BUSINESS COMBINATIONS

6 Months Ended

Jun. 30, 2023

Business Combination and Asset Acquisition [Abstract]

On April 12, 2023, a wholly-owned subsidiary of the Company completed the acquisition of Advance Energy Partners Holdings, LLC (“Advance”) from affiliates of EnCap Investments L.P., including certain oil and natural gas producing properties, undeveloped acreage and midstream assets located primarily in Lea County, New Mexico and Ward County, Texas (the “Advance Acquisition”). The Advance Acquisition had an effective date of January 1, 2023 and an aggregate purchase price consisting of (i) an amount in cash equal to approximately $1.61 billion (which amount is subject to certain customary post-closing adjustments) (the “Cash Consideration”) and (ii) potential additional cash consideration of $7.5 million for each month of 2023 in which the average oil price (as defined in the securities purchase agreement) exceeds $85 per barrel (all such payments for the 12 months in 2023, the “Contingent Consideration”). The Cash Consideration was paid upon the closing of the Advance Acquisition and was funded by a combination of cash on hand and borrowings under the Company’s reserves-based revolving credit facility (the “Credit Agreement”).

The Advance Acquisition was accounted for under the acquisition method of accounting as a business combination in accordance with Accounting Standards Codification Topic 805, Business Combinations (“ASC Topic 805”). Under ASC Topic 805, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values as of the respective acquisition date, with any excess purchase price allocated to goodwill. As the Company acquired 100% of the membership interests of Advance, the acquisition was treated as an asset acquisition for tax purposes.

The Company recorded the 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 unaudited condensed consolidated statements of operations. The fair value of the Contingent Consideration was $21.2 million at April 12, 2023. The fair value of the Contingent Consideration decreased by $15.9 million between April 12, 2023 and June 30, 2023, and this decrease was recorded as “Other income” for the three and six months ended June 30, 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 9 for discussion of the fair value hierarchy).

The preliminary allocation of the total purchase price for the Advance Acquisition is set forth below (in thousands). The Company anticipates that the allocation of the purchase price should be finalized during 2023 upon determination of the final purchase price adjustments.


Consideration	Allocation
Cash	$	1,608,427
Working capital adjustments	(8,405)
Fair value of Contingent Consideration at April 12, 2023	21,151
Total consideration given	$	1,621,173
Allocation of purchase price
Current assets	$	74,689
Oil and natural gas properties
Evaluated	1,362,533
Unproved and unevaluated	202,396
Midstream assets	63,644
Current liabilities	(73,763)
Asset retirement obligations	(8,326)
Net assets acquired	$	1,621,173

The fair value measurements of assets acquired and liabilities assumed are based on inputs that are not observable in the market and therefore represent Level 3 inputs. The fair value of oil and gas properties and asset retirement obligations were measured using the discounted cash flow technique of valuation.

Significant inputs to the valuation of oil and gas properties include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices, (iv) future plugging and abandonment costs, (v) estimated future cash flows, (vi) recent market comparable transactions for unproved acreage, and (vii) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates and are the most sensitive and subject to change.

Estimated production from the Advance wells averaged approximately 25,450 BOE per day during the first quarter of 2023 based upon Advance’s production records. The results of operations for the Advance Acquisition since the closing date have been included in the Company’s condensed consolidated financial statements for the three and six months ended June 30, 2023. The oil and natural gas production from Advance increased the Company’s revenues and net income for the period from April 12, 2023 through June 30, 2023 by $92.1 million and $40.3 million, respectively.

Pro Forma Information

The following unaudited pro forma financial information represents a summary of the condensed consolidated results of operations for the three and six months ended June 30, 2023 and 2022, assuming the Advance Acquisition had been completed as of January 1, 2022. The pro forma financial information is provided for illustrative purposes only and does not purport to represent what the actual consolidated results of operations or the consolidated financial position of the Company would have been had the Advance Acquisition occurred on the dates noted above, nor is it necessarily indicative of the future results of operations or consolidated financial position of the Company. Future results may vary significantly from the results reflected because of various factors.

The information below reflects certain nonrecurring pro forma adjustments that were directly related to the business combination based on currently available information and certain estimates and assumptions that the Company believes provide a reasonable basis for presenting the significant effects of the Advance Acquisition, including (i) the increase in depletion reflecting the relative fair values and production volumes attributable to Advance’s properties and the revision to the depletion rate reflecting the reserve volumes acquired, (ii) adjustments to interest expense as a result of the incremental borrowings necessary to finance the Advance Acquisition and (iii) the estimated tax impacts of the pro-forma adjustments. The pro forma financial information does not reflect the benefits of projected synergies, potential cost savings or the costs that may be necessary to achieve such savings, opportunities to increase revenue generation or other factors that may result from the Advance Acquisition and, accordingly, does not attempt to predict or suggest future results. Management cannot identify the timing, nature and amount of such savings, costs or other factors, any of which could affect the future consolidated results of operations or consolidated financial position of the Company.


	Three months ended June 30,				Six months ended June 30,
	2023		2022		2023		2022
	(In thousands, except per share data)
Total revenue	$	658,084	$	1,138,174	$1,354,640		$	1,871,007
Net income attributable to Matador Resources Company shareholders	$	166,174	$	490,951	$	356,681	$	756,239

Earnings per share:
Basic	$	1.39	$	4.16	$	2.99	$	6.41
Diluted	$	1.39	$	4.09	$	2.98	$	6.31