Good morning, ladies and gentlemen, and welcome to the 2nd quarter 2020 National Retail Recovery Earnings Conference Call. Facilitated questions at the end of the company's remarks. As a reminder, this conference call will be recorded for replay services and the replay will be available on the Fornat for Matador Management Union. Please?
Thank you, Valerie, and good morning, everyone, and thank you for joining us for Matador's 2nd quarter 2020 earnings conference call. Some of the presenters today will reference certain non GAAP financial measures regularly used by Matador Resources in measuring the company's financial performance. Reconciliations of such non GAAP financial measures with 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 that you can find a slide presentation in connection with the Q2 2020 earnings release under the Investor Relations tab on our website. I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?
Thank you, Mac, and good morning to everyone, and thank you for participating in today's call. We appreciate your time and interest in Matador very much. Similar to last quarter, we have prepared a set of 8 slides identified as the Chairman's remarks, slides A through H to add some color and detail, which many of you seem to indicate were helpful. So we're going to try it again. You can find these remarks on our website and I'll begin with Slide A.
It's appropriate that we had some slide some paper around here as because the second quarters of 2020 has been much like that challenging and chaotic. But ultimately, we get to the results and the results for the Q2 were better than expected as we noted in Slide 8. The Board and I would like to thank and commend the entire Matador team in the office and in the field for their continued strong execution and professionalism despite all the recent challenges of the novel coronavirus and the abrupt decline in oil prices. Consistent with our updated plans for 2020 is provided in early March, we reduced our operated drilling program from 5 rigs to 3 rigs during the Q2 and we continue to focus on capital discipline and operating cost control to further reduce our outspend. As a result, despite the challenges and the chaos that we faced in the Q2 of 2020, Matador delivered record high oil production along with record low unit operating expenses and drilling and completion costs per lateral foot, which should help us attain free cash flow by the end of the year.
We were hardened by these promising results. Throughout the Q2 of 2020, capital efficiency, operating cost control and the increase in the number of our 8 plus locations were key objectives. Our operations group once again led the way in this effort by achieving better than anticipated capital cost and operating expenses. Our capital expenditures for drilling, completing and equipping wells in the Q2 were 19,000,000 dollars less than our original estimates for the quarter. And we estimate that $10,000,000 of these savings were attributable to improved operational and capital efficiencies and lower than expected drilling and completion costs.
Drilling and completion costs for all operated horizontal wells completed and turned to sales in the Q2 of 2020 averaged $8.81 per completed lateral foot, an all time low for Matador is illustrated in Slide B. On the 5 Ray wells completed and turned to sales in the Q2 of 2020, all 2 mile laterals, we did even better averaging drilling and completion costs between 7.50 dollars $8.50 per completed lateral foot. Operating expenses in the Q2 of 2020 were also at all time lows for Matador. Lease operating expenses on a unit of production basis declined to $3.92 per BOE in the 2nd quarter, resulting primarily from our continued efforts to reduce costs and improve efficiencies in the field. General and administrative expenses on unit production basis were $2.21 per BOE also an all time low for Matador as the salary and other cost reductions voluntarily implemented in the Q1 of 2020 or more fully realized during the Q2 of 2020.
Further during the Q2 of 2020, we achieved the second of 4 important production milestones we set for Matador back in December of this year when the 5 Ray State wells in the eastern portion of the Rustler Breaks asset area were turned to sales in May and in early June slightly earlier than we had planned. As recently reported in the separate press release, the 24 hour initial potential aggregate test results for the 5 Ray State wells were approximately 7,600 barrels of oil per day and 29,500,000 cubic feet of gas per day. As we all know, 24 hour test can be a little erratic, but these wells have continued to perform very well. And I want to emphasize that they've led to better than expected results. After an average of about 55 days on production, these 5 wells have already produced an aggregate of 500,000 BOEs.
The 6 Rodney Robinson wells also continue to exceed expectations having already produced in aggregate more than 1.2 BOEs in just over 100 days of production. The early outperformance of the Rodney Robinson and the Ray State wells in the Q2 of 2020 contributed to Matador reporting record oil production in the quarter, even though 10% to 15% of our potential production was shut in or curtailed during the months of May June. Matador believes it has 100 and more of these A plus caliber wells in its drilling inventory and building up these number of A plus wells is very important to our future and is a major company and staff. Looking to the Q3, we are very excited by the outlook for Matador going forward is illustrated in Slide F. First, we expect to achieve the 3rd and 4th of the key production milestones mentioned earlier for 2020 as we had earlier projected.
In late July or August, the 5 Leatherneck wells in the Greater Stebbins area, all 2 mile laterals should be turned to sales. Then in September early October, we expect to turn to sales the first 13 bores wells also all 2 mile laterals in the Stateline asset area. 2nd, the San Mateo II expansion in Eddy County should also be completed in the Q3 of 2020, including the addition of an incremental 200,000,000 cubic feet per day of design natural gas processing capacity and the large diameter pipelines connecting the Stateline asset area and the Greater Stebbins area to San Mateo's Black River processing plant in Eddy County, New Mexico covering 43 miles. These projects reflect the vision, planning, execution and hard work of the Matador and San Mateo teams to achieve the goals Matador set as part of the Bureau of Land Management Lease acquisition 2 years ago in terms of production and reserves growth, midstream expansion and improved capital efficiency. And I want to emphasize that this has been a very active 2 years in planning these events and it's very encouraging and satisfied to see that these events are coming off as planned or better than planned.
Financially, we were pleased with the recent upgrades by Moody's Investors Service to our corporate credit rating, senior unsecured notes and rating outlook. We've continued to protect our balance sheet and liquidity while achieving these plans and ended the 2nd quarter with outstanding borrowings that were $10,000,000 less than anticipated and a leverage ratio of 2.5 just as we had expected and still well below our reserves based loan covenant of 4 times. As shown in Slide G, we expect to generate free cash flow in the Q4 of 2020 and we plan to use the excess cash to reduce debt outstanding under our revolving credit facility. In addition, we continue to be pleased with the growth of our financial and operating results compared to our industry peers on Slide 8. The Board, the staff and I look back on the Q2 as yet another time when we came together, kept our focus, executed on our revised operating plan and delivered strong results for our shareholders and bondholders in a very difficult operating environment.
We appreciate the support of our shareholders during this time and we remain confident. The outlook for Matador is very bright and we look forward not only to completing 2020 on a high note, but also in the years to come. With that, we'll turn
it back over to Valerie to take the questions on the line. Thank you.
Thank you.
On Q2. A question on where the cost that you all had on the quarter obviously came in at some regular rates. Can Where do you think those end up coming in at?
Yes. Hey, Scott, good morning. This is David. I think that I think we're pretty optimistic about the Boros wells. I would point out that we began drilling the Boros wells back in January.
So some of the wells were certainly drilled prior to the coronavirus and the oil price decline and maybe some of the service cost declines that we anticipated. But certainly, they've all been fracked during a time when completion costs were particularly low. So I think that we're optimistic. The wells went well. I know that the operations team, Billy and his group actually set a number of records for Matador during that time in terms of portions of the wells drilled.
I know they drilled more faster than what we thought that they would. I think in the last or in the current investor deck, we even highlighted the fact that our drilling costs were a little below our expectations on those wells. So I think that we're optimistic that they'll come in pretty good. I don't know that they'll be quite to where the Ray wells were. The Ray wells, of course, are in an area that in Rustler Breaks, that's a little shallower.
These wells are a little deeper. But nevertheless, I think we're optimistic that we're going to see some pretty good numbers on the D and C costs on those wells.
Yes, Scott, this is Matt. Just to tack on what David said there, I think what the operations team did a really nice job of and not just operations, but land legal, everybody getting ready for these longer laterals. We've talked in past quarters about the additions that we made to the rigs, the high torque, high horsepower top drives, a number of things that we worked with Patterson and getting those rigs ready for these longer laterals are really coming to fruition now. So we just recently this is just one example of that. We recently had a bottom hole assembly run, which is 1 motor, 1 bit, one trip in the hole that we drill over 12,000 feet.
So you're approaching 2.5 miles at that point. So I think it's reflective of the preparation that the team did in order to get ready for these longer laterals.
Scott, one other thing. Last year about this time in the fall conference that we went to, we emphasized that Matador was in the midst of a capital efficiency change
and a
capital efficiency story. And I think you saw it come out last year while we boosted our number of wells that we were drilling more than a mile from like 29% to some like 83%. And this is a continuation of that and that's one thing the Bureau of Land Management acquisition enable us to do to accelerate that. And you're seeing the dramatic drop in cost per lateral foot and rise in productivity from being able to execute on that. The MaxComm room that we have here working with a combination of geologists and engineers going 20 fourseven has added to that efficiency and that cost those cost reductions while still improving the wells by staying in zone honker being able to drill further and quicker than you were before.
So all this seems to be working together, glad for it to be coming together and I think you'll see that continue for the year ahead.
Okay. And just to clarify then, on the target of $900 per foot, a good number to think about going forward on the future longer lateral longer term? I guess, still good to think
about maybe Scott, I think we'll do better. So I really do believe that you're going to see us continue to deliver strong results with regard to our capital efficiency and dollars per lateral foot going forward. So I think for the rest of this year anyway, dollars 900,000,000 is sort of the top end of things. I think we'll do better.
Now Billy, I don't want you to feel any pressure in those remarks, but we do, Scott. We expect to do better. I mean, that does all of us here at comp, when price of oil goes up, service costs are going to go up. But for the foreseeable future, I think Billy and his group and the MaxCom group will continue to improve on that.
Yes, Scott.
We're sorry, Billy. Go ahead. We're really excited about what we've got coming forward. Once you get started drilling these 2 mile laterals, Billy and his team are going to get more and more efficient. They just are they're setting records.
Joe was talking about the Max Con room. Some of the other functions that team is working on are working on torque and drag models. So prior to going into these wells, they run a model that suggests what our torque and drag profile is going to look like and then we monitor that as we go along through that drilling process and make changes as we need to. So I think all this is just a lot of preparation to get to the $900 per foot. I think if you contemplate that it's a mixture of service cost reductions and drilling efficiencies, obviously the drilling efficiencies we keep regardless of whatever the service price is.
So if the commodity price goes up to a point or actually it's probably more related to activity. The rig count in the basin in March was a little over 400 rigs. It's about 125 now. And so we've got lots of room, I think, in the rig activity that where our service costs will stay there. In addition, we've kind of locked in a lot of those costs.
In fact, on the completion side, it's 70% to 80% of the completion costs are locked in for the remainder of the year. So that's in a good position. But even if commodity price goes up, service costs go up, our revenues will go up, we'll maintain those efficiencies. And Scott,
one other thing I'd just like to point out and I'm sure you're aware of it, but most of the shorter laterals in our program for 2020 are behind us now. We achieved the 881 in the second quarter with sort of like a mix of sort of half 2 mile laterals and half less than 2 mile laterals with the exception of just 2 wells going forward. Now, Every well we turn in line, it's going to be a 2 mile lateral. And I think the 2 mile laterals have all had a little extra dose of capital efficiency. And so given the fact that that's where most of the turn in lines are going to be for the rest of the year, That's why I think we're optimistic you're going to continue to see good numbers.
Got it. Thanks for that color.
I'll add on a little
bit more. This is Billy Goodwin. We're doing things a lot more efficiently out there. We've got engineers out in the field now helping out with each part of the business that we moved out and that's helping us out a lot. Those guys are getting better right there, hands on in the field, close to the wellhead, making improvements, but also a shout out to the service companies and vendors, contractors we're working with because they're also getting better at what they do and getting more efficient, improving technology.
We just keep getting better and better. So as costs start coming up, we're getting better all the way around us and the people we're working with and a shout out to Patterson, their frac company, Universal, Directional, MS Energy and Halliburton, Schlumberger, all these companies have gotten better and better all across drilling, completion and production department to help us out and get everything better, including our LOE.
Great. Appreciate the depth and color. And as a follow-up, as you look forward, you've got obviously a lot of the federal permits you need to develop the state line
area as well as in parts
of the Anvil Bridge. Can you discuss the midstream, the size of the midstream expansion and is that the pace that you would actually develop this? Does the midstream maybe expanded as you continue to get active in the state line area? Or are you just going to pay for the midstream?
Scott, it's David. I think that the midstream part is going along extremely well. And we're as we noted in the release, we're nearing completion of the plant. There's a shiny new plant in Eddy County that belongs to San Mateo and it's just it's getting very close to being ready to turn on and start testing. And I think we're very optimistic, as we said, that by the latter part of August, it's going to be ready to accept the new gas from the Stebbins and the Stateline areas.
In particular, with regard to Stateline, the large pipeline is getting very close to being completed now and put together. We're building out all the remaining infrastructure on the surface in the Stateline area itself, and that's all coming together. So I think we remain very optimistic that we've got we certainly have all the permits we need for that too, by the way. I mean, all the permits that San Mateo needs to get all of that wrapped up are in have been received and we're moving ahead. So I think we feel optimistic that things are going to come together as we thought, and we'll be turning those wells to sales in September October as we've laid out.
And I think that the new plant gives us quite a bit of runway then for the development of Stateline. So as we continue to develop Stateline, we're going to have sufficient capacity with the midstream to be able to develop at the pace that we want to. So I feel like that's all moving ahead very well.
Scott, one other thing, everybody listening in, when the operator is speaking and when you all are speaking, there's been an echo and you're breaking up occasionally. So we may have to ask for a repeat of the question. We hope you're hearing our voices okay, but you all are breaking up through no fault of your own. I'm just if we ask to repeat this for no other reason, we want to be sure we under stand what you're asking.
Yes. No, I appreciate that. We heard the feedback from when the operator was talking, and so I understand. But your answers are clear. Thank you.
Thank you, Scott.
Thank you. Our next question comes from Gabe Dodd of Cowen. Your line is open.
Hey, good morning, guys. Hi, guys.
Hey,
guys. I was hoping to start
with your liquidity position. As you
look to the fall, I guess, how
do you
think both the upstream and midstream credit facilities can change? And I guess, are you anticipating an increase to the San Mateo credit facility, just as you mentioned on the back of the processing plant expansion starting up?
Well, this is David. Hi, Gabe. I'll start with that part of the question. So I think that the that once the merger between San Mateo 1 and San Mateo 2 is complete and that's getting pretty close now, that then the assets that were a part of San Mateo II will become party to the existing credit facility. And once they do, that will provide a lot of additional assets backing that facility.
And I think we're optimistic that the lenders then who are party to that facility would entertain an increase. I mean, we've probably invested between Matador and San Mateo. I mean, then Five Point probably somewhere between maybe $250,000,000 $300,000,000 in additional assets that we've built that are going to greatly contribute to an increase in cash flow going forward. And so we feel like that the bank group would be open to increasing the size of the credit facility. But we do need to complete the merger agreement so that those assets can flow into the San Mateo facility.
With regard to the reserve based borrowing agreement, I think that we remain optimistic that we'll hold on to our borrowing base in the fall. Certainly, prices have come back nicely, and I think that, that will contribute to better decks being used by the bank group in the fall than we're in the spring. In addition, we've got a number of very exciting wells that are coming on and that will be in a PDP status by the time we probably initiate the fall borrowing base review. And in talking with our bank group, they've indicated that they certainly will take the initial results from those wells into consideration in looking at our borrowing base for the fall. And I also expect that we'll probably be able to look a fair amount of additional proved undeveloped reserves off of the results of those wells also.
So I think we're we feel pretty optimistic. A lot of it will pin, of course, as you know, on the bank price deck and where that is at the time. But given where things are currently, I think we remain optimistic about the fall borrowing base.
Gabe, this is Joe. I just have two little points. I want to underscore, Dave, you gave a real good answer and but two little points, it means something to me is 1, we were one of the first ones last year in February to undergo a redetermination by the banks. And we went through unanimously. There were 11 different banks, credit committees that approved it, 11 different reservoir groups that approved it.
And we were conforming loan all the way down to $35 fully conforming. And since then, as David said, we've added more PDP, we've added more PUDs. They've been very supportive led by RBC, very cooperative. All of them have been great to work with, very professional, and we're really proud of the bank group and the caliber. And we're not anticipating any problems, but we also don't want to take them for granted.
And we're pleased with these reductions in G and A and in LOE and in our drilling costs, which improve our borrowing base numbers, but also want to give Scotia credit on the midstream as they've been working hand in hand with us through the midstream expansion and very appreciative of their work too. And on the midstream size is that, yes, we'd like an increase and that gives us some flexibility, but our real aim is to get ourselves in position to start reducing debt and be in more free cash flow.
Great. Thanks, Joe, and thanks, David. That's really helpful. I guess just as a follow-up, just looking ahead to next year, if you keep the 3 rig cadence given the significant cost reductions that you guys have highlighted, how
do you
think capital trend next year? And then just alongside that, 3 rigs represent a maintenance type program? Or does that equate to some oil production growth either on an exit basis or on a year over year basis?
Well, I think that if we maintain the 3 rigs throughout the year next year, Gabe, We still believe that we'll be able to grow our production, maybe in the low single digits, plus or minus 5%, let's say. I think we continue to feel
like that we'll
see that growth. I think as we've commented before, that's on a year over year basis as far as exit to exit. I think that I think we can be close on the exit to exit. I will say that the Q4 of 2020 is going to be a pretty difficult comp to beat. And it's going to be a good one.
And because of these wells that are about to come along at Stebbins and particularly at Stateline. And then I think that the next group of wells at Stateline, the Bonnies on the western side are due to really come on right at the beginning of the second quarter. And so that's going to be a very strong quarter too, we feel like in 2021. So I think we'll be close on an exit to exit basis, but we certainly will have another very strong quarter in Q2 of 2021. And overall, I think we think that our production should grow next year even if we stay at the 3 rigs.
And with regard to CapEx, I think we would expect to be probably in the $425,000,000 $450,000,000 range on those 3 rigs. Some will depend before we get to next year on the kind of mix of wells we decide to drill, but that feels pretty reasonable to me. I'm sure there'll be some additional non op that we would have. And depending on what that is, that could impact our CapEx a little bit, but also our growth a little bit because when I'm talking about plus or minus 5%, I'm really not considering much of a non op program. So if we have a little non op, that's going to add to it as well and that might push the production up a little bit also.
And I think with San Mateo that we're thinking of next year as being a bit more of a maintenance CapEx year. And if that's the case, then I think that Matador's portion would probably be $15,000,000 maybe $20,000,000 And so we actually, as you know, are looking for San Mateo to be very positively free cash flow next year. And so I think when you consider the contribution of San Mateo to free cash flow, You consider the incentive payments that we'll have next year because we'll continue to get the San Mateo 1 incentives. Those will be earned. We'll receive that $15,000,000 in the Q1 of next year.
But then as soon as the Bonney wells begin to be turned on, all the San Mateo II incentives, the $1,000,000 per well that we get through San Mateo II is all going to kick in. And so that's going to also contribute, I think we figure $25,000,000 $30,000,000 potentially of incentive payments next year on the San Mateo from Five Point. And so we'll have those incentives. We'll have free cash flow. I think that the E and program will be getting itself close to free cash flow.
But in aggregate, we feel like that we can generate cash flow if we're in a 40, low 40s kind of environment and anything that's 45 or 50 will be that much better. So I mean, I think that's directionally how we're looking at it. Don't beat me up too much if those numbers change a little bit here and there when we finally come out with guidance. But I think that should give you a pretty good direction as to how we think things will go.
Yes. And Gaye, just think that if you were at 50 instead of 40, we can make the numbers work at 40. As we said, we're doing it now. But if you we should be fortunate for it to grow to 50 times the 13,000,000 to 14,000,000 barrels we'll produce, that's an additional 130,000,000 to 140,000,000 would change everything around and even half that would make a great difference. So I think that outlook is pretty good going forward and we intend to make the most of it at 3 rigs and we plan to stay there for the foreseeable future.
Yes, Gabe, this is Matt. Just a couple of points. 1 on the E and P side, David was talking about with 3 rigs, we did see some single digit growth and some capital efficiencies that go along with that. I think that we'll continue to get better drilling these wells. You're going to get more bang for your buck.
And we're drilling these wells at a time where we're drilling them as efficiently as we ever have and likely ever will. So that's a good thing. I think when prices do go back up, like Joe said, to $50 we're going to be really glad that we've drilled these wells. And then just on the San Mateo side, once we get this expansion done, we'll be at almost 0.5 Bcf processing capacity there at the plant. And we're at 335,000 barrels of disposal capacity, so a day.
And so as we go forward, once we get this expansion done, we greatly expanded the footprint of San Mateo. So it's kind of like the we're at a size now where we want to add 3rd party customers, we can go ahead and get contracts in place that support those economics. So it's not like we're and we never have done the build it and they will come model, but we're greatly expanding, like Joe said, another 43 miles of footprint in the basin. So we're in a good position with San Mateo.
Great. Thanks so much, everyone, for the color.
Thank you. Thanks,
Gabe. Jeff Blamp of Northern Capital. Your line is open.
Good morning, guys.
Good morning, Jeff. Good morning, Jeff. Good morning, Jeff. Good morning, Jeff. Good morning, Jeff.
I was curious, Joe, I think you might have just touched on it a minute ago. In regards to the free cash flow kind of objectives that you guys might think about in terms of kind of balancing spending levels. I'm wondering how important you guys view maintaining positive free cash flow as we look into 2021 beyond. If there was a scenario where returns are just so good where you guys might think about adding activity levels is staying free cash flow positive, I guess, is an overarching kind of theme that you guys would look to maintain?
Look, Jeff, we're a public company with public shareholders. We pay attention to them. And if that's where the value creation is, is to be free cash flow that leads to a better evaluation, then we're going to be listening to that. We're not in a growth for growth sake. As Matt Hereford likes to say, we're for profitable growth at a measured pace.
And we hope someday to go to 3 to 4 from 3 to 4 rigs, but we don't want to do it at the cost of evaluation or something that exposes us to too much debt. I think that we're always trying to be in balance and I think the situation now comes from absent a very, very compelling opportunity, we're going to work on reducing debt. And now that the midstream is doesn't need the capital, it's an important part of that free cash flow. The rock that we're drilling in, that's why we emphasize these A plus locations, is strong enough to give us some growth without expanding beyond 3 rigs. The capital efficiencies we've achieved allow us to get more footage in without having to go to a 4th rig.
So there's no hurry until I think you're in a stronger price and economic environment to really give that a whole lot of thought. And so what you're going to continue to see for us is to find these efficiencies, to take advantage of the midstream position and keep drilling this good rock and we're adding A plus locations all the time. As an example, down there in Wolf, we drilled a 3rd Bone Stream carbonate that has added double digit growth in A plus locations in and around it. And we'll have more detail on that at our next conference call or through these conferences. But we have always been I've been in the business 40 years and we've always been know that the necessity of a strong balance sheet, but we saw an opportunity when we did the Bureau of Land Management lease acquisition to change to take Matador a step forward to where it had more capital efficiency opportunities and make it a capital efficiency story and convert ourselves from drilling 29% longer and 2 mile laterals to 83.
Well, that couldn't have happened without it. Also, if we hadn't done that deal, we would have missed out on the 175,000,000 dollars in incentives and capital contributions from our Five Point, our midstream partner. So that was a step up for us and made us much more competitive and helped us grow to number 8 in New Mexico in oil production. So I think David has done a great job in navigating us through here and the Tegnell team and give shout out to Glenn Stetson and Tom for combining with David and coming up with these programs that not only save money, but still increase production. So we'll have a little growth, but now is the time to keep building up the balance sheet, but not stopping in our tracks.
So I think they've put together a good program. We're beginning to see the fruits of it. And I think you'll have an even better report as we bring in those state line wells. And we'll be glad we did that at a time of low cost because these will become some of the most profitable wells we'll ever drill even though they were born at a time of low oil prices, but they're going to produce for a long time just like the Rodney Robinson early days has produced over 1,000,000 barrels of oil or gas equivalent, but they're going to remain out there for years to come just like the Stateline and our other long term wells and that's why we like our chances.
Great. I appreciate that, Joe. And my follow-up, you talked on the A plus locations, so I'm glad you kind of ramped me there. Can you just talk about the opportunity set to kind of grow that either through pouring up lower working interest areas, extending laterals or maybe like that 3rd Bone Springwell you talked about where you're just finding areas that are maybe better than you initially thought. I guess just generally wondering the level of conservatism you guys baked in there and the opportunities set to grow that.
Well, Jeff, it's David. Look, I think we're certainly optimistic that we can continue to grow that. I think you've kind of touched on some of the things that are important to be able to do that. 1, I think, is just part of the continuing geologic effort that has always been a hallmark of Matador's work in the Delaware Basin. I think even in times like this, we've tried to continue to support the teams, the geoscience and the asset teams in their recommendations to step out here and there and try to make yet another target work.
The 3rd Bone Spring was a case in point, and we went ahead and did that and got a very strong result from it. I think the Wolfcamp B up in the Sevens area is another case in point. That's a pretty big step out relative to any horizontal well that's been drilled in the Wolfcamp B before. But our teams like the potential of that. And so we decided to go ahead and include one of those in this group of 5 Stebbins wells that we drilled.
So that's a way that we'll continue to work on that. And then on the land side, our land group continues to do a very good job of helping us to block up more of the more of our acreage. I know that if you looked at a map between 2 years ago and today, you would see much more blockiness in terms of our key asset areas around Russell Breaks, around Stebbins, of course, Stateline, those kind of things that you can definitely see the blockiness improving. And look, that's a lot of good land work. That's trading with others where we have things that make other operators work and they have stuff that makes us work a little better from an operating side.
It's a good thing to do. It's a good thing to put together. And so we're continuing to work on those things. And I think as a result, we're optimistic that we can make that number grow.
Yes, Jeff, this is Matt. And Ned may want to weigh in here. But I think our toolkit is getting better and better as we go along as well. So we've got seismic over the majority of our assets. And so the team is doing a nice job of identifying targets and staying more in targets.
So gets again back to the capital efficiency. The more we stay in target, the better our wells are. I also think that just and this is just kind of a general statement, but success leads to more success. So the more that we're able to go out and identify which of these zones are working and making A plus locations gives us more confidence in what we might try next. And then I think again getting back to the MAXCOM guys and just the overall operational efficiencies as you drive these costs down more and more wells move into that A plus location because as you know it's a 15% rate of return at $30 oil.
So I think that number will grow over time even as we drill some
of them
up. Ned, your group really has done a great job, and I want to give you the opportunity to acknowledge it. Well, I appreciate that.
As Matt said Matt and David said, we do have a broadly increased toolkit between the seismic and petrophysical work being done at Matador really is leaps and bounds beyond where it was a few years ago. Those tools really help us identify the best targets and hopefully grow that A plus location count significantly. It also really helps on the execution too. I mean, I know MaxCom has been mentioned several times here, but having the geologists and the engineers working side by side, analyzing every well that gets drilled relative to the seismic data, relative to the physics, relative to the drilling performance really helps us go faster and stay in better rock.
Great details. I appreciate the time guys. Thank
you, Jeff.
Thank you. Our next question comes from John Freeman of Raymond James. Your line is open. Good morning, guys. Good morning, guys.
Hey, John.
As you all continue to drill those fleet wells quicker, I'm thinking like how do you manage that and promote a budgeting perspective like if the decision came to bring online a handful more wells than planned versus like building up some DUCs, sort of how you kind of manage that balancing act, obviously, it's a good problem to have.
Yes, John. We were that's a great question. And we've talked about it many times and it's a constant deal that we're really proud of the way they're drilling them faster and making all the wells more capital efficient. And so it's hard to be really precise on the capital expenditures because not only is it a high class problem that you're drilling them faster, but as you complete them that means you've spent some more money, but you've converted them to PDPs. So overall, you don't want to slow down on that.
You do want to take that into consideration as you do your budget and probably this is a good time just to note that in the past, our production has been lumpy at times as we brought wells on. It's going to be the same thing with cash flow in some respects as you do this pad drilling. But overall, you don't want to slow down your people from being more capital efficient and say, go home for the month of December, we've exhausted our budget. You just try to leave yourself enough flexibility or cushion that you can take advantage of your groups being more capital efficient or picking up some non op or interest that's good, that's outstanding or picking up some interest in your wells from people wanting to make trades or other activities. And you just kind of have to manage it a little bit and leave yourself a little bit of cushion and that's why the extra liquidity we have with our banks is important because that allows us to adjust the timing.
So it's more of a timing question, John. I think than anything else, you don't want to turn down or slow down your troops from doing that extra the good work. And just when you have a guy like David, you just put more pressure
on him to make it all work somehow in the cash. David? Well, look, I want to just echo what you said. I really think, John, that it seemed like there might have been a little bit of concern that we didn't reduce our capital expenditures estimates for the rest of the year. And I think that just what Joe said is very correct.
I mean, for one thing, we still got 5 months to go in this year. So we'll see how that goes. I think we're optimistic it's going to go well. And there will be opportunities for us down the road to reduce our numbers if it looks like it's going to come that way. But I do know that I do think that what's going to happen is we will see that as the group is drilling these wells a little faster, that there will probably be a few more operated wells that get spud right at the end of the year that we hadn't counted on.
So that could add some additional drilling dollars. In addition, probably won't surprise you that we're seeing the non op side of things kind of beginning to tick up a little. And so even though we took our turn in line count down slightly, what that what we're really seeing is that some of our operating partners that we're in wells with have decided to go ahead and initiate drilling in the latter part of the year on those wells, but defer the completion into next year. So there's a couple of wells that we thought would be completed next year that were in our this year, excuse me, that were in our till count that we've kind of pushed into next year, but we still expect to have those wells getting drilled. And in fact, we expect that we'll have 2 or 3 more wells that will be that may get spud on a non op basis.
So maybe we didn't maybe we didn't have a chance to get quite as clear on all that in the written release. So I appreciate your question to kind of allow us to expand upon that in the call this morning.
No, that's very helpful. And then just my follow-up question on the acreage trades that happened during the quarter, were those concentrated in any one specific operating area for you all?
I would say no. I would say that they are pretty well diversified across our acreage portfolio.
And John, they're not just initiated by us, by other companies. And the silver lining, one silver lining to this COVID-nineteen and the price war is that everybody is trying to work on their capital efficiency and improve it. And so there's a lot more cooperation on data and trades and non off interest and the like during times like this because everybody's trying to get better and people are helping. And as you cooperate and help, it just gets better. So that's made doing business a lot easier.
And
we
you just find a lot of help is what I'm saying is people can be reached. They're returning calls because everybody knows that it's in everybody's interest to help each other improve their capital efficiencies.
Thank you. Our next question comes from Mike Schall of Stifel. Your line is open.
Good morning, everybody. Good morning,
Mike. Good morning.
If oil prices were to
remain around 40 longer term and you stay at 3 rigs, From a midstream perspective with that 0.5 Bcf a day of processing capacity, is it fair to think that the $15,000,000 to $20,000,000 of San Mateo CapEx that David mentioned for 2021, would that be a decent maintenance CapEx number for the midstream for the next few years? And I guess if that is the case, Matt mentioned third party volumes. Is there enough visibility there to fill the Black River processing plant?
Okay. Mike, it's David. I'll start and Matt may want to chime in too. But I would say with regard to is that a pretty good maintenance CapEx number for San Mateo, I think that it is. I think it's a pretty good maintenance number going forward.
I also think that even with the 3 rigs, we had always anticipated having a couple of rigs running at the state line. So as long as we have 2 rigs running at the state line, that has a big impact and doesn't really change a whole lot our outlook for San Mateo. Clearly, when we had 6 rigs in the program, we would have had a little more drilling probably in the Rustler Breaks area, for example. But some of that drilling was going to be in Antelope Ridge, some of that drilling was going to be elsewhere, which wouldn't have had as big an impact on San Mateo anyway. So I think that the San Mateo volume growth should continue to be good even as we run 3 rigs.
In addition, bear in mind that when we designed this 200,000,000 a day plant expansion, we did so with the thought in mind that over time, Matador would need pretty much all of that additional capacity. And so I think that it's not going to be tomorrow or right away, but with the continued development of Stateline, we think that that capacity will be needed. Now I will say regarding the latter part of your question, when you ask does the $15,000,000 to $20,000,000 include 3rd party opportunities, the answer to that is mostly no. It would include maybe some small ones here and there. But if we had any sort of a significant third party opportunity, what we've always said is that that would probably entail some additional CapEx, but that we wouldn't enter into that kind of a deal unless we felt like it was well supported by volume commitments, acreage dedications, whatever we needed to make us feel very comfortable with the return on that capital.
And so that's the advantage that we have by having all that now is that we can kind of plan that way. So I think if we make a bigger deal for a third party a bigger third party customer, which I hope that we're able to do, it will entail some additional CapEx, but it will also be part of a very well thought out business decision.
Yes, Mike, this is Matt. And David said it well. I'll just I'll restate one of the things he said. When we put San Mateo II together, the only volumes we contemplated for the economics were Matador volumes. And so the idea was Matador is the anchor tenant.
We'll make this expansion fly, but we will have 3rd party opportunities on this greatly expanded footprint. Also, one of the things that we do have an advantage with Matador having most of the reserve capacity in the San Mateo II plant is if Matt Spicer, Brian Willie and their team are able to go out and find some 3rd party volumes that want to come on sooner than later, we can bring them into the plant. Matador can temporarily release temporarily release some of that capacity to a 3rd party. And if we get to the point where we need to add another train, say another $200,000,000 we would have the volumes again contracted before we would ever start construction on that. So I think we're in a really good spot on scale for San Mateo.
Great. And I wanted to ask on the federal locations that are permitted. Assuming the permits in progress are approved before a new administration were to make any changes, do you have an estimate of the percentage of your federal leasehold that could potentially go undrilled? And also wondering about expirations on those federal permits.
Yes. We put in the news release a little information on that. But basically is this, is that we think the chances of them saying you can't drill on your leasehold are fairly slim because that probably be taking in the form of constitution, which there is eminent domain or whatever they do, but they've got to pay for it. And particularly if there's a permit, there I think they're going to allow you to drill it. The federal government is going to need the money.
So for leases already granted or permits already issued, I don't see much of a problem. And we put in the release that when we bring one just one of those bonding leases online and we will have HBP 70% of our federal acreage and the rest is soon to follow in this next 2 year period where you have all your permits that are that have been issued, you have 2 years to drill the wells. So don't see much risk there. But the other thing that we've been trying to make known is that we've Maddoor drilling program has a lot of A plus wells that are not on federal leases. And we have explored the concept, what do we do if we had a whole year's drilling or 2 years drilling on all non federal leases.
So we have no federal leases, what would our drilling program look like? And that's the concept of that and the outline of that is already happening. And you got to feel have confidence in your geoscience group that if that were to occur, there's still plenty of opportunities out there. This is a basin 5,000 feet thick that just like we're finding new zones all the time. When we came out here from the Eagle Ford, I've spent almost my whole career out here.
There were 2 or 3 zones that we were looking at and now we're producing from 17 or 18 different zones. So there's a lot of opportunity. One reason we were attracted to the federal leases at the time is our 87.5 percent. So the net is a lot better. But don't think they're going to go away for particularly the lands granted and the permits, but additive to that are a lot of other locations we have on fee leases that are HVP and state leases that are HVP.
We see those continuing. So Mike, I think we're in pretty good shape and we took that into account and have taken it into account. And I don't see much reason in New Mexico, the governor, while a Democrat has been very supportive of the industry, which we appreciate. And I think there'll be some changes, but I think we're nimble enough to change with them and keep up the caliber of our drilling program.
Sounds good. Thank you, Joe.
Thank you. Our next question comes from Neal Dingmann of Strayer. Your line is open.
Good morning, Joe. Just quickly want to commend your team, you guys put out an operation plan quarter ago and you certainly continue to hit those targets. I told David that. And just want to echo that, Joe, to
you and the team.
I think you've done a great job hitting all those targets. But my first question is really on San Mateo. David mentioned about that potentially coming online, the additional part of that coming online in months. Talking the question to David and Joe or you, does this bring it closer to some sort of sale transaction for this in order to quickly lower leverage or maybe just talk about M and A consideration on
Neil, I'll take it first and then David to combat cleanup. And I just tell you this is that we are a public company and we try to play a straight game. If you look at the 40 year history of Matador, we sold first Matador and then in this Matador, we sold a good part, the biggest part of our Haynesville acreage to Chesapeake. We've done we've sold our 1st midstream plant, the EnLink, and we brought in a partner for half interest on this San Mateo 2, on the San Mateo project. So we've always played a straight game.
If an offer comes in, whether big or small and we've sold off pieces of our Eagle Ford on a case by case basis, if it's a strong offer, we're going to give it strong consideration. We've always said that and sometimes you have properties with Chesapeake or Haynesville or Eagle Ford or out here that makes more sense for somebody else to have it. So we play a straight game. We're not out there with a for sale sign because we see a lot of benefits to having a midstream program that's complementary to our E and P and we're working very well. Matt Spicer and his group, they're there with a pipe when we're ready to bring him online.
We're not flaring. It's a complementary because that's a fee based business to our E and P, which is a commodity based business. So we feel at this point that it enhances, but we would consider. But I'd tell the tire kickers they're wasting their time. They need to come and be serious and we'll listen, but we also see how it enhances.
So that's the way we look at it. And everybody here has an opinion and the way we make decisions is we really get together and hash it out. It won't be something that I decide or David will be in the room and really talk about the pros and cons, try to be clinical and try to see what adds the most value for our shareholders. David?
I was just sort of reminiscing a little bit, Joe, as I listened to your answer, which I thought was great. And I was sitting here because Greg Craig is sitting across the table from me today just by happenstance as he was probably 7 years ago explaining what he wanted to do. And I can remember saying, you want to do what with regard to building midstream. And now I look at him and Matt Spicer and James Meyer and all the people, Matt Hereford, all the people at Matador who've had such an impact and a vision to bring San Mateo together. And look at what it is now.
I mean, my goodness, 335,000 barrels a day of water disposal, 13 state of the art saltwater disposal wells, gas gathering, oil gathering, water gathering, a big water I mean, big oil transportation system, a big natural gas transportation system and almost half a 1000000000 a day of natural gas processing capability. Wow! I don't even think Greg thought it was going to be that 7 years ago. So I think that we're really very proud of San Mateo and the business that it's been and all the hard work that's gone into to getting it to this point. Now I'm so excited for just the next 6 weeks of time to run off the clock so that we have all this stuff put together, all these pipes that are just about to get screwed together to the plant and everything.
It's kind of like 5 bones are going to connect to the knee bone and we're going to start running. And I really just am sorry to be a little old home week here, but it's kind of a cool time and something I think we're really excited about. And so we might sell it someday, but it's kind of nice to have right now.
Well, you think and Neil, you may remember this, we really got serious about the idea of building the midstream when we were on our IPO roadshow back in 2012. And because we've given all these questions about transportation processing and we weren't having problems at that time, but it's clear others were. And so Greg has been a good friend of Matt and had worked here before. They went through grade school together in Hooker, Oklahoma. And Greg knows everything there is about the gas business as he explained it.
We started giving it a try a little bit at a time. It just built up and now it's over $1,000,000,000 business. It's only going to get more valuable as we bring this second plant on the line. So it's a very exciting asset for us.
And I think too, Neil, just one last thought on it is, it's provided a lot of operational control to Matador too. It's been really very integral to our ability to get wells on quickly and get things turned to sales more quickly, meet our targets. I mean, it's I think the coordination between the Matador team, the San Mateo team, the planning, I mean, look, from the time we put together the current plans with regard to how we were going to develop Stateline and Stebbins and all this, San Mateo was right alongside us in terms of how they were going to put that together and our partner Five Point as well. So I mean, it's a very it's been a very important part of our business.
Yes. This is Matt. I just going to add one more thing here, maybe a couple of things. I think it's the way these two businesses work together, I think is unique for us. I mean, we didn't put together a bunch of midstream assets and then sell them to somebody or even I mean, we started kind of crawling before we walked in.
Like David said, now we're running, but we're to the point now where these two business lines really do work together. I mean, from the operational efficiencies like David was talking about, when you're putting on these 13 wells in Stateline, you want to make sure that your midstream partner is going to be there and you want to make sure that they're going to do what they say they're going to do, and we're certain of that. I mean, San Joseo operates as an independent midstream company, but we're the anchor tenant and we get a lot of attention from those guys and they need the volume. So they it's been really nice. We've gone from like Joe likes to say, in 2012, we have 400 barrels a day.
Now we're well over 40,000 barrels a day. And it's the same thing. We went from maybe moving a little gas in the Eagle Ford to where we're at now. So it's been a nice write up on both sides.
No, definitely, you can see all those bones go ahead, guys.
Dan. No, go ahead. What are you going to say, Neil?
I would say definitely going to see all those bones connected, just as David said.
It has been an interesting and that's one advantage of being public is you go on the road, you get these good questions, why are you going to do this, what's happening here and you hear about other challenges that it's made, I think, our business plan sharper. So we appreciate your questions. We really appreciate your interest and it's got a lot of value that isn't fully recognized in the market and it's like our Stateline and Rodney Robinson wells are really performing. And we released that on the Rodney Robinson in 1st 100 days, 1,200,000 BOEs and that this is good rock and the teams are working together. The outlook is good in either area, but I want to emphasize whether it's Haynesville or Eagle Ford or a midstream project, we're going to do what's best for the shareholders.
As it's been pointed out many times by you and others, this management group has got a lot more skin in the game than virtually any other public company. I'm the largest single shareholder and most of the senior group own about 5 to 10 times what their counterpart in other companies own. So we're shareholders too and when Matt has his mother and mother-in-law involved, there's an added level of your ability. It gets tricky as Matt said at times.
Time. My quick follow-up. Just on that Slide 8, you talked a lot about the A plus locations. What's notable is not only how much in the various locations such as Ranger and Arrowhead, but Joe, as you said, of all the various formations. Based on this diversification, does this allow you to do much more just more development mode going forward and potentially see even lower cost because that maybe just talk about the overall ops plan because of this diverse inventory base now?
Well, Neil, it's David again. I think that where we have comfort is that we have a lot of options and a lot of opportunities, right? We're currently focused on and have been focused on the work we were doing at the State Line at Rodney Robinson, at Stebbins. There was a time 2 years ago when we were more focused on the Rustler Breaks area. We probably will be again.
There are parts of Arrowhead and Ranger that we've known for a long time. Were going to be good areas for us. But we that acreage up there tended to be more held by existing production. And so there wasn't quite the same urgency to sort of work through that as there was some of our acreage that wasn't as held. But I think we've known for a long time, as I've said many times, that area was sort of the bread basket for the Bone Spring and we knew we were going to have good second and Bone Spring targets all the way through there.
Think back to our Mallon wells, when we drilled those a number of years ago, I think those wells are all getting close to 2,000,000 barrels a day of reserves each. And so there's been some there's been there's some really great wells that can be drilled up in that part of the basin. And we've also, I think, begun to demonstrate that the Wolfcamp is going to work up in that area too. So we're going to continue to work through the basin. I just am confident about the fact that I think that we have lots of opportunities, lots of good wells to go drill.
As we've often said, we don't think we're an opportunity constrained company in any way. So and I wish we could be running 6 rigs today because have plenty of good spots to put those rigs. We've had plenty of good spots, Neil, but I couldn't take all the questions we might
get. 6 rigs and how we were going to pay for. So we're going to stay at 3 and talk about our opportunities.
Very good. Thanks so much guys. Thanks, Neil.
Thank you. Our next question comes from Vikas Stengals of Travelers. Your line is open.
Hi, thanks for taking my question. Just looking at your bond prices, we are bond investors, so just $75 getting a 25% discount. Has any thoughts been given to maybe buyback as you have still capacity on the credit facility even after your CapEx plans?
I think that this is David. Good morning. I think that one thing we've sort of noticed about how our bonds have traded through this period of time is that they seem to kind of move obviously, they move down and then back up, but the moves have been on fairly limited volumes. And I think that we are uncertain as to whether that we could if we initiated some sort of a buyback program that we would really be able to buy enough that would be of significance before it would potentially just cause the price to pop back up further. So So might be wrong on that, but I also think that we feel like that preserving liquidity has been important during this period of time.
And it just didn't feel like the best thing for us to do at the moment. I suppose that change with time. But for now, I don't think we have any immediate plans to buy back any of the bonds. Great.
And then just second question on leverage. How do you think about if oil prices remain at $40 oil, what do you think
is the long term leverage targets?
Well, I think that consistent with the way we can always run our business, we've always tried to have our leverage target at 2 or below. I mean, I think if you kind of look back over the history of Matador, we really didn't have much debt until just before we went public. And then after we went public, our debt to EBITDA was traditionally below 2%. I think the only time that it got above 2% was back in 2016 when prices were low again, and then it got up toward 3%. And then as prices improved, we were able to bring it back down again.
And I think we're optimistic that see the same sort of thing here. I mean, I don't we had projected, of course, that we'll go above 3 before the end of the year. That's not where we would like to be. And as Joe said, we're going to focus on trying to pay down our debt and move our leverage back in the other direction. So I would say long term that we would and the Board would probably be comfortable with 2 or less.
Obviously, the lower we could get it, the better, of course. But I think that that's where we would be the most comfortable. Joe may want to weigh in on that too. But I think that that's sort of the way we've always tried to run things. Yes.
We want to
lower the debt. Just as David said, we've always had a practice of being 2 or lower. The difference being the Bureau of Land Management deal, the BLM deal, that was a once in a lifetime opportunity. If you didn't buy those leases then you weren't going to buy them in your lifetime, yours or mine, and you may live a lot longer than me. But it certainly wouldn't be in my lifetime.
And those are $12,500,000 And we've added so many. I'm going to come up with a slide that shows that on the day we did that deal, we added 100 of 1,000,000 of dollars in puddle locations. It also set us up that if we hadn't done that deal, we wouldn't have done San Mateo II, which brought in $175,000,000 into the company, dollars 50,000,000 carry in the drilling incentives and as well as some of the best wells, they're being drilled in the basin, by others or by us. So that was a strategic deal that looks better and better each month that goes along. But we're not satisfied.
We're going to be much more careful as we work it down to 2. And more of that is because of the price problem, the commodity price than the debt level. Because what I said earlier, if you had a rise to $10 and I use that because it's easy to multiply times our production oil production next year, dollars 13,000,000 or $14,000,000 that's $140,000,000 You add that on and you are back down there in the tubes. So we're looking at a number of things to reduce debt, a mineral deal, all those are on the table. Anything that can help move that down there is going to be on the table.
So I appreciate your question. And once you know, we're bondholders too. All the officers around here besides being stock owners, we got bonds. So our skin is completely in the game.
All right. I appreciate that. Thank you.
Thank you. Thank you.
Thank you, ladies and gentlemen. This ends the Q and A portion of the morning's conference call. I turn the call back over to management for any closing remarks.
Okay. I have 3 very quick brief remarks. First, I want to extend to you all again, everybody out there listening, come see us. We'll be happy to meet with you in person, give you a tour of the office, let you meet some of the teams, see the Mass Comm room. And I think you'll see instantly how remarkable that room is to work with our drillers and everybody else.
Year ago, people thought, can you even drill 2 mile laterals? So I think Billy and them, we felt very confident and they have, they gone out and done it. But come and meet these people yourself. They're very nice people. You like them as neighbors and they're very capable in their respective jobs.
The second thing, I want to thank Moody's for the upgrade in our credit ratings and on our bonds. We appreciate that and the acknowledgment that they can clearly see things are getting better here. And finally, the last group, I haven't fully recognized or given the shout out to is our accounting group. They got through the they're getting through the audit, all the 10 Qs. They're out there.
They have collected the accounts receivable, their audit group has made more than paid for itself and a lot of good work through the coronavirus. And they're the ones that have sometimes real deadlines they got to meet. And come around at the quarter, they'll be here on Saturday, Sunday or doing whatever it takes. And Rob, thanks again for your leadership with that group. So with that, that's all I have.
But say, come if you got more questions, come see us. And we'll spend whatever time you need to get your questions answered. And know you have a choice in these moments and we appreciate you choosing to listen in to this conference call. Thanks again. Hope to see you soon.
Ladies and gentlemen, thanks for your participation today. This concludes the program.