10-Q 1 a2017930mtdr10q.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 September 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 November 6, 2017, there were 108,447,030 shares of the registrant’s common stock, par value $0.01 per share, outstanding.



MATADOR RESOURCES COMPANY
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 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)
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
20,178

 
$
212,884

Restricted cash
10,744

 
1,258

Accounts receivable
 
 
 
Oil and natural gas revenues
49,885

 
34,154

Joint interest billings
53,721

 
19,347

Other
5,406

 
5,167

Derivative instruments
60

 

Lease and well equipment inventory
4,801

 
3,045

Prepaid expenses and other assets
5,550

 
3,327

Total current assets
150,345

 
279,182

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
2,842,810

 
2,408,305

Unproved and unevaluated
600,803

 
479,736

Other property and equipment
240,924

 
160,795

Less accumulated depletion, depreciation and amortization
(1,987,370
)
 
(1,864,311
)
Net property and equipment
1,697,167

 
1,184,525

Other assets
 
 
 
Derivative instruments
285

 

         Other assets
740

 
958

Total other assets
1,025

 
958

Total assets
$
1,848,537

 
$
1,464,665

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
13,839

 
$
4,674

Accrued liabilities
158,345

 
101,460

Royalties payable
53,639

 
23,988

Amounts due to affiliates
12,749

 
8,651

Derivative instruments
3,641

 
24,203

Advances from joint interest owners
4,346

 
1,700

Amounts due to joint ventures
4,873

 
4,251

Other current liabilities
663

 
578

Total current liabilities
252,095

 
169,505

Long-term liabilities
 
 
 
Senior unsecured notes payable
574,027

 
573,924

Asset retirement obligations
23,305

 
19,725

Derivative instruments
209

 
751

Amounts due to joint ventures

 
1,771

Other long-term liabilities
6,104

 
7,544

Total long-term liabilities
603,645

 
603,715

Commitments and contingencies (Note 11)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 160,000,000 and 120,000,000 shares authorized; 100,566,054 and 99,518,764 shares issued; and 100,439,595 and 99,511,931 shares outstanding, respectively
1,006

 
995

Additional paid-in capital
1,455,605

 
1,325,481

Accumulated deficit
(548,819
)
 
(636,351
)
Treasury stock, at cost, 126,459 and 6,833 shares, respectively
(1,589
)
 

Total Matador Resources Company shareholders’ equity
906,203

 
690,125

Non-controlling interest in subsidiaries
86,594

 
1,320

Total shareholders’ equity
992,797

 
691,445

Total liabilities and shareholders’ equity
$
1,848,537

 
$
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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
 
 
 
 
 
 
 
Oil and natural gas revenues
$
134,948

 
$
83,079

 
$
363,559

 
$
196,341

Third-party midstream services revenues
3,218

 
1,566

 
6,871

 
2,956

Realized gain (loss) on derivatives
485

 
885

 
(1,176
)
 
10,413

Unrealized (loss) gain on derivatives
(12,372
)
 
3,203

 
21,449

 
(30,261
)
Total revenues
126,279

 
88,733

 
390,703

 
179,449

Expenses
 
 
 
 
 
 
 
Production taxes, transportation and processing
15,666

 
12,388

 
40,348

 
30,846

Lease operating
16,689

 
14,605

 
48,486

 
41,300

Plant and other midstream services operating
3,096

 
1,449

 
8,379

 
3,537

Depletion, depreciation and amortization
47,800

 
30,015

 
123,066

 
90,185

Accretion of asset retirement obligations
323

 
276

 
937

 
828

Full-cost ceiling impairment

 

 

 
158,633

General and administrative
16,156

 
13,146

 
49,671

 
39,506

Total expenses
99,730

 
71,879

 
270,887

 
364,835

Operating income (loss)
26,549

 
16,854

 
119,816

 
(185,386
)
Other income (expense)
 
 
 
 
 
 
 
Net gain on asset sales and inventory impairment
16

 
1,073

 
23

 
3,140

Interest expense
(8,550
)
 
(6,880
)
 
(26,229
)
 
(20,244
)
Other (expense) income
(36
)
 
(141
)
 
1,956

 
(17
)
Total other expense
(8,570
)
 
(5,948
)
 
(24,250
)
 
(17,121
)
Income (loss) before income taxes
17,979

 
10,906

 
95,566

 
(202,507
)
Income tax (benefit) provision
 
 
 
 
 
 
 
Current

 
(1,141
)
 

 
(1,141
)
Total income tax benefit

 
(1,141
)
 

 
(1,141
)
Net income (loss)
17,979

 
12,047

 
95,566

 
(201,366
)
Net income attributable to non-controlling interest in subsidiaries
(2,940
)
 
(116
)
 
(8,034
)
 
(209
)
Net income (loss) attributable to Matador Resources Company shareholders
$
15,039

 
$
11,931

 
$
87,532

 
$
(201,575
)
Earnings (loss) per common share
 
 
 
 

 

Basic
$
0.15

 
$
0.13

 
$
0.87

 
$
(2.24
)
Diluted
$
0.15

 
$
0.13

 
$
0.87

 
$
(2.24
)
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
100,365

 
93,384

 
100,141

 
90,016

Diluted
100,504

 
93,724

 
100,580

 
90,016


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 Nine Months Ended September 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
527

 
5

 
(5
)
 

 

 

 

 

 

Common stock issued to Board members and advisors
72

 
1

 
(1
)
 

 

 

 

 

 

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

 

 
14,669

 

 

 

 
14,669

 

 
14,669

Stock options exercised, net of options forfeited in net share settlements
448

 
5

 
89

 

 

 

 
94

 

 
94

Restricted stock forfeited

 

 

 

 
120

 
(1,589
)
 
(1,589
)
 

 
(1,589
)
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

 

 

 

 

 

 

 
29,400

 
29,400

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

 

 

 

 

 

 

 
(5,635
)
 
(5,635
)
Current period net income

 

 

 
87,532

 

 

 
87,532

 
8,034

 
95,566

Balance at September 30, 2017
100,566

 
$
1,006

 
$
1,455,605

 
$
(548,819
)
 
126

 
$
(1,589
)
 
$
906,203

 
$
86,594

 
$
992,797


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)
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Operating activities
 
 
 
Net income (loss)
$
95,566

 
$
(201,366
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Unrealized (gain) loss on derivatives
(21,449
)
 
30,261

Depletion, depreciation and amortization
123,066

 
90,185

Accretion of asset retirement obligations
937

 
828

Full-cost ceiling impairment

 
158,633

Stock-based compensation expense
12,488

 
9,138

Amortization of debt issuance cost
103

 
899

Net gain on asset sales and inventory impairment
(23
)
 
(3,140
)
Changes in operating assets and liabilities

 

Accounts receivable
(50,343
)
 
(7,782
)
Lease and well equipment inventory
(1,666
)
 
(669
)
Prepaid expenses
(2,224
)
 
(74
)
Other assets
217

 
480

Accounts payable, accrued liabilities and other current liabilities
35,068

 
9,710

Royalties payable
29,651

 
5,225

Advances from joint interest owners
2,646

 
3,147

Income taxes payable

 
(2,848
)
Other long-term liabilities
(1,521
)
 
3,835

Net cash provided by operating activities
222,516

 
96,462

Investing activities


 


Oil and natural gas properties capital expenditures
(517,270
)
 
(288,175
)
Expenditures for other property and equipment
(80,560
)
 
(57,148
)
Proceeds from sale of assets
977

 
5,173

Restricted cash

 
43,098

Restricted cash in less-than-wholly-owned subsidiaries
(9,486
)
 
(544
)
Net cash used in investing activities
(606,339
)
 
(297,596
)
Financing activities


 


Borrowings under Credit Agreement

 
65,000

Proceeds from issuance of common stock

 
142,350

Cost to issue equity

 
(830
)
Proceeds from stock options exercised
2,920

 

Contributions related to formation of Joint Venture
171,500

 

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries
29,400

 

Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries
(5,635
)
 

Taxes paid related to net share settlement of stock-based compensation
(4,415
)
 
(1,552
)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary
(2,653
)
 

Net cash provided by financing activities
191,117

 
204,968

(Decrease) increase in cash
(192,706
)
 
3,834

Cash at beginning of period
212,884

 
16,732

Cash at end of period
$
20,178

 
$
20,566

 
 
 
 
Supplemental disclosures of cash flow information (Note 12)


 



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 the Company 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 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 September 30, 2017. Amounts as of December 31, 2016 are derived from the Company’s audited consolidated financial statements included 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.
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 nine months ended September 30, 2017, the cost center ceiling was higher than the capitalized costs of oil and natural gas properties, and, as a result, no impairment charge was necessary. For the three months ended September 30, 2016, the cost center ceiling was higher than the capitalized costs of oil and natural gas properties, and, as a result, 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 nine months ended September 30, 2016, and as a result, the Company recorded impairment charges to its net capitalized costs of $158.6 million in its interim unaudited condensed consolidated statement of operations.

7

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

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

The Company capitalized approximately $6.1 million and $4.3 million of its general and administrative costs for the three months ended September 30, 2017 and 2016, respectively, and approximately $2.1 million and $0.7 million of its interest expense for the three months ended September 30, 2017 and 2016, respectively. The Company capitalized approximately $16.9 million and $10.3 million of its general and administrative costs for the nine months ended September 30, 2017 and 2016, respectively, and approximately $5.2 million and $2.9 million of its interest expense for the nine months ended September 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 nine months ended September 30, 2017 and 2016 (in thousands).
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
2017
 
2016
 
2017
 
2016
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
100,365

 
93,384

 
100,141

 
90,016

Dilutive effect of options and restricted stock units
139

 
340

 
439

 

Diluted weighted average common shares outstanding
100,504

 
93,724

 
100,580

 
90,016

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 the nine months ended September 30, 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 nine months ended September 30, 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 has reviewed the new guidance, including (i) identification of revenue streams and (ii) review of contracts and procedures currently in place, and is finalizing its evaluation of the impact, if any, on its consolidated financial statements.
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 11).
NOTE 4 - EQUITY
On October 10, 2017, the Company completed a public offering of 8.0 million shares of its common stock, receiving proceeds of approximately $208.7 million (before expenses). A portion of the proceeds from this offering were and are being used to acquire approximately 6,600 net acres of additional leasehold and minerals in the Delaware Basin at a total acquisition cost of approximately $38 million and to fund certain midstream initiatives and opportunities, including the acceleration of the drilling of commercial salt water disposal wells in the Rustler Breaks asset area on behalf of San Mateo. The remaining proceeds will be used for other midstream development, acreage acquisitions and general corporate purposes, including to fund a portion of the Company’s current and future capital expenditures.





9

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

NOTE 5 - ASSET RETIREMENT OBLIGATIONS


The following table summarizes the changes in the Company’s asset retirement obligations for the nine months ended September 30, 2017 (in thousands).
 
 
Beginning asset retirement obligations
$
20,640

Liabilities incurred during period
1,901

Liabilities settled during period
(349
)
Revisions in estimated cash flows
794

Accretion expense
937

Ending asset retirement obligations
23,923

Less: current asset retirement obligations(1)
(618
)
Long-term asset retirement obligations
$
23,305

 _______________
(1)
Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at September 30, 2017.
NOTE 6 - DEBT
At September 30, 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. At November 6, 2017, the Company had $575.0 million of outstanding 6.875% senior notes due 2023, no borrowings outstanding under the Credit Agreement and approximately $2.1 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. Early in the fourth quarter of 2017, the lenders completed their review of the Company’s proved oil and natural gas reserves at June 30, 2017, and as a result, on October 25, 2017, the borrowing base was increased to $525.0 million and the maximum facility amount remained at $500.0 million. This October 2017 redetermination constituted the regularly scheduled November 1 redetermination. The Company elected to keep the borrowing commitment at $400.0 million. Borrowings under the Credit Agreement are limited to the lowest 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 September 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 September 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 15 and October 15 of each year.
On May 24, 2017, 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

10

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

NOTE 6 - DEBT - Continued

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.
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 of the issuer (Matador), the Non-Guarantor Subsidiaries, the Guarantor Subsidiaries and all entities on a 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.

11

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

NOTE 6 - DEBT - Continued

Condensed Consolidating Balance Sheet
September 30, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
392,082

 
$

 
$
2,028

 
$
(394,110
)
 
$

Third-party current assets
 
635

 
11,676

 
138,034

 

 
150,345

Net property and equipment
 

 
185,464

 
1,511,703

 

 
1,697,167

Investment in subsidiaries
 
1,107,280

 

 
90,993

 
(1,198,273
)
 

Third-party long-term assets
 

 

 
1,025

 

 
1,025

Total assets
 
$
1,499,997

 
$
197,140

 
$
1,743,783

 
$
(1,592,383
)
 
$
1,848,537

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$
1,314

 
$
714

 
$
392,082

 
$
(394,110
)
 
$

Third-party current liabilities
 
18,453

 
18,191

 
215,451

 

 
252,095

Senior unsecured notes payable
 
574,027

 

 

 

 
574,027

Other third-party long-term liabilities
 

 
648

 
28,970

 

 
29,618

Total equity attributable to Matador Resources Company
 
906,203

 
90,993

 
1,107,280

 
(1,198,273
)
 
906,203

Non-controlling interest in subsidiaries
 

 
86,594

 

 

 
86,594

Total liabilities and equity
 
$
1,499,997

 
$
197,140

 
$
1,743,783

 
$
(1,592,383
)
 
$
1,848,537

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




12

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

NOTE 6 - DEBT - Continued

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

 
$
11,242

 
$
122,675

 
$
(7,638
)
 
$
126,279

Total expenses
 
1,175

 
5,253

 
100,940

 
(7,638
)
 
99,730

Operating (loss) income
 
(1,175
)
 
5,989

 
21,735

 

 
26,549

Net gain on asset sales and inventory impairment
 

 

 
16

 

 
16

Interest expense
 
(8,550
)
 

 

 

 
(8,550
)
Other income
 
27

 
11

 
(74
)
 

 
(36
)
Earnings in subsidiaries
 
24,674

 

 
2,997

 
(27,671
)
 

Income before income taxes
 
14,976

 
6,000

 
24,674

 
(27,671
)
 
17,979

Total income tax (benefit) provision

 
(63
)
 
63

 

 

 

Net income attributable to non-controlling interest in subsidiaries
 

 
(2,940
)
 

 

 
(2,940
)
Net income attributable to Matador Resources Company shareholders
 
$
15,039

 
$
2,997

 
$
24,674

 
$
(27,671
)
 
$
15,039

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

 
$
4,993

 
$
86,965

 
$
(3,225
)
 
$
88,733

Total expenses
 
1,018

 
2,043

 
72,043

 
(3,225
)
 
71,879

Operating (loss) income
 
(1,018
)
 
2,950

 
14,922

 

 
16,854

Net gain on asset sales and inventory impairment
 

 

 
1,073

 

 
1,073

Interest expense
 
(6,880
)
 

 

 

 
(6,880
)
Other expense
 

 

 
(141
)
 

 
(141
)
Income earnings in subsidiaries
 
19,800

 

 
2,805

 
(22,605
)
 

Income before income taxes
 
11,902

 
2,950

 
18,659

 
(22,605
)
 
10,906

Total income tax (benefit) provision
 
(29
)
 
29

 
(1,141
)
 

 
(1,141
)
Net income attributable to non-controlling interest in subsidiaries
 

 
(116
)
 

 

 
(116
)
Net income attributable to Matador Resources Company shareholders
 
$
11,931

 
$
2,805

 
$
19,800

 
$
(22,605
)
 
$
11,931


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

 
$
32,179

 
$
382,520

 
$
(23,996
)
 
$
390,703

Total expenses
 
4,021

 
13,935

 
276,927

 
(23,996
)
 
270,887

Operating (loss) income
 
(4,021
)

18,244


105,593




119,816

Net gain on asset sales and inventory impairment
 

 

 
23

 

 
23

Interest expense
 
(26,229
)
 

 

 

 
(26,229
)
Other income
 
27

 
37

 
1,892

 

 
1,956

Earnings in subsidiaries

 
117,574

 

 
10,066

 
(127,640
)
 

Income before income taxes
 
87,351


18,281


117,574


(127,640
)

95,566

Total income tax (benefit) provision

 
(181
)
 
181

 

 

 

Net income attributable to non-controlling interest in subsidiaries
 

 
(8,034
)
 

 

 
(8,034
)
Net income attributable to Matador Resources Company shareholders
 
$
87,532


$
10,066


$
117,574


$
(127,640
)

$
87,532


13

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

NOTE 6 - DEBT - Continued

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

 
$
9,520

 
$
175,789

 
$
(5,860
)
 
$
179,449

Total expenses
 
3,985

 
4,420

 
362,290

 
(5,860
)
 
364,835

Operating (loss) income
 
(3,985
)

5,100


(186,501
)



(185,386
)
Net gain on asset sales and inventory impairment
 

 

 
3,140

 

 
3,140

Interest expense
 
(20,244
)
 

 

 

 
(20,244
)
Other expense
 

 

 
(17
)
 

 
(17
)
(Loss) earnings in subsidiaries
 
(177,400
)
 

 
4,837

 
172,563

 

(Loss) income before income taxes
 
(201,629
)

5,100


(178,541
)

172,563

 
(202,507
)
Total income tax (benefit) provision

 
(54
)
 
54

 
(1,141
)
 

 
(1,141
)
Net income attributable to non-controlling interest in subsidiaries
 

 
(209
)
 

 

 
(209
)
Net (loss) income attributable to Matador Resources Company shareholders
 
$
(201,575
)

$
4,837


$
(177,400
)

$
172,563


$
(201,575
)

Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(99,546
)
 
$
24,075

 
$
297,987

 
$

 
$
222,516

Net cash provided by (used in) investing activities
 
33

 
(85,114
)
 
(387,378
)
 
(133,880
)
 
(606,339
)
Net cash provided by (used in) financing activities
 

 
58,732

 
(1,495
)
 
133,880

 
191,117

(Decrease) increase in cash
 
(99,513
)
 
(2,307
)
 
(90,886
)
 

 
(192,706
)
Cash at beginning of period
 
99,795

 
2,307

 
110,782

 

 
212,884

Cash at end of period
 
$
282

 
$

 
$
19,896

 
$

 
$
20,178


Condensed Consolidating Statement of Cash Flows
For the Nine Months Ended September 30, 2016
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Net cash (used in) provided by operating activities
 
$
(28,752
)
 
$
(2,726
)
 
$
127,940

 
$

 
$
96,462

Net cash used in investing activities
 
(112,720
)
 
(51,904
)
 
(300,201
)
 
167,229

 
(297,596
)
Net cash provided by financing activities
 
141,520

 
54,510

 
176,167

 
(167,229
)
 
204,968

Increase (decrease) in cash
 
48

 
(120
)
 
3,906

 

 
3,834

Cash at beginning of period
 
80

 
186

 
16,466

 

 
16,732

Cash at end of period
 
$
128

 
$
66

 
$
20,372

 
$

 
$
20,566

NOTE 7 - INCOME TAXES
The Company’s deferred tax assets exceeded its deferred tax liabilities at September 30, 2017 due to the deferred tax assets generated by the full-cost ceiling impairment charges recorded in prior periods. The Company established a valuation allowance against most of the deferred tax assets beginning in the third quarter of 2015 and retained a full valuation allowance at September 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.


14

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

NOTE 8 - 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.

15

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

NOTE 9 - DERIVATIVE FINANCIAL INSTRUMENTS


At September 30, 2017, the Company had various costless collar and swap 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), price floor and ceiling for the costless collars and fixed price for the swaps. 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 and open swap contracts for oil and Natural Gas Liquids (“NGL”) at September 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
10/01/2017 - 12/31/2017
 
1,230,000

 
$
45.17

 
$
55.75

 
$
(1,452
)
Oil
01/01/2018 - 12/31/2018
 
2,880,000

 
$
44.27

 
$
60.29

 
670

Natural Gas
10/01/2017 - 12/31/2017
 
6,270,000

 
$
2.51

 
$
3.60

 
(129
)
Natural Gas
01/01/2018 - 12/31/2018
 
16,800,000

 
$
2.58

 
$
3.67

 
(249
)
Total open costless collar contracts
 
 
 
 
 
 
 
$
(1,160
)
Commodity
Calculation Period
 
Notional Quantity (Bbl or Gal)
 
Fixed Price
($/Bbl or $/Gal)
 
Fair Value of
Asset
(Liability)
(thousands)
Oil Basis Swaps
01/01/2018 - 12/31/2018
 
5,220,000

 
$
(1.02
)
 
$
(2,337
)
NGL
10/01/2017 - 12/31/2017
 
900,000

 
$
0.89

 
(8
)
Total open swap contracts
 
 
 
 
 
 
$
(2,345
)
Total open derivative financial instruments
 
 
 
 
 
$
(3,505
)
These derivative financial instruments are subject to master netting arrangements, and 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 September 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
September 30, 2017
 
 
 
 
 
   Current assets
$
89,456

 
$
(89,396
)
 
$
60

   Other assets
29,939

 
(29,654
)
 
285

   Current liabilities
(93,037
)
 
89,396

 
(3,641
)
   Other liabilities
(29,863
)
 
29,654

 
(209
)
      Total
$
(3,505
)
 
$

 
$
(3,505
)
December 31, 2016
 
 
 
 
 
   Current liabilities
$
(24,203
)
 
$

 
$
(24,203
)
   Other liabilities
(751
)
 

 
(751
)
      Total
$
(24,954
)
 
$

 
$
(24,954
)

16

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

NOTE 9 - 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 
 September 30,
 
Nine Months Ended 
 September 30,
Type of Instrument
Location in Condensed Consolidated Statement of Operations
 
2017
 
2016
 
2017
 
2016
Derivative Instrument
 
 
 
 
 
 
 
 
 
Oil
Revenues: Realized gain (loss) on derivatives
 
$
485

 
$
837

 
$
(568
)
 
$
6,861

Natural Gas
Revenues: Realized gain (loss) on derivatives
 

 
48

 
(608
)
 
3,552

Realized gain (loss) on derivatives
 
485

 
885

 
(1,176
)
 
10,413

Oil
Revenues: Unrealized (loss) gain on derivatives
 
(12,479
)
 
2,007

 
15,949

 
(24,967
)
Natural Gas
Revenues: Unrealized gain (loss) on derivatives
 
115

 
1,196

 
5,508

 
(5,294
)
NGL
Revenues: Unrealized loss on derivatives
 
(8
)
 

 
(8
)
 

Unrealized (loss) gain on derivatives
 
(12,372
)
 
3,203

 
21,449

 
(30,261
)
Total
 
 
$
(11,887
)
 
$
4,088

 
$
20,273

 
$
(19,848
)
NOTE 10 - 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 September 30, 2017 and December 31, 2016 (in thousands). 
 
Fair Value Measurements at
September 30, 2017 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Oil, natural gas and NGL derivatives
$

 
$
345

 
$

 
$
345

Oil, natural gas and NGL derivatives

 
(3,850
)
 

 
(3,850
)
Total
$

 
$
(3,505
)
 
$

 
$
(3,505
)

17

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

NOTE 10 - 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 9.
Other Fair Value Measurements
At September 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 September 30, 2017 and December 31, 2016, the fair value of the Notes was $610.2 million and $605.2 million, respectively, based on quoted market prices, which represent Level 1 inputs in the fair value hierarchy.
NOTE 11 - 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 included firm transportation of the natural gas liquids extracted at the counterparty’s processing plant downstream for fractionation. After processing, the residue natural gas was purchased by the counterparty at the tailgate of its processing plant and further transported under its natural gas transportation agreements. The arrangement contained fixed processing and liquids transportation and fractionation fees, and the revenue the Company received varied with the quality of natural gas transported to the processing facilities and the contract period.
Under this agreement, if the Company did not meet 80% of the maximum thermal quantity transportation and processing commitments in a contract year, it would 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 could 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 $0.4 million and $0.7 million in processing and transportation fees under this agreement during the three months ended September 30, 2017 and 2016, respectively, and $1.4 million and $2.4 million in processing and transportation fees under this agreement during the nine months ended September 30, 2017 and 2016, respectively.
This agreement terminated August 31, 2017. As of September 30, 2017, there was no future undiscounted minimum payment under this agreement.
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 September 30, 2017, the total deficiency fee required to be paid would be approximately $11.4 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

18

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

NOTE 11 - COMMITMENTS AND CONTINGENCIES - Continued

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 $4.0 million and $2.4 million in natural gas processing and gathering fees under this agreement during the three months ended September 30, 2017 and 2016, respectively, and $10.8 million and $7.1 million in natural gas processing and gathering fees under this agreement during the nine months ended September 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 provides 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 September 30, 2017 was approximately $245.6 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 $57.0 million. The subsidiary of San Mateo paid approximately $22.4 million and $32.3 million under these agreements during the three and nine months ended September 30, 2017, respectively. As of September 30, 2017, the remaining obligations under these agreements were $24.7 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. 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 $36.1 million at September 30, 2017.
At September 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 $28.5 million at September 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.

19

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

NOTE 12 - SUPPLEMENTAL DISCLOSURES


Accrued Liabilities
The following table summarizes the Company’s current accrued liabilities at September 30, 2017 and December 31, 2016 (in thousands).
 
September 30,
2017
 
December 31, 2016
Accrued evaluated and unproved and unevaluated property costs
$
90,789

 
$
54,273

Accrued support equipment and facilities costs
15,401

 
15,139

Accrued lease operating expenses
14,217

 
16,009

Accrued interest on debt
18,228

 
6,541

Accrued asset retirement obligations
618

 
915

Accrued partners’ share of joint interest charges
18,018

 
5,572

Other
1,074

 
3,011

Total accrued liabilities
$
158,345

 
$
101,460

Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the nine months ended September 30, 2017 and 2016 (in thousands).
 
Nine Months Ended 
 September 30,
 
2017
 
2016
Cash paid for interest expense, net of amounts capitalized
$
14,542

 
$
13,370

Increase in asset retirement obligations related to mineral properties
$
2,484

 
$
2,588

(Decrease) increase in asset retirement obligations related to support equipment and facilities
$
(138
)
 
$
644

Increase (decrease) in liabilities for oil and natural gas properties capital expenditures
$
35,940

 
$
(7,849
)
Decrease in liabilities for support equipment and facilities
$
(247
)
 
$
(2,687
)
Stock-based compensation expense recognized as liability
$
150

 
$
457

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

Transfer of inventory from oil and natural gas properties
$
74

 
$
655


20

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

NOTE 13 - 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 September 30, 2017
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
134,488

 
$
460

 
$

 
$

 
$
134,948

Midstream services revenues

 
11,261

 

 
(8,043
)
 
3,218

Realized gain on derivatives
485

 

 

 

 
485

Unrealized loss on derivatives
(12,372
)
 

 

 

 
(12,372
)
Expenses(1)
86,728

 
5,598

 
15,447

 
(8,043
)
 
99,730

Operating income (loss)(2)
$
35,873

 
$
6,123

 
$
(15,447
)
 
$

 
$
26,549

Total assets
$
1,590,677

 
$
222,274

 
$
35,586

 
$

 
$
1,848,537

Capital expenditures(3)
$
180,686

 
$
35,008

 
$
1,494

 
$

 
$
217,188

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $46.1 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 $2.9 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $17.2 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

21

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

NOTE 13 - SEGMENT INFORMATION - Continued


 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
82,794

 
$
285

 
$

 
$

 
$
83,079