Matador Resources Co (MTDR) 2021 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Fourth Quarter and Full Year 2021 Matador Resources Company Earnings Conference Call. My name is Kirby, and I'll be serving as the operator for today. (Operator Instructions) And the replay will be available on the Company's website through March 30, 2022 as discussed in the Company's earnings press release issued yesterday.

I will now turn the call over to Mr. Mac Schmitz, Capital Markets Coordinator for Matador. Mr. Schmitz, you may proceed.

Thank you, Kirby. Good morning, everybody. And thank you for joining us for Matador's fourth quarter and full year 2021 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 actual results to differ materially is contained in the Company's earnings release and its most recent annual report on Form 10-K and quarterly report on Form 10-Q.

Finally, in addition, with our earnings press release, I would like to remind everyone that you can find a slide presentation in connection with our fourth quarter and full year 2021 earnings release under the Investor Relations tab on our website.

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 thanks all of you for listening in on this call and taking the time. I'd like to simply begin by noting this is our, actually our 10 year anniversary from going public in February 2012. And this is a good high watermark for us for this time last year we considered the best year we ever had in all areas. And in particular just execution and the teamwork that we had between our various disciplines. Want to thank the staff both in the office, in the field for this good performance and say we certainly understand that it was a record setting year. And the past performances are no guarantee of future performances. But we feel it's not a bad indicator to have the -- we like our chances going forward and we think the outlook is the best that it's ever been and hope that you'll see in the documents that were shared with you, how far that we come in the last 10 years.

As a measure, you seeing here the production records, the reserve numbers, the free cash flow, all records being, but I'd also just like to note that if you bought on the IPO, you're up basically 4 times, we came public at $12 and we're approaching $48 now. And if you had to be an original shareholder in this Matador, you were at $3 so, you're up, little over 15 times in that period. As I said, I'd note that past performance is no guarantee toward our future. But we like our chances and we'd rather be having that kind of progress, then the other way around.

As I said with March Madness coming up, just because Duke and Kentucky, and those are not guaranteed anything, it's certainly the way to pick your bracket with teams have been there and have showed some progress. Again, I commend the teams and the staff for their operational and financial progress we've had, we're looking at more free cash flow and more EBITDA than we ever have in some of the slides to my remark, note that in the picture, sometimes tells a thousand, tells a thousand more words.

The forward look is very promising. The bill AMI acreage that we bought is really come through, and I know at the time, there were some question marks about what we're paying too much for it, but as I think you'll see that it made a complete change for us in our capital efficiency, and then we went from drilling 1% of our wells to longer than one mile to where we drilled 98%, 99% of our wells that were a 1.5 mile or longer. In some this year had been as long as [3.3] miles. So, we're handling that change and that made such a difference in our overall capital efficiency and lot of shales don't pay up the 2 to 1, 3 to 1 but in many of the wells that we drilled this year, there'll be payouts as big as 6 to 1.

So, glad that worked out, glad everything has progressed with the team, continuing to get better and our young people gaining skills and experience in this and the innovations that they brought here, I've been very helpful at their execution, their commitment to get to the field to make things happen better, have all come together to make this year possible. And now we can't look back, we're going to discuss the fourth quarter, which was best quarter ever. But after this call, it will be forgotten. And we need to look forward to what's going to happen in the second, third and fourth quarters of this year. But very confident that the alternative in another first-rate performance and we appreciate your interest and are now ready to get to your questions. Kirby?

(Operator Instructions) And first question comes from the line of Neal Dingmann from Truist Securities.

Joe, my first question, centers on sort of the financial upside we're continuing to see from you all, specifically maybe for you and David, the guys, it seems to me a lot of investors are just looking for primarily cash flow growth. And I'm just wondering, I guess it's another way to tackle sort of shareholder return. How do you all see the best way to achieve the shareholder growth? Is it some production growth, is it buying back shares, all of the above? Or you know when you all think about cash flow growth, what's the best way to deliver that?

Yes, Good morning, Neal. This is David. So, thanks for the question. I think we've been pretty consistent in our response there. Certainly, over the course of the past year, true to what we said we would do, we focused very laser like on paying down debt and on initiating a dividend and beginning to return capital to shareholders, and we were pleased, I know Joe and the Board were very pleased to double the dividend in December of last year and we've stayed consistent to that here in the first quarter. I'm sure that they will look through the course of this year to an appropriate point, where they may choose to raise the dividend again.

We certainly are going to stay focused on getting the rest of the debt paid off. We ended the year with about $100 million in borrowings outstanding on the RBL, we're going to pay down another $25 million here in the next few days. And so, that leaves us about $75 million to go. And I think we'll get in short order, the rest of that paid down. And then, we'll have our bank facility paid down. We've talked about the potential later on in the year of perhaps looking at doing some kind of a bond restructuring and maybe paying down a little bit of the bonds, maybe putting a couple of towers in place, we'll see how that goes. I think that would be in the latter part of the year, if we did something like that.

And you know, certainly we've talked about continuing to look for bolt-on opportunities and acquisitions of the sorts that we have done in the last 6 months and may continue to do again, but only if we find what we think are the right things. I think that the Company continues to evaluate the other vehicles for shareholder return, the increases to the base dividend or some sort of a special dividend. If that would -- if that should be appropriate later on in the year, but I think that for the moment, we feel like the best thing is for us to just to kind of maintain our optionality and flexibility and certainly if things go the way that we anticipate that they will this year, you're quite correct, will have a significant amount of free cash flow with which we can work. So, Joe, I don't know if you have anything you'd like to add to that, but that's I think how we see it.

Well, I agree with everything that you've said. But one thing I would add is the operational group maybe concerted effort to try to find ways to drill better wells for less money and that seems quite but it's the truth with some of the innovations that they've done in frac design, the administration of the fracs, the marketing of the oil and gas product, working with our key vendors to find better ways to do it.

As an example, that when you cut down the number of days on a well, those are very sustainable achievements and lead to more cash flow that aren't tied to commodity prices. So, I think they've been resourceful in getting this done. And the oil and gas business is like making the trying to run on time. We can't do it all from here. But just appreciating the gains and experience and expertise, our operating staff have in bringing about these better wells and working on with our vendors to find more efficient ways to develop these properties.

And then maybe I would just also add that I think the Company has had a very good track record over the years of being good allocators of capital and good stewards of the capital. And I think our shareholders can count on us to continue to do that going forward.

No, absolutely, David, I want to say my next question just congrats to you and Matt obviously been great working with you all. Just secondly, Joe, maybe for you or, Matt, it seems to me the market is still not giving you for whatever reason appropriate value on San Mateo, you guys have done just a tremendous job building that up, a lot of cash flow there. Great assets there. I'm just wondering on a go-forward, is there anything else you can do you think to have the market better recognize that or maybe just any comments you have on San Mateo?

Well, Neal I'll go first, [clean up], as long as the other things, it's really missing is the operational enhancements at San Mateo braced us, is that they're able to get there, when we're ready to turn these wells on. So, we're not waiting to turn on the lines and missing days of production. Second, in this value of ESG, the environmental advantages that they bring, that they're there to hook up. So, you don't have trucks on the highway home all or the water or the emissions problems and that really improves our environmental profile.

And then, the options that having that the 3 pipe system on where you market your product also gives us an advantage. So, Matt, I commend Matt, Matt Spicer and James Meier, that the whole group out there has done a fantastic job, Gregg Krug and working through this midstream and our partner 5 Point. And again just a good, another good team effort where people working together make better things happen. Matt?

Yes, Joe. You said it well. I'll just add to that, Neal. I think for San Mateo, there's a couple of points here. And Joe hit on what is very important is how these 2 business lines work together. If you've got an E&P company that doesn't have a midstream company that's serving their needs, that's a problem and vice versa. So, it's still and we said this in other calls, is still really nice to walk down the hall and say we've got 4 wells, touching such asset that we weren't hooked up on whatever data and that happens. So, there's just a tremendous amount of value there.

I think what's happened over the course of time Neal, we're coming to the point now where we've got $0.5 million, close to $0.5 million BCF processing capacity. Our water volumes are up to where we could handle at least 370,000. So, and then the whole system is on that same acreage. So we're at a point now where for us to go out and spend additional capital, we can make sure that we can get a return on that investment prior to doing it. We've never been built and then they will come companies. So any of the capital expenditures that we have going forward will be certainly based on either a minimum volume commitment for an acreage dedication.

And the other thing I wanted to say was, Matt and Todd in the business development team has done a really nice job going out and securing either minimum volume commitments, to assure that we're going to get a rate of return or an acreage dedication. And as the rig count is back up over 600 those acreage dedications became even more valuable, because other operators, come back to drill additional wells on the assets that they have dedicated those volumes to San Mateo. So, I think that the business is in a really good spot right now.

Next question comes from the line of Scott Hanold of RBC Capital Markets.

And David, Matt, on this, I guess 10th anniversary of going public, I mean, I'm going to congratulate you guys on your -- what you've done for the Company. And hopefully, you'll enjoy your retirement if Joe does employee back enough. Right? But congrats.

Scott, I'm not. I've got ankle bracelet...

We're not going very far.

Hey, guys, good to hear it from some respects. But I'm going to push a little bit more on the free cash flow uses of free cash flow because based on our numbers the quantum of free cash flow is going be quite extraordinary this year for you all, this year and potentially next year. And I know you all have not necessarily, specifically done what everybody else have done, just to be like everyone else. You've looked at things like moderated growth, if it gives better returns, bolt-on acquisitions, if it makes sense, I mean we think you're going to have somewhere in excess of $1 billion this year free cash flow.

Like if that quantum of free cash flow actually occurs, can you give us your thoughts around like how you think about your packing order between variable dividends, buybacks, fixed dividend increases and potentially growth and bolt-on acquisitions? Just, I mean there's a lot of things there, but the quantum could be quite large and we know that you all do things, define what's best for shareholders.

Thank you, Scott. I'll try and both Matt and David would be large shareholders that'll be listen in on these calls, next year. They could let us know what their thoughts are too. But the main one is, I think you said question, we are aligned with all the shareholders. You know, I'm the largest individual shareholder, David and Matt are very large shareholders, the staff, our large shareholders that virtually everybody who works for Matador, own some shares and during the worst part of the pandemic over 200 of the employees, which is 80% or so of the staff were buying shares.

So, we're very shareholder long term oriented, we're not trying to do some immediate whatever is fashionable today, but what's tried and true to build long-term value. And by that the main one is the financial discipline to restrain during a time of high prices from drilling, what I consider somewhat marginal wells but focus, continue to focus on drilling the A plus locations and work at developing more of that. So, that's the first thing.

The same thing is the fixed rate dividend we know works and we will certainly continue down that path. David and I, and everybody on the executive team has debated from time to time, the efficacy of some of these other return to shareholder top mechanisms. I'm not particularly how odd, I have an open mind on everything and we have a saying we reserve the right to get smarter. But I'm not particularly high on the buybacks, because you buy back stock, and some, buy they go away. We'd rather invest that and build the value of Matador.

The second one, the special dividend, you don't have a history. So, people don't know when a special dividend might be is the weakness of that proposition. The variable dividend has some pros to it. We've looked at that. But I think at this time, raising the dividend, maybe the more optimal approach, but nothing has been decided, we're going to get further into the year where we can see how things are going. Because we know, it could change overnight, but we are a team to the shareholder, because we are one of them and we're not -- we make more from our shareholder returns then we do from our salaries.

When the stock goes up, we make more than we do from the compensation. And many of the staff, the key members and the Executive Committee, do the same. So, very much but don't want to do some because it's fashionable today and won't have lasting positive effects. So, we're very open on this free cash flow. We've always said, we look for opportunities. More than a deciding to persevere, we're going to dedicate so much to acquisitions. So, we'll just see what opportunities may come our way. I think, there are more of them coming up now, than they were a few years ago. And we're looking at them, but we're trying to be selective. So David I turn back to you.

Joe, I think you answered very well. I think the only thing I might add, Scott, again, it's just to reiterate the fact that I think that we're just sort of entering this phase, right? We still want to get the rest of the RBL paid off, right? We're just about there and I think that -- and it won't take us much longer. We'll get that behind us. And then, I hope your models, right. So I mean that would be a very high-class problem for the company to begin to think about.

I would just say, having been part of the Company for so many years and having had the pleasure of working with Joe and seeing how the Board functions that I'm very confident that they're going to make the right decisions in terms of what's best for both the shareholders and the long-term value of our company. And so that's, but I think other than that I think Joe, laid things out very well.

I appreciate that color. And as a follow-up, can we talk a little bit on the operations side. I mean obviously the state line, it's been a big focus area for the last year or 2 and they perform quite outstandingly. You will move into some of the other areas, we'll call it more of the legacy matter areas, pre Stateline. But can you talk about like what do you think about that mix shifting back to those other areas and the potential impact on returns if any at all?

Yes. Scott, I'm going to take the first part and Matt or Billy or Tom can follow up. But the first thing is when we really started the development, we had the pandemic here and we had the Russian Saudi oil price war. And what those circumstances called for was doing something to scale and we cut back the 3 rigs in light of what was happening. And where it made compelling case was on the Rodney Robinson and the Stateline area, because you could do things the scale of one pad. And so that was more efficient for that time.

We still like the other areas, the legacy areas, a lot of them have the same, or as good or better returns. They just didn't lend themselves to doing the big pad drilling with number of wells at one time. And so, we focused on that. We also -- it was necessary to get those going to earn the some of the incentives on the midstream project and it just, that was what made the most economic sense at the time. But Tom and Billy and Matt are eager to get back to some of those other areas where the returns have been just as robust. It just -- they didn't have the scale at the time that the Stateline and Rodney Robinson had. Tom?

That's right, Joe. The team has been working very hard on these other assets. While we've been focusing down Stateline and learning so much from being able to drill 50 wells in Stateline and this over and over and over getting better, getting faster and getting more efficient. And we're taking those learnings out to the other parts of the basin and the teams are already off to a great start breaking drilling records, getting wells ready to produce in the San Mateo back in Rustler Breaks.

We can't say how excited we are to get to work on Ranger and Antelope Ridge in back in Rustler Breaks and Wolf this year. We're very excited to be back drilling 2 more laterals in Antelope Ridge and really kind of full Rodney Robinson, most of the projects we've been doing in for one mile. And so we're very, very proud of the progress we've made, and the number of targets keeps getting higher and better and Matt and his geologic team are always looking at new and better places to land wells. So, we're just very excited to get back to these other areas.

Yes, Tom, you said that well -- I just wanted to go back to what you said about drilling 50 wells in one spot. If you want to put together recipe to figure out how to be efficient, that's how you do it. You do the same type well over and over in the same type place and you learn in which bottom hole assemblies work, which bits it is motors, the MWDs, we've just the longest run we've had out there in the field, which is a record as well over 13,000 feet and so that's 2, 2.5 miles. So, you can't drill any large than what we've already drilled there. So, you take those learnings to the new place.

And then, the other thing is by doing this by coming back to Stateline periodically, we were able to optimize our production facilities. So that we can flow wells back to a certain level and then let them trail off a little bit. Come back to drill another set. So we're not leaving forever. We're just going back to drill some of these assets. We're very excited to be operating.

And just following up to what Matt was saying there we get better and better at what we're doing there. While geology and reservoir is looking different zones, they're finding more as we're drilling these wells and getting that opportunity and land blocking up the land around it. Everybody's busy doing their thing like the drilling, guys, they went in there to Stateline and started out and had to run a fourth casing string in there and you heard us talk in the past about cutting out a casing string out, that save you $300,000 to $500,000 for each point where you do that and starting out, they went and drilled the first 3 or 4 wells and had to set that extra string, but they worked at and figured it out and then we followed up with over 40 wells without having to run that string. So saved a lot of money there, and those are the kinds of things will do as we get into these other areas and start working with them.

On top of that Joe mentioned earlier, working with our vendors there and they keep us going and we work with them to do these things and B&L, Paco and Patterson and Universal and Halliburton, they work really well with us to save a lot of these dollars here. So, we have more to keep drilling Ned's new zones there and along with that the drilling side and Matt mentioned that technology and BHAs and cutting out trips let's say, it's like a $1,000 now or $100,000, excuse me, little more.

And then the completion guys, they get in there, get after it and they've done the remote frac and we've talked about that here today, I think, and I know what's in the release there and that's saving $250,000 a well. And also the remote frac, we mentioned that that was 6 wells. Well, so that's saving us $1.5 million out there and then they start looking at the dual fuel and that's already moved up to where we're thinking maybe we save $20,000 or $30,000 a well received and $60,000 a well. Now looking at adding fuel gas to that and that will save us a $100,000 a well. So these are just some of the things we'll be doing as we move through these different areas and start figuring them out and it's going to make us a lot of money, a lot more money for us and the shareholders, good, all around. I guess Glenn, you want to jump on the production part of that?

Yes, I think on the -- excuse me, Scott, this is Glenn Stetson. On the LOE side and the production side, we are forecasting the growth, as you've seen in 2022 and a slight growth to LOE. But we are, as the same as drilling and completion is working on ways to be more efficient, getting more water and oil on pipe, more sites on grid power reducing compression where we can and all those things kind of add up to maybe, we're forecasting a 6% increase to LOE for 2020 to over 2021. But working on ways to mitigate that in every way.

Next question comes from the line of Zach Parham of JPMorgan.

First, I guess, could you talk about the decision to add the rig on the acquired acreage? Does that have to do with HBP requirements or just the returns up there? You see from drilling are those compelling? Maybe talk about, how you expect those returns to fit into the portfolio?

Yes. It's David. So first of all, I'd say that of course we wouldn't have bought it in the first place, if we weren't quite excited by the opportunity that we have and we think that it's a great area, great rock. We like the high oil cut. We like the lower water cuts in a lot of those wells up in that area, it's sort of is in an area that's between the Rodney and to north of the Rodney, the west of the mountains so, it's a nice area for rock there in the Delaware Basin.

So, we're very excited about that. I think we feel like that the returns are going to fit in very well as we mentioned in the release this past year, we drilled 4 wells in Ranger, not too far away, on the track, we called Uncle Ches and we've delivered 4 very strong wells. I think the 2 we turned on in mid 2021, have already paid out so, we're very enthusiastic about this area. I think that also just so happened that there is a, there's a number of federal permits that are available and ready to go and it didn't seem like there was any sense to wait around and not get right on those. And so we've moved a rig out there and we're going to get busy and looking forward to it.

Got it. Thanks for that color. I guess, just one follow-up on the operational side. We've heard a lot of talk in the industry about simul-frac. And in the slide deck you mentioned using remote simul-frac. Could you talk a little bit about how that's done from an operational perspective?

Yes. This is Chris Calvert. That's a great question. I think the process on this is very similar to simul-frac, You have a set of wells that you are stimulating 2 wells at the same time, it's kind of zipper-frac 2.0 if you will. You have one frac crew that's treating 2 wells at the same time while you have to wireline crews that are working on 2 other wells on the same pad. On remote frac carver what that does is that opens up the opportunity to simul-frac wells that wouldn't otherwise set themselves up from the simul-frac process, be it an odd number pad layout or just wells on nearby pads. It could be stimulated at the same time.

So with remote frac what the Group did, set up the simul-frac crew on one pad and then basically ran hardlines 7 inch steel from one pad to the next. So, we had to wireline crews, excuse me one wireline crew on one pad, one wireline crew on the second pad, one simul-frac crew on one pad, then we were treating 2 wells in 2 pads on 2 separate pads at the same time. And so it really allows for simul-frac on multiple pads throughout our assets.

Hey, Zach, this is David again. Look, I just -- I cannot add anything to the great description that Chris just added to simul-frac and remote-frac. But I will say this is one where I got to give props to the completions team for their learning about this technology and adapting it very quickly. I don't think hardly anybody else is doing that or has been doing that out in the basin and it fit very well on a couple of recent opportunities that we've had, and I just think it's a testament to the way that our company and our technical teams really stay on top of what the latest innovations are out there and take advantage of it.

And a lot of things that Billy was enumerating in his comments to Scott's question there, I think reflect that, where in from the drilling side or completion side or the production side, I have to compliment all our teams for their further use of technology. I've always said that I think we are a team that punches above its weight for its size and I truly believe that. And so I'll just -- pardon me a little bit for that advertisement, but I'd just like to, I really do mean it and not only the folks here in the office, but the guys in the field, we have a first-rate team of technical people.

Yes, Zach, this is Matt. I'm going to pile on a bit here, just Chris is too humble to mention the numbers, but what they actually did there in 33 days they pumped 407 frac stages. And so, we estimate that saves about 20 days, which saves the money that Billy and Chris were talking about. But in addition to that, it reduces the number of days, you have to shut in offset wells by 20 days. And it also gets these wells that we're completing to sales 20 days earlier, so it works both on the revenue side and on the cost side. So it's a really good deal for us.

I'd like to fall off, we're following all recognize on doing this and this is what Tom, Matt, Billy, and I have been trying and consists group of young people have gained experience and expertise, they're coming to Billy and Matt more often to propose something like this. I didn't think of it. None of us thought of it and Cliff and Chris came up said that we'll give this a try. Matt and Billy pressure tested that there and said let's give it a try. And you can imagine how much extra production you get out of that 20 days, not counting the cost savings and little differences like that there is all sorts of ideas that they've had, they've gone through Billy and his technical group and what the difference they're making. And thank you all and the guys in the field who are really having to scramble to keep up with their ideas.

We don't want to forget well run operations here in the MAXCOM room. Thank you, guys. They do a great job and not only help us drill faster and the faster we go, the more we need people all day long, all night long, middle of the night, making those decisions keeping us in the preferred rock and that makes us so much money. It's hard to quantify, we know what's important to stay in the best rock and that his team is all about and that's what we're doing. So that's a big thing. And then on top of that we have our MaxOps and Max Pro programs too, we bring engineers and they get out like we're in a lot of hats like we've been talking about and they're are out there getting experience and we have extra engineering help out their location in the field, in the MAXCOM room. So all good things.

Yes, Billy some of these, the MAXCOM runs 24/7. We also have a measurement room that does add on a control room. We have measurement guys in the field that have all been in addition since we went public 10 years ago. These are just examples of the many improvements that have occurred like Volkswagen ads, it might look the same from the outside but you were that say under the hood there is one thousand improvements to the Volkswagen bug, at 10 year anniversary, I think it's important to recognize how far we've come even though we might look the same at the executive level. There has been plenty of positive changes.

One last thing, I got this is that when we went out to the Permian, if you remember our history, we were in the Haynesville, like that, great gas, Mulund and Oleg went down to the Eagle Ford to prove up through horizontals in the fracking, you get all molecule through the shale that we went out to the Mexico and that was going to be our third leg of the stool. And how much we went out there with a view that there were 3 or 4 zones that we were interested in. And they had, how many zones, different zones are you producing from right now?

I think we're in the 18 unique zone range right now. We kind of joke about geologist, their lumpers and their splitters whether we want to be granular, we want to amalgamate those. But I think a conservative numbers, north of 18 right now. So the teams have done a really good job of bringing in new targets forward and bringing new and exciting and profitable zones. Billy and Chris and the operations group and MAXCOM make it look easy, but I want to tell you, it's really not. This is still a complicated basin, there's over the course of a 2.5 mile lateral. There's a lot of variability, and these guys, keep putting these wells down as fast as possible same in zone almost all the time and we couldn't be happier with how the team is executing. So it's really a combination of great rock and great operational execution and it's fun to watch right now.

Back to you all, they anchor, for next question.

The next question next question comes from the line of John Freeman of Raymond James.

Congratulations on the 10 year anniversary, and again excellent earlier comments, congratulations too on that, David, both on a terrific careers. The first question I had, I just want to follow up a little bit on the prior discussion on the simul-frac. Just quickly, so if last year, you'll mentioned that you did '23 simul-fracs. What's the plan and the budget this year? How many simul-fracs are you all planning?

This is David. John, I don't know exactly how many that there are. So, I think that will be at least a third of our locations will be eligible for simul-frac. But I can tell you as we go through the course of the year, we're going to be looking to do things like simul-frac and remote-frac and any other flavor frac, that we can do to continue to be more efficient. And I expect we'll be talking about some other kind of happened frac, 6 months from now that you guys have come up with. But I think today, it will probably be at least a third of the locations will be able to do it.

Okay. And then just to make sure that I understand what's kind of already embedded in the guidance on. When you all mentioned on that slide 9, the one that highlights the remote, Simul frac, when you all say I know it's not just the simul-frac, but there's some other things as well. But when you all highlighted that you all could reduce drilling and completion costs by 5% or more in '22, that's not currently in the budget, right? That's 5% more savings relative to the budget, you all cut out there?

Yes, that is correct, John. So we have not built that into the budget. We're just saying that those are some things that we think that we may do as we work on mitigating some of the cost increases. So, but the budget number does not include that. If you look back historically, John with what the operations team has done is that quarter after quarter, they find ways to drill these wells faster, completing more efficiently, and save money. And so I think going forward, the expectation would be that we're going to continue to match on those guys and I think they'll be able to deliver.

Yes. There's, no doubt, track record of beating guidance is pretty phenomenal. The other question I had on San Mateo. I know last year, it was a priority, and again this year, you all listed priority on focus on adding more third party customers. Can you just remind us what percent of San Mateo right now is third-party?

John, I'll make a comment here and then I'll ask Bryan to add some comments too. We typically strive for around a third, maybe as high as 40% at times. But I think right now we're kind of in that 30%, 33% range and that feels pretty good to us. We do have a situation now where, as we've talked about before we're large enough. We have enough volumes, particularly at the plan and, well, actually all 3 pipes, we've got volumes to bring on third-party customers. Maybe, if you look at it in the future several years ahead, those volumes are spoken for, but that gives us a chance to bring them on, in the short term and add these projects that we've talked about, to generate a rate of return. So, Bryan, is that accurate?

Yes, Matt. This is Bryan and exactly right. I think that's accurate. Those numbers are close and I think we're really pleased with third party opportunities we've had in 2021. And we were able to add a number of customers, not just new customers, but one of the things that we're proud ourselves on is we were able to add some additional volumes from existing customers. And so, it's a shout out to those guys in the field that are providing great service and to the BD team to continue those relationships and so we look forward in 2022 to continuing to build those relationships and have additional contracts with third parties, we already have some that we've signed up and look forward to continuing to do that now. And I think those numbers matter right and hopefully in the future those numbers continue to increase as we continue to build the third-party opportunities.

Next question comes from the line of Subash Chandra of Benchmark.

First question is on acquisitions. So trying to I guess handicap your appetite, you talked in depth about the benefits of scale, and then we saw a tuck-in deals like this, which is easily covered by your liquidity and free cash flows. But, do you think you need a transformative deal if it comes along and the metrics are okay?

Now Subash, I mean, we'll look at whatever somebody generally suggest. But now, we don't need one, we've entered a different inflection point now, then back when we were $300 million. We're over a $5 billion company, approaching $6 billion and that we'll look at times, but we are at a pretty good size, where we have scale with our vendors and we're growing at a good pace. You don't want to grow so fast that you don't have the people, the populated or your systems and so we don't prefer the company to company because it can be distracting as David often says, we want to be a better company not just a bigger company.

So, that's why we are as selective as we are in what we do that to make sure that it fits and we have the people that can't attend to it and we have a large inventory right now. So, if you're going to make an acquisition, you would like to get right on it, and that would involve another rig and we don't want to upset the capital expenditure plan and I wouldn't say that has a high probability. Our first one is these continued bolt-on that we did last year. Those opportunities we could just fit right into the drilling program. We have the people, it was seamless and to the sampling find those, that's probably what we look for first, first Matador grew mainly by acquisition and exploitation, this Matador has primarily grown to organically and it's been a good way to grow. We feel like it's earned a higher rate of return and it's been something that's been easier to fit into our capital plans and the capital efficiency.

So I don't -- I don't want to say never to something, but it's not likely. What is most likely, is it will continue as we've done in the past few years, do it opportunistically on acreages bolt-on, because we know that area, and it has less risk, easier to absorb. And we think it's really more capital efficient. I don't think just because you get bigger you're necessarily better and most of the opportunities presented to us would dilute some of our quality. So we're going to continue to be selective and, but we are also working with other companies on trading acreage.

This has been a period of time, where the majors have traded acreage for people to get to the longer laterals. So we try to section or another section. So we get a 2-mile lateral, I get a 2-mile lateral and we think that makes a lot of sense. And there they small but efficient and good economics. Does that help? Matt, wants to say something.

Just want to build on what you're saying about bigger and better. And I think for us to focus absolutely, always has been on better. And I think at this point, we're to the size that I think we've got the scale that we're talking about. And as part of our strategy, as we built this company was to establish relationships with good vendors and we've done that with Patterson, both on the drilling side and with Universal on the pressure pumping, we've been partners for a very long time, we've been partners in good times and partners and not so good times and we just made it working, same with Halliburton and Schlumberger, B&L that Billy mentioned earlier. These are all great relationships for which we have scale.

When we start talking about the way others do it, which is nothing wrong with that, ours is a little different. When times get bad, we talk to our vendors and say, look, we're not wanting to run you on the ground. The last thing we want is for you guys not to be here. We want you to help us create value and they've done that throughout the good times and bad. So, the focus absolutely is on better.

The second question is on permitting lease sales back in the headlines because the litigation on the social capital cost of carbon issue. And so have you seen any disruptions in the Permian? It might have more to do with future lease sales and might have to do with permits. But what are you seeing on the ground there?

Yes, it's David. And Tom, if you want to chime in. But I think the simplest and most of simple answer is, no. So we have not encountered any problems or any concerns. I think our team has had a good working relationship, works very hard with folks out in Carlsbad, they're very helpful, they've been very good through the last several years with all the pandemic and working at home and everything. Those folks have been very good to help us along and to respond to our needs. And I hope best to them as well and we've really -- I think that, that process has proceeded just fine. And we have what we need to prosecute our current drilling plans, and we'll continue to work forward. But like I said, I think that Christopher has answered the question is, no. We're doing good.

Yes, I think the B&L has been very professional and with the restrictions that they've had on the pandemic has been really remarkable getting out and being responsive returning phone calls when you're communicating with them and yet making sure to look after the B&L, it's been very fair whatever additional information request I made of this, we feel, they've been very reasonable. Tom?

All that's correct. I mean, David and Joe both said it correctly. And I think we even got a few kind of final signatures we needed yesterday afternoon. So, things continue to advance and we've gotten a whole bunch of sundries approved an extension. So we're ready to go for 2022.

And certainly appreciate, I failed to say it, certainly appreciate the efforts of those on our team, our land team have worked very hard over the last couple of years to keep the pipeline full. We're very grateful for all their efforts.

Next question comes from the line of Michael Scialla of Stifel.

Yes. And I'd like to echo everybody else, and offer my congratulations to Matt and David, on their great careers and as Scott said, good luck trying to hide from Joe during your retirement.

We're not even going to try to hide, Mike.

I suggest some sort of restraining order personally but, I just wanted to ask on slide 14, you said you've got about a quarter of this year's production hedged with basis swaps. Just wondering if you've done anything there for next year? And any concern about takeaway capacity out of the basin for next year on the gas side?

Of course, the basis swaps, this is David, Mike. The basis swaps that we have in place are for oil and we put most of those hedges in 2 or 3 years ago, as I recall. And so, with regard to oil, no, we haven't added any additional ones going forward. With regard to gas, I don't believe we had any basis swaps in place. Don't think we ever have had. We certainly are aware of some of the concerns that are being expressed about takeaway at Waha and I can assure you that Gregg Krug, Anton and our marketing group is already very proactively looking at how we will meet that challenge, if and when it does manifest itself. So I do feel like, that, I feel confident that we're out in front of it and working to try to mitigate any impact that it may happen going forward.

I guess, without trying to front run anything you're doing there, its firm transportation or consideration there?

Well, you know, we have had for the last several years, we were one of the first people to get on GCX, right? So, we've had quite a bit of our gas with firm transportation to the Gulf and I think we're -- the guys have done a very good job over the years of finding other alternative markets. So, to kind of diversify us away from Waha. We have -- we go to other parts of the country at different times of the year and so that's been helpful. And I think that's currently they're looking at other avenues to continue to diversify the takeaway away from Waha. So, like I said, my hats off to them for being conscious of what's going on and being kind of proactive and ahead of the game. And I feel confident in our abilities to mitigate that problem.

Good. And then I just wanted to follow-up a little bit more on the recent acquisitions. Can you talk about how you see the full cycle returns on those acquisitions? And you gave a PV-10 number for the proved reserves you acquired. Can you give any sort of split on how much of the proved reserves are developed versus undeveloped?

I think, Mike, that it was probably from a from the PV-10 side, of course, it was a little heavier weighted toward developed PDP as supposed to undeveloped. In terms of volumes, it may have been a little 50-50 or so, but of course we've only -- we don't feed a very small amount of what we would anticipate to be future reserves, as current, I mean, we tend to be fairly conservative in our reserves, bookings anyway, and this was no exception. So, while we did book a few PUDs to some of the existing producing wells. It's not a case where we headed up the whole thing, I mean there will still be, as we mentioned in the release, quite a lot of future value to be added as a result of the drilling activities that we undertake.

And in terms of the kind of full cycle returns on acquisitions versus maybe just drilling more of your legacy inventory?

Well, I think this is an area that's going to have very strong returns, Mike. And that's going to compete favorably for capital with others of our legacy areas. So, I'm confident that we're going to be pleased with the long-term returns that we received -- that we get out there. I think we paid a very good price for the acreage relative to what we have done in that area, previously. I think we've always had for a company that came in and sort of 10 years ago or 9 years ago and started building its position, I think as we used to talk about, we felt like we had one of the lowest entry points on a dollar per acre basis of almost anybody out there, unless you were just sort of a legacy company that was sitting on a lot of PDP acreage.

So, but for someone to be interested into the shale, I think our brick-by-brick approach has been very cost effective in terms of what we had to pay to acquire the position that we did and I think that's a tribute to just a lot of good work by our land team and our philosophy that, acres should be left behind I mean, they don't, I mean if it's something that we want, will they go-get it. And I remember, sorry if I'm a little nostalgic but I remember at the beginning, people looking at our map, and go gosh, it seems like that's little scattered, don't you think, and I'm like, no, sure don't and think it's a lot of good spots and just watching I'll get drilled up and you know if you, if you were sitting here this morning, like I am looking at the map across the wall that much HBP, I think people would be shocked to see how much of that we have either operated in development or participated in really good non-op wells over the years because the rock was good.

And so, I couldn't be more complementary of our land staff and the asset that they put together and our geologic team that helped to direct us there in the first place. So it's been a great team effort and these guys, they know how to do it and they do.

Next question comes from the line of David Heikkinen of Pickering Energy.

Just thinking back a year ago, you all went from 3 rigs to 4 rigs and now you're at 6. Kind of got ahead of what we're hearing is an ever-tightening service environment by picking up the sixth rig and some operators are talking about 4 to 6 months to secure tubulars and the like. So how long ago, did you start working on the plan to add the sixth rig? And can you kind of talk through the pinch points in that process of, you've really highlighted your service providers, working with you like where the tight points were and kind of where you would think about kind of the limits in the services space today? If we were to give other operators adding activity.

David, this is Matt. And I think the short answer to that is what we talked about earlier, it's about relationships. And so, when we're talking to Patterson, we've got optionality on both sides of this thing, we've got contracts that we staggering if we wanted to go down a rig, and makes it easy to go down a rig and then we have this ongoing conversation with Patterson, Andy Hendricks and I and Billy and Joe are all friends and so if we think we might want to be adding a rig, we call them and say, hey we might -- we want to add one and when there's 250 rigs running country that's not, that's not hard. But to your point when the high tech rig start getting more and more hard to find, then Patterson tells us, don't worry, we've got a rig for you and that's kind of the way we do it.

In regards to the pipe, a pinch point there, same kind of thing. Forster Smith is our representative at B&L and we sit down and we talk about what we're doing for the next 3 months for the next 6 months, for the next year. And we will react accordingly. Same thing with the services with Chris and Cliff, Billy when they are contracting these frac crews, we look at what the drill schedule is for at least a year out. And that's how we kind of put that stuff together.

So, really when you think about the doubling of activity, year-over-year, you've been working on this like rolling 3-month, 6-month, 12 month almost maybe even 2 year plan to gear up to the 6-rig program as I think about it. So, there are these pinch points that are emerging, but you just kind of this rolling activity level that allowed you to add the 6?

I think from a planning standpoint, David that we tried to -- we try to think far enough ahead in terms of, I mean we scenario plan as you might expect, and it's like if this is -- if conditions are this way and the opportunity might present itself, what do we need to do to be ready for that. And likewise, if things go the other way, how do we need to plan our business so that we can react quickly in that way too. So I think we try to think through as much of it as we can. So, that we're prepared as much as we can be, it's just not pretty much, David, every bit of our business, we try to build a lot of optionality into, I mean it's just -- we typically have lots of different directions we can go, depending on what the environment is.

That's definitely helpful and congratulations, David, Matt, Billy and Van. And I was thinking about it. I don't think you can make retirement look too good for Joe to step out, but do your best.

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

Closing remarks is that, really thank all of you all for participating in this one. Saying again our standing invitation to please come see us if you're in the area and have breakfast or lunch or some sort of meeting, we like for you to get to know more of these young people who are really making a difference in our business and they were turning to more all the time for guidance and direction and recommendations on what we ought to be doing and thank them and everybody else and really thank you on the questions.

We believe going public has made us a better company and that every quarter and ever so often we're in front of you or talking to you, you're asking these questions, keeping us sharp, I often tell the story on the IPO word we get the idea for midstream there was on the IPO, when we kept being asked about how we getting our gas out of the Eagle Ford, we weren't having a problem, but by the questions we knew others were and we went back and re-recruited Gregg, rejoined there he is, he was missing from the start. I think he's trying to get out, but that's an example given with you all. You all have made us a better company and not only in ideas, but having to report every quarter has inspired us to do longer range planning, getting good people have found it's easier to get people to come to work with us because they know how we're doing. It's more transparent. So, we're excited by the 10 years and we look forward to the next 10 years, but really do appreciate you all and hope you all come to see us.

Thank you so much. Ladies and gentlemen, thank you for your participation today. This concludes the program. Have a great day.