MTDR 2023Q1

Good morning, ladies and gentlemen, and welcome to the First Quarter 2023 Matador Resources Company Earnings Conference Call. My name is Judy, and I will be your operator for today. All participants are currently in a listen-only mode. This conference is being recorded for replay purposes, and the replay will be accessible on the company's website for one year, as mentioned in the earnings press release issued yesterday. I will now hand the call over to Mr. Mac Schmitz, Vice President of Investor Relations for Matador. Mr. Schmitz, you may proceed.

Thank you, Judy. Good morning, everyone, and thank you for joining us for Matador’s first quarter 2023 earnings conference call. Some of the presenters this morning will reference certain non-GAAP financial measures regularly used by Matador Resources in measuring the company’s financial performance. Reconciliations of such non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP are contained at the end of the company’s earnings press release. As a reminder, certain statements included in this morning’s presentation may be forward-looking and reflect the company’s current expectations or forecasts of future events based on information that is now available. Actual results and future events could differ materially from those anticipated in such statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company’s earnings release and its most recent Annual Report on Form 10-K and any subsequent quarterly reports on Form 10-Q. 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 2023 earnings release under the Investor Relations tab on our website. And with that, I would now like to turn the call over to Mr. Joe Foran, our Founder, Chairman, and CEO. Joe?

Thank you very much, Mac. It’s a pleasure to be here this morning and thank you all for taking the time to listen in. What I wanted to emphasize is that this year is off to a very strong start, both from an organic growth perspective and also for the acquisition of Advance, which has been off to another really good start, and the integration has gone smoothly. The handoff has been very professional from Ameredev and EnCap, and we are working hard on those assets. Matador in the first quarter has added to its strategic assets, developed several locations to drill, as well as to finish certain ducks, 21 ducks that Ameredev was on. The midstream strength we have has increased its volume and has delivered on-time performance. A theme you will hear from us as we answer questions is that we’ve saved money not just by working with our long-term vendors, but also by reducing the days on the well for drilling, completion, and getting production online—all making a difference. It isn’t just about cutting specific costs, but also about capital efficiency and people efficiency that comes from reducing well days and delivering more product in less time. So with that, I’d like to open the floor for questions. Mac, whoever’s first.

Thanks, Judy. You can open it up to questions.

Good morning, guys.

Good morning, John.

Yes, the first question, Joe, is kind of on what you just touched on, the efficiency gains during completion costs just keep coming down. I know y’all reiterated the full-year D&C guidance of 11.25 a foot. Could you perhaps give me what that was in the first quarter, the D&C per foot?

Hi John, this is Chris Calvert. Yes, so the 11.24 that you mentioned was our full year guide, with a projected 10% to 20% increase from service cost inflation that we really started addressing in December of last year. We did not put anything out publicly, but our D&C cost per foot for this quarter definitely came in below that, around $1,014 per foot. We’re proud of that position, and those efficiencies were achieved through reductions in drill times, Simul-Frac, and Remote Simul-Frac. In 2022, we used Simul-Frac on about 45% of our wells; we aimed to increase that to over half in 2023 during the first quarter and we exceeded that target. The efficiencies mainly come from reduced drilling times, increased use of Simul-Frac, and better partnerships with third-party operators, especially with San Mateo regarding water usage and rates. We have to note that while we're excited about these efficiencies, we're aware that there are still challenges ahead this year.

Thanks, Chris. I appreciate all the detail. And then just my follow-up, regarding the testing of these horseshoe wells, could you provide any background on what led to that decision? Does anyone on the operations team have prior experience with horseshoe wells, and have there been some done in the industry?

Hi, John, this is Glenn Stetson. I’ll start with kind of the why, and then I’ll let Chris discuss some operational efficiencies. This piece of acreage was unique because the upper Wolf Camp, the Wolf Camp AXY, was undeveloped in our section but had been developed on every other side of this piece of acreage. Instead of drilling four one-mile Wolf Camp AXYs, we’ve drilled and cased two horseshoe wells. It was a unique opportunity. Our technical team did extensive work to ensure that the drilling would go smoothly, and it did. Our next step is to complete these wells and bring them online.

Yes, hi, John, this is Chris again. The genesis of this project starts with our team, and the teamwork involved in bringing it to fruition. Travis Wolf, the Team Lead of our West Texas asset, has done a fantastic job. The technical details were managed expertly, and the curve in these U-turns is less dramatic technically than it appears on paper. We believe this will lead to time savings, bringing offset wells online faster and realizing significant cost savings, estimated at regarding $10 million, due to the reduced amount of casing needed. Essentially, this project showcases our team's collaborative nature in handling our operational projects effectively. We’re extremely proud of these wells.

That’s great. Thanks guys, and congratulations on a nice quarter.

Thanks, John.

Thanks. Hey everybody. Good morning. Could we start with the Advance properties? The 1Q production came in a bit better than anticipated, and you noted the 21 wells being completed currently, with another 21 by early 2024. Can you clarify what the cadence looks like from here regarding when those 21 wells will be coming online? Is that in Q3 or Q4?

Hey, Gabe, this is Brian Willey. We’re thrilled about the Advance assets. They are very strategic and a perfect fit for our existing assets. They performed better in the first quarter than we expected. Just as a reminder, we don’t get credit for that production yet since we didn't own the assets at that time. But we are genuinely excited about it. I think our completions team started yesterday, switching to our completions group and we’re beginning to complete those 21 wells. We expect those to come online in the second half of the year, likely Q3 or Q4. Looking ahead to next year, we plan for 49 total wells in progress, including the 21 currently being drilled. We anticipate a run rate of around 142,000 per day, which sets us up for great growth in 2024. On an oil-only basis, we expect about a 40% increase compared to Q4 2022, providing a robust runway as we move forward.

Well, thanks, that’s helpful. Given the elevated number of wells in progress exiting this year and the eight-rig program, how should I think about the exit growth in 2024 relative to 2023?

Yes, regarding exit growth in 2023, based on the 143,000 BOE per day, if we held it flat, it would be about 15% growth for 2024. We hope to exceed that with the eight-rig program, but it’s early to predict an exact exit rate for 2024.

Hey, Gabe, it’s Tom Elsener. We’re very excited for all these wells that will be drilled and completed on the Advance properties. The bulk is in Southern Ranger and Northern Antelope Bridge, areas that have shown great production potential.

Thanks, Tom. That’s helpful. Good quarter, guys.

Thank you.

Morning all and nice update as always. Joe, my first question’s for you. How do you currently view production growth versus shareholder return? I ask this because your wife appreciates a nice dividend occasionally.

Thanks for the question, Neal. We are for both dividend and shareholder returns, as much as we’re for growth and value. We’ve never sought plain growth. We focus on profitable growth. We plan to raise our dividend consistently and we intend to do so prudently. Our dividend has increased from $0.10 to $0.60, and if prices remain stable, shareholders can expect a return over the next year. We are committed to steady dividend growth while also increasing the value of our shares.

That's crystal clear, Joe. About Advance, can you clarify how the production from the 21 new Advance wells will impact production in 2023? You previously mentioned a minimal impact from these wells in Q3 due to coming online late. Is that still the case?

Yes, thanks for the question. We have only been operating the Advance properties for a few weeks, so let's give us some time to provide an update. Our excitement is high about existing production. We had a smooth transition, integrated our drilling rig into our MaxCom room on day one. We started fracturing operations on these Margarita wells yesterday using Simul-Frac and dual-fuel. We hope to complete these wells faster than anticipated and contribute meaningfully to Q3.

Thanks, Glenn.

Hey guys, good morning. Tom, could you provide more color on the advantage midstream has provided? As you connect systems, how does that aid flexibility and stronger performance?

Sure, Scott. When designing the Stateline development, we looked at it as an opportunity to create unique pressure systems for the different 54 producing wells at Stateline. This allows us to custom flow those wells into the appropriate systems, optimizing production. This has benefited Stateline significantly, keeping the wells flowing optimally. I can’t recall a day of downtime there, thanks to San Mateo’s effective management.

Yes, and it's not just at Stateline. We’re drilling an additional saltwater disposal well for Rustler Breaks and are actively building out infrastructure for Matador’s other properties, enabling better flow assurance across the basin. Our partnership with San Mateo is integral to these efforts, ensuring consistent operations even as we expand.

I want to emphasize the growth in third-party volumes going into these pipelines. It’s important, as we’re seeing repeat business from companies indicating they’re happy with our service.

Exactly, Joe. Our service models treat third-party clients the same as Matador, ensuring quality across the board. We’re pleased with the increasing natural gas gathering and processing, even during lower production periods.

That’s good color, guys. On Advance, how do you plan to bring the 21 wells online? Will this be a staggered process to maintain stable production over time?

Yes, Scott. We plan to bring the wells online in a staggered fashion to maintain stability and ensure sufficient capacity across oil, gas, and water. There are logistical challenges with this approach, but we’re cautiously optimistic.

I was curious about the $104 million on the cash flow statement. Was that part of the Advance deal or separate deals?

Leo, that’s a good question. Out of that $104 million, about $80 million was a deposit on the Advance purchase. The remaining $20 million was for our usual acreage purchases or trades.

Just to clarify for that $20 million, it was about 40 different deals, consistent with our brick-by-brick approach.

That’s helpful. How does the strong performance in the first half of the year inform your full-year production guidance? Why not increase the guidance given the second quarter guidance is up by 7%?

We’re being conservative with our guidance. Although we expect to exceed what we projected, we want to ensure we can deliver on our promises. Brian?

Right. Our operations team has been performing exceptionally, and we have seen better-than-expected production from the first quarter. We had seven additional wells come online late in Q1, which will contribute to the increase in Q2. Overall, we’re excited about how the first quarter turned out and the outlook for the second quarter looks promising.

Thanks. On the U-shaped well, could it have a broader application? Is the simulation cost higher for these?

Hi, Subash. There’s no increased stimulation cost for the U-turn wells. The technical specifications of the completion were set up correctly. We’ve transitioned from coil tubing to stick pipe, minimizing risk on drill outs.

We’ve identified around 81-mile wells that could be converted to approximately 42-mile horseshoe wells. If successful, we would look at broader application opportunities.

Remember, we are not the first to drill U-turn wells in the basin, but the industry is gaining traction with this technique, and we’re excited about the positive experience we’re having thus far.

We feel pretty comfortable regarding our exposure to Waha. We have a diverse portfolio capable of reaching other markets, so we don’t feel the pinch that others may.

Have you had conversations with your service providers about larger items like rigs and completion services moving lower? How contracted are you on those larger line items for the rest of the year?

Yes, we’re continually having conversations with our service providers. While costs haven’t come down yet, we see some indications that they may have plateaued. The risk is still present, but we remain optimistic.

Things do appear to be plateauing on the drilling side and some cost items are trending down, like diesel. We’re hopeful for improvements moving forward, especially with the efficiencies seen through the horseshoe well strategy.

Zach, regarding Advance, after purchase price adjustments, we expect to see about $1.6 billion as cash outflow next quarter. The $80 million mentioned earlier was part of this.

Additionally, we utilized a $500 million bond issuance for the acquisition, which was well received, and it allows us to maintain a strong balance sheet while preparing for future opportunities.

I was surprised that we didn’t see any oil hedges considering the volatility in crude. Can you explain your thoughts on protecting the balance sheet?

Tim, we look at hedging as optimistic. Given the current market conditions, we believe oil prices are more likely to rise than fall, making hedging at this point less necessary.

As Joe mentioned, we are consistently evaluating opportunities for hedging, but we haven’t found the right combination just yet.

Thanks for the response. Can you circle back to the wells in progress by the end of 2023? How does that ramp look long term given your reduced U-shaped well completions?

We remain excited about the wells in progress and see opportunities to adjust our completions as we progress through the year. We have options to make adjustments depending on market conditions.

We've always built optionality into our plans, and it’s early days for the year. We aim to finalize our TIL count as Q4 approaches, and we’re continuing to assess the situation as we go.

I want to highlight that we’ve already begun paying down our RBL, having already paid $75 million off due to revenues exceeding expectations. This supports our plans to continue our prudent financial strategy. I want to express my gratitude towards our accounting group for their dedication during the complex process of managing year-end numbers and the Advance transaction. The team's combined efforts have been commendable. As we conclude the conference call, I want to share a lighthearted note that my hometown newspaper recognized our Advanced deal on the front page, a milestone I’ve looked forward to for a long time.

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