Matador Resources Company (MTDR) Earnings Call Transcript & Summary

All right. That's a lot of helpful color there, guys. Just last one for me here. Just want to get a sense on the Advance production. I know you guys have said around 25,000 BOEs per day in the first quarter when you've got significant DUCs like 20 DUCs coming on in the back half of the year. Just given the size of the production base, I would assume that's going to be enough to have a nice growth trajectory to the Advance production. Is that generally thinking about that right here?

Leo, this is Tom. You're right that we do have a nice set of DUCs here that we're really excited about. These are 2 and quarter mile long laterals, and we're very proud to get those going. I do think it's -- to Michael's point, I think we've got a little more time in front of us before we're ready to talk about our 2023 numbers, but those DUCs should be -- should play a role in the back half of the year.

Our next question will come from the line of Tim Rezvan from KeyBanc Capital.

Congratulations on the deal. I was hoping to follow up on Leo's question. I thought it was interesting you made an all-cash deal. In the past, you've used your equity to do this. And I was curious, do you believe that you needed to go all cash to win the bid? Or is this more of just sort of something you've been working towards with the leverage reduction? Or is it kind of a combination of both? I guess what made you not issue equity and structure it like you did?

Well, I think that we could do the all cash. We had to strength of the balance sheet. We have a lot of cash on the balance sheet that was growing. We had -- under our existing RBL, we had room on our borrowing base. Our borrowing base is up there at $2.3 billion. We only -- we have an elected commitment, somewhat less than that. We may increase that. So we can handle it all cash, and it wasn't a deal to be that competition or anything. We just thought that was the most efficient way to do the deal that afterwards left us with the most flexibility. We didn't want to issue stock because we believe our stock is headed up in the right direction. And in that regard, that's a feeling shared by the entire as we adopted a program where the staff who bought up to $25,000 in Matador stock, and over 90% of the staff is participating in that opportunity. So -- and the rest of us, we are big shareholders. As you know that our management growth owns a lot of the stock. So we're -- we like the stock. We like the dividends that were [indiscernible] and -- but doing an all-cash deal staying below 1 seems to be the most elegant way to acquire this property in the cleanest and easiest way. Brian, would you add to that [indiscernible]?

No, I think you said it very well, Joe. So I think on the cash side, it's great to be able to have this balance sheet where we can do it like this and have the strength of the balance sheet. It is something that, over the last year, we've -- a couple of years, we've certainly been working on and paying down debt, and it's -- we've talked about always being opportunistic and looking for the right deal. And it was great to be able to find this deal and how to be with the right deal with the great assets and opportunities that are available. And so I don't think we're forced to do an all-cash transaction, but it certainly -- it's great to have the balance sheet to be able to do so and continue to move forward with our plans for '23.

I appreciate the color. And then if I could just add one follow-up. Looking at the map, you have some acreage in Ward County that you picked up, obviously farther south than anywhere you've drilled there. How do you view that acreage? Is that a possible sale candidate? Is it HBP? Is there anything you need to do there? Or how does that sort of fit into the -- everything else?

Tim, this is Tom Elsener again. We're excited about that asset as well. The bulk of the transaction is in -- on the New Mexico side, but that is something that we're excited about. That area is going to be a little bit gassier, and a little more focused on the Wolfcamp targets, but I know Ned and his team are very excited about that property as well.

Okay. I guess we'll stay tuned on that. And then if I could just one last one.

Let me add one thing to that. There isn't that much distance. It's about 15 miles from our other properties there in -- out there. So you're really a stone's throw for West Texas to be close to our Wolf and Jackson Trust properties. So we're looking at them, and we're familiar with the area. Glenn is intrigued, and they'll get plenty of attention.

Yes, Tim. Glenn Stetson, EVP production. Just to kind of reiterate what Tom has said. Roughly 10% of the net production is in -- there in West Texas. And so -- and same on the reserve front. So -- and they operated well count. So it was just a smaller portion of the overall deal and the way we viewed it today. But just as Joe said, it really logistically and how we'll handle operations there, it'll fit in nicely with our West Texas team, and we'll be able to handle that just without any issue.

Yes. We feel our West Texas team is one of the best teams, and they'll give it plenty of scrutiny. And so as a public company, we try to play a straight game. If someone were to come in and make an offer, we'd be open to on those assets or any of our assets because we want to be transparent and play a straight game. But they're going to get studied. It's a good team. West Texas team has got good ideas. And Tom, I know, will give them a look. But when you have 90% elsewhere right in our main area of activity, that's going to get first look. .

Okay. Okay. That's helpful context. And if I could just sneak one last one in. Just looking at the midstream. I know Neal had asked about this. Did you have line of sight on this acquisition when you bought Pronto? Or is this just sort of a happy coincidence?

I would say it's more of a happy coincidence, although we looked over the area. Again, the Pronto acquisition was also similar to this in the sense that we had a strong balance sheet. The company came to us and said, look, we think you're the logical buyer. We need to sell this to fulfill their other objectives, but you got to be able to close in 30 days. And our guys got busy, and they stayed up all night. By the way, our guys worked all night along with the other side, EnCap and Ameredev, we were all up doing this, and we did the same thing on Pronto. We moved and got it done in 30 days. And I thought we were in a good position given our Delaware -- Northern Delaware activity, but we really couldn't specify here and here. We bought it, and it's almost kind of you buy it, and they will come. And our business development guys got out and started trying to find some business, and it's working out. It's not finished, but we're -- we think we're making progress. But again, that's the advantage. We hit a new inflection point last year when we reached over 100,000 barrels of oil or gas equivalent. And with that kind of cash flow, we paid down our bonds, and we paid down our bank debt. So our bank debt was all paid off. And it put us in a different place for our strategy decisions. And it's kind of working out. We don't want to deviate from that. And that's why it was important for us to figure out how to do this and keep our leverage ratio less than 1.

Our next question will come from the line of Kevin MacCurdy from Pickering Energy Advisors.

I know you haven't put out 2023 guidance yet, but just curious if the incremental inventory changes how you kind of view your growth trajectory in the long term.

Kevin, I think going back to saying [indiscernible] profitable growth at a measured pace is I don't know that anything about this changes that mantra. I would say that we want to continue to add long-term value either through the drill bit or through purchasing properties where we really like the rock quality and it fits our standards or creating value through midstream or any other way, I think. So I don't think this is necessarily changes any of our kind of our philosophies.

Great. And I know you kind of touched on the leverage in the balance sheet a few times on this call, but just to kind of clarify. It sounds like -- I mean, is 1x net debt to EBITDA kind of the limit of where you would where you would see yourself stable for long term? Or is it you'd be willing to get up to that level and then you want to get your leverage back down to close to [indiscernible] like it is now?

Well, I answer the question in this way is we don't have a limit. We don't think in those terms. We think more in terms of opportunities, and we try to be selective in those opportunities. And part of the selection now is to be careful where we are. Given the volatility in the market and the economy, that's all the more reason to be careful about your balance sheet. And so we, again, don't want to take any unnecessary risk. An original shareholder in this Matador is in a much less, and we don't want to endanger any of those gains. We want to enhance them with a better dividend from time to time and from adding to our property base and our inventory. And that's where we're trying to go. If the deal is good enough, I'd go over the 1 leverage. On the other hand, if it's not -- as Tom said, it's not going to be growth for growth sake, it's going to be profitable growth at a measured pace, and that's what we try to follow. And we think it's clear we're at a different inflection point than we were 5 or 10 years ago. And so we can be more selective because our inventory is growing steadily year by year. And our financial strength, our production assets, including the midstream, gives us further enhancement. And so we feel we have a good thing going, and we want to keep it going and being along -- all of us being shareholders, we make more from our shares, most of us, then our shares appreciating than we do necessarily from salaries. And that's a big driver. So everybody here are owners and particularly everybody in this room today. So I think you're going to see us -- I don't want to ever say never, kind of like a football game. Third and one, I'm not likely to pass, but I don't want to ever say I won't pass and play the odds a little different. But for now, we think this is a purchase that met all of our criteria and fit in well with our existing assets and operating philosophy. And it was some that we felt was a really win-win -- deal win for them and win for us.

Our next question will come the line of Subhasish Chandra from Benchmark Company.

Congrats as well. Was curious what you would think of this really, really dumb math here. But if you would bless it in any way that if you, say, at 100,000 BOE a day and running 7 rigs and let's say you're tracking towards 25%, 30% production growth, should be gross up the rig count proportionately to balance the business?

Well, Subhasish, the first thing is when we're planning -- making our plans for any given year, we look at a lot of different factors, and that's one of what's the right rig count. The whole year, half year, there's a lot of thought given to that with the inventory. But even more important is sometimes we haven't had to increase the rig count because our drilling guys have done such a good job in cutting the number of days on wells. And they've got these state-of-the-art rigs that drill the wells faster. And every time you cut a day, you save a lot of money, maybe as much as $100,000 a day. So Chris and his team and Josh and his team in the drilling group have done, I think, an exceptional job under Billy's direction to cut days and come up with all these innovations on [indiscernible] days on well. And that's allowed each rig to be that much more productive. Billy, will you help me here?

Just sir. Yes, we enjoy our guys out there we're working with. We got our partners that we've got long-standing relationships. And we work with them to stay on top of technology and new ideas and procedures and work together and just keep getting better as we go. We see -- we like what we see here at EnCap and Ameredev and what they've done, and we see more opportunities.

Well, the other thing is Patterson has done a very good job in keeping us at state-of-the-art rigs. And this rig that Ameredev was using from HP was a good rig. HP is a great operator. And so they are cutting down the days, and they're being more productive. And since some of these are -- already pads are made or you have DUCs, that saves time to. Having our facilities in place saves time. So I don't know whether we'll need to add another rig to get done what needs to be done, but we could or may do it in the last part of the year -- last half of the year somehow. So once we're fully taken over the properties -- Billy, does that sound right to you?

Yes, sir. The HP out there working. They're doing a great job. They're doing pad drilling, drilling longer laterals. And we're in communication with them. And Patterson has been great with us to customize the rigs and move out to the Delaware Basin and have these high-tech rigs with managed pressure drilling capabilities [indiscernible] some of the first out there. doing this using these techniques, and it's been great for us. Chris, you got some more to add?

Yes. This is Chris Calvert, Senior Vice President of Operations and Co-Chief Operating Officer. I think the one thing I would add to that is this entire process working with the Ameredev team and [ Parker Reece ], the confidence it was kind of built working with these folks over there and understanding how they drill these wells, the synergies that they have, the similarities that they have drilling these wells in the same way that Matador typically would, longer laterals, multi-well pads, they really do line up nicely to Matador's processes and procedures. We talk a lot about simul-frac here, remote simul-frac. Kind of to what Joe said, focusing on spending less days drilling. These wells also spending less days completing these wells. So really, the process of which Ameredev has kind of developed to this acreage really does line up nicely with how Matador operates as well. And so that's going to be the focus of how we continue to work with Ameredev during this transition and then how Matador will continue to operate going forward into 2023, taking the capital efficiencies that we have learned through '21, '22 and really just applying them looking forward.

Subash, does that help? .

That is -- yes. Great answer. And just as a follow-up, this is probably not quite a big issue anymore, but just curious how many permits Ameredev brings with them.

Subash, this is Tom Elsener. I think we're in pretty good shape for 2023. I believe they've got all the permits we need to execute a pretty wide range of plans that we may so choose going forward.

And our last question will come from the line of [indiscernible] from Bank of America.

Congratulations on the transaction. You mentioned in the press release that you expected to increase your commitments on the revolver to -- as part of the transaction. Can you tell us where that stands? How you -- what are you ideally targeting? And if you happen to have it, where you think your debt balance will be on the revolver when the transaction closes?

Well, it's hard to say. I'm going to let Brian handle that question. But in general terms is we had an elected commitment of $700 million roughly. We had $2.3 billion on our borrowing base. And then you're going to be adding -- so you're going to be almost doubling that borrowing base with these new assets. So it shouldn't be a problem of any sort. I don't know exactly where we'll come out, depending on how much cash flow -- one factor would be how much cash flow do we gather over these next 90 days. Brian, I don't know how you and Michael are planning, but...

Yes. This is Brian Willey. And I'd just add that we've had discussions with a number of the banks, and they've been very productive and positive. The banks are excited about this deal as we are. And so it's -- we look forward to increasing that commitment. The other thing I'll just note is that a number of the banks in our facility are also banks in Advance's facility as well. And so we expect that the transition over and increasing our commitment that we'll have good support from the banks and we'll get to closing and then be able to continue on throughout the year.

Got it. And you mentioned you're going to get your debt back to where it was before, before you started buying back bonds last year. Is -- should I read that as you're targeting getting to about $1 billion of debt when it's said and done? Or should we stick with the less than 1x leverage target?

Yes. This is Brian, and I'll take a shot at me and Michael can [indiscernible]. I don't know we have a specific number at the end of the year. Obviously, it's dependent upon a number of items. And there's the price of oil and gas. And our plan that we're going to release next month. So there are a number of items to think through. We certainly look at the 1x leverage, and we like that. As Joe mentioned earlier for -- it's not a limit on us, but that's certainly something that we like to be at and under. And so no specific number, I think, by the end of the year, but that we certainly are targeting reducing debt after we do the acquisition and we use cash flow for that. We'd expect to do that towards the end of the year. I don't know, Michael, if you have anything else.

Yes, Gregg. This is Michael Frenzel, EVP and Treasurer. I think the 1x, based on where prices are and what our kind of general expectations are would be, much more an upper limit. We'd expect to, again, prioritize paying down debt and they're trying to be opportunistic with other things, but that would trend down, I would expect, over the course of the year.

Yes. And I would just add to this is that we don't really generally have a specific target. We want to go in the general direction so that you, hate to say, well, by December 31, we got to be at this place. We may reset in November or January. It's okay as long as we know the direction and the trend that we're headed and what other opportunities may come along. And then when you're in times like we are in now, you just never know when some may happen. That's what happened on this deal is that I got to call before the end of last year saying they wanted to do this deal, and we got on it. It wasn't in the plans. And so we always try to leave a little room in there to what are our planning and not be a prisoner to a specific target but try to look at will this interfere with our long-term plans to continue to reduce debt, to build up the value of the assets and to return money to the shareholders. And we think we've reached that point where we want to be sure we can keep doing all 3 but not try to box ourselves in on any one variable.

I appreciate all that. And then just operationally, you noted in here you picked up a saltwater disposal well. Is there any impact -- is there any way that you're thinking about there with sort of the regulatory focus on saltwater disposal wells in New Mexico? Can you give us a little bit of how you thought through that risk there?

Sure. This is Brian Willey again. I'm happy to take that. And we are excited that the -- as I mentioned earlier, they planned well. I think as they looked at their acreage and being able to have optionality. And so this is one of those items where they have the saltwater disposal well. And it's -- we certainly are aware of the regulatory environment in New Mexico, and we operate in San Mateo and has 15 saltwater disposal wells. And we're very aware of the regulatory environment there. But we're excited about this well, and we're excited about the opportunities to use it and develop the acreage. And this will just be an asset for us and give us optionality as we go to other third parties and also have the opportunity to dispose in the wells. So we're excited about it.

Great. And just last one for you. Do you -- I don't know if you have this available, but do you happen to know the impact to your base decline rate from this transaction? And if you happen to have your year-end [ '20 ] exit number? If you don't, I'll follow up.

Yes, we don't have that handy, but we'll -- but it probably is going to be a wash.

Thank you. And this ends the Q&A portion of this morning's conference call. I would like to turn the call back over to management for any closing remarks.

Thank you very much, Victor, and thanks to everybody who's listening in or has asked questions. We really appreciate your interest. Want to make sure everybody knows we are available. If you want a follow-up and want to invite everybody, come see us here and meet the team, and we can discuss this. So we want people to know because we think we're headed in the right direction and have built a staff that's ready for a bigger role and to operate a bigger company. And it's a group been tried and tested. And this -- the process that we went through certainly has given our Board and the management group here more confidence. And I think it goes all the way throughout the organization is we had to move pretty fast. Everybody did over the Christmas and Thanksgiving holidays. They squeezed it in. We had to work pretty intensely through the last few nights. And they've done everything but bring their bedroll up here. And I'm just enormously proud of the professional way we worked and they worked. And I think it's just a deal where everybody has come together and want to thank you and the public, our public shareholders, for supporting us through that and putting us on a path back towards $70. And we think this is -- this year has already started off well. We think it will continue to get better and make that profitable growth at a measured pace. I think we'll be producing -- that is going to have us producing for new zones. These properties will help build out our Pronto system. I can say all sorts of good things. Our locations been built up. Our reserve group is confident we'll be adding to our borrowing base. And we just see a lot of goods coming from this. We got to execute. Well, this is a group that I think is pledged to do that. And it was a real test of Craig and Brian, and I want to say our appreciation for [indiscernible]. They hung through that. And when we didn't sleep, they didn't sleep. And so it's a real neat deal that I think we'll look back -- that was another step forward for us just as we hit a new inflection point of 100,000. This puts us on a new -- another inflection point towards 150,000. So we don't have the exact details, but you're going to hear more from us after our Board meeting in February, and we have an earnings release there, and we look forward to everybody have an extra time to ask questions, but we're delighted to be here. And of course, in any deal, you wonder sometimes is this effort going to be worth it or break off. And again, I want to thank EnCap and Ameredev for working with us and the individuals and just very -- again, very, very excited by how the whole staff [indiscernible] in and pushed on that rock because that's what it took. It was a big rock, and we all had to push it. This deal that we've done, we're glad we did it and excited about the opportunities it's presenting. So thank you, and we really invite you to come see us and see the level of sophistication in our [indiscernible] room and our [indiscernible] where people go 24/7, that's added new capabilities, too. So come see us and get to know our staff, and I think you'll maybe understand and feel the excitement we all have for this deal and the other opportunities that we were looking at generated by Matador over the last few years. So thanks again. And again, we are open to you. Don't hesitate to call.

Ladies and gentlemen, thank you for your participation today. This concludes today's program. Everyone, have a great day.