Business Combinations and Divestitures

12 Months Ended

Dec. 31, 2022

Business Combinations

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, subject to certain customary post-closing working capital adjustments, including adjusting for production, revenues, operating expenses and capital expenditures from August 1, 2021 to closing. In addition, the Company increased 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, was greater than $75.00 per barrel. The Company recorded this contingent consideration at fair value on the date of the business combination and recorded the change in the fair value in future periods as “Other income (expense)” in its consolidated statements of operations. The change in the fair value of the contingent consideration included in “Other expense” during the years ended December 31, 2022 and 2021 was $11.8 million and $1.5 million, respectively. During the year ended December 31, 2022, the Company paid $15.0 million in cash related to this contingent consideration. The remaining payment of $5.0 million was made in the first quarter of 2023. 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).

The allocation of the consideration given related to this business combination was as follows (in thousands), which the Company considered to be final as of September 30, 2022.


Consideration given			Allocation
Cash			$161,680
Working capital adjustments			(4,444)
Fair value of contingent consideration at December 14, 2021			6,718
Total consideration given			$163,954

Allocation of purchase price
Oil and natural gas properties
Evaluated			$139,312
Unproved and unevaluated			32,260
Accrued liabilities			(360)
Advances from joint interest owners			(6,865)
Asset retirement obligations			(393)
Net assets acquired			$163,954

On June 30, 2022, the Company acquired a cryogenic gas processing plant, three compressor stations and approximately 45 miles of natural gas gathering pipelines in Lea and Eddy Counties, New Mexico as part of the acquisition (the “Pronto Acquisition”) of a wholly-owned subsidiary of Summit Midstream Partners, LP that was subsequently renamed Pronto. This acquisition was also accounted for as a business combination in accordance with ASC Topic 805. In addition, the Company assumed certain takeaway capacity on a Federal Energy Regulatory Commission regulated natural gas pipeline. As consideration for the business combination, the Company paid approximately $77.8 million in cash, subject to certain customary post-closing purchase price adjustments. The pro forma impact of this business combination to revenues and net income for 2022 would not be material to the Company’s 2022 revenues and net income as reported.

The allocation of the consideration given related to this business combination was as follows (in thousands), which the Company considered to be final as of December 31, 2022.


Consideration given	Allocation
Total cash consideration given	$	77,828


Allocation of purchase price
Cash acquired	$	2,012
Property, plant & equipment	74,100
Accounts receivable	6,093
Other assets	296

Accrued liabilities	(4,673)
Net assets acquired	$	77,828

Joint Ventures

At December 31, 2022, 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, 2022, Five Point owned the remaining 49% of San Mateo. The midstream assets include (i) the Black River Processing Plant, (ii) 15 salt water disposal wells and associated commercial salt water disposal facilities and (iii) approximately 415 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 agreements 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 February 21, 2023, the Company had earned all of the potential $73.5 million in performance incentives. Five Point had paid $14.7 million in performance incentives in each of the first quarters of 2018, 2019, 2020 and 2021 and the remaining $14.7 million in performance incentives is expected to be paid during the first quarter of 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 through mid-2024, of which the Company has earned $62.2 million, plus additional performance incentives for securing volumes from third-party customers. During the years ended December 31, 2022 and 2021, Five Point paid $28.3 million and $33.9 million in these additional performance incentives. Both of these performance incentives are recorded when received, net of the $5.9 million and $3.6 million deferred tax impact to Matador for the years ended December 31, 2022 and 2021, respectively, in “Additional paid-in-capital” in the Company’s consolidated balance sheets.

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, 2022, 2021 and 2020, San Mateo distributed $89.5 million, $64.5 million and $47.4 million respectively, to the Company and $86.0 million, $62.0 million and $45.6 million, respectively, to Five Point. During the years ended December 31, 2022 and 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. San Mateo II was merged with and into San Mateo effective October 1, 2020.

Divestitures

During 2022 and 2021, the Company converted approximately $46.5 million and $4.2 million, respectively, of non-core assets to cash. These properties were primarily located in South Texas and Northwest Louisiana.