Edgar Filing: Matador Resources Co

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________

FORM 10-Q

_________________________________________________________



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 001-35410

_________________________________________________________

Matador Resources Company

(Exact name of registrant as specified in its charter)

_________________________________________________________



Texas	27-4662601
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

5400 LBJ Freeway, Suite 1500 Dallas, Texas	75240
(Address of principal executive offices)	(Zip Code)

(972) 371-5200

(Registrant’s telephone number, including area code)

_________________________________________________________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	x	Accelerated filer	¨

Non-accelerated filer	¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

As of August 2, 2017, there were 100,437,295 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 JUNE 30, 2017

INDEX



	Page
PART I — FINANCIAL INFORMATION	3
Item 1. Financial Statements - Unaudited	3
Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016	3
Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and 2016	4
Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Six Months Ended June 30, 2017	5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016	6
Notes to Condensed Consolidated Financial Statements	7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	41
PART II — OTHER INFORMATION	42
Item 1. Legal Proceedings	42
Item 1A. Risk Factors	42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 6. Exhibits	42
SIGNATURES	43

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)



	June 30, 2017			December 31, 2016
ASSETS
Current assets
Cash	$	131,466		$	212,884
Restricted cash	15,040			1,258
Accounts receivable
Oil and natural gas revenues	39,621			34,154
Joint interest billings	37,387			19,347
Other	7,303			5,167
Derivative instruments	7,067			—
Lease and well equipment inventory	2,957			3,045
Prepaid expenses and other assets	5,946			3,327
Total current assets	246,787			279,182
Property and equipment, at cost
Oil and natural gas properties, full-cost method
Evaluated	2,694,766			2,408,305
Unproved and unevaluated	567,009			479,736
Other property and equipment	204,299			160,795
Less accumulated depletion, depreciation and amortization	(1,939,570		)	(1,864,311		)
Net property and equipment	1,526,504			1,184,525
Other assets
Derivative instruments	2,992			—
Other assets	793			958
Total other assets	3,785			958
Total assets	$	1,777,076		$	1,464,665
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable	$	7,371		$	4,674
Accrued liabilities	151,336			101,460
Royalties payable	35,423			23,988
Amounts due to affiliates	5,865			8,651
Derivative instruments	1,192			24,203
Advances from joint interest owners	5,468			1,700
Amounts due to joint ventures	4,873			4,251
Other current liabilities	656			578
Total current liabilities	212,184			169,505
Long-term liabilities
Senior unsecured notes payable	573,988			573,924
Asset retirement obligations	22,391			19,725
Derivative instruments	—			751
Amounts due to joint ventures	—			1,771
Other long-term liabilities	6,142			7,544
Total long-term liabilities	602,521			603,715
Commitments and contingencies (Note 10)
Shareholders’ equity
Common stock - $0.01 par value, 160,000,000 and 120,000,000 shares authorized; 100,399,756 and 99,518,764 shares issued; and 100,324,852 and 99,511,931 shares outstanding, respectively	1,004			995
Additional paid-in capital	1,453,341			1,325,481
Accumulated deficit	(563,858		)	(636,351		)
Treasury stock, at cost, 74,904 and 6,833 shares, respectively	(745		)	—
Total Matador Resources Company shareholders’ equity	889,742			690,125
Non-controlling interest in subsidiaries	72,629			1,320
Total shareholders’ equity	962,371			691,445
Total liabilities and shareholders’ equity	$	1,777,076		$	1,464,665

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

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Matador Resources Company and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED

(In thousands, except per share data)



	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Revenues
Oil and natural gas revenues	$	113,764		$	69,336		$	228,611		$	113,262
Third-party midstream services revenues	2,099			918			3,654			1,391
Realized gain (loss) on derivatives	558			2,465			(1,661		)	9,528
Unrealized gain (loss) on derivatives	13,190			(26,625		)	33,821			(33,464		)
Total revenues	129,611			46,094			264,425			90,717
Expenses
Production taxes, transportation and processing	12,875			10,556			24,682			18,459
Lease operating	16,040			12,183			31,797			26,695
Plant and other midstream services operating	2,942			1,061			5,283			2,088
Depletion, depreciation and amortization	41,274			31,248			75,266			60,170
Accretion of asset retirement obligations	314			289			614			552
Full-cost ceiling impairment	—			78,171			—			158,633
General and administrative	17,177			13,197			33,515			26,360
Total expenses	90,622			146,705			171,157			292,957
Operating income (loss)	38,989			(100,611		)	93,268			(202,240		)
Other income (expense)
Net gain on asset sales and inventory impairment	—			1,002			7			2,067
Interest expense	(9,224		)	(6,167		)	(17,679		)	(13,365		)
Other income	1,922			29			1,991			124
Total other expense	(7,302		)	(5,136		)	(15,681		)	(11,174		)
Net income (loss)	31,687			(105,747		)	77,587			(213,414		)
Net income attributable to non-controlling interest in subsidiaries	(3,178		)	(106		)	(5,094		)	(93		)
Net income (loss) attributable to Matador Resources Company shareholders	$	28,509		$	(105,853	)	$	72,493		$	(213,507	)
Earnings (loss) per common share
Basic	$	0.28		$	(1.15	)	$	0.72		$	(2.40	)
Diluted	$	0.28		$	(1.15	)	$	0.72		$	(2.40	)
Weighted average common shares outstanding
Basic	100,211			92,346			100,005			88,826
Diluted	100,227			92,346			100,455			88,826

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

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Matador Resources Company and Subsidiaries

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - UNAUDITED

(In thousands)

For the Six Months Ended June 30, 2017



														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		Additional paid-in capital			Accumulated deficit			Shares	Amount
Balance at January 1, 2017	99,519	$	995	$	1,325,481		$	(636,351	)	6	$	—		$	690,125		$	1,320		$	691,445
Issuance of common stock pursuant to employee stock compensation plan	499	5		(5		)	—			—	—			—			—			—
Common stock issued to Board members and advisors	55	1		(1		)	—			—	—			—			—			—
Stock-based compensation expense related to equity-based awards including amounts capitalized	—	—		12,521			—			—	—			12,521			—			12,521
Stock options exercised, net of options forfeited in net share settlements	327	3		(27		)	—			—	—			(24		)	—			(24		)
Restricted stock forfeited	—	—		—			—			69	(745		)	(745		)	—			(745		)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary	—	—		(1,250		)	—			—	—			(1,250		)	(1,403		)	(2,653		)
Contributions related to formation of Joint Venture (see Note 3)	—	—		116,622			—			—	—			116,622			54,878			171,500
Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries	—	—		—			—			—	—			—			14,700			14,700
Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries	—	—		—			—			—	—			—			(1,960		)	(1,960		)
Current period net income	—	—		—			72,493			—	—			72,493			5,094			77,587
Balance at June 30, 2017	100,400	$	1,004	$	1,453,341		$	(563,858	)	75	$	(745	)	$	889,742		$	72,629		$	962,371

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

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Matador Resources Company and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - UNAUDITED

(In thousands)



	Six Months Ended June 30,
	2017			2016
Operating activities
Net income (loss)	$	77,587		$	(213,414	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Unrealized (gain) loss on derivatives	(33,821		)	33,464
Depletion, depreciation and amortization	75,266			60,170
Accretion of asset retirement obligations	614			552
Full-cost ceiling impairment	—			158,633
Stock-based compensation expense	11,192			5,553
Amortization of debt issuance cost	64			592
Net gain on asset sales and inventory impairment	(7		)	(2,067		)
Changes in operating assets and liabilities
Accounts receivable	(25,642		)	(2,751		)
Lease and well equipment inventory	(140		)	(514		)
Prepaid expenses	(2,619		)	186
Other assets	165			520
Accounts payable, accrued liabilities and other current liabilities	4,442			2,451
Royalties payable	11,435			153
Advances from joint interest owners	3,768			5,083
Income taxes payable	—			(2,848		)
Other long-term liabilities	(1,062		)	3,837
Net cash provided by operating activities	121,242			49,600
Investing activities
Oil and natural gas properties capital expenditures	(328,929		)	(162,381		)
Expenditures for other property and equipment	(41,743		)	(47,548		)
Proceeds from sale of assets	977			—
Restricted cash	—			43,437
Restricted cash in less-than-wholly-owned subsidiaries	(13,783		)	460
Net cash used in investing activities	(383,478		)	(166,032		)
Financing activities
Proceeds from issuance of common stock	—			142,350
Cost to issue equity	—			(768		)
Proceeds from stock options exercised	2,201			—
Contributions related to formation of Joint Venture	171,500			—
Contributions from non-controlling interest owners of less-than-wholly-owned subsidiaries	14,700			—
Distributions to non-controlling interest owners of less-than-wholly-owned subsidiaries	(1,960		)	—
Taxes paid related to net share settlement of stock-based compensation	(2,970		)	(1,009		)
Purchase of non-controlling interest of less-than-wholly-owned subsidiary	(2,653		)	—
Net cash provided by financing activities	180,818			140,573
(Decrease) increase in cash	(81,418		)	24,141
Cash at beginning of period	212,884			16,732
Cash at end of period	$	131,466		$	40,873

Supplemental disclosures of cash flow information (Note 11)

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

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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, natural gas, oil and salt water gathering services and salt water disposal services to third parties on a limited basis.

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 Matador and its subsidiaries 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, 2016 (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 (“ASC”) 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 adjustments, consisting only of normal, recurring adjustments, which are necessary for a fair presentation of the Company’s interim unaudited condensed consolidated financial statements as of June 30, 2017. Amounts as of December 31, 2016 are derived from the Company’s audited consolidated financial statements 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 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.

Reclassifications

Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period presentation. As a result of the growth of the Company’s midstream operations, these operations met the required threshold for segment reporting. As a result, $0.9 million for the three months ended June 30, 2016 and $1.4 million for the six months ended June 30, 2016 were reclassified from other income to third-party midstream services revenues. In addition, $1.1 million related to midstream operating costs for the three months ended June 30, 2016 and $2.1 million for the six months ended June 30, 2016 were reclassified from lease operating expenses to plant and other midstream services operating expenses. These reclassifications had no effect on previously reported results of operations, cash flows or retained earnings.

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 and six months ended June 30, 2017, the cost center ceiling was higher than the capitalized costs

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Matador Resources Company and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -

UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

of oil and natural gas properties; no impairment charge was necessary. However, due primarily to declines in oil and natural gas prices in early 2016, the capitalized costs of oil and natural gas properties exceeded the cost center ceiling for the three and six months ended June 30, 2016, and as a result, the Company recorded impairment charges to its net capitalized costs of $78.2 million and $158.6 million, respectively, in its interim unaudited condensed consolidated statements of operations.

The Company capitalized approximately $5.2 million and $4.0 million of its general and administrative costs for the three months ended June 30, 2017 and 2016, respectively, and approximately $1.9 million and $1.7 million of its interest expense for the three months ended June 30, 2017 and 2016, respectively. The Company capitalized approximately $10.8 million and $6.0 million of its general and administrative costs for the six months ended June 30, 2017 and 2016, respectively, and approximately $3.2 million and $2.2 million of its interest expense for the six months ended June 30, 2017 and 2016, respectively.

Earnings (Loss) Per Common Share

The Company reports basic earnings (loss) attributable to Matador Resources Company shareholders per common share, which excludes the effect of potentially dilutive securities, and diluted earnings (loss) 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 six months ended June 30, 2017 and 2016 (in thousands).



	Three Months Ended June 30,		Six Months Ended June 30,
	2017	2016	2017	2016
Weighted average common shares outstanding
Basic	100,211	92,346	100,005	88,826
Dilutive effect of options and restricted stock units	16	—	450	—
Diluted weighted average common shares outstanding	100,227	92,346	100,455	88,826

A total of 2.9 million options to purchase shares of the Company’s common stock and 0.1 million restricted stock units were excluded from the diluted weighted average common shares outstanding for both the three and six months ended June 30, 2016, respectively, because their effects were anti-dilutive. Additionally, 0.9 million restricted shares, which are participating securities, were excluded from the calculations above for both the three and six months ended June 30, 2016, respectively, as the security holders do not have the obligation to share in the losses of the Company.

Recent Accounting Pronouncements

Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 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. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2016. In May 2016, the FASB issued ASU 2016-11, which rescinds guidance from the SEC on accounting for gas balancing arrangements and will eliminate the use of the entitlements method. Entities have the option of using either a full retrospective or modified approach to adopt the new standards. In December 2016, the FASB issued ASU 2016-20, which clarifies disclosure requirements in ASU 2014-09. The Company expects to adopt the new guidance effective January 1, 2018 using the modified approach. The Company is evaluating the new guidance, including (i) identification of revenue streams and (ii) review of contracts and procedures currently in place.

Leases. In February 2016, the 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

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Matador Resources Company and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -

UNAUDITED - CONTINUED

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued

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. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

Statement of Cash Flows. In November 2016, the FASB issued 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. This ASU will become effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The update should be applied using a retrospective transition method to each period presented. The Company believes that the impact of the adoption of this ASU will change the presentation of its beginning and ending cash balances on its Consolidated Statements of Cash Flows and eliminate the presentation of changes in restricted cash balances from investing activities on its Consolidated Statements of Cash Flows.

Clarifying the Definition of a Business. In January 2017, the FASB issued 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. This ASU will become effective for fiscal years beginning after December 15, 2017 with early adoption permitted. Entities are required to apply guidance prospectively upon adoption. The Company is currently evaluating the impact of the adoption of this ASU on its consolidated financial statements.

NOTE 3 – BUSINESS COMBINATION

Joint Venture

On February 17, 2017, the Company contributed substantially all of its midstream assets located in the Rustler Breaks (Eddy County, New Mexico) and Wolf (Loving County, Texas) asset areas in the Delaware Basin to San Mateo, a joint venture with a subsidiary of Five Point Capital Partners LLC (“Five Point”). The midstream assets contributed to San Mateo include (i) the Black River cryogenic natural gas processing plant in the Rustler Breaks asset area (the “Black River Processing Plant”); (ii) one salt water disposal well and a related commercial salt water disposal facility in the Rustler Breaks asset area; (iii) three salt water disposal wells and related commercial salt water disposal facilities in the Wolf asset area; and (iv) substantially all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas (collectively, the “Delaware Midstream Assets”). The Company continues to operate the Delaware Midstream Assets. The Company retained its ownership in certain midstream assets in South Texas and Northwest Louisiana, which are not part of the Joint Venture.

The Company and Five Point own 51% and 49% of the Joint Venture, respectively. Five Point provided initial cash consideration of $176.4 million to the Joint Venture in exchange for its 49% interest. Approximately $171.5 million of this cash contribution by Five Point was distributed by the Joint Venture to the Company as a special distribution. The Company may earn an additional $73.5 million in performance incentives over the next five years. The Company contributed the Delaware Midstream Assets and $5.1 million in cash to the Joint Venture in exchange for its 51% interest. The parties to the Joint Venture have also committed to spend up to an additional $140.0 million in the aggregate to expand the Joint Venture’s midstream operations and asset base. The Joint Venture is consolidated in the Company’s interim unaudited condensed consolidated financial statements with Five Point’s interest in the Joint Venture being accounted for as a non-controlling interest.

In connection with the Joint Venture, 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, effective as of February 1, 2017. 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 (see Note 10).

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Matador Resources Company and Subsidiaries

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -

UNAUDITED - CONTINUED

NOTE 4 - ASSET RETIREMENT OBLIGATIONS

The following table summarizes the changes in the Company’s asset retirement obligations for the six months ended June 30, 2017 (in thousands).




Beginning asset retirement obligations	$	20,640
Liabilities incurred during period	1,222
Liabilities settled during period	(176		)
Revisions in estimated cash flows	794
Accretion expense	614
Ending asset retirement obligations	23,094
Less: current asset retirement obligations⁽¹⁾	(703		)
Long-term asset retirement obligations	$	22,391

_______________


(1)	Included in accrued liabilities in the Company’s interim unaudited condensed consolidated balance sheet at June 30, 2017.

NOTE 5 - DEBT

At June 30, 2017 and August 2, 2017, the Company had $575.0 million of outstanding 6.875% senior notes due 2023, no borrowings outstanding under the Company’s revolving credit agreement (the “Credit Agreement”) and approximately $0.8 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 2017, the lenders completed their review of the Company’s proved oil and natural gas reserves at December 31, 2016, and on April 28, 2017, the borrowing base was increased to $450.0 million and the maximum facility amount remained at $500.0 million. The Company elected to keep the borrowing commitment at $400.0 million. Borrowings under the Credit Agreement are limited to the least of the borrowing base, the maximum facility amount and the elected commitment. The Credit Agreement matures on October 16, 2020.

In the event of an increase in the elected commitment, the Company is required to pay a fee to the lenders equal to a percentage of the amount of the increase, which is determined based on market conditions at the time of the increase. Total deferred loan costs were $1.1 million at June 30, 2017, and these costs are being amortized over the term of the Credit Agreement, which approximates amortization of these costs using the effective interest method. If, upon a redetermination of the borrowing base, the borrowing base were to be less than the outstanding borrowings under the Credit Agreement at any time, the Company would be required to provide additional collateral satisfactory in nature and value to the lenders to increase the borrowing base to an amount sufficient to cover such excess or to repay the deficit in equal installments over a period of six months.

The Company believes that it was in compliance with the terms of the Credit Agreement at June 30, 2017.

Senior Unsecured Notes

On April 14, 2015 and December 9, 2016, the Company issued $400.0 million and $175.0 million, respectively, of 6.875% senior notes due 2023 (collectively, the “Notes”). The Notes mature on April 15, 2023, and interest is payable semi-annually in arrears on April and October 15 of each year.

On May 24, 2017, and pursuant to a registered exchange offer, the Company exchanged all of the $175.0 million of Notes issued on December 9, 2016, which were privately placed, for a like principal amount of 6.875% senior notes due 2023 that have been registered under the Securities Act of 1933, as amended. The terms of such registered Notes are substantially the same as the terms of the original Notes except that the transfer restrictions, registration rights and provisions for additional interest relating to the original Notes do not apply to the registered Notes.

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UNAUDITED - CONTINUED

NOTE 5 - DEBT - Continued

On February 17, 2017, in connection with the formation of San Mateo (see Note 3), Matador entered into a Fourth Supplemental Indenture (the “Fourth Supplemental Indenture”), which supplements the indenture governing the Notes. Pursuant to the Fourth Supplemental Indenture, (i) Longwood Midstream Holdings, LLC, the holder of Matador’s 51% equity interest in San Mateo, was designated as a guarantor of the Notes and (ii) DLK Black River Midstream, LLC and Black River Water Management Company, LLC, each subsidiaries of San Mateo, were released as parties to, and as guarantors of, the Notes. The guarantors of the Notes, following the effectiveness of the Fourth Supplemental Indenture, are referred to herein as the “Guarantor Subsidiaries.” San Mateo and its subsidiaries (the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes, although they remain restricted subsidiaries under the indenture governing the Notes.

The following presents condensed consolidating financial information on an issuer (Matador), Non-Guarantor Subsidiaries, Guarantor Subsidiaries and consolidated basis (in thousands). Elimination entries are necessary to combine the entities. This financial information is presented in accordance with the requirements of Rule 3-10 of Regulation S-X. The following financial information may not necessarily be indicative of results of operations, cash flows or financial position had the Guarantor Subsidiaries operated as independent entities.



Condensed Consolidating Balance Sheet June 30, 2017
	Matador		Non-Guarantor Subsidiaries		Guarantor Subsidiaries		Eliminating Entries			Consolidated
ASSETS
Intercompany receivable	$	385,885	$	—	$	1,679	$	(387,564	)	$	—
Third-party current assets	2,944		16,953		226,890		—			246,787
Net property and equipment	—		151,331		1,375,173		—			1,526,504
Investment in subsidiaries	1,083,542		—		75,585		(1,159,127		)	—
Third-party long-term assets	—		—		3,785		—			3,785
Total assets	$	1,472,371	$	168,284	$	1,683,112	$	(1,546,691	)	$	1,777,076
LIABILITIES AND EQUITY
Intercompany payable	$	—	$	1,679	$	385,885	$	(387,564	)	$	—
Third-party current liabilities	8,640		17,753		185,791		—			212,184
Senior unsecured notes payable	573,988		—		—		—			573,988
Other third-party long-term liabilities	—		639		27,894		—			28,533
Total equity attributable to Matador Resources Company	889,743		75,584		1,083,542		(1,159,127		)	889,742
Non-controlling interest in subsidiaries	—		72,629		—		—			72,629
Total liabilities and equity	$	1,472,371	$	168,284	$	1,683,112	$	(1,546,691	)	$	1,777,076



Condensed Consolidating Balance Sheet December 31, 2016
	Matador		Non-Guarantor Subsidiaries		Guarantor Subsidiaries		Eliminating Entries			Consolidated
ASSETS
Intercompany receivable	$	316,791	$	3,571	$	12,091	$	(332,453	)	$	—
Third-party current assets	101,102		4,242		173,838		—			279,182
Net property and equipment	33		113,107		1,071,385		—			1,184,525
Investment in subsidiaries	856,762		—		90,275		(947,037		)	—
Third-party long-term assets	—		—		958		—			958
Total assets	$	1,274,688	$	120,920	$	1,348,547	$	(1,279,490	)	$	1,464,665
LIABILITIES AND EQUITY
Intercompany payable	$	—	$	12,091	$	320,362	$	(332,453	)	$	—
Third-party current liabilities	9,265		16,632		143,608		—			169,505
Senior unsecured notes payable	573,924		—		—		—			573,924
Other third-party long-term liabilities	1,374		602		27,815		—			29,791
Total equity attributable to Matador Resources Company	690,125		90,275		856,762		(947,037		)	690,125
Non-controlling interest in subsidiaries	—		1,320		—		—			1,320
Total liabilities and equity	$	1,274,688	$	120,920	$	1,348,547	$	(1,279,490	)	$	1,464,665

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NOTE 5 - DEBT - Continued



Condensed Consolidating Statement of Operations For the Three Months Ended June 30, 2017
	Matador			Non-Guarantor Subsidiaries			Guarantor Subsidiaries		Eliminating Entries			Consolidated
Total revenues	$	—		$	11,274		$	127,198	$	(8,861	)	$	129,611
Total expenses	1,586			4,814			93,083		(8,861		)	90,622
Operating (loss) income	(1,586		)	6,460			34,115		—			38,989
Net gain on asset sales and inventory impairment	—			—			—		—			—
Interest expense	(9,224		)	—			—		—			(9,224		)
Other income	(27		)	26			1,923		—			1,922
Earnings in subsidiaries	39,228			—			3,244		(42,472		)	—
Income before income taxes	28,391			6,486			39,282		(42,472		)	31,687
Total income tax (benefit) provision	(118		)	64			54		—			—
Net income attributable to non-controlling interest in subsidiaries	—			(3,178		)	—		—			(3,178		)
Net income attributable to Matador Resources Company shareholders	$	28,509		$	3,244		$	39,228	$	(42,472	)	$	28,509



Condensed Consolidating Statement of Operations For the Three Months Ended June 30, 2016
	Matador			Non-Guarantor Subsidiaries			Guarantor Subsidiaries			Eliminating Entries			Consolidated
Total revenues	$	—		$	3,210		$	44,778		$	(1,894	)	$	46,094
Total expenses	1,032			1,244			146,323			(1,894		)	146,705
Operating (loss) income	(1,032		)	1,966			(101,545		)	—			(100,611		)
Net gain on asset sales and inventory impairment	—			—			1,002			—			1,002
Interest expense	(6,167		)	—			—			—			(6,167		)
Other income	—			—			29			—			29
(Loss) earnings in subsidiaries	(98,672		)	—			1,842			96,830			—
(Loss) income before income taxes	(105,871		)	1,966			(98,672		)	96,830			(105,747		)
Total income tax (benefit) provision	(18		)	18			—			—			—
Net income attributable to non-controlling interest in subsidiaries	—			(106		)	—			—			(106		)
Net (loss) income attributable to Matador Resources Company shareholders	$	(105,853	)	$	1,842		$	(98,672	)	$	96,830		$	(105,853	)

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Condensed Consolidating Statement of Operations For the Six Months Ended June 30, 2017
	Matador			Non-Guarantor Subsidiaries			Guarantor Subsidiaries		Eliminating Entries			Consolidated
Total revenues	$	—		$	20,937		$	259,846	$	(16,358	)	$	264,425
Total expenses	2,846			8,682			175,987		(16,358		)	171,157
Operating (loss) income	(2,846		)	12,255			83,859		—			93,268
Net gain on asset sales and inventory impairment	—			—			7		—			7
Interest expense	(17,679		)	—			—		—			(17,679		)
Other income	—			26			1,965		—			1,991
Earnings in subsidiaries	92,900			—			7,069		(99,969		)	—
Income before income taxes	72,375			12,281			92,900		(99,969		)	77,587
Total income tax (benefit) provision	(118		)	118			—		—			—
Net income attributable to non-controlling interest in subsidiaries	—			(5,094		)	—		—			(5,094		)
Net income attributable to Matador Resources Company shareholders	$	72,493		$	7,069		$	92,900	$	(99,969	)	$	72,493



Condensed Consolidating Statement of Operations For the Six Months Ended June 30, 2016
	Matador			Non-Guarantor Subsidiaries			Guarantor Subsidiaries			Eliminating Entries			Consolidated
Total revenues	$	—		$	4,527		$	88,825		$	(2,635	)	$	90,717
Total expenses	2,967			2,377			290,248			(2,635		)	292,957
Operating (loss) income	(2,967		)	2,150			(201,423		)	—			(202,240		)
Net gain on asset sales and inventory impairment	—			—			2,067			—			2,067
Interest expense	(13,365		)	—			—			—			(13,365		)
Other income	—			—			124			—			124
(Loss) earnings in subsidiaries	(197,200		)	—			2,032			195,168			—
Income before income taxes	(213,532		)	2,150			(197,200		)	195,168			(213,414		)
Total income tax (benefit) provision	(25		)	25			—			—			—
Net income attributable to non-controlling interest in subsidiaries	—			(93		)	—			—			(93		)
Net (loss) income attributable to Matador Resources Company shareholders	$	(213,507	)	$	2,032		$	(197,200	)	$	195,168		$	(213,507	)

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Condensed Consolidating Statement of Cash Flows For the Six Months Ended June 30, 2017
	Matador			Non-Guarantor Subsidiaries			Guarantor Subsidiaries			Eliminating Entries			Consolidated
Net cash (used in) provided by operating activities	$	(98,583	)	$	1,566		$	218,259		$	—		$	121,242
Net cash provided by (used in) investing activities	33			(51,580		)	(198,051		)	(133,880		)	(383,478		)
Net cash provided by (used in) financing activities	—			47,707			(769		)	133,880			180,818
(Decrease) increase in cash	(98,550		)	(2,307		)	19,439			—			(81,418		)
Cash at beginning of period	99,795			2,307			110,782			—			212,884
Cash at end of period	$	1,245		$	—		$	130,221		$	—		$	131,466



Condensed Consolidating Statement of Cash Flows For the Six Months Ended June 30, 2016
	Matador			Non-Guarantor Subsidiaries			Guarantor Subsidiaries			Eliminating Entries			Consolidated
Net cash (used in) provided by operating activities	$	(24,519	)	$	(6,198	)	$	80,317		$	—		$	49,600
Net cash used in investing activities	(117,086		)	(44,074		)	(172,108		)	167,236			(166,032		)
Net cash provided by financing activities	141,582			50,150			116,077			(167,236		)	140,573
(Decrease) increase in cash	(23		)	(122		)	24,286			—			24,141
Cash at beginning of period	80			186			16,466			—			16,732
Cash at end of period	$	57		$	64		$	40,752		$	—		$	40,873

NOTE 6 - INCOME TAXES

The Company’s deferred tax assets exceeded its deferred tax liabilities at June 30, 2017 due to the deferred tax assets generated by the full-cost ceiling impairment charges recorded in prior periods; as a result, the Company established a valuation allowance against most of the deferred tax assets beginning in the third quarter of 2015. The Company retained a full valuation allowance at June 30, 2017 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 are more likely than not to be utilized.

NOTE 7 - STOCK-BASED COMPENSATION

In February 2017, the Company granted awards of 228,174 shares of restricted stock and options to purchase 590,128 shares of the Company’s common stock at an exercise price of $27.26 per share to certain of its employees. The fair value of these awards was approximately $12.4 million. All of these awards vest ratably over three years. In February 2017, the Company also granted awards of 174,561 shares of restricted stock and options to purchase 444,491 shares of the Company’s common stock at an exercise price of $26.86 per share to certain of its employees. The fair value of these awards was approximately $9.3 million. All of these awards vest ratably over three years.

In June 2017, the Company granted an employee an award of 87,757 shares of common stock that vested immediately on the grant date. The fair value of this award was approximately $2.1 million. In June 2017, the Company also accelerated the expense for 97,797 restricted stock units issued to directors and outstanding prior to June 2017, resulting from a change in the vesting schedule applicable to equity awards granted to the Company’s directors. The total expense associated with these restricted stock units recognized in the three months ended June 30, 2017 was approximately $1.5 million.

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NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS

At June 30, 2017, the Company had various costless collar 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. Each contract is set to expire at varying times during 2017 and 2018.

The following is a summary of the Company’s open costless collar contracts for oil and natural gas at June 30, 2017.



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	07/01/2017 - 12/31/2017	2,460,000	$	45.17	$	55.75	$	4,365
Oil	01/01/2018 - 12/31/2018	1,920,000	$	43.91	$	63.44	4,990
Natural Gas	07/01/2017 - 12/31/2017	12,540,000	$	2.51	$	3.60	(500		)
Natural Gas	01/01/2018 - 12/31/2018	16,800,000	$	2.58	$	3.67	12
Total open derivative financial instruments							$	8,867

These derivative financial instruments are subject to master netting arrangements; 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.

The following table presents the gross asset and liability fair values of the Company’s commodity price derivative financial instruments and the location of these balances in the interim unaudited condensed consolidated balance sheets as of June 30, 2017 and December 31, 2016 (in thousands).



Derivative Instruments	Gross amounts recognized			Gross amounts netted in the condensed consolidated balance sheets			Net amounts presented in the condensed consolidated balance sheets
June 30, 2017
Current assets	$	10,835		$	(3,768	)	$	7,067
Other assets	5,066			(2,074		)	2,992
Current liabilities	(4,915		)	3,723			(1,192		)
Other liabilities	(2,074		)	2,074			—
Total	$	8,912		$	(45	)	$	8,867
December 31, 2016
Current liabilities	$	(24,203	)	$	—		$	(24,203	)
Other liabilities	(751		)	—			(751		)
Total	$	(24,954	)	$	—		$	(24,954	)

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NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS - Continued

The following table summarizes the location and aggregate fair value of all derivative financial instruments recorded in the interim unaudited condensed consolidated statements of operations for the periods presented (in thousands). These derivative financial instruments are not designated as hedging instruments.



		Three Months Ended June 30,						Six Months Ended June 30,
Type of Instrument	Location in Condensed Consolidated Statement of Operations	2017			2016			2017			2016
Derivative Instrument
Oil	Revenues: Realized gain (loss) on derivatives	$	581		$	561		$	(1,053	)	$	6,024
Natural Gas	Revenues: Realized (loss) gain on derivatives	(23		)	1,904			(608		)	3,504
Realized gain (loss) on derivatives		558			2,465			(1,661		)	9,528
Oil	Revenues: Unrealized gain (loss) on derivatives	10,643			(19,319		)	28,422			(26,974		)
Natural Gas	Revenues: Unrealized gain (loss) on derivatives	2,547			(7,306		)	5,399			(6,490		)
Unrealized gain (loss) on derivatives		13,190			(26,625		)	33,821			(33,464		)
Total		$	13,748		$	(24,160	)	$	32,160		$	(23,936	)

NOTE 9 - FAIR VALUE MEASUREMENTS

The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Fair value measurements are classified and disclosed in one of the following categories.


Level 1	Unadjusted quoted prices for identical, unrestricted assets or liabilities in active markets.

Level 2

Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that are valued with industry standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.


Level 3	Unobservable inputs that are not corroborated by market data that reflect a company’s own market assumptions.

Financial and non-financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following tables summarize the valuation of the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis in accordance with the classifications provided above as of June 30, 2017 and December 31, 2016 (in thousands).



	Fair Value Measurements at June 30, 2017 using
Description	Level 1		Level 2			Level 3		Total
Assets (Liabilities)
Oil and natural gas derivatives	$	—	$	10,059		$	—	$	10,059
Oil and natural gas derivatives	—		(1,192		)	—		(1,192		)
Total	$	—	$	8,867		$	—	$	8,867

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	Fair Value Measurements at December 31, 2016 using
Description	Level 1		Level 2			Level 3		Total
Liabilities
Oil and natural gas derivatives	$	—	$	(24,954	)	$	—	$	(24,954	)
Total	$	—	$	(24,954	)	$	—	$	(24,954	)

Additional disclosures related to derivative financial instruments are provided in Note 8.

Other Fair Value Measurements

At June 30, 2017 and December 31, 2016, the carrying values reported on the interim unaudited condensed consolidated balance sheets for accounts receivable, prepaid expenses and other assets, accounts payable, accrued liabilities, royalties payable, amounts due to affiliates, advances from joint interest owners, amounts due to joint ventures and other current liabilities approximated their fair values due to their short-term maturities.

At June 30, 2017 and December 31, 2016, the fair value of the Notes was $592.3 million and $605.2 million, respectively, based on quoted market prices, which represent Level 1 inputs in the fair value hierarchy.

NOTE 10 - COMMITMENTS AND CONTINGENCIES

Processing, Transportation and Salt Water Disposal Commitments

Eagle Ford

Effective September 1, 2012, the Company entered into a firm five-year natural gas processing and transportation agreement whereby the Company committed to transport the anticipated natural gas production from a significant portion of its Eagle Ford acreage in South Texas through the counterparty’s system for processing at the counterparty’s facilities. The agreement also includes firm transportation of the natural gas liquids extracted at the counterparty’s processing plant downstream for fractionation. After processing, the residue natural gas is purchased by the counterparty at the tailgate of its processing plant and further transported under its natural gas transportation agreements. The arrangement contains fixed processing and liquids transportation and fractionation fees, and the revenue the Company receives varies with the quality of natural gas transported to the processing facilities and the contract period.

Under this agreement, if the Company does not meet 80% of the maximum thermal quantity transportation and processing commitments in a contract year, it will be required to pay a deficiency fee per MMBtu of natural gas deficiency. Any quantity in excess of the maximum MMBtu delivered in a contract year can be carried over to the next contract year for purposes of calculating the natural gas deficiency. During certain prior periods, the Company had an immaterial natural gas deficiency, and the counterparty to this agreement waived the deficiency fee. The Company paid $0.5 million and $0.8 million in processing and transportation fees under this agreement during the three months ended June 30, 2017 and 2016, respectively, and $1.0 million and $1.7 million in processing and transportation fees under this agreement during the six months ended June 30, 2017 and 2016, respectively. The future undiscounted minimum payment under this agreement as of June 30, 2017 was $0.2 million.

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 currently projected production. If the Company ceased operations in this area at June 30, 2017, the total deficiency fee required to be paid would be approximately $11.6 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

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NOTE 10 - COMMITMENTS AND CONTINGENCIES - Continued

contract year can be carried over to the next contract year for purposes of calculating the natural gas deficiency. The Company paid approximately $3.7 million and $2.8 million in natural gas processing and gathering fees under this agreement during the three months ended June 30, 2017 and 2016, respectively, and $6.8 million and $4.7 million in natural gas processing and gathering fees under this agreement during the six months ended June 30, 2017 and 2016, 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 — San Mateo

In connection with the Joint Venture, effective as of February 1, 2017, the Company dedicated its current and future leasehold interests in the Rustler Breaks and Wolf asset areas pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements. In addition, the Company dedicated its current and future leasehold interests in the Rustler Breaks asset area pursuant to a 15-year, fixed-fee natural gas processing agreement (collectively with the gathering and salt water disposal agreements, the “Operational Agreements”). The Joint Venture will provide the Company with firm service under each of the Operational Agreements in exchange for certain minimum volume commitments. The minimum contractual obligation under the Operational Agreements at June 30, 2017 was approximately $256.4 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, including required compression. The expansion is expected to be placed into service in 2018. San Mateo’s total commitments under these agreements are $56.9 million. The subsidiary of San Mateo paid approximately $7.9 million and $9.9 million under these agreements during the three and six months ended June 30, 2017. As of June 30, 2017, the remaining obligations under these agreements were $47.0 million, which are expected to be incurred 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, which have typically been for two years or less. 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 or 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 $42.0 million at June 30, 2017.

At June 30, 2017, 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 $19.7 million at June 30, 2017. The Company expects these costs to be incurred within the next year.

Legal Proceedings

The Company is a party to several lawsuits encountered in the ordinary course of its business. While the ultimate outcome and impact to the Company cannot be predicted with certainty, in the opinion of management, it is remote that these lawsuits will have a material adverse impact on the Company’s financial condition, results of operations or cash flows.

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Matador Resources Company and Subsidiaries

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NOTE 11 - SUPPLEMENTAL DISCLOSURES

Accrued Liabilities

The following table summarizes the Company’s current accrued liabilities at June 30, 2017 and December 31, 2016 (in thousands).



	June 30, 2017		December 31, 2016
Accrued evaluated and unproved and unevaluated property costs	$	98,589	$	54,273
Accrued support equipment and facilities costs	15,596		15,139
Accrued lease operating expenses	12,613		16,009
Accrued interest on debt	8,345		6,541
Accrued asset retirement obligations	703		915
Accrued partners’ share of joint interest charges	12,479		5,572
Other	3,011		3,011
Total accrued liabilities	$	151,336	$	101,460

Supplemental Cash Flow Information

The following table provides supplemental disclosures of cash flow information for the six months ended June 30, 2017 and 2016 (in thousands).



	Six Months Ended June 30,
	2017			2016
Cash paid for interest expense, net of amounts capitalized	$	15,875		$	12,226
Increase in asset retirement obligations related to mineral properties	$	1,978		$	2,511
(Decrease) increase in asset retirement obligations related to support equipment and facilities	$	(138	)	$	75
Increase (decrease) in liabilities for oil and natural gas properties capital expenditures	$	43,797		$	(3,476	)
Increase (decrease) in liabilities for support equipment and facilities	$	1,838		$	(11,565	)
Stock-based compensation expense recognized as liability	$	(339	)	$	88
(Decrease) increase in liabilities for accrued cost to issue equity	$	(343	)	$	62
Transfer of inventory from oil and natural gas properties	$	(228	)	$	474

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Matador Resources Company and Subsidiaries

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NOTE 12 - SEGMENT INFORMATION

The Company operates in two business segments: (i) exploration and production and (ii) midstream. The exploration and production segment is engaged in the acquisition, exploration and development 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, natural gas, oil and salt water gathering services and salt water disposal services to third parties on a limited basis. As of February 17, 2017, 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 (see Note 3).

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
	Exploration and Production		Midstream		Corporate			Consolidations and Eliminations			Consolidated Company
Three Months Ended June 30, 2017
Oil and natural gas revenues	$	113,387	$	377	$	—		$	—		$	113,764
Midstream services revenues	—		11,367		—			(9,268		)	2,099
Realized gain on derivatives	558		—		—			—			558
Unrealized gain on derivatives	13,190		—		—			—			13,190
Expenses⁽¹⁾	78,078		5,960		15,852			(9,268		)	90,622
Operating income (loss)⁽²⁾	$	49,057	$	5,784	$	(15,852	)	$	—		$	38,989
Total assets	$	1,436,678	$	192,889	$	147,509		$	—		$	1,777,076
Capital expenditures⁽³⁾	$	165,583	$	27,347	$	1,752		$	—		$	194,682

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(1)	Includes depletion, depreciation and amortization expenses of $39.6 million and $1.3 million for the exploration and production and midstream segments, respectively. Also includes corporate depletion, depreciation and amortization expenses of $0.4 million.


(2)	Includes $3.2 million in net income attributable to non-controlling interest in subsidiaries related to the midstream segment.


(3)	Includes $13.4 million in capital expenditures attributable to non-controlling interest in subsidiaries related to the midstream segment.

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NOTE 12 - SEGMENT INFORMATION - Continued



	Exploration and Production								Consolidations and Eliminations			Consolidated Company
	Exploration and Production			Midstream		Corporate			Consolidations and Eliminations			Consolidated Company
Three Months Ended June 30, 2016
Oil and natural gas revenues	$	68,864		$	472	$	—		$	—		$	69,336
Midstream services revenues	—			3,469		—			(2,551		)	918
Realized gain on derivatives	2,465			—		—			—			2,465
Unrealized loss on derivatives	(26,625		)	—		—			—			(26,625		)
Expenses⁽¹⁾	134,338			1,562		13,356			(2,551		)	146,705
Operating (loss) income⁽²⁾	$	(89,634	)	$	2,379	$	(13,356	)	$	—		$	(100,611	)
Total assets	$	927,557		$	106,425	$	52,106		$	—		$	1,086,088
Capital expenditures	$	97,309		$	11,192	$	2,328		$	—		$	110,829

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(1)	Includes depletion, depreciation and amortization expenses of $30.6 million and $0.5 million for the exploration and production and midstream segments, respectively, and full-cost ceiling impairment expenses of $78.2 million for the exploration and production segment. Also includes corporate depletion, depreciation and amortization expenses of $0.2 million.


(2)