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Private Equity Steps Up For JV to Expand Matador's Delaware Basin Midstream Assets

Units of Matador Resources Co. and private equity firm Five Point Capital Partners LLC have formed joint venture (JV) San Mateo Midstream LLC to operate and expand Matador's midstream assets in the Permian's Delaware sub-basin in Eddy County, NM, and Loving County, TX.

Included in the assets contributed by Matador are the Black River Cryogenic Processing Plant in Eddy County; one salt water disposal well and a related commercial saltwater disposal facility in the company's Rustler Breaks asset area; three salt water disposal wells and a related commercial saltwater disposal facility in its Wolf asset area in Loving County; and all related oil, natural gas and water gathering systems and pipelines in both the Rustler Breaks and Wolf asset areas.

"When we kicked off our midstream initiatives in the Delaware Basin in 2014, our primary goals were to ensure firm takeaway and processing capacity for our production and to generate significant value for our shareholders," said Matador CEO Joseph Foran in an announcement Friday. "Through the strong execution of our midstream team, combined with the success of our drilling efforts in both the Rustler Breaks and Wolf asset areas, we have achieved these goals."

San Mateo will continue to provide firm service to Matador while also serving third-party customers in and around Matador's Rustler Breaks and Wolf asset areas. San Mateo expects to expand the Black River Cryogenic Processing Plant in the Rustler Breaks area from its current inlet capacity of 60 MMcf/d to as much as 260 MMcf/d. This expansion is expected to be operational as early as the first quarter of 2018. San Mateo also plans to accelerate the buildout of oil, natural gas and water gathering lines throughout both the Rustler Breaks and Wolf asset areas, as well as to drill and complete at least one additional commercial saltwater disposal well in the Rustler Breaks area this year.

"...[T]he Delaware is one of the most promising producing basins in North America, yet currently lacks sufficient permanent 'in-basin' midstream infrastructure," said Five Point CEO David Capobianco.

Matador dedicated its current and future leasehold interests in the Rustler Breaks and Wolf asset areas pursuant to 15-year, fixed-fee natural gas, oil and salt water gathering agreements and salt water disposal agreements. The company also dedicated its current and future leasehold interests in Rustler Breaks pursuant to a 15-year, fixed-fee gas processing agreement. Matador also made certain minimum volume commitments.

The independent producer also said it would add a fifth operated drilling rig in the Delaware Basin in the Rustler Breaks area beginning early in the second quarter. Matador anticipates operating the five rigs in the Delaware throughout the remainder of 2017, including three rigs primarily in Rustler Breaks, one rig primarily in the Wolf asset area and one rig primarily in the Arrowhead and Ranger asset areas.

Matador received $171.5 million in connection with the formation of the JV and may earn up to an additional $73.5 million in deferred performance incentives over the next five years. It will continue to operate the assets and control the JV. At formation, Matador and Five Point owned 51% and 49% of the JV, respectively. Implied value of the assets is about $500 million after accounting for performance incentives.

Five Point provided initial cash consideration of $176.4 million in exchange for its 49% interest. About $171.5 million of the Five Point contribution was distributed by the JV to Matador as a special distribution. Matador contributed the assets and $5.1 million in cash in exchange for its 51% interest. The parties committed to spend up to an additional $150 million on expanding the assets.

"We like this transaction for multiple reasons," wrote Wunderlich Securities Inc. analyst Irene Haas. "The cash will help MTDR [Matador] fund its 2017 capex, accelerate drilling, adding a fifth rig in the basin in 2Q17. In addition, it also frees up cash for MTDR to invest in its upstream business while expanding the midstream business. This deal will strengthen MTDR's balance sheet, and we are unlikely to hear about funding gaps anytime soon."

Dallas-based Matador is 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. Matador 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. Matador retained its ownership in its midstream assets in South Texas and North Louisiana, which are not part of the JV. Matador fourth quarter and year-end earnings, as well as 2017 outlook and guidance are to be released Wednesday.

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