too. They went all around the boardroom, and everybody agreed to do that. So I think that's a better example of people trying to do the right thing than anything that I did and the executive team did, and everybody pitched in.

And in this past 6 weeks, there has really been a lot of extra effort from people trying to do the right thing and reposition Matador and make it clear that we had a plan, a good plan to address work through the coronavirus as well as these poor pricing, and we were really helpful and the best moves was David and them restructuring the hedges to take them so that we got a much larger percentage, up 90%, 100% for the rest of this quarter. Coverage on the hedges, with a base price of a -- bottom price of about $35 to $37. We still have a few $48, but that took a lot of the risk out going forward. And our -- everybody -- it's been all hands on deck to keep things moving. So the credit is really to other people, but I appreciate you give me that credit, Neal, and I'll take it.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [46]

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No, I still consider you a saint, Joe.

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Operator [47]

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And your next question comes from Noel Parks from Coker & Palmer.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [48]

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I was wondering about the mention you made earlier about the Boros wells and that you expected that they would be even better than the Rodney Robinson ones. So I was wondering what you attribute that to and also wondering, with the outperformance you saw in the first 6 wells, would love to hear some more about what the components of that was, whether it's just the rock back effectiveness.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [49]

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Yes. Noel, it's David. Well, I think that, that's right. I think that it's largely just a function of -- it's just a function of the rocks. And clearly, that's an area there at the Stateline that we feel like is -- some of the very best reservoir quality are likely to be in the entire Delaware Basin.

And so I think we're just very optimistic about the potential for those wells. I mean we've liked the look of the section from the Avalon through the lower parts of the Wolfcamp ever since we've been working in the basin, and we think it's an area that offers a lot of opportunity. And I mean proof will be in the pudding of course, but I think we're very optimistic. And so far, the drilling on those wells has gone well. And so we're anxious to get that stage behind us and get to start fracking some of these wells here before too very long and see what we got.

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Matthew V. Hairford, Matador Resources Company - President [50]

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Yes. Noel, this is Matt. I'll just add to what David has said there. One of the things that we're excited about is having those rigs on there at the same time. There's lots of synergy, lots of efficiencies that you get just by having ever all the rigs right there close by. We're sharing -- some of the mud systems we're able to share. We're sharing some of the supervision. We're able to reduce some of that. Our superintendents, our troubleshooters, if you will, they're staying on location. They're able to access all 4 rigs at the same time. There's just a lot of efficiencies that go along with that.

And this is a big batch of long laterals for us, but it's not the first. We drilled well over 30 of these 2-mile laterals already. And so Billy and his team are doing a really nice job on the drilling. And I know Chris and his team will do well in the completions, and Glenn and his team will do well in production. So we're excited about those wells.

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Billy E. Goodwin, Matador Resources Company - Executive VP and COO of Drilling, Completions & Production [51]

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Noel, this is Billy here. I'll just add on to that. In the MAXCOM room, you see the different asset managers. You see the geologists in there. You see the engineers. And when we have that many rigs running in the same place at the same time, you get all this group energy there, and they're all looking at different things they're doing. And out of that, I mean, I know you see in the slides there, we've had 84 records across different asset areas and categories to the tune of saving $9 million already. And you just feel it and see it, and you're getting more time in zone, 94% of the time in zone and all good.

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Noel Augustus Parks, Coker & Palmer Investment Securities, Inc., Research Division - Senior Analyst Exploration, Production and MLP’s [52]

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Great. And just wanted to turn to hedging for a minute. With what we've seen with the gas strip looking better than it has been in a while, are you more inclined to look at getting more aggressive on gas hedging going forward, either in the near term or sort of longer term when we get -- hopefully get past the coronavirus? Is that looking more likely, less likely, more inclined, just to see what the spot will bring you?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [53]

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I think, Noel, it's probably more likely. I mean we already, as you noted in the release, have entered into some hedges for natural gas in the winter months. So we've got some hedges down between November and March already that have $2.50 floors and I think they've got about $3.75 on the top end. And we certainly have begun to monitor the move in gas prices. And I would expect that things continue to look favorable, and I think we feel like that they will, that, that's probably something that we would look to do. To be able to lock in a little bit better natural gas price for next year would help us out quite a bit. So we do have 40% of our production that's natural gas. And when you're talking about producing 60 or 70 Bcf a year, that in extra dollar is $60 million or $70 million. So I think it's important and something that we're paying attention to.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [54]

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The other thing -- this is Joe. The other thing is just to note that we're right now about 60% oil, 40% gas, and we have a number of knobs that we can turn either in the Haynesville or the Eagle Ford or out there in New Mexico, in the -- particularly in the Rustler Breaks area, where we could rapidly increase our gas production if we should choose to do so. So we're monitoring the hedging, but we kind of like to have a backup, use the hedging to back up what we're doing either in oil or gas to try to reduce the risk of commodity pricing.

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Operator [55]

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And your next question comes from Richard Tullis from Capital One Securities.

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Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [56]

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Joe, congratulations on the strong quarter, particularly on the cost side. Jumping back to 2021 a little bit. I know it was talked about a little earlier. But with 4Q production benefiting from the Stateline wells coming online later this year, what level of drilling completion CapEx do you think would be necessary in 2021 or rig activity, if you'd rather look at it that way, to kind of keep production flattish with the new oil production outlook for this year, around 41,000 a day?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [57]

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Richard, It's David. Well, I really believe that we will be able to keep our -- we can -- we'll probably have -- we can have small growth, I think, let's say, low single-digit kind of growth next year, even if we just maintain the 3 rigs. I think that -- and some of that will be timing related. But as you have noted, we do have a significant influx of production from the first 13 wells there at the Stateline that will come on mostly in the fourth quarter, and that will carry over nicely into the first part of 2021.

And then, of course, at the moment, we expect that we'll have the first batch of wells from the western side of Stateline, the wells were calling Voni, that will -- I think it's another dozen wells that will be coming on right about probably the beginning of the second quarter. So that will be another boost to our production early in the year.

And then I think the Antelope Ridge team is also expecting to drill 4 more wells on the Rodney Robinson tract beginning in the end of this year, and those wells also would probably get fracked and turned to sales about the same time, end of the first quarter, first or second quarter, kind of like the other Rodneys did this year. So I think we feel like that we're likely to have a pretty nice boost in production in the early part of 2021, and that would -- I think that would help to sustain even some level potentially of growth even at the 3 rigs in 2021.

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Richard Merlin Tullis, Capital One Securities, Inc., Research Division - Senior Analyst of Oil & Gas Exploration and Production [58]

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That's helpful, David. And just for my follow-up, with San Mateo adjusted EBITDA kind of flattish the last couple of quarters, what are current thoughts on potentially monetizing all a part of the interest there over the next 1 or 2 years? If you could update us on that.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [59]

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Yes. Richard, we're a public company. And as such, we try to play a straight game. We've sold things in the past. We sold first Matador. We sold part of our Haynesville to Chesapeake, and we sold a plant to EnLink. So that's a hard one to predict, particularly at the time of volatile pricing. But if we got a serious offer, we would give it serious consideration.

The -- as far as the EBITDA going fairly flat, you've had a reduction in rigs. So there's third-party contracts not as plentiful as you might like. But it's also we have a growing production profile out there, and we need that capacity just to take care of ourselves and hope to add to it with more third-party contracts.

And I think our field staff and -- have done a real good job of servicing those other companies. And we like to think that we're getting a good reputation for delivering good service out there and keeping them moving. So it's a matter of time when you build those pipelines to attract other gas, and we built the pipelines, particularly the expansion through the Stateline and up to the Stebbins area, which are great areas. And we think just kind of -- there's an element -- we're not reliant upon it, but there is an element of building and they will come, combined with our own production profile, and the needs of some of the other third-party relationships that we already have. So there may be a little pause here and stayed a little flat, but we expect that growth to pick up particularly as people -- gas prices improve and people start drilling more gas wells. Water production, that's kind of -- that's been fairly consistent and so is oil. So I think outlook is pretty good. David, anything?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [60]

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No, I think, that was a good answer. I would just add to that, Joe, you kind of said it, but when San Mateo contemplated this expansion, what we would look at is the anchor tenant to make the economics work, and the anchor tenant is Matador. And so the fact that we're running the rigs on the San Mateo acreage does make the economics work for the expansion going forward. And like we said, at some point in time, things will come back and we'll be there at San Mateo. We'll be there with the capacity and ready to go for third-parties.

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Operator [61]

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And our next question comes from Sameer Panjwani from Tudor, Pickering.

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Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [62]

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This is a bit of a hypothetical question, but on the shut-ins, if the hedge book wasn't in place, would you guys have decided to shut-in more? And following on to that, what price do you think the company needs to generate full cycle returns on new drilling on an unhedged basis?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [63]

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Sameer, it's David. I think it's always difficult to answer hypothetical questions. So I mean we kind of are where we are. I think there are a lot of considerations that go into making decisions on shutting in wells. And not only do you have situations with regard to different wells have different levels of operating expenses, different wells are producing from different zones, different wells have different times of artificial lift types that maybe make them easier or more difficult to shut in, different wells have all kinds of different lease obligations.

And so there's many different considerations, I think, that all of we, operators, have to go through in terms of deciding what and how much we're going to shut in. And it's not just simply a matter of price. So I don't -- you have volume commitments and things like that for gas production. So I think you have to take all those things into account. And I don't know that if I think the hedge book helps. I think that it's only one of any number of considerations that you try to take into account when you're making these kind of decisions.

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Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [64]

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Okay. That's helpful. And the second part of that question was, as you think about what price do you think the company needs to be generating full cycle returns on new wells?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [65]

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Again, I don't mean to be -- obviously abstain here or anything, but I think that's also kind of a difficult question to answer because of the fact that price and service costs tend to go hand-in-hand. And currently, some of the prices that we're projecting that we're going to be able to drill and complete these wells for are the best that we've ever seen.

So no, I'm not going to tell you that I think that, that makes $20 work for every well that we're going to drill. But I will say that it's again, to me, it's just not a one variable situation. We have certain wells that, like all operators, you've got a portfolio of locations and a portfolio of opportunities and some of you know are going to have higher returns than others. And in this period where prices are low and costs are low, it makes a difference in terms of the decisions you make on which wells to drill and whether they're going to be economic in the long run.

So I just hesitate to give you a specific price because I think it -- there's a lot that goes into making those decisions, and it's not just all about price. Cost makes a lot of difference, too. And I can tell you several years ago, when we look back and do some of our own studies, 2016 was another time when prices were very low, then there was an increase in prices following that. And we think those are some of the most economic wells that we ever drilled because of the fact that we're able to construct them for a very low cost. And so it's just -- it's not something, I think, you can leave out of the equation when you're thinking about this.

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Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [66]

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Okay. Okay. Got it. Maybe switching gears. On San Mateo, there was a question earlier on liquidity and free cash flow implications from Matador as the Midstream business turns free cash flow positive. But can you talk a little bit about how San Mateo II could further enhance this once some of the facilities come online, both in terms of liquidity and free cash flow?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [67]

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Well, I think we think it can do both very well. First of all, with regard to the liquidity part of the question, the current facility, credit facility, that we have in place with regard to San Mateo is tied simply to San Mateo I's assets. So none of the assets belonging to San Mateo II yet are part of the credit facility. We believe that once the merger of San Mateo I and San Mateo II is completed, which both parties are working on at this time, and I think we would expect that to happen down the road here, then the assets of San Mateo II will be brought into the credit facility.

When they are, we feel like that there's very good likelihood that the bank then would -- the bank group would agree to increase the size of that facility because they'll have substantially more collateral. And with that then, once that's accomplished, then we'd have sufficient -- substantially more liquidity just under our -- under the credit facility associated with San Mateo.

Secondly, I don't think there's any doubt that once the new plant is online, and the new pipelines are in place that we're going to see a significant increase in the revenues from San Mateo with the -- specifically from San Mateo II as the gas from the Stateline begins to travel to -- from the north and the gas and oil from Stebbins starts to come to the south. And we've already added a couple of additional saltwater disposal wells up in the Stebbins area, which are already contributing to the revenue of San Mateo II.

So I think that as we have expected and projected, that we're going to see a nice bump in San Mateo's financials as coming the fourth quarter and beyond into 2021 as we get everything turned on at the Stateline and Stebbins.

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Operator [68]

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And our last question comes from Gail Nicholson from Stephens.

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Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [69]

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The Rodney Robinson and the Boros wells have a higher NRI. Could you remind me on the 20 activity level what is the average NRI? And then how do you think that could potentially change in '21?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [70]

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Gail, the -- it's David. The -- you're right, the Rodney Robinson wells have that 87.5%. All the Boros wells have 87.5%. Anything on Stateline, so the Vonis will have 87.5%. The wells at Rustler Breaks probably tend to run between 75% and 80% on the NRIs, and that's probably pretty good elsewhere, too. I mean we have wells that run -- if they're fee leases, they're mostly 75%. If they're state leases, they tend to be a little better than that, maybe plus or minus 80%. And if they're the federal leases, we often have the full 1/8 (sic) [7/8] or 87.5%.

And so as you think about next year, I mean, we probably will continue running a couple of rigs at the Stateline, and that will -- those wells should all have the 87.5%. We'll drill a few more Rodneys. But we'll also have, I'm sure, 8 or 10 other wells that will have something closer to 75%.

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Gail Amanda Nicholson Dodds, Stephens Inc., Research Division - MD & Analyst [71]

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Okay, great. And then just a follow-up on San Mateo. When you look at third-party MVCs for '20, I do believe that, that upticks in '21 is an amount of MVCs for third party, is that correct? And can you just kind of quantify that change '21 versus '20?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [72]

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Well, the answer is it's correct. I probably would prefer not to quantify the amount, just from the standpoint that consider that sort of confidential between San Mateo and its customers. But to answer your question, yes, we would expect an uptick in the volume in 2021.

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Operator [73]

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Ladies and gentlemen, this concludes the Q&A portion of this morning's conference call. I'd like to turn the call over to management for any closing remarks.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [74]

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Thank you very much to all of you listening in and participating. We appreciate it. The final thought is, is that -- is what's been most encouraging to us is way everybody on the various areas, drilling, production, marketing, land, land administration, ever group, accounting, division orders, everybody has really pitched in and made the extra effort.

And I know our processes are working better. The communication is better, coordination is, and we think we're going to finish this year strongly and next year will be even better.

And as challenging as these times are, there are going to be some good opportunities come up. As David mentioned, our drilling costs are down. That'll lead to better rates of return. We think there'll be some opportunities come up. Midstream is growing, and it's a fee-based business, so it's not as subject to the volatility. Our marketing group is encouraged by the outlook for gas prices to rise. So while $20 oil does present a lot of challenges, we also think there'll be some opportunities come out of this.

So we appreciate your interest. And anytime we can help you or answer questions for you, please give us a call. And thank you very much for joining this call. We appreciate your interest very, very much.

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Operator [75]

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