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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ________________________________________________________ 
FORM 10-Q
 _________________________________________________________  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
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
 
75240
 
Dallas,
Texas
 
 
(Address of principal executive offices)
 
(Zip Code)
(972) 371-5200
(Registrant’s telephone number, including area code)
 _________________________________________________________  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.01 per share
 
MTDR
 
New York Stock Exchange
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.       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).      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
 
 
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      No
As of April 28, 2020, there were 116,557,234 shares of the registrant’s common stock, par value $0.01 per share, outstanding.



MATADOR RESOURCES COMPANY
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2020
TABLE OF CONTENTS
 
Page



Part I — FINANCIAL INFORMATION
Item 1. Financial Statements — Unaudited
Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS — UNAUDITED
(In thousands, except par value and share data)
 
March 31,
2020
 
December 31,
2019
ASSETS
 
 
 
Current assets
 
 
 
Cash
$
27,063

 
$
40,024

Restricted cash
29,732

 
25,104

Accounts receivable
 
 
 
Oil and natural gas revenues
52,879

 
95,228

Joint interest billings
70,318

 
67,546

Other
30,592

 
26,639

Derivative instruments
121,179

 

Lease and well equipment inventory
11,638

 
10,744

Prepaid expenses and other current assets
13,234

 
13,207

Total current assets
356,635

 
278,492

Property and equipment, at cost
 
 
 
Oil and natural gas properties, full-cost method
 
 
 
Evaluated
4,724,293

 
4,557,265

Unproved and unevaluated
1,169,751

 
1,126,992

Midstream properties
711,863

 
643,903

Other property and equipment
27,640

 
27,021

Less accumulated depletion, depreciation and amortization
(2,746,314
)
 
(2,655,586
)
Net property and equipment
3,887,233

 
3,699,595

Other assets
 
 
 
Derivative instruments
11,371

 

Other long-term assets
78,432

 
91,589

Total other assets
89,803

 
91,589

Total assets
$
4,333,671

 
$
4,069,676

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current liabilities
 
 
 
Accounts payable
$
17,659

 
$
25,230

Accrued liabilities
197,305

 
200,695

Royalties payable
85,577

 
85,193

Amounts due to affiliates
234

 
19,606

Derivative instruments

 
1,897

Advances from joint interest owners
11,240

 
14,837

Amounts due to joint ventures

 
486

Other current liabilities
47,883

 
51,828

Total current liabilities
359,898

 
399,772

Long-term liabilities
 
 
 
Borrowings under Credit Agreement
315,000

 
255,000

Borrowings under San Mateo Credit Facility
307,500

 
288,000

Senior unsecured notes payable
1,039,811

 
1,039,416

Asset retirement obligations
37,118

 
35,592

Derivative instruments

 
1,984

Deferred income taxes
84,700

 
37,329

Other long-term liabilities
35,264

 
43,131

Total long-term liabilities
1,819,393

 
1,700,452

Commitments and contingencies (Note 9)


 


Shareholders’ equity
 
 
 
Common stock - $0.01 par value, 160,000,000 shares authorized; 116,671,325 and 116,644,246 shares issued; and 116,564,598 and 116,642,899 shares outstanding, respectively
1,167

 
1,166

Additional paid-in capital
2,014,246

 
1,981,014

Accumulated deficit
(22,771
)
 
(148,500
)
Treasury stock, at cost, 106,727 and 1,347 shares, respectively
(1,293
)
 
(26
)
Total Matador Resources Company shareholders’ equity
1,991,349

 
1,833,654

Non-controlling interest in subsidiaries
163,031

 
135,798

Total shareholders’ equity
2,154,380

 
1,969,452

Total liabilities and shareholders’ equity
$
4,333,671

 
$
4,069,676


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



Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED
(In thousands, except per share data)
 
Three Months Ended 
 March 31,
 
2020
 
2019
Revenues
 
 
 
Oil and natural gas revenues
$
197,914

 
$
193,269

Third-party midstream services revenues
15,830

 
11,838

Sales of purchased natural gas
10,544

 
11,231

Realized gain on derivatives
10,867

 
3,270

Unrealized gain (loss) on derivatives
136,430

 
(45,719
)
Total revenues
371,585

 
173,889

Expenses
 
 
 
Production taxes, transportation and processing
21,716

 
19,665

Lease operating
30,910

 
31,163

Plant and other midstream services operating
9,964

 
9,316

Purchased natural gas
8,058

 
10,634

Depletion, depreciation and amortization
90,707

 
76,866

Accretion of asset retirement obligations
476

 
414

General and administrative
16,222

 
18,290

Total expenses
178,053

 
166,348

Operating income
193,532

 
7,541

Other income (expense)
 
 
 
Interest expense
(19,812
)
 
(17,929
)
Other income (expense)
1,320

 
(110
)
Total other expense
(18,492
)
 
(18,039
)
Income (loss) before income taxes
175,040

 
(10,498
)
Income tax provision (benefit)
 
 
 
Deferred
39,957

 
(1,013
)
Total income tax provision (benefit)
39,957

 
(1,013
)
Net income (loss)
135,083

 
(9,485
)
Net income attributable to non-controlling interest in subsidiaries
(9,354
)
 
(7,462
)
Net income (loss) attributable to Matador Resources Company shareholders
$
125,729

 
$
(16,947
)
Earnings (loss) per common share
 
 
 
Basic
$
1.08

 
$
(0.15
)
Diluted
$
1.08

 
$
(0.15
)
Weighted average common shares outstanding
 
 
 
Basic
116,607

 
115,315

Diluted
116,684

 
115,315


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


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
(In thousands)
For the Three Months Ended March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
 
 
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, 2020
116,644

 
$
1,166

 
$
1,981,014

 
$
(148,500
)
 
1

 
$
(26
)
 
$
1,833,654

 
$
135,798

 
$
1,969,452

Issuance of common stock pursuant to employee stock compensation plan
3

 

 

 

 

 

 

 

 

Issuance of common stock pursuant to directors’ and advisors’ compensation plan
2

 

 

 

 

 

 

 

 

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

 

 
5,066

 

 

 

 
5,066

 

 
5,066

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

 

 
(24
)
 

 

 

 
(24
)
 

 
(24
)
Liability-based stock option awards settled in equity
22

 
1

 
297

 

 

 

 
298

 

 
298

Restricted stock forfeited

 

 

 

 
106

 
(1,267
)
 
(1,267
)
 

 
(1,267
)
Contribution related to formation of San Mateo I, net of tax of $3.1 million (see Note 6)

 

 
11,613

 

 

 

 
11,613

 

 
11,613

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries, net of tax of $4.3 million (see Note 6)

 

 
16,280

 

 

 

 
16,280

 
29,394

 
45,674

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

 

 

 

 

 

 

 
(11,515
)
 
(11,515
)
Current period net income

 

 

 
125,729

 

 

 
125,729

 
9,354

 
135,083

Balance at March 31, 2020
116,671

 
$
1,167

 
$
2,014,246

 
$
(22,771
)
 
107

 
$
(1,293
)
 
$
1,991,349

 
$
163,031

 
$
2,154,380







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


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 6)

 

 
11,613

 

 

 

 
11,613

 

 
11,613

Contribution of property related to formation of San Mateo II (see Note 6)

 

 
(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.
6


Matador Resources Company and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED
(In thousands)
 
Three Months Ended 
 March 31,
 
2020
 
2019
Operating activities
 
 
 
Net income (loss)
$
135,083

 
$
(9,485
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
 
 
 
Unrealized (gain) loss on derivatives
(136,430
)
 
45,719

Depletion, depreciation and amortization
90,707

 
76,866

Accretion of asset retirement obligations
476

 
414

Stock-based compensation expense
3,794

 
4,587

Deferred income tax provision (benefit)
39,957

 
(1,013
)
Amortization of debt issuance cost
684

 
643

Changes in operating assets and liabilities

 

Accounts receivable
36,342

 
(3,873
)
Lease and well equipment inventory
(1,296
)
 
(1,465
)
Prepaid expenses and other current assets
174

 
(936
)
Other long-term assets
1,749

 
9,809

Accounts payable, accrued liabilities and other current liabilities
(58,562
)
 
(41,621
)
Royalties payable
384

 
(7,500
)
Advances from joint interest owners
(3,598
)
 
(6,297
)
Other long-term liabilities
(92
)
 
(6,608
)
Net cash provided by operating activities
109,372

 
59,240

Investing activities


 


Oil and natural gas properties capital expenditures
(173,994
)
 
(182,288
)
Midstream capital expenditures
(73,439
)
 
(33,340
)
Expenditures for other property and equipment
(787
)
 
(807
)
Proceeds from sale of assets

 
1,555

Net cash used in investing activities
(248,220
)
 
(214,880
)
Financing activities


 


Borrowings under Credit Agreement
60,000

 
100,000

Borrowings under San Mateo Credit Facility
19,500

 

Cost to amend Credit Agreement
(660
)
 

Proceeds from stock options exercised
45

 
3,150

Contributions related to formation of San Mateo I
14,700

 
14,700

Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries
50,000

 
12,330

Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries
(11,515
)
 
(8,330
)
Taxes paid related to net share settlement of stock-based compensation
(1,336
)
 
(3,208
)
Cash paid under financing lease obligations
(219
)
 
(274
)
Net cash provided by financing activities
130,515

 
118,368

Decrease in cash and restricted cash
(8,333
)
 
(37,272
)
Cash and restricted cash at beginning of period
65,128

 
83,984

Cash and restricted cash at end of period
$
56,795

 
$
46,712

 
 
 
 
Supplemental disclosures of cash flow information (Note 10)


 



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. 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, 2019 filed with the SEC on March 2, 2020 (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, 2020. Amounts as of December 31, 2019 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 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.
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, 2020 and 2019 (in thousands).
 
Three Months Ended 
 March 31,
 
2020
 
2019
Revenues from contracts with customers
$
224,288

 
$
216,338

Realized gain on derivatives
10,867

 
3,270

Unrealized gain (loss) on derivatives
136,430

 
(45,719
)
Total revenues
$
371,585

 
$
173,889


8

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — Continued

 
Three Months Ended 
 March 31,
 
2020
 
2019
Oil revenues
$
169,585

 
$
154,204

Natural gas revenues
28,329

 
39,065

Third-party midstream services revenues
15,830

 
11,838

Sales of purchased natural gas
10,544

 
11,231

Total revenues from contracts with customers
$
224,288

 
$
216,338


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, 2020 and 2019, 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 $8.2 million and $8.4 million of its general and administrative costs and approximately $1.4 million and $1.6 million of its interest expense for the three months ended March 31, 2020 and 2019, respectively.
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, 2020 and 2019 (in thousands).
 
Three Months Ended 
 March 31,
2020
 
2019
Weighted average common shares outstanding
 
 
 
Basic
116,607

 
115,315

Dilutive effect of options and restricted stock units
77

 

Diluted weighted average common shares outstanding
116,684

 
115,315


A total of 2.7 million options to purchase shares of Matador’s common stock were excluded from the diluted weighted average common shares outstanding for the three months ended March 31, 2020 because their effects were anti-dilutive. 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.

9

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 three months ended March 31, 2020 (in thousands).
Beginning asset retirement obligations
$
36,211

Liabilities incurred during period
990

Liabilities settled during period
(44
)
Accretion expense
476

Ending asset retirement obligations
37,633

Less: current asset retirement obligations(1)
(515
)
Long-term asset retirement obligations
$
37,118

 _______________
(1)
Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at March 31, 2020.
NOTE 4 — DEBT
At March 31, 2020, the Company had $1.05 billion of outstanding senior notes due 2026 (the “Notes”), $315.0 million in borrowings outstanding under its reserves-based revolving credit facility (the “Credit Agreement”) and approximately $46.0 million in outstanding letters of credit issued pursuant to the Credit Agreement. Between March 31 and April 29, 2020, the Company borrowed an additional $30.0 million under the Credit Agreement.
At March 31, 2020, San Mateo I had $307.5 million in borrowings outstanding under its revolving credit facility (the “San Mateo Credit Facility”) and approximately $9.0 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 February 2020, the lenders completed their review of the Company’s proved oil and natural gas reserves at December 31, 2019, and, as a result, the borrowing base was affirmed at $900.0 million. The Company elected to increase the borrowing commitment from $500.0 million to $700.0 million, and the maximum facility amount remained $1.5 billion. This February 2020 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 October 31, 2023.
The Credit Agreement requires the Company to maintain a debt to EBITDA ratio, which is defined as debt outstanding (net of up to $50.0 million of cash or cash equivalents) divided by a rolling four quarter EBITDA calculation, of 4.00 or less. The Company believes that it was in compliance with the terms of the Credit Agreement at March 31, 2020.
San Mateo Midstream, LLC
The San Mateo Credit Facility is non-recourse with respect to Matador and its wholly-owned subsidiaries, as well as San Mateo II and its subsidiaries, but is guaranteed by San Mateo I’s subsidiaries and secured by substantially all of San Mateo I’s assets, including real property. The San Mateo Credit Facility includes an accordion feature, which provides for potential increases to up to $400.0 million, and matures December 19, 2023. At March 31, 2020, the lender commitments under the San Mateo Credit Facility were $375.0 million.
The San Mateo Credit Facility requires San Mateo I to maintain a debt to EBITDA ratio, which is defined as total consolidated funded indebtedness outstanding (as defined in the San Mateo Credit Facility) divided by a rolling four quarter EBITDA calculation, of 5.00 or less, subject to certain exceptions. The San Mateo Credit Facility also requires San Mateo I to maintain an interest coverage ratio, which is defined as a rolling four quarter EBITDA calculation divided by San Mateo I’s consolidated interest expense, of 2.50 or more. The Company believes that San Mateo I was in compliance with the terms of the San Mateo Credit Facility at March 31, 2020.

10

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

NOTE 4 — DEBT — Continued

Senior Unsecured Notes
At March 31, 2020, the Company had $1.05 billion of outstanding 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 5 — INCOME TAXES
The Company’s effective tax rates for the three months ended March 31, 2020 and 2019 were 24% and 33%, respectively. The Company’s total income tax provision for the three months ended March 31, 2020 and 2019 differed from amounts computed by applying the U.S. federal statutory tax rates to pre-tax income due primarily to the impact of permanent differences between book and tax income and state taxes, primarily in New Mexico.
NOTE 6 — EQUITY
Stock-based Compensation
In March 2020, the Company granted awards to certain of its employees of 601,210 service-based restricted stock units to be settled in cash, which are liability instruments, and 601,210 performance-based stock units, which are equity instruments. The performance-based stock units vest in an amount between zero and 200% of the target units granted based on the Company’s relative total shareholder return over the three-year period ending December 31, 2022, as compared to a designated peer group. The service-based restricted stock units vest ratably over three years, and the performance-based stock units are eligible to vest after completion of the three-year performance period. The fair value of these awards was approximately $2.5 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 in the southern portion of the Arrowhead asset area (the “Greater Stebbins Area”) and the Stateline asset area. During the first quarter of 2019, the Company contributed $1.0 million of property and Five Point contributed $4.0 million of cash to San Mateo II. During the first quarter of 2020, the Company contributed $7.5 million and Five Point contributed $50.0 million of cash, of which $20.6 million was paid to carry Matador’s proportionate interest in San Mateo II and was therefore recorded in “Additional paid-in capital” in the Company’s interim unaudited condensed consolidated balance sheet, net of the $4.3 million deferred tax impact to Matador related to this equity contribution. In addition, the Company has the ability to earn up to $150.0 million in deferred performance incentives over the next several years, plus additional performance incentives for securing volumes from third-party customers.
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, 2020, 2019 and 2018. The Company may earn up to an additional $29.4 million in performance incentives over the next two years. These performance incentives are recorded, net of the $3.1 million deferred tax impact to Matador, in “Additional paid-in capital” in the Company’s interim unaudited condensed consolidated balance sheet when received. These performance incentives for the three months ended March 31, 2020 and 2019 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 7 — DERIVATIVE FINANCIAL INSTRUMENTS
At March 31, 2020, the Company had various costless collar and swap contracts open and in place to mitigate its exposure to oil price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and price floor and ceiling for the collars and fixed price for the swaps. At March 31, 2020, each contract was set to expire at varying times during 2020, 2021 and 2022. The Company had no open contracts associated with natural gas or natural gas liquids (“NGL”) prices at March 31, 2020.

11

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

NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued

The following is a summary of the Company’s open costless collar contracts for oil at March 31, 2020.
Commodity
 
Calculation Period
 
Notional Quantity (Bbl)
 
Weighted Average Price Floor ($/Bbl)
 
Weighted Average Price Ceiling ($/Bbl)
 
Fair Value of Asset (Liability) (thousands)
Oil
 
04/01/2020 - 12/31/2020
 
5,205,000

 
$
47.68

 
$
66.69

 
$
95,553

Total open costless collar contracts
 
 
 
 
 
 
 
$
95,553


The following is a summary of the Company’s open basis swap contracts for oil at March 31, 2020.
Commodity
 
Calculation Period
 
Notional Quantity (Bbl)
 
Fixed Price
($/Bbl)
 
Fair Value of
Asset
(Liability)
(thousands)
Oil Basis
 
04/01/2020 - 12/31/2020
 
7,335,000

 
$
0.61

 
$
23,318

Oil Basis
 
01/01/2021 - 12/31/2021
 
8,400,000

 
$
0.87

 
8,552

Oil Basis
 
01/01/2022 - 12/31/2022
 
5,520,000

 
$
0.95

 
5,127

Total open basis swap contracts
 
 
 
 
 
 
 
$
36,997


At March 31, 2020, the Company had an aggregate asset value for open derivative financial instruments of $132.6 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, 2020 and December 31, 2019 (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, 2020
 
 
 
 
 
 
Current assets
 
$
321,607

 
$
(200,428
)
 
$
121,179

Other assets
 
296,261

 
(284,890
)
 
11,371

Current liabilities
 
(200,428
)
 
200,428

 

Long-term liabilities
 
(284,890
)
 
284,890

 

Total
 
$
132,550

 
$

 
$
132,550

December 31, 2019
 
 
 
 
 
 
Current assets
 
$
442,291

 
$
(442,291
)
 
$

Other assets
 
280,397

 
(280,397
)
 

Current liabilities
 
(444,188
)
 
442,291

 
(1,897
)
Long-term liabilities
 
(282,381
)
 
280,397

 
(1,984
)
Total
 
$
(3,881
)
 
$

 
$
(3,881
)


12

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

NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS — Continued

The following table summarizes the location and aggregate gain (loss) 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
 
2020
 
2019
Derivative Instrument
 
 
 
 
 
 
Oil
 
Revenues: Realized gain on derivatives
 
$
10,867

 
$
3,366

Natural Gas
 
Revenues: Realized loss on derivatives
 

 
(96
)
Realized gain on derivatives
 
10,867

 
3,270

Oil
 
Revenues: Unrealized gain (loss) on derivatives
 
136,430

 
(45,444
)
Natural Gas
 
Revenues: Unrealized loss on derivatives
 

 
(275
)
Unrealized gain (loss) on derivatives
 
136,430

 
(45,719
)
Total
 
 
 
$
147,297

 
$
(42,449
)

In April 2020, the Company restructured a portion of its oil derivative contracts, increasing its oil volumes hedged during the period from April through December 2020. As part of this restructuring, the Company repurchased the call options on certain existing open costless collars and kept the remaining put options, which represent options to sell at a specific exercise price, exchanged certain existing open costless collars and added swaps.
As a result of this restructuring process, the Company’s open oil derivative contracts for the period from April through December 2020 have changed. The restructuring transactions were executed with the same counterparties and were costless to the Company. As a result, the execution of the restructuring transactions is not expected to have a material impact on the consolidated financial statements of the Company. No changes were made to the Company’s open oil basis swaps from those positions noted above. In April 2020, the Company also entered into oil swaps for 2021 and natural gas collars for late 2020 and early 2021.
The following is a summary of the Company’s open costless collar contracts for oil and natural gas at April 29, 2020.
Commodity
 
Calculation Period
 
Notional Quantity (Bbl or MMBtu)
 
Weighted Average Price Floor ($/Bbl or
$/MMBtu)
 
Weighted Average Price Ceiling ($/Bbl or
$/MMBtu)
Oil
 
04/01/2020 - 12/31/2020
 
2,311,500

 
$
47.94

 
$
66.19

Natural Gas
 
11/01/2020 - 12/31/2020
 
3,200,000

 
$
2.52

 
$
3.71

Natural Gas
 
01/01/2021 - 03/31/2021
 
4,800,000

 
$
2.52

 
$
3.71

The following is a summary of the Company’s open swap contracts for oil at April 29, 2020.
Commodity
 
Calculation Period
 
Notional Quantity (Bbl)
 
Fixed Price
($/Bbl)
Oil
 
04/01/2020 - 12/31/2020
 
7,620,000

 
$
34.93

Oil
 
01/01/2021 - 12/31/2021
 
2,040,000

 
$
35.26

The following is a summary of the Company’s open put option contracts for oil at April 29, 2020.
Commodity
 
Calculation Period
 
Notional Quantity (Bbl)
 
Fixed Price
($/Bbl)
Oil
 
04/01/2020 - 06/30/2020
 
391,500

 
$
48.15



13

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



NOTE 8 — FAIR VALUE MEASUREMENTS
The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Fair value measurements are classified and disclosed in one of the following categories.
Level 1
Unadjusted quoted prices for identical, unrestricted assets or liabilities in active markets.
Level 2
Quoted prices in markets that are not active, or inputs 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, 2020 and December 31, 2019 (in thousands).
 
 
Fair Value Measurements at
March 31, 2020 using
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
 
Oil derivatives and basis swaps
 
$

 
$
132,550

 
$

 
$
132,550

Total
 
$

 
$
132,550

 
$

 
$
132,550


 
 
Fair Value Measurements at
December 31, 2019 using
Description
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets (Liabilities)
 
 
 
 
 
 
 
 
Oil derivatives and basis swaps
 
$

 
$
(3,881
)
 
$

 
$
(3,881
)
Total
 
$

 
$
(3,881
)
 
$

 
$
(3,881
)

Additional disclosures related to derivative financial instruments are provided in Note 7.
Other Fair Value Measurements
At March 31, 2020 and December 31, 2019, 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, 2020 and December 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.

14

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

NOTE 8 — FAIR VALUE MEASUREMENTS — Continued

At March 31, 2020 and December 31, 2019, the fair value of the Notes was $307.1 million and $1.06 billion, respectively, based on quoted market prices, which represent Level 1 inputs in the fair value hierarchy. At April 29, 2020, the fair value of the Notes was $499.5 million.
NOTE 9 — 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 and salt water from certain portions of its acreage for gathering, transportation, processing, fractionation, sales and, in the case of salt water, disposal. The Company paid approximately $11.0 million and $6.8 million for deliveries under these agreements during the three months ended March 31, 2020 and 2019, respectively. Certain of these agreements contain minimum volume commitments. If the Company does not meet the minimum 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, 2020, the total deficiencies required to be paid by the Company under these agreements would be approximately $398.1 million, in addition to the commitments described below.
Future Commitments
In late 2017, the Company entered into a fixed-fee NGL sales 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”) to a certain counterparty. The Company is committed to deliver a minimum amount of NGLs to the counterparty upon construction and completion of a pipeline extension 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 would 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 would 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 would be required to pay a deficiency fee per gallon of NGL below the Company’s commitment. 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 $129.2 million.
In October 2019, the Company entered into a 15-year, fixed-fee natural gas transportation agreement 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 agreement begins when the counterparty’s pipeline is placed in service, which is anticipated to be the third quarter of 2020. Should the pipeline be placed in service, the Company would owe the fees to transport the committed volume whether or not the committed volume is transported through the counterparty’s pipeline, and the minimum contractual obligation would be approximately $106.9 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 remaining minimum contractual obligation under the Operational Agreements at March 31, 2020 was approximately $150.7 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 remaining minimum contractual obligation under the San Mateo II Operational Agreements at March 31, 2020 was approximately $361.1 million.

15

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

NOTE 9 — COMMITMENTS AND CONTINGENCIES — Continued

In June 2019, a subsidiary of San Mateo II entered into an agreement with third parties for the engineering, procurement, construction and installation of an expansion of the Black River Processing Plant, including required compression. The expansion is expected to be placed in service in 2020. San Mateo II’s total commitments under this agreement are $80.6 million. San Mateo II paid approximately $21.1 million under this agreement during the three months ended March 31, 2020. As of March 31, 2020, the remaining obligations of San Mateo II under this agreement were $19.4 million, which are expected to be paid within the next 12 months.
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.
NOTE 10 — SUPPLEMENTAL DISCLOSURES
Accrued Liabilities
The following table summarizes the Company’s current accrued liabilities at March 31, 2020 and December 31, 2019 (in thousands).
 
March 31,
2020
 
December 31,
2019
Accrued evaluated and unproved and unevaluated property costs
$
107,173

 
$
72,376

Accrued midstream properties costs
40,781

 
46,402

Accrued lease operating expenses
20,849

 
18,223

Accrued interest on debt
2,861

 
18,569

Accrued asset retirement obligations
515

 
619

Accrued partners’ share of joint interest charges
18,202

 
14,322

Accrued payable related to purchased natural gas
1,770

 
17,806

Other
5,154

 
12,378

Total accrued liabilities