Good morning, ladies and gentlemen. Welcome to the third quarter 2019 Matador Resources Company earnings conference call. My name is Bridget, and I'll be serving as the operator for today. At this time, all participants are in 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 call is being recorded for replay purposes, and the replay will be available on the company's website through November 30th, 2019, 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 begin.
Thank you, Bridget. Good morning, everyone, and thank you for joining us for Matador's third quarter 2019 earnings conference call. Some of the presenters today will reference certain non-GAAP financial measures regularly used by Matador Resources in measuring the company's financial performance. Reconciliations of such non-GAAP financial measures with comparable financial measures calculated in accordance with GAAP are contained at the end of the company's earnings press release. As a reminder, certain statements included in this morning's presentation may be forward-looking and reflect the company's current expectations or forecasts of future events based on the information that is now available. Actual results and future events could differ materially from those anticipated in such statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company's earnings release and its most recent quarterly report on Form 10-Q.
In addition to our earnings press release, I would like to remind everyone on the call that you can find a short slide presentation summarizing the highlights of our third quarter 2019 earnings release on our website on the Events and Presentations page under the Investor Relations tab. I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?
Thank you, Mac. Good morning to everyone on the line, and thank you for participating in today's call. We appreciate your time and interest in Matador very much, and we appreciate your comments and our discussions with you. Now, I would like to introduce the Executive Committee who is joining me this morning, along with other members of our management team and senior staff who are standing by for all your questions. They are Matt Hufford, President; David Lancaster, Executive Vice President and Chief Financial Officer; Craig Adams, Executive Vice President and Chief Operating Officer, Land, Legal and Administration; Billy Goodwin, Executive Vice President and Chief Operating Officer, Drilling, Completions and Production; Van Singleton, Executive Vice President of Land; Brad Robinson, Executive Vice President of Reservoir Engineering and Chief Technology Officer; Greg Krug, Executive Vice President of Marketing and Midstream Strategy. We also have a special guest today.
We have with us Jason Thibodeaux, who is the head of our field operations out there in southeastern New Mexico and in Loving County. Jason runs the crews that keep our production going. Good weather, bad weather, no matter what comes up, he and his crew have been there and done that and made sure that things have gone smoothly as we could. Jason, thank you very much for being here, and thank your field people for all that they do. As outlined in our earnings release issued yesterday, we are very pleased to report the third quarter of 2019, we felt, was the best quarter in the company's history. We had many financial and operational achievements during the quarter, and I want to take a moment and personally thank the rest of the Matador staff for all their hard work and dedication.
Our business is too complex to think one person does it, and this is a group that not only each contributes, but they work very well together to make it work even more effectively. Now, I'd like to highlight a few key points before taking your questions this morning. The first is what I said about the team. I want to mention our board and how supportive and helpful they've been over the last year in working out the strategies that we've been implementing, and they appear to be working very well. The second thing is, when we began the year, we'd laid out a plan, and we've been executing on that plan, doing what we said we were gonna do, that we thought we had developed Antelope Ridge into another area of great interest for us, and it's worked out that way.
We've also reached the production targets and beyond of what we hoped to achieve. We've kept to the six-rig program. Billy has managed to upgrade those rigs, and those are working as good or better than ever. We've continued to lower cost, so we've actually had more wells drilled for less cost. We've been able to do that tricky, through the narrows where you reduce your CapEx spending, but you actually get more for your dollar because you have more wells and better than expected production. The last thing is we continue to address the issues that you all have noted, and we're making progress, we believe, on all fronts in narrowing the spending gap, which may accelerate in the next quarter or two, and that we've looked at other cards that we have to play that could lead to increased valuation.
Finally, the midstream has received special attention this year. We began the year with doing another San Mateo deal. As we had indicated, we would work that up to a $25 million EBITDA quarter, and we've achieved that. Now, that thunder you hear coming in, I don't know whether you hear it or not, but if it comes in, it's not directed at us. We consider that applause from above. All right. Now let me turn it over to you for questions.
As a reminder, to ask a question, you will need to press star one on your touchtone telephone. To withdraw your question, press the pound key. Ladies and gentlemen, due to the time constraint, we ask that you please limit yourself to one question and one follow-up. We ask that you please limit yourself to one question and one follow-up until you've had a chance to ask a question, after which we welcome any additional questions from you. The first question comes from the line of Scott Hanold with RBC Capital Markets. Your line is open.
Thanks. Good morning, guys.
Hi, Scott.
Hi, Scott.
Hey. It looks like you guys gave some pretty good color on how you progress into the next quarter. By the way, obviously, a very strong third quarter exit rate. I would assume we can't expect you guys to drive that kind of growth every quarter. Obviously, you did run into some times when you're going to have to shut in wells from offsetting fracs and such that's going to impact 4Q. Can you discuss a little bit about where 4Q could exit, though, versus where you exited in 3Q?
Hi, Scott. It's David. I think that obviously, we are going to have to shut in a number of the wells that we just had recently completed, particularly there in the Rustler Breaks for the offset operator fracs. Then, of course, it's our practice to proactively shut in wells as part of our own completion operations. We do think November is going to be particularly low in terms of production. As we've noted, I think that things could be down 6,000 BOE or so as a result of those shut-ins, because those were some very good wells and in the flush part of their production. We're having to shut them in pretty early on in their life. I think that we feel like that we can get some of that back in the month of December.
I guess I feel like that maybe we may exit in December closer to what we averaged in the quarter this past time, Scott. A lot of that will just depend on how quickly we can get these wells back on production and if there is any kind of additional cleanup that's associated with them following the offset fracs.
Got it. Okay. Joe, I think you had mentioned in your prepared comments, talking about understanding the need to bridge that free cash flow gap right now, and that there's some opportunities to accelerate that in the coming quarters. Were you just referring to asset sales, or is it a combination of asset sales, organic growth, and other initiatives?
Yeah. It's all the above, Scott. We're on a good trajectory as far as the bread and butter of the business, which is operations, E&P, and midstream. We've been methodical and from time to time, we've sold an asset, non-core asset in the Eagle Ford or the Haynesville, and we could do that again. They're profitable. They get a favored price on oil, about $3 more on oil, and of course, gas is a little better. We would make a deal if we had a strong enough offer. We've said that, and we've had more interest this quarter than some, so we'll just see where that goes. In addition, we're trying to be proactive. It's no secret that we've got minerals, that we have leased some. We're studying the various mineral deals out there.
As we normally do, the way Matt likes to say, be methodical and measured in each of the things that we do and study it until we feel comfortable that we know the pros and the cons. That's not being ignored or put to the side. We're studying that as we would some other promising prospect, to know when and what we want to do with that. Speaking of that, as we had a guy in our accounting group do some audits and other follow-up work, has saved us a lot of money, found some errors, and we've collected on that.
That's the type of individual effort that we see across the board of our guys getting out there and saving a little bit here and a little bit there on cost, and driving the cost down, as well as the capital efficiencies that we've been achieving this year, and driving down the cost per foot, completed well cost, and as well as making reductions in G&A. It's a deal that every avenue, everybody here is looking to find ways to get a little better, work with the service companies on finding ways to improve efficiencies there too. I know that's a long-winded answer, but it's on everybody's mind, and everybody's trying to do what they can to help.
Okay. It sounds like it's a holistic effort. You guys are just out there picking up every quarter nickel and dime on the ground. Is that right?
That's right. It's comprehensive.
Got it. Thank you.
Thank you, Scott.
Our next question comes from the line of Gabe Daoud with Cowen and Company. Your line is open.
Hey, good morning, Joe and everyone. Just hoping, I guess maybe we could just start with the delivered footage expectations and D&C cost per foot slide in your deck, just given efficiency gains and as you've highlighted on the Antelope Ridge Well, D&C cost per foot moving lower. Do you think both of those numbers at this point could be a bit conservative, and what type of oil growth do you think can be achieved in the Delaware on that delivered footage number?
Hi, Gabe, it's David. I think Look, as to whether we think it's conservative or not, I don't think that we ever intentionally guide to things that are conservative or put numbers out that we think were conservative. That's our best estimate of where we think that we can be. It is encouraging, I think, to see that the Jeff Hartwell did manage to come in a little below $1,000 a foot. That was positive. I will say that when we started out this year, that I think the first time we put this slide in the deck, it was showing I want to say about a 12%-13% decline for 2019, and we managed to do 20% year to date. I think everyone will continue to push hard. I give great credit to our operating team.
Drilling completions have done a great job this year, continuing to be more efficient in both parts of that operation. I think certainly it's possible that we could improve upon these numbers going forward. Today that's where we see them.
Gabe, this is Matt. Just to tack on what David said there, you see the slide there that we're projecting that from 2018 to 2020 with the same number of rigs, six rigs, that we're going to drill an additional 200,000 feet of completed lateral footage. I think that's a great improvement in efficiency. Billy and his team, and I might ask Billy to speak about this here in a minute, but what they've done in preparation for drilling these longer laterals is impressive. We've gone and worked with Patterson, our selected provider for our drilling rigs. We really enjoy that relationship, and they've been able to prepare these rigs for these longer laterals. The rigs that we have currently, the super spec rigs that Patterson provides, are very capable of drilling these two mile, two and a half mile laterals.
With Billy and his team adding the third mud pump, the high torque top drive, using high torque drill pipe and a number of other things, just getting prepared for these longer laterals, I think that's going to be a great efficiency for us. When you're talking in terms of service pricing and how all that works, what we really like to do is sit down with the vendor and show them this type of graph and say, "We're not talking about the same number of wells, same number of completions next year that we were talking about this year. We've got improved efficiencies," we're able to sit down and work with these guys and figure out a solution for pressure pumping services, for instance, that makes sense for both sides.
I know we can go and push on these guys and get less and less or more and more of a pricing discount, but we want to make sure that we're adding value at the same time.
Billy, do you want to describe the rigs? You had a makeover of these rigs this past year.
Right. We had the super spec rigs, we started out with those back in the day, when it wasn't cool. We really did a good job with those, we moved forward, as new equipment's come available, we've gone ahead and added third mud pumps and high torque top drives, like Matt mentioned. We've got three of the rigs outfitted that way already. We'll have a fourth one by the end of next month and a fifth one by the end of January of next year. We'll have five of the six upgraded. We're seeing good things there, along with that, trying out different kinds of motors, stronger, bigger motors, different bits.
We had a spin the hole this last week that was the first time it's been run, working with some of Smith Bits bits and staying out on the leading edge of those type things. Also on the completion side, moving from one mile to a mile and a half and two-mile laterals. We got out ahead and tested new things, standalone snubbing units, and found different methods, different tools. Kind of experimented with that and got those things lined up where they were running really efficiently. When we actually got to start drilling the two-mile laterals and completing them, we were ready to go, and we didn't stumble. All we did was get better. The longer laterals made us even more efficient. It's a lot of work the guys put in ahead of time, and it's really paid off for us.
Good job. We've noticed the difference, like on the Jeff Hart.
Right.
-one of your first ones, and you did that in record time.
Yes, sir. Very good well.
Yeah, that's great. Thanks, guys. That's helpful color. I guess just as a follow-up from me, just digging a little bit more into the trajectory in 2020, I guess could we potentially see more of a back-half weighted growth profile given some of the items you mentioned, like more shut-ins, just getting ready for longer laterals and the longer cycle times on the two State Line rigs. Could we see a back-half weighted profile, but overall, on a year-over-year basis, still get that double-digit oil production growth number?
Without providing 2020 guidance, which is I know what you're asking me here, Gabe, and thank you for the attempt. I was going to say, certainly, I think as we have indicated pretty consistently, that we're going to be running 6 rigs next year. 1 of those rigs is going to run down in Wolf and Jackson Trust, and 1 of them is going to run up on the Stebbins property. 2 of them are going to run between Antelope Ridge and Rustler Breaks, and 2 of them, pending the approval and issuance of our initial permits on the State Line asset, are going to run at the State Line. That today hasn't changed. That's still where we project that those rigs will be running.
I think as we've made clear, when we start drilling those wells on the State Line, for example, we plan to drill a minimum of two 4-well pads to begin with. We'll have at least eight wells that are drilling. From the time we start drilling, hopefully in January, until those wells are completed, and turned to sales, it's probably going to be late August or early September. There's going to be an eight-month period there where those two rigs in 2020 don't contribute to any production. Once they do, it's going to be a very significant event, of course, we think, and there will be a lot of production that comes from those late in the third quarter and into the fourth quarter.
From that alone, I think you would be correct to assume or conclude that our production growth is going to be a bit back weighted into next year. We are optimistic that we will see growth year-over-year. I think that it is fair to assume, just based on the way that the program will unfold next year, that you'll see a back-weighted production profile.
Okay. Understood. Thanks a lot, David, Joe, and everyone else. Thanks.
Thanks, Gabe.
Thank you. Our next question comes from the line of John Freeman with Raymond James. Your line is open.
Good morning.
Hey, John.
Mine was sort of a follow-up to what Gabe was asking. As you all mentioned in the release, as you transition to the longer laterals, more of the multi-well pads, just sort of the nature of that is going to be a more lumpy completion cadence. Given the rig allocation that you all just outlined, I'm just curious how much, if at all, of a factor is trying to avoid the frack hits or having to shut in from time to time activity that's happening during 4Q, or is that just something that you all just going to have to bake into 2020 guidance, and that'll just be something that'll happen kind of, I don't want to say regularly, but from time to time?
Yeah. John, this is David again. First off, I'd say just to be clear, this is something we've baked into production forecasts since 2012 in the Eagle Ford, okay? This is not something particularly new. I think that we have the operating philosophy, and always have, that when we're completing wells that are offsetting currently producing wells, that we're going to shut them in. We do the same thing when we have an offset operator that's completing a well next to one that we have producing. We do that because we think that it helps to protect those wells just proactively from any damage that might be incurred from the frack operation itself. I think we've had good success in doing that, and that's something that we will want to continue to do.
I think this particular quarter is one where it was just very significant, and one reason that we wanted to point it out. We had five brand-new wells in the Rustler Breaks asset area that were five very strong wells, both on the oil and gas side, all of which are now shut in, as we noted in the release, and will be for several weeks now as a result of offset frack operations that are being done by another company. The significance of that being that was going to be a 6,000 BOE a day impact for a few weeks, certainly through the month of November, was something we just thought was worth pointing out. We did so well production-wise in the third quarter.
Really, when you look at our third quarter numbers as a result of just the outstanding well performance of some of the new wells that we brought on and the fact that we completed a few wells ahead of schedule and got them turned on and producing, we substantially beat our internal estimates for where we thought we were going to be in the third quarter. Frankly, we, in the third quarter, beat where we thought we were going to be by the end of the year. When we had to shut these wells in, it just resulted, frankly, our total production is going to be above where we thought it would be at the end of the year. We actually raised our production guidance.
We've bumped our old production guidance up 200,000 barrels for the year as a result of all the good results that we've seen. It just so happens in this quarter that we've had to just guide our number down a little bit due to these offsetting operations. Going forward, I think that there will always be not only the times where you have to shut in some wells, but just the timing of the operations. As we go to longer laterals, they take a little longer to drill and to complete. We're going to be drilling more of these wells on multi-well pads, three, four, five. As we do that, there will just be longer periods of time between when wells get put on.
When we're drilling all one-mile laterals and drilling them one at a time or two at a time, there was a fairly more, a little bit more, I guess, ratable completion pace. It'll be a little more lumpy, as we say going forward, that may result in times for a while where we have a little better production quarter and then one that may be flatter down and then much better, and then flat. I think that's something we've been signaling for a while. I think it's going to happen, and it's something that we'll continue to keep everybody informed of as we go forward. I think it's a good thing, by the way. Because of the fact that I think that these wells are going to perform well, they're going to be more capital efficient and they're going to have lots higher returns.
I can't think of anything negative about it at all. I think really it just may be one of those times where you got to look at things on six months to six months. That quarter to quarter, things may be a little lumpy. Six months to six months, it's all going to be good. I'll tell you, I'll take production being a little down in one quarter if we can have wells that are generating much better returns and much better payouts, and I think we're all for that.
John,
Absolutely, yeah.
Yeah, John, I just wanted to add to what David was saying there. There's really three different ways that we address these offset fracs. Number one are the wells that we operate, which is part of the holistic plan to make sure our drill schedule minimizes the number of offset frac hits we have and how things are spaced out and all that. We're pretty much in total control of that. Like David said, the non-op stuff, we have insight into when those wells are going to be drilled and when they may or may not be completed. In some instances, and this quarter is one of those instances, our non-op partners have elected to complete these wells sooner than what we had anticipated they would, which is a good thing because we'll also participate in that.
Then the third bucket is the stuff that we don't operate, that we don't have a non-op position in, and I think the completion production, the drilling team, even as Joe mentioned Jason Thibodeaux, the field guys have done a fantastic job of making sure that we're communicating with other operators to understand their completion schedules as much as we can. Like David said, sometimes it just ends up being lumpy.
Yeah. I appreciate that. Just the follow-up for me, obviously really strong results on those initial two-mile laterals at Antelope Ridge. When I look at the cost per foot being below $1,000 per foot, which is actually already better than what y'all were guiding to for 2020, is there anything, when you look at those wells, you can identify that says, "Okay, well, this or that did a lot better than we were expecting, and that's why the costs were even better than we were expecting in 2020 on a per foot basis?
Yeah, sure, John. There's lots of things that can happen while you're drilling a well, and the operations team did a really fantastic job on those wells, and you see the results there. The Bone Spring wells are a little different cost than the Wolfcamp wells. They're deeper and have a little different pressure environment, that's going to factor in. I think as we go forward, again, like we mentioned before, I think the operations team has done a nice job of getting these rigs prepared. I think they're doing lots of planning. Billy mentioned yet another bit record. Those things are going to continue on. When you get to the completions, you start completing these longer laterals. You can do it with coil, you can do it with standalone snubbing units, you can do it with rig assist snubbing units.
The completion team's done a really nice job of getting prepared and finding cost-effective ways to go in and make those things happen. We're off to a great start. It's going to be something that will evolve over time.
John, this is Joe. One other thing that factors into it, I think we've taken you through our MAXCOM room, where they're going 24/7. One factor that seems to make a difference since the advent of that room, we've been able to stay in zone more often on our horizontal leg. When you do, that means you're fracking, the right rock. Within that zone, you generally have a preferred zone, smaller, 20 foot, something like that, 25 foot. If you are able to stay in that, your wells are going to turn out even better. On wells like the Jeff Hart, they did such a good job steering those through that time, the MAXCOM room, working with the drilling rigs, that we were in 100% zone. We consider ourselves 100% of the preferred zone.
The more that we can stay in zone will add to those reserves and then continue to improve the results along with what Matt was talking about, and you've got several of these little things like this. Jason and his crew out there monitoring these wells and putting them on, they learn something about production out there every time they complete a well and put it online. Each one is different, and they give them a lot of individual attention, and I think that pays off as well. The Jeff Hart, as you know, produced 70,000 barrels in the first 30 days, and has continued to hang in there very well. Very pleased with these better-than-expected results. We want to keep doing the same things, but keep looking for other ways to improve too.
Thanks, guys. I appreciate it. Well done.
Thank you.
Thanks, John.
Our next question is from the line of Neal Dingmann with SunTrust. Your line is open.
Morning, Joe, team.
Hey, Neal.
My question's really about the efficiencies. Obviously, you continue just to, it seems like, improve every quarter, and my question would be, if you see these efficiencies continue to improve to such a point, would this allow you to, when you think about it, potentially even drop another rig, and would that still give you the growth you desire? Maybe if you could talk about the efficiencies and sort of your targeted growth, if you could.
Yeah. Neal, I look at these things as these are not single variable deals. You got to look at if you outspend, it isn't just the amount you outspend, it's what you get for the outspend. If we continue to get more than we expected from the outspend, that's a good thing. Although we're not trying to be the spendthrift, it's just it's a calculated deal. Is this worth the additional expense or additional risk, and will it pay off? So far, that answer has been yes. The same thing on these efficiencies. It's conceivable we could enter into a time period where we could go to five rigs. Not that we're seeking to do that, but we'd look at that, what are we getting? If our opportunity set wasn't so strong as it is, maybe we'd do that.
We've got tremendous opportunities here in front of us. Everybody knows what Rustler Breaks is doing, and the incentives we have there with our San Mateo joint venture with Five Point. You look at Stebbins. Stebbins came in delivering a very strong note of confidence that that's gonna be an area of great interest to us going forward. They've delivered some good results there. You go over to Arrowhead Ranger, the Verner Ray well is another well that's performed very strongly for us, and we wanna do more there. Antelope Ridge, not to mention Rodney Robinson and State Line, that we think are gonna be two of our best areas. Yet, we've had good results down there in Loving County. All the areas are coming up and looking really good. In that regard, I would just mention this notion about Senator Warren.
I don't think she can do all the things that she says that she can do. Eliminate fracking, I don't think it'd be wise. We have a saying around here, "Let's reserve the right to get smarter." I hope she exercises that right and gets in there and sees the effect that going after tech, finance, and the energy area, three of our strongest businesses in this country, that that would not be wise to do. If she does, it's one thing not to lease federal lands, but another to ban fracking from leases already granted and already producing. Almost all of our wells, by the time the election's over, are all gonna be producing in that HBP status, which I think will be treated different. Even if not, we still have thousands of other locations out there in the Permian to do.
We've always adapted. We think we have a great oil-finding team. We made the right decision. We found gas in the Haynesville. We were one of the first to drill the Haynesville wells. We were early on into the Eagle Ford, and we were early on back out here to the Permian. I've got great confidence that whatever opportunities come our way, that we're gonna make the most of them. I think there's a lot of rhetoric. As time goes along, the reality sets in that this wouldn't be good to her thriving industries. I think she'll have to modify her approach if she seeks to be elected.
Neal, I just want to underscore what Joe was saying there about the pace, the six-rig pace and dropping to five. Number one, if we wanted to drop to five, we could. We have the optionality to do that. I think one important thing to think about when we're talking about pace and the plan that we've put together and the plan that we're executing on is having midstream and the E&P businesses work together. I'll put my midstream hat on. For the midstream team to be successful, what they're really looking for is an anchor tenant that's going to provide volumes. They've got that with Matador, and the economics work for the midstream business based on that alone.
In addition, when I put my Matador hat on, when I'm being incentivized to drill these wells, to drill them even faster, it's a very nice way to build up both of these business lines together at the same time, because they absolutely do feed off one another, and also allows the San Mateo team to go out and secure additional third parties, which are just gravy on top of the Matador volumes.
Matt, if I could do one follow-up, you guys have already talked a lot around this, so I'm just wondering any additional color around the potential completion design around that Jeff Hart State. Obviously, the well was very prolific. What I'm wondering, was there some different things here that you did on the completion design, or was this just so you know that you could apply to future wells? Or this is more simply what you all have been talking about, the longer laterals? I just didn't know if there was anything else in that design that was out there.
Nothing specifically unique to that design, Neal. I will say that what Joe was saying earlier about the MAXCOM, to be able to drill these long laterals and stay 100% in zone is very helpful. To be able to come back in and continue to tweak the knobs. You've seen in our investor deck, we talked to you about the fluid volumes and the proppant volumes that we're kind of settled in on, and how we're using diverting agents and doing different things. In particular, the low temp diverting agents have been good for us. We've been out in front of that and making those things happen. When it comes right down to it's just pretty much simple execution. You get these wells drilled under expected time. The completion team comes in, and they're able to do more stages per day.
All those things just drive those efficiency costs down.
Agree. Joe, hopefully you can talk some sense into Warren. Thanks.
Thank you, Neal, you're giving me skills I don't have. I don't have any political skills. I've worked out in New Mexico for 40 years. Many people have raised the question out there about shutting down the oil and gas, and they're a part of the country that needs the industry. They've been very sensible in what they've asked of operators, and there's a good working relationship, and I would hope that she would pay attention to people from her party who are out there that want to continue to see their state economy thrive. I think it's an amazing number of the amount of taxes and monies paid in by the industry into the state. I think it's a third, Van, is that?
Joe, that's about right. That's just in lease bonuses and royalties and that sort of thing, but not really including all the jobs that it brings into the state and the additional spending that comes from that, and tax revenue that comes from that as well.
Yeah. The most jobs have been created in our industry of late, in addition to Senator Warren has this plan about paying 2%. Well, all ad valorem is about 2%, we're already in that 2% category, paying down and creating jobs in an area where there wouldn't be jobs. I think we should all work together and find solutions that are bipartisan is my real point. I think in the long run that I think our candidates will do that. I think that's what we all want. Let's get good government and a fair system.
Great. Thanks, guys.
Thank you. Our next question is from Asad Khan with Bank of America. Your line is open.
Thanks. Good morning, everyone. I have two quick questions. Thanks for all the details on drilling efficiency gains. Dave, was wondering if you could update us on your base decline rate and expectations into 2020?
Well, I think as we've answered that question in the past, Asad, I think for 2019, the base decline was 38%-40% for the company as a whole. I would hope that would continue to shallow as we become a more mature organization. Also, I do think that as we drill more of the longer laterals, I think that our observation has been that those wells tend to exhibit a bit shallower declines early. As a result, I'm hopeful that that will also contribute to the improvement in the base decline rate going forward.
Okay, great. My second question was on San Mateo EBITDA was higher than expected. To what extent was this driven by the Gulf Coast Express coming online? Dave, how do we think about differentials to trend going forward?
First of all, the San Mateo adjusted EBITDA didn't have anything to do with the transition to Gulf Coast Express. What it had to do with was excellent execution on the part of our midstream business, really all year long, but particularly in the third quarter, and the continued addition of third-party volumes to the system. I think that San Mateo has hit on all cylinders and probably then some this year. I don't know if you picked up in the release, but in case you didn't, I want to reiterate the fact that the plant at various times in the third quarter, the 260 million a day of processing capacity that we have was around 95% full. We have been contractually full for some time, but we were full from the standpoint of actual gas that was being run through that system and processed.
It was an excellent quarter for San Mateo, and we were really pleased with those numbers, but had nothing to do with Gulf Coast Express. What Gulf Coast Express we think will do for us, going forward, is improve our natural gas price realizations on the residue gas that comes out of the back of that plant and other places in the Delaware Basin. After we've done the processing, we have then the residue gas, and that's what is going to be transported to the Gulf Coast now, large volumes of that in the Gulf Coast Express Pipeline. Because the pricing there is based upon Houston Ship Channel pricing as opposed to Waha, we would expect an improvement in the overall realization that we receive for our natural gas prices going forward. Again, I give a lot of credit to our marketing team there.
That decision was one that we made about 18 months ago when we could sort of see some of the issues with transportation of natural gas in the Delaware Basin, knew that we wanted an outlet to the Gulf Coast, signed up for a lot more volume than we had at the time, anticipating that by the time this day came and the pipeline was ready, that we would need it. We made that decision. We made that call. We signed up. We're thrilled we have it, and glad to see that that pipeline came in service a few days before we anticipated, and now that we have a significant quantity of our natural gas from the Delaware going to the Gulf Coast via the Gulf Coast Express pipeline.
Great. Very helpful. Thanks for the details, Dave.
Yes, sir.
Our next question is from the line of Sameer Panjwani with Tudor, Pickering, Holt. Your line is open.
Hey, guys. Good morning.
Hey, Sameer.
Morning.
I wanted to touch on a couple of earlier questions on the D&C front. You already saw the 1,000 foot on some of the pads that you just drilled in the third quarter. I think these are smaller on average from a pad size than what's planned for 2020. I would assume you continue to get better from here, but the early outlook has costs going back up to call it $1,075. Can you just help bridge the gap there?
Well, first of all, Sameer, good morning. It's David. I think that Matt alluded to some of the answer in one of the previous comments that he made. The Jeff Hart well, the Third Bone Spring that we called out in the release, is a Third Bone Spring well. It's a shallower well. We will continue to drill a lot of Wolfcamp A wells and Wolfcamp D wells that are going to be deeper and higher pressure, and that will require four casing strings and they're just going to be a little more expensive to drill and complete.
I think with regard to the wells that are the two mile laterals in the Second Bone Spring and the First Bone Spring and the Third Bone Spring, and the occasional Avalon or Brushy Canyon that we may do next year, the shallower zones, you'll probably see that the D&C cost per foot there may be at the low end. I think when you put it all together and it becomes an average number, the average number we still think right now will be in that 1,000 foot-1,100 foot. I think the graph we have projected is right in the middle of that, 1,050 or 1,070, something like that. I think that's why. It's just because it's just not all one kind of well. There are some that are deeper that'll cost a little more. There are some that are shallower that'll cost a little less.
Given the weighted average of all that's where it comes out.
Okay. That's helpful. There was also some commentary on the trajectory of production in 2020. It seems to me that the implication here is that while I'll see the benefits on cost next year, the overall capital efficiency uplift on both cost and production will be more of a 2021 event, which means 2020 should be more of a transition year and maybe not a good, I guess, benchmark for go-forward capital efficiency. Am I thinking about that correctly?
Well, I guess, Sameer, when I think about capital efficiency, I think of it in terms of the dollars per foot. Are we able to deliver more completed lateral feet for the same amount of money? I think that you will clearly see that. Again, I think your comment is correct, and it's something we've talked about for a while, is that it's just the nature of our business. You have to get a well in the ground, before you start seeing any production come out of it, right? Usually the capital efficiency associated with the drilling and completion happens, before you begin to see the production and the return come from that well. There will be a little bit of a delay.
I think that 2020, you will definitely see continued improvement in capital efficiency, but you'll really start to see the production impact of that as we get to the latter parts of 2020 and into 2021. I think that we could certainly see the production impact really be very positive beginning in early 2021. If you just think for a moment, if the first eight wells we drilled at State Line, for example, let's just talk about it. If they come on in right about the end of August or the first of September, the next batch of eight is probably going to come on right at the end of the year or probably early in 2021.
You're going to have eight wells that are still in pretty much the early stages and kind of flush stages of their production and eight more that are then in the very initial flush stages of their production. When you think of how that's all going to unwind, I think that's probably what you're referring to, is the fact that the production impact will come a little later, but that's to be expected. I think we'll see the capital efficiency impact of it all year long next year.
Okay.
Yeah.
That makes sense.
Sameer?
Yep.
Sameer, this is Joe. I just think of it, you've been building one-story buildings for a long time, and you're shifting to building three or four-story buildings. That doesn't mean you're having a bad year. You got more demand, you've got more technical expertise. You got more of everything. It just affects the near term, the near term effect that you can't rent it out because you're building a bigger building. As soon as you get the first one or two done, then the capital efficiency shows up, your revenues are up there, and you're all the better. That's just a natural part of growth and progress, and we're not going to have a bad year. It's still going to be better than what it was. It just is the reality. We're calling it to your attention that we're going to work hard.
It's going to be a better year, but it ain't going to happen within a neat little quarter. It may transition over a quarter or, as David's pointed out, to the back half of the year. Matador is still getting better, and it has better assets when it drills these wells, even though they're not yet online. You can count that it has more reserves ready to go, and it's just a matter of 90 days or something, often for these wells. The asset is there, just like behind every share of Matador. Each share represents more than one barrel of oil, 7 Mcf of gas. Your midstream business you get for free, your minerals, your acreage, all of that. It doesn't mean it isn't there.
It's just waiting to come online as we proceed in a very orderly, methodical way, as Matt likes to say, proper growth at a measured pace. That's what this is happening. To get to the rate of change story and the capital efficiency, yeah, you have to wait a few days, a month or two or three or whatever, it's coming. Once the well is drilled, the asset is there, and it's better to wait a month or two to get twice the asset that you would get with a one-mile lateral. We think that's good business.
Right. Thanks for that color, Joe. It's really helpful. If I can just squeeze one more question in with my time. I think we're all on the same page of the merits of a frack ban, but it definitely seems like the market's already starting to price it in to some degree. If we assume a frack ban on federal lands goes into effect, and you've kind of provided some context around your acreage exposure, but can you talk through your optionality to work around this, maybe from a permitting standpoint or in terms of how many years of inventory you'd have available excluding federal leases?
Well, Sameer, we have several thousand locations that we could drill if there's a frack ban. Before the frack ban goes into effect, I think you'd have years of litigation with your major companies, Exxon, Chevron, Conoco. You go on and on down that line that they've got so much invested out here, they're going to probably lead the way in objecting because you'd have a taking of property by that ban, and there'd be due process concerns. That's why I think on unleased federal lands, she may be able to do more. Before she tackles where you've already been granted a lease and it's already spent money in production, then she's having to look at pay for the monies that people have been out as she's tried to change the rules while the horse is in midstream. That just doesn't seem practical.
For her activities, what she wants to go to, she's got to find a way to pay for it. This has been a big source of revenue. I just don't see her. The last thing she's going to go after are those leases with wells that are producing.
Sameer, maybe just to add one small comment to what Joe said, I certainly agree with what he said there. Just to add to that, we do have many locations that are on fee and state lands, not on federal lands, that we will be able to pivot to and just reorganize our schedule, reorganize our program, if that were to happen, with this ban on federal lands. I think that if we've done anything over our time as a public company, and as a private company for that matter, I think Matador has always demonstrated that it's a pretty resilient organization, and that we got a lot of smart people, and that we're able to understand and meet the challenges that come our way. I think that everybody in this room today feels the same way.
While I don't think we expect to be faced with that challenge, if we are, we will have planned ahead for it, and we'll be ready to meet it head on. We'll cross that bridge when we come to it, if we should ever.
One thing I would add to David's statement, one commentator pointed out, if that were to happen, there's a ban on fracking, you'd see oil prices go to $100 or $150 a barrel, is my belief. If so, there'd be no problem anymore about our outspend.
As a matter of fact, I think one of those commentators was Sameer.
Right.
If I recall correctly, right, Sameer?
Yep, you're correct.
Thank you for that.
Thank you for bringing this up. Yeah, we'd suddenly have no outspend problem. All those locations on fee and state land become that much more valuable. You should have, before it could go into effect, have already drilled and completed according to our plan. We're going to have a lot of this developed prior to the election. I think we're in pretty good shape. We're going to be more wary. As I said, we'll have a plan to adapt if that's a change in the circumstances. The most important thing, again, is we have our team here that's found the best wells, the core of the core in the Haynesville, the core of the core in the Eagle Ford, and out here in the Delaware. Let's give them some regard that they can go find the next best area.
Great. Thanks, guys.
Thank you, Sameer.
Thank you, Sameer.
Thank you. Our next question is from Irene Haas with Imperial Capital. Your line is open.
Yeah, very quickly. Just taking a look at all the demand that's going on for San Mateo, the fact that you have really high capacity utilization. What's in the works for San Mateo next year? Will it be similar spending as it is current year? That's all I have.
Irene, this is Matt. I think we've been messaging that the CapEx will be about the same for next year. In regards to San Mateo too, as we've talked about before, we're adding another 200 million cubic feet a day at the plant there in our Rustler Breaks area, the Black River plant. We're also adding gathering systems for oil, water, and gas at the state line area and at the Stebbins area and building a gas trunk line to get back to the gas plant there in Rustler Breaks. All that is currently now on time and on budget. We should have that plant operational sometime in the summer next year, and we'll be building the gathering facilities to go along with that. That's the plan.
That being said, we're going to remain open to different opportunities as something really good comes up from a San Mateo perspective. We will take a look at that too. Right now, we don't have anything in the works.
Great. Thanks.
Thanks, Irene.
Thanks, Irene.
Our next question is from Mike Kelly with Piper Sandler. Your line is open.
Yeah, good morning, guys. Joe, I know this is something you've addressed in the past, but I want to get your.
Pardon me, Mr. Kelly, your line is coming through very jumbled.
Either that or Mike has a really bad cold this morning. I'm not sure which it was there.
Can you hear me now?
Yeah.
Sorry about that. I don't think I have a cold.
You sound much healthier there.
Maybe we'll get that checked out after the call, but Joe, I know you've addressed this in the past, but some investors would like to see mid-cap E&P companies merge. I just want to get your latest thoughts on M&A or the possibility of a drill co.
We've always said we play a straight game. We sold First Matador, we sold part of our Haynesville position to Chesapeake. We made a deal with EnLink on one of our early midstream projects. We've made a deal with a JV with FivePoint, we think we play a very straight game. Anytime we get a serious offer, we'll give it serious consideration. Again, I've found most often that people, when they look at things, particularly from companies, they tend to look at things too narrowly, and you've got to also look at, okay, if an offer comes in, it doesn't just affect that price then, but as Matt spent some time pointing out, that between midstream and E&P, one hand washes the other.
Our E&P helps provide an anchor tenant, reduces the risk for the midstream. The midstream, by being there to hook up just when you are, has a lot of operational advantages. We're not flaring. When we hook up, we are almost all on pipe now, so we've taken thousands of trucks off the highway. That really helps our ESG program. Plus, it reduces the cost of produced water disposal. You've got to look at both sides of that, and no one yet has come in and made such a strong offer that has really captured our attention.
They come in, and most of the time, they want to just pay some amount that's maybe good for somebody who's a financial partner, that only has money in it, but where we have enhanced operations, there needs to be something taken into account there, and also to offer terms that assure us that we won't have a decline in the quality of the services. That hadn't happened, but we play a straight game.
In our other assets, we know we're a public company, but we know the value of the operational advantages in a way that most investors on the Street would find it hard to know and understand how helpful it is to have people right there when you're ready to turn it on, taking your gas, or during the winter, have you on pipeline, or when there are gas problems, the help that it's been in marketing, that we probably have more options than somebody that just sells his gas and that's the end of it. I think those are the people that suffered most at Waha. It hadn't been a hard choice at all.
The advantage of keeping this and growing it when it's growing at the rate that it is, and we think in a couple of years, it could be two or three times what it is now. Giving up that opportunity for a little short-term payout, it hadn't even been a close call yet on what we should do. We fully want to get the most value out of it, and it's discussed at every board meeting, and it's discussed internally at least weekly, two or three times.
Thanks for that.
Does that make sense to you, Mike?
Yeah, it does, Joe. I want to see, given that it sounds like you're near capacity or were at times at San Mateo, is there any potential to be constrained there before the next plant comes online? If so, what would be the alternative? Would you flare gas for a short period, or what are your thoughts about that?
Yeah, Mike, this is Matt Spicer. That's a real good question. If you look at our contracts on our gas side where we've had a lot of success, we have some interruptible volumes on that system as well, which is allowing us to fill up the plant 95%. As Matador or other firm customers come on with more gas, we don't see constraints. We just move aside the interruptible gas that's on the system.
Very good. Thank you.
Thank you, Mike.
Our next question comes from the line of Richard Tullis with Capital One Securities. Your line is open.
Hey, thanks. Good morning, everyone. I stepped away for a moment. Hopefully you didn't touch on these two topics. Joe, real quick, as far as 2020 goes, I know the budget hasn't been released yet, at a high level, with the recent efficiency gains and likely more to come as you move into longer lateral development next year, what could the spending gap look like next year at, say, $55 oil and current nat gas and NGL pricing?
Well, Richard, I don't know whether you heard it. David, thank somebody for trying to get to the 2020 numbers.
I'm a plug. I didn't hear it.
Yeah. The first thing that I would tell you, we think the spending gap is narrowing steadily. We're looking not only for the narrowing that's occurring naturally as we have these better and better quarters, but also, we know we have some good cards to play. We set out the first of the year, making two of our priorities, doing the midstream deal, which we did, which narrows that because there are drilling incentives in that. The second thing was the BLM, which gave us the rate of change, the capital efficiency story. Now that we're proving those up and we're making the kind of wells that we are with these longer laterals, that was the thing we wanted to prove. Now it leaves us more flexibility to deal one of the other cards that we have.
We've made some small, not small, they're $1 million, that's a lot to me. I started with $270,000, anything over $1 million is still a lot of money to me. We've made a number of sales, and we've leased minerals, we've recovered judgments, we've recovered on audits. The scrappiness has recovered a lot of money. We're continuing to do that. We're very pleased with those efforts, and we're pleased with the quality of the offers that we're now beginning to see for other non-core assets. All that is happening, and you're seeing the results of this. Okay. For example, we kept, in the Haynesville, the LA Wildlife wells. They're making 40 million a day apiece or more. Chesapeake has said those are the best Haynesville wells that they've drilled. We have 49%, roughly half of that. Well, that's one reason why our gas went over the edge.
Well, you would have hated to sell that for cents on the dollar. That just shows the deliberate method. We have two 40 million-a-day wells. That's a great outcome. Chesapeake did a great job on that. We've enjoyed continuing to work with them, and that's an example why you want to be deliberate in these sales. I think Van and Timmy and Craig have done a terrific job. We'll probably expand the effort there. Don't know what kind of results we'll get, but expand the effort, because now we know more what we have in New Mexico and in Loving County and our other areas. If you like the way we did it over the last two years, where we've collected drilling fees and sold some properties, that's amounted to tens of millions of dollars, and I think in aggregate, probably well over $100 million.
I think those efforts will be stepped up because now we have a lot more certainty on the assets we expect to retain.
Thank you, Joe. My last question, related to E&P asset sales, I know you just touched on that. Basically, do you think you could be out of the Haynesville and Eagle Ford totally by, say, year-end 2020?
Well, we always could. If you want to sell it, just accept the offer you get, and if you really want to sell it, tell them you'll accept less.
I understand.
I'm not trying to be facetious, Richard. It's just saying is that we've tried to make clear on all these sales, we've sold to a number of well-known names that you would recognize. Here and there, is that we've always made it clear is, come in with a strong offer, but don't try to come in with a tire kicker and expect to get a response. Chesapeake did that. They came in strong offer. We made a deal. We've made other deals with them since then. We've, I think, worked well with other buyers in other areas. Matt, you look like you're ready to say something.
I was just thinking, with the Haynesville, Richard, that's a very low-cost operation for us. Those wells are great wells, Joe's talking about these two at $40 million a day. That's a lot of volumes. They're very efficient to operate. In terms of the Eagle Ford, that's still a great asset for us. We've got production there. We have a number of undeveloped locations. Everything that we did as an operated company in Eagle Ford was in the lower Eagle Ford. We didn't do anything in the upper. We've done some Austin Chalk testing, which has turned out really well for us, there's lots of opportunities still in both those assets. To Joe's point, we don't want to just have a fire sale and get rid of them. We still think there's a ton of value there.
Thanks, Matt. I understand. I appreciate the comments. Thanks as well, Joe.
Thank you, Richard. The last thing is we've boosted our production. If you sell some in the Eagle Ford, it isn't going to quite have the effect. These two $40 million-a-day wells, they get that preferred pricing up there in North Louisiana, and the Eagle Ford got preferred pricing. It was a big help last summer when Waha prices got low, before the Gulf Coast went online. The Gulf Coast is online, we're not so sensitive to prices anymore. Looking at it holistically, we're probably more ready today than we were, but we like our properties. They're cash flowing well, and we see more potential there. We'll always try to play a straight game.
Thank you, Joe.
Thank you, Richard.
Thank you. Our next question is from Jeff Grampp with Northland Capital. Your line is open.
Morning, guys. Thanks for fitting me in.
Hey, Jeff.
Just a quick one on the San Mateo side. It looks like you guys took a little bit more money into the corporate side with the credit facility. Just wondering strategically, how you guys think about utilizing that or what the appropriate leverage is for San Mateo. It looks like it's at about maybe 2.5 times on a run rate EBITDA basis. Is that where you guys would like to keep it? As that ramps up, maybe you guys could put some more money on the San Mateo credit facility and pull some money back into the corporate entity, or just kind of wondering how you guys strategically think about that.
Hey, Jeff. It's David. I think that we're just looking at it as what's a good way to finance that business. I think it's pretty well understood that folks are generally more comfortable with a little more leverage on the midstream businesses. I think you're right. I think we're currently at around 2.5, and I don't think that we would be uncomfortable with the leverage on San Mateo nor would our banks going to a higher level. I think we have about a 5 times debt to EBITDA covenant in the bank group, there would still be room to move there. It's not something that we'll probably do with great aggression. I think we'll just be very measured in terms of our use of leverage in San Mateo like we have been in Matador.
All right. Appreciate the time, guys.
Thanks, Jeff.
Thank you. Our final question comes from the line of Scott Hanold with RBC Capital Markets. Your line is open.
Hey, guys. Just one quick follow-up, I don't want to get into too much in the fracs ban debate. When you look at the state line, those are obviously going to be some pretty prolific wells and important for you guys to get online. Can you just give us a quick update on where you're at in getting those permits on those? Is there any way to accelerate that? Effectively, can you get the majority of the wells you want drilled anyway prior to, in theory, something that could occur?
Yeah, Scott, it's David again. Look, we're very pleased with the progress that we see in the state line permits. I think we're still very optimistic that we'll have the first batch of those permits sometime this fall, and that when we receive them, then we'll move ahead with our plans to move a couple of rigs down there and get started. As we said in the release that we put out on our federal acreage exposure, we currently have 88 permits submitted for that particular asset, and they are in various stages of the review and approval process. We are very thankful and appreciative of the BLM staff there in Carlsbad who continue to work very diligently, not only on our permits, but permits throughout the industry. We think they're doing a great job. We really appreciate how we've worked with them.
I give a lot of credit to our own internal land team and those that have been specifically focused on working on the permitting process for us. They've done a great job. These permits are involved processes. It's a fairly significant amount of information that's required to be submitted, our teams have pulled all that together and have all those pending in front of the BLM. I think our expectation is we'll get an initial batch, then those will just continue to come at a fairly regular pace throughout next year. Certainly, in plenty of time to enable us to continue to prosecute our development at the state line at the pace that we plan to, perhaps even give us the opportunity to accelerate that should we decide that's the right thing to do.
Very optimistic, very satisfied with the progress that we're making there.
Appreciate the color. Thank you.
Thank you. That does conclude the Q&A portion of this morning's conference call. I'd like to turn the call over to management for closing remarks.
All right. I'd just like to simply close by again mentioning Stebbins is becoming an increased interest area. We've had good results, our initial wells up there. That's also tied into Sa n Mateo II, that'll be a big part of that deal. The second thing, I just want to thank again the staff for the wonderful job that they've done. The third thing is just to mention that we think we have a lot of ways to pivot. That's got to be one of our strengths, is the ability, and we have pivoted from, we were all in the Haynesville, if you remember. Chesapeake came along and made us the proverbial offer we couldn't refuse. We did that deal with them, did the JV, and pivoted to the Eagle Ford, which was an oil province, to prove that the frack jobs could go through the.
narrower pore throats of the larger oil molecules could go through the smaller pore throats of the shale, proved that up, and started building the position in the Delaware. We did that when we were going public, and we advised everybody that looked at us then that would be our third leg of the stool. It rests well enough that it's a big part, but we could pivot back to either the Haynesville or the Eagle Ford if necessary. I don't think we'll need to. We've got plenty of locations, but we have built in that kind of flexibility. Same thing on our rigs. We could drop one. They are on relatively short-term contracts. Don't want to do that. We've got a great relationship with Patterson. They've worked with us and Halliburton and everybody else. We think the business has a lot of opportunities going forward.
I do want people to feel comfortable that we do what we say we're going to do. When we merely point out that you have the natural effect of going with the capital efficiency, is you're going to be drilling more laterals, longer laterals, more pads that you've got some of that built-in. You've got to accept that challenge when you go to do that, it's going to pay off in a big way for us. We like our chances in all these areas, and we're addressing all the concerns that I've heard today. We are addressing each of those. On the plus side, we're continuing ahead with the plus side, and as good as those results are, they're going to get even better going forward. Thank you to the staff. Thank you to the shareholders. We know you have a choice.
We hope you'll keep picking Matador, and I think you'll be really glad that you did.
Ladies and gentlemen, thank you for your participation today. This concludes the program.