Matador Resources Co (MTDR) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Third Quarter 2017 Matador Resources Company Earnings Conference Call. My name is Nicole and I'll be serving as the Operator 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 through November 30, 2017, as discussed in the company's earnings press release issued yesterday.

I would now like to turn the call over to Mr. Mac Schmitz, Capital Markets Coordinator for Matador. Mr. Schmitz, you may begin.

Thank you, Nicole. Good morning everyone and thank you for joining us for Matador's Third Quarter 2017 Earnings Conference Call.

Some of the presenters today 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 press release.

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 results to differ materially is contained in the company's earnings release and its most recent annual report on Form 10-K.

Finally, in addition to our earnings press release issued yesterday, I would like to remind everyone that you can find a short slide presentation summarizing the highlights of our third quarter 2017 earnings release on our website, on the Presentations and Webcasts page under the Investors tab.

And with that, I would now like to turn the call over to Mr. Joe Foran, our Chairman and CEO. Joe?

Thank you, Mac, and good morning to everyone on the line. I know this is a busy morning for you, but we really appreciate you're participating in today's call. Now, I would like to introduce you to the senior members of the operating staff, who joining me this morning, who are standing by for any questions. Matt Hairford, President; David Lancaster, Executive Vice President and Chief Financial Officer; Craig Adams, Executive Vice President, Land, Legal and Administration; Van Singleton, Executive Vice President of Land; Billy Goodwin, Executive Vice President of Operations; Brad Robinson, Senior Vice President of Reservoir Engineering and Chief Technology Officer; Gregg Krug, Senior Vice President, Marketing and Midstream;

Rob Macalik, our new Senior Vice President and Chief Accounting Officer, who was just promoted; Matt Spicer, Vice President and General Manager of Midstream; Kathy Wayne, Vice President, Controller and Treasurer; Brian Willey, Vice President and Co-General Counsel; Bryan Erman, Vice President and Co-General Counsel; Ned Frost, Vice President of Geoscience; Tom Elsener, Vice President, Engineering & Asset Manager; and Jim Basich, who's just been promoted to Vice President and Managing Director, IT.

I am pleased to announce another quarter of strong execution and better-than-expected operational and financial results by the Matador staff for its shareholders in the third quarter of 2017. I'd like to highlight a few quick key points before taking your questions. First thing I'd like to just say, as you read in your press release, this is the best quarter we have had in company history. And I'm pleased because we were dealing with $50 oil and not $100 oil. And through volume and execution in cutting costs, our teams really delivered. And it's a record quarter in terms of reserves and nearly every other category. Great work on reducing LOE. And so you can say in midstream advance to plan that it was a total team effort. But I'd like to express particular appreciation to the field staff, who anticipated the Hurricane Harvey and had our field operations in good order so that Hurricane Harvey had minimal impact, and all the extra effort that they've done to hook up so we're not flaring any and that they have been very innovative on implementing artificial lift and improving our results there. So a special shout out to them. Second to the group in the office, I attribute a good part of the good results at our land midstream and E and P group have been quick to act on opportunities and that David Lancaster and Rob, our financial group, has had the financial flexibility to do so and the operational expertise to be quick on making changes and making improvements. Finally, I'd like to open the questions by just noting that this is our 13th consecutive quarter where we've met or exceeded guidance. All the areas of the company are working. All around the basin, each of our asset teams have delivered good results. And we've had good results coming out of our ancillary areas in the Haynesville and in the Eagle Ford. Just everything -- this was just one of those quarters where everything came together. We hope to continue it, and want to invite everybody on the call to come see us sometime and meet the whole staff. David and Matt and I try to get our on a regular basis, but would like for you to meet the actual guys on the front lines, who are really making it happen. And with that, I'd like to now open the call back to the operator for your questions.

(Operator Instructions). Our first question comes from the line of Jeff Grampp of Northland Capital.

Obviously, a lot of focus in the space lately seems to be on free cash flow neutrality or moving to a positive free cash flow generation, corporate returns, that sort of thing. And I know you guys tend to think much more holistically and not run the company for any specific metric, but it would be great to get your all's thoughts on that and potentially managing the business with that mindset and if and when Matador may be in a position to be in a free cash flow neutral or positive type of mode here.

This is David. I'll start and let the other guys chime in. I think what we have tried to focus on, Jeff, is the opportunity set that we have and not focus so much on the out-spend but more on what we're spending the money for. And I think that we feel like that we spend our money primarily in 3 ways, or our shareholders' money primarily in 3 ways. One, by drilling good wells for less money, which I think we've done well in the past few years particularly out in the Delaware Basin, but also, prior to that, in the Eagle Ford. I think that we have demonstrated our ability to create value through our midstream opportunities and the midstream program that we've got going out in the Delaware particularly and have demonstrated that a couple of times with even a couple of monetization events so far. And I think that continues to grow well. And then the other thing is on the land side, I think we've demonstrated that we have put together an extremely high-quality land position at prices that have tended to be very attractive and below market. So we try to focus on the opportunities that are out there for us. And when we see them, we hope to be able to take advantage of them. And we obviously can't take advantage of all of them, but we try to focus in on the ones that are most important. With regard to the cash flow neutrality, it isn't something that we're averse to, obviously. And we run various different scenarios, as I'm sure other do too, as to how to achieve that. As you would know, it's probably a function of growth versus commodity price versus opportunity set that you have available. And we continue to look for the right mix of that. I think we expect that we'll outspend our cash flow a bit next year, but if commodity prices find themselves continuing to move forward and are up in the $60 range, well, that may get us there. So we certainly would be much close. So I hope that answers your question. Joe may want to add a little bit to that. But I think that's how we're looking at it. And again, I just want to emphasize that we feel like that we're trying to take advantage of what we consider to be very special opportunities that we see available to Matador.

David, I think you did a really good in explaining. It's a very good question. It's something that we talk about every day. But one of the reasons when you're a company like ours that's starting off small and trying to get bigger, you can't do it like everybody else. You've got to be a little nimble and you've got to do things a little differently. And one of the things that we've always done differently in our 34-year history is that we plan for difficult times when prices are low and we make more -- as much or more progress in difficult times than we do in the more robust times. And you're like a farmer or a rancher, if you're a farmer or a rancher and you don't plan every 4 or 5 years to have a drought, you'll not be in business long. And when you're a small company like ours, if you're not prepared during the robust times that there will be a drought, you're not going to be around very long. And so we really try to be extra careful in those more robust times so that when the difficult times we have the borrowing capacity, we have the shareholders' support to take advantage of some of those special opportunities that come up in the more difficult times that are not around in the robust times. And that's we experienced this year and last year; that there was a number of opportunities that if we hadn't acted upon to buy land, for example, land or the midstream, they wouldn't have been around in a year or 2 or 3 from here. That when the land came up, you could buy it then or you'll never get it. And we were able to get it at such good prices, one average of about 6 to 8 weighted average, $6,000 to $8,000, and it's a nibble in there or there, you just couldn't pass it up. And when midstream came around, it was not only needed because you have to process your gas, but we saw that there was an absence and with our drilling plans, we knew we could be the anchor tenant and thought it was the right thing to do. And I think it's proving out that way. We went public 5 years ago. Our value prior to going public was about $300 million. And today it's over $3 billion. And shareholders have moved from $12 a share to approaching $30 a share even when oil prices as half of what they were 2 or 3 years ago. And I'm not saying that strategy will always work for us, but while we're small, we're adding value. But we've got to do things a little different and be a little more flexibly and on the technical side, a little more innovative and be among the first to do things rather than a company that has other advantages. We've got to be more nimble and more quick. And that's the way I look at it. I think David's answer was very good. And when we sit down and talk about these things, we aim for -- we try to be very fiscally disciplined, but we don't - I think you hurt yourself either being too conservative or too aggressive. We just try to be middle of the fairway, but optimistic. Matt, do you want to add to that?

Yes, I think David and Joe both said it very well. But when I think about it, Jeff, and you've heard us say this over and over and over, it's profitable growth at a measured pace. And a lot of times people think about that in different terms. The commodity prices are higher and people trying to figure out to grow and what the right rate to grow is. So when I think about this, I think, as David has said very well, it's how you invest those dollars. As long as you're creating value and you're consistent with how you're creating value and you're looking at things from an opportunity standpoint, for instance this midstream stuff that Joe was talking about, that's something I think that's been available to us as a result of low commodity prices. And I think we've been able to do a good job at exploiting that and again, getting back to profitable growth at a measured pace.

Those are all great responses and I appreciate those thoughts there, guys. And for my follow-up, just on the operations side, I wanted to get a little bit more thoughts on this Wolf Camp B well at Wolf. Just kind of curious how you guys are thinking about maybe incorporating that zone going forward. Obviously not a bad comparison at all to be compared to the Blair up in Rustler. And then just wanted to clarify, is that kind of, I guess, commodity mix in line with what you guys were expecting on a pre-drill basis?

This is David again. No we were real pleased with the results of the Wolf Camp B. It, as we mentioned in the earnings release, probably floated the highest pressure of any well that we've had out in the Delaware Basin. I feel that it's likely that if we had opened it up a little more it would have just coming on. Its results were excellent. I think they were quite comparable to the Wolf Camp B up in the Rustler Breaks area. It's a little deeper here. So I think the expectation that it might be a little bit gassier was sort of in line with what we thought, but still had nice oil production coming along with it. And I certainly think that we'll look to incorporate this zone going forward. I think we see it now as another very viable completion target for us at Wolf and I'm sure we'll have a couple of additional tests of that zone if we can get them worked into our plans for next year. And I think we'll probably want to test it to the west and maybe up to the north. We just got this one test kind of right on the east to begin with so we're going to want to validate it across the acreage position. But all in all, I would say that we were very happy with the results from that well and look forward to doing more tests on it.

This is Matt. Just to add to what David has said there too. I think one of the other things that is encouraging about this, and it's a hats off to Ned and the Geoscience team, is it's about delineating yet another horizon and how that gives us confidence in our ability to go in and look at data and determine which of these zones may or may not be prospective and to go in and pick the right zone and drill it, and Billy and his Operations teams, about going in and staying in these zones and completing these zones and getting good wells. I think it just gives us confidence to try even more and more zones in the basin.

Our next question comes from the line Irene Haas of Imperial Capital.

It's just amazing to see all your original thinking turning into real organic growth. And congrats on the reserve adds as well. Question is probably a little color on your transaction. Because Joe mentioned earlier that if you see land that's available, sometimes you can come back and get it. Can you give us a little color on what's the urgency to grab the land in New Mexico and sort of the significance of that, please?

Well, Irene, it isn't just buying isolated tracts. What we focus on is buying within our existing units, is one thing. So we're bolting on additional working interest to what we already have. So it doesn't add people. We know the property. It's already producing or about to drill. We have control over it. That's our main focus. Or on the adjacent acreage, where we'll soon be drilling. And when that acreage becomes available like that, you either take it or somebody else will snap it up and then the well produces and it won't be available again for years to come. So your good sense is you just need to find a way to make that work. The other things that we try to do is, as you remember, Irene, when we started in Rustler Breaks, we had a few scattered tracts and we filled in the gaps and now it's getting a little blockier. That's what we want to do. And then the third thing is our guys have done a good job with delineating acreage and we can see where the trends are going. And the last thing is, is the minerals. We've had some mineral opportunities become available to us and that fit in well with our drilling because they add to our net revenue interest and make it that much more valuable. So we're on the lookout for opportunities like that and work with people who are interested. And sometimes we have some creative deals where we give carry the interest for people who don't want to expend all their capital. They'll keep some and we'll carry them for some or make a deal of some sort. And that's worked out pretty favorably. And the other thing is the repeat business that we've had with people. So it's just one of those things that comes up. And at the prices we've been getting it, I think it's a value-add because in many cases, we're actually adding reserves with the purchase or adding production with the purchase. One example was at the federal sale where one tract already had 2 wells drilled on it by us. So that was money in the bank. And that's a good example of the opportunity. Once that was sold that lease wasn't going to come up again. But that completed our 640-acre section there. So did that answer your question?

Yes, great. Just one more follow-up. Are the sellers like multiple party? Are they mostly private producers?

Irene, it's the full range of people out there. And our guys are just out there trying to cover everything. But we welcome people bringing deals to us. We've looked at some of the bigger deals, but they just haven't had the same fit as acquiring it a brick at a time, as David likes to say.

Our next question comes from the line of Neal Dingmann of SunTrust.

Joe, maybe for you or the team, You guys continue to do such a tremendous job of adding acreage, not only just the amount of acreage, but the price you're paying. Two questions there. One, when you look at that, the appetite, I guess is it just more based on the increase in the returns you see what sort of drives the amount? And then, secondly, will you stay in sort of your general Delaware footprint now? Or do you see maybe expanding that?

I'd like to stress is that the way we do particularly land is a group effort that we get in here together with Ned, Geoscience and Brad on the Engineering and Matt Hairford and David. And we talk about this. And we're not all of one opinion. And it just kind of works its way around. But I think the first option is to stay with the Delaware, but we always try to look down the road a little bit for what's next. I still think that Twin Lakes has a lot of promise. The Culbertson well has performed well. It came on. It's the best Wolf Camp D well we've drilled up there. And even though we can see a lot of room for improvement, it came on for over 600 barrels a day and it's leveled off and been very, very flat, better than expected flat. We had predicted it would level off and be very a steady performer and that's what it's developed, which has given us encouragement. We're drilling with Cimarex out there and seeing what it is over to the west. But we've been approached by another operator to drill a well with them in the east. So we're starting to get data points and the results that we've had have gotten, it looks like, some other people interested. And we still plan to drill a well in the Kemnitz area. But that's an example of some we're still looking at what next, but the opportunities in the Delaware have been strong enough that we've had a pretty full plate down there. But always ready to add to it under the right circumstances. I don't know if I said that well. Matt, would you add?

Yes, Neal. This is Matt. And I think just to build on that, one of the things I think that's very favorable to us is you mentioned appetite based on returns and a lot of these acreage adds were able to put together our on blocks, as Joe said, that either have wells drilled on them or were proposing to drill wells on them. So we were very comfortable with economics on those acreage adds. And it's very easy for us to slide that into the inventory. And we do. We all are of separate minds and we sit down and we talk about this. But a lot of these things, like I said, in blocks where we're proposing wells or have drilled wells or will be drilling wells, that's a pretty easy add. And the thing that's to our advantage there, a lot of times maybe it's not 500 acres; maybe it's 5 acres and maybe it's 10 acres or whatever it is. But Van and his team, they are able to go in there and negotiate these purchases at very favorable prices. So it's a great way to slowly build on to our acreage position.

Great details, guys. And then one second if I could. Just looking at CapEx, being aware, Joe, you guys haven't released '18 plans yet, but it's noticeable kind it looks like at least the guided CapEx for the rest of this year should go down while production and EBITDA continues to do extremely well. And I'm just wondering without saying too much about '18 yet, trying to get a sense of if that trend will continue as we exit this year and into '18, as far as that reduced CapEx and the ramp in production EBITDA associated.

Well, Neal, that's kind of almost a do you beat your wife type of question or how hard -- how many times do you expect to beat her up into next year? But the spending you take what is assumed that you're spending on capital spending will achieve the same kind of returns that you had this year. Well, if you cut that back, you're going to ultimately cut back your production growth in the ride. And I think Matt had said it very well that we try to do profitable growth at a measured pace. And tell us what price is. It's not a one-variable thing. That tell us what price is and we'll give you a better idea what CapEx is going to be. And what the economics are. I just -- we want to grow, but we want profitable growth at that measured pace and you're not going to see us throw 5 extra rigs out there because you lose innovation and you lose progress. You're going to see us kind of go -- we're more of a tortoise than a hare. And we want that profitable growth. David?

Well maybe, Joe, I'd just say, Neal, I think as we tried to lay out in the earnings release, obviously we're well into the process of deciding on our plans for 2018. We're going to wait until after the first of the year to roll those out. I think we have stated we'll most likely be in that 5 to 6 rig range and I think that's where we'll end up. And I think at this point in year, you're at the point of negotiating new agreements for services and things going into the next year, which certainly informs what your capital plan is going to be. But I'm excited going into next year because I am very pleased with the lineup of wells that we have to drill. And I know that our Operations team will do everything they can to keep the capital spending as low as they can. I think they've done a very nice job this year of innovating in certain ways to be able to mitigate what service cost increases we did see. And obviously that will be something that we pay a lot of attention to going into next year. So we'll be pleased to share all that with everybody after the 1st of the year, but obviously we're looking to continue to drill great wells as cheap as we possibly can.

Our next question comes from the line of Ben Wyatt with Stephens.

David, maybe for you, if we can just kind of stay on '18, it kind of feels like maybe we go to 6 rigs in '18. If that's the case, I'm assuming we should kind of assume 6 rigs, 2 frack crews. And just to kind of confirm, you guys are still kind of 1 dedicated frack crew and a spot crew right now?

Yes. So, Ben, I think if in fact we elect to keep the sixth rig -- as we pointed out, we have a sixth rig. It is currently pretty well dedicated to drilling saltwater disposal wells. San Mateo would like to see 5 saltwater disposal wells up in the Rustler Breaks area. And we've got a couple now that are drilled and completed and disposing of water, 1/3 that's been drilled and likely 2 more that are going to come over the next few months. So once we've completed that program, then we will be making the decision as to whether to hang onto that sixth rig or stay at the 5. So I don't think that in any case it's going to be a full 6 rigs for next year. I mean it may be like 5 3/4 or 5 2/3 or something like that because I don't think we would have even in the scenario where we kept it that sixth rig working all year drilling oil and gas wells. So that's one point I would make. Certainly as we get to, if we do go to the sixth rig, I think that will lend itself more to the 2 crews that are probably pretty close to full-time dedicated to Matador. And you're correct; right now, we're using primarily one dedicated crew and kind of spot uses as we need it. But I have to give a shout out to our completions guys. I think they've done a terrific job in 2017 of getting our wells fracked in really much right on schedule with what we had planned for the year. And so I give them a lot of credit even though it hasn't been 2 dedicated crews, they've been able to work successfully with the service companies to achieve what we needed them to do. So my compliments to them. And Matt, you may have something else you want to add on that.

Yes, Ben, just to kind of build on what David is saying. Just getting back to starting with the drilling rigs, as you know, we've got 3 of these rigs that we have under a longer-term contract and they're kind of towards the end of those contracts. But even there, a year, 1.5 years on those rigs. The other 3 we've got on shorter contracts, which gives us a lot of optionality for us to go down or for us to even go up if we wanted to. And I think it speaks to the strength of the relationship we have with Patterson. They've been very good to work with and very receptive to what we need. So in regards to the rigs that we're using, all 6 of them are these high-tech that we've been talking about. We've got the one that's drilling the saltwater disposal wells is kind of the biggest and baddest one we have. So it's great to have that rig drilling saltwater disposal wells. If you decide you want to move that over and start drilling E-and-P wells, that's very easy for us to do and we're very comfortable doing that. As far as the frack crews, you're right; we do have one that's just fully dedicated. Our contract right now is with Haliburton. They've done a great job for us. And as we've talked about throughout the course of the year, the way we plan our business where we're able to get well out in front to get the second crew that you mentioned onboard on a spot basis. So even as far as going into Q1 of 2018, where we need that second crew, we've already got that secured with our vendor. So going into the end of 2017, we will be negotiating service company pricing with our frack vendors, and we will in all likelihood, take the same approach where we'll have some optionality within that contract. If we need to go outside the contract to get our wells fracked, we will. But very comfortable with both the drilling rigs and the frack crews that we have onsite right now.

Neal, a couple of other subtle points just to keep in mind is that as you move north in the basin, you run into more fractionated leases and it's harder to have a pure 100% lease. And so you're going to normally pick up some working interest partners. That means you don't have 100% of the rig and so having a sixth rig doesn't mean you have one full net rig. The second major difference is whether we're drilling Bone Springs or the deeper Wolfcamp wells because if you're drilling a deeper well, you won't drill as many wells as you might on the Bone Springs. So come of that depends on what we think is the optimal well count for next year between Bone Springs and Wolfcamp. Those are just a couple of the subtleties. But you can expect us to be probably 20 to 5 in the sixth rig, watching whether this current surge in price is a spike an actual turnaround in the forward look on oil and we're watching that very closely. But I think it's safe to say that we'll have at least 5 rigs running and we hope that circumstances will, and cash flow, will be such that we can add that sixth rig at an appropriate time during the year. But it will be based on economics and return on capital and those things and not just growth for growth's sake. We are seeking the profitable growth and that's what we're going to achieve.

Very good, guys. That was helpful. And maybe if I can just ask one more. David, you were kind of bragging on the completion guys there. I believe the guide for this year, you called for about 6 stages a day. It sounds like that's on plan. But just curious if you could maybe give us a sense of maybe where leading-edge stages a day are and maybe just how we should think about that and has we head into '18 with the efficiencies you guys are seeing.

Yes. I think that's right, Ben. Again, the completion guys have done a great job there. I think they've probably been somewhere in the 6 to 8 on average as far as stages go this year. So that's been terrific. I know on one Eagle Ford wells I think they even got 10 a day in one of those wells. So that was probably the top end of it for 2017. But I think by doing so many of our jobs in pairs this year and kind of doing these simultaneous operations where we've been perfing and prepping one while we're fracking a zone in the other and back and forth; that's been very effective. The increase in the number of stages has been great. And all those things have helped us to reduce cost. The other thing I think in terms of just the efficiency of the operation, I think that's also been helpful in terms of when we needed a second crew from time to time. The fact that we can typically on and off these wells very efficiently from a frack standpoint is also a positive when we're trying to fill in some of those gaps.

I appreciate the time here, and want to give Van a pat on the back. It's quite the feat the amount of acreage you guys have been able to buy at the prices you have. So congrats.

Well, thanks. It's a team effort. Van's done a good job of bringing his team along to assist him in that. And again, we send an invitation to all of you out there listening to come see us and meet these guys. You're hearing from Matt and David and me, but we're happy for you to meet the whole team because everybody has done their part this quarter and the other quarters.

(Operator Instructions). Our next question comes from the line of Mike Scialla with Stifel.

Just wanted to get a sense of where you are kind of with the maturation of your asset base here. You guys have tested a lot of different things in a lot of different areas. And I wanted to see at this point are there any other either major zones or concepts that you want to test over the next couple of years? And if so, can you share those? Or are you starting to move more to a full-phased development mode here?

Mike, I'm going to jump in here real quick and then turn it over to the technical guys. But of course, we haven't seen the end. We've got a 5,000-6,000 foot column. And yes, some of these others have come to the forefront, but there's others down the road. We're looking at them. We can't identify all of them because that affects acreage acquisition and other factors. But we see -- continue to see a lot of opportunity out here in the Delaware and in the Twin Lakes area. And we've seen where just moving your landing target a relatively few feet really adds to the productivity and the recovery of the well. So we haven't reached the limit of the number of zones that I think are very prospective. And we have drilled a number and hopefully we're not going to be in full development, 100% development, for a time to come. But we'll continue to turn up some exploration ideas that may want to be tested so that you keep your acreage fresh. There are some zones that obviously are coming out to be concentrated on as very proven at this point. But you know how we say around here, we reserve the right to get smarter. We reserve the right to keep coming up with new ideas and new concepts. David or Ned do you want to want to respond?

Sure, Joe. Ned here. I think Joe said it really nicely. But there always are going to be new zones that we're looking at. I mean you'll see completely new tests like the Wolfcamp B and Wolf. I mean I think that was a good win for the team and really kind of showed the quality of the asset over there. We will also look at an interval like that with even targeting within the Wolfcamp B. The team had a couple different zones that they looked at when we originally planned that well. So likely we'll get back and test some of the different zones there. So you'll see kind of targeting refinement. And another example would be the first Bone Spring in Antelope Ridge. We have a couple wells teed up for later in the year, maybe 2018, that will target the first Bone Spring so that would be a new zone over there. But Joe mentioned also the importance of targeting. We are acquiring more 3D seismic around our assets. And really we've seen in the past that 3D seismic can help us really kind of hone in on the best zone. So we'll also kind of be working into targets with 3D.

This is Matt. Just to add to what Ned had said there. Finding these new zones and exploring new zones is fantastic. But in regards to maturation, as you mentioned, we're going to continue to evolve on the zones that we're drilling in the development phase. I'm not going to say we're anywhere close to the end of the line and where we're going to go with completion is on targeting intervals and things like that. So we've still got improvements that we think we can make in regards to the ones that we would consider more at the developmental stage as well.

And not to overly pile on. This is David. But I will just say I just want to emphasize what Ned said about Antelope Ridge because it was something I was going bring up too. And that is the fact that we haven't tested anything there as yet, Mike. I think we are very optimistic given what others in the industry have been doing. But I think we're looking at first, second, third Bone Spring and at least one target in the Wolfcamp if not more And the Brushy Canyon on top of that. So there's lots of opportunities for us over there. And we were tickled to see EOG's announcement about the first Bone Spring because we actually have a well just sort of in an offsetting section that we've already got teed up to drill in 2018. So looking forward to being able to take advantage of all of those opportunities. And that's in early 2018.

That's great. Is there a rig or 2 that you would dedicate to sort of development drilling at this point and then a sum that you dedicate to more delineation work or --?

I think like Matt was saying, I think when you look at an area like Rustler Breaks where we're running rigs, we'll be moving on out in the northwestern part of that acreage. But there's a lot of that acreage where I would consider we already are pretty solidly in development mode and are drilling 2s and 3s and may have plans to drill more per single pads next Down in Wolf, a lot of what we're doing right now I would say is very much in development mode at the moment, with -- we spent a fair amount of time this year kind of delineating out the second Bone Spring, testing the Avalon, testing the Wolfcamp B. We'll do that again next year, as far as some of the new zones go. But mostly, we're planning to drill XY wells because we have the opportunity to drill a lot of longer laterals laterals on that acreage. And so we're going to be sort of focusing right in and through the heart of that acreage and drilling predominantly Wolfcamp X and Y wells next year.

I think the great thing, Mike, about the asset base is you can do both on the same pad where we're able to go in and to drill development wells like David's talking about and then also like we did down at Wolf, drill a Wolfcamp B exploratory test. So you're able to do both and mix them in there and still see the efficiencies for batch drilling and things like that.

Pretty good. I just wanted to follow up on what are your thoughts now with the Avalon at Wolf that well. Do you just need to watch that well more? Or does it tell you that you're done there with the Avalon?

Mike, this is Matt. I wouldn't say in any means that we're done with the Avalon there. I think it's early on. The well is making more water than we thought it might. So initially we went in knowing that this well was probably something we were going to have to put on ESP, which we did. And we sought the ESP for what we thought was going to be the right size. It turns out we need a slightly larger capacity on that pump, which we just recently installed it. So it's been producing for a few days here and it's going to take a while for us to get the fluid level drawn down on that (inaudible) where we can actually see what it's going to make. But as far as being encouraged by the Avalon, we still like the Avalon a lot from what we saw when we drilled through it and while we initially drilled this initial well.

Yes. And I would just point out, too, Mike, that just remind everybody the Avalon is a 800-900 foot section here and we've drilled one target. We had at least 3 targets that we thought looked very viable here. So by no means are we done. I mean we'll continue working with this well. But there will be other concepts that are put together for the Wolfcamp here.

And to follow on David, Ned here, I mean there was some -- some of our original assumptions were confirmed here. The thermal maturity looked right in line where we expected it to be, which is very positive for that. It's more or less in line with what you see at the state line acreage. So we're just going to wait and see and see how the new ESP helps clean this well up. But I think I remain, and I know the team remains, very optimistic on the potential of the Avalon and Wolf. We'll look forward to move forward on that.

Our last question comes from the line of Gabe Daoud of JP Morgan.

Just maybe following up and piggybacking a little bit off the last question from Mike. Just as you think about 2018 and just more broadly, do you move to large multi-well pads and try to, I guess, drain the column at once? Or do you worry at all what's the parent-child relationships that's kind of been brought up a little bit more recently? Just how do you think about ultimately draining and developing the resource? Is it parent-child? Is it kind of doing the stack all at once? Just any thoughts around that.

Well, Gabe, we think about those things on every well. What's the best way to do that. And it's just a complex calculus of which way you do that. And you watch what others are doing and what seems to have success. And it varies from area to area depending on what zones are most viable, also what your lease terms are because one well hold all rights all depths or is there pew clauses that limit it. So I mean it's just a lot of factors that go into it. And I don't think we're -- we're typically not a company that gets to a point that says one size fits all and that we're going to do all these like this or all these like that. We really try to tailor the drilling, the batch drilling or anything else, to tailoring it to the individual property. One consideration, of course, is that if we were to go out there and leave rig, which you could do potentially, drill on one location all year, but you couldn't complete them until all were drilled, then you'd have a big timing difference on production. So there is another factor in there; that you want to work on making sure you don't -- that you keep them all timely and not too much of one or the other. And we have a sizeable acreage position and it's important to work all areas of that because the nice thing is we've been having success in different areas, all these different areas, different zones, different areas, but having that success. So David, I thought, phrased it pretty well. In some areas we're pretty much in full development mode. And in other areas that we have zones that we could be in full development, but there are some interesting target intervals we want to test so it's in common. And then those you have a mix of development of some zones, but you're doing some exploratory or delineation on a third zone. So it's across the board there. We're trying to optimize the economics of it and be sure it tailors to the property and that we have the infrastructure ready to support it too. What am I leaving out? David, Brad, anything?

I don't think you're leaving out anything, Joe. I think you handled that very well.

I thought you did a really good job. And you hit the nail on the head. It really depends on the quality of the reservoirs and the reservoir properties in each of the different layers. And part of that delineation process is evaluating those reservoirs and how far out they can drain and both laterally away from the well bore and vertically up and down. And that dictates how you stack those wells in, the distance vertically between the wells, as well as laterally away from each other. So it's a learning process. We're gathering that data with each new well we drill. And where we are comfortable with certain well spacings and vertical spacings and so forth, Wolf is a good example, we're going to be going in and drilling those wells. And in other areas, we're still learning. So it's a fairly timely process.

I mean, Gabe, your question is a good one that we talk about nearly every day around here. What do we want to do here or there? But one thing we did do in anticipation is the rigs that we have have been specially built to allow joint operations off of the same pad. And so we've done that with anticipation that we would do more and more of this batch drilling as we firm this up. And then the last thing that I would mention about this whole sequence of the batch drilling and development and everything else is that you need data is real important. Because when you first -- if you're spacing them too closely, I may be getting it a little bit in the weeds, you won't notice that at first when those wells first come on. It's generally about a year before you really start to see the interference. So taking your time. You think maybe I'm ready for the full development, but you sometimes need to wait a year or so to be sure the interference isn't going on. That's just one more factor that goes into the calculus in the puzzle. But I think our deal teams have been very pragmatic. And some of the early drilling we did in the Eagle Ford has made us a little more cautious here in the future development so that you make sure you've got optimal spacing and you understand not only the way the oil and gas flows horizontally, but also potentially vertically into other zones so that you don't over-drill the sections, that you make the maximum use of your capital. David, I --

No. I think you did well again. I do --

These guys are giving me way too much credit. OR I'm spending way too much time.

Ladies and gentlemen, this ends the Q&A portion of this morning's call. I'd like to turn the call back over to management for any closing remarks.

Thank you again. I know it's a busy morning, that you've got a lot of different calls to take. We appreciate you listening in. And again, want to extend the invitation to come see us so that you're not scheduled on a call, but you have more time for your questions and meet more of the staff and see the depth that we're trying to develop around here. But thanks again. Thanks again to the staff for such a special quarter, to our vendors for working so much with us and, of course, to our shareholders and other supporters who really helped us with the offering and taking a long-term view and allowing us to grow and to reach this point. And we're excited about the outlook going forward. And with that, we'll sign off.

Ladies and gentlemen, thank you for participating in today's conference. That does conclude today's program. You may all disconnect. Everyone, have a great day.