Good morning, ladies and gentlemen, and welcome to the fourth quarter and full year 2019 Matador Resources Company earnings conference call. My name is Tawanda, and I'll be serving as the operator for today. At this time, all participants are on a listen-only mode. We will facilitate a question and answer session at the end of the company's remarks. As a reminder, this conference is being recorded for replay purposes. The replay will be available on the company's website through March 31st, 2020, as discussed in the company's earnings press release issued yesterday. I will now turn the call over to Mr. Mac Schmitz, Capital Markets Coordinator for Matador. Mr. Schmitz, you may proceed.
Thank you, Tawanda, and good morning, everyone, and thank you for joining us for Matador's fourth quarter and full year 2019 earnings conference call. Some of the presenters today will reference certain non-GAAP financial measures regularly used by Matador Resources in measuring the company's financial performance. Reconciliations of such non-GAAP financial measures with 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 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 short slide presentation summarizing the highlights of our fourth quarter and full year 2019 earnings release on our website on the Events and Presentations page under the Investor Relations tab. With that, I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?
Thank you, Mac. Good morning to everyone on the line. Thank you for participating in today's call. We appreciate your time and interest in Matador very much. I'm gonna forego the usual introduction of the executive committee who are in the room with me today, and other significant people at Matador. In order to make a couple of points, then we'll have more time for questions. I'd like to begin simply by thanking the staff, our shareholders, that with their help and support, we can report to you that we've very simply had the best quarter we've ever had in the fourth quarter, and we've had the best year we've ever had in 2019, despite the headlines. Now two months into 2020, I can say that 2020 is shaping up to be even better.
2021, as I've noted for the first time, looks like we'll reach the free cash flow and continue the achievements in the field and with the midstream, and that 2021 will be the next best yet. Several points I just want to make. It's not an idle claim that 2020's gonna do good, and 2021 will be clear that we're reaching that free cash flow point, subject to the opportunities. You can mark it this year by a number of catalysts. First, in late March and early April, we'll be bringing the Rodney Robinson, six Rodney Robinson wells online in our Antelope Ridge. That will be very important and I think very productive wells. In June, we'll have the Ray and Leatherneck. June and July, the Ray and Leatherneck wells coming online will be the second important catalyst.
You get to September, and we'll have our big birthday, so to speak, from the Statel ine wells. We'll have 13 of them coming online, in September, and you can begin to see the full impact, as well as our second San Mateo project and plant will be ready to go in September. It's on time, on budget, and which will enable us to start processing a half a billion cubic feet of gas per day, doubling our capacity. Naturally, we're all very excited by that. This is the result of a two-year strategic plan that, based on the longer laterals, and associated operating and capital efficiencies, from these longer laterals. It's obvious that you save money, but you also pick up extra productive zone, and these are delivering superior results.
It was a turning point when we were able to secure the leases and block up the acreage in the other parts so that we could do these 2 mi greater than 1 mi laterals. Next year, 84% of our drilling will be wells that will have laterals longer than 1 mi , 74% of which will be the longer 2 mi , or in a few cases, 2.5 mi. You can mark your calendars. If we attain those goals that I've mentioned, you'll see it'll become even clearer that the free cash flow is around the corner, subject to those opportunities. We just didn't want to announce that in specific terms until we felt very confident that we could do what we said we were going to do. That's important part of our operating strategy, is to do what we say we're going to do.
I know that sounds corny, it means something to us. When you look at our steady rise in our production, our exit rates, think about in 2016, which was one of the most difficult years, we exited, with the growth at 29,965 bbl of oil a day. Today, we exited in December at 73,749 bbl of oil a day. When you consider on the day we went public back there in February of 2012, we were only making 400 bbl a day. In seven years, we feel we've come a long way from 400 bbl a day to over 73,000 bbl a day, and we have further progress in sight.
A shout-out to all of our different groups at Matador for turning in exceptional jobs, from operations to marketing and midstream, to the accounting groups, to the land groups with their brick-by-brick strategy, has all resulted in this consistency that we think we've delivered for shareholders, that we've met or exceeded industry guidance, projected guidance now 22 straight quarters. We don't see anything stopping that. Which leads me to my final point, that these leases that allow us to drill these longer laterals have helped us reach a different level, and our midstream rate going forward has helped build a thriving business out there. It now allows us to look at consider non-core assets and making transactions on that would allow us to further accelerate our growth and perhaps start a mineral business, much like what we've done with San Mateo and a JV partner.
This strategic plan that we put in place and have carried out leads us to how we're going to sustain our growth. You'll see the seeds being planted to go into new asset areas to continue the better execution and continuing to work some of the best rock in the Delaware. We're very excited and still operating under the notion, again, it sounds corny, but I think it works, of having profitable growth at a measured pace and putting first the notion, let's create some value for shareholders, even if it makes it a little more difficult for us in the short term. The long-term value of good rock, good people, and a good operating plan, that strategy's been working for us. We expect it to continue. David, did I leave anything out?
No, sir, Joe. I think you covered it. We continue to be very excited about the plan we put in place last year. I think everybody can see that we've executed very well against the plan. Probably are a little farther along at this point than we thought we would. I think things that we had laid out for our investors at this time a year ago, that we'd be drilling at the Rodney Robinson area by the fall and that we'd be at the Stateline by the end of the year have all come to pass. I think all of us here on the team are very excited about the year ahead and the things that we have to accomplish.
We've said we were going to build these two businesses, the E&P business and the midstream business, side by side, and I think that's exactly what we're doing. We're looking forward to achieving the milestones that we've laid out, and particularly, when the expansion of San Mateo and the Stateline production come on at the latter part of the year. That's what we're focused on and looking forward to accomplishing that.
All right. We'll take the questions. Operator?
Thank you. Ladies and gentlemen, to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, that's star one to ask a question. Due to the constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you limit yourself to one question and one follow-up until all have had a chance to ask a question. After, we would welcome additional questions. Our first question comes from Scott Hanold with RBC Capital Markets. Your line is open.
Thanks. Good morning.
Morning, Scott.
Morning, Scott.
Good. Appreciate all the updates, pretty constructive, especially setting a free cash flow timeline. Can you give us a little bit of color as you look into that period of potentially hitting that in mid-2021? How do you look at the decisions to that point? Do you see yourselves maintaining a free cash flow neutral position from that point? Or would you ever move into the strategy of now more of maintaining activity, and generating free cash flow for other options?
Hey, Scott, it's David. It's an interesting question. I think, in some ways, I would say, maybe the best answer I can give you is one step at a time. I think that we are, and have been for the last year, looking toward how we would best get to that point where we felt like we could achieve and continue to generate free cash flow into the future. I think that we feel like we're solidly on that path, and that next year can be an inflection point for us. I think that's what we're going to focus on over the next 12-18 months. As we get closer, we can give some additional thought to how we want to use some of that cash flow. I think, as you know, we don't see ourselves as an opportunity-constrained company.
I think that we always feel that there are good ways for us to put money to work. The current environment, we've been a little constrained in terms of the capital and what we could do. We've really focused on this six-rig plan. I don't think we have any immediate plans thinking through into next year to increase the rig count. I think we feel like we can achieve these goals with staying with the six-rig count that we have. I think if you look at what we did in 2019 in terms of the improvements in the capital and operating efficiency, I think we already feel like we'll make more strides in that way in 2020. As we travel through the year, I think we'll have an ever better outlook for 2021.
I think things look pretty promising, and we're excited about the days ahead.
Appreciate that color. You all have a pretty impressive entry to exit growth rate that really sets you up pretty good for 2021. In that context, David, where you said, generally speaking, you're maintaining six rigs into next year as kind of a high-level perspective. What do you think growth looks like in 2021? Obviously, you made the point that you think it's going to be stronger than 2020, but can you provide us a little bit of context on what that might look like?
Well, Scott, I would say this. Is a lot of it depends what is the price of oil in 2021. What is the American economy doing in 2021? What has changed about our industry over these next two years? I think we're in something there's great change going on around the world, and we've got to look at those circumstances. That's why, while we're looking at it from a number of different perspectives, it's important to take one step at a time. We know we're doing that. It's not that we're going to not think about anything until 2021, but it's a lot of uncertainty, and there's no sense in making an announcement, "Oh, yeah, we're gonna do this, do that." That's almost two years away, and a lot can happen in two years.
We will have more definite and clearer plans or announcements on that as year 2021 approaches. Those are under study right now, and I do think we'll maintain the six-rig program that's working pretty well for us. We're optimistic about the opportunity. We'll have more on that as the year goes along. Give us a little time to see how circumstances shape up.
I appreciate that. Will do, and congratulations.
Thanks, Scott. We appreciate it.
Thank you. Our next question comes from the line of John Freeman with Raymond James. Your line's open.
Good morning, guys.
Hey, good morning, John.
Morning. When I think about just you all have had a terrific track record of beating your production guidance over the years, and I'm just trying to get a sense of when we think about such a dramatic step-up from only 8% of the wells last year that were 2 mi or longer laterals versus the 74% this year. Just sort of how we should think about how you incorporate the uplift from the 2 mi laterals in your production guidance, given the limited data set in 2019 from those type of wells, and just y'all's typical conservatism. Just any way to think about how you go about budgeting with such a dramatic change in the wells.
Hi, John. It's David. I think what we've done, of course, is done a lot of looking at not only the few wells that we've drilled, but also wells that have been drilled by others throughout the basin, to get an idea as to what the expectations would be. I think that we have generally are of a mind that from the standpoint of EUR, that whether it's BOE per foot or however you want to look at it, that those things seem to be pretty close to linear, I think. We feel like we'll see that from an EUR standpoint. I think we've said in the past that we have typically seen, and think that it bears out when you look at others' wells as well, that you probably tend to have a little less of an initial rate.
It's certainly not a 2x kind of initial rate, and that probably tends to be a little flatter as these wells begin to clean up. I think that's certainly been the case. Like if you take the Jeff Hart wells, for example, that we did in the third quarter in Antelope Ridge, that's absolutely what happened there. Those wells maintained a fairly flat or low decline for the first four, five months, six months of their life. In fact, I think even the Second Bone Spring well inclined a little bit as it continued to clean up. I think that that's the way that we've approached it, is to try to forecast the wells in these areas like the Rodney Robinson or the Statel ine in that way.
We'll see what happens, and as we have more actual information from our own wells, we'll modify things accordingly if we need to. That's probably the best answer I can give you in terms of how we've approached it.
Yeah, John, this is Matt. I'll just tag onto what David said there in regards to the scheduling for 2020 and these longer laterals. While we didn't, on a percentage basis, drill most of the wells were shorter laterals in the past, we have, at present, well north of 20, the 2 mi laterals that we have drilled and cased and got another 10 or so in progress. We've successfully completed about half of those and, knock on wood, we're having some good success there. I think one of the things that we did in preparation for these 2 mi laterals that's really paying off is these rig modifications that Billy and his team did, including the high torque top drives and the big pumps and the high torque drilling systems. It really started to pay off.
We've got one example is here just recently, we drilled well over 4,000 ft of lateral in one 24-hour period. I think the team is off to a really good start. The MAXCOM team is rolling in there, too, and that 4,000 ft, it's actually closer to 4,100 ft that we drill in that one 24-hour period. 100% of that was done in zone. The drilling team continues to make great efficiencies. Chris Galvin, Cliff Humphries on the completion side, they're doing the same thing there. We've got built into the plan these efficiencies for drilling and completing these multi-well pads, I think the team is really off to a good start on these longer laterals.
Wait. Billy, go ahead.
Also in the MAXCOM room and Patrick Walsh in geology, using the big data technology, working with our non-op group, we've also been watching others go out and drill 2 mi laterals, our partners and all. We've been able to see the good and bad and what's gone on there. They've been able to use that to also help us from running into those same little bumps along with our experience with over 20, 2 mi laterals now as well.
John, this is Brad. I'll just add one piece. These are conversations about the uplift that you referred to that we have on a regular basis with Netherland, Sewell, our reserves auditors. We look at that very carefully. We look at, as David mentioned, an analysis of all the surrounding wells. We're doing statistics, EUR distributions, and things like that, and we come to agreement with our reserves auditors on what those uplifts, Because they vary, as you can imagine. Bone Spring is different than the Wolfcamp A, which is different than the Wolfcamp B. We look at that very carefully.
Thanks for all that info. Then just the follow-up question. I appreciate the commentary and details you all provided on the ESG front and in the release. With what's going on with the additional investments at San Mateo, the large diameter oil pipe that'll be operational late summer, can you give us a ballpark idea of how much oil will be on pipe at the end of the year relative to the 55% that's transferred via pipe at the end of 2019?
I don't know if I know the exact number, John. I think that certainly, we would expect that. Right now, essentially everything that comes from Rustler Breaks and from Wolf is on pipe. Everything from Stateline will be on pipe. Everything at Stebbins at that point will be on pipe from the greater Stebbins area. I believe that would only leave maybe a little bit of our production, which is a fairly small volume, up in the Arrowhead area, and that would be maybe still being trucked. There might be some in Rustler Breaks, although we're working on options to get more of that on pipe as well. I think it'd be fair to say that we could probably be between 70%-75% of the oil on pipe by the end of the year.
John, this is Matt. I think one other thing that's important there is the amount of water that we'll have on pipe. Where we've got these big drilling activities at Stebbins and Stateline and Rodney Robinson and other places, we've got everything set up where we can put most, if not all of that water on pipe. We'll be well north of 90% for 2020 that we'll have water on pipe as well.
Yeah, I think we're looking forward into 2021, John. Those numbers should increase as well. I think we feel that we'd have the potential to be better than 90% on pipe in 2021.
Thanks, everyone. Congrats on the quarter.
Thanks, John.
Thanks, John. One other thing I'll just mention while we're on this ESG topic, is we've always had an active ESG program. It's getting renewed focus, and of course, we're trying to continue to step it up. I'd also like just to note that Billy and his operations group have logged zero lost time accidents since 2017, and no employee injuries have been recorded since 2014. Kudos to Billy and his group.
Thank you. Our next question comes from the line of Neal Dingmann of SunTrust. The line is open.
Morning, Joe and team. Joe, my first question centers on your Stateline area. It sounds like the plan now is to drill even more initial wells in the play before completing all of them shortly. I'm just wondering, is this increased plan a result of new confidence you all have in the play with the increased multi-zone development, or is there anything else we can read into this?
This is David. Neal, good morning. I think that what we've decided as a team, what the technical team that works at Stateline had put forward for consideration was the fact that we feel strongly that it would be best to drill the Wolfcamp AXY and the Wolfcamp A lower, sort of the greater Wolfcamp A formation, and to sort of co-develop that, if you will. I think we have more concerns about if we have any with regard to drainage impacts or shut-in impacts or things as we go horizontally across this play, or this acreage, as opposed to vertically.
Although we always knew we were going to drill the first nine wells, the team came to us and suggested that we ought to bring a couple of the other rigs down and drill out the remaining Wolfcamp AXY and A lower locations, which was four additional locations on the Boros wells, and complete all those at the same time. That seemed like quite a great idea to us, that's what we incorporated into the plan. It's just sort of consistent with our philosophy about how to develop this asset area in the most prudent way possible to make us the most money possible. This is what we thought made a lot of sense.
As a result, that's what we're going to do, and that's why you saw the increase in the initial well count from Boros being 13 instead of nine in September.
Very good. My second question focuses on San Mateo. You all suggested in the release that the facility's expansion of last year's initial footprint should be completed by late summer. I know John was kind of alluding to part of this. I'm just wondering, after this point, Joe, do you all foresee a material amount of third-party business in addition to obviously Matador benefiting from this?
Well, yes. Neal, the third party is very important. The team has done a good job of developing relationships with quality companies out there to provide third-party services, and that's worked very well. We feel like we really have some very strong companies that are long-term and are the kind of people you really want to work with, and importantly, can pay their bills. The second thing, on building the relations with them, what's pleased us is that virtually all of them have increased their business with us since the time of the first contract. All those relationships into San Mateo have been expanding, which I think bodes well going future.
Our guys have been hitting the streets and continuing to develop the relationships and look for additional business, and that's why the plant's grown from its original output, taking care of what we had in Rustler Breaks to something that's going to be a half a billion cubic feet of gas a day. The marketing group's been working hard to develop options and interconnect points and working out deals with other companies that are downstream. It's really worked. A shout-out to our partner, Five Point, has really contributed to this and helped make everything work. We appreciate their point of view and the suggestions they've made operationally and financially, and think that has also accelerated the growth.
Neal, this is Matt. Just to add to what Joe said there, one of the things that we take a lot of comfort in is when we do these expansions for going all the way back to when we first started the midstream business, they've always been opportunity-based. We've never done the build-it-and-they-will-come model. With San Mateo II, what we've done here is expanded this business based on volumes that Matador can and will provide, and that makes the economics work. If you're looking at a map, we're going 12 mi-15 mi to the north and about 25 mi to the south with this expansion. Along those paths, there's a lot of great rock, a lot of good operators are going to drill good wells.
I think the challenge for the San Mateo team, and I think they're going to respond to this challenge very well, is to add some third-party volumes along that pipe, which will make the economics even better.
Thanks, guys. Look forward to all the activity.
Thank you, Neal.
Thanks, Neal.
Thank you. Our next question comes from the line of Sameer Panjwani with Tudor, Pickering, Holt. The line is open.
Good morning, guys. Last quarter, you highlighted getting below 1,000 ft of D&C in Antelope Ridge, just wanted to see if you had an updated number for leading-edge cost. I'm just trying to see how to maybe frame potential downside to the 2020 expectation of 1025 a ft.
Well, hi, Sameer. It's David. I think that the 1,025 that we put out there is already down 3% or 4%, I think, from what we had in the fourth quarter. It does reflect what we think will be some additional efficiencies and cost savings in 2020. I think that when you think about that number being a little over $1,000 a foot, I think you have to think of it also in terms of where the wells come from. If you're a Wolfcamp well, you're probably a little more expensive on a cost per foot basis than if you're a Second Bone Spring well. I think that a couple of the wells that we highlighted last week or last quarter, excuse me, as getting below $1,000 a foot were the Second and Third Bone Spring wells.
I think that we'll see, and when you just put all that together, it averages out to a little over $1,000 a foot. There certainly will be, I think, wells that we drill in the Bone Spring that will be below $1,000 a foot. On the flip side, there'll probably be wells in the Wolfcamp that'll be a little higher than that. We will continue to work diligently, I know, throughout the course of the year to try to bring those costs down further.
Okay. That's helpful. On San Mateo, things definitely look to be progressing well operationally, but wanted to get updated thoughts on how you think about the value of this asset. I know you've talked about maybe a double-digit multiple over time here, but what we've seen from recent transactions is somewhere closer to a mid to high single digits. Wanted to see if you had any updated thoughts there.
Sameer, I'm sorry. This is Joe. Could you rephrase that question and just go a little slower? I was trying to write it down as we went.
Yeah, sure. On San Mateo, I think you guys have talked about 10x or maybe higher on the multiple side in an eventual monetization. What we've seen more recently in the market has been in that mid to high single digit EBITDA multiple for Permian assets. I wanted to see if you guys had any updated thoughts on potential valuation or if the thought process there had evolved given what we've seen in the market recently.
Yeah. Hey, Sameer. I'd say two things. Number one, I think we still probably tend to value the asset at around about a 10x multiple. I think there are still transactions that go for that. There have probably been some that have been less. There's probably been some that have been more. One thing's for certain, I don't think that today we're looking to monetize San Mateo. That's going to be a discussion probably for down the road. I don't know what the market will be at that point.
I think, again, what we're most focused on for 2020 is to complete the build-out of the expansion that we started a year ago, which is going very well, going on time, on budget, and I'm confident that we're going to have some very valuable new assets in the ground come the latter part of this year, including two large trunk lines, a $200 million a day expansion in capacity to our processing capabilities, and additional local oil, gas, and water gathering, as well as a very nice oil transportation pipeline coming from the Stebbins area down to our existing Rustler Breaks infrastructure. I think there's a lot of very valuable assets being created by San Mateo and that they are going to contribute greatly to the future of Matador.
At some point, if we look to monetize those assets, I think that'll be more of a discussion as to what multiples are at that point. It seems a little premature for us to be overly concerned about that at this point.
Yes, Sameer, this is Matt. I think we're, at San Mateo, I've got my San Mateo hat on now. I think we're a bit unique in that space in regards to number one, we've got assets, as David is saying, that are new. Our saltwater disposal wells are new, the facilities are new, the plant's new. All this stuff is just a few years old at best. I think secondly, this third-party base that the team has built up in this 30%-40% range on San Mateo I is a nice spot for us to be in. Like I said just a little bit earlier, I think we'll add third party to San Mateo II as well.
I think also the strength of the anchor tenant, San Mateo, I take a lot of comfort that it's Matador, and that Matador continues to execute on their plan the way that they said that they're going to execute, and they're going to drill the wells and provide the volume. I think that absolutely does warrant a little bit better multiple.
Great. Appreciate the color, guys. Thank you.
The last thing, Sameer, I'd just say that in evaluating the multiple, there's other factors about is the acreage dedicated or is it interruptible? What is the nature of the commitment? What other options do you have beyond the interconnect, and do you have an outlet for the NGLs? Those are all factors that weigh in on that multiple. It's more a complex question, but right now we feel we're as well positioned as any. The last thing is just the operational advantage to Matador of having the pipes ready to hook up so you're not flaring when you're ready to bring the wells on, and the different options that it affords. You have to wait and see.
Multiples vary according to these special factors, but I think if anybody considers this, they've got to appreciate that this has been built in the right way, and they're getting quality assets. We'll wait. Again, we're opportunistic, and we'd wait for an opportunistic time. I think David and Matt said it very well.
Makes sense. Thanks, Joe.
Thanks, Sameer.
Thank you. Our next question comes from the line of Jeff Grampp with Northland Capital Markets. Your line is open.
Good morning, guys.
Hey, Jeff.
Hey, Jeff.
Hey. Was wondering, kind of sticking on some of the more complementary assets with Matador. The minerals royalty side, I think the release mentioned potential sale or joint venture type of structure. Was just wondering, is that still, I guess, a potential goal or objective for you guys that's actively being evaluated, or is that a more passive approach? Just, I guess, hoping to characterize how you view any potential transactions for the minerals business in 2020?
Yeah. Jeff, we have a saying around here, we always reserve the right to get smarter. Presently, it's active consideration because we see an opportunity if we could find a strategic JV partner to start a business, much like what we've done in the midstream. We know these areas, we've got the data, we're operating the wells, we control the drill schedule some. It looks like it'd be a good opportunity for a JV, and much like we did with Five Point, where you have a partner and you have a go for it, and the notion is to build a mineral business. We're open to other ideas. We have a set of minerals. We could sell them part of that and then go forward and buy in these areas we know we're going to drill, and that there is good rock.
To add to that, while getting a more accelerated rate of return from our E&P, minerals are more long-term and get a bigger multiple. We see that as a basis for a win-win, and things have worked out real well in midstream on that. You'd have a similar type structure. Now, we're open to other ways to do it. We were thinking if we could do that would be attractive, and we've got a go-forward plan that puts us in some of the best rock, and we'd like to add to what we have and take advantage of what we have to mitigate the outspend plan as well as to generate more cash flow. David, I don't know if I said that right, but that's a general idea, but open to other ways to do it. Matt?
No, I think you said it well, Joe. I think it's an asset that has a lot of optionality to it that you can sell part of it, keep part of it. There's just a number of transactions that you can do with it, and I think as we typically do, we're going to look for the right transaction with the right people.
That answer your question, Jeff?
That's perfect. That sounds good. Looking forward to it. Obviously pretty volatile start to the year here. I know you guys are never ones to have a knee-jerk reaction, but can you just talk sensitivity, I guess, in terms of activity levels in 2020, if we see $45 or pick a number for a sustained period, just talk about, I guess, your all's comfort level with either keeping the six rigs or what that sensitivity could be if you wanted to pare it back at all.
Jeff, that's a very fair question. The first thing I always start out on a question like that is, it's not a single variable. What is the price of oil? You got to look at also what you get for that are the costs. Do the costs come down proportionally? That has a big determination because you can make money at a lot less than $50 as long as costs come down proportionately and look at your opportunities. That with the volatility, that's another reason why we hedge to try to protect ourselves, and about 45% approximately, maybe a little more, is hedged on the oil side. We think we're pretty well-protected for 2020, and we'll see where it goes from there.
As far as the rigs go, we have six rigs, but these are on short-term contracts, and that we have a couple of rigs, Billy, that, correct me if I'm wrong, they could be released on 60 or 90 days.
Yes, sir.
if worse came to worse.
That's right. We keep some of our rigs on a longer-term basis and some of them shorter and depends on what we're doing with the rigs. Like I mentioned earlier, we've beefed up some of the rigs with even more equipment, and as we're going through doing that, we keep changing the term on the rigs, but adding third pumps, high torque top drive, and just letting this drill more efficiently and be better at these 2 mi laterals.
The last thing, Jeff, is that consistently through time, I've been doing this 36 years, and consistently through time, you make your best rates of return, your most money from wells drilled in these more turbulent, difficult times because if oil goes up $1, $0.25 of that generally goes to the landowner and only 75% goes to your bottom line. On the other hand, for every dollar of cost savings, you get the whole dollar going to your bottom line. When you look back over time, your most profitable wells are generally drilled in these more difficult times. That doesn't mean you just load up, we would double our rig count, but it does mean we don't panic and overreact to short-term period of low prices.
We just move ahead cautiously in a measured pace, keeping our balance sheet in mind, to be sure we don't get over the skis, but it's important to keep going forward. Also, with your staffing, if we were to cut our rigs in half, a lot of our best people would leave, so what has been working for us, the strategy that I mentioned at the first of the conversation, was to keep going. We thought six rigs was the right size for our cash flow, and it seems to be working out that way because that line of sight is now visible to the free cash flow. By staying with the program and drilling the good wells that we had and had the growth, our cash flow is continuing to grow, and we're now in a position to see free cash flow.
If we make a deal on a couple of our assets, either the minerals or have an appropriate offer for some in the Eagle Ford or the Haynesville, we'll be even better off. Those assets in the Eagle Ford have been very good to us, really got us started. Now they're a relatively small part of the whole pie, and we could continue to benefit from the cash flow and the opportunity, but it also would be an attractive deal if I were starting over. Those would be the kind of assets I'd want to have. They have good cash flow, good return. There's some upside, and it's a little simpler down there, not as complex. You go down and hit the Eagle Ford and turn right, drill your well, which they've gotten the drilling. Last time we drilled one, we did it in six days.
It's a great opportunity, but probably, it would be something that we could make a good deal on and someone else could benefit, too. It'd just be a better fit. David, is.
No, I think you handled that well, Joe.
Please record that send that to me later.
I wrote every word of it down, Joe.
Thanks, Jeff.
Thank you. Our next question comes from the line of Gabe Daoud with Cowen. Your line is open.
Hey. Good morning, everyone.
Hey, Gabe.
I was hoping-
Hey, Gabe.
Hey, Joe. Hey, David. I was hoping we could maybe just, I guess, on San Mateo, the $200 million a day expansion, how quickly do you think that plant fills up? I guess I'm just trying to get a sense of what 2021 run rate San Mateo EBITDA would be and CapEx for that year as well.
It's not going to be immediately full. Obviously, as we drill the first set of wells at Stateline that will fill a nice portion of it. When we put the Voni wells on in the spring of 2021, that will continue to increase it. I also think there will probably be some additional third-party volumes that get added to the system. It will continue to ramp up from there. I don't have in front of me exactly what our expectation for is when that plant comes completely full. We expect the volumes to one, I think as you noted in the release, in the fourth quarter, there were days when the processing plant was already running above 95% capacity
We think that it's certainly something we're going to need from day one, and we'll just continue to add to it as our volumes increase. As I say, I'm sure there will be additional third parties that come along or other ways. Our guys seem to be awfully clever in terms of finding ways to maybe even process third-party customers or gas of other midstream companies, things like that. I think that there's a lot of optionality for us to begin filling that plant up.
Thanks, David. That's helpful. I guess just as a follow-up, the capital program this year, obviously a lot of exciting stuff going on at both Matador and San Mateo. I guess if commodities do rebound, it's somewhat of a moot point, but at current strip, you're obviously looking at an outspend for this year. You've highlighted asset sales, but I was curious if you could maybe quantify through asset sales how much of that outspend you do think you'd cover. Is it maybe 50%? Is it 60%? Just trying to get a sense of, also, I guess, balance sheet protection as you move through 2020.
Well, I think, Gabe, that I don't want to sound flip, but it sort of depends on what somebody offers for some of these assets. I think that we could go anywhere from covering a small percentage to substantially all of it, depending on what sort of deals that we're able to make and going down the road. I think that both the minerals and the Eagle Ford offer the possibility to cover a substantial part of the outspend. I think that that's something that we would be very interested in doing. We want to just be sure that we get what we consider to be the proper value for those assets. We certainly are mindful of the need to keep the balance sheet front of mind. It's important to us.
It's something that we talk about all the time, and I think we did an excellent job of it last year in terms of, I think a lot of folks at this time a year ago would have thought we'd have been in the high 2s, 2.8, 2.9, and we managed to hold that down to 2.3 through a lot of initiatives that we did, including selling some portions of the Eagle Ford and the Haynesville last year. We are very much going to continue to keep that front of mind and continue to do what we need to do in order to manage the balance sheet and protect the balance sheet. We know it's important. We know we have to do it. As to exactly what all that brings, I think that we'll see as we go along.
Great.
Yeah.
Great.
Gabe, the other thing I just keep in mind is that our bank renewed our line of credit at $900 million. We currently have $225 million drawn. That means we're not going to have any forced sales or anything like that, and that we have flexibility on the timing. The important thing is not to sell too cheap or expect too much, and consider the other alternatives. If you'd had a little better price of oil last year than what you had in 2018, we wouldn't have had an outspend, largely. A very small one. That was pretty much our difference. Again, in your question, you got to take into account what is going to be the oil price, and it'll trend down, and it'll trend up. The political risk of the Mid East, I don't think is necessarily factored in.
We plan to work on it diligently. We also, with the backing that we have from our banks, that we don't feel we have to do it, and we feel we have even other options from that. In our group, we have the drilling incentives from San Mateo coming up. We've sold bits and pieces of the Eagle Ford and the Haynesville this past year. Not calling a lot of attention to it, but we've recovered different money in different ways, and to the extent that if there is a low oil price, you're going to have better cost, and there's savings on cost, as we've mentioned on capital efficiency, just the costs themselves, the fact that infrastructure's built out there on the roads and the tank batteries and the pads. There's not just one way to close that gap and margin.
I think our group did a real good job of margining. The Gulf Coast Express is operating, which we may be earning as much as $1 more from that firm transportation or other trade-offs. That's what I would say. I know you have to screen and have your deal, but I wish there'd be an algorithm for these little ways that you chip away, but they add up over the course of the year, and that's one of the reasons why we finished with 2.3 instead of a 2.8 or 2.9 on the leverage ratio. Good job to all the staff in not only increasing revenues, but watching the cost side.
Definitely. Thanks a lot, Joe and David.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Gail Nicholson with Stephens. Your line is open.
Good morning. Thanks for taking my questions. In the release, you guys talked about there were going to be some cost savings from using some existing infrastructure. Can you just talk about how many wells in 2020 are utilizing existing infrastructure, and how you think that changes over time?
Hi, Gail. It's David. I think that you would pretty much think that the wells we drill at Wolf and the Jackson Trust area are going to benefit from mostly existing infrastructure. Things that we do at Rustler Breaks are, we're already building out infrastructure in the Stebbins area, so there's going to be some infrastructure there that we'll be able to take advantage of. Anything that we do in Antelope Ridge that's not Rodney Robinson probably will be able to take advantage of existing infrastructure. Certainly the new areas like Rodney Robinson, there's going to be new infrastructure built there. Statel ine, there's going to be new infrastructure built there. It's a bit of a mix.
Gail, I'd just add to that. This is Matt. I would just add to that, too. It's all part of the, as David said earlier in the discussion, that building these two businesses up together at the same time. Each and every one of these little legs that we add to San Mateo to go out to get one of these new facilities is something that we can use not only to extend the Matador reach there, or the San Mateo reach to Matador, but also for third parties.
Great. Just a housekeeping aspect. The potential of that $50 to $60 million of incentive for next year, is that just for San Mateo II, or does that include an incremental $14.7 million in incentives for San Mateo I incentives?
Yes, Gail, it's both. It would be the $14.7 from San Mateo I plus additional incentives we would expect to earn from San Mateo II.
Do you think when we look at that $50 million-$60 million run rate, is that a good number to use at least for the next several years, maybe X the San Mateo I as that rolls off after achieving the full amount there?
Well, I certainly think that we'll have 2021 and 2022. I think that threshold amount of $50 million is probably a pretty good estimate. I think that once you get into 2023 and beyond, the San Mateo I incentives will have been satisfied and will have rolled off. Maybe that number becomes more 35 or something in that ballpark. By that time, of course, everything that we're drilling in Stebbins and Statel ine, and there's another AMI associated with that where there will likely be other wells drilled. I think it's reasonable to expect that those wells will come into that, too. One thing I would say, just to keep in mind as you are modeling that out, it's predicated on when wells get turned in line, so when they begin to produce.
It's going to be subject to a little bit of the same lumpiness of the production. The nice thing about it is we get those paid on the San Mateo II side on a quarterly basis as opposed to annually. Once we sort of clear this initial threshold to start earning those incentives, which we think will be toward the end of the year, and start earning them into 2021, they'll get them paid on a quarterly basis. It won't necessarily be that it's going to be $10 million per quarter. It may be $15 million one quarter and $5 million the next, and $15 million the next. It'll have a little bit of lumpiness to it, too.
Great. Thank you.
Thank you. Our next question comes from the line of Matt Sorenson with Scotia Howard Weil. The line is open.
Hi. Good morning, gentlemen. Thanks for squeezing me in here. I think based on all the questions today, you might have to start holding a separate call just for San Mateo still.
They probably like that.
Happy to do it.
On the lateral length side, your 2020 program calls for a 53% increase over your 2019 average. I don't think you'll be able to continue to increase at 53% moving forward. Wondering if you guys could speak to your ability to either maintain that average or continue to increase your lateral lengths in 2021 and beyond.
Matt, this is Matt. I think the way we're thinking about this now is this is the new path for us forward. I think going into 2021, 2022, these 2 mi and 2.5 Mi laterals are going to be even more and more the norm. I don't know that you ever get to 100%, but I think the notion that we would be in the.
The 85% range for longer than 1 mi and 75% or greater for 2 mi , I think is pretty much what we're looking at going forward.
Okay, great. Thanks. Then, just a housekeeping one. I'm sorry if I missed this, following up on a few of the mineral questions, about how many royalty acres do you guys currently own? I think the last number you guys referenced was maybe about 11,200 net royalty acres. Has that changed at all since then?
No. I think, Matt, this is David, that's still right in the ballpark. I think that's still a good number.
Okay, great. Thank you guys so much.
Thank you, Matt.
Thank you. Our next question comes from the line of Richard Tullis with Capital One Securities. Your line is open.
Thanks. Good morning. Two quick ones from me, Joe and David. Looking at the 2020 production guidance, roughly what level of contingencies for downtime, just the move to the longer laterals, et cetera, do you have factored into the guidance? Is it more contingencies than what you've done in the past or kind of similar?
Richard, it's David. I think that I would say it's probably reasonably consistent with what we've had in the past. I will say that it may tend to be a little bit higher just from the standpoint that we do have, and some of it because with these bigger pads and more wells, there's a lot of wells being completed at the same time. One thing I can tell you for sure is that it's all been very meticulously thought out, and in terms of how that's going to work and how those are scheduled. We don't typically just say, "Eh, we think it's going to be X percent," and just model that flat across the board. It's modeled very much with a timing component as well.
Our teams are charged with, and do a good job, I think, of actually figuring out, as they have new wells coming on and operations in their areas, what has to be shut in, trying to anticipate what other operators in the area are going to be doing. We do try to put a little more science to it. I think that it's usually about 2% - 3%, and I would imagine that's about where it is on average for this year. That doesn't mean that it's just linearly that. It probably changes from quarter to quarter.
That's helpful. Thank you. Just lastly, David, earlier in the call, new asset areas were mentioned. I just wanted to verify. That comment is related to the company's existing acreage portfolio. Is that correct?
Yes, it absolutely is, Neal. I mean, Richard, I think when Joe mentioned the new assets he was referring to, in particular, the work we're doing on the Rodney Robinson area, the work we're doing down at Statel ine, and certainly we feel like that there are other areas of our existing Delaware portfolio that offer a lot of future potential for Matador. When we're talking about new assets, you don't need to anticipate that we're announcing we're about to go into Utah or something like that. We're talking about just being right where we are there.
Yeah, Richard, this is Joe. I want to emphasize. We got a very full plate where we are right now. When we talk about new asset areas, we're really talking about different zones. There are more zones opening up all the time. When we went out there, we thought we had about three zones, five, six years ago. I think we're producing from 16 or 17 different zones. The final point that I really want to make on that, is we haven't talked about the MAXCOM room, but that's been a very important part of our success is that in the MAXCOM room, we have on real time, run 24/7 by engineers and geologists here at the firm that runs 24/7, that's looking in real time what each of our rigs are doing.
Within each target zone, there's generally a preferred zone that you want to stay in the middle of that preferred zone because you'll get more reserves, better permeability. If you can do that, you'll have more productive feet. If you were to drill out of zone or even out of the preferred zone, if you drill out w hole zone, you may be getting nothing back, whereas if you stay in the preferred zone, that's more than even the rest of the zone. That's generally a smaller target, 15-30 ft, but if you stay in there, you're going to have a better than expected well. If you drill out of zone, you may not get something.
In the old days, the guy might suspect out there on the rig that he was out of zone, but by the time he calls, it could've been several hours, you got to redirect it back into zone, you've lost that much of the productive interval in the well. We've cut that down, we're saving money and adding reserves on every well we've been drilling since day one. We would like to invite all of you to come in, get to know us. We'll have lunch or dinner, take you down there, you can see. It's dramatic what they're accomplishing on there and one reason why these are leading to better wells. Just kudos to the operations group, the engineers and geologists working on that, they're delivering the results. Billy, do you want to add to that?
Yes, sir, Joe. That's exactly right. This MAXCOM and big data, that's something that was needed back in the '80s and '90s. You're just trying to stay somewhere in a particular formation. In the 2000s, you're trying to drill 1,000 ft a day, and you've narrowed it down a little bit to a part of the formation. Now we're drilling 100-200 ft an hour, and 4,000 ft days in the lateral, and we're keeping that in a smaller target formation. There's no way you can do it without MAXCOM and all the different software, big data they're using. It's amazing. They just keep getting better and better and working with the providers of that service to find different ways to make it better, watching all the offset wells, and it's all real time.
It's not like it used to be, like you're getting data from the old wells and pulling it up after you've already drilled that. They're watching out front. They're comparing the other wells that they drill next to it and other operators drill. It's just getting after it.
Yeah. We're not the only company with such a room, but it is something that adds to your efficiency, saves money and adds to your reserve base. We've seen it make a great difference and want you all to see it. That's why these results we've been able to generally report better than expected drilling results and costs because this has contributed, and it has our geologists and engineers working together to make a more tightly integrated operational effort by more of the team concept that we try to emphasize that's around here. Richard, since you were the last guy to ask questions, I was hoping somebody would ask me that. I just thought I'd jump in on the end of your question period and put in that plug for our operation people.
No, happy to lend a hand, Joe. I appreciate all the comments. Thank you, Billy.
Thanks, Richard.
Thanks, Richard.
Thank you, ladies and gentlemen. This ends the Q&A portion of this morning's conference call. I'd like to turn the call over to management for any closing remarks.
I think I made them. It's been a great team effort. It's fun to have your best quarter, fun to have your best year. Would like to simplify the life a little bit and have a few of the other difficulties. Things are going well here. Proud of the effort and looking forward to what we can deliver, value that we can deliver for you in 2020 and 2021, and pleased that we can say with confidence that by this time next year, we think the free cash flow standard will be clearly seen and very close to where we'll be as a company.
Ladies and gentlemen.
All right, talk to you later.
Ladies and gentlemen, thank you for your participation today. This concludes the program.