Business Combinations and Divestitures

12 Months Ended

Dec. 31, 2021

Business Combination

On December 14, 2021, the Company completed an acquisition of assets from a private operator. This acquisition was accounted for as a business combination in accordance with ASC Topic 805, which requires the assets acquired and liabilities assumed to be recorded at fair value as of the respective acquisition date. The Company obtained certain oil and natural gas producing properties and undeveloped acreage located in Lea and Eddy Counties, New Mexico, strategically located primarily within the Company’s existing acreage in its Ranger and Arrowhead asset areas.

As consideration for the business combination, the Company paid approximately $161.7 million in cash and will pay an additional $6.5 million, net of customary working capital adjustments, including adjusting for production, revenues, operating expenses and capital expenditures from August 1, 2021 to closing. In addition, the Company will increase the purchase price by $5.0 million for each quarter during 2022 in which the average oil price, as defined in the purchase and sale agreement, is greater than $75.00 per barrel. The Company recorded this contingent consideration at fair value on the date of the business combination and will record the change in the fair value in future periods as “Other income (expense)” in its consolidated statements of operations. The fair value of the contingent consideration increased between December 14, 2021 and December 31, 2021 by $1.5 million, which was recorded as “Other expense” for the year ended December 31, 2021. The Company used the Monte Carlo simulation method to measure the fair value of the contingent consideration, which has unobservable inputs and is thus classified at Level 3 in the fair value hierarchy (see Note 13 for discussion of the fair value hierarchy).

In addition, the Company acquired oil and natural gas production of approximately 3,500 BOE per day at the date of acquisition, which increased the Company’s revenues and net income for the period from December 15, 2021 through December 31, 2021 by $4.0 million and $3.2 million, respectively. The pro forma impact of this business combination to revenues and net income for the remainder of 2021 would not be material to the Company’s 2021 revenues and net income as reported.

The preliminary allocation of the consideration given related to this business combination was as follows (in thousands). The Company anticipates that the allocation of the consideration given should be finalized during 2022 upon determination of the final customary purchase price adjustments.


Consideration given			Allocation
Cash			$161,680
Working capital adjustments to be paid in 2022			6,500
Fair value of contingent consideration at December 14, 2021			6,718
Total consideration given			$174,898

Allocation of purchase price
Oil and natural gas properties
Evaluated			$139,312
Unproved and unevaluated			43,204
Accrued liabilities			(360)
Advances from joint interest owners			(6,865)
Asset retirement obligations			(393)
Net assets acquired			$174,898

Joint Ventures

At December 31, 2021, the Company owned 51% of San Mateo, a midstream joint venture with a subsidiary of Five Point Energy LLC (“Five Point”) in portions of Eddy County, New Mexico and Loving County, Texas. At December 31, 2021, Five Point owned the remaining 49% of San Mateo. The midstream assets include (i) the Black River Processing Plant, (ii) 14 salt water disposal wells and associated commercial salt water disposal facilities and (iii) approximately 370 miles of oil gathering and transportation pipelines, natural gas gathering pipelines and produced water pipelines. The Company operates San Mateo, and San Mateo is consolidated in the Company’s financial statements, with Five Point’s interest being accounted for as a non-controlling interest.

As part of the joint venture agreement with Five Point, the Company had the potential to earn two different sets of performance incentives. These performance incentives are recorded as additional contributions related to the formation of San Mateo as they are received. Beginning in 2017, the Company had the potential to earn up to $73.5 million in performance incentives related to the Company’s performance in its Rustler Breaks asset area in Eddy County and its Wolf asset area in Loving County over a five-year period, which in October 2020 was extended by an additional year to January 31, 2023. At December 31, 2021, the Company had earned $58.8 million of the potential $73.5 million in performance incentives and Five Point had paid $14.7 million in performance incentives in each of the first quarters of 2018, 2019, 2020 and 2021. The Company may earn up to the remaining $14.7 million in performance incentives until January 31, 2023. Beginning in 2019, the Company had the potential to earn up to $150.0 million in additional deferred performance incentives in its Stebbins area and surrounding leaseholds in the southern portion of its Arrowhead asset area (the “Greater Stebbins Area”) and Stateline asset area over the next several years, plus additional performance incentives for securing volumes from third-party customers. During the year ended December 31, 2021, Five Point paid $33.9 million in these additional performance incentives.

The Company dedicated to San Mateo its current and certain future leasehold interests in the Rustler Breaks and Wolf asset areas and acreage in the Greater Stebbins Area and Stateline asset area pursuant to 15-year, fixed-fee oil transportation, oil, natural gas and produced water gathering and produced water disposal agreements. In addition, the Company dedicated to San Mateo its current and certain future leasehold interests in the Rustler Breaks asset area and acreage in the Greater Stebbins Area and the Stateline asset area pursuant to 15-year, fixed-fee natural gas processing agreements (see Note 14).

During the years ended December 31, 2021 and 2020, San Mateo distributed $64.5 million and $47.4 million, respectively, to the Company and $62.0 million and $45.6 million, respectively, to Five Point. During the year ended December 31, 2021, neither the Company nor Five Point contributed cash to San Mateo. During the year ended December 31, 2020, the Company contributed $75.0 million and Five Point contributed $119.7 million of cash to San Mateo, of which $23.1 million was paid to carry Matador’s proportionate interest in San Mateo Midstream II, LLC (“San Mateo II”). Five Point agreed to carry a portion of Matador’s proportionate interest as part of the formation agreement for San Mateo II. The amount that Five Point paid to carry Matador’s proportionate interest in San Mateo was recorded in “Additional paid-in capital” in the Company’s consolidated balance sheets at December 31, 2020, net of the $4.8 million deferred tax impact to Matador related to this equity contribution. During the year ended December 31, 2019, the Company contributed $24.2 million and Five Point contributed $77.3 million of cash to San Mateo, of which $28.4 million was paid to carry Matador’s proportionate interest in San Mateo II and was recorded in “Additional paid-in capital” in the consolidated balance sheet, net of the $5.9 million deferred tax impact to Matador related to this equity contribution. In the first quarter of 2019, the Company also contributed $1.0 million of property to San Mateo II. San Mateo II was merged with and into San Mateo effective October 1, 2020.

Divestitures

During 2021 and 2020, the Company converted approximately $4.2 million and $4.8 million, respectively, of non-core assets to cash. These properties were primarily located in South Texas and Northwest Louisiana.