Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2020

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements, Basis of Presentation, Consolidation and Significant Estimates

The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) but do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 2, 2020 (the “Annual Report”). The Company consolidates certain subsidiaries and joint ventures that are less than wholly-owned and are not involved in oil and natural gas exploration, including San Mateo, and the net income and equity attributable to the non-controlling interest in these subsidiaries have been reported separately as required by Accounting Standards Codification (“ASC”), Consolidation (Topic 810). The Company proportionately consolidates certain joint ventures that are less than wholly-owned and are involved in oil and natural gas exploration. All intercompany accounts and transactions have been eliminated in consolidation. In management’s opinion, these interim unaudited condensed consolidated financial statements include all normal, recurring adjustments that are necessary for a fair presentation of the Company’s interim unaudited condensed consolidated financial statements as of September 30, 2020. Amounts as of December 31, 2019 are derived from the Company’s audited consolidated financial statements included in the Annual Report.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company’s interim unaudited condensed consolidated financial statements are based on a number of significant estimates, including oil and natural gas revenues, accrued assets and liabilities, stock-based compensation, valuation of derivative instruments, deferred tax assets and liabilities and oil and natural gas reserves. The estimates of oil and natural gas reserves quantities and future net cash flows are the basis for the calculations of depletion and impairment of oil and natural gas properties, as well as estimates of asset retirement obligations and certain tax accruals. While the Company believes its estimates are reasonable, changes in facts and assumptions or the discovery of new information may result in revised estimates. Actual results could differ from these estimates.

Revenues

The following table summarizes the Company’s total revenues and revenues from contracts with customers on a disaggregated basis for the three and nine months ended September 30, 2020 and 2019 (in thousands).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Revenues from contracts with customers	$	221,825	$	264,498	$	593,529	$	715,218
Lease bonus - mineral acreage	—		1,711		4,062		1,711
Realized (loss) gain on derivatives	(5,406)		3,346		49,571		7,781
Unrealized (loss) gain on derivatives	(13,033)		9,847		(9,271)		(29,715)
Total revenues	$	203,386	$	279,402	$	637,891	$	694,995


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
Oil revenues	$	150,620	$	198,302	$	414,379	$	541,590
Natural gas revenues	38,484		31,075		91,406		92,116
Third-party midstream services revenues	19,363		15,257		49,861		41,454
Sales of purchased natural gas	13,358		19,864		37,883		40,058
Total revenues from contracts with customers	$	221,825	$	264,498	$	593,529	$	715,218

Property and Equipment

The Company uses the full-cost method of accounting for its investments in oil and natural gas properties. Under this method, all costs associated with the acquisition, exploration and development of oil and natural gas properties and reserves, including unproved and unevaluated property costs, are capitalized as incurred and accumulated into a single cost center representing the Company’s activities, which are undertaken exclusively in the United States. Such costs include lease acquisition costs, geological and geophysical expenditures, lease rentals on undeveloped properties, costs of drilling both productive and non-productive wells, capitalized interest on qualifying projects and certain general and administrative expenses directly related to acquisition, exploration and development activities, but do not include any costs related to production, selling or general corporate administrative activities. The Company capitalized approximately $7.6 million and $8.3 million of its general and administrative costs and approximately $2.0 million and $2.7 million of its interest expense for the three months ended September 30, 2020 and 2019, respectively. The Company capitalized approximately $23.9 million and $25.1 million of its general and administrative costs and approximately $5.2 million and $7.0 million of its interest expense for the nine months ended September 30, 2020 and 2019, respectively.

The net capitalized costs of oil and natural gas properties are limited to the lower of amortized costs less related deferred income taxes or the cost center “ceiling.” The cost center ceiling is defined as the sum of:

(a)the present value, discounted at 10%, of future net revenues of proved oil and natural gas reserves, reduced by the estimated costs of developing these reserves, plus

(b)unproved and unevaluated property costs not being amortized, plus

(c)the lower of cost or estimated fair value of unproved and unevaluated properties included in the costs being amortized, if any, less

(d)income tax effects related to the properties involved.

Any excess of the Company’s net capitalized costs above the cost center ceiling as described above is charged to operations as a full-cost ceiling impairment. The need for a full-cost ceiling impairment is required to be assessed on a quarterly basis. The fair value of the Company’s derivative instruments is not included in the ceiling test computation as the Company does not designate these instruments as hedge instruments for accounting purposes.

The estimated present value of after-tax future net cash flows from proved oil and natural gas reserves is highly dependent upon the quantities of proved reserves, the estimation of which requires substantial judgment. The Company’s oil and natural gas reserves estimates are prepared by the Company’s engineering staff in accordance with guidelines established by the SEC. Under these guidelines, oil and natural gas reserves are estimated using then-current operating and economic conditions, with no provision for price and cost escalations in future periods except by contractual agreements. Future net revenues are calculated using prices that represent the arithmetic averages of first-day-of-the-month oil and natural gas prices for the previous 12-month period, and the guidelines further dictate that a 10% discount factor be used to determine the present value of future revenues. For the period from October 2019 to September 2020, the average oil and natural gas prices were $39.71 per barrel and $1.97 per MMBtu, respectively. In estimating the present value of after-tax future net cash flows from proved oil and natural gas reserves, the average oil and natural gas prices were adjusted by property for quality, energy content, transportation and marketing fees and regional price differentials.

Using average commodity prices, as adjusted, to determine the Company’s estimated proved oil and natural gas reserves at September 30, 2020, the Company’s net capitalized costs less related deferred income taxes exceeded the full-cost ceiling by $189.1 million. As a result, the Company recorded an impairment charge of $251.2 million to its net capitalized costs and a deferred income tax benefit of $62.1 million at September 30, 2020. Using average commodity prices, as adjusted, to determine the Company’s estimated proved oil and natural gas reserves at June 30, 2020, the Company’s net capitalized costs less related deferred income taxes exceeded the full-cost ceiling by $243.9 million. As a result, the Company recorded an impairment charge of $324.0 million to its net capitalized costs and a deferred income tax benefit of $80.1 million at June 30, 2020. These charges are reflected in the Company’s interim unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2020. For the three and nine months ended September 30, 2019, the Company’s net capitalized costs less related deferred income taxes did not exceed the full-cost ceiling. As a result, the Company recorded no impairment to its net capitalized costs for the three and nine months ended September 30, 2019.

Earnings (Loss) Per Common Share

The Company reports basic earnings attributable to Matador shareholders per common share, which excludes the effect of potentially dilutive securities, and diluted earnings attributable to Matador shareholders per common share, which includes the effect of all potentially dilutive securities unless their impact is anti-dilutive.

The following table sets forth the computation of diluted weighted average common shares outstanding for the three and nine months ended September 30, 2020 and 2019 (in thousands).


	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
Weighted average common shares outstanding
Basic	116,155	116,643	116,036	116,541
Dilutive effect of options and restricted stock units	—	333	—	453
Diluted weighted average common shares outstanding	116,155	116,976	116,036	116,994

A total of 2.5 million options to purchase shares of Matador’s common stock were excluded from the diluted weighted average common shares outstanding for both the three and nine months ended September 30, 2020, respectively, because their effects were anti-dilutive. Additionally, 0.7 million and 0.6 million restricted shares, which are participating securities, were excluded from the calculations above for the three and nine months ended September 30, 2020, respectively, as the security holders do not have the obligation to share in the losses of the Company. A total of 2.5 million and 2.7 million options to purchase shares of Matador’s common stock were excluded from the diluted weighted average common shares outstanding for both the three and nine months ended September 30, 2019, respectively, because their effects were anti-dilutive.