Good morning, ladies and gentlemen. Welcome to the second quarter 2018 Matador Resources Company earnings conference call. My name is Sonia, and I'll be serving as 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 is being recorded for replay purposes, and the replay will be available on the company's website through August 31, 2018, 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, Sonia. Good morning, everyone, and thank you for joining us for Matador's second quarter 2018 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 annual report on Form 10-K and its most recent quarterly report on Form 10-Q. Finally, in addition to our earnings press release issued yesterday, I would like to remind everybody on the call that you can find a short slide presentation summarizing the highlights of our second quarter 2018 earnings release on our website under the Presentation Webcast page on the Investors tab. I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?
Thank you, Mac, and good morning to everyone on the line, and thank you for participating in today's call. We appreciate your time and interest in Matador very much, and we welcome your questions and comments. Now, I'd like to introduce the executive committee of Matador, who is joining me in this call this morning, along with other members of our management team and senior staff, who are all standing by for your questions. They are Matt Hairford, President, David Lancaster, Executive Vice President and Chief Financial Officer, Craig Adams, Executive Vice President, Land, Legal, and Administration, Billy Goodwin, Executive Vice President and Head of Operations, Van Singleton, Executive Vice President of Land, and a new Executive Vice President, Brad Robinson of Reservoir Engineering and Chief Technology Officer. Congratulations, Brad.
Thank you, Joe.
You're in part of the sharp questioning and comments that we're about to receive.
I'm ready.
As outlined in our earnings release yesterday, the second quarter of 2018 was the very best overall quarter in Matador's history, both operationally and financially. I want to take a moment and personally acknowledge the Matador staff for all their achievements and to recognize them, I think, for their extraordinary teamwork this past year, where the teamwork among the different departments and within the departments have continued to improve. This quarter was a real example of how everybody pushed on the rock. Land and Legal combined to make an $80 million acquisition yesterday. Production and the midstream have combined and worked together as a team, so we're not flaring any gas. Just over and over, the teamwork with our MAXCOM program, with our drilling program, has been extraordinary.
From the executive staff, I'd like a shout-out to the guys in the field who have really been connecting wells, working in tough weather conditions, and making it all happen. Something very pleasing to us is just the way everybody has worked together, and I didn't want this conference to go by without recognizing them. We're gonna move into questions in just a moment, but I do wanna address just quickly a couple items and then take your questions or comments on them. One is the outspend that is of concern, and I think you all know our views on that we are very selective about any outspend that we have. When we do, we weigh the choices of, is this gonna have better than average returns?
Is this an opportunity that has to be done now and won't be around in a year from now? An example of that is some of these leases and minerals that we've taken. Third, is there in the midstream that if we don't do it, someone else will. The same way is that we've discussed in previous conversations the takeaway in flow assurance. We issued a press release June fourth that summarized and updated our views then. Since then, we've made additional deals that we can discuss here and addressed it in different ways, and we're not done yet. We're gonna continue to improve and feel like not only we've made great progress, but we're working towards the long term. With that, I'd be happy to turn it back to you all for questions.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star one on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Due to time constraints, we ask that you please limit yourself to one question and one follow-up. Again, we ask that you please limit yourself to one question and one follow-up until all have asked a question, after which we would welcome additional questions from you. Our first question comes from Scott Hanold of RBC Capital Markets. Your line is now open.
Thanks. Good morning, guys.
Morning, Scott.
Hey. I was wondering if you could talk about the OBO activity that is incremental. It seems like, especially on a growth basis, there's a lot more happening in the areas where you guys are at, and I'm assuming it's pretty strong economic returns. Could you give us a little bit of color on where some of that activity is concentrated on? You did mention longer laterals. Can you give us some color also on the operators that are doing this? Are these some of these larger scale, big development pads that we've been hearing about from others?
Scott, thank you. I'll take it first, and then if David and Matt will follow up. First, I want to thank you because in our outspend, the wells operated by others is one of the major motivators for the outspend, because when these wells are proposed, and there are more wells being proposed than we had projected, you don't want to go non-consent, because many of these wells have these high rate of returns and big reserves from the two-mile laterals. I think the overall CapEx associated this year with OBO is going to be somewhere in the neighborhood of $70 million. That and the amount of additional wells, we have two and a half net OBO wells to drill in addition to the five net that we had projected.
As you said, these are some high return, large recovery wells, big pad drilling, and we want to be a part of that, and I think the economics are clearly there to do it rather than go non-consent. OBO is going to be a factor, and when you're in the better areas of the basin, you have more OBO proposals. That just goes with that territory, and we've always liked being in what we felt was the core of the core or the best of the best, and accepted that competition. David, do you want to comment further?
Yeah, sure. I'd be happy to, Joe. Scott, I think just to add a little to what Joe said, probably the two areas where we've seen the most non-operated proposals have been in Rustler Breaks and Antelope Ridge. We do have, from time to time, wells that we're asked to participate in on a non-operated basis up in the Arrowhead and Ranger as well, and I think in previous releases, we've talked about some of the results of all of those wells. I think you know the folks that are in the areas that we are. We've talked in the past about wells we've been in with Cimarex or Concho or Mewbourne or WPX, Marathon.
The folks that are in the areas that we're in, we do have some smaller pieces, some smaller tracts outside the cores of our positions at times, and this has been a great way for us to get those tracts held. I think that we've been real pleased with the results. It gives us a chance also to learn some things. I think last quarter we were talking about, or at Analyst Day anyway, we were talking about, for example, Concho doing some Break Sand wells down in the Rustler Breaks area. That always gives us a chance to learn a little bit about participating in these wells too. We're happy to continue to participate in these wells.
Our fellow peers are doing a good job with them. As long as we feel like they're going to make us good returns, we're always interested to participate.
Scott, this is Matt, just to jump on with David and Joe here, I think very good wells that we're participating in. I think what David mentioned there, the ability for us to learn is very important. We always reserve the right to get smarter. I think it also gives us an opportunity to collaborate with our offset partners. We are pretty active in a non-op role in calling their technical folks and discussing which targets they're picking and how they're going to drill the wells and complete them. Another thing is these relationships set us up for potential trades. When we get offered a non-op position, we may want to trade out of that into something that we're operating in. It works both ways. It's a good deal, a win-win situation for both us and the non-op.
The last thing, we also feel it enhances our midstream because every well drilled out there in Rustler Breaks is right in our gathering systems for oil, gas, and water out there for San Mateo. It represents also an opportunity for San Mateo to gain from participation. If we're not in the well, there's less chance that they'll do it, but if we're in it, that's that much more fluids and gas that we can send through our system there. Again, it's a very selective bid on outspend, and the OBO is an important factor. We've never taken the view that we had all the answers on every drilling, completion, or production system. There's always a chance to learn from others, to develop some relationships that will pay off going forward.
Great. You're kind of leading me down my second question then. On San Mateo, can you give us a little bit of color on the progress on signing up third-party operators? I think Plains should be complete with their part of the system in the not too distant future. You did sign the deal with Marathon on the water. Can you just give us some general sense of how that's going, and is there more interest in one piece than the other? Does it seem like there's more interest in the saltwater disposal versus the oil or gas lines, or do you see good progress on sort of all the streams of pipes you have?
Scott, we feel we're making progress on all three. I can't say that one stands out to the other necessarily. That we believe that there are probably more options sometimes on the gas than having the oil on pipe. Of all of those, that with gas you can flare, oil you can truck, but water has to be disposed of, or they'll shut your well in out there. We've built up a lot of capacity in our saltwater disposal well, and that's another area where our teams have worked very well together, is we have the capacity to drill deep and the knowledge that most midstreams don't have, because we're doing it in our every day.
We've moved a couple of our rigs from drilling oil and gas wells to drill 2 saltwater disposal wells to 14,000 feet or so, and get them completed on time. That enhances both our own need for saltwater disposal, but helps attract further business. I want to make clear, we, as a practice, don't reveal who our third-party contracts are with, I can just say things are working, we're pleased with the third-party contracts that we've entered into, the ones that are working, and we feel the ones that are yet to come. We did announce that we had done an exchange offer on an interruptible basis of some gas coming through.
We feel we are ahead of the curve on what we had set as our goals, and we can't guarantee we have set as a target that in the fourth quarter of this year that we will have $25 million in EBITDA. While we are not yet ready to guarantee it, we do believe that it is achievable, more likely to be achieved now than was three months ago or six months ago. The guys are working right along, and the plant is running on time efficiently. They have done a number of improvements. For example, they have an interconnect line with BP. I mean BP. We are selling our natural gas liquids to them on pipe, which has given an uplift to our gas prices, and it put us in a position to do the ethane recovery, either the full recovery or a quasi-recovery.
Again, that would be helpful to our commodity pricing. Matt, did I forget something there?
No, I think you summed it up pretty well, Joe. Scott, just to kind of talk about where we are at in relation to San Mateo, we have got the saltwater disposal system put in place. Joe mentioned we are drilling an additional two wells, that is going to ultimately get us well north of 200,000 barrels a day capacity. That is a good thing for the San Mateo team to go out and sell to people. Additionally, we have got our inlet design capacity, 260 million cubic feet, which will be at full capacity, where we can bring on 260 million by the end of the year. Like Joe said, with the ethane recovery option available. The oil gathering system is complete for us at Wolfcamp. We are selling into the Plains pipeline there.
We have got our infrastructure in place at Rustler Breaks. When Plains gets to us, we will be ready to go there. It is really in a nice position that the guys can go out and say the water is important to one of the third-party operators. As we start talking about having the ability to process gas, to go into ethane recovery, to make sure that they got flow assurance and a pricing agreement for the NGLs at the tailgate of the plant, as well as being able to bring oil onto the system, I think that is a pretty powerful thing for them to sell.
Last thing, Scott, is in our Wolf area, that oil pipeline gathering system is complete and operational, so that as we gather that up on our gathering line, we can turn it over to Plains at Wolf and they'll go away on their pipeline. We like to note on this flow assurance and takeaway, that we're selling our barrels at the wellhead. We don't have the concern about piping it to Midland, and we have the option to buy it back there, but we don't have the obligation to give it to Midland or other markets. It's sold at the wellhead to Plains, and we've enjoyed working with Plains. They've really been professional, and that's going very smoothly, and I'd like to give them a shout-out. Their work with us is hard to think of any improvements.
Appreciate that. Thanks.
Thank you. Our next question comes from Gabe Daoud at JPMorgan. Your line is now open.
Hey, good morning, guys. Could you maybe, either Joe or David or Matt, just talk a little bit about how you're thinking about the seventh rig at this point. You did mention in the release your expectations about oil differentials for the third quarter, I guess at what point do you think it absolutely makes sense to put the seventh rig in the Eagle Ford?
David, why don't you take this?
Sure, I'd be happy to. Morning, Gabe.
Morning.
I think what we put in the release sort of reflects where we are, which is that we are continuing to evaluate it, but we haven't actually made a decision on what to do yet. I think that we're still looking at the possibility of maybe putting the rig down in the Eagle Ford for a short period of time. We're also weighing that against the potential for putting that seventh rig, when we're ready to go with it, into the Permian. Clearly, we're pleased with the early results we're seeing at Antelope Ridge, and I think it could certainly be a candidate for the rig. I'll also tell you, we're pretty excited by some of the things we've been seeing and reporting on from the Arrowhead area, the Stebbins area, the FST. We're giving considerable consideration to that being the candidate for the next rig.
I think that it's a little bit of a high-class problem. We probably have two or three different options where we could put the rig, and our teams are working to be ready no matter what we might decide together is the right thing to do. At this moment, we're still kind of debating that internally, Gabe.
Thanks, David. That's helpful. Definitely a high-class problem, like you said. I guess maybe just a similar question, but do you think there could be a point where it makes sense to, if differentials continue to get worse, it makes sense to not only not add the seventh rig in the Permian, but also slow down the current pace of activity? Just any thoughts around that?
Well, I suppose that it's always a consideration. Obviously, commodity price and differentials clearly have an impact on our thinking, and as to what they will be, what the duration of that will be. Certainly two years ago, when commodity prices declined the way they did, we looked at things and felt like it made the sense to slow down at that point, we did. We didn't stop. We continued at a three-rig pace. I don't think today that we're entertaining a slowdown at the moment, because I think we feel like this issue will resolve itself sooner rather than later. Certainly, we remain vigilant in terms of watching it and seeing how it goes. One thing I'll say is that I'm always very comforted by the fact that I think we've done a good job in terms of the optionality that we've given ourselves.
As we've added rigs back, I think as you know, we have done them on a short-term basis. Even the long-term rigs that we have now are under contract for less than a year. We really have a lot of optionality in terms of the ability to go faster or go slower if that's what we should decide to do. I think that it's not necessarily something we're entertaining at the moment, Gabe, one thing I do know is if the environment indicated it was the right decision, we could get there pretty quick.
Gabe, I'd like to just chime in here a little bit and mention again that we're focused also not just on commodity price, but returns. One thing is that if price goes down, generally your costs go down, and that you can still achieve 40%-50% rate of return, and I think we demonstrated that when oil was $50 or even less. We were still making money, and we were beating consensus now for 16 straight quarters. As that we make adjustments and focus on returns and how to get to the desired returns and not just be driven by price. As Matt says, we aim at profitable growth at a measured pace, and measured means taking into account the environment, maintain a strong balance sheet, as you've seen over time.
Over five years we've kept that debt to EBITDA ratio as being one of the best in the industry, and that's still a core belief of ours, that if you're going to be in this business, I've been in it 34 years, you've got to maintain a strong balance sheet. So as David says, you maintain your flexibility and ability to carry through, because it's some of those times where it's tougher, you actually make more progress. So I would like for everybody to feel comfortable that we're not out there growing for just the sake of growing, but it's a definite plan that's based on returns and profitability and the value added, and we're all committed to that.
We do think that if you're selective enough, you can still have, and you're fortunate to have the acreage, the right kind of rock, you can still have growth, with profitability in almost any circumstance. You've just got to be a little creative and put in a little extra effort. Matt?
Yeah, I just want to add one thing, Gabe. Just the way we think about things is pretty consistent across all the different activities we do. David mentioned the optionality we have with the drilling rigs. We've been talking with Patterson-UTI for just a really continuous discussion with them about if we decide to add a seventh rig, what kind of rig are we going to get? When we're assured that we're going to get a high-tech rig, it's going to be just exactly like what we want. On the other hand, in discussions with them, if we need to go down a rig or two, we can absolutely do that. Same with the frac crews. We don't have any obligation to frac a number of wells or a number of stages or anything like that. We have a pricing agreement that allows us to go up or down.
The Eagle Ford versus Delaware option is there. Nobody said anything about it for a long time, but we still have a Haynesville option. So keeping all our options open, even in the midstream business. One of the things that Gregg Krug, head of marketing, has told us since day one is, options are good. So when we built our plant, we built a number of outlets that we could offload gas into it, and one of those outlets now has turned into the one that's bringing gas into us. So just maintaining optionality in all our business lines is very important to us.
Gabe, it's a great question that you asked. I hope that answer was sufficient. I would invite you to come see us, we can, again, continue to discuss at length. It's really important for us to have that flexibility, we do have that deal. If it doesn't provide a return, we don't do it unless it makes economic sense. As you know how much stock that these executives in our board own, we make more from our stock than we do our salary. We're not out here to invest in things that don't add value. That sounds corny, we really believe that. A lot of our other shareholders are friends and family, everybody's pretty value conscious.
That's definitely a great answer and great color. Thanks, Joe, David, Matt, and everyone else. Talk soon.
Thanks, Gabe.
Thank you. Our next question comes from Dan McSpirit of BMO Capital. Your line is now open.
Thank you, folks. Good morning. Speaking of driving shareholder value, Joe, if we could just turn to Twin Lakes. No ignoring what Twin Lakes could mean to the inventory and how it could help write the next growth chapter for the company. How do you frame the asset's importance in driving shareholder value, and how do you assess the risk of it not working and outcompeting for capital?
Well, Dan, let me try to take your question in this basis. A question like that has to be taken in relation to your other assets. Very fortunately, we'll probably finish the year with over 90,000 acres in the Delaware portion of the company. We've got great assets. We've got 2,000 engineered locations down there, no shortage, lots of options. What you have up in Twin Lakes is very additive to what we already have. It's exploration acreage that we acquired for the most part on a weighted average basis of probably $200-$300. In terms of investment up there isn't that much. On the other hand, we've been encouraged by what we've seen. We've approached it like we've done everything. If you think about our progress in the Delaware, we went public in 2012 with a small Delaware position.
We announced that it wouldn't be until 2015 that we thought we'd really gear up, that's exactly what we did. We drilled a well in 2013 or 2014, drilled a few more following that as we began to delineate our position, then geared up. I think most good exploration is done deliberately over a period of time, that's what we've approached. Others have gotten interested in that area up there, Continental, Cimarex, Greywolf .
DCP.
DCP. We're not the only ones that appear to be encouraged by the data. The three wells that we've drilled up there ourselves have all done better than expected. The Olivine, the Culberson, one that we're in now in the process of completing, we're very encouraged by, it's a deliberate game. If you go too fast, you waste some money. We've cored two wells. We're able to compare. They look promising, they're behaving better than expected, much like we had projected, that they would have not headline-grabbing initial rates, over time, their little better permeability, porosity would have a more gentle decline. We've raised our reserve estimates on those wells. We think it's going to be additive. If the whole thing should not happen, we didn't pay much in acreage.
It was a couple of hundred dollars, and it's, to me, good exploration to go into an area where you know there's oil. That area up there has produced billions of barrels. It's still very promising. I think it'll come to contribute. Things are moving faster up there now that other companies have seen kind of what we've done and the results, that's building some momentum. Brad, what would you add to that? Brad's our Head of Reservoir Engineering.
Joe, I think you hit all the key points there. I do think the point you made on just the Wolfcamp especially is a little different up there. What we're finding is that targeting can make a big difference. We're producing, in our Culberson well, we're really pleased. It's done probably better than I expected at this point, we're learning that it could be better with some slightly different targeting. That's things we're learning from the data that we're collecting, we're applying that now over in Kimmins, we're really excited to be completing that well, which should be towards the end of this month. We'll know something probably by our third quarter. It's a little different up there than down in the heart of the basin.
We've got a great science team, with Ned and his Geoscience team analyzing all the data, we're real excited that it is gonna be a major asset for us in the future.
Well, it certainly could be. We're going at it in a way we're not dependent upon it anyway to achieve our 20% growth that we aim for, or the profitability, we think it'll be additive. You have the opportunity because that area is blockier for the longer laterals. It has opportunities for midstream possibilities, we're gonna continue this methodical approach to exploration, just like what we did down there in Wolfcamp and then again in Rustler Breaks, we've gone in our other areas. I hope that answers your question. We see it a lot of upside, not much downside.
Okay.
Anyway, again, we feel there's two areas, the Kimmins area and over on the other side of Lovington, both showing a lot of possibilities. Not just in Wolfcamp, which is thick, and there's a number of target zones, but also in the Strawn. The Olivine well that we drilled has held up very well too and exceeded expectations, and that was just a vertical well. Looking good. I don't want to tell you it's gonna be better than Rustler Breaks or any of that. It's hard to meet that kind of success superstar, but I think it's gonna be a productive area and could get really good.
Well, I appreciate the thoughts, folks. With that, have a great day.
Thanks, Dan.
Thank you. Our next question comes from Philip Stewart of Scotiabank. Your line is now open.
Good morning, guys. Congrats on a great quarter.
Thanks, Phil.
You guys have obviously done a very good job of adding acreage to your existing operating areas. I'm just curious if you see a larger opportunity set in any one particular operating area to add acreage going forward. Maybe Rustler Breaks, just given the San Mateo partnership there and that's your area where you're running the most rigs. Is that maybe the most likely spot where you continue to look to add, and what kind of prospects are out there?
Phil, a very good question. We ask that same question of ourselves all the time. We included a map on our website, which shows on this $80 million deal that we did yesterday, where we added acreage. I would refer people to that, and that showed that we acquired acreage in Wolf, a good amount in Antelope Ridge, and of course, a good amount in Rustler Breaks that was really add-on to our existing acreage or in the adjacent tracts. I think there's still just as much opportunity up in Arrowhead and Ranger to add acreage. The pleasant thing for us is that each of our operating areas, across all of our acreage, we're having good drilling success, and even up there in Twin Lakes.
It's a high-class problem, as David said, but each of the asset teams are asking for more drill time and more CapEx being spent, and they're proposing some pretty good wells. We're trying to, again, keep to that measured pace. I would just tell you that in Wolf, Jackson Trust, all that down south, our guys did a good job, but I think up there in Arrowhead and Ranger, you're going to see opportunities, and in our core areas of Twin Lakes. Over the next 12 months, expect additions in all of those areas. I do want to, again, thank you and the other analysts who last time really wanted to see a map.
We wanted to be responsive to that and include the map to give people an idea and tie it back to when we did the equity raise in our offering document there, that we did exactly what we said we'd do. That a good part of this money was going to go to buy lease acreage and mineral interest in and around our acreage. I think people can see that we've done that, and that we haven't stopped yet. My experience over 34 years out here in this area and being a landman is there's always acreage to be had, deals to be had, trades to be had with other companies, which I think are picking up steam, because that's such a win-win proposition that you fill in your sections, they fill in theirs, you do the trades.
I see that opportunities continue, and we kid with Van, he still has his RV, and that you never know where he's going to pull out tonight and just set up shop at all the courthouses.
Oh, I'm sorry, Matt.
Joe, I was just going to add to that. It's not entirely coincidental that a lot of these opportunities present themselves in areas where you're very active. Down in Wolfcamp at Rustler Breaks, Antelope Ridge, as our activity levels increased in those areas over time, we had more and more opportunities come to us, I think there's a number of reasons for that. Maybe one of the most important one is when you get in an area and you start to show efficiencies and you're drilling good wells and you're a good operator, those opportunities will come to you. I think as we increase our activity level in the coming year or so up in Antelope Ridge or in Arrowhead and Ranger, I think we're going to see additional opportunities up there as well.
Philip, this is David. I just wanted to make one quick comment while we're talking about acreage and the maps. In the slide deck that we sent out last night as part of our earnings release, I noted this morning as we were getting ready actually last night, as I was doing one last review of all the materials in preparation for the call today. On slides eight and nine, where we show the updated map, particularly slide nine, the callout box that we had for Antelope Ridge actually happened to cover up a chunk of the acreage that we bought in Antelope Ridge. That was probably not the best placement of that callout box, but we have corrected that on the website.
If you just go back, if you're interested, anyone who may be listening, and reprint slides eight and nine, you'll see the acreage in its fullness, as opposed to the little peekaboo that we had last night there.
All right, guys. I appreciate the time and the color. Thanks.
Yeah, thank you.
Thanks, Phil.
Thank you. Our next question comes from Neal Dingmann of SunTrust. Your line is now open.
Morning, guys, Joe, let me know if there's room on that RV. I'm always ready to go on a road trip with Van.
Oh.
Oh.
You and Van together? No.
Phil, you're welcome anytime.
I'm not sure the Delaware Basin's ready for that, but
Hey, Dave, for you or Joe, my question is really just on opportunities you continue to see. You guys did a great San Mateo long-term agreement deal. You've talked a lot about that's been really beneficial, as well as this Kinder Firm sales agreement. Joe, my question is really, as you guys continue to see out there, are there more opportunities, or do you call it needs for more of these things going forward?
Neal, yes. We're not done yet. We do see further agreements or arrangements that can be made to improve our lot, so to speak, improve where we have set things up that will give us more options, volumes, prices, terms. When I say terms, I'm talking about duration, that we're looking at some very tempting deals, but they're, say, a little longer term than we'd like to have, and that we're looking at some shorter term deals that we think can be favorable. We're never going to stop trying to provide better takeaway and flow assurance and processing options and market options. We're working towards just like what we did with Plains, where we can buy the barrels back in Midland for those days when we might want to send it to Cushing or down to the Gulf Coast.
We're working out deals to get our gas down the Gulf Coast, which we think is a good market, or even the Henry Hub. I give a lot of credit. Gregg Krug and his marketing group have really done a good job of creating those options and those opportunities, and we think there will be more to come. There's going to be more pipes, which mean you have more opportunities. The marketing is getting more sophisticated, and they've been good about building relationships, and I've really learned a lot from all of them on what can be. I think in October and at the end of the year, you're going to have more comment from us on how they continue to further our position. Matt?
Neal, this is Matt, and I think the way you phrase the question in regards to San Mateo, I think it's important. The takeaway capacity we're talking about, Joe was talking about the deal with Plains. Any third-party volumes that San Mateo brings on board for the gathering system will be in that same agreement. They all have the same flow assurance that Matador has, getting the barrels bought at the wellhead and the opportunity to buy them back at Plains. The one thing that doesn't get near as much discussion is the NGL takeaway and the fractionization.
I think people are starting to talk about it a little bit more, but that's one thing Matt Spicer, who heads up the San Mateo group, that's one of the things he can now go to third-party operators with and say, "Look, not only do we have firm takeaway capacity for your residue gas, but we have a couple things in regards to the NGL. We're going to have the full ethane recovery option," which ethane now is in the money, and certainly as gas prices would continue to deteriorate, that would become even more valuable for them to be able to offer that. This agreement that we have with the pipeline that comes to the tailgate of the plant for NGLs, that's a firm takeaway issue there, too. BP is actually buying the NGLs at the tailgate of the plant, so they own them.
They're putting them on their system, taking them away to where they've got fractionation capacity. That's a pretty good deal for both Matador and San Mateo.
Very good. Then just one quick follow-up, Joe, talk to you on why your well costs continue to be about among the lowest up in the basin there in the Delaware. Was just wondering about when you talked about local sand, are you looking at things like local sand or more vertical integration to bring costs down further, or are opportunities like that getting a little bit more difficult to come by?
Neal, again, an excellent question. The answer is yes to all of those. Every phase of cost that we're really looking at, we've begun some experimentation with local sand. We're doing almost all of those things. Billy, I want Billy to pitch in here, Matt, because they're due a lot of the credit for working out some pretty good arrangements. We have a MAXCOM program which goes 24/7 in our offices, where the geologists and the engineers are doing the directional drilling, that's working out amazingly well, the teamwork between them. The engineers learn geology, the geologists learn engineering, we're saving a lot of money because you don't have drilling engineers that got to wake up in the middle of the night and make a decision and takes two to three hours. Our guys are making them instantly.
That's already saved us a ton of money. Our young guys that are running the rigs, they just get better and better. Let me just let Billy speak for his group because I know he's beaming with pride at your question.
Oh, that's right, Joe. The MAXCOM room, 24/7, it's tied together the drillers and geology department and the asset teams. They all spend a lot of time in there working together, having meetings, watching what each other's doing, we found that we're staying in zone a lot more. Not just zone in the target zone, but in the preferred part of the target zone. Thinking that we're going to be doing that, we were thinking we might be slowing down, but we didn't. We've actually started staying in there and drilling faster at the same time. Making better wells, drilling faster, saving money, and hats off to all those guys, like we say, 24/7. That's a great thing for us, and we set records in each hole section, and we've become not just like a one-off record, but they've become consistent.
They'll knock down a curve in an area from 12 hours to 10 hours to 7 to 6.5 hours, then they'll just keep matching it. We're consistently performing at a high level and expect that to continue. They're all doing a great job there. Then also, like you mentioned, the completion side. We've been testing and evaluating new techniques, the slick water fracs and spacing and the local sand, and I'll let Matt chime in here.
Yep.
Yeah, Neal, I like the fact that you said too we're running low cost. What we're really looking at is trying to maximize value. The completion team, we've talked in quarters past about moving towards regional sand, and we're going to do our testing, we're going to do our research, and we're going to make sure that we're comfortable. I think we're pretty comfortable at this point. We've actually pumped some jobs with regional sand, and as we've talked about before, we're not going to know from an IP or even 30 or 60 or 90 days. So far things look good. The cost savings that we had anticipated
Are there. There's a reason for us to do that. Billy mentioned some slick water jobs. That's an area where we may actually spend a little more money. If we can increase the production and the reserves, we're very willing to do that. Again, we just try to maintain a lot of optionality with this. We're also, as we put the drill schedule together for this year and for next year, we've got a large number of the wells that we're going to drill will have some component of pad drilling. We talked to Dan, let's say about two-thirds will have some multi-well component to it. We're going to continue to focus on not only cost structures but also efficiencies.
Want to thank Patterson-UTI for working with us as they have on the rigs, because these are really state-of-the-art rigs, as Billy will describe. They can do a lot more. They're more powerful, better pump systems. They, again, have helped set those records in each section of the hole, has made a difference. Billy?
Right. That's right, Joe. We got out front with Patterson-UTI putting together the rigs for us with a high pressure, 7,500 PSI piping, the 1,600 horsepower pumps, redundancies in the mud system, the higher pressure, higher capacity gas separators. We've added our managed pressure drilling packages to those. It's helped us as we face challenges in the different hole sections when they appear, and we just blow right through them. That's helped us be really efficient. Also the walking packages, like Joe mentioned there with the BOP handlers and all, so we can get the rigs moved around and batch drill the wells and working with the asset teams there, saved a lot of money.
That's great details, guys. Thanks so much, I'll be waiting for that invite from Dan.
Okay.
Thank you. Our next question comes from Gordon Douthat of Wells Fargo. Your line is now open.
Hey, good morning, everybody.
Hey, Gordon.
Hey. Just had a question. As you've put on these wells across various multiple benches in the Bone Spring, multiple benches in the Wolfcamp, pretty strong results across various areas. Are there any projects that are rising to the top from an economic standpoint? As you look to plan out your development, what are you seeing rise to the top?
Hey, Gordon, it's David. That's an interesting question. I think that in some ways it's a little bit dependent on the area that we're in. I think that we've been very pleased with the returns from both the XY and the B in Rustler Breaks. You get up to Ranger and Arrowhead, I think, the second and the third Bone Spring have probably been what we've focused on the most, and we're pleased with what we're seeing there. Though even as we speak, we're doing another test at Stebbins on the Upper Wolfcamp, there in that area as we continue to try to test the Wolfcamp a little farther to the north. I think you get over an Antelope Ridge, there's a number of targets that we're excited about.
I would say this first Bone Spring target is one that I think has really begun to catch our attention and catch our fancy. Of course, the lower part of the Wolfcamp, where we drilled that Thorsness well in the last quarter has certainly been a standout and continued to do well. Being down in the Wolf area, while we like what we've seen in the V, in the Fad, and the lower part of the Wolfcamp and the Bone Spring, I think the XY has probably been the strongest. You go over to Jackson Trust, and it's probably the lower part of the Wolfcamp there. It's hard to just say. It becomes more asset specific, I think.
That's all I have. Thank you very much.
Thank you.
Gordon, before you go, I don't want to leave out that we have some deeper targets that we haven't gotten to that have showed promise in one of our wells. We decided just to deepen a well to the Morrow just to get a, quote "easy test" to get some gauge of it. Here's a vertical well we took to the Morrow, and it's made 3 million a day very steadily for a long time, it has really held in. That's the Norris Thornton well, named after two of our shareholders who were recipients of the Medal of Honor. I told them that we really appreciate their efforts to make sure we had a really good well coming out of their nomenclature, I guess, so to speak.
That test alone shows some of the options you have by going deeper to these other zones that we hadn't gotten to. We hadn't yet reached full development mode because we're having so many different zones. Just to give you a story, as we were doing the IPO, our reasons for going out there to the Delaware was that we had done the oil in the Eagle Ford. That was the hot area of the country, and we felt there was more application for these old techniques, these oil shales out there than anywhere else. As we went out there, it was on the strength of 2 or 3 formations, and now we've got production coming from about 16, and it hadn't stopped yet. It's been a very favorable area. The Eagle Ford has had comparable returns on the well you drill.
It just has 1 or 2 zones. The Austin Chalk is coming back down there in the Buda, out there in the Delaware, as I said, you got 16, and we may end up with 20 before different zones. If the column is so thick, 5,000, what Brad was talking about targeting, we found that even moving as little as 30 feet can sometimes make twice the well. We've been proponents that over time, targeting will be as important as any of the other steps of looking at the formations and figuring out which ones offer the most potential.
The thing that pleases us most, that across all of our acreage, we're earning the targeted returns that we try to get to, 40%-50%, we're still assessing and watching the new innovation and new frack techniques, all that can have a big effect on which zone has got the most to offer and where should we go economically.
Thank you for that color, Joe.
Thanks, Gordon. It's a great question. As I said, it's hard to say. They've all been so good that you can't say, "We're gonna go over here and put this other area in hold." All the asset teams make very compelling cases to keep up investment in each area and see what happens.
Thank you.
Thank you. Our next question comes from Jeff Grampp of Northland Capital Markets. Your line is now open.
Good morning, guys. Thanks for squeezing me in.
Hey, Jeff.
Hey, Jeff.
I was curious, you guys referenced in the release a couple of times, the trucking of your oil in the Delaware. I'm just curious if you guys can give us a sense of what's trucked versus what's on pipe on your Delaware oil, how that could potentially change over the next few months, and then just in general of your conversations with the trucking companies, what's your sense of how availability might be trending on that side of things? Thanks.
Yeah, Jeff, this is Matt. As we talked about the Wolf acreage, everything at Wolf is currently on pipe. When we get Plains into Rustler Breaks up there, all that will be on pipe. I think in the basin, you're probably looking at certainly north of 70% of all the oil will be on pipe. The remainder of it, we've been successful thus far, and we'll knock on wood, but we've been successful thus far in securing firm capacity on the stuff at Antelope Ridge and the stuff up at Ranger and Arrowhead that's not on pipe. Statistically, the negotiation is about term and how long we're willing to sign up for that. Even the stuff that we've got on trucks there, we've got firm capacity there.
Okay, great. Then for my follow-up, I'll hop in the weeds here. You guys may not have this offhand, but on the mineral acquisition side of things, can you give us a number of where that mineral acreage stands today and maybe what kind of production is coming from those minerals?
Yeah. This is David, Jeff. If you'll just sort of forgive us, I think we're not quite ready to disclose. I think we said in here that we had 3,400 acres of minerals that closed in this deal. I think you can go back to previous releases and see what we had, but we're just not quite ready to disclose what all we've done there. We still have a little bit of work to do there and want to maintain as much of our competitive advantage as we can. If you'll indulge us a little bit there, I think we certainly will talk more about that as time goes on.
I do think that as we said at the time of the offering, that the minerals that we had acquired over in the Rustler Breaks area, for example, we're probably going to add plus or minus 500 BOE a day, as I recall, once they had closed. We'll begin to see that. I think what's exciting to us is that so many of those minerals are under tracks that we actually already have on production or will have on production. It's certainly in an area where there's a lot of activity. We expect those minerals to get drilled. Likewise, the things that we acquired in the other areas should have the same kind of activity on them. I hope that's adequate, but that's probably about as far as we're ready to go today.
Yeah, I appreciate it, David, and we'll stay tuned in the future. Appreciate the time and good quarter.
Okay. Very good. Thank you.
Thank you. Our next question comes from Noel Parks of Coker Palmer Institutional. Your line is now open.
Morning.
Morning.
I wanted to go back to Twin Lakes for a minute again, and I was wondering there, I know one of the features of the position out there is the water content is expected to be lower than elsewhere in the basin. I was just wondering, from the wells that have been drilled so far, I know it's early still, but has the cleanup and then sort of the oil cut relative to the water, has that been about like you expected pre-drill?
This is Brad. It is. We expected it to be a little lower up there, and right now the water cut average is maybe 40% or 50%, so that's substantially less than what we found down in the main part of the basin. I'm not too surprised, but I am pleasantly surprised that it is actually a little bit lower than we expected.
In the lower part of the Delaware Basin, you may have four times the water for each barrel of oil.
That's right.
Up here, you're having a half a barrel for each barrel of water. Certainly makes your lift costs better. That's one of the economic advantages. As I said, we like both areas. They're different kinds of production, and wells, but we believe both will add value.
Great. Thanks. Just to follow up, as you plan the next wells you're going to do out there, or between you and your partners that are going to happen, are you more doing at this point sort of along a trend, or are you going to be heading more towards, if you will, the four corners of your acreage, just to get a sense of how the formations might develop across it?
I'll speak, then anybody else can say what they want. We don't tend to go the four corners. We tend to go the very core, then expand out, is the way I would describe it, on a step-out controlled basis. Brad?
I agree, Joe. I think we go right to what we believe to be the core of the acreage. We collect data in that area, and we use that data to help extrapolate in all directions and try to help us predict, based on our geologic models and our reservoir models, where we think the acreage can be developed. Over in Twin Lakes, we had identified two different specific areas where the Wolfcamp looked very good to us, and you can tell from our acreage position, were the areas we were interested in. We went right in the middle and drilled some test wells there. We're real excited to complete and test this new well that we've drilled. As Joe mentioned earlier, there's quite a bit of activity going on up there.
If you would've looked at that area two years ago, it wouldn't have been very active. We're real excited about it, that's what we're planning on.
Great. Thanks a lot.
Thank you, Noel.
Thank you. Our next question comes from Mike Thielen of Stifel. Your line is now open.
Morning, guys.
Hey, Mike.
Hey, Mike.
Just trying to do some math here, which is always a challenge for me, I wanted to see if this sounded right to you. I'm looking at your first half D&C capital of about $336 and a half million to complete 35.7 wells, works out to about $nine and a half million per well. Is that in the ballpark, or is there something faulty with my math there?
Yeah, I'd say what probably is faulty with the math, Mike, is that there's always costs of wells in progress that from an accounting standpoint have to be accrued. I don't have that number exactly off the top of my head, but I can guarantee you that there will be a significant chunk of capital that's been accrued in that $335 million for wells that have not been turned to sales yet because they were either drilling or completed, or in the process of drilling and completion. I think you just always have to take that with a grain of salt. For example, we had two wells on our Coleman lease up there in Rustler Breaks that were absolutely drilled, completed, finished, that didn't come online until the first or second day of July.
When we report numbers turned into line, well, they didn't make the cut, they weren't shown on the list. All their costs, I guarantee you, are in that number already. I think until you get through a year, and have a chance to look at all that in hindsight, it's a little hard to make that kind of math work.
Got you. Okay. Wanted to follow up on Joe's commentary on the 16 zones that you've tested. I think you guys have been really a pioneer in the basin on testing both the number of zones and the acreage that you've delineated. Do you foresee at some point next year, or, I guess my question is, when do you foresee There's a lot of issues with full development. People have talked about parent-child issues and how to set up your infrastructure. Do you have any plans for 2019 or beyond to maybe look at a full development scenario?
Mike, it's Matt. I think the way we're approaching this is, as Joe says, at a measured pace. We are currently drilling wells on what we think is likely the proper spacing, both vertically and horizontally. As we learn more about that, we'll adjust that as we go. I think it's going to take a while before we're able to determine exactly what we want to do in a full development on a section. I know there's some others that are out testing that are actually doing multiple wells, our approach is going to be a little more methodical, I think, where we're going to do it in a section here and a section there, where we're looking at the right type of spacing before we jump off into a full development cube-type drilling.
Mike, the big risk about rushing into full development is there's a likelihood of over-drilling the sections. That this is something that we discovered in the Eagle Ford, that when you thought that you could drill, say, these on 40s or 80s, you didn't notice on the high P the first month that there was any interference, it wasn't until after a year, you began to see the interference. As a result, you just can't rush in and drill four off the pad. I wouldn't do that. I think there's too much risk that you take some time and some data points to know whether it should be four wells to the section or six wells to the section. You need to go at it in a pretty methodical fashion.
The same thing, it's a tension between delineation and full pad, you can't say there's always a bright line, you have a push-pull there that depends on a lot of different circumstances. It's not a single factor, you can do a pad, in the first months of production you'll think, "Hey, no interference." At the end of the year it'll begin to be seen.
This is Brad. I agree, Joe. We treat each area a little differently because the reservoir properties do change. What we may develop on 160-acre spacing in one area might be 80-acre spacing in a different area for essentially the same reservoir. As we drill these parent wells and we analyze the production and the data that we collect, we are constantly looking at optimizing the well spacing. Just to expand a little bit, in Wolf right now, we are more in a development mode for the XY. It's been our bread and butter down there, but we're still doing some exploration. There are some areas where we're in, I would say, full development mode, while in other areas we're still delineating new reservoirs.
Did that answer your question, Mike?
Yeah, it did. It sounds like you're still primarily delineation probably through next year, I would guess, but in isolated areas like Wolf, sounds like you're there, but I wouldn't expect a big cube-type development for six or seven zones in a section next year. That'd probably be too early to anticipate, it sounds like.
Yeah, I think that's fair. Matt?
Yeah, no, I think that's accurate. Like I said, I don't think we're quite ready to start doing that. We're kind of, like Brad said, piecemealing together what's going to work in the XY and what's going to work in the second and third Bone Spring and first Bone Spring in areas where we're drilling. We'll take it piece by piece.
Mike, we're trying to gather data from some of our operated by others that are in a bigger development mode like that and see how those results compare. Letting somebody else go first and through our OBO, give us a chance to get smarter.
Makes sense. Thank you, guys.
Thanks, Mike.
Thank you. Our next question comes from Sameer Panjwani of Tudor, Pickering, Holt & Co. Your line is now open.
Hey, guys. Good morning.
Hey, Sameer.
Is the increased non-op activity in the Permian, is that pushing a more aggressive stance basin wide on trying to get trades done to have better control over company-specific spending and development?
Well, this is David. Sameer, I think I would characterize it is that it just provides for more opportunities to do that. There are times that we issue proposals to partners or they issue proposals to us, and as part of that activity, you may discover, hey, we could swap out our interest in this section for your interest in that section, and it might result in a situation that both of us prefer from an operating standpoint. When that's a mutual win-win for both of us, we're certainly very willing to do that and have done it many times, and I compliment our land staff on the ability to recognize those situations and seek them out. I think that we've done several trades.
We've done a lot of trades, but we've done a number that we've talked about that I think we felt like really added value for us, and I'm confident they did for the partners that we traded with. I think we're pleased with the cooperation that we see and get and appreciative of the other companies that we work with and the relationships that we have. I think we're all trying to just improve our lives the best we can, and this has proven to be a good way. I'm glad that the industry is very open to doing that sort of thing.
Okay, that makes sense. I guess it would be fair to say that the pace at which those opportunities are presenting themselves has accelerated.
I think that's probably fair because of the fact that activity has picked up, and as activity has picked up for everyone, then there's just more of these kind of proposals that are being issued. When they are, that just opens up the opportunities.
Okay, great. On the midstream side, you guys are quickly approaching that $100 million EBITDA mark. It kind of feels like that's the point where, generally, it might be able to stand on its own two feet. Are there any incremental third-party opportunities available today? How far away do you guys think you are from achieving the scale required to make a decision on the future of that business?
Well, this is David again. I think that, first of all, sometimes the midstream guys think they already are standing on their own two feet. They might push back with me a little bit there, but I know what you mean. I think that, look, we feel like that there continue to be a lot of midstream opportunities available to Matador and to San Mateo. San Mateo has done a great job of getting the infrastructure in place both at Wolf and in the Rustler Breaks area, for all three streams, for natural gas, for oil, for water, drilling out two more saltwater disposal wells up there now as we speak. The oil infrastructure, gathering infrastructure is all in place. The trucking facility is all just about finished up so that we're all ready when the Plains line arrives.
Look, there's areas of our acreage, Antelope Ridge, Arrowhead Ranger, where we're starting to talk about what might we want to do from a midstream basis in those areas as well. In the areas where we are, there's always additional third-party opportunities. Clearly, the significant agreement signed with another producer on the water side this year, this past quarter was great. It was just terrific. We have other agreements that are already in place. As Joe mentioned earlier, there's another, and we've put in the release, there's another midstream company where we're going to be having the ability to purchase some of their gas and process that there at San Mateo, that'll add to the volumes there. The guys are working on other deals all the time. I think we're very optimistic.
Pleased where we are, very optimistic that we will continue to add to these third-party opportunities.
David, I think you make a very good point, and one of the things that I think is very advantageous is the footprint we now have in the basin with oil gathering, water gathering and disposal, gas gathering, processing. All these things are at a point now where as the third-party opportunities present themselves and those continue to grow and grow, it's pretty easy for us to add to these assets. For instance, on the saltwater disposal systems, we've got to the point where we've got a number of saltwater disposal wells, and as more opportunities, more volumes come online, it's pretty easy to drill another well and add to that.
Even on the gas plant, the gas processing plant we have there at Rustler Breaks, if we get that thing full of 260 million a day, we can easily add another train and just continue to build the business. It's in a very nice place for growth.
Okay, that's really helpful. Last one for me. I'm just trying to understand with the second quarter production outperformance and the increase to the full year guidance, how much of that is coming from operations and how much of that is coming from the acquisitions?
It's coming almost entirely from operations. The acquisitions are going to add round off error to what those numbers are.
Okay. Thank you.
Sameer, that's one of the things that we think distinguishes Matador from many other companies out there. We haven't been acquiring really producing properties. All of our growth is almost all come organically from drilling of wells. When you grow organically, you should have higher rates of return. Generally, you're lucky to get a 10% rate of return because there's a lot of competition. It turns in one way or another into a bidding auction, the seller is going to do his best to get that rate of return as low as he can and be much less than what your drilling opportunities are. It's trickier to grow organically and with the drill bit, our teams have met the challenge.
Matador started off with $6 million, we're at the $4 billion level. When we went public, we were making 400 barrels of oil a day, now it's 30,000 barrels of oil. You got to give credit to our various teams, that production we have comes out of three basins. We made good decisions in the Haynesville and the Eagle Ford, now the Delaware. I think that's one thing like to be noted, that over the 15 years that we've had a very steady rate of return, we've done it organically, that we put the money back in good decisions. The outlook for us going forward, we think has never looked better. All areas of the company are doing very well, exceeding expectations. The wells are exceeding expectations. The teams are really working well together.
A couple of things I don't think are fully recognized in the market, one is the growing value of the midstream. As you noted, they're really doing a good job in their areas. I don't know when it reaches critical mass. We're studying it, we have a great partner there that has worked with us. We're very pleased with the way that joint venture is going. Our minerals are growing in value, that gives us further options there. The ongoing development plan that we have. We're not finished targeting our various zones or other zones, our teams are building scale. We like our chances going forward and are very pleased with the opportunities we have above. We just enjoyed the two best quarters in company history.
We would like to think that momentum will continue. We invite all of you to come see us and see that the depth of Matador isn't just with the executive committee, but goes throughout the company. We've got rising contributions from our young leaders here and in each of the departments. The outlook, I'd just like to say, looks very promising here. We got a lot of hard work in front of us. We got to keep finding ways to improve, but I like our chances.
That's good color, Joe. Thank you.
Thank you. Ladies and gentlemen, this ends the Q&A portion of this morning's conference call. I'd now like to turn the call over to management for any closing remarks.
Compliments of Sameer, I think I just did it. If you want more, hit your rewind and do that again. Thank you all. We do appreciate your questions and comments. We do think it helps make us better. We hope to see all of you soon. More to report in the near future.
Ladies and gentlemen, thank you for your participation today. This concludes the program. You may now disconnect.