Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________________________ 
FORM 10-Q
 _________________________________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
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 every Interactive Data File required to be submitted 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 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
 
¨  
 
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No
As of May 1, 2019, there were 116,598,207 shares of the registrant’s common stock, par value $0.01 per share, outstanding.


Table of Contents

MATADOR RESOURCES COMPANY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2019
TABLE OF CONTENTS
 
Page



Table of Contents

Part I — FINANCIAL INFORMATION
Item 1. Financial Statements — Unaudited
Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED
(In thousands, except par value and share data)
 
March 31,
2019
 
December 31,
2018
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
20,758

 
$
64,545

Restricted cash
25,954

 
19,439

Accounts receivable
 
 
 
Oil and natural gas revenues
74,699

 
68,161

Joint interest billings
56,632

 
61,831

Other
19,344

 
16,159

Derivative instruments
4,795

 
49,929

Lease and well equipment inventory
18,779

 
17,564

Prepaid expenses and other assets
8,993

 
8,057

Total current assets
229,954

 
305,685

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
3,943,423

 
3,780,236

Unproved and unevaluated
1,235,264

 
1,199,511

Midstream properties
457,456

 
428,025

Other property and equipment
24,848

 
22,041

Less accumulated depletion, depreciation and amortization
(2,383,815
)
 
(2,306,949
)
Net property and equipment
3,277,176

 
3,122,864

Other assets
 
 
 
Deferred income taxes
18,065

 
20,457

Other assets
58,103

 
6,512

Total other assets
76,168

 
26,969

Total assets
$
3,583,298

 
$
3,455,518

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
48,068

 
$
66,970

Accrued liabilities
173,113

 
170,855

Royalties payable
57,276

 
64,776

Amounts due to affiliates
4,413

 
13,052

Derivative instruments
161

 

Advances from joint interest owners
4,672

 
10,968

Amounts due to joint ventures
2,433

 
2,373

Other current liabilities
38,287

 
1,028

Total current liabilities
328,423

 
330,022

Long-term liabilities
 
 
 
Borrowings under Credit Agreement
140,000

 
40,000

Borrowings under San Mateo Credit Facility
220,000

 
220,000

Senior unsecured notes payable
1,038,229

 
1,037,837

Asset retirement obligations
30,290

 
29,736

Derivative instruments
507

 
83

Deferred income taxes
12,903

 
13,221

Other long-term liabilities
21,417

 
4,962

Total long-term liabilities
1,463,346

 
1,345,839

Commitments and contingencies (Note 10)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 160,000,000 shares authorized; 116,593,623 and 116,374,503 shares issued; and 116,388,175 and 116,353,590 shares outstanding, respectively
1,166

 
1,164

Additional paid-in capital
1,946,466

 
1,924,408

Accumulated deficit
(253,224
)
 
(236,277
)
Treasury stock, at cost, 205,448 and 20,913 shares, respectively
(3,585
)
 
(415
)
Total Matador Resources Company shareholders’ equity
1,690,823

 
1,688,880

Non-controlling interest in subsidiaries
100,706

 
90,777

Total shareholders’ equity
1,791,529

 
1,779,657

Total liabilities and shareholders’ equity
$
3,583,298

 
$
3,455,518


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

Table of Contents


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
(In thousands, except per share data)
 
Three Months Ended 
 March 31,
 
2019
 
2018
Revenues
 
 
 
Oil and natural gas revenues
$
193,269

 
$
181,954

Third-party midstream services revenues
11,838

 
3,068

Sales of purchased natural gas
11,231

 

Realized gain (loss) on derivatives
3,270

 
(4,258
)
Unrealized (loss) gain on derivatives
(45,719
)
 
10,416

Total revenues
173,889

 
191,180

Expenses
 
 
 
Production taxes, transportation and processing
19,665

 
17,791

Lease operating
31,163

 
22,148

Plant and other midstream services operating
9,316

 
4,220

Purchased natural gas
10,634

 

Depletion, depreciation and amortization
76,866

 
55,369

Accretion of asset retirement obligations
414

 
364

General and administrative
18,290

 
17,926

Total expenses
166,348

 
117,818

Operating income
7,541

 
73,362

Other income (expense)
 
 
 
Interest expense
(17,929
)
 
(8,491
)
Other (expense) income
(110
)
 
53

Total other expense
(18,039
)
 
(8,438
)
(Loss) income before income taxes
(10,498
)
 
64,924

Income tax (benefit) provision
 
 
 
Deferred
(1,013
)
 

Total income tax benefit
(1,013
)
 

Net (loss) income
(9,485
)
 
64,924

Net income attributable to non-controlling interest in subsidiaries
(7,462
)
 
(5,030
)
Net (loss) income attributable to Matador Resources Company shareholders
$
(16,947
)
 
$
59,894

(Loss) earnings per common share
 
 
 
Basic
$
(0.15
)
 
$
0.55

Diluted
$
(0.15
)
 
$
0.55

Weighted average common shares outstanding
 
 
 
Basic
115,315

 
108,913

Diluted
115,315

 
109,412


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

Table of Contents

Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(In thousands)
For the Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2019
116,375

 
$
1,164

 
$
1,924,408

 
$
(236,277
)
 
21

 
$
(415
)
 
$
1,688,880

 
$
90,777

 
$
1,779,657

Issuance of common stock pursuant to employee stock compensation plan
6

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to directors’ and advisors’ compensation plan
3

 

 

 

 

 

 

 

 

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

 

 
5,802

 

 

 

 
5,802

 

 
5,802

Stock options exercised, net of options forfeited in net share settlements
210

 
2

 
3,109

 

 

 

 
3,111

 

 
3,111

Restricted stock forfeited

 

 

 

 
184

 
(3,170
)
 
(3,170
)
 

 
(3,170
)
Contribution related to formation of San Mateo I, net of tax of $3.1 million (see Note 7)

 

 
11,613

 

 

 

 
11,613

 

 
11,613

Contribution of property related to formation of San Mateo II (see Note 7)

 

 
(506
)
 

 

 

 
(506
)
 
506

 

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

 

 
2,040

 

 

 

 
2,040

 
10,291

 
12,331

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

 

 

 

 

 

 

 
(8,330
)
 
(8,330
)
Current period net (loss) income

 

 

 
(16,947
)
 

 

 
(16,947
)
 
7,462

 
(9,485
)
Balance at March 31, 2019
116,594

 
$
1,166

 
$
1,946,466

 
$
(253,224
)
 
205

 
$
(3,585
)
 
$
1,690,823

 
$
100,706

 
$
1,791,529


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

Table of Contents


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(in thousands)
For the Three Months Ended March 31, 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
697

 
7

 
(7
)
 

 

 

 

 

 

Issuance of common stock pursuant to directors’ and advisors’ compensation plan
6

 
1

 
(1
)
 

 

 

 

 

 

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

 

 
5,390

 

 

 

 
5,390

 

 
5,390

Stock options exercised, net of options forfeited in net share settlements
130

 
1

 
(1,918
)
 

 

 

 
(1,917
)
 

 
(1,917
)
Restricted stock forfeited

 

 

 

 
82

 
(2,377
)
 
(2,377
)
 

 
(2,377
)
Contributions related to formation of San Mateo I (see Note 7)

 

 
14,700

 

 

 

 
14,700

 

 
14,700

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

 

 

 

 

 

 

 
(4,900
)
 
(4,900
)
Current period net income

 

 

 
59,894

 

 

 
59,894

 
5,030

 
64,924

Balance at March 31, 2018
109,347

 
$
1,094

 
$
1,684,188

 
$
(450,590
)
 
85

 
$
(2,446
)
 
$
1,232,246

 
$
130,520

 
$
1,362,766



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

Table of Contents

Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
 
Three Months Ended 
 March 31,
 
2019
 
2018
Operating activities
 
 
 
Net (loss) income
$
(9,485
)
 
$
64,924

Adjustments to reconcile net (loss) income to net cash provided by operating activities
 
 
 
Unrealized loss (gain) on derivatives
45,719

 
(10,416
)
Depletion, depreciation and amortization
76,866

 
55,369

Accretion of asset retirement obligations
414

 
364

Stock-based compensation expense
4,587

 
4,179

Deferred income tax benefit
(1,013
)
 

Amortization of debt issuance cost
643

 
365

Changes in operating assets and liabilities

 

Accounts receivable
(3,873
)
 
3,268

Lease and well equipment inventory
(1,465
)
 
(3,806
)
Prepaid expenses
(936
)
 
(674
)
Other assets
9,809

 
(249
)
Accounts payable, accrued liabilities and other current liabilities
(41,621
)
 
15,184

Royalties payable
(7,500
)
 
1,627

Advances from joint interest owners
(6,297
)
 
6,063

Other long-term liabilities
(6,608
)
 
(49
)
Net cash provided by operating activities
59,240

 
136,149

Investing activities


 


Oil and natural gas properties capital expenditures
(182,288
)
 
(183,422
)
Midstream capital expenditures
(33,340
)
 
(36,806
)
Expenditures for other property and equipment
(807
)
 
(526
)
Proceeds from sale of assets
1,555

 

Net cash used in investing activities
(214,880
)
 
(220,754
)
Financing activities


 


Borrowings under Credit Agreement
100,000

 

Proceeds from stock options exercised
3,150

 
164

Contributions related to formation of San Mateo I
14,700

 
14,700

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries
12,330

 
29,400

Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries
(8,330
)
 
(4,900
)
Taxes paid related to net share settlement of stock-based compensation
(3,208
)
 
(4,458
)
Cash paid under financing lease obligations
(274
)
 

Net cash provided by financing activities
118,368

 
34,906

Decrease in cash and restricted cash
(37,272
)
 
(49,699
)
Cash and restricted cash at beginning of period
83,984

 
102,482

Cash and restricted cash at end of period
$
46,712

 
$
52,783

 
 
 
 
Supplemental disclosures of cash flow information (Note 11)


 



The accompanying notes are an integral part of these financial statements.
7


Table of Contents
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 ventures, San Mateo Midstream, LLC (“San Mateo I”) and San Mateo Midstream II, LLC (“San Mateo II” and, together with San Mateo I, “San Mateo”), 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, 2018 filed with the SEC on March 1, 2019 (the “Annual Report”). The Company consolidates certain subsidiaries and joint ventures that are less than wholly-owned and are not involved in oil and natural gas exploration, including San Mateo, and the net income and equity attributable to the non-controlling interest in these subsidiaries have been reported separately as required by Accounting Standards Codification (“ASC”), 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 March 31, 2019. Amounts as of December 31, 2018 are derived from the Company’s audited consolidated financial statements included in the Annual Report. Certain reclassifications have been made to the December 31, 2018 financial statement amounts in order to conform them to the March 31, 2019 presentations.
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 oil and natural gas revenues, accrued assets and liabilities, stock-based compensation, valuation of derivative instruments, deferred tax assets and liabilities 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
Leases. During the first quarter of 2019, the Company adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) and the amendments provided for in ASU 2018-11, Leases (Topic 842), which require the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that the Company chose to apply. These practical expedients relate to (i) the identification and classification of leases that commenced before the effective date, (ii) the treatment of initial direct costs for leases that commenced before the effective date, (iii) the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset and (iv) the ability to initially apply the new lease standard at the adoption date. During the first quarter of 2019, the Company also adopted ASU 2018-01, Leases (Topic 842), which is a land easement practical expedient, and, as a result, the Company began evaluating land easements that are entered into or modified after December 31, 2018. See Note 3 for additional disclosures related to leases.

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

The adoption of ASC 842 resulted in the Company recording in the condensed consolidated balance sheet as of March 31, 2019 certain of the Company’s compressor leases, drilling rig leases and office leases, which were previously considered operating leases and not reported on the Company’s condensed consolidated balance sheets. As such, the Company recorded (i) long-term right of use assets of $62.3 million, which are included in “Other assets” and “Other property and equipment” and (ii) net right of use liabilities of $62.3 million, which are included in “Other current liabilities” and “Other long-term liabilities.” There was no cumulative-effect adjustment to the opening balance of accumulated deficit as a result of the adoption of this standard.
Stock Compensation. During the first quarter of 2019, the Company also adopted ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which extends the scope of Topic 718 to include share-based payment transactions related to the acquisition of goods and services from nonemployees. Previously, the Company accounted for stock-based awards to special advisors and contractors under ASC 505-50 as liability instruments, and the fair value of the awards was recalculated each reporting period. Upon adoption, all such awards are now measured at fair value on the grant date and the resulting expense is recognized on a straight-line basis over the awards’ vesting periods. 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. Adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
Revenues
The following table summarizes the Company’s total revenues and revenues from contracts with customers on a disaggregated basis for the three months ended March 31, 2019 and 2018 (in thousands).
 
Three Months Ended 
 March 31,
 
2019
 
2018
Revenues from contracts with customers
$
216,338

 
$
185,022

Realized gain (loss) on derivatives
3,270

 
(4,258
)
Unrealized (loss) gain on derivatives
(45,719
)
 
10,416

Total revenues
$
173,889

 
$
191,180

 
Three Months Ended 
 March 31,
 
2019
 
2018
Oil revenues
$
154,204

 
$
148,159

Natural gas revenues
39,065

 
33,795

Third-party midstream services revenues
11,838

 
3,068

Sales of purchased natural gas
11,231

 

Total revenues from contracts with customers
$
216,338

 
$
185,022

Property and Equipment
The Company uses the full-cost method of accounting for its investments in oil and natural gas properties. Under this method, the Company is required to perform a ceiling test each quarter that determines a limit, or ceiling, on the capitalized costs of oil and natural gas properties based primarily on the after-tax estimated future net cash flows from oil and natural gas properties using a 10% discount rate and the arithmetic average of first-day-of-the-month oil and natural gas prices for the prior 12-month period. For the three months ended March 31, 2019 and 2018, 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 $8.4 million and $7.3 million of its general and administrative costs and approximately $1.6 million and $1.9 million of its interest expense for the three months ended March 31, 2019 and 2018, respectively.

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

Earnings (Loss) Per Common Share
The Company reports basic earnings attributable to Matador shareholders per common share, which excludes the effect of potentially dilutive securities, and diluted earnings attributable to Matador shareholders per common share, which includes the effect of all potentially dilutive securities unless their impact is anti-dilutive.
The following table sets forth the computation of diluted weighted average common shares outstanding for the three months ended March 31, 2019 and 2018 (in thousands).
 
Three Months Ended 
 March 31,
2019
 
2018
Weighted average common shares outstanding
 
 
 
Basic
115,315

 
108,913

Dilutive effect of options and restricted stock units

 
499

Diluted weighted average common shares outstanding
115,315

 
109,412

A total of 2.8 million options to purchase shares of Matador’s common stock and 0.4 million restricted stock units were excluded from the diluted weighted average common shares outstanding for the three months ended March 31, 2019 because their effects were anti-dilutive. Additionally, 0.8 million restricted shares, which are participating securities, were excluded from the calculations above for the three months ended March 31, 2019, as the security holders do not have the obligation to share in the losses of the Company.

10

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


NOTE 3 — LEASES

The Company determines if an arrangement is a lease at inception of the contract. If an arrangement is a lease, the present value of the related lease payments is recorded as a liability and an equal amount is capitalized as a right of use asset on the Company’s interim unaudited condensed consolidated balance sheet. Right of use assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company’s estimated incremental borrowing rate, determined at the lease commencement date using the Company’s average secured borrowing rate, is used to calculate present value. The weighted average estimated incremental borrowing rate used for the three months ended March 31, 2019 was 3.68%. For these purposes, the lease term includes options to extend the lease when it is reasonably certain that the Company will exercise such option. Leases with terms of 12 months or less at inception are not recorded on the interim unaudited condensed consolidated balance sheet unless there is a significant cost to terminate the lease, including the cost of removal of the leased asset. As the Company is the responsible party under these arrangements, the Company records the resulting assets and liabilities on a gross basis in its interim unaudited condensed consolidated balance sheets.
The following table presents supplemental interim unaudited condensed consolidated statement of operations information related to lease expenses, on a gross basis, for the three months ended March 31, 2019 (in thousands). Lease payments represent gross payments to vendors, which, for certain of our operating assets, are partially offset by amounts received from other working interest owners in our operated wells.
 
 
Three Months Ended 
 March 31, 2019
Operating leases
 
 
Lease operating
 
$
2,242

Plant and other midstream services
 
31

General and administrative
 
809

Total operating leases(1)
 
3,082

Short-term leases
 
 
Lease operating
 
2,209

Plant and other midstream services
 
1,620

General and administrative
 
12

Total short-term leases(2)(3)
 
3,841

Financing leases
 
 
Depreciation of assets
 
209

Interest on lease liabilities
 
31

Total financing leases
 
240

Total lease expense
 
$
7,163

_____________________
(1)
Does not include gross payments of $5.3 million related to drilling rig leases that were capitalized and recorded in “Oil and natural gas properties, full-cost method” in the interim unaudited condensed consolidated balance sheet at March 31, 2019.
(2)
These costs are related to leases that are not recorded on the interim unaudited condensed consolidated balance sheet.
(3)
Does not include gross payments of $26.5 million related to drilling rig leases and other equipment rentals that were recorded in the interim unaudited condensed consolidated balance sheet at March 31, 2019.
    


11

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


NOTE 3 — LEASES — Continued

The following table presents supplemental interim unaudited condensed consolidated balance sheet information related to leases as of March 31, 2019 (in thousands).
 
 
March 31, 2019
Operating leases
 
 
Other assets
 
$
51,744

Other current liabilities
 
$
(36,899
)
Other long-term liabilities
 
(20,012
)
Total operating lease liabilities
 
$
(56,911
)
 
 

Financing leases
 
 
Other property and equipment, at cost
 
$
3,505

Accumulated depreciation
 
(634
)
Net property and equipment
 
$
2,871

Other current liabilities
 
$
(1,384
)
Other long-term liabilities
 
(1,405
)
Total financing lease liabilities
 
$
(2,789
)

The following table presents supplemental interim unaudited condensed consolidated cash flow information related to lease payments for the three months ended March 31, 2019 (in thousands).
 
 
Three Months Ended 
 March 31, 2019
Cash paid related to lease liabilities
 
 
Operating cash payments for operating leases
 
$
2,527

Investing cash payments for operating leases
 
$
5,300

Financing cash payments for financing leases
 
$
274

 
 

Right of use assets obtained in exchange for lease obligations entered into during the period
 
 
Operating leases
 
$
1,332

Financing leases
 
$
84


The following table presents the maturities of lease liabilities at March 31, 2019 (in years).
 
 
Three Months Ended 
 March 31, 2019
Weighted-Average Remaining Lease Term
 
 
Operating leases
 
2.9
Financing leases
 
2.5

12

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


NOTE 3 — LEASES — Continued

The following table presents a schedule of future minimum lease payments required under all lease agreements as of March 31, 2019 and December 31, 2018, respectively (in thousands). 
 
 
March 31, 2019
 
 
Operating Leases
 
Financing Leases
2019
 
$
30,508

 
$
943

2020
 
12,605

 
940

2021
 
3,705

 
548

2022
 
3,239

 
457

2023
 
3,234

 

Thereafter
 
7,680

 

Total lease payments
 
60,971

 
2,888

Less imputed interest
 
(4,060
)
 
(99
)
Total lease obligations
 
56,911

 
2,789

Less current obligations
 
(36,899
)
 
(1,384
)
Long-term lease obligations
 
$
20,012

 
$
1,405

 
 
December 31, 2018
 
 
Operating Leases
 
Financing Leases
2019
 
$
39,457

 
$
1,240

2020
 
12,009

 
913

2021
 
3,513

 
534

2022
 
3,209

 
455

2023
 
3,234

 

Thereafter
 
7,680

 

Total lease payments
 
69,102

 
3,142

Less imputed interest
 
(4,300
)
 
(130
)
Total lease obligation
 
64,802

 
3,012

Less current obligations
 
(39,457
)
 
(1,240
)
Long-term lease obligations
 
$
25,345

 
$
1,772


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



NOTE 4 — ASSET RETIREMENT OBLIGATIONS
The following table summarizes the changes in the Company’s asset retirement obligations for the three months ended March 31, 2019 (in thousands).
Beginning asset retirement obligations
$
31,086

Liabilities incurred during period
445

Accretion expense
414

Ending asset retirement obligations
31,945

Less: current asset retirement obligations(1)
(1,655
)
Long-term asset retirement obligations
$
30,290

 _______________
(1)
Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at March 31, 2019.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
UNAUDITED — CONTINUED

NOTE 5 — DEBT



At March 31, 2019, the Company had $1.05 billion of outstanding senior notes due 2026 (the “Notes”), $140.0 million in borrowings outstanding under its revolving credit facility (the “Credit Agreement”) and approximately $13.6 million in outstanding letters of credit issued pursuant to the Credit Agreement. At May 1, 2019, the Company had $1.05 billion of outstanding Notes, $190.0 million in borrowings outstanding under the Credit Agreement and approximately $13.6 million in outstanding letters of credit issued pursuant to the Credit Agreement.
At March 31 and May 1, 2019, San Mateo I had $220.0 million in borrowings outstanding under its revolving credit facility (the “San Mateo Credit Facility”) and approximately $16.2 million in outstanding letters of credit issued pursuant to the San Mateo Credit Facility.
Credit Agreements
MRC Energy Company
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. The Company and the lenders may each request an unscheduled redetermination of the borrowing base once between scheduled redetermination dates. In April 2019, the lenders completed their review of the Company’s proved oil and natural gas reserves at December 31, 2018, and, as a result, the borrowing base was increased to $900.0 million. The Company elected to keep the borrowing commitment at $500.0 million, and the maximum facility amount remained $1.5 billion. This April 2019 redetermination constituted the regularly scheduled May 1 redetermination. 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 31, 2023.
The Company believes that it was in compliance with the terms of the Credit Agreement at March 31, 2019.
San Mateo Midstream, LLC
On December 19, 2018, San Mateo I entered into the $250.0 million San Mateo Credit Facility, which matures December 19, 2023. The San Mateo Credit Facility includes an accordion feature, which could expand lender commitments to up to $400.0 million. The San Mateo Credit Facility is non-recourse with respect to Matador and its wholly-owned subsidiaries, as well as San Mateo II, but is guaranteed by San Mateo I’s subsidiaries and secured by substantially all of San Mateo I’s assets, including real property.
The Company believes that San Mateo I was in compliance with the terms of the San Mateo Credit Facility at March 31, 2019.
Senior Unsecured Notes
In August and October 2018, the Company issued $750.0 million and $300.0 million, respectively, of Notes, which have a 5.875% coupon rate. The Notes will mature September 15, 2026, and interest is payable on the Notes semi-annually in arrears on each March 15 and September 15. The Notes are guaranteed on a senior unsecured basis by certain subsidiaries of the Company.
NOTE 6 — INCOME TAXES
The Company’s total income tax benefit for the three months ended March 31, 2019 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax loss due primarily to the impact of permanent differences between book and tax loss at March 31, 2019.
Due to a variety of factors, including the Company’s significant net income in 2017 and 2018, the Company’s federal valuation allowance and a portion of the Company’s state valuation allowance were reversed at December 31, 2018 as the deferred tax assets were determined to be more likely than not to be utilized. As a portion of the Company’s state net operating loss carryforwards are not expected to be utilized before expiration, a valuation allowance will continue to be recognized until the state deferred tax assets are more likely than not to be utilized.
The Company’s deferred tax assets exceeded its deferred tax liabilities at March 31, 2018 due to the deferred tax assets generated by full-cost ceiling impairment charges 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 March 31, 2018 due to uncertainties regarding the future realization of its deferred tax assets.


15

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

NOTE 7 — EQUITY

Stock-based Compensation
In February 2019, the Company granted awards to certain of its employees of 428,006 service-based restricted stock units to be settled in cash, which are liability instruments, and 428,006 performance-based stock units, which are equity instruments. The performance-based stock units vest in an amount between zero and 200% based on the Company’s relative total shareholder return over the three-year period ending December 31, 2021, as compared to a designated peer group. The service-based restricted stock units vest ratably over three years, and the performance-based stock units vest after completion of the three-year performance period. The fair value of these awards was approximately $16.8 million on the grant date. In April 2019, the Company granted awards to certain of its employees of 259,038 service-based restricted stock units to be settled in cash, which are liability instruments, and 205,361 shares of service-based restricted stock, which are equity instruments. Both the liability instruments and the equity instruments vest ratably over three years. The fair value of these awards was approximately $9.2 million on the grant date.
San Mateo II
On February 25, 2019, the Company announced the formation of San Mateo II, a strategic joint venture with a subsidiary of Five Point Energy LLC (“Five Point”) designed to expand the Company’s midstream operations in the Delaware Basin, specifically in Eddy County, New Mexico. San Mateo II is owned 51% by the Company and 49% by Five Point. In addition, Five Point has committed to pay $125 million of the first $150 million of capital expenditures incurred by San Mateo II to develop facilities in the Stebbins area and surrounding leaseholds (the “Greater Stebbins Area”) and the Stateline asset area. The Company also has the ability to earn up to $150 million in deferred performance incentives over the next five years related to the formation of San Mateo II, plus additional performance incentives for securing volumes from third-party customers. During the three months ended March 31, 2019, the Company contributed $1.0 million of property and Five Point contributed $4.0 million of cash to San Mateo II.
Performance Incentives
In connection with the formation of San Mateo I in 2017, the Company has the ability to earn a total of $73.5 million in performance incentives to be paid by Five Point over a five-year period. The Company earned, and Five Point paid to the Company, $14.7 million in performance incentives during each of the three months ended March 31, 2019 and 2018, and the Company may earn up to an additional $44.1 million in performance incentives over the next three years. These performance incentives are recorded as an increase to additional paid-in capital when received. These performance incentives for the three months ended March 31, 2019 and 2018 are also denoted as “Contributions related to formation of San Mateo I” under “Financing activities” in the Company’s interim unaudited condensed consolidated statements of cash flows and changes in shareholders’ equity.
NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS
At March 31, 2019, 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 2019 and 2020.
The following is a summary of the Company’s open costless collar contracts for oil and natural gas at March 31, 2019.
Commodity
 
Calculation Period
 
Notional Quantity (Bbl or MMBtu)
 
Weighted Average Price Floor ($/Bbl or
$/MMBtu)
 
Weighted Average Price Ceiling ($/Bbl or
$/MMBtu)
 
Fair Value of Asset (Liability) (thousands)
Oil
 
04/01/2019 - 12/31/2019
 
4,860,000

 
$
51.16

 
$
71.67

 
$
1,446

Natural Gas
 
04/01/2019 - 12/31/2019
 
1,800,000

 
$
2.50

 
$
3.80

 
36

Total open costless collar contracts
 
 
 
 
 
 
 
$
1,482



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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
UNAUDITED — CONTINUED

NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued

The following is a summary of the Company’s open three-way costless collar contracts for oil and natural gas at March 31, 2019. 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 or MMBtu)
 
Weighted Average Price Floor ($/Bbl or $/MMBtu)
 
Weighted Average Price, Short Call ($/Bbl or $/MMBtu)
 
Weighted Average Price, Long Call ($/Bbl or $/MMBtu)
 
Fair Value of Asset (Liability) (thousands)
Oil
 
04/01/2019 - 12/31/2019
 
990,000

 
$
60.00

 
$
75.00

 
$
78.85

 
$
3,298

Natural Gas
 
04/01/2019 - 12/31/2019
 
3,600,000

 
$
2.50

 
$
3.00

 
$
3.24

 
(28
)
Total open three-way costless collar contracts
 
 
 
 
 
 
 
$
3,270

The following is a summary of the Company’s open basis swap contracts for oil at March 31, 2019.
Commodity
 
Calculation Period
 
Notional Quantity (Bbl)
 
Fixed Price
($/Bbl)
 
Fair Value of
Asset
(Liability)
(thousands)
Oil Basis Swaps
 
01/01/2020 - 12/31/2020
 
1,200,000

 
$
(0.15
)
 
$
(625
)
Total open swap contracts
 
 
 
 
 
 
 
$
(625
)
At March 31, 2019, the Company had an aggregate asset value for open derivative financial instruments of $4.1 million.
The Company’s derivative financial instruments are subject to master netting arrangements, and the Company’s counterparties allow for cross-commodity master netting provided the settlement dates for the commodities are the same. The Company does not present different types of commodities with the same counterparty on a net basis in its interim unaudited condensed consolidated balance sheets.
The following table presents the gross asset and liability fair values of the Company’s commodity price derivative financial instruments and the location of these balances in the interim unaudited condensed consolidated balance sheets as of March 31, 2019 and December 31, 2018 (in thousands).
Derivative Instruments
 
Gross
amounts
recognized
 
Gross amounts
netted in the condensed
consolidated
balance sheets
 
Net amounts presented in the condensed
consolidated
balance sheets
March 31, 2019
 
 
 
 
 
 
Current assets
 
$
9,368

 
$
(4,573
)
 
$
4,795

Current liabilities
 
(4,734
)
 
4,573

 
(161
)
Long-term liabilities
 
(507
)
 

 
(507
)
Total
 
$
4,127

 
$

 
$
4,127

December 31, 2018
 
 
 
 
 
 
Current assets
 
$
53,136

 
$
(3,207
)
 
$
49,929

Current liabilities
 
(3,207
)
 
3,207

 

Long-term liabilities
 
(83
)
 

 
(83
)
Total
 
$
49,846

 
$

 
$
49,846


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

NOTE 8 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued

The following table summarizes the location and aggregate fair value of all derivative financial instruments recorded in the interim unaudited condensed consolidated statements of operations for the periods presented (in thousands). These derivative financial instruments are not designated as hedging instruments.
 
 
 
 
Three Months Ended 
 March 31,
Type of Instrument
 
Location in Condensed Consolidated Statement of Operations
 
2019
 
2018
Derivative Instrument
 
 
 
 
 
 
Oil
 
Revenues: Realized gain (loss) on derivatives
 
$
3,366

 
$
(4,309
)
Natural Gas
 
Revenues: Realized (loss) gain on derivatives
 
(96
)
 
51

Realized gain (loss) on derivatives
 
3,270

 
(4,258
)
Oil
 
Revenues: Unrealized (loss) gain on derivatives
 
(45,444
)
 
11,127

Natural Gas
 
Revenues: Unrealized loss on derivatives
 
(275
)
 
(711
)
Unrealized (loss) gain on derivatives
 
(45,719
)
 
10,416

Total
 
 
 
$
(42,449
)
 
$
6,158

NOTE 9 — FAIR VALUE MEASUREMENTS
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Fair value measurements are classified and disclosed in one of the following categories.
Level 1
Unadjusted quoted prices for identical, unrestricted assets or liabilities in active markets.
Level 2
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that are valued with industry standard models that consider various inputs, including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.
Level 3
Unobservable inputs that are not corroborated by market data that reflect a company’s own market assumptions.
Financial and non-financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The following tables summarize the valuation of the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis in accordance with the classifications provided above as of March 31, 2019 and December 31, 2018 (in thousands).
 
 
Fair Value Measurements at
March 31, 2019 using
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
 
Oil derivatives and basis swaps
 
$

 
$
4,119

 
$

 
$
4,119

Natural gas derivatives
 

 
8

 

 
8

Total
 
$

 
$
4,127

 
$

 
$
4,127


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

NOTE 9 — FAIR VALUE MEASUREMENTS — Continued

 
 
Fair Value Measurements at
December 31, 2018 using
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
 
Oil derivatives and basis swaps
 
$

 
$
49,562

 
$

 
$
49,562

Natural gas derivatives
 

 
284

 

 
284

Total
 
$

 
$
49,846

 
$

 
$
49,846

Additional disclosures related to derivative financial instruments are provided in Note 8.
Other Fair Value Measurements
At March 31, 2019 and December 31, 2018, 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 March 31, 2019, the carrying value of borrowings under the Credit Agreement and the San Mateo Credit Facility approximated their fair value as both are subject to short-term floating interest rates that reflect market rates available to the Company at the time and are classified at Level 2 in the fair value hierarchy.
At March 31, 2019 and December 31, 2018, the fair value of the Notes was $1.05 billion and $0.97 billion, respectively, based on quoted market prices, which represent Level 1 inputs in the fair value hierarchy.
NOTE 10 — COMMITMENTS AND CONTINGENCIES
Processing, Transportation and Salt Water Disposal Commitments
Firm Commitments    
From time to time, the Company enters into agreements with third parties whereby the Company commits to deliver anticipated natural gas and oil production from certain portions of its acreage for transportation, processing, fractionation, sales and, in the case of salt water, disposal. The Company paid approximately $5.0 million and $4.0 million for deliveries under these agreements during the three months ended March 31, 2019 and 2018, respectively. Certain of these agreements contain minimum volume commitments. If the Company does not meet the volume commitments under these agreements, it will be required to pay certain deficiency fees. If the Company ceased operations in the areas subject to these agreements at March 31, 2019, the total deficiencies required to be paid by the Company under these agreements would be approximately $152.6 million, in addition to the commitments described below.
Future Commitments
In late 2017, the Company entered into a fixed-fee natural gas liquids (“NGL”) transportation and fractionation agreement whereby the Company committed to deliver its NGL production at the tailgate of the Black River cryogenic natural gas processing plant in Eddy County, New Mexico (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 in 2020. 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 also 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 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 the

19

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
UNAUDITED — CONTINUED

NOTE 10 — COMMITMENTS AND CONTINGENCIES — Continued

committed volume whether or not the committed volume is transported through the counterparty’s pipeline. The minimum contractual obligation at March 31, 2019 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 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 March 31, 2019 was approximately $202.3 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 with subsidiaries of San Mateo I. 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 I 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 March 31, 2019 was approximately $205.8 million.
In connection with the February 2019 formation of San Mateo II, the Company dedicated to San Mateo II acreage in the Greater Stebbins Area and the Stateline asset area pursuant to 15-year, fixed-fee agreements for oil, natural gas and salt water gathering, natural gas processing and salt water disposal (collectively, the “San Mateo II Operational Agreements”). San Mateo II will provide the Company with firm service under each of the San Mateo II Operational Agreements in exchange for certain minimum volume commitments. The minimum contractual obligation under the San Mateo II Operational Agreements at inception was approximately $363.8 million and begins in 2020.
Legal Proceedings
The Company is a party to several legal proceedings encountered in the ordinary course of its business. While the ultimate outcome and impact on the Company cannot be predicted with certainty, in the opinion of management, it is remote that these legal proceedings will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

20

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
UNAUDITED — CONTINUED

NOTE 11 — SUPPLEMENTAL DISCLOSURES


Accrued Liabilities
The following table summarizes the Company’s current accrued liabilities at March 31, 2019 and December 31, 2018 (in thousands).
 
March 31,
2019
 
December 31,
2018
Accrued evaluated and unproved and unevaluated property costs
$
101,955

 
$
86,318

Accrued midstream property costs
12,907

 
16,808

Accrued lease operating expenses
19,015

 
12,705

Accrued interest on debt
3,087

 
22,448

Accrued asset retirement obligations
1,655

 
1,350

Accrued partners’ share of joint interest charges
15,457

 
17,037

Other
19,037

 
14,189

Total accrued liabilities
$
173,113

 
$
170,855

Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the three months ended March 31, 2019 and 2018 (in thousands).
 
Three Months Ended 
 March 31,
 
2019
 
2018
Cash paid for interest expense, net of amounts capitalized
$
35,326

 
$

Increase in asset retirement obligations related to mineral properties
$
445

 
$
337

Increase in liabilities for oil and natural gas properties capital expenditures
$
16,184

 
$
5,863

(Decrease) increase in liabilities for midstream properties capital expenditures
$
(3,908
)
 
$
8,090

Stock-based compensation expense (benefit) recognized as liability
$
605

 
$
(102
)
Transfer of inventory from (to) oil and natural gas properties
$
250

 
$
(176
)
Transfer of inventory to midstream properties
$

 
$
(820
)
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).
 
Three Months Ended 
 March 31,
 
2019
 
2018
Cash
$
20,758

 
$
27,030

Restricted cash
25,954

 
25,753

Total cash and restricted cash
$
46,712

 
$
52,783

NOTE 12 — SEGMENT INFORMATION
The Company operates in two business segments: (i) exploration and production and (ii) midstream. The exploration and production segment is engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States 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, oil, natural gas 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.

21

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
UNAUDITED — CONTINUED

NOTE 12 — SEGMENT INFORMATION — Continued


The following tables present selected financial information for the periods presented regarding the Company’s business segments on a stand-alone basis, corporate expenses that are not allocated to a segment and the consolidation and elimination entries necessary to arrive at the financial information for the Company on a consolidated basis (in thousands). On a consolidated basis, midstream services revenues consist primarily of those revenues from midstream operations related to third parties, including working interest owners in the Company’s operated wells. All midstream services revenues associated with Company-owned production are eliminated in consolidation. In evaluating the operating results of the exploration and production and midstream segments, the Company does not allocate certain expenses to the individual segments, including general and administrative expenses. Such expenses are reflected in the column labeled “Corporate.”
 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Three Months Ended March 31, 2019
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
191,663

 
$
1,606

 
$

 
$

 
$
193,269

Midstream services revenues

 
30,254

 

 
(18,416
)
 
11,838

Sales of purchased natural gas

 
11,231

 

 

 
11,231

Realized gain on derivatives
3,270

 

 

 

 
3,270

Unrealized loss on derivatives
(45,719
)
 

 

 

 
(45,719
)
Expenses(1)
141,980

 
25,834

 
16,950

 
(18,416
)
 
166,348

Operating income (loss)(2)
$
7,234

 
$
17,257

 
$
(16,950
)
 
$

 
$
7,541

Total assets
$
3,043,375

 
$
477,836

 
$
62,087

 
$

 
$
3,583,298

Capital expenditures(3)
$
197,611

 
$
29,432

 
$
807

 
$

 
$
227,850

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $72.6 million and $3.7 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.6 million.
(2)
Includes $7.5 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $23.1 million attributable to land and seismic acquisition expenditures related to the exploration and production segment and $13.7 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
 
 
Three Months Ended March 31, 2018
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
180,260

 
$
1,694

 
$

 
$

 
$
181,954

Midstream services revenues

 
15,812

 

 
(12,744
)
 
3,068

Realized loss on derivatives
(4,258
)
 

 

 

 
(4,258
)
Unrealized gain on derivatives
10,416

 

 

 

 
10,416

Expenses(1)
106,155

 
7,198

 
17,209

 
(12,744
)
 
117,818

Operating income (loss)(2)
$
80,263

 
$
10,308

 
$
(17,209
)
 
$

 
$
73,362

Total assets
$
1,902,151

 
$
323,536

 
$
50,018

 
$

 
$
2,275,705

Capital expenditures(3)
$
189,445

 
$
45,717

 
$
526

 
$

 
$
235,688

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $53.2 million and $1.5 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.6 million.
(2)
Includes $5.0 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $22.4 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

22

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

NOTE 13 — 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 March 31, 2019, 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 Matador (as issuer of the Notes), 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
March 31, 2019
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
1,570,507

 
$
14,257

 
$

 
$
(1,584,764
)
 
$

Current assets
 
3,787

 
46,389

 
179,778

 

 
229,954

Net property and equipment
 

 
402,870

 
2,874,306

 

 
3,277,176

Investment in subsidiaries
 
1,146,156

 

 
105,680

 
(1,251,836
)
 

Long-term assets
 
21,505

 
1,428

 
62,569

 
(9,334
)
 
76,168

Total assets
 
$
2,741,955

 
$
464,944

 
$
3,222,333

 
$
(2,845,934
)
 
$
3,583,298

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$

 
$

 
$
1,584,764

 
$
(1,584,764
)
 
$

Current liabilities
 

 
28,512

 
300,684

 
(773
)
 
328,423

Senior unsecured notes payable
 
1,038,229

 

 

 

 
1,038,229

Other long-term liabilities
 
12,903

 
230,046

 
190,729

 
(8,561
)
 
425,117

Total equity attributable to Matador Resources Company
 
1,690,823

 
105,680

 
1,146,156

 
(1,251,836
)
 
1,690,823

Non-controlling interest in subsidiaries
 

 
100,706

 

 

 
100,706

Total liabilities and equity
 
$
2,741,955

 
$
464,944

 
$
3,222,333

 
$
(2,845,934
)
 
$
3,583,298

Condensed Consolidating Balance Sheet
December 31, 2018
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
1,244,405

 
$
29,816

 
$

 
$
(1,274,221
)
 
$

Current assets
 
4,109

 
34,027

 
267,549

 

 
305,685

Net property and equipment
 

 
379,052

 
2,743,812

 

 
3,122,864

Investment in subsidiaries
 
1,490,401

 

 
95,346

 
(1,585,747
)
 

Long-term assets
 
23,897

 
1,479

 
11,095

 
(9,502
)
 
26,969

Total assets
 
$
2,762,812

 
$
444,374

 
$
3,117,802

 
$
(2,869,470
)
 
$
3,455,518

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$

 
$

 
$
1,274,221

 
$
(1,274,221
)
 
$

Current liabilities
 
22,874

 
27,988

 
279,884

 
(724
)
 
330,022

Senior unsecured notes payable
 
1,037,837

 

 

 

 
1,037,837

Other long-term liabilities
 
13,221

 
230,263

 
73,296

 
(8,778
)
 
308,002

Total equity attributable to Matador Resources Company
 
1,688,880

 
95,346

 
1,490,401

 
(1,585,747
)
 
1,688,880

Non-controlling interest in subsidiaries
 

 
90,777

 

 

 
90,777

Total liabilities and equity
 
$
2,762,812

 
$
444,374

 
$
3,117,802

 
$
(2,869,470
)
 
$
3,455,518

Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2019
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
42,876

 
$
149,248

 
$
(18,235
)
 
$
173,889

Total expenses
 
1,035

 
25,505

 
158,043

 
(18,235
)
 
166,348

Operating (loss) income
 
(1,035
)
 
17,371

 
(8,795
)
 

 
7,541

Interest expense
 
(15,787
)
 
(2,142
)
 

 

 
(17,929
)
Other expense
 

 

 
(110
)
 

 
(110
)
(Loss) earnings in subsidiaries
 
(1,138
)
 

 
7,767

 
(6,629
)
 

(Loss) income before income taxes
 
(17,960
)
 
15,229

 
(1,138
)
 
(6,629
)
 
(10,498
)
Total income tax benefit
 
(1,013
)
 

 

 

 
(1,013
)
Net income attributable to non-controlling interest in subsidiaries
 

 
(7,462
)
 

 

 
(7,462
)
Net (loss) income attributable to Matador Resources Company shareholders
 
$
(16,947
)
 
$
7,767

 
$
(1,138
)
 
$
(6,629
)
 
$
(16,947
)
Condensed Consolidating Statement of Operations
For the Three Months Ended March 31, 2018
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$

 
$
17,194

 
$
186,480

 
$
(12,494
)
 
$
191,180

Total expenses
 
1,234

 
6,928

 
122,150

 
(12,494
)
 
117,818

Operating (loss) income
 
(1,234
)
 
10,266