10-Q 1 a20180630mtdr10q.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, 2018
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 1, 2018, there were 116,365,216 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, 2018
TABLE OF CONTENTS
 
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,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
122,450

 
$
96,505

Restricted cash
21,063

 
5,977

Accounts receivable
 
 
 
Oil and natural gas revenues
74,771

 
65,962

Joint interest billings
71,041

 
67,225

Other
4,726

 
8,031

Derivative instruments
5,875

 
1,190

Lease and well equipment inventory
12,557

 
5,993

Prepaid expenses and other assets
8,454

 
6,287

Total current assets
320,937

 
257,170

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
3,338,515

 
3,004,770

Unproved and unevaluated
692,544

 
637,396

Midstream and other property and equipment
360,971

 
281,096

Less accumulated depletion, depreciation and amortization
(2,164,013
)
 
(2,041,806
)
Net property and equipment
2,228,017

 
1,881,456

         Other assets
6,893

 
7,064

Total assets
$
2,555,847

 
$
2,145,690

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
25,278

 
$
11,757

Accrued liabilities
133,365

 
174,348

Royalties payable
69,751

 
61,358

Amounts due to affiliates
8,108

 
10,302

Derivative instruments
4,016

 
16,429

Advances from joint interest owners
18,814

 
2,789

Amounts due to joint ventures
3,373

 
4,873

Other current liabilities
893

 
750

Total current liabilities
263,598

 
282,606

Long-term liabilities
 
 
 
Senior unsecured notes payable
574,164

 
574,073

Asset retirement obligations
26,890

 
25,080

Derivative instruments
5,253

 

Other long-term liabilities
6,194

 
6,385

Total long-term liabilities
612,501

 
605,538

Commitments and contingencies (Note 9)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 160,000,000 shares authorized; 116,461,171 and 108,513,597 shares issued; and 116,357,739 and 108,510,160 shares outstanding, respectively
1,165

 
1,085

Additional paid-in capital
1,916,821

 
1,666,024

Accumulated deficit
(390,784
)
 
(510,484
)
Treasury stock, at cost, 103,432 and 3,437 shares, respectively
(2,670
)
 
(69
)
Total Matador Resources Company shareholders’ equity
1,524,532

 
1,156,556

Non-controlling interest in subsidiaries
155,216

 
100,990

Total shareholders’ equity
1,679,748

 
1,257,546

Total liabilities and shareholders’ equity
$
2,555,847

 
$
2,145,690


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,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Oil and natural gas revenues
$
209,019

 
$
113,764

 
$
390,973

 
$
228,611

Third-party midstream services revenues
3,407

 
2,099

 
6,475

 
3,654

Realized (loss) gain on derivatives
(2,488
)
 
558

 
(6,746
)
 
(1,661
)
Unrealized gain on derivatives
1,429

 
13,190

 
11,845

 
33,821

Total revenues
211,367

 
129,611

 
402,547

 
264,425

Expenses
 
 
 
 
 
 
 
Production taxes, transportation and processing
20,110

 
12,875

 
37,901

 
24,682

Lease operating
25,006

 
16,040

 
47,154

 
31,797

Plant and other midstream services operating
5,676

 
2,942

 
9,896

 
5,283

Depletion, depreciation and amortization
66,838

 
41,274

 
122,207

 
75,266

Accretion of asset retirement obligations
375

 
314

 
739

 
614

General and administrative
19,369

 
17,177

 
37,295

 
33,515

Total expenses
137,374

 
90,622

 
255,192

 
171,157

Operating income
73,993

 
38,989

 
147,355

 
93,268

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

 

 

 
7

Interest expense
(8,004
)
 
(9,224
)
 
(16,495
)
 
(17,679
)
Other (expense) income
(352
)
 
1,922

 
(299
)
 
1,991

Total other expense
(8,356
)
 
(7,302
)
 
(16,794
)
 
(15,681
)
Net income
65,637

 
31,687

 
130,561

 
77,587

Net income attributable to non-controlling interest in subsidiaries
(5,831
)
 
(3,178
)
 
(10,861
)
 
(5,094
)
Net income attributable to Matador Resources Company shareholders
$
59,806

 
$
28,509

 
$
119,700

 
$
72,493

Earnings per common share
 
 
 
 

 

Basic
$
0.53

 
$
0.28

 
$
1.08

 
$
0.72

Diluted
$
0.53

 
$
0.28

 
$
1.08

 
$
0.72

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
112,706

 
100,211

 
110,809

 
100,005

Diluted
113,056

 
100,227

 
111,280

 
100,455


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, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2018
108,514

 
$
1,085

 
$
1,666,024

 
$
(510,484
)
 
3

 
$
(69
)
 
$
1,156,556

 
$
100,990

 
$
1,257,546

Issuance of common stock pursuant to employee stock compensation plan
717

 
7

 
(7
)
 

 

 

 

 

 

Issuance of common stock
7,000

 
70

 
226,542

 

 

 

 
226,612

 

 
226,612

Cost to issue equity

 

 
(146
)
 

 

 

 
(146
)
 

 
(146
)
Issuance of common stock pursuant to directors’ and advisors’ compensation plan
76

 
1

 
(1
)
 

 

 

 

 

 

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

 

 
11,327

 

 

 

 
11,327

 

 
11,327

Stock options exercised, net of options forfeited in net share settlements
154

 
2

 
(1,618
)
 

 

 

 
(1,616
)
 

 
(1,616
)
Restricted stock forfeited

 

 

 

 
100

 
(2,601
)
 
(2,601
)
 

 
(2,601
)
Contributions related to formation of Joint Venture (see Note 6)

 

 
14,700

 

 

 

 
14,700

 

 
14,700

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

 

 

 

 

 

 

 
53,900

 
53,900

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

 

 

 

 

 

 

 
(10,535
)
 
(10,535
)
Current period net income

 

 

 
119,700

 

 

 
119,700

 
10,861

 
130,561

Balance at June 30, 2018
116,461

 
$
1,165

 
$
1,916,821

 
$
(390,784
)
 
103

 
$
(2,670
)
 
$
1,524,532

 
$
155,216

 
$
1,679,748


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,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
130,561

 
$
77,587

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Unrealized gain on derivatives
(11,845
)
 
(33,821
)
Depletion, depreciation and amortization
122,207

 
75,266

Accretion of asset retirement obligations
739

 
614

Stock-based compensation expense
8,945

 
11,192

Amortization of debt issuance cost
411

 
64

Net gain on asset sales and inventory impairment

 
(7
)
Changes in operating assets and liabilities

 

Accounts receivable
(9,321
)
 
(25,642
)
Lease and well equipment inventory
(8,611
)
 
(140
)
Prepaid expenses
(2,167
)
 
(2,619
)
Other assets
(149
)
 
165

Accounts payable, accrued liabilities and other current liabilities
(883
)
 
4,442

Royalties payable
8,393

 
11,435

Advances from joint interest owners
16,025

 
3,768

Other long-term liabilities
(97
)
 
(1,062
)
Net cash provided by operating activities
254,208

 
121,242

Investing activities


 


Oil and natural gas properties capital expenditures
(421,595
)
 
(328,929
)
Expenditures for midstream and other property and equipment
(79,560
)
 
(41,743
)
Proceeds from sale of assets
7,593

 
977

Net cash used in investing activities
(493,562
)
 
(369,695
)
Financing activities


 


Repayments of borrowings
(45,000
)
 

Borrowings under Credit Agreement
45,000

 

Proceeds from issuance of common stock
226,612

 

Cost to issue equity
(73
)
 

Proceeds from stock options exercised
464

 
2,201

Contributions related to formation of Joint Venture
14,700

 
171,500

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries
53,900

 
14,700

Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries
(10,535
)
 
(1,960
)
Taxes paid related to net share settlement of stock-based compensation
(4,683
)
 
(2,970
)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary

 
(2,653
)
Net cash provided by financing activities
280,385

 
180,818

Increase (decrease) in cash and restricted cash
41,031

 
(67,635
)
Cash and restricted cash at beginning of period
102,482

 
214,142

Cash and restricted cash at end of period
$
143,513

 
$
146,507

 
 
 
 
Supplemental disclosures of cash flow information (Note 10)


 



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, oil transportation services, oil, natural gas and salt water gathering services and salt water disposal services to third parties.
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, 2017 (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, Consolidation (Topic 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 normal, recurring adjustments that are necessary for a fair presentation of the Company’s interim unaudited condensed consolidated financial statements as of June 30, 2018. Amounts as of December 31, 2017 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 and midstream 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.
Change in Accounting Principles
During the first quarter of 2018, the Company adopted Accounting Standards Codification, Revenue from Contracts with Customers (Topic 606) (“ASC 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. The Company adopted the new guidance using the modified retrospective approach. The adoption did not require an adjustment to opening accumulated deficit for any cumulative effect adjustment and did not have a material impact on the Company’s consolidated balance sheets, statements of operations, statement of shareholders’ equity or statements of cash flows.  
Prior to the adoption of ASC 606, the Company recorded oil and natural gas revenues at the time of physical transfer of such products to the purchaser. The Company followed the sales method of accounting for oil and natural gas sales, recognizing revenues based on the Company’s actual proceeds from the oil and natural gas sold to purchasers.
The Company enters into contracts with customers to sell its oil and natural gas production. With the adoption of ASC 606, revenue on these contracts is recognized in accordance with the five-step revenue recognition model prescribed in

7

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

ASC 606. Specifically, revenue is recognized when the Company’s performance obligations under these contracts are satisfied, which generally occurs with the transfer of control of the oil and natural gas to the purchaser. Control is generally considered transferred when the following criteria are met: (i) transfer of physical custody, (ii) transfer of title, (iii) transfer of risk of loss and (iv) relinquishment of any repurchase rights or other similar rights. Given the nature of the products sold, revenue is recognized at a point in time based on the amount of consideration the Company expects to receive in accordance with the price specified in the contract. Consideration under the oil and natural gas marketing contracts is typically received from the purchaser one to two months after production.
The majority of the Company’s oil marketing contracts transfer physical custody and title at or near the wellhead, which is generally when control of the oil has been transferred to the purchaser. The majority of the oil produced is sold under contracts using market-based pricing, which price is then adjusted for differentials based upon delivery location and oil quality. To the extent the differentials are incurred at or after the transfer of control of the oil, the differentials are included in oil sales on the statements of operations as they represent part of the transaction price of the contract. If the differentials, or other related costs, are incurred prior to the transfer of control of the oil, those costs are included in production taxes, transportation and processing expenses on the Company’s consolidated statements of operations, as they represent payment for services performed outside of the contract with the customer.
The Company’s natural gas is sold at the lease location, at the inlet or outlet of a natural gas plant or at an interconnect near a marketing hub following transportation from a processing plant. The majority of the Company’s natural gas is sold under fee-based contracts. When the natural gas is sold at the lease, the purchaser gathers the natural gas and transports the natural gas via pipeline to natural gas processing plants where, if necessary, natural gas liquid (“NGL”) products are extracted. The NGL products and remaining residue gas are then sold by the purchaser, or if the Company elects to repurchase the natural gas, the Company sells the natural gas to a third party. Under the fee-based contracts, the Company receives NGL and residue gas value, less the fee component, or is invoiced the fee component. To the extent control of the natural gas transfers upstream of the transportation and processing activities, revenue is recognized as the net amount received from the purchaser. To the extent that control transfers downstream of those services, revenue is recognized on a gross basis, and the related costs are included in production taxes, transportation and processing expenses on the Company’s consolidated statements of operations.
The Company recognizes midstream services revenues at the time services have been rendered and the price is fixed and determinable. Third-party midstream services revenues are those revenues from midstream operations related to third parties, including working interest owners in our operated wells. All midstream services revenues related to the Company’s working interest are eliminated in consolidation. Since the Company has a right to payment from its customers in amounts that correspond directly to the value that the customer receives from the performance completed on each contract, the Company applies the practical expedient in ASC 606 that allows recognition of revenue in the amount for which there is a right to invoice the customer without estimating a transaction price for each contract and allocating that transaction price to the performance obligations within each contract.
The Company determined the impact to its consolidated financial statements as a result of adoption of ASC 606 was a $2.6 million and $4.8 million decrease in oil and natural gas revenues and a $2.6 million and $4.8 million decrease in production taxes, transportation and processing expenses for the three and six months ended June 30, 2018, respectively, which was not material. As a result of adoption of this standard, the Company is now required to disclose the following information regarding total revenues and revenues from contracts with customers on a disaggregated basis for the three and six months ended June 30, 2018 (in thousands).

8

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

 
Three Months Ended 
 June 30, 2018
Six Months Ended 
 June 30, 2018
Revenues from contracts with customers
$
212,426

$
397,448

Realized loss on derivatives
(2,488
)
(6,746
)
Unrealized gain on derivatives
1,429

11,845

Total revenues
$
211,367

$
402,547

 
Three Months Ended 
 June 30, 2018
Six Months Ended 
 June 30, 2018
Oil revenues
$
166,271

$
314,430

Natural gas revenues
42,748

76,543

Third-party midstream services revenues
3,407

6,475

Total revenues from contracts with customers
$
212,426

$
397,448


The Company does not disclose the value of unsatisfied performance obligations under its contracts with customers as it applies the practical expedient in accordance with ASC 606. The expedient, as described in ASC 606-10-50-14(a), applies to variable consideration that is recognized as control of the product is transferred to the customer. Since each unit of product represents a separate performance obligation, future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.
During the first quarter of 2018, the Company adopted Accounting Standards Update (“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. The Company adopted ASU 2016-18 effective January 1, 2018 and determined that the adoption of this ASU changed the presentation of its beginning and ending cash balances and eliminated the presentation of changes in restricted cash balances from investing activities in its consolidated statements of cash flows. The Company adopted the new guidance using the retrospective transition method; as a result, approximately $6.0 million and $1.3 million of restricted cash was added to the beginning cash balance for the six months ended June 30, 2018 and 2017, respectively.
During the first quarter of 2018, the Company adopted 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. The Company adopted ASU 2017-01 prospectively, which did not have a material impact on its consolidated financial statements.
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 both the three and six months ended June 30, 2018 and 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.
The Company capitalized approximately $6.8 million and $5.2 million of its general and administrative costs for the three months ended June 30, 2018 and 2017, respectively, and approximately $2.6 million and $1.9 million of its interest expense for the three months ended June 30, 2018 and 2017, respectively. The Company capitalized approximately $14.1 million and $10.8 million of its general and administrative costs for the six months ended June 30, 2018 and 2017, respectively, and approximately $4.5 million and $3.2 million of its interest expense for the six months ended June 30, 2018 and 2017, respectively.
Earnings (Loss) Per Common Share
The Company reports basic earnings attributable to Matador Resources Company shareholders per common share, which excludes the effect of potentially dilutive securities, and diluted earnings attributable to Matador Resources Company

9

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

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, 2018 and 2017 (in thousands).
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
2018
 
2017
 
2018
 
2017
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
112,706

 
100,211

 
110,809

 
100,005

Dilutive effect of options and restricted stock units
350

 
16

 
471

 
450

Diluted weighted average common shares outstanding
113,056

 
100,227

 
111,280

 
100,455

Recent Accounting Pronouncements
Leases. In February 2016, the Financial Accounting Standards Board (“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. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which is a land easement practical expedient. If the Company elects to use this practical expedient, the Company should evaluate new or modified land easements under this ASU beginning at the date of adoption. Adoption of ASU 2016-02 will result in increased reported assets and liabilities. The quantitative impact of the new lease standard will depend on the leases in force at the time of adoption. The Company is currently evaluating the impact of the adoption of these ASUs on its consolidated financial statements, including identifying all leases, as defined under the new lease standard, determining which practical expedients the Company will use and quantifying the impact of the new lease standard on existing leases. The Company expects to adopt these ASUs as of January 1, 2019.
Stock Compensation. In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU extends the scope of Topic 718 to include share-based payment transactions related to the acquisition of goods and services from nonemployees. Currently, the Company accounts for stock-based awards to special advisors and contractors under ASC 505-50 as liability instruments, and the fair value of the awards is recalculated each reporting period. Upon adoption, all such awards will be measured at fair value on the grant date and the resulting expense will be recognized on a straight-line basis over the awards’ vesting period. This ASU is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The transitional guidance requires entities to remeasure all unvested awards that are being accounted for under ASC 505-50 as liability instruments as of the beginning of the year in which this ASU is adopted. The Company expects to adopt this ASU as of January 1, 2019 and does not anticipate this ASU will have a material impact to the Company’s consolidated financial statements.

10

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

NOTE 3 — ASSET RETIREMENT OBLIGATIONS


The following table summarizes the changes in the Company’s asset retirement obligations for the six months ended June 30, 2018 (in thousands).
 
 
Beginning asset retirement obligations
$
26,256

Liabilities incurred during period
1,589

Liabilities settled during period
(459
)
Accretion expense
739

Ending asset retirement obligations
28,125

Less: current asset retirement obligations(1)
(1,235
)
Long-term asset retirement obligations
$
26,890

 _______________
(1)
Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at June 30, 2018.
NOTE 4 — DEBT
At June 30, 2018 and August 1, 2018, the Company had $575.0 million of outstanding 6.875% senior notes due 2023 (the “Notes”), no borrowings outstanding under the Company’s revolving credit agreement (the “Credit Agreement”) and approximately $3.0 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 2018, the lenders completed their review of the Company’s proved oil and natural gas reserves at December 31, 2017, and as a result, on March 5, 2018, the borrowing base was increased to $725.0 million. This March 2018 redetermination constituted the regularly scheduled May 1 redetermination. The Company elected to keep the borrowing commitment at $400.0 million and the maximum facility amount remained at $500.0 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.
The Company believes that it was in compliance with the terms of the Credit Agreement at June 30, 2018.
Senior Unsecured Notes
On April 14, 2015 and December 9, 2016, the Company issued $400.0 million and $175.0 million, respectively, of 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.
NOTE 5 — INCOME TAXES
The Company’s deferred tax assets exceeded its deferred tax liabilities at June 30, 2018 due to the deferred tax assets generated by 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 June 30, 2018 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 is more likely than not to be utilized.

11

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

NOTE 6 — EQUITY

Equity Offering
On May 17, 2018, the Company completed a public offering of 7,000,000 shares of its common stock. After deducting offering costs totaling approximately $0.1 million, the Company received net proceeds of approximately $226.5 million. The proceeds from this offering were and are being used to acquire additional leasehold and mineral acres in the Delaware Basin, to fund certain midstream initiatives in the Delaware Basin and for general corporate purposes, including to fund a portion of the Company’s future capital expenditures. Pending such uses, the Company used a portion of the proceeds from the offering to repay the $45.0 million of outstanding borrowings under the Credit Agreement and invested the remaining funds in short-term marketable securities.
Stock-based Compensation
In February 2018, the Company granted awards of 667,488 shares of restricted stock and options to purchase 563,408 shares of the Company’s common stock at an exercise price of $29.68 per share to certain of its employees. The fair value of these awards was approximately $26.9 million. All of these awards vest ratably over three years.

Performance Incentive
In connection with the formation of San Mateo in 2017, the Company has the ability to earn a total of $73.5 million in performance incentives to be paid by its joint venture partner, a subsidiary of Five Point Energy LLC (“Five Point”), over a five-year period. The Company earned, and Five Point paid to the Company, $14.7 million in performance incentives during the six months ended June 30, 2018, and the Company may earn an additional $58.8 million in performance incentives over the next four years. These performance incentives are recorded as an increase to additional paid-in capital when received.

12

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

NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS


At June 30, 2018, the Company had various costless collar, three-way 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) and price floor and ceiling and fixed price for the swaps. Each contract is set to expire at varying times during 2018 and 2019.
The following is a summary of the Company’s open costless collar contracts for oil and natural gas at June 30, 2018.
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 - WTI(1)
07/01/2018 - 12/31/2018
 
1,440,000

 
$
44.27

 
$
60.29

 
$
(15,986
)
Oil - WTI(1)
01/01/2019 - 12/31/2019
 
2,400,000

 
$
50.00

 
$
64.75

 
(12,208
)
Oil - LLS(2)
07/01/2018 - 12/31/2018
 
360,000

 
$
45.00

 
$
63.05

 
(4,381
)
Natural Gas
07/01/2018 - 12/31/2018
 
8,400,000

 
$
2.58

 
$
3.67

 
79

Total open costless collar contracts
 
 
 
 
 
 
 
$
(32,496
)
_____________________
(1) NYMEX West Texas Intermediate crude oil.
(2) Argus Louisiana Light Sweet crude oil.
The following is a summary of the Company’s open three-way costless collar contracts for oil at June 30, 2018. Open three-way costless collars consist of a long put (the floor), a short call (the ceiling) and a long call that limits losses on the upside.
Commodity
Calculation Period
 
Notional Quantity (Bbl)
 
Weighted Average Price Floor ($/Bbl)
 
Weighted Average Price, Short Call ($/Bbl)
 
Weighted Average Price, Long Call ($/Bbl)
 
Fair Value of Asset (Liability) (thousands)
Oil - WTI(1)
07/01/2018 - 12/31/2018
 
960,000

 
$
50.08

 
$
63.50

 
$
66.68

 
$
(2,249
)
Total open three-way costless collar contracts
 
 
 
 
 
 
 
$
(2,249
)
_____________________
(1) NYMEX West Texas Intermediate crude oil.
The following is a summary of the Company’s open basis swap contracts for oil at June 30, 2018.
Commodity
Calculation Period
 
Notional Quantity (Bbl)
 
Fixed Price
($/Bbl)
 
Fair Value of
Asset
(Liability)
(thousands)
Oil Basis Swaps
07/01/2018 - 12/31/2018
 
2,610,000

 
$
(1.02
)
 
$
31,351

Total open swap contracts
 
 
 
 
 
 
$
31,351

 
 
 
 
 
 
 
 
Total open derivative financial instruments
 
 
 
 
 
$
(3,394
)
The Company’s 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.


13

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

NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued

 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, 2018 and December 31, 2017 (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, 2018
 
 
 
 
 
   Current assets
$
101,679

 
$
(95,804
)
 
$
5,875

   Other assets
2,749

 
(2,749
)
 

   Current liabilities
(99,820
)
 
95,804

 
(4,016
)
   Other liabilities
(8,002
)
 
2,749

 
(5,253
)
      Total
$
(3,394
)
 
$

 
$
(3,394
)
December 31, 2017
 
 
 
 
 
   Current assets
$
131,092

 
$
(129,902
)
 
$
1,190

   Current liabilities
(146,331
)
 
129,902

 
(16,429
)
      Total
$
(15,239
)
 
$

 
$
(15,239
)
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
 
2018
 
2017
 
2018
 
2017
Derivative Instrument
 
 
 
 
 
 
 
 
 
Oil
Revenues: Realized (loss) gain on derivatives
 
$
(2,488
)
 
$
581

 
$
(6,797
)
 
$
(1,053
)
Natural Gas
Revenues: Realized (loss) gain on derivatives
 

 
(23
)
 
51

 
(608
)
Realized (loss) gain on derivatives
 
(2,488
)
 
558

 
(6,746
)
 
(1,661
)
Oil
Revenues: Unrealized gain on derivatives
 
1,829

 
10,643

 
12,956

 
28,422

Natural Gas
Revenues: Unrealized (loss) gain on derivatives
 
(400
)
 
2,547

 
(1,111
)
 
5,399

Unrealized gain on derivatives
 
1,429

 
13,190

 
11,845

 
33,821

Total
 
 
$
(1,059
)
 
$
13,748

 
$
5,099

 
$
32,160


14

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

NOTE 8 — 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, 2018 and December 31, 2017 (in thousands). 
 
Fair Value Measurements at
June 30, 2018 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Natural gas derivatives
$

 
$
79

 
$

 
$
79

Oil derivatives and basis swaps

 
(3,473
)
 

 
(3,473
)
Total
$

 
$
(3,394
)
 
$

 
$
(3,394
)
 
Fair Value Measurements at
December 31, 2017 using
Description
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
Natural gas derivatives
$

 
$
1,190

 
$

 
$
1,190

Oil derivatives and basis swaps

 
(16,429
)
 

 
(16,429
)
           Total
$

 
$
(15,239
)
 
$

 
$
(15,239
)
Additional disclosures related to derivative financial instruments are provided in Note 7.
Other Fair Value Measurements
At June 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017, the fair value of the Notes was $603.4 million and $614.1 million, respectively, based on quoted market prices, which represent Level 1 inputs in the fair value hierarchy.

15

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

NOTE 9 — COMMITMENTS AND CONTINGENCIES

Processing, Transportation and Salt Water Disposal Commitments
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 minimum commitment. If the Company ceased operations in this area at June 30, 2018, the total deficiency fee required to be paid would be approximately $10.9 million. In addition, if the Company elects to reduce the gathering and processing commitment in any year, the Company has the ability to elect to increase the committed volumes in any future year to the originally agreed gathering and processing commitment. Any quantity in excess of the volume commitment delivered in a contract year can be carried over to the next contract year for purposes of calculating that year’s natural gas deficiency. The Company paid approximately $4.0 million and $3.7 million in natural gas processing and gathering fees under this agreement during the three months ended June 30, 2018 and 2017, respectively, and $7.4 million and $6.8 million in natural gas processing and gathering fees under this agreement during the six months ended June 30, 2018 and 2017, 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 — Eddy County, New Mexico Natural Gas Transportation
In late 2017, the Company entered into an 18-year, fixed-fee natural gas transportation agreement whereby the Company committed to deliver a portion of the residue natural gas production at the tailgate of San Mateo’s Black River cryogenic natural gas processing plant in the Rustler Breaks asset area (the “Black River Processing Plant”) to transport through the counterparty’s pipeline. Under this agreement, if the Company does not meet the volume commitment for transportation in a contract year, the Company will owe the fees to transport the committed volume whether or not the committed volume is utilized. The minimum contractual obligation at June 30, 2018 was approximately $45.8 million. The Company paid approximately $0.9 million and $1.5 million in transportation fees under this agreement during the three and six months ended June 30, 2018, respectively.
In late 2017, the Company also entered into a fixed-fee NGL transportation and fractionation agreement whereby the Company committed to deliver its NGL production at the tailgate of the Black River Processing Plant. The Company is committed to deliver a minimum amount of NGLs to the counterparty upon construction and completion of a pipeline expansion and a fractionation facility by the counterparty, which is currently expected to be completed late in 2019. The Company has no rights to compel the counterparty to construct this pipeline extension or fractionation facility. If the counterparty does not construct the pipeline extension and fractionation facility, then the Company does not have any minimum volume commitments under the agreement. If the counterparty constructs the pipeline extension and fractionation facility on or prior to February 28, 2021, then the Company will have a commitment to deliver a minimum amount of NGLs for seven years following the completion of the pipeline extension and fractionation facility. If the Company does not meet its NGL volume commitment in any quarter during the seven-year commitment period, it will be required to pay a deficiency fee per gallon of NGL deficiency. Should the pipeline extension and fractionation facility be completed on or prior to February 28, 2021, the minimum contractual obligation during the seven-year period would be approximately $132.3 million.
In April 2018, the Company entered into a short-term natural gas transportation agreement whereby the Company committed to deliver a portion of the residue natural gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline. Under this short-term agreement, the Company will owe the fees to transport the committed volume whether or not the committed volume is transported through the counterparty’s pipeline. The minimum contractual obligation under this short-term contract at June 30, 2018 is approximately $4.6 million. This short-term agreement ends on September 30, 2019. The Company paid approximately $0.2 million in transportation fees under this agreement during the three and six months ended June 30, 2018.
In addition, in April 2018, the Company entered into a 16-year, fixed-fee natural gas transportation agreement that begins on October 1, 2019, whereby the Company committed to deliver a portion of the residue natural gas production at the tailgate of the Black River Processing Plant to transport through the counterparty’s pipeline. The Company will owe the fees to transport

16

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

NOTE 9 — COMMITMENTS AND CONTINGENCIES — Continued

the committed volume whether or not the committed volume is transported through the counterparty’s pipeline. The minimum contractual obligation at June 30, 2018 was approximately $56.8 million.
In May 2018, the Company also entered into a 10-year, fixed-fee natural gas sales agreement whereby the Company committed to deliver residue natural gas through the counterparty’s pipeline to the Texas Gulf Coast beginning on the in-service date of such pipeline, which is expected to be operational in late 2019. If the Company does not meet the volume commitment specified in the natural gas sales agreement, it may be required to pay a deficiency fee per MMBtu of natural gas deficiency. The minimum contractual obligation at June 30, 2018 was approximately $200.6 million.
Delaware Basin — San Mateo
In February 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”). San Mateo 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 June 30, 2018 was approximately $222.6 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. The expansion was completed late in the first quarter of 2018. San Mateo’s total commitments under these agreements are $55.3 million. The subsidiary of San Mateo paid approximately $1.1 million and $3.6 million under these agreements during the three and six months ended June 30, 2018. As of June 30, 2018, the remaining obligations under these agreements were $2.0 million, which are expected to be paid within the next few months.
During the first quarter of 2018, a subsidiary of San Mateo entered into agreements for additional field compression and an amine gas treatment unit to maximize the operation of the Black River Processing Plant. San Mateo’s total commitments under these agreements are $19.9 million. The subsidiary of San Mateo paid approximately $6.0 million and $6.5 million under these agreements during the three and six months ended June 30, 2018. As of June 30, 2018, the remaining obligations under these agreements were $13.5 million, which are expected to be paid 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 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 $32.4 million at June 30, 2018.
At June 30, 2018, 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 $47.2 million at June 30, 2018. The Company expects these costs to be incurred within the next year.
Legal Proceedings
The Company is a party to several lawsuits encountered in the ordinary course of its business. While the ultimate outcome and impact to the Company cannot be predicted with certainty, in the opinion of management, it is remote that these lawsuits will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

17

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

NOTE 10 — SUPPLEMENTAL DISCLOSURES


Accrued Liabilities
The following table summarizes the Company’s current accrued liabilities at June 30, 2018 and December 31, 2017 (in thousands).
 
June 30,
2018
 
December 31,
2017
Accrued evaluated and unproved and unevaluated property costs
$
79,540

 
$
105,347

Accrued midstream property costs
11,459

 
14,823

Accrued cost to issue equity
73

 

Accrued lease operating expenses
14,209

 
12,611

Accrued interest on debt
8,345

 
8,345

Accrued asset retirement obligations
1,235

 
1,176

Accrued partners’ share of joint interest charges
14,824

 
27,628

Other
3,680

 
4,418

Total accrued liabilities
$
133,365

 
$
174,348

Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the six months ended June 30, 2018 and 2017 (in thousands).
 
Six Months Ended 
 June 30,
 
2018
 
2017
Cash paid for interest expense, net of amounts capitalized
$
14,286

 
$
15,875

Increase in asset retirement obligations related to mineral properties
$
834

 
$
1,978

Increase (decrease) in asset retirement obligations related to midstream properties
$
296

 
$
(138
)
(Decrease) increase in liabilities for oil and natural gas properties capital expenditures
$
(26,389
)
 
$
43,797

(Decrease) increase in liabilities for midstream properties capital expenditures
$
(2,371
)
 
$
1,838

Stock-based compensation expense recognized as liability
$
(93
)
 
$
(339
)
Increase (decrease) in liabilities for accrued cost to issue equity
$
73

 
$
(343
)
Transfer of inventory from (to) oil and natural gas properties
$
343

 
$
(228
)
Transfer of inventory to midstream and other property and equipment
$
(2,390
)
 
$

The following table provides a reconciliation of cash and restricted cash recorded in the interim unaudited condensed consolidated balance sheets to cash and restricted cash as presented on the interim unaudited condensed consolidated statements of cash flows (in thousands).
 
Six Months Ended 
 June 30,
 
2018
 
2017
Cash
$
122,450

 
$
131,467

Restricted cash
21,063

 
15,040

Total cash and restricted cash
$
143,513

 
$
146,507



18

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

NOTE 11 — 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, development and production 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, oil transportation services, natural gas, oil and salt water gathering services and salt water disposal services to third parties. 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.
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, 2018
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
207,229

 
$
1,790

 
$

 
$

 
$
209,019

Midstream services revenues

 
19,896

 

 
(16,489
)
 
3,407

Realized loss on derivatives
(2,488
)
 

 

 

 
(2,488
)
Unrealized gain on derivatives
1,429

 

 

 

 
1,429

Expenses(1)
126,025

 
9,363

 
18,475

 
(16,489
)
 
137,374

Operating income (loss)(2)
$
80,145

 
$
12,323

 
$
(18,475
)
 
$

 
$
73,993

Total assets
$
2,058,447

 
$
354,068

 
$
143,332

 
$

 
$
2,555,847

Capital expenditures(3)
$
199,345

 
$
32,900

 
$
732

 
$

 
$
232,977

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $64.5 million and $2.3 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $25,000.
(2)
Includes $5.8 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $16.1 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

19

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

NOTE 11 — SEGMENT INFORMATION — Continued


 
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.
 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
387,489

 
$
3,484

 
$

 
$

 
$
390,973

Midstream services revenues

 
35,708

 

 
(29,233
)
 
6,475

Realized loss on derivatives
(6,746
)
 

 

 

 
(6,746
)
Unrealized gain on derivatives
11,845

 

 

 

 
11,845

Expenses(1)
232,180

 
16,561

 
35,684

 
(29,233
)
 
255,192

Operating income (loss)(2)
$
160,408

 
$
22,631

 
$
(35,684
)
 
$

 
$
147,355

Total assets
$
2,058,447

 
$
354,068

 
$
143,332

 
$

 
$
2,555,847

Capital expenditures(3)
$
388,790

 
$
78,617

 
$
1,258

 
$

 
$
468,665

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $117.8 million and $3.9 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.6 million.
(2)
Includes $10.9 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $38.5 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 11 — SEGMENT INFORMATION — Continued


 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
227,552

 
$
1,059

 
$

 
$

 
$
228,611

Midstream services revenues

 
20,983

 

 
(17,329
)
 
3,654

Realized loss on derivatives
(1,661
)
 

 

 

 
(1,661
)
Unrealized gain on derivatives
33,821

 

 

 

 
33,821

Expenses(1)
146,416

 
10,462

 
31,608

 
(17,329
)
 
171,157

Operating income (loss)(2)
$
113,296

 
$
11,580

 
$
(31,608
)
 
$

 
$
93,268

Total assets
$
1,436,678

 
$
192,889

 
$
147,509

 
$

 
$
1,777,076

Capital expenditures(3)
$
373,956

 
$
40,227

 
$
3,216

 
$

 
$
417,399

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $72.1 million and $2.5 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.7 million.
(2)
Includes $5.1 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $18.6 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 12 — SUBSIDIARY GUARANTORS

The Notes are jointly and severally guaranteed by certain subsidiaries of Matador (the “Guarantor Subsidiaries”) on a full and unconditional basis (except for customary release provisions). At June 30, 2018, the Guarantor Subsidiaries were 100% owned by Matador. Matador is a parent holding company and has no independent assets or operations, and there are no significant restrictions on the ability of Matador to obtain funds from the Guarantor Subsidiaries by dividend or loan. San Mateo and its subsidiaries (the “Non-Guarantor Subsidiaries”) are not guarantors of 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.
Condensed Consolidating Balance Sheet
June 30, 2018
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
811,982

 
$
8,235

 
$

 
$
(820,217
)
 
$

Third-party current assets
 
3,031

 
29,358

 
288,548

 

 
320,937

Net property and equipment
 

 
299,258

 
1,928,759

 

 
2,228,017

Investment in subsidiaries
 
1,285,896

 

 
162,418

 
(1,448,314
)
 

Third-party long-term assets
 
6,433

 

 
3,394

 
(2,934
)
 
6,893

Total assets
 
$
2,107,342

 
$
336,851

 
$
2,383,119

 
$
(2,271,465
)
 
$
2,555,847

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$

 
$

 
$
820,217

 
$
(820,217
)
 
$

Third-party current liabilities
 
8,646

 
15,482

 
239,726

 
(256
)
 
263,598

Senior unsecured notes payable
 
574,164

 

 

 

 
574,164

Other third-party long-term liabilities
 

 
3,735

 
37,280

 
(2,678
)
 
38,337

Total equity attributable to Matador Resources Company
 
1,524,532

 
162,418

 
1,285,896

 
(1,448,314
)
 
1,524,532

Non-controlling interest in subsidiaries
 

 
155,216

 

 

 
155,216

Total liabilities and equity
 
$
2,107,342

 
$
336,851

 
$
2,383,119

 
$
(2,271,465
)
 
$
2,555,847

Condensed Consolidating Balance Sheet
December 31, 2017
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
585,109

 
$
2,912

 
$

 
$
(588,021
)
 
$

Third-party current assets
 
2,240

 
9,334

 
245,596

 

 
257,170

Net property and equipment
 

 
223,178

 
1,658,278

 

 
1,881,456

Investment in subsidiaries
 
1,147,295

 

 
111,077

 
(1,258,372
)
 

Third-party long-term assets
 
6,425

 

 
3,642

 
(3,003
)
 
7,064

Total assets
 
$
1,741,069

 
$
235,424

 
$
2,018,593

 
$
(1,849,396
)
 
$
2,145,690

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$

 
$

 
$
588,021

 
$
(588,021
)
 
$

Third-party current liabilities
 
8,847

 
19,891

 
254,142

 
(274
)
 
282,606

Senior unsecured notes payable
 
574,073

 

 

 

 
574,073

Other third-party long-term liabilities
 
1,593

 
3,466

 
29,135

 
(2,729
)
 
31,465

Total equity attributable to Matador Resources Company
 
1,156,556

 
111,077

 
1,147,295

 
(1,258,372
)
 
1,156,556

Non-controlling interest in subsidiaries
 

 
100,990

 

 

 
100,990

Total liabilities and equity
 
$
1,741,069

 
$
235,424

 
$
2,018,593

 
$
(1,849,396
)
 
$
2,145,690

Condensed Consolidating Statement of Operations
For the Three Months Ended June 30, 2018
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
21,356

 
$
206,219

 
$
(16,208
)
 
$
211,367

Total expenses
 
1,178

 
9,466

 
142,938

 
(16,208
)
 
137,374

Operating (loss) income
 
(1,178
)
 
11,890

 
63,281

 

 
73,993

Interest expense
 
(8,004
)
 

 

 

 
(8,004
)
Other income (expense)
 

 
11

 
(363
)
 

 
(352
)
Earnings in subsidiaries
 
68,988

 

 
6,070

 
(75,058
)
 

Income before income taxes
 
59,806

 
11,901

 
68,988

 
(75,058
)
 
65,637

Net income attributable to non-controlling interest in subsidiaries
 

 
(5,831
)
 

 

 
(5,831
)
Net income attributable to Matador Resources Company shareholders
 
$
59,806

 
$
6,070

 
$
68,988

 
$
(75,058
)
 
$
59,806

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

Interest expense
 
(9,224
)
 

 

 

 
(9,224
)
Other (expense) 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 Six Months Ended June 30, 2018
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
38,550

 
$
392,699

 
$
(28,702
)
 
$
402,547

Total expenses
 
2,412

 
16,394

 
265,088

 
(28,702
)
 
255,192

Operating (loss) income
 
(2,412
)
 
22,156

 
127,611

 

 
147,355

Interest expense
 
(16,495
)
 

 

 

 
(16,495
)
Other income (expense)
 
6

 
11

 
(316
)