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Edited Transcript of MTDR earnings conference call or presentation 1-Aug-19 2:00pm GMT

Q2 2019 Matador Resources Co Earnings Call

Dallas Aug 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Matador Resources Co earnings conference call or presentation Thursday, August 1, 2019 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

* Bradley M. Robinson

Matador Resources Company - Executive VP of of Reservoir Engineering & CTO

* 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 D. Spicer

Matador Resources Company - Senior VP & GM of Midstream

* Matthew V. Hairford

Matador Resources Company - President

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Conference Call Participants

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* 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

* John Christopher Freeman

Raymond James & Associates, Inc., Research Division - 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

* Timothy A. Rezvan

Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen. Welcome to the Second Quarter 2019 Matador Resources Company Earnings Conference Call. My name is Cherie, and I'll be serving as your 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 August 31, 2019, as discussed in the company's earnings press release issued yesterday. I would now like to 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, Cherie. Good morning, everyone, and thank you for joining us for Matador's Second Quarter 2019 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 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, I would like to remind everyone on the call that you can find a short slide presentation summarizing the highlights of our second quarter 2019 earnings release on our website on the Events and Presentations page under the Investor Relations tab.

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 on the line, and thank you for participating in today's call. We appreciate your time and interest in Matador very much, and feel this has been a very strong quarter for us and so we appreciate your attention.

I'd also like to introduce the Executive Committee who are the ones, with the staff, who are really responsible for these exceptional results. They are Matt Hairford, President; David Lancaster, Executive Vice President and Chief Financial Officer; Craig Adams, EVP and Chief Operating Officer, Land, Legal and Administration; Billy Goodwin, EVP and Chief Operating Officer, Drilling, Completions and Production; Van Singleton, EVP of Land; Brad Robinson, EVP of Reservoir Engineering and Chief Technology Officer; Gregg Krug, EVP of Marketing and Midstream Strategy.

As outlined in our earnings release issued yesterday, we are very pleased with the execution and operating performance during the first half of 2019. We had many financial and operation -- operational challenges, and the staff really rose to the occasion, and I wish to personally acknowledge the entire Matador staff for all their hard work and dedication. It sounds corny, but it was truly a team effort. The way everybody put in a little extra effort and applied their skills to achieve in these results is, really, there's not -- I wish I had all the words to express my appreciation the way everybody pit stand and worked together. I know that's corny but it is really fun to see the teams really working with each other to achieve these ends.

Second, I also would like to recognize Midstream. They are certainly coming of age with our most recent project in San Mateo II, as well as continuing to achieve stellar results in San Mateo I. And in particular, we have done now -- this is our, San Mateo II represents our fourth midstream project. All have come in on time, on budget, and I'm pleased to say this most recent one is working right now on track to be on time, on budget too. We have a great partner there with Five Point and appreciate their help and cooperation and goodness to this point and look forward to reporting more on midstream in the next quarter.

Finally, at the beginning of the year, it was clear the market was interested in what kind of efficiencies for each company going to have because that was, I would say, the #1 theme when we were on the road is what kind of efficiency are you achieving. And I think these results reflect the increasing capital efficiency that we're enjoying as reflected in the -- that we were able to drill more wells, but actually bring in CapEx with that was less than projected or in the budget. And there was a -- again, a lot of cooperation.

One good example is working with Halliburton on the sand, using local sand, helped bring down the cost without that apparent degradation to our production or reserves.

At the same time, part of the team effort was Patterson working with us on rig efficiency and upgrading some of our rigs to the 3 pumps and the top drive, and really appreciate the way they worked with us.

And then the same thing on operational, the cooperation between our Midstream and production group so that when those wells are ready to come online, Midstream was waiting there with the pipe. And we're pleased with the services we've been able to render to other third parties and give them the same type of efficiency.

And finally, just within the organization, I thought there was a really a special effort by all the groups to work within our discipline. The geologists and the engineers and the various teams that we have, the operational and just everything clicked. So we -- it happened this time doesn't mean it happens next time unless we get busy and get to work. But really appreciate also all the kind words that we received for you, for the efforts this quarter. And please know, we're going to continue to try to get better this next quarter and the next half of the year and into 2020. And so we like our chances. And with that, I'd like to open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Scott Hanold with RBC Capital Markets.

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

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This is Scott. So I mean you're seeing CapEx, where it was this quarter was very, very good, well below expectations. And can you kind of give us some quantifications on some of the savings you're seeing and where we could ultimately -- maybe look through where you were at the end of '19, where we are today, but where could we be as we enter 2020. I don't know if there's a relative figure like dollar per foot completed or an average well cost of a typical lateral length. Or if you can give us some context of how that's progressed to today and where we can expect it to go in 2020?

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

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Yes. Scott, it's David. I think that we had put out in the investor deck this last quarter, so a slide that had talked to how we thought that 2019 could go in terms of our ability to improve our capital efficiency. And I think that we have said that kind of on a dollar per foot basis, as I recall, that we thought that would be down 13% or 14% over the course of this year. So far, I think we're probably a little bit ahead of that this year. And I think that, that had projected we'd be down another 10% to 12% again next year. Of course, that assumed that there wasn't any inflation in service costs, that those would remain flat because we were trying to give an idea of what our own capital efficiencies could be. So I think that we're probably running a little ahead of our expectations. And I give a lot of credit, of course, to the operations group for their abilities to do that. I think that's been accomplished, both on the drilling side and probably, in particular, on the stimulation side as well.

And so it's been a really good effort to this point in the year. I do think it's important to note that we sort of -- a lot of what we've done in the first half of the year hasn't been as much associated with the longer laterals, although it probably was in the Eagle Ford. But in the Delaware, we're just -- while we do some longer laterals that will -- we're kind of just, I think, still in the beginning stages of that. So as we go through the second half of the year, we'll see that a little more. And then, of course, as we go into 2020, I think that will even pick up more. So I think we're pretty optimistic that as that transition happens, we'll continue to make progress in terms of dollars per foot.

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Scott Michael Hanold, RBC Capital Markets, LLC, Research Division - Analyst [4]

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Okay. No, that's good to hear. I appreciate that. Shifting to the Midstream for my follow-up question. On San Mateo, it looks like you all elected to spend a little bit more to accommodate growing third-party potential there. Could you give us a sense, as you look into 2020 and maybe even 2021, where do you think that, based on your own expectations of growth for Matador and what you're seeing in third-party volumes, how much spend is needed to continue to enhance that investment?

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Matthew V. Hairford, Matador Resources Company - President [5]

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Scott, this is Matt. And it's a good question. And I think the way I'll answer that, it just depends on the opportunities. And we kind of have a really good handle on what Matador's going to do so we know what expansion we need to do on the current assets. The third parties, it's been a good thing as we're talking about increasing the CapEx for the back half of the year. That's been demand-related. So the thing that we take a lot of comfort in is that we have the base asset, we've got the gas processing there in Eddy County, we've got the saltwater disposal facilities. We're looking at completing our 10th saltwater disposal well. So we got a really nice footprint to expand on. So that's kind of the way I think about that.

And just getting back to capital efficiency, this deal we've got with Five Point for San Mateo II, we do have the carry that we'll continue to get on the first 200 -- or first $250 million of build-out of San Mateo II.

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Operator [6]

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Our next question comes from John Freeman with Raymond James.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [7]

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John, just following up on Scott's questions on San Mateo. I'm just trying to see if we could get maybe a little bit more detail on the breakout of the additional expenditures? Because you mentioned, in addition to sort of these additional projects that you all are going to be working on, you also entered into an agreement to make a few sort of commercial SWD well permits, some acres that was sort of more acquisition-oriented. Just sort of the -- maybe the composition of that?

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

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John, it's David. Yes, I think that I would be correct in saying, it was probably about half and half, I think. So the -- in terms of probably the additional CapEx, we had a -- we just had a, we thought, a special opportunity come up to be able to acquire an existing commercial well and facility up in what we call the Greater Stebbins area, and that was something that we were probably going to drill anyway. And there was also some surface acreage associated with that. And we're working to get that finished up. And so that was a particularly, I think, good opportunity for us and I think for the seller as well. So that worked out well. And then, of course, of -- because of the fact that the midstream business development team, I think, is just doing such a good job in terms of securing additional commitments and finding other third-party customers that we just made the decision that we want to pick up that business. It requires sometimes building out a little extra pipe to get to them or putting on a little extra compression on our system to do it, and I think that's what we were just trying to -- that's what we were trying to convey.

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John Christopher Freeman, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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That's very helpful. And then in addition to the completed well cost improvements you all have seen, you had a pretty nice decrease in LOE that you all mentioned was a good bit driven by the lower saltwater disposal costs as you had more of those volumes that got put -- moved from truck to pipe. And as I just sort of try to think about maybe the additional sort of running room you have on improving the costs on that front. Could you give me kind of rough numbers, what percentage of your saltwater is now on pipe versus truck?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [10]

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John, the answer to that. On the Rustler Breaks side, we've got San Mateo over there. So we've got almost all our water is on pipe there, with the goal to get to close to 100% or get to 100% on -- over in Lea County, where we've just recently began adding these volumes on pipe, we're probably at about 80% or so, maybe a little better with the volumes. And then towards the end of the year, we're projecting that we're going to get, again, closer to the 90% or 95% on that. So the team has done a really nice job.

And as we talk about LOE, there's just a couple of things I want to point out, John. Number one, you want these cost savings to be sustainable and we feel like, absolutely, on the saltwater disposal side, that is. I mean when you get those volumes off trucks and onto pipe, that's for the duration of the contract. And so we're very, very happy about that. The other component of this that we mentioned is workover cost. So the team has done a really nice job in reducing workover cost. And in addition to that, we've got a task force that's actually looking at ways to mitigate even having to do a workover. So a lot of it ties back to artificial lift and how you install the artificial lift and how you make longer run times on ESP, better gas lift operations. So the team is really focused on not only doing better execution on these workovers, but also eliminating a lot of them.

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Operator [11]

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Our next question comes from Neal Dingmann with SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [12]

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And it's nice to be able to tell somebody nice quarter these days, so congrats, guys.

My question is on your slide where there seemed to be a lot of talk these days, even more so than ever, about, on Slide 9, you guys always do a great job breaking that out in the different plays. Just maybe if you could talk spacing a little bit, Matt, Joe or David, any of the guys. You haven't changed this now in a while. And might -- where I'm getting at is, there's some investors now seeing the question part to that in the Permian, and I'm just wondering if you could maybe talk about your spacing assumptions, and going forward, how you still have belief in that.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [13]

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Yes, Neal, it's David. I think that our spacing assumptions remain pretty well unchanged. We, I think, have been pretty consistent in saying that our inventory, for the most part, was based on 160-acre spacing and that the wells that we drill are fairly consistently at that kind of spacing. We do have some locations in zones that are particularly thick, like maybe the Wolfcamp B, where we've ended up [having] 2 or 3 different landing targets, where we have kind of spaced things on a kind of a wine rack 80. But again, at any one plane or in any one sort of stratigraphic location, we're still about 160-acres part. I think we feel like that, that serves us well to this point. Clearly, in our non-OP program, we've had the opportunities at times to participate at a fairly small working interest in some of the closer spacing tests that some of our -- some of the other operators have done. And certainly, we are very interested in doing so.

I think one thing that we've always said here at Matador is that we reserve the right to get smarter. And so we're always trying to figure out what the optimal way is to do things. But at this point, I think we'll probably continue. You'd probably remember there was several years ago when we drilled a few wells a little closer to that and weren't particularly satisfied with the results. And some of our Eagle Ford experience I think had kind of made us a little more cautious coming into the Delaware. So for all those reasons, I think that we've pretty well continued regardless of the stratigraphic interval to keep ourselves spaced at, at least 160 acres.

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Matthew V. Hairford, Matador Resources Company - President [14]

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Neal, this is Matt. Just to add on to what David say in there, we do reserve the right to get smarter. And one of the things that we have the pleasure of doing is participating into non-op wells that have closer spacing than what we would be comfortable drilling. So it's nice to be able to participate in those wells for a single-digit percentage and be able to get the data and see how those react, whether it's a wine rack 80-acre spacing or maybe even something closer than that.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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No, that's great to hear. And maybe if I hit the other hot topic, just on GOR. It seems you've held in better than some others. And again, David, for you or Matt or the guys, just how you see that as far as when I'm looking sort of, I don't know, west to east from your Rustler Breaks and maybe all the way down to some of the newer BLM. Maybe if you could just comment if you have any thoughts of change in the GOR or what you're thinking about it these days?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [16]

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I think, generally speaking, Neal, that it's been pretty clear that different areas of the basin just have different gas cuts associated with them. And we think we've talked about that a lot and been pretty transparent about it all along. And even sometimes different stratigraphic intervals within a particular asset area have different gas cuts. I -- you look at Antelope Ridge, it seems like most of our wells tend to come in, in the low 80s over there in terms of oil cut. You look down into Wolf and things are more like 60%, 65%. You go up to Rustler Breaks and from the Wolfcamp B, those may be 30%, 40%, but you get up into the Wolfcamp X-Y, and it's 75% or more. And then you go up into the Antelope Ridge area and some of those wells are 90%-plus.

So it's just -- it's never been just one thing. It's in the -- I think that we've just -- I think it seems to be fairly consistent. When I think we have a pretty good idea of when we drill some of these wells what to expect in terms of the oil and gas cuts from the particular wells. But one thing I always remember when we talk about this is several years ago, when Ned and the geologic team did one of the coolest things I thought that I've ever seen at that time was they went out and got a bunch of cuttings and did some geochemical analysis and brought a chart in and basically spread it on the table and said, "Now when we drill these wells in Antelope Ridge, these ones at the bottom are going to be gas here and as we go up, it's going to get progressively oilier," and that's exactly what happened. That's exactly what it was. And I just always had to give them a ton of credit for the really good science that went in long before we actually stuck the first drill bit in the ground. And so I hope that's helpful. But again, it's just not -- it's just an area where things just change across the basin. And I think we've adapted to all of them.

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Bradley M. Robinson, Matador Resources Company - Executive VP of of Reservoir Engineering & CTO [17]

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Yes. Neal, I...

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [18]

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No, that's helpful. It's -- go ahead, Matt.

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Bradley M. Robinson, Matador Resources Company - Executive VP of of Reservoir Engineering & CTO [19]

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This is Brad. I just wanted to add to what David said. And you -- because you mentioned the BLM specifically. And that acreage is in more or less the deepest part of the basin. And as you get deeper, the pressure gets higher, which is a good thing because it adds more energy to drive the oil out. And with that comes more gas in the oil. So we do expect to see different GORs around the basin, as David mentioned. But that can be a real good thing in terms of driving the oil out of rock.

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Operator [20]

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Our next question comes from Sameer Panjwani with Tudor, Pickering, Holt.

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Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [21]

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So I know it's still a bit early to talk about 2020, but just given the continued capital efficiency improvements you've seen both on the well cost side and cycle times, along with the potentially negative macro -- oil backdrop going into next year. Could you just share your updated thoughts on activity levels heading into next year? And also how you think about the strategic goals for capital allocation?

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [22]

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Sameer, let me take the first shot at it and Matt, and David and others can chime in and give their perspective, too. That's a very -- first part is we're just getting started on these various efficiencies that I mentioned earlier, particularly the capital efficiency. So we're very early on coming to realize, I mean, they're on the plans and we are taking more and more advantage of them, but we're just really getting started on the rig efficiency of drilling the 2-mile, the longer laterals. Otherwise, I've mentioned several other ways we're increasing the effectiveness of here the working together of the various groups, the rigs, and so we're going to continue that. We see that as a big part of the future of Matador.

And the industry is continuing to improve on efficiencies, drilling the wells faster, trying to frac them faster, the pad drilling, all those sort of things are becoming more and more commonplace. And we're trying to stay with that trend and make it happen. That 2020, the next thing I would just point out on 2020 is we're making do with 6 rigs and not 7 rigs. The market, for a long time, seemed to be very worried about us adding a seventh rig. We try to do what we say we were going to do, and so we didn't want to say we were definitely taking the rig or we definitely weren't taking a rig until we could see more clearly what the lay of the land was. And so it's now clear that we don't need it to reach our targets. We've drilled some wells faster. And so we've been reaching our targets with less. I give credit to the operation group and Billy's people. And so we're not going there. And hopefully, you and others are now more comfortable with the 2020 outlook. If that isn't going to be necessary, we won't say we won't add, at some point in the future, a seventh rig, but just don't see any need for it in the foreseeable future or on the horizon. Have I left something out, Sameer? Matt?

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

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Yes, Joe, just to build on what you're saying there. I think, Sameer, one of the real nice things that's happened this year and going on into 2020 are these efficiencies. We feel like we were talking about adding a seventh rig and Billy and his team have done so good with 6 rigs, we're getting more and more things done with that. And as you talk about Matador and how we think about things, we put a lot of value on optionality. And we talk about it just about every quarter, but we're going to maintain that optionality with our rigs. We've got 3 rigs on longer-term contracts. We've got 3 rigs that are shorter-term contracts with our agreement with Halliburton on the frac pricing. We've got a lot of optionality in that.

And then just as we talk about going into 2020, where we're indicating 85% to 90% of these laterals that are going to be 1.5 miles or 2 miles, the operations team has done a really nice job in preparing for that. We've got Patterson rigs. We're very happy with our Patterson rigs. We're very happy with the upgrades that we've made to these same rigs. And so in anticipation of drilling 2-mile laterals -- more and more 2-mile laterals and even at the state line, 2.5-mile laterals, Billy and his team have gone and had some modifications done to the high-tech rigs we already have and adding a third mud pump. And I'll ask him to speak about this here in just a second, but higher-torque top drives. And our guys, our drilling engineers on these bits, they just continue to push the envelope, and we just go faster and faster and faster. So Billy, you might want to talk about that on to the rigs.

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Billy E. Goodwin, Matador Resources Company - Executive VP and COO of Drilling, Completions & Production [24]

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Okay. Sameer, this is Billy Goodwin. And like everyone has been saying, we kind of stepped into the 1.5-mile and 2-mile laterals, and that's given us time on the drilling and completions side to kind of look at different techniques and different equipment and get ready for going to 80% 2-mile laterals next year. And in doing so, we found things that really worked for us and helped us get more efficient. And some of the things we've seen that really look good and helped for us as far as having the 3 pumps and high-torque top drive. And we think we can get things done a lot better there, shave more days off and get a lot quicker on that end. And the guys and engineers working in the MAXCOM room with the geologists while we're doing it, we're staying in target on a lot of these wells 100% of the time and then the preferred target, 90% of the time. So we keep getting better there, too, as well. So we're getting better, faster, saving on the CapEx and drilling better wells at the same time. So we look forward to continuing with that. And also, since we start up the MAXCOM room, we've set approximately 50 records since we started that last year. So it's been a great deal for us.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [25]

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Yes. I'd just like to add a little bit to what Billy said, it's 50 records. And it's not just in one category, but it's across the whole drilling spectrum. And a lot -- and all around our properties around the basin. So it isn't just in one area with one set of engineers, but it's across all areas, all across that activity. Also this MAXCOM room, would invite everybody to come see it because I think you have to kind of see it to appreciate it, to fully appreciate it. It runs 24/7. And one of the things that we have in there, one of the attributes of it is that you have both engineers and geologists in there working together 24/7, and they have a rig -- I mean they have a rotation where they're not always working nights or always days, but that's a cooperation. And they're learning from each other. So you take young engineers, young geologists and there's a great exchange. And you're not waking people up at night and taking those delays. Because as fast as you're drilling, you could be several hundred feet, but they're making decisions. They learning how to work together to make decisions.

And to what Billy says, stay in zone, not just in zone, but in preferred part, usually within the horizon. Some parts of that horizon are better than others, and being able to stay in zone and track it in real time has really delivered an advantage to us, and it takes a lot of extra work on Billy's part and Ned's part to organize and schedule those people. And [Austin Ryan] and Steve Rogers have all contributed -- Clark Collier. And that's been a big, big boost, but it's taking a little bit of that extra work that I mentioned earlier. And Matt and David and I are real proud of it.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [26]

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Yes, we really are, Sameer, and just to continue on that line of discussion. To get to the point where you've got 1.5-mile, 2-mile, 2.5-mile laterals, there's a lot of work that has to happen on the land and legal side. And those guys have done a really nice job in making trades and putting joint operating agreements together and working with other operators and putting it together. And that's why you see the hockey stick for us on the number of longer laterals to go from 9% last year to 90% next year. It's because of a lot of very hard and effective land and legal work too.

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Sameer Hyderali Panjwani, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Exploration and Production Research [27]

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That's really great color and I really appreciate the comprehensive answer there. I guess on to my second question, on the mineral side of things. Looks like you remain active in continuing to acquire interest in building the portfolio. So I'm just wondering if you've started to look at the ideal structure for that business towards making a determination of whether you'd like to keep it internally to further enhance your economics and capital efficiency or if it could be a source of proceeds at some point down the road?

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [28]

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Sameer, I would say, your thinking is a lot like ours. We talk about it nearly every day. We just don't know yet which is the best route to go, and it depends on a number of variables. And it's actively studied in -- almost on a regular basis, we're invoking our right to get smarter and move this direction or that direction to try to get to what we think is the optimal situation. So we think we have some valuable assets there that can enhance the company's value. We're just not sure which one will deliver the most value over the long term. We don't want to do something short term. We want to be long term, sustainable and something that enhances what we're already doing. And so we're making progress, just still early in the process.

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Operator [29]

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Our next question comes from Irene Haas with Imperial Capital.

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Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [30]

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I just wanted to congratulate you guys on hitting and exceeding your goals quarter after quarter, 24/7, especially against a really challenging macro is really quite an achievement. And my question, actually, if David can give me a little update on the sort of performance incentives that you have for San Mateo I and II for '19 and '20. Do you have a schedule for that?

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [31]

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Well, I think, as you know, Irene, we earned the performance incentive in 2018 and -- 2017 and 2018 from Five Point. And so those were both paid in the first quarter of 2018 and then the first quarter of 2019. So the $14.7 million in San Mateo I incentives were paid. And I believe, and the company anticipates that it's on track to earn the 2019 incentives, which would be paid in the first quarter of 2020 with regard to San Mateo I. So that would be another $14.7 million if we're successful and as we expect to be.

If you look at the San Mateo II incentives, they're a little bit different. And they do require us to -- they're drilling-based that requires us to drill certain wells. I believe there's a threshold of about 20 wells that we drill before those incentives begin to kick in. And so it may be towards the end of 2020 or early in 2021 before we begin to realize those incentives. Those will actually be paid on a quarterly basis. So I would think that by the -- we'd probably estimate, by the first quarter of '21, for sure, that we would be in a period of time in which we would be earning in some of those incentives each quarter going forward until they were exhausted.

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Irene Oiyin Haas, Imperial Capital, LLC, Research Division - MD & Senior Research Analyst [32]

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Great. And if you don't mind, one quick question is that you did some divestitures during this quarter. And I think earlier, you said you expect to sell about $50 million roughly. So should we expect some more divestiture in the second half? And also, your 2019 guidance, is that net of divestitures? That's all I have.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [33]

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Well, with regard to what we'll be able to get done in the second half of the year, certainly we're optimistic that we'll be able to do some additional deals. I think the land guys have been very proactive in the first half of the year in terms of making some of these deals happen. And we're certainly optimistic that we'll be able to do some more in the second half of the year. Usually, Irene, in terms of our forecast, we typically assume that it belongs to us until we know different. So I don't -- so at this point, our guidance would include any of those volumes that potentially could be divested over the second half of the year. But I don't know exactly what those are. So until we do, until that's more definite, they would be included.

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Operator [34]

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Our next question comes from Jeff Grampp with Northland Capital.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [35]

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Was curious, first off, on the operational side, these Rodney Robinson wells that you guys referred to in the release on the Western Antelope Ridge. Can you guys just give us a sense, kind of strategically, how you're approaching those 6 wells in terms of kind of the zones that you plan to do?

And well, you mentioned 2, 3 well pads. Is the plan to do kind of complete all 6 before flowing any back? Or would you do kind of 3 and 3? Or just hoping to get a little bit more color on your approach there.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [36]

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Yes. So I believe that, Jeff, I'm correct that, first of all, we do plan to -- assuming the approval and the receipt of the permits from the BLM, we will plan to move a couple of rigs onto those -- onto the Rodney Robinson tracts. We plan to drill 3 wells with each rig initially, so it will be a 6-well package. I believe I'm correct that there will be some completions in the Bone Spring and some completions in the Wolfcamp. And so we'll drill 3 separate stratigraphic intervals with the East rig. Yes, all the 6 wells will get drilled before we begin completion operations. They'll all be then completed before we turn any of them to sales. And so right now, if we're able to stay on track and get started on them kind of early in the fall, then we would anticipate that probably first production would come from them, I would say, probably late in the first quarter of 2020.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [37]

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All right. Great. Great. Appreciate those details. And for my follow-up, just on the land side, you guys mentioned doing some acreage trades around the Stebbins area. Obviously, had that nice Wolfcamp well that you guys updated us on. Can you guys give us a sense, kind of with the recent trades, how sizable the block is that for you all? And can you remind us the average NRI? If I recall, it was a little bit above kind of the standard 75%.

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

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Yes. I think I'm correct that it's in the kind of 2,500-, 3,000-acre sort of range currently. And we have the -- I think, hopefully, the potential to continue to improve that. But I think that's where we are right now. There would be multiple drilling targets that we'll have there. There's at least immediately a couple of second and third -- the Second Bone Spring and Third Bone Spring and the Wolfcamp A-XY, but I would imagine the team will have other targets that they want to complete there as time goes on.

And the other thing, too, is that because of the good land work that's going on, it's really sort of taken a nice block for us that maybe a year ago or 18 months ago at this time, we were thinking was going to be mostly 1-mile laterals, and it's turned it into a project that is going to be pretty much 1.5-mile and 2-mile laterals going forward. We've just begun drilling our first 2-mile laterals in the Bone Spring, Second Bone Spring there. And we have our first Wolfcamp A-XY longer laterals scheduled there getting going before the end of the year. So a lot to look forward to, I think, in that particular block. And it's one where I think we feel like we can -- that we can keep the rig going for quite some time as we develop it out.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [39]

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Jeff, if I can jump in here just a little bit, is that on the land work, is, again, it's our practice, we want to do deals, but we want to do deals that build relationships so that when we're -- that these are win-win deals. To get some of this acreage, we had to give up some of our favorite tracts. And as you know from the wells that have been released here in [Eufaula], I've been naming, since these are state and local tracts, after a number of our early shareholders, and it's -- as satisfied or pleased you may be if I trade, it allows you to do longer lateral. When you call up the person whose tract was traded and tell him, "We're not going to be drilling his well," he can assume he's been traded to XYZ company in order to block something up. I've gotten a little pushback. And so if you see some names moved around the basin like that, I've felt -- I know how major league players feel when they get called in and told they're traded in. And these guys have kidded me about that. But it's really an encouraging sign in the industry to have increased cooperation on sharing retention ponds or cooperate with information or on these trades. And the real aim of it is to help make a win-win deal and build the relationship. So we hope to keep that up and sure -- we're glad, we think that's -- those are all healthy trends and will help us all do better without to get to 2 miles. That when that happens, both sides win.

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Matthew V. Hairford, Matador Resources Company - President [40]

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And I think too, Joe -- by the way, Jeff, this is Matt -- one of the other things that we've been talking about and just related to the efficiency, it's putting this block together where we've got a rig, we can just park there. It's drilling 1.5-mile and 2-mile laterals. And the other thing that a block this size allows you to do in regards to parent-child relationships is you can kind of just march your way down through the asset. And so instead of having years where you come back and drill a subsequent well, you're looking at weeks or months. So it's a very efficient way to develop a large block like that.

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Jeffrey Scott Grampp, Northland Capital Markets, Research Division - MD & Senior Research Analyst [41]

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Yes. Very good point, Matt. And Joe, to your point, nothing wrong with a nice sacrificed bunt once in a while. So...

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [42]

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Yes, I'm going to use that because one friend, Kevin Grevey, was a professional basketball player from -- and I called him up. He -- his designated well got traded 2 or 3 times, and he says, "It's okay, you understand it." The Warriors ( sic) [Washington Bullets] traded him to the Milwaukee Bucks -- I mean the Bullets traded him to the Bucks -- and so he said he's used to it. But not all have been. But there's a good atmosphere out there. When at times like this happen, the service providers and everybody else are looking for some strategic relationships and efforts and they're open to ideas that help everyone. So as tough as it is sometimes on prices or pipelines, it's good that everybody seems to have a greater degree of cooperation. And so every cloud has a silver lining. And we appreciate the way that's happening and appreciate the way our staff is meeting some of these challenges. So I don't want to go on, but we -- overall, the trends are a net positive.

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Operator [43]

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Our next question comes from Tim Rezvan with Oppenheimer.

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Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [44]

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I wanted to circle back to San Mateo quickly. I noticed the strong 2Q results. You had 9% sequential EBITDA growth. The guide for 2019 of $90 million looks increasingly attainable and then you have additional kind of projects in the works. So how should we think about, from a modeling point of view, kind of earnings growth for that segment? Is that 9% ramp an attainable level? Or has growth been more lumpy as projects get tied in? Or how do we think about longer-term growth there?

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

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Tim, I'm going to say something, but I think, Matt and Dave will have some thoughts. I just don't think we have enough data points to draw a real firm bowline on how much growth is going to occur. I think there are scenarios where it could be less or it could be more. And I just think we need a few more data points before staking our reputation. We want to do what we say we're going to do, and I just don't think we know yet. Matt?

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Matthew V. Hairford, Matador Resources Company - President [46]

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Technically, I agree with that. And Tim, it's been a great quarter. First quarter was good. Second quarter was even better. As we move forward at San Mateo, you want a balance of your anchor tenant, which is Matador. You've got great visibility into what they're going to do, and particularly for us, I mean I'm proud to say we do what we say we're going to do. So you really have your finger on that pulse. The third-party stuff, that's a little more difficult. I mean people can start and stop, and there can be commitments that you think are coming on Monday and they don't show up till Wednesday or maybe months down the line. So there's a lot more -- I hesitate to use the word ambiguity, but there is more of a...

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [47]

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[Green is a pretty booth, per se].

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Matthew V. Hairford, Matador Resources Company - President [48]

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There you go. I agree with that phrase. Thank you, David. That's exactly right. So it's good news. I mean I think the quarter we've had is great, and it's indicative of a lot of hard work for the San Mateo guys, and they're continuing to -- as we say, push on that rock.

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

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Yes, I don't really have a lot to add, Tim. I think that we continue to feel good about the guidance that we've given through the year. And I think things are progressing as we would have thought. I don't -- I'd be reluctant to say it's going to be up 9% every quarter, per se. But nevertheless, I think it was a very strong quarter for San Mateo, highlighted not only by some nice increases in third party revenues, but a shout-out to that team, too. They did some nice work on their OP cost, too, during the quarter and they definitely made some improvements there. And it showed up in the bottom line this quarter. So we're hopeful that we can see that continue. But I think they just had a particularly nice quarter.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [50]

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Matt, and I'm not trying to put words in your mouth, but I think we all see, based on what you've been talking about, that the $90 million is, we're increasingly confident, will be attainable.

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Matthew D. Spicer, Matador Resources Company - Senior VP & GM of Midstream [51]

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I'm sorry, Joe, and this is Matt Spicer. And Matt Hairford hit the nail on the head. I think we've got a really nice mix of blue-chip quality customers out there, and we have a really nice mix of contracts. Some of them are firm. Some of them have interruptible agreements. And when some of that interrupts, old stuff shows up, it looks real nice, and sometimes it doesn't. So we have to be careful on what we're going to estimate, but I think we had a great quarter.

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Timothy A. Rezvan, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [52]

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And just as a follow-up, you provided longer-term performance on the Stebbins well up in Arrowhead. We've seen strong well results from that area and Ranger. But in a tough market, to really kind of add capital for delineation, how do you think over the medium-term about kind of proving up the value of that acreage? And if you're running 6 rigs, is there the opportunity that you could possibly allocate more capital up to the north to really, sort of, prove up that resource?

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [53]

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Yes, Tim, all that you say is true and possible, and it's just how you put the digs all puzzled together. But one aspect I'd really like to stress is that we keep track of how much we spend on each well and how much revenue we get. And there's a little bit of counter-intuitiveness that you make more money about drilling wells in this low-cost environment than you do when oil sometimes is $100 a barrel. And the reason for that is that 25% of the revenue generally goes to the royalty owner and another 5% to 10% to the government for severance tax and others. But when you say the dollar and costs, that goes all the way to the bottom line and when prices go up to $100, costs go up, and there's a balance there that you want to keep going, keep your groups and teams together and getting better with new technology and new areas, but you don't want to go too fast or too slow. And we feel we're on a good pace. We're gaining efficiency on the drilling and on the whole processes. And -- but yes, you could allocate more up there, that you'd make money, if you did. But we're making money on these other areas, and there are just a lot of variables that make it more of a calculus than a single variable deal. You just -- you've got to take a lot into consideration. Matt?

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Matthew V. Hairford, Matador Resources Company - President [54]

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No, I agree, Joe. And I think that you get a nice mix, like what you said, Tim, on this Stebbins well, the Wolfcamp well. We've been talking for quite some time now that we're going to just keep moving Wolfcamp farther north and farther north and farther north, and we've done that. And you're able to do that while mixing in the Second and Third Bone Spring wells that have a great rate of return. So as we learn more and more about these reservoirs, we're going to -- the delineation becomes a little bit easier, I guess, is what I should say.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [55]

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I might just add one comment on that, Tim. I do think that I mean a lot of that acreage that we have up there, not all, but a lot of it, came through our merger with HEYCO a number of years ago. And so a lot of it is HBP, which is positive. Then in addition, I think that the teams are really doing a very nice job now up in that area of kind of using this time also to -- now that we understand it a little bit better, to really, again, reformulate units and do trades and things like we've done in Stebbins. Some of that's going on in other places too to try to reformulate these units into longer laterals. Because I think we feel like that's going to be very important to the -- not only development there, but all across our acreage position. But I know there's a lot of good work going on up there and kind of taking this time to get that in place.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [56]

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Well, and again, following up. Among all the variables, one is just the notion that, yes, we'd like to be hitting away for doubles, triples and homers all the time. But occasionally, as Jeff said earlier in the conference, you got to sometimes lay down the sacrifice bunt or a bunt single to confirm the delineation process and to give geology time to process new information on wells and the 3D seismic that we have. We -- last year was a hard decision with all the concern about capital spending that we authorized, paying up pretty good sum of money for 3D seismic, that would have been easy to abstain from. But it's been a good move. Ned recommended it, we honored his request, and he's made it paid off. But there's still more work to do, so there's a little timing incorporating this new information and this new data into our overall understanding of these areas. And so that's, again, just an example that there is -- generally, it's a more complex decision than it first appears as you start taking everything into account.

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Operator [57]

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And our final question will come from Gabe Daoud with Cowen.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [58]

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And just a quick one back to 2020, I guess, if we -- if we're thinking about a flat activity -- flat rig program into next year? How should we think about the impact on capital relative to 2019?

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

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Well, let me be real quick and then jump in there. Gabe, just because we're keeping the rigs flat, doesn't mean we're keeping the amount of footage drilled flat. It's that, that's just the big point that Billy and his group have achieved is they've drilled more footage with the same number of rigs. And that's partly the rigs getting better equipped, the crews understanding these areas better and our guys finding ways to save an hour here, an hour there, new technology in the form of bits, and these things all combined that we'd give Billy a hard time. He came in and said he'd just going to get the same amount of footage with the same amount of rigs. Yes, we -- he's built up high expectations for us, and we think we can achieve that. And the other thing is, is that as you move in and you're able to get a higher percentage of your working interest, then you increase your recoveries even with the same number of rigs. And then the final note is, as you move to -- from 30%, and I think, this year as we're expecting 2 miles to 80% or 90% next year, you're going to have a big boost in recoveries because you're going to be able to drill a 2-mile lateral faster and have better recovery. So I just wanted to kind of try to put that in perspective and then turning to my good friend, probably David, for that [patient touch].

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

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Yes, obviously, so in this case, I don't believe that I can improve upon your answer, so I'll decline to. So I think you said what I would have said so -- and probably better. So...

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [61]

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Let's get that on a recording tape.

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David E. Lancaster, Matador Resources Company - Executive VP & CFO [62]

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Yes, I think it is recorded.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [63]

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I'll take it. Gabe, I hope that helped.

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Gabriel J. Daoud, Cowen and Company, LLC, Research Division - Senior Analyst [64]

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Yes. No, that's helpful.

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Operator [65]

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Thank you, ladies and gentlemen. This ends the Q&A portion of this morning's conference call. I'd like to turn the call over to management for any closing remarks.

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Joseph Wm. Foran, Matador Resources Company - Founder, Chairman of the Board, CEO & Secretary [66]

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Thank you. The biggest closing remarks that I have is to invite all of you on the call to come by and see us sometime, large or small shareholder or even prospective. Just come by. We would like to meet you in person, we'd like to show you around to the MAXCOM room and I think you can see what a difference that makes and meet a few of the management and some of the staff that are really doing such a good job making things happen. Our business is complex enough that we feel it's not so much grand strategy but execution and making the train run on time. So we enjoy having you come by, and meet everybody in person. And hope that you all will take us up on that.

So the light's always on, so to speak. Come see us. And thank you for your time and attention. And one last big shout-out to the staff and to the executive team. It's really been a neat time, and we appreciate all the many kind words that you all have had. And we think our best years and quarters and months are still ahead of us.

So thanks, and come see us.

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Operator [67]

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Ladies and gentlemen, thank you for your participation in today's call. This concludes the program. You may all disconnect, and have a wonderful day.