10-Q 1 a2017630mtdr10q.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 June 30, 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 August 2, 2017, there were 100,437,295 shares of the registrant’s common stock, par value $0.01 per share, outstanding.



MATADOR RESOURCES COMPANY
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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)
 
June 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
131,466

 
$
212,884

Restricted cash
15,040

 
1,258

Accounts receivable
 
 
 
Oil and natural gas revenues
39,621

 
34,154

Joint interest billings
37,387

 
19,347

Other
7,303

 
5,167

Derivative instruments
7,067

 

Lease and well equipment inventory
2,957

 
3,045

Prepaid expenses and other assets
5,946

 
3,327

Total current assets
246,787

 
279,182

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
2,694,766

 
2,408,305

Unproved and unevaluated
567,009

 
479,736

Other property and equipment
204,299

 
160,795

Less accumulated depletion, depreciation and amortization
(1,939,570
)
 
(1,864,311
)
Net property and equipment
1,526,504

 
1,184,525

Other assets
 
 
 
Derivative instruments
2,992

 

         Other assets
793

 
958

Total other assets
3,785

 
958

Total assets
$
1,777,076

 
$
1,464,665

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
7,371

 
$
4,674

Accrued liabilities
151,336

 
101,460

Royalties payable
35,423

 
23,988

Amounts due to affiliates
5,865

 
8,651

Derivative instruments
1,192

 
24,203

Advances from joint interest owners
5,468

 
1,700

Amounts due to joint ventures
4,873

 
4,251

Other current liabilities
656

 
578

Total current liabilities
212,184

 
169,505

Long-term liabilities
 
 
 
Senior unsecured notes payable
573,988

 
573,924

Asset retirement obligations
22,391

 
19,725

Derivative instruments

 
751

Amounts due to joint ventures

 
1,771

Other long-term liabilities
6,142

 
7,544

Total long-term liabilities
602,521

 
603,715

Commitments and contingencies (Note 10)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 160,000,000 and 120,000,000 shares authorized; 100,399,756 and 99,518,764 shares issued; and 100,324,852 and 99,511,931 shares outstanding, respectively
1,004

 
995

Additional paid-in capital
1,453,341

 
1,325,481

Accumulated deficit
(563,858
)
 
(636,351
)
Treasury stock, at cost, 74,904 and 6,833 shares, respectively
(745
)
 

Total Matador Resources Company shareholders’ equity
889,742

 
690,125

Non-controlling interest in subsidiaries
72,629

 
1,320

Total shareholders’ equity
962,371

 
691,445

Total liabilities and shareholders’ equity
$
1,777,076

 
$
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Oil and natural gas revenues
$
113,764

 
$
69,336

 
$
228,611

 
$
113,262

Third-party midstream services revenues
2,099

 
918

 
3,654

 
1,391

Realized gain (loss) on derivatives
558

 
2,465

 
(1,661
)
 
9,528

Unrealized gain (loss) on derivatives
13,190

 
(26,625
)
 
33,821

 
(33,464
)
Total revenues
129,611

 
46,094

 
264,425

 
90,717

Expenses
 
 
 
 
 
 
 
Production taxes, transportation and processing
12,875

 
10,556

 
24,682

 
18,459

Lease operating
16,040

 
12,183

 
31,797

 
26,695

Plant and other midstream services operating
2,942

 
1,061

 
5,283

 
2,088

Depletion, depreciation and amortization
41,274

 
31,248

 
75,266

 
60,170

Accretion of asset retirement obligations
314

 
289

 
614

 
552

Full-cost ceiling impairment

 
78,171

 

 
158,633

General and administrative
17,177

 
13,197

 
33,515

 
26,360

Total expenses
90,622

 
146,705

 
171,157

 
292,957

Operating income (loss)
38,989

 
(100,611
)
 
93,268

 
(202,240
)
Other income (expense)
 
 
 
 
 
 
 
Net gain on asset sales and inventory impairment

 
1,002

 
7

 
2,067

Interest expense
(9,224
)
 
(6,167
)
 
(17,679
)
 
(13,365
)
Other income
1,922

 
29

 
1,991

 
124

Total other expense
(7,302
)
 
(5,136
)
 
(15,681
)
 
(11,174
)
Net income (loss)
31,687

 
(105,747
)
 
77,587

 
(213,414
)
Net income attributable to non-controlling interest in subsidiaries
(3,178
)
 
(106
)
 
(5,094
)
 
(93
)
Net income (loss) attributable to Matador Resources Company shareholders
$
28,509

 
$
(105,853
)
 
$
72,493

 
$
(213,507
)
Earnings (loss) per common share
 
 
 
 

 

Basic
$
0.28

 
$
(1.15
)
 
$
0.72

 
$
(2.40
)
Diluted
$
0.28

 
$
(1.15
)
 
$
0.72

 
$
(2.40
)
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
100,211

 
92,346

 
100,005

 
88,826

Diluted
100,227

 
92,346

 
100,455

 
88,826


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 Six Months Ended June 30, 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
499

 
5

 
(5
)
 

 

 

 

 

 

Common stock issued to Board members and advisors
55

 
1

 
(1
)
 

 

 

 

 

 

Stock-based compensation expense related to equity-based awards including amounts capitalized

 

 
12,521

 

 

 

 
12,521

 

 
12,521

Stock options exercised, net of options forfeited in net share settlements
327

 
3

 
(27
)
 

 

 

 
(24
)
 

 
(24
)
Restricted stock forfeited

 

 

 

 
69

 
(745
)
 
(745
)
 

 
(745
)
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)

 

 
116,622

 

 

 

 
116,622

 
54,878

 
171,500

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

 

 

 

 

 

 

 
14,700

 
14,700

Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries

 

 

 

 

 

 

 
(1,960
)
 
(1,960
)
Current period net income

 

 

 
72,493

 

 

 
72,493

 
5,094

 
77,587

Balance at June 30, 2017
100,400

 
$
1,004

 
$
1,453,341

 
$
(563,858
)
 
75

 
$
(745
)
 
$
889,742

 
$
72,629

 
$
962,371


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)
 
Six Months Ended 
 June 30,
 
2017
 
2016
Operating activities
 
 
 
Net income (loss)
$
77,587

 
$
(213,414
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Unrealized (gain) loss on derivatives
(33,821
)
 
33,464

Depletion, depreciation and amortization
75,266

 
60,170

Accretion of asset retirement obligations
614

 
552

Full-cost ceiling impairment

 
158,633

Stock-based compensation expense
11,192

 
5,553

Amortization of debt issuance cost
64

 
592

Net gain on asset sales and inventory impairment
(7
)
 
(2,067
)
Changes in operating assets and liabilities

 

Accounts receivable
(25,642
)
 
(2,751
)
Lease and well equipment inventory
(140
)
 
(514
)
Prepaid expenses
(2,619
)
 
186

Other assets
165

 
520

Accounts payable, accrued liabilities and other current liabilities
4,442

 
2,451

Royalties payable
11,435

 
153

Advances from joint interest owners
3,768

 
5,083

Income taxes payable

 
(2,848
)
Other long-term liabilities
(1,062
)
 
3,837

Net cash provided by operating activities
121,242

 
49,600

Investing activities


 


Oil and natural gas properties capital expenditures
(328,929
)
 
(162,381
)
Expenditures for other property and equipment
(41,743
)
 
(47,548
)
Proceeds from sale of assets
977

 

Restricted cash

 
43,437

Restricted cash in less-than-wholly-owned subsidiaries
(13,783
)
 
460

Net cash used in investing activities
(383,478
)
 
(166,032
)
Financing activities


 


Proceeds from issuance of common stock

 
142,350

Cost to issue equity

 
(768
)
Proceeds from stock options exercised
2,201

 

Contributions related to formation of Joint Venture
171,500

 

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries
14,700

 

Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries
(1,960
)
 

Taxes paid related to net share settlement of stock-based compensation
(2,970
)
 
(1,009
)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary
(2,653
)
 

Net cash provided by financing activities
180,818

 
140,573

(Decrease) increase in cash
(81,418
)
 
24,141

Cash at beginning of period
212,884

 
16,732

Cash at end of period
$
131,466

 
$
40,873

 
 
 
 
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 June 30, 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, $0.9 million for the three months ended June 30, 2016 and $1.4 million for the six months ended June 30, 2016 were reclassified from other income to third-party midstream services revenues. In addition, $1.1 million related to midstream operating costs for the three months ended June 30, 2016 and $2.1 million for the six months ended June 30, 2016 were 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 and six months ended June 30, 2017, the cost center ceiling was higher than the capitalized costs

7

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

of oil and natural gas properties; no impairment charge was necessary. However, due primarily to declines in oil and natural gas prices in early 2016, the capitalized costs of oil and natural gas properties exceeded the cost center ceiling for the three and six months ended June 30, 2016, and as a result, the Company recorded impairment charges to its net capitalized costs of $78.2 million and $158.6 million, respectively, in its interim unaudited condensed consolidated statements of operations.
The Company capitalized approximately $5.2 million and $4.0 million of its general and administrative costs for the three months ended June 30, 2017 and 2016, respectively, and approximately $1.9 million and $1.7 million of its interest expense for the three months ended June 30, 2017 and 2016, respectively. The Company capitalized approximately $10.8 million and $6.0 million of its general and administrative costs for the six months ended June 30, 2017 and 2016, respectively, and approximately $3.2 million and $2.2 million of its interest expense for the six months ended June 30, 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 and six months ended June 30, 2017 and 2016 (in thousands).
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
2017
 
2016
 
2017
 
2016
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
100,211

 
92,346

 
100,005

 
88,826

Dilutive effect of options and restricted stock units
16

 

 
450

 

Diluted weighted average common shares outstanding
100,227

 
92,346

 
100,455

 
88,826

A total of 2.9 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 both the three and six months ended June 30, 2016, respectively, because their effects were anti-dilutive. Additionally, 0.9 million restricted shares, which are participating securities, were excluded from the calculations above for both the three and six months ended June 30, 2016, respectively, 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

8

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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.
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 six months ended June 30, 2017 (in thousands).
 
 
Beginning asset retirement obligations
$
20,640

Liabilities incurred during period
1,222

Liabilities settled during period
(176
)
Revisions in estimated cash flows
794

Accretion expense
614

Ending asset retirement obligations
23,094

Less: current asset retirement obligations(1)
(703
)
Long-term asset retirement obligations
$
22,391

 _______________
(1)
Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at June 30, 2017.
NOTE 5 - DEBT
At June 30, 2017 and August 2, 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 $1.1 million at June 30, 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 June 30, 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 May 24, 2017, and pursuant to a registered exchange offer, the Company exchanged all of the $175.0 million of Notes issued on December 9, 2016, which were privately placed, for a like principal amount of 6.875% senior notes due 2023 that have been registered under the Securities Act of 1933, as amended. The terms of such registered Notes are substantially the same as the terms of the original Notes except that the transfer restrictions, registration rights and provisions for additional interest relating to the original Notes do not apply to the registered Notes.

10

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

NOTE 5 - DEBT - Continued

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 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
June 30, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
385,885

 
$

 
$
1,679

 
$
(387,564
)
 
$

Third-party current assets
 
2,944

 
16,953

 
226,890

 

 
246,787

Net property and equipment
 

 
151,331

 
1,375,173

 

 
1,526,504

Investment in subsidiaries
 
1,083,542

 

 
75,585

 
(1,159,127
)
 

Third-party long-term assets
 

 

 
3,785

 

 
3,785

Total assets
 
$
1,472,371

 
$
168,284

 
$
1,683,112

 
$
(1,546,691
)
 
$
1,777,076

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$

 
$
1,679

 
$
385,885

 
$
(387,564
)
 
$

Third-party current liabilities
 
8,640

 
17,753

 
185,791

 

 
212,184

Senior unsecured notes payable
 
573,988

 

 

 

 
573,988

Other third-party long-term liabilities
 

 
639

 
27,894

 

 
28,533

Total equity attributable to Matador Resources Company
 
889,743

 
75,584

 
1,083,542

 
(1,159,127
)
 
889,742

Non-controlling interest in subsidiaries
 

 
72,629

 

 

 
72,629

Total liabilities and equity
 
$
1,472,371

 
$
168,284

 
$
1,683,112

 
$
(1,546,691
)
 
$
1,777,076

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
)
 
$

Third-party 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
)
 

Third-party 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
)
 
$

Third-party current liabilities
 
9,265

 
16,632

 
143,608

 

 
169,505

Senior unsecured notes payable
 
573,924

 

 

 

 
573,924

Other third-party 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 June 30, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
11,274

 
$
127,198

 
$
(8,861
)
 
$
129,611

Total expenses
 
1,586

 
4,814

 
93,083

 
(8,861
)
 
90,622

Operating (loss) income
 
(1,586
)
 
6,460

 
34,115

 

 
38,989

Net gain on asset sales and inventory impairment
 

 

 

 

 

Interest expense
 
(9,224
)
 

 

 

 
(9,224
)
Other income
 
(27
)
 
26

 
1,923

 

 
1,922

Earnings in subsidiaries
 
39,228

 

 
3,244

 
(42,472
)
 

Income before income taxes
 
28,391

 
6,486

 
39,282

 
(42,472
)
 
31,687

Total income tax (benefit) provision

 
(118
)
 
64

 
54

 

 

Net income attributable to non-controlling interest in subsidiaries
 

 
(3,178
)
 

 

 
(3,178
)
Net income attributable to Matador Resources Company shareholders
 
$
28,509

 
$
3,244

 
$
39,228

 
$
(42,472
)
 
$
28,509

Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2016
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
3,210

 
$
44,778

 
$
(1,894
)
 
$
46,094

Total expenses
 
1,032

 
1,244

 
146,323

 
(1,894
)
 
146,705

Operating (loss) income
 
(1,032
)
 
1,966

 
(101,545
)
 

 
(100,611
)
Net gain on asset sales and inventory impairment
 

 

 
1,002

 

 
1,002

Interest expense
 
(6,167
)
 

 

 

 
(6,167
)
Other income
 

 

 
29

 

 
29

(Loss) earnings in subsidiaries
 
(98,672
)
 

 
1,842

 
96,830

 

(Loss) income before income taxes
 
(105,871
)
 
1,966

 
(98,672
)
 
96,830

 
(105,747
)
Total income tax (benefit) provision
 
(18
)
 
18

 

 

 

Net income attributable to non-controlling interest in subsidiaries
 

 
(106
)
 

 

 
(106
)
Net (loss) income attributable to Matador Resources Company shareholders
 
$
(105,853
)
 
$
1,842

 
$
(98,672
)
 
$
96,830

 
$
(105,853
)


12

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

NOTE 5 - DEBT - Continued

Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
20,937

 
$
259,846

 
$
(16,358
)
 
$
264,425

Total expenses
 
2,846

 
8,682

 
175,987

 
(16,358
)
 
171,157

Operating (loss) income
 
(2,846
)

12,255


83,859




93,268

Net gain on asset sales and inventory impairment
 

 

 
7

 

 
7

Interest expense
 
(17,679
)
 

 

 

 
(17,679
)
Other income
 

 
26

 
1,965

 

 
1,991

Earnings in subsidiaries

 
92,900

 

 
7,069

 
(99,969
)
 

Income before income taxes
 
72,375


12,281


92,900


(99,969
)

77,587

Total income tax (benefit) provision

 
(118
)
 
118

 

 

 

Net income attributable to non-controlling interest in subsidiaries
 

 
(5,094
)
 

 

 
(5,094
)
Net income attributable to Matador Resources Company shareholders
 
$
72,493


$
7,069


$
92,900


$
(99,969
)

$
72,493

Condensed Consolidating Statement of Operations
For the Six Months Ended June 30, 2016
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
4,527

 
$
88,825

 
$
(2,635
)
 
$
90,717

Total expenses
 
2,967

 
2,377

 
290,248

 
(2,635
)
 
292,957

Operating (loss) income
 
(2,967
)

2,150


(201,423
)



(202,240
)
Net gain on asset sales and inventory impairment
 

 

 
2,067

 

 
2,067

Interest expense
 
(13,365
)
 

 

 

 
(13,365
)
Other income
 

 

 
124

 

 
124

(Loss) earnings in subsidiaries
 
(197,200
)
 

 
2,032

 
195,168

 

Income before income taxes
 
(213,532
)

2,150


(197,200
)

195,168

 
(213,414
)
Total income tax (benefit) provision

 
(25
)
 
25

 

 

 

Net income attributable to non-controlling interest in subsidiaries
 

 
(93
)
 

 

 
(93
)
Net (loss) income attributable to Matador Resources Company shareholders
 
$
(213,507
)

$
2,032


$
(197,200
)

$
195,168


$
(213,507
)


13

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 Six Months Ended June 30, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(98,583
)
 
$
1,566

 
$
218,259

 
$

 
$
121,242

Net cash provided by (used in) investing activities
 
33

 
(51,580
)
 
(198,051
)
 
(133,880
)
 
(383,478
)
Net cash provided by (used in) financing activities
 

 
47,707

 
(769
)
 
133,880

 
180,818

(Decrease) increase in cash
 
(98,550
)
 
(2,307
)
 
19,439

 

 
(81,418
)
Cash at beginning of period
 
99,795

 
2,307

 
110,782

 

 
212,884

Cash at end of period
 
$
1,245

 
$

 
$
130,221

 
$

 
$
131,466


Condensed Consolidating Statement of Cash Flows
For the Six Months Ended June 30, 2016
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(24,519
)
 
$
(6,198
)
 
$
80,317

 
$

 
$
49,600

Net cash used in investing activities
 
(117,086
)
 
(44,074
)
 
(172,108
)
 
167,236

 
(166,032
)
Net cash provided by financing activities
 
141,582

 
50,150

 
116,077

 
(167,236
)
 
140,573

(Decrease) increase in cash
 
(23
)
 
(122
)
 
24,286

 

 
24,141

Cash at beginning of period
 
80

 
186

 
16,466

 

 
16,732

Cash at end of period
 
$
57

 
$
64

 
$
40,752

 
$

 
$
40,873

NOTE 6 - INCOME TAXES
The Company’s deferred tax assets exceeded its deferred tax liabilities at June 30, 2017 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 June 30, 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.
In June 2017, the Company granted an employee an award of 87,757 shares of common stock that vested immediately on the grant date. The fair value of this award was approximately $2.1 million. In June 2017, the Company also accelerated the expense for 97,797 restricted stock units issued to directors and outstanding prior to June 2017, resulting from a change in the vesting schedule applicable to equity awards granted to the Company’s directors. The total expense associated with these restricted stock units recognized in the three months ended June 30, 2017 was approximately $1.5 million.

14

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

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS


At June 30, 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 June 30, 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
07/01/2017 - 12/31/2017
 
2,460,000

 
$
45.17

 
$
55.75

 
$
4,365

Oil
01/01/2018 - 12/31/2018
 
1,920,000

 
$
43.91

 
$
63.44

 
4,990

Natural Gas
07/01/2017 - 12/31/2017
 
12,540,000

 
$
2.51

 
$
3.60

 
(500
)
Natural Gas
01/01/2018 - 12/31/2018
 
16,800,000

 
$
2.58

 
$
3.67

 
12

Total open derivative financial instruments
 
 
 
 
 
 
 
$
8,867

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 June 30, 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
June 30, 2017
 
 
 
 
 
   Current assets
$
10,835

 
$
(3,768
)
 
$
7,067

   Other assets
5,066

 
(2,074
)
 
2,992

   Current liabilities
(4,915
)
 
3,723

 
(1,192
)
   Other liabilities
(2,074
)
 
2,074

 

      Total
$
8,912

 
$
(45
)
 
$
8,867

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

 
$
(24,203
)
   Other liabilities
(751
)
 

 
(751
)
      Total
$
(24,954
)
 
$

 
$
(24,954
)

15

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 
 June 30,
 
Six Months Ended 
 June 30,
Type of Instrument
Location in Condensed Consolidated Statement of Operations
 
2017
 
2016
 
2017
 
2016
Derivative Instrument
 
 
 
 
 
 
 
 
 
Oil
Revenues: Realized gain (loss) on derivatives
 
$
581

 
$
561

 
$
(1,053
)
 
$
6,024

Natural Gas
Revenues: Realized (loss) gain on derivatives
 
(23
)
 
1,904

 
(608
)
 
3,504

Realized gain (loss) on derivatives
 
558

 
2,465

 
(1,661
)
 
9,528

Oil
Revenues: Unrealized gain (loss) on derivatives
 
10,643

 
(19,319
)
 
28,422

 
(26,974
)
Natural Gas
Revenues: Unrealized gain (loss) on derivatives
 
2,547

 
(7,306
)
 
5,399

 
(6,490
)
Unrealized gain (loss) on derivatives
 
13,190

 
(26,625
)
 
33,821

 
(33,464
)
Total
 
 
$
13,748

 
$
(24,160
)
 
$
32,160

 
$
(23,936
)
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 June 30, 2017 and December 31, 2016 (in thousands). 
 
Fair Value Measurements at
June 30, 2017 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Oil and natural gas derivatives
$

 
$
10,059

 
$

 
$
10,059

Oil and natural gas derivatives

 
(1,192
)
 

 
(1,192
)
Total
$

 
$
8,867

 
$

 
$
8,867


16

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 June 30, 2017 and December 31, 2016, the carrying values reported on the interim unaudited condensed consolidated balance sheets for accounts receivable, prepaid expenses and other assets, 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 June 30, 2017 and December 31, 2016, the fair value of the Notes was $592.3 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 $0.8 million in processing and transportation fees under this agreement during the three months ended June 30, 2017 and 2016, respectively, and $1.0 million and $1.7 million in processing and transportation fees under this agreement during the six months ended June 30, 2017 and 2016, respectively. The future undiscounted minimum payment under this agreement as of June 30, 2017 was $0.2 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 June 30, 2017, the total deficiency fee required to be paid would be approximately $11.6 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

17

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

NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued

contract year can be carried over to the next contract year for purposes of calculating the natural gas deficiency. The Company paid approximately $3.7 million and $2.8 million in natural gas processing and gathering fees under this agreement during the three months ended June 30, 2017 and 2016, respectively, and $6.8 million and $4.7 million in natural gas processing and gathering fees under this agreement during the six months ended June 30, 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 June 30, 2017 was approximately $256.4 million.
Beginning in May 2017, a subsidiary of San Mateo entered into certain agreements with third parties for the engineering, procurement, construction and installation of an expansion of the Black River Processing Plant, including required compression. The expansion is expected to be placed into service in 2018. San Mateo’s total commitments under these agreements are $56.9 million. The subsidiary of San Mateo paid approximately $7.9 million and $9.9 million under these agreements during the three and six months ended June 30, 2017. As of June 30, 2017, the remaining obligations under these agreements were $47.0 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 $42.0 million at June 30, 2017.
At June 30, 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 $19.7 million at June 30, 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.

18

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 June 30, 2017 and December 31, 2016 (in thousands).
 
June 30,
2017
 
December 31, 2016
Accrued evaluated and unproved and unevaluated property costs
$
98,589

 
$
54,273

Accrued support equipment and facilities costs
15,596

 
15,139

Accrued lease operating expenses
12,613

 
16,009

Accrued interest on debt
8,345

 
6,541

Accrued asset retirement obligations
703

 
915

Accrued partners’ share of joint interest charges
12,479

 
5,572

Other
3,011

 
3,011

Total accrued liabilities
$
151,336

 
$
101,460

Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the six months ended June 30, 2017 and 2016 (in thousands).
 
Six Months Ended 
 June 30,
 
2017
 
2016
Cash paid for interest expense, net of amounts capitalized
$
15,875

 
$
12,226

Increase in asset retirement obligations related to mineral properties
$
1,978

 
$
2,511

(Decrease) increase in asset retirement obligations related to support equipment and facilities
$
(138
)
 
$
75

Increase (decrease) in liabilities for oil and natural gas properties capital expenditures
$
43,797

 
$
(3,476
)
Increase (decrease) in liabilities for support equipment and facilities
$
1,838

 
$
(11,565
)
Stock-based compensation expense recognized as liability
$
(339
)
 
$
88

(Decrease) increase in liabilities for accrued cost to issue equity
$
(343
)
 
$
62

Transfer of inventory from oil and natural gas properties
$
(228
)
 
$
474


19

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 June 30, 2017
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
113,387

 
$
377

 
$

 
$

 
$
113,764

Midstream services revenues

 
11,367

 

 
(9,268
)
 
2,099

Realized gain on derivatives
558

 

 

 

 
558

Unrealized gain on derivatives
13,190

 

 

 

 
13,190

Expenses(1)
78,078

 
5,960

 
15,852

 
(9,268
)
 
90,622

Operating income (loss)(2)
$
49,057

 
$
5,784

 
$
(15,852
)
 
$

 
$
38,989

Total assets
$
1,436,678

 
$
192,889

 
$
147,509

 
$

 
$
1,777,076

Capital expenditures(3)
$
165,583

 
$
27,347

 
$
1,752

 
$

 
$
194,682

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $39.6 million and $1.3 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.4 million.
(2)
Includes $3.2 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $13.4 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

20

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 June 30, 2016
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
68,864

 
$
472

 
$

 
$

 
$
69,336

Midstream services revenues

 
3,469

 

 
(2,551
)
 
918

Realized gain on derivatives
2,465

 

 

 

 
2,465

Unrealized loss on derivatives
(26,625
)
 

 

 

 
(26,625
)
Expenses(1)
134,338

 
1,562

 
13,356

 
(2,551
)
 
146,705

Operating (loss) income(2)
$
(89,634
)
 
$
2,379

 
$
(13,356
)
 
$

 
$
(100,611
)
Total assets
$
927,557

 
$
106,425

 
$
52,106

 
$

 
$
1,086,088

Capital expenditures
$
97,309

 
$
11,192

 
$
2,328

 
$

 
$
110,829

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $30.6 million and $0.5 million for the exploration and production and midstream segments, respectively, and full-cost ceiling impairment expenses of $78.2 million for the exploration and production segment. Also includes corporate depletion, depreciation and amortization expenses of $0.2 million.
(2)
Includes $106,000 in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.