10-Q 1 mtdr-2017331x10q.htm 10-Q Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________________________ 
FORM 10-Q
 _________________________________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to            
Commission File Number 001-35410
 _________________________________________________________  
Matador Resources Company
(Exact name of registrant as specified in its charter)
  _________________________________________________________ 
Texas
27-4662601
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
5400 LBJ Freeway, Suite 1500
Dallas, Texas
75240
(Address of principal executive offices)
(Zip Code)
(972) 371-5200
(Registrant’s telephone number, including area code)
 _________________________________________________________  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     x  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
As of May 3, 2017, there were 100,188,235 shares of the registrant’s common stock, par value $0.01 per share, outstanding.



MATADOR RESOURCES COMPANY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2017
INDEX
 
Page



Part I – FINANCIAL INFORMATION
Item 1. Financial Statements — Unaudited
Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS - UNAUDITED
(In thousands, except par value and share data)
 
March 31,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
209,705

 
$
212,884

Restricted cash
14,604

 
1,258

Accounts receivable
 
 
 
Oil and natural gas revenues
40,423

 
34,154

Joint interest billings
27,945

 
19,347

Other
7,077

 
5,167

Derivative instruments
1,715

 

Lease and well equipment inventory
2,929

 
3,045

Prepaid expenses and other assets
5,578

 
3,327

Total current assets
309,976

 
279,182

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
2,531,559

 
2,408,305

Unproved and unevaluated
564,813

 
479,736

Other property and equipment
175,139

 
160,795

Less accumulated depletion, depreciation and amortization
(1,898,296
)
 
(1,864,311
)
Net property and equipment
1,373,215

 
1,184,525

Other assets
 
 
 
Derivative instruments
2,283

 

         Other assets
919

 
958

Total other assets
3,202

 
958

Total assets
$
1,686,393

 
$
1,464,665

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
5,266

 
$
4,674

Accrued liabilities
111,492

 
101,460

Royalties payable
30,972

 
23,988

Amounts due to affiliates
2,515

 
8,651

Derivative instruments
8,321

 
24,203

Advances from joint interest owners
2,956

 
1,700

Amounts due to joint ventures
5,162

 
4,251

Other current liabilities
621

 
578

Total current liabilities
167,305

 
169,505

Long-term liabilities
 
 
 
Senior unsecured notes payable
573,968

 
573,924

Asset retirement obligations
21,482

 
19,725

Derivative instruments

 
751

Amounts due to joint ventures
860

 
1,771

Other long-term liabilities
7,282

 
7,544

Total long-term liabilities
603,592

 
603,715

Commitments and contingencies (Note 10)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 120,000,000 shares authorized; 100,203,648 and 99,518,764 shares issued; and 100,135,608 and 99,511,931 shares outstanding, respectively
1,002

 
995

Additional paid-in capital
1,444,263

 
1,325,481

Accumulated deficit
(592,367
)
 
(636,351
)
Treasury stock, at cost, 68,040 and 6,833 shares, respectively
(633
)
 

Total Matador Resources Company shareholders’ equity
852,265

 
690,125

Non-controlling interest in subsidiaries
63,231

 
1,320

Total shareholders’ equity
915,496

 
691,445

Total liabilities and shareholders’ equity
$
1,686,393

 
$
1,464,665


The accompanying notes are an integral part of these financial statements.
3


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
(In thousands, except per share data)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Revenues
 
 
 
Oil and natural gas revenues
$
114,847

 
$
43,926

Third-party midstream services revenues
1,555

 
473

Realized (loss) gain on derivatives
(2,219
)
 
7,063

Unrealized gain (loss) on derivatives
20,631

 
(6,839
)
Total revenues
134,814

 
44,623

Expenses
 
 
 
Production taxes, transportation and processing
11,807

 
7,902

Lease operating
15,758

 
14,511

Plant and other midstream services operating
2,341

 
1,027

Depletion, depreciation and amortization
33,992

 
28,923

Accretion of asset retirement obligations
300

 
264

Full-cost ceiling impairment

 
80,462

General and administrative
16,338

 
13,163

Total expenses
80,536

 
146,252

Operating income (loss)
54,278

 
(101,629
)
Other income (expense)
 
 
 
Net gain on asset sales and inventory impairment
7

 
1,065

Interest expense
(8,455
)
 
(7,197
)
Other income
70

 
94

Total other expense
(8,378
)
 
(6,038
)
Net income (loss)
45,900

 
(107,667
)
Net (income) loss attributable to non-controlling interest in subsidiaries
(1,916
)
 
13

Net income (loss) attributable to Matador Resources Company shareholders
$
43,984

 
$
(107,654
)
Earnings (loss) per common share
 
 
 
Basic
$
0.44

 
$
(1.26
)
Diluted
$
0.44

 
$
(1.26
)
Weighted average common shares outstanding
 
 
 
Basic
99,799

 
85,305

Diluted
100,298

 
85,305


The accompanying notes are an integral part of these financial statements.
4


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED
(In thousands)
For the Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Total shareholders’ equity attributable to Matador Resources Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-controlling interest in subsidiaries
 
Total shareholders’ equity
 
Common Stock
 
Additional
paid-in capital
 
Accumulated deficit
 
Treasury Stock
 
 
 
 
 
Shares
 
Amount
 
 
 
Shares

 
Amount

 
 
 
Balance at January 1, 2017
99,519

 
$
995

 
$
1,325,481

 
$
(636,351
)
 
6

 
$

 
$
690,125

 
$
1,320

 
$
691,445

Issuance of common stock pursuant to employee stock compensation plan
406

 
4

 
(4
)
 

 

 

 

 

 

Common stock issued to Board members and advisors
19

 

 

 

 

 

 

 

 

Stock-based compensation expense related to equity-based awards

 

 
4,318

 

 

 

 
4,318

 

 
4,318

Stock options exercised, net of options forfeited in net share settlements
260

 
3

 
716

 

 

 

 
719

 

 
719

Restricted stock forfeited

 

 

 

 
62

 
(633
)
 
(633
)
 

 
(633
)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary

 

 
(1,250
)
 

 

 

 
(1,250
)
 
(1,403
)
 
(2,653
)
Contributions related to formation of Joint Venture (see Note 3)

 

 
115,002

 

 

 

 
115,002

 
56,498

 
171,500

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries

 

 

 

 

 

 

 
4,900

 
4,900

Current period net income

 

 

 
43,984

 

 

 
43,984

 
1,916

 
45,900

Balance at March 31, 2017
100,204

 
$
1,002

 
$
1,444,263

 
$
(592,367
)
 
68

 
$
(633
)
 
$
852,265

 
$
63,231

 
$
915,496


The accompanying notes are an integral part of these financial statements.
5


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED
(In thousands)
 
Three Months Ended 
 March 31,
 
2017
 
2016
Operating activities
 
 
 
Net income (loss)
$
45,900

 
$
(107,667
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Unrealized (gain) loss on derivatives
(20,631
)
 
6,839

Depletion, depreciation and amortization
33,992

 
28,923

Accretion of asset retirement obligations
300

 
264

Full-cost ceiling impairment

 
80,462

Stock-based compensation expense
4,166

 
2,243

Amortization of debt issuance cost
44

 
300

Net gain on asset sales and inventory impairment
(7
)
 
(1,065
)
Changes in operating assets and liabilities

 

Accounts receivable
(16,777
)
 
7,307

Lease and well equipment inventory
147

 
150

Prepaid expenses
(2,251
)
 
(47
)
Other assets
39

 
97

Accounts payable, accrued liabilities and other current liabilities
8,256

 
2,591

Royalties payable
6,984

 
(3,975
)
Advances from joint interest owners
1,255

 
2,524

Income taxes payable

 
(2,463
)
Other long-term liabilities
(108
)
 
1,875

Net cash provided by operating activities
61,309

 
18,358

Investing activities


 


Oil and natural gas properties capital expenditures
(204,457
)
 
(74,370
)
Expenditures for other property and equipment
(20,867
)
 
(27,409
)
Proceeds from sale of assets
350

 

Restricted cash

 
43,337

Restricted cash in less-than-wholly-owned subsidiaries
(13,346
)
 
510

Net cash used in investing activities
(238,320
)
 
(57,932
)
Financing activities


 


Proceeds from issuance of common stock

 
142,350

Cost to issue equity

 
(614
)
Proceeds from stock options exercised
1,981

 

Contributions related to formation of Joint Venture
171,500

 

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries
4,900

 

Taxes paid related to net share settlement of stock-based compensation
(1,896
)
 
(565
)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary
(2,653
)
 

Net cash provided by financing activities
173,832

 
141,171

(Decrease) increase in cash
(3,179
)
 
101,597

Cash at beginning of period
212,884

 
16,732

Cash at end of period
$
209,705

 
$
118,329

 
 
 
 
Supplemental disclosures of cash flow information (Note 11)


 



The accompanying notes are an integral part of these financial statements.
6


Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED
NOTE 1 - NATURE OF OPERATIONS
Matador Resources Company, a Texas corporation (“Matador” and, collectively with its subsidiaries, the “Company”), is an independent energy company engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States, with an emphasis on oil and natural gas shale and other unconventional plays. The Company’s current operations are focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company also operates in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. Additionally, the Company conducts midstream operations, primarily through its midstream joint venture, San Mateo Midstream, LLC (“San Mateo” or the “Joint Venture”), in support of the Company’s exploration, development and production operations and provides natural gas processing, natural gas, oil and salt water gathering services and salt water disposal services to third parties on a limited basis.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements, Basis of Presentation, Consolidation and Significant Estimates
The interim unaudited condensed consolidated financial statements of Matador and its subsidiaries have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) but do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”) filed with the SEC. The Company consolidates certain subsidiaries and joint ventures that are less than wholly owned and are not involved in oil and natural gas exploration, including San Mateo, and the net income and equity attributable to the non-controlling interest in these subsidiaries have been reported separately as required by Accounting Standards Codification (“ASC”) 810. The Company proportionately consolidates certain joint ventures that are less than wholly owned and are involved in oil and natural gas exploration. All intercompany accounts and transactions have been eliminated in consolidation. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments, consisting only of normal, recurring adjustments, which are necessary for a fair presentation of the Company’s interim unaudited condensed consolidated financial statements as of March 31, 2017. Amounts as of December 31, 2016 are derived from the Company’s audited consolidated financial statements in the Annual Report.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s interim unaudited condensed consolidated financial statements are based on a number of significant estimates, including accruals for oil and natural gas revenues, accrued assets and liabilities primarily related to oil and natural gas operations, stock-based compensation, valuation of derivative instruments and oil and natural gas reserves. The estimates of oil and natural gas reserves quantities and future net cash flows are the basis for the calculations of depletion and impairment of oil and natural gas properties, as well as estimates of asset retirement obligations and certain tax accruals. While the Company believes its estimates are reasonable, changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates.
Reclassifications
Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period presentation. As a result of the growth of the Company’s midstream operations, these operations met the required threshold for segment reporting. As a result, $0.5 million for the three months ended March 31, 2016 was reclassified from other income to third-party midstream services revenues. In addition, $1.0 million related to midstream operating costs for the three months ended March 31, 2016 was reclassified from lease operating expenses to plant and other midstream services operating expenses. These reclassifications had no effect on previously reported results of operations, cash flows or retained earnings.
Property and Equipment
The Company uses the full-cost method of accounting for its investments in oil and natural gas properties. Under this method, the Company is required to perform a ceiling test each quarter that determines a limit, or ceiling, on the capitalized costs of oil and natural gas properties based primarily on the after-tax estimated future net cash flows from oil and natural gas properties using a 10% discount rate and the arithmetic average of first-day-of-the-month oil and natural gas prices for the prior 12-month period. For the three months ended March 31, 2017, the cost center ceiling was higher than the capitalized costs of oil and natural gas properties; no impairment charge was necessary. However, due primarily to declines in oil and natural gas

7

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

prices in early 2016, the capitalized costs of oil and natural gas properties exceeded the cost center ceiling for the three months ended March 31, 2016, and as a result, the Company recorded an impairment charge to its net capitalized costs of $80.5 million in its interim unaudited condensed consolidated statements of operations for the three months ended March 31, 2016.
The Company capitalized approximately $5.6 million and $2.0 million of its general and administrative costs for the three months ended March 31, 2017 and 2016, respectively, and approximately $1.2 million and $0.4 million of its interest expense for the three months ended March 31, 2017 and 2016, respectively.
Earnings (Loss) Per Common Share
The Company reports basic earnings (loss) attributable to Matador Resources Company shareholders per common share, which excludes the effect of potentially dilutive securities, and diluted earnings (loss) attributable to Matador Resources Company shareholders per common share, which includes the effect of all potentially dilutive securities unless their impact is anti-dilutive.
The following table sets forth the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2017 and 2016 (in thousands).
 
Three Months Ended 
 March 31,
2017
 
2016
Weighted average common shares outstanding
 
 
 
Basic
99,799

 
85,305

Dilutive effect of options, restricted stock units and preferred shares
499

 

Diluted weighted average common shares outstanding
100,298

 
85,305

A total of 3.0 million options to purchase shares of the Company’s common stock and 0.1 million restricted stock units were excluded from the diluted weighted average common shares outstanding for the three months ended March 31, 2016 because their effects were anti-dilutive. Additionally, 1.0 million restricted shares, which are participating securities, were excluded from the calculations above for the three months ended March 31, 2016, as the security holders do not have the obligation to share in the losses of the Company.
Recent Accounting Pronouncements
Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which specifies how and when to recognize revenue. This standard requires expanded disclosures surrounding revenue recognition and is intended to improve, and converge with international standards, the financial reporting requirements for revenue from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-11, which rescinds guidance from the SEC on accounting for gas balancing arrangements and will eliminate the use of the entitlements method. Entities have the option of using either a full retrospective or modified approach to adopt the new standards. In December 2016, the FASB issued ASU 2016-20, which clarifies disclosure requirements in ASU 2014-09. The Company expects to adopt the new guidance effective January 1, 2018 using the modified approach. The Company is evaluating the new guidance, including (i) identification of revenue streams and (ii) review of contracts and procedures currently in place.
Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. This ASU will become effective for fiscal years beginning after December 15, 2018 with early adoption permitted. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial direct costs for leases that commenced before the effective date and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

8

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

Statement of Cash Flows. In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), which specifies that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. This ASU will become effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The update should be applied using a retrospective transition method to each period presented. The Company believes that the impact of the adoption of this ASU will change the presentation of its beginning and ending cash balances on its Consolidated Statements of Cash Flows and eliminate the presentation of changes in restricted cash balances from investing activities on its Consolidated Statements of Cash Flows.
Clarifying the Definition of a Business. In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805), which specifies the minimum inputs and processes required for an integrated set of assets and activities to meet the definition of a business. This ASU will become effective for fiscal years beginning after December 15, 2017 with early adoption permitted. Entities are required to apply guidance prospectively upon adoption. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.
NOTE 3 – BUSINESS COMBINATION
Joint Venture
On February 17, 2017, the Company contributed substantially all of its midstream assets located in the Rustler Breaks (Eddy County, New Mexico) and Wolf (Loving County, Texas) asset areas in the Delaware Basin to San Mateo, a joint venture with a subsidiary of Five Point Capital Partners LLC (“Five Point”). The midstream assets contributed to San Mateo include (i) the Black River cryogenic natural gas processing plant in the Rustler Breaks asset area (the “Black River Processing Plant”); (ii) one salt water disposal well and a related commercial salt water disposal facility in the Rustler Breaks asset area; (iii) three salt water disposal wells and related commercial salt water disposal facilities in the Wolf asset area; and (iv) substantially all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas (collectively, the “Delaware Midstream Assets”). The Company continues to operate the Delaware Midstream Assets. The Company retained its ownership in certain midstream assets in South Texas and Northwest Louisiana, which are not part of the Joint Venture.
The Company and Five Point own 51% and 49% of the Joint Venture, respectively. Five Point provided initial cash consideration of $176.4 million to the Joint Venture in exchange for its 49% interest. Approximately $171.5 million of this cash contribution by Five Point was distributed by the Joint Venture to the Company as a special distribution. The Company may earn an additional $73.5 million in performance incentives over the next five years. The Company contributed the Delaware Midstream Assets and $5.1 million in cash to the Joint Venture in exchange for its 51% interest. The parties to the Joint Venture have also committed to spend up to an additional $140.0 million in the aggregate to expand the Joint Venture’s midstream operations and asset base. The Joint Venture is consolidated in the Company’s interim unaudited condensed consolidated financial statements with Five Point’s interest in the Joint Venture being accounted for as a non-controlling interest.
In connection with the Joint Venture, the Company dedicated its current and future leasehold interests in the Rustler Breaks and Wolf asset areas pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements, effective as of February 1, 2017. In addition, the Company dedicated its current and future leasehold interests in the Rustler Breaks asset area pursuant to a 15-year, fixed fee natural gas processing agreement (see Note 10).

9

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 4 - ASSET RETIREMENT OBLIGATIONS


The following table summarizes the changes in the Company’s asset retirement obligations for the three months ended March 31, 2017 (in thousands).
 
 
Beginning asset retirement obligations
$
20,640

Liabilities incurred during period
577

Liabilities settled during period
(130
)
Revisions in estimated cash flows
794

Accretion expense
300

Ending asset retirement obligations
22,181

Less: current asset retirement obligations(1)
(699
)
Long-term asset retirement obligations
$
21,482

 _______________
(1)
Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at March 31, 2017.
NOTE 5 - DEBT
At March 31, 2017 and May 3, 2017, the Company had $575.0 million of outstanding 6.875% senior notes due 2023, no borrowings outstanding under the Company’s revolving credit agreement (the “Credit Agreement”) and approximately $0.8 million in outstanding letters of credit issued pursuant to the Credit Agreement.
Credit Agreement
The borrowing base under the Credit Agreement is determined semi-annually as of May 1 and November 1 by the lenders based primarily on the estimated value of the Company’s proved oil and natural gas reserves at December 31 and June 30 of each year, respectively. Both the Company and the lenders may request an unscheduled redetermination of the borrowing base once each between scheduled redetermination dates. During the first quarter of 2017, the lenders completed their review of the Company’s proved oil and natural gas reserves at December 31, 2016, and on April 28, 2017, the borrowing base was increased to $450.0 million and the maximum facility amount remained at $500.0 million. The Company elected to keep the borrowing commitment at $400.0 million. Borrowings under the Credit Agreement are limited to the least of the borrowing base, the maximum facility amount and the elected commitment. The Credit Agreement matures on October 16, 2020.
In the event of an increase in the elected commitment, the Company is required to pay a fee to the lenders equal to a percentage of the amount of the increase, which is determined based on market conditions at the time of the increase. Total deferred loan costs were $1.2 million at March 31, 2017, and these costs are being amortized over the term of the Credit Agreement, which approximates amortization of these costs using the effective interest method. If, upon a redetermination of the borrowing base, the borrowing base were to be less than the outstanding borrowings under the Credit Agreement at any time, the Company would be required to provide additional collateral satisfactory in nature and value to the lenders to increase the borrowing base to an amount sufficient to cover such excess or to repay the deficit in equal installments over a period of six months.
The Company believes that it was in compliance with the terms of the Credit Agreement at March 31, 2017.
Senior Unsecured Notes
On April 14, 2015 and December 9, 2016, the Company issued $400.0 million and $175.0 million, respectively, of 6.875% senior notes due 2023 (collectively, the “Notes”). The Notes mature on April 15, 2023, and interest is payable semi-annually in arrears on April and October 15 of each year.
On February 17, 2017, in connection with the formation of San Mateo (see Note 3), Matador entered into a Fourth Supplemental Indenture (the “Fourth Supplemental Indenture”), which supplements the indenture governing the Notes. Pursuant to the Fourth Supplemental Indenture, (i) Longwood Midstream Holdings, LLC, the holder of Matador’s 51% equity interest in San Mateo, was designated as a guarantor of the Notes and (ii) DLK Black River Midstream, LLC and Black River Water Management Company, LLC, each subsidiaries of San Mateo, were released as parties to, and as guarantors of, the Notes. The guarantors of the Notes, following the effectiveness of the Fourth Supplemental Indenture, are referred to herein as the “Guarantor Subsidiaries.” San Mateo

10

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 5 - DEBT - Continued

and its subsidiaries (the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes, although they remain restricted subsidiaries under the indenture governing the Notes.
The following presents condensed consolidating financial information on an issuer (Matador), Non-Guarantor Subsidiaries, Guarantor Subsidiaries and consolidated basis (in thousands). Elimination entries are necessary to combine the entities. This financial information is presented in accordance with the requirements of Rule 3-10 of Regulation S-X. The following financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantor Subsidiaries operated as independent entities.
Condensed Consolidating Balance Sheet
March 31, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
389,913

 
$
2,762

 
$

 
$
(392,675
)
 
$

Other current assets
 
1,850

 
15,153

 
292,973

 

 
309,976

Net property and equipment
 
4

 
124,974

 
1,248,237

 

 
1,373,215

Investment in subsidiaries
 
1,052,474

 

 
65,812

 
(1,118,286
)
 

Other long-term assets
 

 

 
3,202

 

 
3,202

Total assets
 
$
1,444,241

 
$
142,889

 
$
1,610,224

 
$
(1,510,961
)
 
$
1,686,393

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$

 
$

 
$
392,675

 
$
(392,675
)
 
$

Other current liabilities
 
18,008

 
13,272

 
136,025

 

 
167,305

Senior unsecured notes payable
 
573,968

 

 

 

 
573,968

Other long-term liabilities
 

 
574

 
29,050

 

 
29,624

Total equity attributable to Matador Resources Company
 
852,265

 
65,812

 
1,052,474

 
(1,118,286
)
 
852,265

Non-controlling interest in subsidiaries
 

 
63,231

 

 

 
63,231

Total liabilities and equity
 
$
1,444,241

 
$
142,889

 
$
1,610,224

 
$
(1,510,961
)
 
$
1,686,393

Condensed Consolidating Balance Sheet
December 31, 2016
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
316,791

 
$
3,571

 
$
12,091

 
$
(332,453
)
 
$

Other current assets
 
101,102

 
4,242

 
173,838

 

 
279,182

Net property and equipment
 
33

 
113,107

 
1,071,385

 

 
1,184,525

Investment in subsidiaries
 
856,762

 

 
90,275

 
(947,037
)
 

Other long-term assets
 

 

 
958

 

 
958

Total assets
 
$
1,274,688

 
$
120,920

 
$
1,348,547

 
$
(1,279,490
)
 
$
1,464,665

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$

 
$
12,091

 
$
320,362

 
$
(332,453
)
 
$

Other current liabilities
 
9,265

 
16,632

 
143,608

 

 
169,505

Senior unsecured notes payable
 
573,924

 

 

 

 
573,924

Other long-term liabilities
 
1,374

 
602

 
27,815

 

 
29,791

Total equity attributable to Matador Resources Company
 
690,125

 
90,275

 
856,762

 
(947,037
)
 
690,125

Non-controlling interest in subsidiaries
 

 
1,320

 

 

 
1,320

Total liabilities and equity
 
$
1,274,688

 
$
120,920

 
$
1,348,547

 
$
(1,279,490
)
 
$
1,464,665




11

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 5 - DEBT - Continued

Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
9,663

 
$
132,648

 
$
(7,497
)
 
$
134,814

Total expenses
 
1,260

 
3,868

 
82,905

 
(7,497
)
 
80,536

Operating (loss) income
 
(1,260
)
 
5,795

 
49,743

 

 
54,278

Net gain on asset sales and inventory impairment
 

 

 
7

 

 
7

Interest expense
 
(8,455
)
 

 

 

 
(8,455
)
Other income
 
27

 

 
43

 

 
70

Earnings in subsidiaries
 
53,672

 

 
3,825

 
(57,497
)
 

Income before income taxes
 
43,984

 
5,795

 
53,618

 
(57,497
)
 
45,900

Total income tax provision (benefit)
 

 
54

 
(54
)
 

 

Net income attributable to non-controlling interest in subsidiaries
 

 
(1,916
)
 

 

 
(1,916
)
Net income attributable to Matador Resources Company shareholders
 
$
43,984

 
$
3,825

 
$
53,672

 
$
(57,497
)
 
$
43,984

Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2016
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
1,317

 
$
44,047

 
$
(741
)
 
$
44,623

Total expenses
 
1,935

 
1,133

 
143,925

 
(741
)
 
146,252

Operating (loss) income
 
(1,935
)
 
184

 
(99,878
)
 

 
(101,629
)
Net gain on asset sales and inventory impairment
 

 

 
1,065

 

 
1,065

Interest expense
 
(6,875
)
 

 
(322
)
 

 
(7,197
)
Other income
 

 

 
94

 

 
94

(Loss) earnings in subsidiaries
 
(98,851
)
 

 
190

 
98,661

 

(Loss) income before income taxes
 
(107,661
)
 
184

 
(98,851
)
 
98,661

 
(107,667
)
Total income tax (benefit) provision
 
(7
)
 
7

 

 

 

Net loss attributable to non-controlling interest in subsidiaries
 

 
13

 

 

 
13

Net (loss) income attributable to Matador Resources Company shareholders
 
$
(107,654
)
 
$
190

 
$
(98,851
)
 
$
98,661

 
$
(107,654
)

12

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 5 - DEBT - Continued

Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(99,235
)
 
$
(1,064
)
 
$
161,608

 
$

 
$
61,309

Net cash provided by (used in) investing activities
 
29

 
(32,950
)
 
(63,359
)
 
(142,040
)
 
(238,320
)
Net cash provided by financing activities
 

 
31,707

 
85

 
142,040

 
173,832

(Decrease) increase in cash
 
(99,206
)
 
(2,307
)
 
98,334

 

 
(3,179
)
Cash at beginning of period
 
99,795

 
2,307

 
110,782

 

 
212,884

Cash at end of period
 
$
589

 
$

 
$
209,116

 
$

 
$
209,705


Condensed Consolidating Statement of Cash Flows
For the Three Months Ended March 31, 2016
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(5,663
)
 
$
4,294

 
$
19,727

 
$

 
$
18,358

Net cash used in investing activities
 
(109,810
)
 
(26,482
)
 
(53,675
)
 
132,035

 
(57,932
)
Net cash provided by financing activities
 
141,736

 
22,225

 
109,245

 
(132,035
)
 
141,171

Increase in cash
 
26,263

 
37

 
75,297

 

 
101,597

Cash at beginning of period
 
80

 
186

 
16,466

 

 
16,732

Cash at end of period
 
$
26,343

 
$
223

 
$
91,763

 
$

 
$
118,329


NOTE 6 - INCOME TAXES
The Company’s deferred tax assets exceed its deferred tax liabilities due to the deferred tax assets generated by the full-cost ceiling impairment charges recorded in prior periods; as a result, the Company established a valuation allowance against most of the deferred tax assets beginning in the third quarter of 2015. The Company retained a full valuation allowance at March 31, 2017 due to uncertainties regarding the future realization of its deferred tax assets. The valuation allowance will continue to be recognized until the realization of future deferred tax benefits are more likely than not to be utilized.
NOTE 7 - STOCK-BASED COMPENSATION
In February 2017, the Company granted awards of 228,174 shares of restricted stock and options to purchase 590,128 shares of the Company’s common stock at an exercise price of $27.26 per share to certain of its employees. The fair value of these awards was approximately $12.4 million. All of these awards vest ratably over three years. In February 2017, the Company also granted awards of 174,561 shares of restricted stock and options to purchase 444,491 shares of the Company’s common stock at an exercise price of $26.86 per share to certain of its employees. The fair value of these awards was approximately $9.3 million. All of these awards vest ratably over three years.

13

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS


At March 31, 2017, the Company had various costless collar contracts open and in place to mitigate its exposure to oil and natural gas price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and price floor and ceiling. Each contract is set to expire at varying times during 2017 and 2018.
The following is a summary of the Company’s open costless collar contracts for oil and natural gas at March 31, 2017.
Commodity
Calculation Period
 
Notional Quantity (Bbl or MMBtu)
 
Weighted Average Price Floor ($/Bbl or
$/MMBtu)
 
Weighted Average Price Ceiling ($/Bbl or
$/MMBtu)
 
Fair Value of Asset (Liability) (thousands)
Oil
04/01/2017 - 12/31/2017
 
3,690,000

 
$
45.17

 
$
55.75

 
$
(3,493
)
Oil
01/01/2018 - 12/31/2018
 
1,920,000

 
$
43.91

 
$
63.44

 
2,205

Natural Gas
04/01/2017 - 12/31/2017
 
18,810,000

 
$
2.51

 
$
3.60

 
(2,502
)
Natural Gas
01/01/2018 - 12/31/2018
 
13,200,000

 
$
2.53

 
$
3.68

 
(533
)
Total open derivative financial instruments
 
 
 
 
 
 
 
$
(4,323
)
These derivative financial instruments are subject to master netting arrangements; all but one counterparty allow for cross-commodity master netting provided the settlement dates for the commodities are the same. The Company does not present different types of commodities with the same counterparty on a net basis in its interim unaudited condensed consolidated balance sheets.
 The following table presents the gross asset and liability fair values of the Company’s commodity price derivative financial instruments and the location of these balances in the interim unaudited condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016 (in thousands).
Derivative Instruments
Gross
amounts
recognized
 
Gross amounts
netted in the condensed
consolidated
balance sheets
 
Net amounts presented in the condensed
consolidated
balance sheets
March 31, 2017
 
 
 
 
 
   Current assets
$
5,399

 
$
(3,684
)
 
$
1,715

   Other assets
6,137

 
(3,854
)
 
2,283

   Current liabilities
(12,005
)
 
3,684

 
(8,321
)
   Other liabilities
(3,854
)
 
3,854

 

      Total
$
(4,323
)
 
$

 
$
(4,323
)
December 31, 2016
 
 
 
 
 
   Current liabilities
$
(24,203
)
 
$

 
$
(24,203
)
   Other liabilities
(751
)
 

 
(751
)
      Total
$
(24,954
)
 
$

 
$
(24,954
)

14

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The following table summarizes the location and aggregate fair value of all derivative financial instruments recorded in the interim unaudited condensed consolidated statements of operations for the periods presented (in thousands). These derivative financial instruments are not designated as hedging instruments.
 
 
 
Three Months Ended 
 March 31,
Type of Instrument
Location in Condensed Consolidated Statement of Operations
 
2017
 
2016
Derivative Instrument
 
 
 
 
 
Oil
Revenues: Realized (loss) gain on derivatives
 
$
(1,635
)
 
$
5,464

Natural Gas
Revenues: Realized (loss) gain on derivatives
 
(584
)
 
1,599

Realized (loss) gain on derivatives
 
(2,219
)
 
7,063

Oil
Revenues: Unrealized gain (loss) on derivatives
 
17,780

 
(7,654
)
Natural Gas
Revenues: Unrealized gain on derivatives
 
2,851

 
815

Unrealized gain (loss) on derivatives
 
20,631

 
(6,839
)
Total
 
 
$
18,412

 
$
224

NOTE 9 - FAIR VALUE MEASUREMENTS
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Fair value measurements are classified and disclosed in one of the following categories.
Level 1
Unadjusted quoted prices for identical, unrestricted assets or liabilities in active markets.
Level 2
Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that are valued with industry standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.
Level 3
Unobservable inputs that are not corroborated by market data that reflect a company’s own market assumptions.
Financial and non-financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following tables summarize the valuation of the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis in accordance with the classifications provided above as of March 31, 2017 and December 31, 2016 (in thousands). 
 
Fair Value Measurements at
March 31, 2017 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Oil and natural gas derivatives
$

 
$
3,998

 
$

 
$
3,998

Oil and natural gas derivatives
$

 
$
(8,321
)
 
$

 
$
(8,321
)
Total
$

 
$
(4,323
)
 
$

 
$
(4,323
)

15

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 9 - FAIR VALUE MEASUREMENTS - Continued

 
Fair Value Measurements at
December 31, 2016 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
   Oil and natural gas derivatives
$

 
$
(24,954
)
 
$

 
$
(24,954
)
           Total
$

 
$
(24,954
)
 
$

 
$
(24,954
)
Additional disclosures related to derivative financial instruments are provided in Note 8.
Other Fair Value Measurements
At March 31, 2017 and December 31, 2016, the carrying values reported on the interim unaudited condensed consolidated balance sheets for accounts receivable, prepaid expenses, accounts payable, accrued liabilities, royalties payable, amounts due to affiliates, advances from joint interest owners, amounts due to joint ventures and other current liabilities approximated their fair values due to their short-term maturities.
At March 31, 2017 and December 31, 2016, the fair value of the Notes was $598.1 million and $605.2 million, respectively, based on quoted market prices, which represent Level 1 inputs in the fair value hierarchy.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Processing, Transportation and Salt Water Disposal Commitments
Eagle Ford
Effective September 1, 2012, the Company entered into a firm five-year natural gas processing and transportation agreement whereby the Company committed to transport the anticipated natural gas production from a significant portion of its Eagle Ford acreage in South Texas through the counterparty’s system for processing at the counterparty’s facilities. The agreement also includes firm transportation of the natural gas liquids extracted at the counterparty’s processing plant downstream for fractionation. After processing, the residue natural gas is purchased by the counterparty at the tailgate of its processing plant and further transported under its natural gas transportation agreements. The arrangement contains fixed processing and liquids transportation and fractionation fees, and the revenue the Company receives varies with the quality of natural gas transported to the processing facilities and the contract period.
Under this agreement, if the Company does not meet 80% of the maximum thermal quantity transportation and processing commitments in a contract year, it will be required to pay a deficiency fee per MMBtu of natural gas deficiency. Any quantity in excess of the maximum MMBtu delivered in a contract year can be carried over to the next contract year for purposes of calculating the natural gas deficiency. During certain prior periods, the Company had an immaterial natural gas deficiency, and the counterparty to this agreement waived the deficiency fee. The Company paid $0.5 million and $0.9 million in processing and transportation fees under this agreement during the three months ended March 31, 2017 and 2016, respectively. The future undiscounted minimum payment under this agreement as of March 31, 2017 was $0.6 million.
Delaware Basin — Loving County, Texas Natural Gas Processing
In late 2015, the Company entered into a 15-year, fixed-fee natural gas gathering and processing agreement whereby the Company committed to deliver the anticipated natural gas production from a significant portion of its Loving County, Texas acreage in West Texas through the counterparty’s gathering system for processing at the counterparty’s facilities. Under this agreement, if the Company does not meet the volume commitment for transportation and processing at the facilities in a contract year, it will be required to pay a deficiency fee per MMBtu of natural gas deficiency. At the end of each year of the agreement, the Company can elect to have the previous year’s actual transportation and processing volumes be the new minimum commitment for each of the remaining years of the contract. As such, the Company has the ability to unilaterally reduce the gathering and processing commitment if the Company’s production in the Loving County area is less than the Company’s currently projected production. If the Company ceased operations in this area at March 31, 2017, the total deficiency fee required to be paid would be approximately $11.7 million. In addition, if the Company elects to reduce the gathering and processing commitment in any year, the Company has the ability to elect to increase the committed volumes in any future year to the originally agreed gathering and processing commitment. Any quantity in excess of the volume commitment delivered in a contract year can be carried over to the next contract year for purposes of calculating the natural gas deficiency. The Company paid approximately $3.2 million and $2.0 million in natural gas processing and gathering fees under

16

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued

this agreement during the three months ended March 31, 2017 and 2016, respectively. The Company can elect to either sell the residue gas to the counterparty at the tailgate of its processing plants or have the counterparty deliver to the Company the residue gas in-kind to be sold to third parties downstream of the plants.
Delaware Basin — San Mateo
In connection with the Joint Venture, effective as of February 1, 2017, the Company dedicated its current and future leasehold interests in the Rustler Breaks and Wolf asset areas pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements. In addition, the Company dedicated its current and future leasehold interests in the Rustler Breaks asset area pursuant to a 15-year, fixed-fee natural gas processing agreement (collectively with the gathering and salt water disposal agreements, the “Operational Agreements”). The Joint Venture will provide the Company with firm service under each of the Operational Agreements in exchange for certain minimum volume commitments. The minimum contractual obligation under the Operational Agreements at March 31, 2017 was approximately $267.3 million.
On May 2, 2017, a subsidiary of San Mateo entered into an agreement with third parties for the engineering, procurement, construction and installation of an expansion of the Black River Processing Plant. The expansion is expected to be placed into service in 2018. Total commitments under this agreement are $40.9 million. During the three months ended March 31, 2017, the subsidiary of San Mateo made a deposit of $2.0 million to be credited against its obligations under this agreement. As of May 2, 2017, the remaining obligations under this agreement were $38.9 million, which are expected to be incurred within the next year.
Other Commitments
The Company does not own or operate its own drilling rigs, but instead enters into contracts with third parties for such drilling rigs. These contracts establish daily rates for the drilling rigs and the term of the Company’s commitment for the drilling services to be provided, which have typically been for two years or less. The Company would incur a termination obligation if the Company elected to terminate a contract and if the drilling contractor were unable to secure replacement work for the contracted drilling rigs or if the drilling contractor were unable to secure replacement work for the contracted drilling rigs at the same daily rates being charged to the Company prior to the end of their respective contract terms. The Company’s undiscounted minimum outstanding aggregate termination obligations under its drilling rig contracts were approximately $44.6 million at March 31, 2017.
At March 31, 2017, the Company had outstanding commitments to participate in the drilling and completion of various non-operated wells. If all of these wells are drilled and completed as proposed, the Company’s minimum outstanding aggregate commitments for its participation in these non-operated wells were approximately $20.8 million at March 31, 2017. The Company expects these costs to be incurred within the next year.
Legal Proceedings
The Company is a party to several lawsuits encountered in the ordinary course of its business. While the ultimate outcome and impact to the Company cannot be predicted with certainty, in the opinion of management, it is remote that these lawsuits will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

17

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 11 - SUPPLEMENTAL DISCLOSURES


Accrued Liabilities
The following table summarizes the Company’s current accrued liabilities at March 31, 2017 and December 31, 2016 (in thousands).
 
March 31,
2017
 
December 31, 2016
Accrued evaluated and unproved and unevaluated property costs
$
58,299

 
$
54,273

Accrued support equipment and facilities costs
10,939

 
15,139

Accrued lease operating expenses
11,091

 
16,009

Accrued interest on debt
15,688

 
6,541

Accrued asset retirement obligations
699

 
915

Accrued partners’ share of joint interest charges
9,635

 
5,572

Other
5,141

 
3,011

Total accrued liabilities
$
111,492

 
$
101,460

Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the three months ended March 31, 2017 and 2016 (in thousands).
 
Three Months Ended 
 March 31,
 
2017
 
2016
Increase in asset retirement obligations related to mineral properties
$
1,434

 
$
1,606

Increase (decrease) in asset retirement obligations related to support equipment and facilities
$
(194
)
 
$
(65
)
Increase (decrease) in liabilities for oil and natural gas properties capital expenditures
$
2,820

 
$
(11,622
)
Decrease in liabilities for support equipment and facilities
$
(6,329
)
 
$
(5,000
)
Issuance of restricted stock units for Board and advisor services
$

 
$
138

Stock-based compensation expense recognized as liability
$
(152
)
 
$
(98
)
Increase (decrease) in liabilities for accrued cost to issue equity
$
(294
)
 
$
216

Transfer of inventory from oil and natural gas properties
$
31

 
$
64


18

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 12 - SEGMENT INFORMATION

The Company operates in two business segments: (i) exploration and production and (ii) midstream. The exploration and production segment is engaged in the acquisition, exploration and development of oil and natural gas properties and is currently focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company also operates in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. The midstream segment conducts midstream operations in support of the Company’s exploration, development and production operations and provides natural gas processing, natural gas, oil and salt water gathering services and salt water disposal services to third parties on a limited basis. As of February 17, 2017, substantially all of the Company’s midstream operations in the Rustler Breaks and Wolf asset areas in the Delaware Basin are conducted through San Mateo (see Note 3).
The following tables present selected financial information for the periods presented regarding the Company’s business segments on a stand-alone basis, corporate expenses that are not allocated to a segment and the consolidation and elimination entries necessary to arrive at the financial information for the Company on a consolidated basis (in thousands). On a consolidated basis, midstream services revenues consist primarily of those revenues from midstream operations related to third parties, including working interest owners in the Company’s operated wells. All midstream services revenues associated with Company-owned production are eliminated in consolidation. In evaluating the operating results of the exploration and production and midstream segments, the Company does not allocate certain expenses to the individual segments, including general and administrative expenses. Such expenses are reflected in the column labeled “Corporate.”
 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
114,165

 
$
682

 
$

 
$

 
$
114,847

Midstream services revenues

 
9,616

 

 
(8,061
)
 
1,555

Realized loss on derivatives
(2,219
)
 

 

 

 
(2,219
)
Unrealized gain on derivatives
20,631

 

 

 

 
20,631

Expenses(1)
68,339

 
4,503

 
15,755

 
(8,061
)
 
80,536

Operating income (loss)(2)
$
64,238

 
$
5,795

 
$
(15,755
)
 
$

 
$
54,278

Total assets
$
1,296,823

 
$
166,148

 
$
223,422

 
$

 
$
1,686,393

Capital expenditures(3)
$
208,373

 
$
12,880

 
$
1,464

 
$

 
$
222,717

_____________________
(1)
Includes depletion, depreciation, and amortization expenses of $32.5 million and $1.2 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.3 million.
(2)
Includes $1.9 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $4.7 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

19

Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
UNAUDITED - CONTINUED

NOTE 12 - SEGMENT INFORMATION - Continued


 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
43,809

 
$
117

 
$

 
$

 
$
43,926

Midstream services revenues

 
2,091

 

 
(1,618
)
 
473

Realized gain on derivatives
7,063

 

 

 

 
7,063

Unrealized gain on derivatives
(6,839
)
 

 

 

 
(6,839
)
Expenses(1)
133,027

 
1,534

 
13,309

 
(1,618
)
 
146,252

Operating (loss) income(2)
$
(88,994
)
 
$
674

 
$
(13,309
)
 
$

 
$
(101,629
)
Total assets
$
942,206

 
$
96,691

 
$
125,255

 
$

 
$
1,164,152

Capital expenditures
$
64,807

 
$
21,058

 
$
1,254

 
$

 
$
87,119

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $28.3 million and $0.5 million for the exploration and production and midstream segments, respectively, and full-cost ceiling impairment expenses of $80.5 million for the exploration and production segment. Also includes corporate depletion, depreciation and amortization expenses of $0.1 million.
(2)
Includes $13,000 in net loss attributable to non-controlling interest in subsidiaries related to the midstream segment.

20


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our interim unaudited condensed consolidated financial statements and related notes thereto contained herein and in our Annual Report on Form 10-K for the year ended December 31, 2016 (the “Annual Report”) filed with the Securities and Exchange Commission (“SEC”), along with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Annual Report. The Annual Report is accessible on the SEC’s website at www.sec.gov and on our website at www.matadorresources.com. Our discussion and analysis includes forward-looking information that involves risks and uncertainties and should be read in conjunction with the “Risk Factors” section of the Annual Report and the section entitled “Cautionary Note Regarding Forward-Looking Statements” below for information about the risks and uncertainties that could cause our actual results to be materially different than our forward-looking statements.
In this Quarterly Report on Form 10-Q (the “Quarterly Report”), references to “we,” “our” or the “Company” refer to Matador Resources Company and its subsidiaries as a whole and references to “Matador” refer solely to Matador Resources Company.
For certain oil and natural gas terms used in this Quarterly Report, please see the “Glossary of Oil and Natural Gas Terms” included with the Annual Report.
Cautionary Note Regarding Forward-Looking Statements
Certain statements in this Quarterly Report constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Additionally, forward-looking statements may be made orally or in press releases, conferences, reports, on our website or otherwise, in the future by us or on our behalf. Such statements are generally identifiable by the terminology used such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “forecasted,” “hypothetical,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “project,” “should” or other similar words, although not all forward-looking statements contain such identifying words.
By their very nature, forward-looking statements require us to make assumptions that may not materialize or that may not be accurate. Forward-looking statements are subject to known and unknown risks and uncertainties and other factors that may cause actual results, levels of activity and achievements to differ materially from those expressed or implied by such statements. Such factors include, among others: general economic conditions, changes in oil, natural gas and natural gas liquids prices and the demand for oil, natural gas and natural gas liquids, the success of our drilling program, the timing of planned capital expenditures, the sufficiency of our cash flow from operations together with available borrowing capacity under our credit agreement, uncertainties in estimating proved reserves and forecasting production results, operational factors affecting the commencement or maintenance of producing wells, the condition of the capital markets generally, as well as our ability to access them, the proximity to our properties and capacity of transportation facilities, availability of acquisitions, our ability to integrate acquisitions with our business, weather and environmental conditions, uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business, and the other factors discussed below and elsewhere in this Quarterly Report and in other documents that we file with or furnish to the United States Securities and Exchange Commission, or the SEC, all of which are difficult to predict. Forward-looking statements may include statements about:
our business strategy;
our reserves;
our technology;
our cash flows and liquidity;
our financial strategy, budget, projections and operating results;
our oil and natural gas realized prices;
the timing and amount of future production of oil and natural gas;
the availability of drilling and production equipment;
the availability of oil field labor;
the amount, nature and timing of capital expenditures, including future exploration and development costs;
the availability and terms of capital;
our drilling of wells;
our ability to negotiate and consummate acquisition and divestiture opportunities;
government regulation and taxation of the oil and natural gas industry;
our marketing of oil and natural gas;
our exploitation projects or property acquisitions;
the integration of acquisitions with our business;

21


our ability and the ability of our midstream joint venture to construct and operate midstream facilities, including the expansion of our Black River cryogenic natural gas processing plant and the drilling of additional salt water disposal wells;
our costs of exploiting and developing our properties and conducting other operations;
general economic conditions;
competition in the oil and natural gas industry, including in both the exploration and production and midstream segments;
the effectiveness of our risk management and hedging activities;
environmental liabilities;
counterparty credit risk;
developments in oil-producing and natural gas-producing countries;
our future operating results;
estimated future reserves and the present value thereof; and
our plans, objectives, expectations and intentions contained in this Quarterly Report or in our other filings with the SEC that are not historical.
Although we believe that the expectations conveyed by the forward-looking statements in this Quarterly Report are reasonable based on information available to us on the date hereof, no assurances can be given as to future results, levels of activity, achievements or financial condition.
You should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors. The foregoing statements are not exclusive and further information concerning us, including factors that potentially could materially affect our financial results, may emerge from time to time. We do not intend to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements, except as required by law, including the securities laws of the United States and the rules and regulations of the SEC.
Overview
We are an independent energy company founded in July 2003 and engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States, with an emphasis on oil and natural gas shale and other unconventional plays. Our current operations are focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. We also operate in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. Additionally, we conduct midstream operations, primarily through our midstream joint venture, San Mateo Midstream, LLC (“San Mateo” or the “Joint Venture”), in support of our exploration, development and production operations and provide natural gas processing, natural gas, oil and salt water gathering services and salt water disposal services to third parties on a limited basis.
First Quarter Highlights
For the three months ended March 31, 2017, our total oil equivalent production was 2.97 million BOE, and our average daily oil equivalent production was 32,999 BOE per day, of which 18,323 Bbl per day, or 56%, was oil and 88.1 MMcf per day, or 44%, was natural gas. Our oil production of 1.65 million Bbl for the three months ended March 31, 2017 increased 58% year-over-year from 1.04 million Bbl for the three months ended March 31, 2016. Our natural gas production of 7.9 Bcf for the three months ended March 31, 2017 increased 17% year-over-year from 6.8 Bcf for the three months ended March 31, 2016.
During the first quarter of 2017, our oil and natural gas revenues were $114.8 million, an increase of 161% from oil and natural gas revenues of $43.9 million during the first quarter of 2016. The increase in our oil and natural gas revenues was due to (i) the 37% increase in our total oil equivalent production to 2.97 million BOE in the first quarter of 2017, as compared to 2.17 million BOE produced in the first quarter of 2016 and (ii) the increase in weighted average oil and natural gas prices to $50.72 per Bbl and $3.94 per Mcf, respectively, realized in the first quarter of 2017, as compared to weighted average oil and natural gas prices of $28.89 per Bbl and $2.04 per Mcf, respectively, realized in the first quarter of 2016. The increase in oil and natural gas production was primarily a result of our ongoing delineation and development drilling in the Delaware Basin, which offset declining production in the Eagle Ford and Haynesville shales where we have significantly reduced our activity since 2014 and 2015.
For the first quarter of 2017, we reported net income attributable to Matador Resources Company shareholders of approximately $44.0 million, or $0.44 per diluted common share on a GAAP basis, as compared to a net loss attributable to Matador Resources Company shareholders of $107.7 million, or $1.26 per diluted common share, for the first quarter of 2016.

22


For the first quarter of 2017, our Adjusted EBITDA attributable to Matador Resources Company shareholders, a non-GAAP financial measure, was $70.0 million, as compared to Adjusted EBITDA attributable to Matador Resources Company shareholders of $17.2 million during the first quarter of 2016. For a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to our net income (loss) and net cash provided by operating activities, see “— Liquidity and Capital Resources — Non-GAAP Financial Measures.” For more information regarding our financial results for the first quarter of 2017, see “— Results of Operations” below.
During the first quarter of 2017, we operated four drilling rigs in the Delaware Basin. During the first quarter and at May 3, 2017, one of these rigs was drilling in the Wolf/Jackson Trust asset areas in Loving County, Texas, two were drilling in the Rustler Breaks asset area in Eddy County, New Mexico and one was drilling in the Ranger/Arrowhead and Twin Lakes asset areas in Eddy and Lea Counties, New Mexico. We added a fifth drilling rig in the Delaware Basin in late April 2017, and at May 3, 2017, this rig was drilling in the Rustler Breaks asset area.
We began producing oil and natural gas from a total of 14 gross (12.5 net) wells in the Delaware Basin during the first quarter of 2017, including 13 gross (12.4 net) operated and one gross (0.1 net) non-operated horizontal wells. In the Rustler Breaks asset area, we began producing oil and natural gas from a total of eight gross (7.0 net) wells during the first quarter of 2017, including seven gross (6.9 net) operated and one gross (0.1 net) non-operated wells. Of the seven gross operated wells in the Rustler Breaks asset area, two were Wolfcamp A-XY completions, three were lower Wolfcamp B (Blair Shale) completions, one was a Wolfcamp B-Middle completion and one was a Second Bone Spring completion. In the Ranger asset area, we began producing oil and natural gas from a total of four gross (3.9 net) operated wells during the first quarter of 2017. Of the four gross operated wells in the Ranger asset area, one was a Wolfcamp A-Lower completion, two were Second Bone Spring completions and one was a Third Bone Spring completion. In addition, we began producing oil and natural gas from two gross (1.5 net) operated wells in the Wolf/Jackson Trust asset areas during the first quarter of 2017, including one Wolfcamp A-Lower completion and one Second Bone Spring completion.
As a result of our ongoing drilling and completion operations in these asset areas, our Delaware Basin production has continued to increase over the past twelve months. Our total Delaware Basin production for the first quarter of 2017 was 24,535 BOE per day, consisting of 15,685 Bbl of oil per day and 53.1 MMcf of natural gas per day, a 2.5-fold increase from production of 9,958 BOE per day, consisting of 7,172 Bbl of oil per day and 16.7 MMcf of natural gas per day, in the first quarter of 2016. The Delaware Basin contributed approximately 86% of our daily oil production and approximately 60% of our daily natural gas production in the first quarter of 2017, as compared to approximately 63% of our daily oil production and approximately 22% of our daily natural gas production in the first quarter of 2016.
At December 31, 2016, we held approximately 163,700 gross (94,300 net) acres in the Permian Basin in Southeast New Mexico and West Texas, primarily in the Delaware Basin in Lea and Eddy Counties, New Mexico and Loving County, Texas. Between January 1, 2017 and May 3, 2017, we acquired approximately 15,900 gross (9,500 net) acres and approximately 1,000 BOE per day of related production from various lessors, mineral owners and other operators, mostly in and around our existing acreage in the Delaware Basin. Some of this acreage, and a portion of the production, included properties identified at the time of our December 2016 equity and notes offerings. These transactions were pending at the time of those offerings and closed subsequent to December 31, 2016, which contributed to bringing our total Permian Basin acreage position at May 3, 2017 to approximately 178,600 gross (102,300 net) acres, almost all of which was located in the Delaware Basin. We have incurred capital expenditures of approximately $121 million since January 1, 2017 to acquire the acreage and related production. We plan to continue our leasing and acquisition efforts in the Delaware Basin during the remainder of 2017 and may also consider acquiring acreage in the Eagle Ford and Haynesville shales as strategic opportunities are identified.
Midstream Joint Venture
On February 17, 2017, we announced the formation of San Mateo, a strategic joint venture with a subsidiary of Five Point Capital Partners LLC (“Five Point”). The midstream assets contributed to San Mateo include (i) the Black River cryogenic natural gas processing plant in the Rustler Breaks asset area (the “Black River Processing Plant”); (ii) one salt water disposal well and a related commercial salt water disposal facility in the Rustler Breaks asset area; (iii) three salt water disposal wells and related commercial salt water disposal facilities in the Wolf asset area; and (iv) substantially all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas (collectively, the “Delaware Midstream Assets”). We received $171.5 million in connection with the formation of the Joint Venture and may earn up to an additional $73.5 million in performance incentives over the next five years. We continue to operate the Delaware Midstream Assets and retain operational control of the Joint Venture. We and Five Point own 51% and 49% of the Joint Venture, respectively. San Mateo will continue to provide firm capacity service to us at market rates, while also being a midstream service provider to third parties in and around our Wolf and Rustler Breaks asset areas.

23


2017 Capital Expenditure Budget
On March 23, 2017, we adjusted our 2017 capital expenditure budget from between $426 and $454 million to between $456 and $484 million (excluding capital expenditures related to acreage and mineral acquisitions), which reflects our decision to drill and complete a five-well operated program in the Eagle Ford shale in South Texas in order to maintain the leasehold associated with this drilling program and to enhance the value of our Eagle Ford asset. At May 3, 2017, we had begun this five-well Eagle Ford program and anticipate that all five wells will be completed and placed on production late in the second quarter or early in the third quarter of 2017. In addition to drilling these five Eagle Ford wells, our updated 2017 capital expenditure budget includes four drilling rigs operating in the Delaware Basin through late April 2017, when a fifth drilling rig was added in the Delaware Basin. During 2017, we expect to spend $400 to $420 million for drilling, completions and infrastructure and $56 to $64 million for midstream capital expenditures. We expect to direct 93% of our estimated capital expenditure budget (excluding capital expenditures related to acreage and mineral acquisitions) to drilling and completion and midstream activities in the Delaware Basin. For more information regarding our 2017 capital expenditure budget, see “— Liquidity and Capital Resources” below.
Estimated Proved Reserves
The following table sets forth our estimated total proved oil and natural gas reserves at March 31, 2017, December 31, 2016 and March 31, 2016. Our production and proved reserves are reported in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Where we produce liquids-rich natural gas, such as in the Delaware Basin and the Eagle Ford shale, the economic value of the natural gas liquids associated with the natural gas is included in the estimated wellhead natural gas price on those properties where the natural gas liquids are extracted and sold. The reserves estimates were based on evaluations prepared by our engineering staff in accordance with the SEC’s rules for oil and natural gas reserves reporting and do not include any unproved reserves classified as probable or possible that might exist on our properties. In addition, the reserves estimates at December 31, 2016 and March 31, 2016 were audited by an independent reservoir engineering firm, Netherland, Sewell & Associates, Inc.
 
March 31, 
 2017
 
December 31,
2016
 
March 31, 
 2016
Estimated Proved Reserves Data: (1) (2)
 
 
 
 
 
Estimated proved reserves:
 
 
 
 
 
Oil (MBbl)(3)
62,922

 
56,977

 
50,718

Natural Gas (Bcf)(4)
325.3

 
292.6

 
236.7

Total (MBOE)(5)
117,134

 
105,752

 
90,168

Estimated proved developed reserves:
 
 
 
 
 
Oil (MBbl)(3)
26,243

 
22,604

 
16,818

Natural Gas (Bcf)(4)
145.4

 
126.8

 
96.9

Total (MBOE)(5)
50,478

 
43,731

 
32,968

Percent developed
43.1
%
 
41.4
%
 
36.6
%
Estimated proved undeveloped reserves:
 
 
 
 
 
Oil (MBbl)(3)
36,679

 
34,373

 
33,900

Natural Gas (Bcf)(4)
179.9

 
165.9

 
139.8

Total (MBOE)(5)
66,656

 
62,021

 
57,200

Standardized Measure(6) (in millions)
$
810.2

 
$
575.0

 
$
495.6

PV-10(7) (in millions)
$
857.2

 
$
581.5

 
$
501.9

_______________
(1)
Numbers in table may not total due to rounding.
(2)
Our estimated proved reserves, Standardized Measure and PV-10 were determined using index prices for oil and natural gas, without giving effect to derivative transactions, and were held constant throughout the life of the properties. The unweighted arithmetic averages of the first-day-of-the-month prices for the period from April 2016 through March 2017 were $44.10 per Bbl for oil and $2.73 per MMBtu for natural gas, for the period from January 2016 through December 2016 were $39.25 per Bbl for oil and $2.48 per MMBtu for natural gas and for the period from April 2015 through March 2016 were $42.77 per Bbl for oil and $2.40 per MMBtu for natural gas. These prices were adjusted by property for quality, energy content, regional price differentials, transportation fees, marketing deductions and other factors affecting the price received at the wellhead. We report our proved reserves in two streams, oil and natural gas, and the economic value of the natural gas liquids associated with the natural gas is included in the estimated wellhead natural gas price on those properties where the natural gas liquids are extracted and sold.
(3)
One thousand barrels of oil.

24


(4)
One billion cubic feet of natural gas.
(5)
One thousand barrels of oil equivalent, estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas.
(6)
Standardized Measure represents the present value of estimated future net cash flows from proved reserves, less estimated future development, production, plugging and abandonment costs and income tax expenses, discounted at 10% per annum to reflect the timing of future cash flows. Standardized Measure is not an estimate of the fair market value of our properties.
(7)
PV-10 is a non-GAAP financial measure and generally differs from Standardized Measure, the most directly comparable GAAP financial measure, because it does not include the effects of income taxes on future net revenues. PV-10 is not an estimate of the fair market value of our properties. We and others in the industry use PV-10 as a measure to compare the relative size and value of proved reserves held by companies and of the potential return on investment related to the companies’ properties without regard to the specific tax characteristics of such entities. Our PV-10 at March 31, 2017, December 31, 2016 and March 31, 2016 may be reconciled to the Standardized Measure of discounted future net cash flows at such dates by reducing our PV-10 by the discounted future income taxes associated with such reserves. The discounted future income taxes at March 31, 2017, December 31, 2016 and March 31, 2016 were, in millions, $47.0, $6.5 and $6.3, respectively.
At March 31, 2017, our estimated total proved oil and natural gas reserves were 117.1 million BOE, including 62.9 million Bbl of oil and 325.3 Bcf of natural gas, with a Standardized Measure of $810.2 million and a PV-10, a non-GAAP financial measure, of $857.2 million. At December 31, 2016, our estimated total proved oil and natural gas reserves were 105.8 million BOE, including 57.0 million Bbl of oil and 292.6 Bcf of natural gas, and at March 31, 2016, our estimated total proved oil and natural gas reserves were 90.2 million BOE, including 50.7 million Bbl of oil and 236.7 Bcf of natural gas. Our proved oil reserves of 62.9 million Bbl at March 31, 2017 increased 10%, as compared to 57.0 million Bbl at December 31, 2016, and increased 24%, as compared to 50.7 million Bbl at March 31, 2016. At March 31, 2017, approximately 43% of our total proved reserves were proved developed reserves, 54% of our total proved reserves were oil and 46% of our total proved reserves were natural gas.
As a result of our drilling, completion and delineation activities in Southeast New Mexico and West Texas since 2014, our Delaware Basin oil and natural gas reserves have become a more significant component of our total oil and natural gas reserves. Our estimated Delaware Basin proved oil and natural gas reserves have increased 52% from 59.6 million BOE at March 31, 2016, or 66% of our total proved oil and natural gas reserves, including 37.7 million Bbl of oil and 131.6 Bcf of natural gas, to 90.6 million BOE, or 77% of our total proved oil and natural gas reserves, including 52.6 million Bbl of oil and 227.5 Bcf of natural gas, at March 31, 2017.
There have been no changes to the technology we used to establish reserves or to our internal control over the reserves estimation process from those set forth in the Annual Report.
Critical Accounting Policies
There have been no changes to our critical accounting policies and estimates from those set forth in the Annual Report.
Recent Accounting Pronouncements
See Note 2 to the interim unaudited condensed consolidated financial statements in this Quarterly Report for a summary of recent accounting pronouncements that we believe may have an impact on our financial statements upon adoption.

25


Results of Operations
Revenues
The following table summarizes our unaudited revenues and production data for the periods indicated:
 
Three Months Ended 
 March 31,
 
2017
 
2016
Operating Data:
 
 
 
Revenues (in thousands):(1)
 
 
 
Oil
$
83,636

 
$
30,157

Natural gas
31,211

 
13,769

Total oil and natural gas revenues
114,847

 
43,926

Third-party midstream services revenues(2)
1,555

 
473

Realized (loss) gain on derivatives
(2,219
)
 
7,063

Unrealized gain (loss) on derivatives
20,631

 
(6,839
)
Total revenues
$
134,814

 
$
44,623

Net Production Volumes:(1)
 
 
 
Oil (MBbl)(3)
1,649

 
1,044

Natural gas (Bcf)(4)
7.9

 
6.8

Total oil equivalent (MBOE)(5)
2,970

 
2,170

Average daily production (BOE/d)(6)
32,999

 
23,846

Average Sales Prices:
 
 
 
Oil, without realized derivatives (per Bbl)
$
50.72

 
$
28.89

Oil, with realized derivatives (per Bbl)
$
49.73

 
$
34.12

Natural gas, without realized derivatives (per Mcf)
$
3.94

 
$
2.04

Natural gas, with realized derivatives (per Mcf)
$
3.86

 
$
2.27

_________________
(1)
We report our production volumes in two streams: oil and natural gas, including both dry and liquids-rich natural gas. Revenues associated with natural gas liquids are included with our natural gas revenues.
(2)
Reclassified from other income for the three months ended March 31, 2016 due to the midstream segment becoming a reportable segment.
(3)
One thousand barrels of oil.
(4)
One billion cubic feet of natural gas.
(5)
One thousand barrels of oil equivalent, estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas.
(6)
Barrels of oil equivalent per day, estimated using a conversion ratio of one Bbl of oil per six Mcf of natural gas.
Three Months Ended March 31, 2017 as Compared to Three Months Ended March 31, 2016
Oil and natural gas revenues. Our oil and natural gas revenues increased $70.9 million to $114.8 million, or an increase of 161%, for the three months ended March 31, 2017, as compared to $43.9 million for the three months ended March 31, 2016. Our oil revenues increased $53.5 million, or 177%, to $83.6 million for the three months ended March 31, 2017, as compared to $30.2 million for the three months ended March 31, 2016. The increase in oil revenues resulted from (i) a higher weighted average oil price realized for the three months ended March 31, 2017 of $50.72 per Bbl, as compared to $28.89 per Bbl realized for the three months ended March 31, 2016 and (ii) the 58% increase in oil production to 1.65 million Bbl of oil for the three months ended March 31, 2017, or about 18,323 Bbl of oil per day, as compared to 1.04 million Bbl of oil, or about 11,473 Bbl of oil per day, for the three months ended March 31, 2016. The increase in oil production is primarily attributable to our ongoing delineation and development drilling activities in the Delaware Basin. Our natural gas revenues increased by $17.4 million, or 127%, to $31.2 million for the three months ended March 31, 2017, as compared to $13.8 million for the three months ended March 31, 2016. The increase in natural gas revenues resulted from (i) a higher weighted average natural gas price realized for the three months ended March 31, 2017 of $3.94 per Mcf, as compared to $2.04 per Mcf realized for the three months ended March 31, 2016 and (ii) the 17% increase in our natural gas production to 7.9 Bcf for the three months ended March 31, 2017, as compared to 6.8 Bcf for the three months ended March 31, 2016. The increase in natural gas production was primarily attributable to our ongoing delineation and development drilling activities in the Delaware Basin.

26


Third-party midstream services revenues. Our third-party midstream services revenues increased to $1.6 million, or an increase of more than three-fold, for the three months ended March 31, 2017, as compared to $0.5 million for the three months ended March 31, 2016. This increase was primarily attributable to a significant increase in natural gas gathering and processing revenues to approximately $1.1 million for the three months ended March 31, 2017, as compared to $0.3 million for the three months ended March 31, 2016, due to increased natural gas production in our Wolf asset area and to our natural gas gathering system and the Black River Processing Plant in the Rustler Breaks asset area being placed into service in the second half of 2016. The remaining increase was primarily attributable to salt water gathering and disposal revenues of $0.3 million for the three months ended March 31, 2017, as compared to $0.1 million for the three months ended March 31, 2016.
Realized loss on derivatives. Our realized net loss on derivatives was $2.2 million for the three months ended March 31, 2017, as compared to a realized net gain of $7.1 million for the three months ended March 31, 2016. We realized a net loss of $1.6 million and $0.6 million from our oil and natural gas derivative contracts, respectively, for the three months ended March 31, 2017, resulting from oil and natural gas prices that were above the ceiling prices of certain of our oil and natural gas costless collar contracts. We realized net gains of $5.5 million and $1.6 million from our oil and natural gas derivative contracts, respectively, for the three months ended March 31, 2016, resulting from oil and natural gas prices being below the floor prices of the majority of our oil and natural gas costless collar contracts. We realized an average loss of approximately $1.70 per Bbl hedged on all of our open oil costless collar contracts during the three months ended March 31, 2017, as compared to an average gain of $11.15 per Bbl hedged for the three months ended March 31, 2016. Our oil volumes hedged for the three months ended March 31, 2017 were also 96% higher as compared to the three months ended March 31, 2016. We realized an average loss of approximately $0.11 per MMBtu hedged on all of our open natural gas costless collar contracts during the three months ended March 31, 2017, as compared to an average gain of approximately $0.58 per MMBtu hedged on all of our open natural gas costless collar contracts for the three months ended March 31, 2016. Our total natural gas volumes hedged for the three months ended March 31, 2017 were also 94% higher than the total natural gas volumes hedged for the three months ended March 31, 2016.
Unrealized gain on derivatives. Our unrealized net gain on derivatives was $20.6 million for the three months ended March 31, 2017, as compared to an unrealized net loss of $6.8 million for the three months ended March 31, 2016. During the three months ended March 31, 2017, the net fair value of our open oil and natural gas derivative contracts changed to a net liability of approximately $4.3 million from a net liability of $25.0 million at December 31, 2016, resulting in an unrealized net gain on derivatives of $20.6 million for the three months ended March 31, 2017. During the three months ended March 31, 2017, the net fair value of our open oil and natural gas derivative contracts increased by $17.8 million and $2.9 million, respectively, due to the decrease in the underlying oil and natural gas futures prices at March 31, 2017, as compared to December 31, 2016, as well as realized losses from oil and natural gas derivatives contracts settled during the three months ended March 31, 2017.



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Expenses
The following table summarizes our unaudited operating expenses and other income (expense) for the periods indicated:
 
Three Months Ended 
 March 31,
(In thousands, except expenses per BOE)
2017
 
2016
Expenses:
 
 
 
Production taxes, transportation and processing
$
11,807

 
$
7,902

Lease operating (1)
15,758

 
14,511

Plant and other midstream services operating
2,341

 
1,027

Depletion, depreciation and amortization
33,992

 
28,923

Accretion of asset retirement obligations
300

 
264

Full-cost ceiling impairment

 
80,462

General and administrative
16,338

 
13,163

Total expenses
$
80,536

 
$
146,252

Operating income (loss)
$
54,278