Matador Resources Company (MTDR) Earnings Call Transcript

Good morning, ladies and gentlemen. Welcome to the Second Quarter 2026 Matador Resources Company Earnings Conference Call. My name is Michelle, and I'll be serving as the operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes, and the replay will be available on the company's website for 1 year as discussed in the company's earnings press release issued yesterday. I will now turn the call over to Mr. Mac Schmitz, Senior Vice President, Investor Relations for Matador. Mr. Schmitz, you may proceed.

Thank you, Michelle. Good morning, everyone, and thank you for joining us for Matador's Second Quarter 2026 Earnings Conference Call. Some of the presenters this morning will reference certain non-GAAP financial measures regularly used by Matador Resources in measuring the company's financial performance. Reconciliations of such non-GAAP financial measures with the comparable financial measures calculated in accordance with GAAP are contained at the end of the company's earnings release issued yesterday. As a reminder, certain statements included in this morning's presentation may be forward-looking and reflect the company's current expectations or forecasts of future events based on the information that is now available. Actual results and future events could differ materially from those anticipated in such statements. Additional information concerning factors that could cause actual results to differ materially is contained in the company's earnings release and its most recent annual report on Form 10-K and any subsequent quarterly reports on Form 10-Q. In addition to our earnings press release issued yesterday, I would also like to remind everyone that you can find a slide presentation in connection with our second quarter 2026 earnings release under the Investor Relations tab on our corporate website. And with that, I would now like to turn the call over to Mr. Joe Foran, our Chairman, Founder and CEO. Joe?

Thank you very much, Mac. It's a pleasure to be here with you all again, having an exchange of your questions and our answers and your comments. We appreciate, we'd like to hear from you. I want to be sure that all of you know that you're welcome here to come visit. And if you do, you'll be assured of meeting not only most of the senior staff, but also the opportunity to visit with some of our young staffers that have come in, in geology and engineering, and you hear directly from them who are doing the work, how they feel about it and what they -- their views on the future and the strength and technology that they're using being state-of-the-art. Second, I'd like to give you an overall picture. We've had near record adjusted free cash flow for this quarter of $303 million, $200 million of which has been used to pay down the bank debt that we had on the acquisition of the federal leases. So now we're under $1 billion on that debt and making progress to get it paid down further in these upcoming quarters. And I think that's an important point to remember when people wonder about how we really stand, we have 19 banks in our bank group, and they all scrubbed down our numbers pretty thoroughly and had some real good exchanges and they raised good questions. But all 19 have participated and have indicated more is available if we come across opportunities like that. So thank you, banks. We appreciate your backing us and working with us in our relationship with you. Last, two things on this report. If you're asking us how we're doing, we'd just say we -- the true answer is that we've exceeded the high end of our production guidance. So it's nice to be sitting in that spot when -- also mentioned we've had a 5% increase in our oil and natural gas reserves, up from 667 million barrels of oil or gas equivalent to 703 million barrels of oil or gas equivalent. So nice increase for a quarter. And I want to say to all of our teams, our exploration and production teams that good work and keep it up. As I mentioned, these results and cash flow generation has enabled us to pay down $200 million in the borrowings we had for the May federal lease sale on our RBL. We expect to now generate approximately $900 million in free cash flow for the year. So we'll have this largely paid down, if not paid off by the end of the year. Second, in this area, we remain very focused on prioritizing continued debt reduction, but it's not very often that you have an opportunity to buy 3 properties like Cardinal, like Paloma and like Ridge Runner of this quality to bring into your asset group and the upside of Ridge Runner and on -- these properties to continue growing our base in New Mexico. And we've steadily risen in the ranks to where we're one of the -- we're in the top 10 and top 5 in Lea County. I'm also pleased and excited to provide update. We began the year saying we had 4 strategic catalysts that we were planning to execute on. First is the closing and integrating of Cardinal. And on that score, that was very professional work with the Cardinal team. We had good relations, went smoothly and to the point where we gained increasing confidence on the capability of their people who might be interested in Matador, and we made offers to 26 of their field people, their whole staff out there, basically, and all 26 accepted the offer. We thought that was a good sign of how professional the negotiations went and the opportunities they feel are ahead of them being with a company committed to the Delaware as we are. I also want to emphasize that midstream money was used to purchase Cardinal and for midstream assets, that's our policy, midstream money for midstream assets. And on the E&P side, again, we're using Matador money for properties that will end up in Matador. So first, we've closed and we're integrating Cardinal. And as I said, we -- those are 2 separate companies, but we collaborate with each other, and we think we help each other to better performance. So that was the first strategic catalyst. The second one was BLM lease sale. We paid a lot of money for it. We would have been nervous about that. But if you remember back to 2018, we were criticized some for buying and paying what we did for lease sales and look what that did for us. That boosted us into the best cash flow and the best properties that we had for a number of times. And the Rodney Robinson wells that were drilled in the Nina Cortell are all making over 1 million barrels a piece. And that extra free cash flow has given us a lot of opportunities. We tried to take advantage of it. So when the opportunity came up again for BLM lease sale years later, we really prepared for it, and we're excited by the leases that we were received. And it extended our inventory life to over 15 years. And good properties like that with 9 different zones are likely to have a lot more than just 10 to 15 years of extension. They also are enhanced by the fact we have a midstream system that should be able to increase their cash flow picking up this gas and getting it to market. I think in the succeeding years, flow assurance is going to play a bigger and bigger role. On page -- I think it's Page 7 of the slides, we have a map showing how all these properties fit together. And on the Cardinal, you -- it lays down to give us pipeline movement all around the basin, and you couldn't really have a better fit than the way it fits in with our other pipeline systems. But -- in that regard, you have 100 rigs approximately out there within 10 miles of our pipelines. So that's a great opportunity for our group to pick up some additional business and relationships. And our teams are out there trying to take advantage of it now and bring in new customers and take on the existing customers of Cardinal and build that up into -- and weave it into our existing pipeline systems. Finally, the future results of Cardinal and these BLM leases should we expect them to turn out to be better than expected given the quality of the acreage from not only our acquisitions, but the E&P activities of other people in the area. As I mentioned, it's 100 rigs out there working. And so you can expect if you are not lining up how to get your gas out of the Delaware need to be doing so because I think it -- there will be some tightness in the markets. We'll try to take care of you as best we can. But at this point, you might want to take some action to be sure that's lined up for any investment you make in new wells. All this, we believe, sets us up for a strong finish to 2026, an even stronger performance in 2027 as we're able to plan and coordinate our various activities. As a result, we've raised our production guidance from year-over-year oil growth of 4% to 7%. And all this is done with 1% less capital expenditures. One note about capital expenditures. Of course, I started this company with some friends 43 years ago and with $270,000, and now we have over $12 billion in assets. And on that, we borrowed money the whole way, always paid it back, and we'll need to borrow some as we finish development of these undeveloped acres and extend the coverage the midstream has in these more prolific areas. So we think that outlook looks good. The capital will be put to good use and appreciate the support that we've had and think -- things look good going forward. And if not, I'd tell you so that we've got to work through some things. But it's very exciting to have the best acreage, the best team that you've had with the opportunities provided with a bank group that is as solid as we've been fortunate to have in the group and the shareholders that we have. So we've been blessed with a lot of good things. We plan to be good stewards. That's always been our mark. We didn't come up through private equity, but friends and family. And I can assure you your friends and family are rooting for you, but they have a lot of questions, and they're not afraid to ask the tough questions. So we've tried to answer for them as this transaction unfolded. But now we're ready for yours. And with that, I'll turn you over for the first question.

[Operator Instructions] Our first question is from Neal Dingmann of William Blair.

Nice update. I'll jump right to my question. Joe, my question is around your new asset economics that you all highlighted last night. Specifically, you all suggested the rates of return on these newer properties likely to be over 80%. So my question is, what's driving this outperformance, these new assets versus peers and your existing assets, which are already over 50%. And given these high returns, do you anticipate more activity in these new areas?

Neal, thanks for the question. It's Tom Elsener. We're very excited for these new properties and the 80% rate of return is really underpinned first and foremost, just by the very high-quality rock. As you can see on the maps on Slides 5 and 6, you can see that the acreage we bought is in the core of the Delaware Basin. And we expect that there'll be 15% to 20% higher oil EURs on those properties, which will greatly enhance the returns on those wells, along with the fact that there's 9 or more different benches. And that allows for batch development and longer laterals and will support getting our well costs down significantly down to the $600 per foot range. Also, the high net revenue interest, particularly on the federal leases with a 1/8 royalty will also enhance those economics. Not included in the 80% is also the synergies with the midstream, which many of those properties are just a few miles away from our existing infrastructure.

Our next question comes from Gabe Daoud of Truist.

Just wondering if we could maybe get an updated view on how you think about '27 at this point? I know profitable growth at a measured pace had always kind of been the strategy here. And so kind of targeting a mid-single-digit oil growth for '27, is that fair? And would that require the same level of spending that you're guiding to for this year? Or would that require a step-up in CapEx?

Gabe, I'll start and some of the others may chip in. But first, you got it right. That's our basic policy, profitable growth at a measured pace. So that's the way we plan to go. Now for example, if prices were to collapse to $30 a barrel instead of $70, we wouldn't do the same program. But we're expecting right now despite the volatility in the Middle East that it's going to level out somewhere in this $70 to $80 range. It might be better and we will adjust accordingly, but I think we can count on making money even at $70 a barrel from these properties. They're that good. We will be careful about our debt, and we will pay that down as reasonably as we can and make adjustments in the year since it's an elective repayment, we'll adjust it to the cash flow per month. But our target would be something at present prices, somewhat in that range of $100 a month. So it's paid off within a year to 15 months. On the acquisition, the money is used to acquire Cardinal. We've already brought it down from $1.25 billion to less than $1 billion, a little less than $1 billion. And we're pleased with that activity, and we're going to keep that up. And we've always had -- when you come not from private equity who has more access to money, but you're relying on friends and neighbors, you're always very careful. They may be your friends and neighbors, but if the debt gets too high, you can be sure they'll be calling in and expressing concern. So we've always tried to be forward-looking on getting the debt paid down. It also gives assurance to our banks. So they're that much more agreeable to make loans if another acquisition opportunity, the quality of what we had in the federal lease sale or acquiring Cardinal and then you couldn't line up two more companies that had a better fit on their undeveloped acreage or production than what we've had with Paloma and with Ridge Runner. And those are quality companies that have had great success in developing some of these properties and selling them on and then getting back to putting together another quality group. So that relationship has gone well. We have great respect and admiration for them as well as for [ EnCap ] as a sponsor of those companies. And that's kind of what I foresee. I hope that answers your question. If not, I'll give it another try.

Our next question comes from Scott Hanold with RBC.

Obviously, the federal acreage is a big highlight for you all. And can you give us a sense on the path on activity for that? Like when do you expect permits? Like have you gotten some visibility? And what is sort of the targeting strategy when you get to there? Are we looking at large pad development that's going to be a good part of your early 2027 activity? Or how do you see that unfolding, just the development of that asset?

Scott, this is Bryan Erman. Yes, I'll tackle the first part of your question. I mean I think the advantage of that acreage for us is it's something that we've been targeting for many months. And so the advantage of that is from the federal permitting process, we hit the ground running day 1 after the lease sale and are already making significant progress on those permits. So we talked about that we'd like to potentially get on those leases as early as the end of this year, if not early part of next year. But I just want to highlight the fact that, I do think we had a significant advantage on being able to hit the ground running on those because we have looked at those for so long. But I'll let Chris or Tom talk about the kind of development plan.

Yes. And Scott, I would just yes, add to and I'd love for Chris and Tom to add as well. But we highlighted in the release, too, that there are 12 operated wells that are close to this acreage that we're currently in the process of completing and will plan on turning online in Q3, which I think is important. And then also, we highlighted the increase in the midstream spend to be able to build out both San Mateo and Matador to these federal properties, which I think is an indicator that we're planning on spudding some wells this year in that vicinity to what was acquired in May.

Our next question comes from Derrick Whitfield with Texas Capital.

I wanted to focus on the recent acquisitions. The strategic fit is very clear as shown on Slide 6 and 7. With that said, how do the acquisitions impact your view on the path forward with the midstream business?