UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.

As of November 1, 2016,August 2, 2017, there were 93,469,313100,437,295 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -

NOTE 1 - NATURE OF OPERATIONS

Matador Resources Company, a Texas corporation (“Matador” and, collectively with its subsidiaries, the “Company”), is an independent energy company engaged in the exploration, development, production and acquisition of oil and natural gas resources in the United States, with an emphasis on oil and natural gas shale and other unconventional plays. The Company’s current operations are focused primarily on the oil and liquids-rich portion of the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. The Company also operates in the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas. Additionally, the Company conducts midstream operations, primarily through its midstream joint venture, San Mateo Midstream, LLC (“San Mateo” or the “Joint Venture”), in support of itsthe Company’s exploration, development and production operations and provides natural gas processing, natural gas, oil and salt water gathering services and salt water disposal services to third parties on a limited basis.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

The interim unaudited condensed consolidated financial statements of Matador and its subsidiaries 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, 20152016 (the “Annual Report”) filed with the SEC. The Company consolidates certain subsidiaries and joint ventures that are less-than-wholly-ownedless 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”) 810. The Company proportionately consolidates certain joint ventures that are less-than-wholly-ownedless 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 adjustments, consisting only of normal, recurring adjustments, which are necessary for a fair presentation of the Company’s interim unaudited condensed consolidated financial statements as of SeptemberJune 30, 2016.2017. Amounts as of December 31, 20152016 are derived from the Company’s audited consolidated financial statements 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 accruals for oil and natural gas revenues, accrued assets and liabilities primarily related to oil and natural gas operations, stock-based compensation, valuation of derivative instruments 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.

Reclassifications

Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period presentation. As a result of the growth of the Company’s midstream operations, these operations met the required threshold for segment reporting at September 30, 2016.reporting. As a result, $0.5 million and $1.3$0.9 million for the three and nine months ended SeptemberJune 30, 2015, respectively,2016 and $1.4 million for the six months ended June 30, 2016 were reclassified from other income to third-party midstream services revenues and $0.1 million for both the three and nine months ended September 30, 2015 was reclassified from production taxes, transportation and processing expenses to third-party midstream services revenues. In addition, $1.5 million and $2.8$1.1 million related to midstream operating costs for the three and nine months ended SeptemberJune 30, 2015, respectively,2016 and $2.1 million for the six months ended June 30, 2016 were reclassified from lease operating expenses to plant and other midstream services operating expenses. These reclassifications had no effect on previously reported results of operations, cash flows or retained earnings.

The Company uses the full-cost method of accounting for its investments in Accounting Principle

The Company capitalized approximately $4.3$5.2 million and $1.4$4.0 million of its general and administrative costs for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and approximately $0.7$1.9 million and $0.5$1.7 million of its interest expense for the three months ended SeptemberJune 30, 20162017 and 2015,2016, respectively. The Company capitalized approximately $10.3$10.8 million and $4.9$6.0 million of its general and administrative costs for the ninesix months ended SeptemberJune 30, 20162017 and 2015,2016, respectively, and approximately $2.9$3.2 million and $2.2 million of its interest expense for each of the ninesix months ended SeptemberJune 30, 2017 and 2016, and 2015.respectively.

Earnings (Loss) Per Common Share

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

A total of 2.9 million options to purchase shares of the Company’s common stock and 0.1 million restricted stock units were excluded from the diluted weighted average common shares outstanding for the nine months ended September 30, 2016, because their effects were anti-dilutive. Additionally, 1.0 million restricted shares, which are participating securities, were excluded from the calculations above for the nine months ended September 30, 2016, as the security holders do not have the obligation to share in the losses of the Company.

Recent Accounting Pronouncements

Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606),which specifies how and when to recognize revenue. In addition, thisThis standard requires expanded disclosures surrounding revenue recognition and is intended to improve, and converge with international standards, the financial reporting requirements for revenue from contracts with customers. ThisIn August 2015, the FASB issued ASU will become2015-14, which defers the effective date of ASU 2014-09 for one year to fiscal years beginning after December 15, 2017. Early adoption is permitted for fiscal years beginning after December 15, 2017 with early adoption permitted2016. In May 2016, the FASB issued ASU 2016-11, which rescinds guidance from the SEC on accounting for periods beginning after December 15, 2016. Entities can transition togas balancing arrangements and will eliminate the standard either retrospectively to each period presented or as a cumulative-effect adjustment asuse of the dateentitlements method. Entities have the option of adoption.using either a full retrospective or modified approach to adopt the new standards. In December 2016, the FASB issued ASU 2016-20, which clarifies disclosure requirements in ASU 2014-09. The Company expects to adopt the new guidance effective January 1, 2018 using the modified approach. The Company is currently evaluating the impact, if any,new guidance, including (i) identification of the adoptionrevenue streams and (ii) review of this ASU on its consolidated financial statements.contracts and procedures currently in place.

Leases. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. This ASU will become effective for fiscal years beginning after December 15, 2018 with early adoption permitted. Entities are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. These practical expedients relate to the identification and classification of leases that commenced before the effective date, initial

NOTE 3 - EQUITY– BUSINESS COMBINATION

On March 11, 2016,February 17, 2017, the Company completed a public offering of 7,500,000 sharescontributed substantially all of its common stock. After deducting offering costs totaling approximately $0.8midstream assets located in the Rustler Breaks (Eddy County, New Mexico) and Wolf (Loving County, Texas) asset areas in the Delaware Basin to San Mateo, a joint venture with a subsidiary of Five Point Capital Partners LLC (“Five Point”). The midstream assets contributed to San Mateo include (i) the Black River cryogenic natural gas processing plant in the Rustler Breaks asset area (the “Black River Processing Plant”); (ii) one salt water disposal well and a related commercial salt water disposal facility in the Rustler Breaks asset area; (iii) three salt water disposal wells and related commercial salt water disposal facilities in the Wolf asset area; and (iv) substantially all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas (collectively, the “Delaware Midstream Assets”). The Company continues to operate the Delaware Midstream Assets. The Company retained its ownership in certain midstream assets in South Texas and Northwest Louisiana, which are not part of the Joint Venture.

NOTE 5 - DEBT

At SeptemberJune 30, 2016,2017 and August 2, 2017, the Company had $400$575.0 million of outstanding 6.875% senior notes due 2023, (the “Notes”), $65.0 million inno borrowings outstanding under the Company’s revolving credit agreement (the “Credit Agreement”) and approximately $0.8 million in outstanding letters of credit issued pursuant to the Credit Agreement. At November 1, 2016, the Company had $400.0 million in Notes outstanding, $95.0 million in borrowings outstanding

The borrowing base under the Credit Agreement is determined semi-annually as of May 1 and approximately $0.8November 1 by the lenders based primarily on the estimated value of the Company’s proved oil and natural gas reserves at December 31 and June 30 of each year, respectively. Both the Company and the lenders may request an unscheduled redetermination of the borrowing base once each between scheduled redetermination dates. During the first quarter of 2017, the lenders completed their review of the Company’s proved oil and natural gas reserves at December 31, 2016, and on April 28, 2017, the borrowing base was increased to $450.0 million and the maximum facility amount remained at $500.0 million. The Company elected to keep the borrowing commitment at $400.0 million. Borrowings under the Credit Agreement are limited to the least of the borrowing base, the maximum facility amount and the elected commitment. The Credit Agreement matures on October 16, 2020.

In the event of an increase in the elected commitment, the Company is required to pay a fee to the lenders equal to a percentage of the amount of the increase, which is determined based on market conditions at the time of the increase. Total deferred loan costs were $1.1 million at June 30, 2017, and these costs are being amortized over the term of the Credit Agreement, which approximates amortization of these costs using the effective interest method. If, upon a redetermination of the borrowing base, the borrowing base were to be less than the outstanding lettersborrowings under the Credit Agreement at any time, the Company would be required to provide additional collateral satisfactory in nature and value to the lenders to increase the borrowing base to an amount sufficient to cover such excess or to repay the deficit in equal installments over a period of creditsix months.

On May 24, 2017, and pursuant to a registered exchange offer, the Credit Agreement.Company exchanged all of the $175.0 million of Notes issued on December 9, 2016, which were privately placed, for a like principal amount of 6.875% senior notes due 2023 that have been registered under the Securities Act of 1933, as amended. The terms of such registered Notes are substantially the same as the terms of the original Notes except that the transfer restrictions, registration rights and provisions for additional interest relating to the original Notes do not apply to the registered Notes.

On February 17, 2017, in connection with the formation of San Mateo (see Note 3), Matador entered into a Fourth Supplemental Indenture (the “Fourth Supplemental Indenture”), which supplements the indenture governing the Notes. Pursuant to the Fourth Supplemental Indenture, (i) Longwood Midstream Holdings, LLC, the holder of Matador’s 51% equity interest in San Mateo, was designated as a guarantor of the Notes and (ii) DLK Black River Midstream, LLC and Black River Water Management Company, LLC, each subsidiaries of San Mateo, were released as parties to, and as guarantors of, the Notes. The borrowing baseguarantors of the Notes, following the effectiveness of the Fourth Supplemental Indenture, are referred to herein as the “Guarantor Subsidiaries.” San Mateo and its subsidiaries (the “Non-Guarantor Subsidiaries”) are not guarantors of the Notes, although they remain restricted subsidiaries under the Credit Agreement is determined semi-annually as of May 1 and November 1 byindenture governing the lenders based primarily on the estimated value of the Company’s proved oil and natural gas reserves at December 31 and June 30 of each year, respectively. Both the Company and the lenders may request an unscheduled redetermination of the borrowing base once each between scheduled redetermination dates. On May 3, 2016, the borrowing base under the Credit Agreement was reduced to $300.0 million from $375.0 million based on the lenders’ review of the Company’s proved oil and natural gas reserves at December 31, 2015. At September 30, 2016, the borrowing base under the Credit Agreement remained $300.0 million. During the fourth quarter of 2016, the lenders completed their review of the Company’s estimated total proved oil and natural gas reserves at June 30, 2016, and as a result, in late October 2016, the borrowing base under the Credit Agreement was increased to $400.0 million. This October 2016 redetermination constituted the regularly scheduled November 1 redetermination.

The Company believes that it wasfollowing presents condensed consolidating financial information on an issuer (Matador), Non-Guarantor Subsidiaries, Guarantor Subsidiaries and consolidated basis (in thousands). Elimination entries are necessary to combine the entities. This financial information is presented in complianceaccordance with the termsrequirements of the Credit Agreement at September 30, 2016.

NOTE 6 - INCOME TAXES

The Company’s deferred tax assets exceedexceeded its deferred tax liabilities at June 30, 2017 due to the deferred tax assets generated by the full-cost ceiling impairment charges recorded in prior periods; as a result, the Company established a valuation allowance against most of the deferred tax assets beginning in the third quarter of 2015. The Company retainsretained a full valuation allowance at SeptemberJune 30, 20162017 due to uncertainties regarding the future realization of its deferred tax assets. The valuation allowance will continue to be recognized until the realization of future deferred tax benefits are more likely than not to be utilized. The current tax benefit for the three and nine months ended September 30, 2016 represents a refund due from the Internal Revenue Service for 2015 income taxes.

NOTE 7 - STOCK-BASED COMPENSATION

In February 2016,2017, the Company granted awards of 243,428228,174 shares of restricted stock and options to purchase 608,287590,128 shares of the Company’s common stock at an exercise price of $15.00$27.26 per share to certain of its employees. The fair value of these awards was approximately $7.0$12.4 million. All of these awards vest onratably over three years. In February 2017, the three-year anniversary of the grant date of these awards. In August 2016, the Company also granted awards of 177,024174,561 shares of restricted stock and options to purchase 39,903444,491 shares of the Company’s common stock at an exercise price of $22.70$26.86 per share to certain of its employees. The fair value of these awards was $4.3approximately $9.3 million. All of these awards vest ratably over three years.

At SeptemberJune 30, 2016,2017, the Company had various costless collar contracts open and in place to mitigate its exposure to oil and natural gas price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and price floor and ceiling. Each contract is set to expire at varying times during 2017 and 2018.