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Matador Reources (NYSE:MTDR)
Q4 2019 Earnings Call
Feb 26, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, ladies and gentlemen, and welcome to the fourth-quarter and full-year 2019 Matador Resources Company earnings conference call. My name is Tawanda, and I'll be serving as the operator for today. [Operator instructions] We will facilitate a question-and-answer session at the end of the company's remarks. As a reminder, this conference is being recorded for replay purposes.

The replay will be available on the company's website through March 31, 2020, 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.

Mac Schmitz -- Capital Markets Coordinator

Thank you, Tawanda, and good morning, everyone, and thank you for joining us for Matador's fourth-quarter and full-year 2019 earnings conference call. Some of the presenters today will reference certain non-GAAP financial measures regularly used on 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 quarterly report on Form 10-Q. Finally, in addition to our earnings press release, I would like to remind everyone that you can find a short slide presentation summarizing the highlights of our fourth quarter and full-year 2019 earnings release on our website on the Events and Presentations page under the Investor Relations tab. And with that, I would now like to turn the call over to Mr.

Joe Foran, our chairman and CEO. Joe?

Joe Foran -- Chairman and Chief Executive Officer

Thank you, Mac, and good morning to everyone on the line, and thank you for participating in today's call. We appreciate your time and interest in Matador very much. I'm going to forego the usual introduction of the executive committee, who are in the room with me today and other significant people at Matador, in order to make a couple of points, and then we'll have more time for questions. And I'd like to begin simply by thanking the staff, shareholders that with their help and support, we can report to you that we've, very simply, had the best quarter we've ever had in fourth quarter, and we've had the best year we've ever had in 2019 despite the headlines.

And now two months into 2020, I can say that 2020 is shaping up to be even better. And 2021, as I've noted, for the first time, looks like we'll reach the free cash flow and continue the achievements in the field and with the midstream and that 2021 will be the next best year. Several points I just want to make. It's not a nodal claim that 2020 is going to do good and in 2021 we'll be clear that we're reaching that free cash flow point subject to the opportunities.

And you can mark it this year a number of catalysts. First, in late March and early April, we'll be bringing the six Rodney Robinson wells online and our Antelope Ridge that will be very important, and I think very productive wells. Then in June, we'll have the Ray and Leather Neck. June and July, the Ray and Leather Neck wells coming online will be the second important catalyst.

And then you get to September, and we'll have our big birth so to speak, from the Stateline wells. We'll have 13 of them coming online in September, and you begin to see the full impact, as well as our second San Mateo Project and plan will be ready to go in September. It's currently online -- I mean, it's on time, on budget and which will enable us to start processing 0.5 billion cubic feet of gas per day, doubling our capacity. So naturally, we are all very excited by that, and this is the result of a two-year strategic plan that based on the longer laterals and associated operating and capital efficiencies from these longer laterals, and it's obvious that you save money, but you also pick up extra productive zone and these are delivering superior results.

And it was a turning point when we were able to secure the leases and block up the acreage and the other parts so that we could do these two-mile, greater-than-one-mile laterals. Next year, 84% of our drilling will be wells that will have laterals longer than one mile, 74% of which will be the longer two miles or in a few cases, 2.5 miles. So you can mark your calendars. If we attain those goals that I've mentioned, you'll see it will become even clearer that the free cash flow is around the corner, subject to those opportunities.

We just didn't want to announce that in specific terms until we had felt very, very confident that we could do what we said we were going to do, and that's an important part of our operating strategy is to do what we say we're going to do. I know that sounds corny, but it means something to us. And when you look at our steady rise in our production, our exit rates, think about in 2016, which was one of the most difficult years, we exited with growth at 29,965 barrels of oil a day. And today, we exited in December at 73,749 barrels of oil a day.

And when you consider on the day we went public back there in February of 2012, we were only making 400 barrels a day. So in seven years, we feel we've come a long way from 400 barrels a day to over 73,000 barrels a day, and we have further progress inside. A shoutout to all of our different groups at Matador for turning in exceptional jobs from operations to marketing in midstream, to the accounting groups, to the land groups. So their break-by-brick strategy has all resulted in this consistency that we think we've delivered for shareholders that we've met or exceeded industry projected guidance now 22 straight quarters.

We don't see anything stopping that, which leads me to my final point that these leases that allow us to drill these longer laterals have helped us reach a different level, and our midstream rate going forward has helped build a thriving business out there. And it now allows us to look at -- consider noncore assets and making transactions on that that would allow us to further accelerate our growth and perhaps start a mineral business, much like what we've done with San Mateo and a JV partner. This strategic plan that we put in place and have carried out, leads us to how we're going to sustain our growth. And you'll see the seeds being planted to go into new asset areas to continue the better execution and continuing to work some of the best rock in the Delaware, and so we're very excited and still operating under the notion.

Again, it sounds corny, but I think it works of having profitable growth at a measured pace and put in first the notion, let's create some value for shareholders. And even if it makes a little more difficult for us in the short term, but the long-term value of good rock, good people and a good operating plan, that strategy has been working for us and we expect to continue. David, did I leave anything out?

David Lancaster -- Executive Vice President and Chief Financial Officer

No, Joseph. I think you've covered it. I think it's -- we continue to be very excited about the plan we put in place last year. I think everybody can see that we've executed very well against the plan, probably a little farther along at this point than we thought we would.

But I think things that we had laid out for our investors at this time a year ago that we would be drilling at the Rodney Robinson area by the fall and that we would be at the Stateline by the end of the year, have all come to pass. And I think all of us here on the team are very excited about the year ahead and the things that we have to accomplish. And we've said we were going to build these two businesses, the E&P business and the midstream business, side by side. And I think that's exactly what we're doing.

And we're looking forward to achieving the milestones that we've laid out, and particularly when the expansion of San Mateo and the Stateline line production come on at the latter part of the year. So that's what we're focused on and looking forward to accomplishing that.

Joe Foran -- Chairman and Chief Executive Officer

All right. So we'll take the questions. Operator?

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Scott Hanold with RBC Capital Markets. Your line is open.

Scott Hanold -- RBC Capital Markets -- Analyst

Appreciate all the updates, pretty constructive, especially setting a free cash flow timeline. Can you give us a little bit of color as you look into that period of potentially hitting that in maintaining a free cash flow neutral position from that point, or would you ever move into the strategy of now more of maintaining activity and generating free cash flow for other options?

David Lancaster -- Executive Vice President and Chief Financial Officer

Hey, Scott, it's David. It's an interesting question. I think in some ways, I would say maybe the best answer I can give you is kind of one step at a time. I think that we are and have been for the last year looking toward how we would get best to that point where we felt like we could achieve and continue to generate free cash flow into the future.

I think that we feel like we're solidly on that path and that next year can be an inflection point for us, but I think that that's what we're going to focus on over the next 12 to 18 months. And as we get closer, we can give some additional thought to how we want to use some of that cash flow. I think, as you know, we don't see ourselves as an opportunity-constrained company. So I think that we always feel that there are good ways for us to put money to work.

The current environment has -- we've been a little constrained in terms of the capital and what we could do, so we're really focused on the six-rig plan. I don't think we have any immediate plans thinking through into next year to increase the rig count. I think we feel like we can achieve these goals with staying with the six-rig count that we have. And I think if you look at what we did in 2019 in terms of the improvements in the capital and operating efficiency, I think we already feel like we'll make more strides in that way in 2020.

And as we travel through the year, I think we'll have an even better outlook for 2021, but I think things look pretty promising, and we're excited about the days ahead.

Scott Hanold -- RBC Capital Markets -- Analyst

I appreciate that color. And you all have a pretty impressive entry to exit growth rates that really sets you up pretty good for 2021. And in that context, David, where you said, generally speaking, you're maintaining six rigs into next year is kind of a high-level perspective. And what do you think growth looks like in 2021? Obviously, you made the point that you think it's going to be stronger than 2020, but can you provide us a little bit of context on what that might look like?

Joe Foran -- Chairman and Chief Executive Officer

Scott, I would say this. A lot of it depends, what is the processed oil in 2021, what is the American economy doing in 2021 and what has changed about our industry over these next two years. I think we're in something that's -- there's great change that went on around the world. And we got to look at those circumstances, and that's why while we're looking at it from a number of different perspectives, it's important to take one step at a time.

We know we're doing that. It's not that we're going to not think about anything until 2021. It's a lot of uncertainty, and there's no sense in making an announcement, "Oh, yes, we're going to do this, do that." That's almost two years away, and a lot can happen in two years. We will have more definite and clear plans or announcements on that as year 2021 approaches, but those are under study right now.

And I do think we'll maintain the six-rig program that's working pretty well for us, and we're optimistic about the opportunity. So we'll have more on that as the year goes along, so give us a little time to see how circumstances shape up.

Scott Hanold -- RBC Capital Markets -- Analyst

I appreciate that. We'll do. And congratulations.

Joe Foran -- Chairman and Chief Executive Officer

Thanks, Scott. We appreciate it.

Operator

Thank you. Our next question comes from the line of John Freeman with Raymond James. Your line is open.

John Freeman -- Raymond James -- Analyst

Good morning, guys.

Joe Foran -- Chairman and Chief Executive Officer

Hey. Good morning, John.

John Freeman -- Raymond James -- Analyst

Good morning. So I'm just -- when I think about just -- you've had a terrific track record of beating all your production guidance over the years. And I'm just trying to get a sense of when we think about such a dramatic step-up from only 8% of the wells last year that were two-mile or longer laterals versus the 74% this year, just sort of how we should think about how you incorporate kind of the uplift from the two-mile laterals in your production guidance given the limited data set in '19 from those type of wells and your just typical conservatism? Just any way to kind of think about how you go about budgeting with such a dramatic change in the wells.

David Lancaster -- Executive Vice President and Chief Financial Officer

Yes. Hi, John, it's David. Well, I think it's a -- I think what we've done, of course, is done a lot of looking at not only the few wells that we've drilled but also wells that have been drilled by others throughout the basin to get an idea as to what the expectations would be. I think that we have generally are of a mind that from the standpoint of EUR, whether it's field preferred or how we want to look at it, that those things seem to be pretty close to linear, I think.

And so we feel like we'll see that from an EUR standpoint. I think we've said in the past that we have typically seen and think that it bears out. When you look at other wells as well that you probably tend to have a little less of an initial rate. It's certainly not a two times kind of initial rate, and that probably tends to be a little flatter as these wells begin to clean up.

And I think that's certainly been the case like you take the Jeff Hart wells, for example, that we did in the third quarter in Antelope Ridge. That's absolutely what happened there. Those wells maintained a fairly flat or low decline for the first four, five months, six months of their life. In fact, I think even the Second Bone Spring Well inclined a little bit as it continued to clean up.

So I think that that's the way that we've approached it, is to try to forecast the wells in these areas like the Rodney Robinson or the Stateline in that way, and we'll see what happens. And as we have more actual information from our own wells, we'll modify things accordingly, if we need to, but that's probably the best answer I can give you in terms of how we've approached it.

Matt Hairford -- President and Chair of the Operating Committee

Yes. John, this is Matt. I'll just tag on to what David said there in regards to the scheduling for 2020 and these longer laterals. While we didn't, on a percentage basis, drill -- most of the wells were shorter laterals in the past.

We have, at present, well north of 20, the two-mile laterals that we have drilled and cased and get another 10 or so in progress, and we've successfully completed about half of those, and knock on wood, we're having some good success there. I think one of the things that we did in preparation for these two-mile laterals, it's really paying off as these rig modifications that Billy and his team did, including the high-torque top drives and the big pumps and the high-torque drilling systems that really started to pay off. One example is here, just recently, we drilled well over 4,000 foot of lateral in 124-hour period, so I think the team is off to a really good start. The MAXCOM team is rolling in there, too, and that 4,000-foot, it's actually closer to 4,100-foot that we drill in that 124-hour period.

100% of that was done in zone, so the drilling team continues to make great efficiencies. Chris Calvert and Cliff Humphreys on the completion side. They're doing the same thing there. We've got built into the plan these efficiencies for drilling or drilling and completing these multi-well pads, and so I think the team is really off to a good start on these longer laterals.

Joe Foran -- Chairman and Chief Executive Officer

Billy, go ahead.

Billy Goodwin -- Executive Vice President and Chief Operating Officer, Drilling, Completions, and Production

Also in the MAXCOM room and Patrick Walsh in geology, using the big data technology, working with our non-op group. We've also been watching others go out and drill two-mile laterals or partners and all. So we've been able to see the good and bad and what's going on there, and they've been able to use that to also help us from running into those same little bumps along with our experience with over 20 two-mile laterals now as well.

Brad Robinson -- Executive Vice President of Reservoir Engineering and Chief Technology Officer

John, this is Brad. I'll just add one piece. These are conversations about the uplift that you referred to that we have on a regular basis with Netherland & Sewell, our reserves auditors. And so we look at that very carefully.

We look at, as David mentioned, an analysis of all the surrounding wells. We're doing statistics, EUR distributions and things like that. And we come to an agreement with our reserves auditors on what those are because they vary. As you can imagine, Bone Springs is different than the Wolfcamp A, which is different than the Wolfcamp B, and so we look at that very carefully.

John Freeman -- Raymond James -- Analyst

Thanks for all that info. And then just the follow-up question. I appreciate the commentary and details you all provided on the ESG front in the release and with what's going on with the additional investments at San Mateo, the large-diameter oil pipe that will be operational late summer. Can you give us a ballpark idea of how much oil will be on pipe at the end of the year relative to the 55% that's transported via pipe at the end of '19?

David Lancaster -- Executive Vice President and Chief Financial Officer

I don't know if I know the exact number, John. I think that certainly, we would expect that right now, essentially, everything that comes from Rustler Rigs and from Wolf is on pipe. Everything from Stateline will be on pipe. Everything at Stebbins at that point will be on pipe from the greater Stebbins area.

I believe that would only leave maybe a little bit of our production, which is a fairly small volume up in the Arrowhead area, and that would be maybe still being trucked. And there might be some in Rustler Breaks, although we're working on options to get more of that on pipe as well. I think it'd be fair to say that we could probably be between 70% and 75% of the oil on pipe by the end of the year.

Matt Hairford -- President and Chair of the Operating Committee

And John, this is Matt. I think one other thing that's important there is the amount of water that we'll have on pipe. So where we've got these big drilling activities at Stebbins and Stateline and Rodney Robinson and other places, we've got everything set up where we can put most, if not all, that water on pipe. So we'll be well north of 90% for 2020 that we'll have on water on pipe as well.

David Lancaster -- Executive Vice President and Chief Financial Officer

And I think we're looking forward into 2021, John, those numbers should increase as well. So I think we feel that we'd have the potential to be better than 90% on pipe in 2021.

John Freeman -- Raymond James -- Analyst

Thanks, everyone. Congrats on the quarter.

David Lancaster -- Executive Vice President and Chief Financial Officer

Thanks, John.

Joe Foran -- Chairman and Chief Executive Officer

Thanks, John. One other thing I'll just mention while we're on this ESG topic is we've always had an active ESG program. It's getting renewed focus, and of course, we're trying to continue to step it up. I'd also like just to note that Billy and his operations group have logged zero lost time accidents since 2017, and no employee injuries have been recorded since 2014.

So kudos to Billy and his group.

Operator

Thank you. Our next question comes from the line of Neal Dingmann of SunTrust. Your line is open.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Good morning, Joe and team. Joe, my first question centers on your Stateline area. It sounds like the plan now is to drill even more initial wells in the play before completing all of them shortly. And I'm just wondering, is this increased plan result of new confidence you all have in the play with the increased multizone development, or is there anything else we can read into this?

David Lancaster -- Executive Vice President and Chief Financial Officer

This is David, Neal. I think that what we decided as a team, what the technical team that works at Stateline had put forward for consideration was the fact that we feel strongly that it would be best to drill the Wolfcamp A-XY and the Wolfcamp A lower, sort of the greater Wolfcamp A formation and to sort of co-develop that, if you will. I think we have more concerns about, if we have any with regard to drainage impacts or shut-in impacts or things as we go horizontally across display as opposed to -- or this acreage that's opposed to vertically. And so although we always knew we were going to drill the first nine wells, the team came to us and suggested that we ought to bring a couple of the other rigs down and drill out the remaining -- the Wolfcamp A-XY and in lower locations, which was four additional locations on the boroughs wells and complete all those at the same time.

That seemed like quite a great idea to us, and so that's what we incorporated into the plan. And so it's just an effort for us to -- it's just sort of consistent with our philosophy about how to develop this asset area in the most prudent way possible to make us the most money possible. And this is what we thought made a lot of sense. And so as a result, that's what we're going to do, and that's why you saw the increase in the initial well count from boroughs being 13 instead of nine in September.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Very good. And then my second question focuses on San Mateo. You all suggested in the release that the facilities expansion of last year's initial footprint should be completed by late summer, and I know John was kind of alluding to part of this. I'm just wondering, after this point, Joe, do you all foresee a material amount of third-party business in addition to, obviously, Matador benefiting from this?

Joe Foran -- Chairman and Chief Executive Officer

Well, yes. Neal, the third party is very important, and the team has done a good job of developing relationships with quality companies out there to provide third-party services, and that's worked very well. I mean, we feel like we really have some very strong companies that are long term and are the kind of people that you really want to work with and, importantly, can pay their bills. The second thing, on building the relations with them what's placed us is that virtually all of them have increased their business with us since the time of the first contract.

So all those relationships in the San Mateo had been expanding, which I think bodes well going into the future. But our guys have been hitting the streets and continuing to develop the relationships and look for additional business, and that's why the plants grown from its original output, taking care of what we had in Rustler Breaks to something is going to be 0.5 billion cubic feet of gas a day. And the marketing group has been working hard to develop options and interconnect points and working out deals with other companies that are downstream. So it's really worked and then a shout out to our partner, Five Point, has really contributed to this and help make everything work.

And we appreciate their point of view and the suggestions they've made operationally and financially, and I think that has also accelerated the growth.

Matt Hairford -- President and Chair of the Operating Committee

Neal, this is Matt. Just to add to what Joe said there, I think one of the things that we take a lot of comfort in is when we do these expansions for going all the way back to when we first started the midstream business, they've always been opportunity based. We've never done the build and they will come model. I think with San Mateo II, what we've done here is expanded this business based on volumes that the Matador can and will provide, and that makes the economics work.

But if you're looking at a map, we're going 12 to 15 miles to the north and about 25 miles to the south with this expansion. And along those paths, there's a lot of great rock, a lot of good operators are going to drill good wells. So I think the challenge for the San Mateo team, and I think they're going to respond to this challenge very well is to add some third-party volumes along that path, which will make the economics even better.

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Thanks, guys. Look forward to all the activity.

Matt Hairford -- President and Chair of the Operating Committee

Thank you, Neal.

Joe Foran -- Chairman and Chief Executive Officer

Thanks, Neal.

Operator

Thank you. Our next question comes from the line of Sameer Panjwani with Tudor, Pickering, Holt. Your line is open.

Sameer Panjwani -- Tudor, Pickering, Holt & Co. -- Analyst

Good morning, guys. So last quarter, you highlighted getting below 1,000 foot of D&C in Antelope Ridge. And just wanted to see if you had an updated number for leading-edge cost. I'm just trying to see how to maybe frame potential downside to the 2020 expectation of $1,025 a foot.

David Lancaster -- Executive Vice President and Chief Financial Officer

Well, again, I think – Hi, Sameer, it's David. I think that the $1,025 that we put out there is already down 3%, 4%, I think, from what we had in the fourth quarter. It does reflect what we think will be some additional efficiencies and cost savings in 2020. So I think that when you think about that number being a little over $1,000 a foot, I think you have to think of it also in terms of kind of where the wells come from.

If you're a Wolfcamp well, you're probably a little more expensive on a cost-per-foot basis than if you're a Second Bone Spring well. I think that a couple of the wells that we highlighted last week is getting or last quarter, excuse me, as getting below $1,000 a foot where the Second and Third Bone spring wells. And so I think that we'll see a little bit of a -- when you just kind of put all that together, it averages out to a little over $1,000 a foot, but there certainly will be, I think, wells that we drill in the Bone Spring that will be below $1,000 a foot. On the flip side, there will probably be wells in the Wolfcamp that will be a little higher than that.

But we will continue to work diligently, I know, throughout the course of the year to try to bring those costs down further.

Sameer Panjwani -- Tudor, Pickering, Holt & Co. -- Analyst

OK. OK, that's helpful. And then on San Mateo, things definitely look to be progressing well operationally. But wanted to get updated thoughts on how you think about the value of this asset? I know you've talked about maybe a double-digit multiple over time here.

What we've seen from recent transactions is somewhere closer to like a mid- to high single digits, so I wanted to see if you had any updated thoughts there.

Joe Foran -- Chairman and Chief Executive Officer

Sameer, I'm sorry, this is Joe. Could you kind of rephrase that question just a little slower? I was trying to write it down as we went.

Sameer Panjwani -- Tudor, Pickering, Holt & Co. -- Analyst

Yes, sure. So on San Mateo, I think you guys have talked about 10 times or maybe higher on the multiple side in an eventual monetization, but what we've seen more recently in the market has been in that mid- to high single-digit EBITDA multiple for Permian assets. And so I wanted to see if you guys had any updated thoughts on potential valuation or the thought process there had evolved given what we've seen in the market recently.

David Lancaster -- Executive Vice President and Chief Financial Officer

Yes, Sameer. I think that we -- I'd say two things. Number one, I think we still probably tend to value the asset at about a 10 times multiple, that I think there's still transactions that go for that. There probably have been some that have been less.

There's probably been some that have been more. One thing is for certain. I don't think that today, we're looking to monetize San Mateo, so that's going to be a discussion probably for down the road, and I don't know what the market will be at that point. But I think, again, what we're most focused on for 2020 is to complete the build-out of the expansion that we started a year ago, which is going very well, going on time, on budget.

And I'm confident that we're going to have some very valuable new assets in the ground, come the latter part of this year, including two large trunk lines, a 200 million a day expansion in capacity to our processing capabilities and additional local oil, gas and water gathering, as well as a very nice oil transportation pipeline coming from the Stebbins Area down to our existing Rustler Breaks infrastructure. So I think there's a lot of very valuable assets being created by San Mateo and that they are going to contribute greatly to the future of Matador, and at some point, if we look to monetize those assets, I think that will be more of a discussion as to what multiples are at that point. It seems a little premature for us to be overly concerned about that at this point.

Matt Hairford -- President and Chair of the Operating Committee

Yes. Sameer, this is Matt. I think at San Mateo -- I've got my San Mateo hat on me. I think we're a bit unique in that space in regards to, number one, we've got assets, as David is saying, that are new.

So water disposal wells are new. The facilities are new. The plants are new. All the stuff is just a few years old at best.

I think, secondly, this third-party base that the team has built up in this 30% to 40% range on San Mateo I is a nice spot for us to be in. And like I said, you've heard just a little bit earlier, I think we'll add third party to San Mateo II as well. I think also the strength of the anchor tenant at San Mateo, I'll take a lot of comfort that it's Matador and that Matador continues to execute on their plan and the way that they said that they're going to execute, and they're going drill the wells and provide the volume. So I think that absolutely does warrant a little bit better multiple.

Joe Foran -- Chairman and Chief Executive Officer

The last thing, Sameer, I'd just say that in evaluating the multiple, there's other factors that, is the acreage dedicated or is it interruptible, whether it's the nature of the commitment. And then what other options do you have on the interconnect, do you have an outlet for the NGLS, and those are all factors that weigh in on that multiple, so it's more a complex question. But right now, we feel we're as well-positioned as any. And the last thing is just the operational advantage to Matador of having, in the past, ready to hook up, so you're not flaring when you're ready to bring the wells on and the different options that it affords.

So you have to wait and see. Multiples vary according to these special factors. But I think if anybody considers this, they got to appreciate that this has been built in the right way and they're getting quality assets and we'll wait. Again, we're opportunistic and would like for an opportunistic time, but I think David and Matt said it very well.

Operator

Thank you. Our next question comes from the line of Jeff Grampp with Northland Capital Markets. Your line is open.

Jeff Grampp -- Northland Capital Markets -- Analyst

Good morning, guys. I was wondering kind of sticking on some of the more complementary assets with Matador. The minerals, kind of Royalty side, I think the release mentioned potential sale or joint venture type of structure. I was just kind of wondering, is that still, I guess, a potential goal or objective for you guys that's actively being evaluated? Or is that a more kind of passive approach? Or just, I guess, hoping to kind of characterize how you kind of view any potential transactions for the minerals business in 2020.

Joe Foran -- Chairman and Chief Executive Officer

Yes. Jeff, we have a saying around here, "We always reserve the right to get smarter." But presently, it's active consideration because we see an opportunity if we could find a strategic JV partner to start a business, much like what we've done in the Midstream, because we know these areas, we've got the data, we operate in the wells, we control the drill shares with some. It looks like it'd be a good opportunity for a JV and -- much like we did with Five Point, where you have a partner and you have a go-forward and the notion is to build a mineral business. And you don't have to be -- but we're open to other ideas, but we have a set of minerals.

We could sell them part of that and then go forward and buy in these areas we know we're going to drill and there is good rock. And to add to that, while getting a more accelerated rate of return from our E&P, minerals are more long term and get a bigger multiple. So we see that as a basis for a win-win, and things have worked out real well in midstream on that so you have a similar comp structure. Now we're open to other ways to do it, but we were thinking if we could do that, that would be attractive.

And we've got a go-forward plan that puts us in some of the best rock, and we'd like to add to what we have and take advantage of what we have to address, to mitigate the outspend plan, as well as to generate more cash flow. David, I don't know if I said that right, but that's a general -- I will say, that's the general idea but open to other ways to do it. Matt?

Matt Hairford -- President and Chair of the Operating Committee

No, I think you said it well, Joe. I think it's an asset that has a lot of optionality to it that you can sell a part of it, keep a part of it. There's just a number of transactions that you can do with it. And I think as we typically do, we're going to look for the right transaction with the right people.

Joe Foran -- Chairman and Chief Executive Officer

Does that answer your question, Jeff?

Jeff Grampp -- Northland Capital Markets -- Analyst

That's perfect. That sounds good. Looking forward to it. And then, obviously, pretty volatile start to the year here.

I know you guys are never ones to have a knee-jerk reaction. But can you just talk kind of sensitivity, I guess, in terms of activity levels in 2020? And if we see $45 or pick a number for a sustained period, just talk about, I guess, your all's comfort level with either keeping the six rigs or what that sensitivity could be if you wanted to kind of pair it back at all.

Joe Foran -- Chairman and Chief Executive Officer

Jeff, that's a very fair question. The first thing I always start out on the question like that is it's not a single variable. What is the price of oil? You got to look at also what you get for that are the cost? Does the cost come down proportionately, and that has a big determination because you make money a lot less than $50 as long as costs come down proportionately, and look at your opportunities, that with volatility, that's another reason why we hedge to try to protect ourselves and about 45%, approximately, maybe a little more, is hedged on the oil side. So we think we're pretty well protected for 2020, and we'll see where it goes from there.

And as far as the rigs go, we have six rigs, but these are on short-term contracts and that we have a couple of rigs. Billy, correct me if I'm wrong, it could be released on 60 or 90 days to see if worse came to worst.

Billy Goodwin -- Executive Vice President and Chief Operating Officer, Drilling, Completions, and Production

That's right. We keep some of our rigs on a longer-term basis and some of the shorter, and it depends on what we're doing with the rig. Like Matt mentioned earlier, we've beefed up some of the rigs with even more equipment. And as we're going through doing that, we keep changing the term on the rigs but adding third time with high-torque top drive and sowing this drill more efficiently and be better at these two-mile laterals.

Joe Foran -- Chairman and Chief Executive Officer

And the last thing, Jeff, is consistently through time, I've been doing this 36 years. And consistently through time, you make your best rates of return, your most money from wells drilled in these more turbulent, difficult times because if all goes up $1, $0.25 of that generally goes to the landowner, and only 75% goes to your bottom line. On the other hand, for every dollar of cost savings, you get the whole dollar going to your bottom line. So when you look back over time, your most thoughtful wells are generally drilled in these more difficult times.

Now that doesn't mean you just load up, we would double our rig count, but it does mean we don't panic and overreact to short-term period of low prices. We just move ahead cautiously in a measured pace, keeping our balance sheet in mind to be sure we don't get over the skis, but it's important to keep going forward. And also, with your staffing, if we were to cut our rigs in half, a lot of our best people would leave. And so what has been working for us is strategy that I mentioned at the first of the conversation was to keep going.

We thought six rigs was the right size for our cash flow, and it seems to be working out that way because that line of sight is now visible to the free cash flow. And by staying with the program and drilling the good wells that we had and had the growth, our cash flow is continuing to grow, and we're now in a position to see free cash flow. And if we make a deal on a couple of our assets into the minerals or have an appropriate offer for some in the Eagle Ford or the Haynesville, we will be even better off. Those assets in the Eagle Ford have been very good to us, really got us started.

But now they are a relatively small part of the whole pie, and we could continue to benefit from the cash flow and the opportunity, but it also would be an attractive deal if I were starting over. Those would be the kind of assets I'd want to have, a good cash flow, good return. There's some upside. And it's a little simpler down there, not as complex.

You go down and hit the Eagle Ford and turn right, drill your well, which they've gotten the drilling. Last time we drilled one, we did it in six days. So it's a great opportunity, but probably, it would be something that we could make a good deal on and someone else could benefit, too, just be a better fit. David, is...

David Lancaster -- Executive Vice President and Chief Financial Officer

No, I think you said it well, Joe.

Joe Foran -- Chairman and Chief Executive Officer

Please record that and send that to me later.

Jeff Grampp -- Northland Capital Markets -- Analyst

I wrote every word of it down, Joe.

Joe Foran -- Chairman and Chief Executive Officer

Thanks, Jeff.

Operator

Thank you. Our next question comes from the line of Gabe Daoud with Cowen. Your line is open.

Gabe Daoud -- Cowen and Company -- Analyst

I was hoping we could maybe just -- I guess on San Mateo, the 200 million a day expansion, how quickly do you think that plant fills up? I guess, I'm just trying to get a sense of what 2021 run rate San Mateo EBITDA would be and capex for that year as well.

David Lancaster -- Executive Vice President and Chief Financial Officer

Well, look, it's not going to be immediately full. I mean, obviously, as we drill the first set of wells at Stateline, that will fill a nicely portion of it. And then when we put the body wells on in the spring of 2021, that will continue to increase it. I also think there will probably be some additional third-party volumes that get added to the system, and so it will continue to ramp up from there.

So I don't have in front of me exactly what our expectation for is when that plant comes completely full. But certainly, we expect the volumes to, one, I think, as you noted in the release in the fourth quarter, there were days when the processing plant was already running at above 95% capacity. So we think that it's certainly something we're going to need from day 1, and we'll just continue to add to it as our volumes increase. As I say, I'm sure there will be additional third parties that come along or other ways.

So I ask them to be awfully clever in terms of finding ways to maybe even process another third-party customers or gas of other midstream companies, things like that. So I think that there's a lot of optionality for us to begin filling that plant up.

Gabe Daoud -- Cowen and Company -- Analyst

Thanks, David. That's helpful. And then I guess just as a follow-up, the capital program this year, obviously, a lot of exciting stuff going on at both Matador and San Mateo. And I guess if commodities do rebound, it's somewhat of a move point, but at current strip, you're obviously looking at an outspend for this year.

You've highlighted asset sales, but I was curious if you could maybe quantify through asset sales. How much of that outspend you do think you'd cover? Is it maybe 50%? Is it 60%? Just trying to get a sense of, also, I guess, balance sheet protection as you move through 2020.

David Lancaster -- Executive Vice President and Chief Financial Officer

Well, I think I gave that -- I don't want to sound flip, but it's sort of like, if someone, somebody offers for some of these assets, I think that we could go anywhere from covering a small percentage to substantially all of it, depending on what sort of deals that we were able to make and going down the road. I mean, I think that both of the minerals and the Eagle Ford offer the possibility to cover a substantial part of the outspend. And I think that that's something that we would be very interested in doing, but we want to just be sure that we get what we consider to be the proper value for those assets. But we certainly are mindful of the need to keep the balance sheet front of mind, and it's important to us.

It's something that we talked about all the time. And I think we did an excellent job of it last year, in terms of, I think, lot of folks at this time a year ago would have thought we'd have been in the high 2s, 2.8 times, 2.9 times, and we managed to hold that down to 2.3 times through a lot of initiatives that we did, including selling some portions of the Eagle Ford and the Haynesville last year. So we are very much going to continue to keep that front of mind and continue to do what we need to do in order to manage the balance sheet and protect the balance sheet. We know it's important.

We know we have to do it. So as to exactly what all that brings, I think that we'll see as we go along.

Joe Foran -- Chairman and Chief Executive Officer

Yes. Gabe, the other thing, just to keep in mind is that our bank renewed our line of credit at $900 million. We currently have $225 million drawn, so that means we're not going to have any foresales or anything like that, and we have flexibility on the timing. So the important thing is not to sell too cheap or expect too much and consider the other alternatives who want the price of oil.

If you'd had a little better price of oil last year, it is what you had in 2018, we wouldn't have announced it yet, largely, a very small one. That was pretty much our difference. So again, in your question, you've got to take into account what is going to be the oil price, and it will trend down and it will trend up. The political risk of the Mid-East, I don't think is necessarily factored in.

So we plan to work on it diligently, but we also, with the banking that we have from our base, that we don't feel we have to do it, and we feel we have even other options from that. And our group is -- we have the drilling incentives from San Mateo coming up. We've sold bits and pieces of the Eagle Ford and the Haynesville this past year, not calling a lot of attention to it, but we've recovered different many in different ways. And to the extent that if there is a low oil price, you're going to have better cost and there are savings on cost, as we've mentioned, on capital efficiency, just the cost and sales.

The fact that infrastructure is built up here on the roads, at the tank batteries and the pads. So there's not just one way to close that gap. And marking, I think our group did a real good job at marking. The Gulf Coast Express is operating, which we may be earning as much as a $1 more from that firm transportation or other trade-offs.

So that's what I would say. I know you have to screen and have your deal, but there wish should have been an algorithm for these little ways that you chip away, but they add up over the course of the year. And that's why one of the reasons why we finished with 2.3 times instead of 2.8 times or 2.9 times on the leverage ratio. So good job to all the staff.

And they are not only increasing revenues but watching the cost side.

Gabe Daoud -- Cowen and Company -- Analyst

Definitely. Thanks a lot, Joe and David.

David Lancaster -- Executive Vice President and Chief Financial Officer

Thank you.

Joe Foran -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you. Our next question comes from the line of Gail Nicholson with Stephens. Your line is open.

Gail Nicholson -- Stephens Inc. -- Analyst

Good morning. Thanks for taking my questions. In the release, you guys talked about that there were going to be some cost savings from using some existing infrastructure. Can you just talk about how many wells in 2020 are utilizing existing infrastructure and how you think that changes over time?

David Lancaster -- Executive Vice President and Chief Financial Officer

Yes. Hi, Gail, it's David. I think that you can pretty much -- you would pretty much think that the wells we drill at Wolf and the Jackson Trust area are going to benefit from mostly existing infrastructure, things that we do at Rustler Breaks are. We're already building out infrastructure in the Stebbins Area, so there's going to be some infrastructure there that we'll be able to take advantage of.

And anything that we do in Antelope Ridge, that's not Rodney Robinson probably will be able to take advantage of existing infrastructure. Certainly, the new areas like Rodney Robinson, there's going to be new infrastructure built there. Stateline, there's going to be new infrastructure built there. So it's a bit of a mix.

Matt Hairford -- President and Chair of the Operating Committee

Gail, I'll just add to that. This is Matt. I would just add to that, too. It's all kind of part of the -- as David said earlier in the discussion, that building these two businesses up together at the same time, each and every one of these little legs that we add to San Mateo to go out to get one of these new facilities, is something that we can use not only to extend the Matador reach there or the San Mateo reach to Matador but also for third parties.

Gail Nicholson -- Stephens Inc. -- Analyst

Great. And then just a housekeeping aspect. The potential of that $50 million to $60 million of incentive for next year, is that just for San Mateo II, or does that include an incremental $14.7 million in incentives with San Mateo I incentives?

David Lancaster -- Executive Vice President and Chief Financial Officer

Yes. Gail, it's both. So it would be the $14.7 million from San Mateo I plus additional incentives we would expect to earn from San Mateo II.

Gail Nicholson -- Stephens Inc. -- Analyst

And do you think when we look at that $50 million to $60 million run rate, is that a good number to use for the -- at least for the next several years, maybe ex the San Mateo I, as that rolls off after achieving the full amount there?

David Lancaster -- Executive Vice President and Chief Financial Officer

Well, I certainly think that -- I mean, we'll have '21 and '22, I think that would be plus or minus $50 million is probably a pretty good estimate. But once you get into '23 and beyond, the San Mateo I incentives will have been satisfied and will have rolled off, and so maybe that number becomes more $35 million or something in that ballpark. But by that time, of course, everything that we're drilling in Stebbins and Stateline is -- there's another AMI associated with that, whether or likely be other wells drilled. And I think it's reasonable to expect that those wells will come into that, too.

One thing I would say, just to keep in mind as you kind of are modeling that out, it will be sort of a -- it's predicated on when wells get turned in line, so when they begin to produce. And so it's going to be subject to a little bit of the same lumpiness of the production. I mean, you'll see that -- now the nice thing about it is we get those paid on the San Mateo II side on a quarterly basis as opposed to annually. So once we sort of clear this initial threshold to start earning those incentives, which we think will be toward the end of the year and start earning them into 2021, we will get them -- they will get paid on a quarterly basis, but it won't necessarily be that.

It's going to be $10 million per quarter. It may be $15 million one quarter and $5 million the next and $15 million the next, so it will have a little bit of lumpiness to it, too.

Gail Nicholson -- Stephens Inc. -- Analyst

Great. Thank you.

Operator

Thank you. Our next question comes from the line of Matt Sorenson with Scotia. The line is open.

Matt Sorenson -- Scotiabank --Analyst

Thanks for squeezing me in here. I think based on all the questions there, you might have to start holding a separate call just for San Mateo. So on the lateral length side, your 2020 program calls for a 53% increase over your 2019 average. I don't think you'll be able to continue to increase at 53% moving forward.

But wondering if you guys could speak to your ability to either maintain that average or kind of continue to increase your lateral lengths in 2021 and beyond.

Matt Hairford -- President and Chair of the Operating Committee

This is Matt. I think the way we're thinking about this now is this is the new path for us forward. I think going into '21, '22, these two-mile and 2.5-mile laterals are going to be even more and more the norm. So I don't know that you ever get to 100%, but I think the notion that we would be in the 85% range for the longer than one mile and 75% or greater for two-mile, I think, is pretty much what we're looking at going forward.

Matt Sorenson -- Scotiabank --Analyst

OK. Great. Thanks. And then just kind of a housekeeping one.

I'm sorry if I missed this but following up on a few of the mineral questions. About how many royalty acres do you guys currently own? I think the last number you guys referenced is maybe about 11,200 net royalty acres. Has that changed at all since then?

David Lancaster -- Executive Vice President and Chief Financial Officer

Well, I think that, Matt -- this is David. That's still right in the ballpark, so I think that's still a good number.

Matt Sorenson -- Scotiabank --Analyst

OK. Great. Thank you, guys, so much.

David Lancaster -- Executive Vice President and Chief Financial Officer

Thank you, Matt.

Operator

Thank you. Our next question comes from the line of Richard Tullis with Capital One Securities. Your line is now open.

Richard Tullis -- Capital One Securities -- Analyst

Thanks. Good morning. Two quick ones from me, Joe and David. Looking at the 2020 production guidance, roughly what level of contingencies for downtime, just to move to the longer laterals, etc.

you have factored into the guidance? Is it more contingencies than what you've done in the past or kind of similar?

David Lancaster -- Executive Vice President and Chief Financial Officer

Richard, it's David. I think that it's probably -- I would say it's probably reasonably consistent with what we've had in the past. I will say that it may tend to be a little bit higher just from the standpoint that we do have in some of the -- I think with these bigger pads and more wells, there's a lot of wells being completed at the same time. And one thing I can tell you for sure is that it's all been very -- it's been very meticulously thought out in terms of how that's going to work and how those are scheduled.

We don't typically just say, we think it's going to be X percent, and then just model that flat across the board. It's modeled very much with the timing component as well. So our teams are charged with and do a good job, I think, of actually figuring out as they have new wells coming on in operations in their areas, what has to be shed in, trying to anticipate what other operators in the area are going to be doing. And so we do try to put a little more science to it.

I think that it's usually about 2% to 3%. And I would imagine that's about where it is on average for this year, but that doesn't mean that it's just linearly that, and probably it changes from quarter to quarter.

Richard Tullis -- Capital One Securities -- Analyst

That's helpful. Thank you. And just lastly, David, earlier in the call, new asset areas were mentioned. I just wanted to verify, that comment is related to the company's existing acreage portfolio.

Is that correct?

David Lancaster -- Executive Vice President and Chief Financial Officer

Yes. It absolutely is. I mean, Richard, I think when Joe mentioned the new assets, he was referring to, in particular, the work we're doing on the Rodney Robinson area, the work we're doing down in Stateline. And certainly, we feel like that there are other areas of our existing Delaware portfolio that offer a lot of future potential for Matador.

But when we're talking about new assets, you don't need to anticipate that we're announcing we're about to go into Utah or something like that. So we're talking about just being right where we are there.

Joe Foran -- Chairman and Chief Executive Officer

Yes. Richard, this is Joe. And I want to emphasize, yes, we've got a very full plate where we are right now, and when we talk about new asset areas, we're really talking about different zones. There are more zones opening up all the time.

When we went out there, we thought we'd have about three zones five, six years ago, and I think we're producing from 16 or 17 different zones. And the final point that I really want to make on that is, we haven't talked about the MAXCOM room, but that's been a very important part of our success is that in the MAXCOM room, we have on real-time room run 24/7 by engineers and geologists here at the firm that runs 24/7. It's making, real time, what each of our rigs are doing. And within each target zone, they're generally a preferred zone that you want to stay in the middle of that preferred zone because you'll get more reserves, better permeability.

And if you can do that, you'll have more productive feet. If you were to drill out of zone or even out of the preferred zone, if you drill out of the whole zone, you might be getting nothing back. Whereas, if you stay in the preferred zone, that's more than even in the rest of the zone. So that's generally a smaller target, 15 to 30 feet.

But if you stay in there, you're going to have a better-than-expected well. If you drill out of zone, you might not get something. Now in the old days, the guy might suspect, after on the rig, that he was out of zone, but by the time he calls, it could have been several hours and then you got to redirect it back in to zone, and you've lost that much of the productive interval in the well. We cut that down, so we're saving money and adding reserves on every well we've been drilling since day 1.

And we would like to invite all of you to come in, get to know us. We'll have lunch or dinner and take you down there, and you can see. And it's dramatic what they're accomplishing on there and one reason why these are leading to better wells. And just kudos to the operations group, the engineers and geologists working on that, but they're delivering the results.

Billy, do you want to add to that?

Billy Goodwin -- Executive Vice President and Chief Operating Officer, Drilling, Completions, and Production

Yes, sure. Joe, that's exactly right. This MAXCOM and big data, that's something that was needed back in the '80s and '90s. You're just trying to stay somewhere in a particular formation.

And in the 2000s, you're trying to drill 1,000 foot a day, and you've narrowed it down a little bit to a part of the formation. But now we're drilling 100- to 200-foot an hour, 4,000-foot days in the lateral, and we're keeping that in a smaller target formation. I mean, there's no way you can do it without MAXCOM and all the different software, big data, they're using. It's amazing.

They just keep getting better and better and working with the providers of that service to find different ways to make it better, watching all the offset wells, and it's all real time. It's not like it used to be, like, you're getting data from the old wells and pulling it up after you've already drilled that. I mean, they're watching out front. They're comparing the other wells that they drilled next to it and other operators drilled, and I mean, this is getting after it.

Joe Foran -- Chairman and Chief Executive Officer

Yes. So we're not the only company with such a room but it is something that adds to your efficiency, saves money and adds to your reserve base. And we've seen it make a great difference and want you all to see it, and that's why these results have -- we've been able to generally report better-than-expected drilling results and cost because this has contributed. And it has our geologists and engineers working together to make a more tightly integrated operational effort, but more as a team concept that we try to emphasize is around here.

So Richard, since you are the last, you got to ask questions out. I was hoping somebody had asked me that, so I just thought I'd jump in on the end of your question period and put in that plug for our operation people.

Richard Tullis -- Capital One Securities -- Analyst

No, happy to lend a hand, Joe. I appreciate all the comments. Thanks. Thank you, Billy.

Joe Foran -- Chairman and Chief Executive Officer

Thanks, Richard.

Operator

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

Joe Foran -- Chairman and Chief Executive Officer

I think I made them. It's been a great team effort. It's fun to have your best quarter, fun to have your best year. I would like to simplify the life a little bit, and they have a few of the other difficulties, but things are going well here, proud of the effort and looking forward to what we can deliver value that we can deliver for you in 2020 and 2021.

And pleased that we can say with confidence that by this time next year, we think the free cash flow standard will be clearly seen and very close to where we will be as a company. All right. Talk to you later.

Operator

[Operator signoff]

Duration: 74 minutes

Call participants:

Mac Schmitz -- Capital Markets Coordinator

Joe Foran -- Chairman and Chief Executive Officer

David Lancaster -- Executive Vice President and Chief Financial Officer

Scott Hanold -- RBC Capital Markets -- Analyst

John Freeman -- Raymond James -- Analyst

Matt Hairford -- President and Chair of the Operating Committee

Billy Goodwin -- Executive Vice President and Chief Operating Officer, Drilling, Completions, and Production

Brad Robinson -- Executive Vice President of Reservoir Engineering and Chief Technology Officer

Neal Dingmann -- SunTrust Robinson Humphrey -- Analyst

Sameer Panjwani -- Tudor, Pickering, Holt & Co. -- Analyst

Jeff Grampp -- Northland Capital Markets -- Analyst

Gabe Daoud -- Cowen and Company -- Analyst

Gail Nicholson -- Stephens Inc. -- Analyst

Matt Sorenson -- Scotiabank --Analyst

Richard Tullis -- Capital One Securities -- Analyst

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