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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________________________ 
FORM 10-Q
 _________________________________________________________  
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 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 October 31, 2018, there were 116,333,766 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 SEPTEMBER 30, 2018
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)
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
45,942

 
$
96,505

Restricted cash
7,066

 
5,977

Accounts receivable
 
 
 
Oil and natural gas revenues
81,422

 
65,962

Joint interest billings
55,390

 
67,225

Other
10,060

 
8,031

Derivative instruments
4

 
1,190

Lease and well equipment inventory
18,758

 
5,993

Prepaid expenses and other assets
6,790

 
6,287

Total current assets
225,432

 
257,170

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
3,506,479

 
3,004,770

Unproved and unevaluated
1,241,529

 
637,396

Midstream and other property and equipment
408,436

 
281,096

Less accumulated depletion, depreciation and amortization
(2,234,470
)
 
(2,041,806
)
Net property and equipment
2,921,974

 
1,881,456

         Other assets
6,796

 
7,064

Total assets
$
3,154,202

 
$
2,145,690

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
32,491

 
$
11,757

Accrued liabilities
178,830

 
174,348

Royalties payable
67,023

 
61,358

Amounts due to affiliates
12,998

 
10,302

Derivative instruments
19,740

 
16,429

Advances from joint interest owners
12,354

 
2,789

Amounts due to joint ventures
2,373

 
4,873

Other current liabilities
942

 
750

Total current liabilities
326,751

 
282,606

Long-term liabilities
 
 
 
Borrowings under Credit Agreement
325,000

 
—

Senior unsecured notes payable
740,063

 
574,073

Asset retirement obligations
28,706

 
25,080

Derivative instruments
4,996

 
—

Other long-term liabilities
6,243

 
6,385

Total long-term liabilities
1,105,008

 
605,538

Commitments and contingencies (Note 9)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 160,000,000 shares authorized; 116,506,743 and 108,513,597 shares issued; and 116,348,548 and 108,510,160 shares outstanding, respectively
1,165

 
1,085

Additional paid-in capital
1,923,030

 
1,666,024

Accumulated deficit
(372,990
)
 
(510,484
)
Treasury stock, at cost, 158,195 and 3,437 shares, respectively
(4,039
)
 
(69
)
Total Matador Resources Company shareholders’ equity
1,547,166

 
1,156,556

Non-controlling interest in subsidiaries
175,277

 
100,990

Total shareholders’ equity
1,722,443

 
1,257,546

Total liabilities and shareholders’ equity
$
3,154,202

 
$
2,145,690


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 
 September 30,
 
Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Oil and natural gas revenues
$
216,282

 
$
134,948

 
$
607,255

 
$
363,559

Third-party midstream services revenues
6,809

 
3,218

 
13,284

 
6,871

Realized gain (loss) on derivatives
5,424

 
485

 
(1,322
)
 
(1,176
)
Unrealized (loss) gain on derivatives
(21,337
)
 
(12,372
)
 
(9,492
)
 
21,449

Total revenues
207,178

 
126,279

 
609,725

 
390,703

Expenses
 
 
 
 
 
 
 
Production taxes, transportation and processing
20,215

 
15,666

 
58,116

 
40,348

Lease operating
22,531

 
16,689

 
69,685

 
48,486

Plant and other midstream services operating
7,291

 
3,096

 
17,187

 
8,379

Depletion, depreciation and amortization
70,457

 
47,800

 
192,664

 
123,066

Accretion of asset retirement obligations
387

 
323

 
1,126

 
937

General and administrative
18,444

 
16,156

 
55,739

 
49,671

Total expenses
139,325

 
99,730

 
394,517

 
270,887

Operating income
67,853

 
26,549

 
215,208

 
119,816

Other income (expense)
 
 
 
 
 
 
 
Net (loss) gain on asset sales and inventory impairment
(196
)
 
16

 
(196
)
 
23

Interest expense
(10,340
)
 
(8,550
)
 
(26,835
)
 
(26,229
)
Prepayment premium on extinguishment of debt
(31,226
)
 
—

 
(31,226
)
 
—

Other (expense) income
(976
)
 
(36
)
 
(1,275
)
 
1,956

Total other expense
(42,738
)
 
(8,570
)
 
(59,532
)
 
(24,250
)
Net income
25,115

 
17,979

 
155,676

 
95,566

Net income attributable to non-controlling interest in subsidiaries
(7,321
)
 
(2,940
)
 
(18,182
)
 
(8,034
)
Net income attributable to Matador Resources Company shareholders
$
17,794

 
$
15,039

 
$
137,494

 
$
87,532

Earnings per common share
 
 
 
 

 

Basic
$
0.15

 
$
0.15

 
$
1.22

 
$
0.87

Diluted
$
0.15

 
$
0.15

 
$
1.21

 
$
0.87

Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
116,358

 
100,365

 
112,659

 
100,141

Diluted
116,912

 
100,504

 
113,208

 
100,580


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 Nine Months Ended September 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
736

 
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
79

 
1

 
(1
)
 
—

 
—

 
—

 
—

 
—

 
—

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

 
—

 
17,174

 
—

 
—

 
—

 
17,174

 
—

 
17,174

Stock options exercised, net of options forfeited in net share settlements
178

 
2

 
(1,256
)
 
—

 
—

 
—

 
(1,254
)
 
—

 
(1,254
)
Restricted stock forfeited
—

 
—

 
—

 
—

 
155

 
(3,970
)
 
(3,970
)
 
—

 
(3,970
)
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
—

 
—

 
—

 
—

 
—

 
—

 
—

 
73,500

 
73,500

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

 
—

 
—

 
—

 
—

 
—

 
—

 
(17,395
)
 
(17,395
)
Current period net income
—

 
—

 
—

 
137,494

 
—

 
—

 
137,494

 
18,182

 
155,676

Balance at September 30, 2018
116,507

 
$
1,165

 
$
1,923,030

 
$
(372,990
)
 
158

 
$
(4,039
)
 
$
1,547,166

 
$
175,277

 
$
1,722,443


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

Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
155,676

 
$
95,566

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Unrealized loss (gain) on derivatives
9,492

 
(21,449
)
Depletion, depreciation and amortization
192,664

 
123,066

Accretion of asset retirement obligations
1,126

 
937

Stock-based compensation expense
13,787

 
12,488

Prepayment premium on extinguishment of debt
31,226

 
—

Amortization of debt issuance cost
851

 
103

Net loss (gain) on asset sales and inventory impairment
196

 
(23
)
Changes in operating assets and liabilities

 

Accounts receivable
(5,654
)
 
(50,343
)
Lease and well equipment inventory
(15,347
)
 
(1,666
)
Prepaid expenses
(502
)
 
(2,224
)
Other assets
—

 
217

Accounts payable, accrued liabilities and other current liabilities
20,823

 
35,068

Royalties payable
5,665

 
29,651

Advances from joint interest owners
9,565

 
2,646

Other long-term liabilities
(250
)
 
(1,521
)
Net cash provided by operating activities
419,318

 
222,516

Investing activities


 


Oil and natural gas properties capital expenditures
(1,106,556
)
 
(517,270
)
Expenditures for midstream and other property and equipment
(122,239
)
 
(80,560
)
Proceeds from sale of assets
8,267

 
977

Net cash used in investing activities
(1,220,528
)
 
(596,853
)
Financing activities


 


Repayments of borrowings
(45,000
)
 
—

Borrowings under Credit Agreement
370,000

 
—

Proceeds from issuance of senior unsecured notes
750,000

 
—

Cost to issue senior unsecured notes
(9,531
)
 
—

Purchase of senior unsecured notes
(605,780
)
 
—

Proceeds from issuance of common stock
226,612

 
—

Cost to issue equity
(146
)
 
—

Proceeds from stock options exercised
827

 
2,920

Contributions related to formation of Joint Venture
14,700

 
171,500

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries
73,500

 
29,400

Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries
(17,395
)
 
(5,635
)
Taxes paid related to net share settlement of stock-based compensation
(6,051
)
 
(4,415
)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary
—

 
(2,653
)
Net cash provided by financing activities
751,736

 
191,117

Decrease in cash and restricted cash
(49,474
)
 
(183,220
)
Cash and restricted cash at beginning of period
102,482

 
214,142

Cash and restricted cash at end of period
$
53,008

 
$
30,922

 
 
 
 
Supplemental disclosures of cash flow information (Note 10)


 



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

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 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 September 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 Update 2014-09, 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 from these contracts is recognized in accordance with the five-step revenue recognition model prescribed in

7
Table of Contents
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 the Company’s 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 on its consolidated financial statements as a result of adoption of ASC 606 was a $2.8 million and $7.6 million decrease in oil and natural gas revenues and a $2.8 million and $7.6 million decrease in production taxes, transportation and processing expenses for the three and nine months ended September 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 nine months ended September 30, 2018 (in thousands).

8
Table of Contents
Matador Resources Company and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
UNAUDITED — CONTINUED

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

 
Three Months Ended 
 September 30, 2018
Nine Months Ended 
 September 30, 2018
Revenues from contracts with customers
$
223,091

$
620,539

Realized gain (loss) on derivatives
5,424

(1,322
)
Unrealized loss on derivatives
(21,337
)
(9,492
)
Total revenues
$
207,178

$
609,725

 
Three Months Ended 
 September 30, 2018
Nine Months Ended 
 September 30, 2018
Oil revenues
$
169,913

$
484,343

Natural gas revenues
46,369

122,912

Third-party midstream services revenues
6,809

13,284

Total revenues from contracts with customers
$
223,091

$
620,539


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 nine months ended September 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 nine months ended September 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 $8.5 million and $6.1 million of its general and administrative costs for the three months ended September 30, 2018 and 2017, respectively, and approximately $1.7 million and $2.1 million of its interest expense for the three months ended September 30, 2018 and 2017, respectively. The Company capitalized approximately $22.6 million and $16.9 million of its general and administrative costs for the nine months ended September 30, 2018 and 2017, respectively, and approximately $6.2 million and $5.2 million of its interest expense for the nine months ended September 30, 2018 and 2017, respectively.
On September 12, 2018, the Company announced the successful acquisition of 8,400 gross (8,400 net) leasehold acres in Lea and Eddy Counties, New Mexico for approximately $387 million in the Bureau of Land Management New Mexico Oil and Gas Lease Sale on September 5 and 6, 2018 (the “BLM Acquisition”).

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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 Resources Company shareholders per common share, which excludes the effect of potentially dilutive securities, and diluted earnings attributable to Matador Resources Company shareholders per common share, which includes the effect of all potentially dilutive securities unless their impact is anti-dilutive.
The following table sets forth the computation of diluted weighted average common shares outstanding for the three and nine months ended September 30, 2018 and 2017 (in thousands).
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
2018
 
2017
 
2018
 
2017
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
116,358

 
100,365

 
112,659

 
100,141

Dilutive effect of options and restricted stock units
554

 
139

 
549

 
439

Diluted weighted average common shares outstanding
116,912

 
100,504

 
113,208

 
100,580

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. The Company plans to use this practical expedient, and as a result, the Company will evaluate new or modified land easements under this ASU beginning at the date of adoption. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which is a targeted improvement for comparative reporting requirements for initial adoption of ASU 2016-02. The Company plans to use the optional transition method to adopt ASU 2016-02, and the amendments provided for in ASU 2018-11 will allow the Company to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period 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, 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 on the Company’s consolidated financial statements.

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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 nine months ended September 30, 2018 (in thousands).
 
 
Beginning asset retirement obligations
$
26,256

Liabilities incurred during period
2,473

Liabilities settled during period
(663
)
Revisions in estimated cash flows
442

Accretion expense
1,126

Ending asset retirement obligations
29,634

Less: current asset retirement obligations(1)
(928
)
Long-term asset retirement obligations
$
28,706

 _______________
(1)
Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at September 30, 2018.
NOTE 4 — DEBT
At September 30, 2018, the Company had $750.0 million of outstanding 5.875% senior notes due 2026 (the “Original 2026 Notes”), $325.0 million in 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. At October 31, 2018, the Company had $1.05 billion of outstanding Notes (as defined below), $25.0 million in borrowings outstanding under 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, in March 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 at September 30, 2018.
In October 2018, the lenders completed their review of the Company’s proved oil and natural gas reserves at June 30, 2018. In connection with such review, the Company amended the Credit Agreement to, among other items, increase the maximum facility amount to $1.5 billion, increase the borrowing base to $850.0 million, increase the elected borrowing commitment to $500.0 million, extend the maturity to October 31, 2023 and reduce borrowing rates by 0.25% per annum. This October 2018 redetermination constituted the regularly scheduled November 1 redetermination. Borrowings under the Credit Agreement are limited to the lowest of the borrowing base, the maximum facility amount and the elected borrowing commitment.
The Company believes that it was in compliance with the terms of the Credit Agreement at September 30, 2018.
Senior Unsecured Notes
As of June 30, 2018, the Company had $575.0 million of outstanding 6.875% senior notes due 2023 (the “2023 Notes”). On August 21, 2018, the Company issued $750.0 million of Original 2026 Notes in a private placement (the “2026 Notes Offering”). The Original 2026 Notes were issued at par value with a coupon rate of 5.875%, and the Company received net proceeds of approximately $740.0 million, after deducting the initial purchasers’ discounts and offering expenses. In conjunction with the 2026 Notes Offering, in August and September 2018, respectively, the Company completed a tender offer to purchase for cash and subsequent redemption of all of the Company’s $575.0 million aggregate principal amount of 2023 Notes (the “2023 Notes Tender Offer and Redemption”). The Company used a portion of the net proceeds from the 2026 Notes Offering to fund the 2023 Notes Tender Offer and Redemption. In connection with the 2023 Notes Tender Offer and Redemption, the Company incurred a loss of $31.2 million, including total payments of $30.4 million to holders of the 2023

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
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NOTE 4 — DEBT — Continued

Notes as a result of the tender premium and the required 105.156% redemption price payable pursuant to the 2023 Notes indenture.
On October 4, 2018, the Company issued an additional $300.0 million of 5.875% senior unsecured notes due 2026 (the “Additional 2026 Notes” and, collectively with the Original 2026 Notes, the “Notes”). The Additional 2026 Notes were issued pursuant to, and are governed by, the same indenture governing the Original 2026 Notes (the “Indenture”). The Additional 2026 Notes were issued at 100.5% of par, plus accrued interest from August 21, 2018. The Company received net proceeds from this offering of approximately $297.6 million, after deducting the initial purchasers’ discounts and estimated offering expenses but excluding accrued interest from August 21, 2018 paid by the initial purchasers of the Additional 2026 Notes. The proceeds from this offering were used to repay a portion of the outstanding borrowings under the Credit Agreement, which were incurred in connection with the BLM Acquisition. 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 (the “Guarantors”).
On or after September 15, 2021, the Company may redeem all or a part of the Notes at any time or from time to time at the following redemption prices (expressed as percentages of principal amount) plus accrued and unpaid interest, if any, to the applicable redemption date, if redeemed during the twelve-month period beginning on September 15 of the years indicated below:
Year
 
Redemption Price
2021
 
104.406%
2022
 
102.938%
2023
 
101.469%
2024 and thereafter
 
100.000%

At any time prior to September 15, 2021, the Company may redeem up to 35% of the aggregate principal amount of the Notes with net proceeds from certain equity offerings at a redemption price of 105.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, provided that (i) at least 65% in aggregate principal amount of the Notes (including any additional notes) originally issued remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its subsidiaries) and (ii) each such redemption occurs within 180 days of the date of the closing of the related equity offering.
In addition, at any time prior to September 15, 2021, the Company may redeem all or part of the Notes at a redemption price equal to the sum of:
(i) the principal amount thereof, plus
(ii) the excess, if any, of (a) the present value at such time of (1) the redemption price of such Notes at September 15, 2021 plus (2) any required interest payments due on such Notes through September 15, 2021, discounted to the redemption date on a semi-annual basis using a discount rate equal to the Treasury Rate (as defined in the Indenture) plus 50 basis points, over (b) the principal amount of such Notes, plus
(iii) accrued and unpaid interest, if any, to the redemption date.
Subject to certain exceptions, the Indenture contains various covenants that limit the Company’s ability to take certain actions, including, but not limited to, the following:
•
incur additional indebtedness;
•
sell assets;
•
pay dividends or make certain investments;
•
create liens that secure indebtedness;
•
enter into transactions with affiliates; and
•
merge or consolidate with another company.

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

NOTE 4 — DEBT — Continued

In the case of an event of default arising from certain events of bankruptcy or insolvency with respect to Matador, any Restricted Subsidiary (as defined in the Indenture) that is a Significant Subsidiary (as defined in the Indenture) or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary, all outstanding Notes will become due and payable immediately without further action or notice.  If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in principal amount of the then outstanding Notes may declare all the Notes to be due and payable immediately. Events of default include, but are not limited to, the following events:
•
default for 30 days in the payment when due of interest on the Notes;
•
default in the payment when due of the principal of, or premium, if any, on the Notes;
•
failure by the Company to comply with its obligations to offer to purchase or purchase notes pursuant to the change of control or asset sale covenants of the Indenture or to comply with the covenant relating to mergers;
•
failure by the Company for 180 days after notice to comply with its reporting obligations under the Indenture;
•
failure by the Company for 60 days after notice to comply with any of the other agreements in the Indenture;
•
payment defaults and accelerations with respect to other indebtedness of the Company and its Restricted Subsidiaries in the aggregate principal amount of $50.0 million or more;
•
failure by the Company or any Restricted Subsidiary to pay certain final judgments aggregating in excess of $50.0 million within 60 days;
•
any subsidiary guarantee by a Guarantor ceases to be in full force and effect, is declared null and void in a judicial proceeding or is denied or disaffirmed by its maker; and
•
certain events of bankruptcy or insolvency with respect to the Company or any Restricted Subsidiary that is a Significant Subsidiary or any group of Restricted Subsidiaries that, taken together, would constitute a Significant Subsidiary.
NOTE 5 — INCOME TAXES
The Company’s deferred tax assets exceeded its deferred tax liabilities at September 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 September 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.

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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 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 capital expenditures. Pending such uses, the Company used a portion of the proceeds from the offering to repay the $45.0 million in borrowings then outstanding 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 Incentives
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 nine months ended September 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. These performance incentives for the nine months ended September 30, 2018 are also denoted as “Contributions related to formation of Joint Venture” under “Financing activities” in the Company’s condensed consolidated statements of cash flows.

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NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS


At September 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 September 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)
10/01/2018 - 12/31/2018
 
720,000

 
$
44.27

 
$
60.29

 
$
(9,240
)
Oil - WTI(1)
01/01/2019 - 12/31/2019
 
2,400,000

 
$
50.00

 
$
64.75

 
(21,287
)
Oil - LLS(2)
10/01/2018 - 12/31/2018
 
180,000

 
$
45.00

 
$
63.05

 
(2,973
)
Natural Gas
10/01/2018 - 12/31/2018
 
4,200,000

 
$
2.58

 
$
3.67

 
(18
)
Total open costless collar contracts
 
 
 
 
 
 
 
$
(33,518
)
_____________________
(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 September 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)
10/01/2018 - 12/31/2018
 
480,000

 
$
50.08

 
$
63.50

 
$
66.68

 
$
(1,369
)
Total open three-way costless collar contracts
 
 
 
 
 
 
 
$
(1,369
)
_____________________
(1) NYMEX West Texas Intermediate crude oil.
The following is a summary of the Company’s open basis swap contracts for oil at September 30, 2018.
Commodity
Calculation Period
 
Notional Quantity (Bbl)
 
Fixed Price
($/Bbl)
 
Fair Value of
Asset
(Liability)
(thousands)
Oil Basis Swaps
10/01/2018 - 12/31/2018
 
1,305,000

 
$
(1.02
)
 
$
10,155

Total open swap contracts
 
 
 
 
 
 
$
10,155

At September 30, 2018, the Company had an aggregate liability for open derivative financial instruments of $24.7 million.
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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
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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 September 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
September 30, 2018
 
 
 
 
 
   Current assets
$
49,723

 
$
(49,719
)
 
$
4

   Other assets
654

 
(654
)
 
—

   Current liabilities
(69,459
)
 
49,719

 
(19,740
)
   Long-term liabilities
(5,650
)
 
654

 
(4,996
)
      Total
$
(24,732
)
 
$
—

 
$
(24,732
)
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 
 September 30,
 
Nine Months Ended 
 September 30,
Type of Instrument
Location in Condensed Consolidated Statement of Operations
 
2018
 
2017
 
2018
 
2017
Derivative Instrument
 
 
 
 
 
 
 
 
 
Oil
Revenues: Realized gain (loss) on derivatives
 
$
5,424

 
$
485

 
$
(1,373
)
 
$
(568
)
Natural Gas
Revenues: Realized gain (loss) on derivatives
 
—

 
—

 
51

 
(608
)
Realized gain (loss) on derivatives
 
5,424

 
485

 
(1,322
)
 
(1,176
)
Oil
Revenues: Unrealized (loss) gain on derivatives
 
(21,240
)
 
(12,479
)
 
(8,284
)
 
15,949

Natural Gas
Revenues: Unrealized (loss) gain on derivatives
 
(97
)
 
115

 
(1,208
)
 
5,508

NGL
Revenues: Unrealized loss on derivatives
 
—

 
(8
)
 
—

 
(8
)
Unrealized (loss) gain on derivatives
 
(21,337
)
 
(12,372
)
 
(9,492
)
 
21,449

Total
 
 
$
(15,913
)
 
$
(11,887
)
 
$
(10,814
)
 
$
20,273


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

 
$
(18
)
 
$
—

 
$
(18
)
Oil derivatives and basis swaps
—

 
(24,714
)
 
—

 
(24,714
)
Total
$
—

 
$
(24,732
)
 
$
—

 
$
(24,732
)
 
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 September 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 September 30, 2018, the carrying value of borrowings under the Credit Agreement approximated its fair value as it is subject to short-term floating interest rates that reflect market rates available to the Company at the time and is classified at Level 2.

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UNAUDITED — CONTINUED

NOTE 8 — FAIR VALUE MEASUREMENTS — Continued

At September 30, 2018 and December 31, 2017, the fair value of the Original 2026 Notes and the 2023 Notes was $761.3 million and $614.1 million, respectively, based on quoted market prices, which represent Level 1 inputs in the fair value hierarchy.
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 September 30, 2018, the total deficiency fee required to be paid would be approximately $12.5 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 $4.8 million and $4.0 million in natural gas processing and gathering fees under this agreement during the three months ended September 30, 2018 and 2017, respectively, and $12.2 million and $10.8 million in natural gas processing and gathering fees under this agreement during the nine months ended September 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 September 30, 2018 was approximately $45.2 million. The Company paid approximately $1.0 million and $2.5 million in transportation fees under this agreement during the three and nine months ended September 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 in late 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 September 30, 2018 was approximately $3.6 million. This short-term

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UNAUDITED — CONTINUED

NOTE 9 — COMMITMENTS AND CONTINGENCIES — Continued

agreement ends on September 30, 2019. The Company paid approximately $0.9 million and $1.1 million in transportation fees under this agreement during the three and nine months ended September 30, 2018, respectively.
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 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 the committed volume whether or not the committed volume is transported through the counterparty’s pipeline. The minimum contractual obligation at September 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 September 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 with subsidiaries of San Mateo. 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 September 30, 2018 was approximately $222.0 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. Since inception, San Mateo’s commitments under these agreements totaled $55.3 million. The subsidiary of San Mateo paid approximately $2.0 million and $5.6 million under these agreements during the three and nine months ended September 30, 2018. As of September 30, 2018, there was no remaining obligation under these agreements.
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. Since inception, San Mateo’s commitments under these agreements totaled $24.8 million. The subsidiary of San Mateo paid approximately $6.3 million and $12.8 million under these agreements during the three and nine months ended September 30, 2018. As of September 30, 2018, the remaining obligations under these agreements were $12.0 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 $32.8 million at September 30, 2018.
At September 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 $44.2 million at September 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 on the Company cannot be predicted with certainty, in the opinion of management, it is remote that these lawsuits will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

19
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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 September 30, 2018 and December 31, 2017 (in thousands).
 
September 30,
2018
 
December 31,
2017
Accrued evaluated and unproved and unevaluated property costs
$
108,420

 
$
105,347

Accrued midstream property costs
16,996

 
14,823

Accrued lease operating expenses
18,651

 
12,611

Accrued interest on debt
5,407

 
8,345

Accrued asset retirement obligations
928

 
1,176

Accrued partners’ share of joint interest charges
22,114

 
27,628

Other
6,314

 
4,418

Total accrued liabilities
$
178,830

 
$
174,348

Supplemental Cash Flow Information
The following table provides supplemental disclosures of cash flow information for the nine months ended September 30, 2018 and 2017 (in thousands).
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Cash paid for interest expense, net of amounts capitalized
$
29,773

 
$
14,542

Increase in asset retirement obligations related to mineral properties
$
1,705

 
$
2,484

Increase (decrease) in asset retirement obligations related to midstream properties
$
547

 
$
(138
)
Increase in liabilities for oil and natural gas properties capital expenditures
$
5,157

 
$
35,940

Increase (decrease) in liabilities for midstream properties capital expenditures
$
1,864

 
$
(247
)
Stock-based compensation expense recognized as liability
$
(107
)
 
$
150

Decrease in liabilities for accrued cost to issue equity
$
—

 
$
(343
)
Increase in liabilities for accrued cost to issue senior notes
$
510

 
$
—

Transfer of inventory from oil and natural gas properties
$
305

 
$
74

Transfer of inventory to midstream and other property and equipment
$
(2,691
)
 
$
—

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).
 
Nine Months Ended 
 September 30,
 
2018
 
2017
Cash
$
45,942

 
$
20,178

Restricted cash
7,066

 
10,744

Total cash and restricted cash
$
53,008

 
$
30,922



20
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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 September 30, 2018
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
215,248

 
$
1,034

 
$
—

 
$
—

 
$
216,282

Midstream services revenues
—

 
24,950

 
—

 
(18,141
)
 
6,809

Realized gain on derivatives
5,424

 
—

 
—

 
—

 
5,424

Unrealized loss on derivatives
(21,337
)
 
—

 
—

 
—

 
(21,337
)
Expenses(1)
128,263

 
10,162

 
19,041

 
(18,141
)
 
139,325

Operating income (loss)(2)
$
71,072

 
$
15,822

 
$
(19,041
)
 
$
—

 
$
67,853

Total assets
$
2,697,685

 
$
391,323

 
$
65,194

 
$
—

 
$
3,154,202

Capital expenditures(3)
$
716,751

 
$
47,153

 
$
312

 
$
—

 
$
764,216

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $67.2 million and $2.6 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.6 million.
(2)
Includes $7.3 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $554.9 million attributable to land and seismic acquisition expenditures related to the exploration and production segment and $23.1 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

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

 
$
460

 
$
—

 
$
—

 
$
134,948

Midstream services revenues
—

 
11,261

 
—

 
(8,043
)
 
3,218

Realized gain on derivatives
485

 
—

 
—

 
—

 
485

Unrealized loss on derivatives
(12,372
)
 
—

 
—

 
—

 
(12,372
)
Expenses(1)
86,728

 
5,598

 
15,447

 
(8,043
)
 
99,730

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

 
$
6,123

 
$
(15,447
)
 
$
—

 
$
26,549

Total assets
$
1,590,677

 
$
222,274

 
$
35,586

 
$
—

 
$
1,848,537

Capital expenditures(3)
$
180,686

 
$
35,008

 
$
1,494

 
$
—

 
$
217,188

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $46.1 million and $1.3 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.4 million.
(2)
Includes $2.9 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $17.2 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.
 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
602,737

 
$
4,518

 
$
—

 
$
—

 
$
607,255

Midstream services revenues
—

 
60,658

 
—

 
(47,374
)
 
13,284

Realized loss on derivatives
(1,322
)
 
—

 
—

 
—

 
(1,322
)
Unrealized loss on derivatives
(9,492
)
 
—

 
—

 
—

 
(9,492
)
Expenses(1)
359,830

 
26,723

 
55,338

 
(47,374
)
 
394,517

Operating income (loss)(2)
$
232,093

 
$
38,453

 
$
(55,338
)
 
$
—

 
$
215,208

Total assets
$
2,697,685

 
$
391,323

 
$
65,194

 
$
—

 
$
3,154,202

Capital expenditures(3)
$
1,105,541

 
$
125,770

 
$
1,570

 
$
—

 
$
1,232,881

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $184.4 million and $6.5 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $1.8 million.
(2)
Includes $18.2 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $613.8 million attributable to land and seismic acquisition expenditures related to the exploration and production segment and $61.6 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS —
UNAUDITED — CONTINUED

NOTE 11 — SEGMENT INFORMATION — Continued


 
Exploration and Production
 
 
 
 
 
Consolidations and Eliminations
 
Consolidated Company
 
 
Midstream
 
Corporate
 
 
Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
Oil and natural gas revenues
$
362,040

 
$
1,519

 
$
—

 
$
—

 
$
363,559

Midstream services revenues
—

 
32,244

 
—

 
(25,373
)
 
6,871

Realized loss on derivatives
(1,176
)
 
—

 
—

 
—

 
(1,176
)
Unrealized gain on derivatives
21,449

 
—

 
—

 
—

 
21,449

Expenses(1)
233,145

 
16,060

 
47,055

 
(25,373
)
 
270,887

Operating income (loss)(2)
$
149,168

 
$
17,703

 
$
(47,055
)
 
$
—

 
$
119,816

Total assets
$
1,590,677

 
$
222,274

 
$
35,586

 
$
—

 
$
1,848,537

Capital expenditures(3)
$
554,642

 
$
75,235

 
$
4,710

 
$
—

 
$
634,587

_____________________
(1)
Includes depletion, depreciation and amortization expenses of $118.2 million and $3.8 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $1.1 million.
(2)
Includes $8.0 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.
(3)
Includes $35.8 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.




23
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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 September 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
September 30, 2018
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Intercompany receivable
 
$
939,294

 
$
26,382

 
$
—

 
$
(965,676
)
 
$
—

Third-party current assets
 
827

 
23,159

 
201,446

 
—

 
225,432

Net property and equipment
 
—

 
343,371

 
2,578,603

 
—

 
2,921,974

Investment in subsidiaries
 
1,346,446

 
—

 
183,297

 
(1,529,743
)
 
—

Third-party long-term assets
 
6,425

 
—

 
3,305

 
(2,934
)
 
6,796

Total assets
 
$
2,292,992

 
$
392,912

 
$
2,966,651

 
$
(2,498,353
)
 
$
3,154,202

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Intercompany payable
 
$
—

 
$
—

 
$
965,676

 
$
(965,676
)
 
$
—

Third-party current liabilities
 
5,763

 
30,335

 
290,909

 
(256
)
 
326,751

Senior unsecured notes payable
 
740,063

 
—

 
—

 
—

 
740,063

Other third-party long-term liabilities
 
—

 
4,003

 
363,620

 
(2,678
)
 
364,945

Total equity attributable to Matador Resources Company
 
1,547,166

 
183,297

 
1,346,446

 
(1,529,743
)
 
1,547,166

Non-controlling interest in subsidiaries
 
—

 
175,277

 
—

 
—

 
175,277

Total liabilities and equity
 
$
2,292,992

 
$
392,912

 
$
2,966,651

 
$
(2,498,353
)
 
$
3,154,202

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 September 30, 2018
 
 
Matador
 
Non-Guarantor Subsidiaries
 
Guarantor Subsidiaries
 
Eliminating Entries
 
Consolidated
Total revenues
 
$
—

 
$
25,640

 
$
199,386

 
$
(17,848
)
 
$
207,178

Total expenses
 
1,184

 
10,708

 
145,281

 
(17,848
)
 
139,325

Operating (loss) income
 
(1,184
)
 
14,932

 
54,105

 
—

 
67,853

Net loss on asset sales and inventory impairment
 
—

 
—

 
(196
)
 
—

 
(196
)
Interest expense
 
(10,340
)
 
—

 
—

 
—

 
(10,340
)
Prepayment premium on extinguishment of debt
 
(31,226
)
 
—

 
—

 
—

 
(31,226
)
Other (expense) income
 
(6
)
 
8

 
(978
)
 
—

 
(976
)
Earnings in subsidiaries
 
60,550

 
—

 
7,619

 
(68,169
)
 
—

Income before income taxes
 
17,794

 
14,940