Q3 2019 Earnings Call
My name is there and I'll be your operator for today.
At this time all participants on in listen only mode.
Well be conducting a question and answer session after the financial and operations report.
A reminder, this call is being recorded for replay purposes.
It is now my pleasure to introduce Mr., Ron Hagood, Vice President Investor Relations you May proceed Sir.
Joining me today, or Jason <unk>, President and Chief Executive Officer churn Chandler Senior Vice President and Chief Operations Officer, Michael Bar, Senior Vice President and Chief Financial Officer, as well as additional members of our management team.
Before we begin this morning, let me remind you that during today's call will be making forward looking statements. These statements, including those describing our beliefs goals expectations for cash and assumptions.
Tended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act to 1990.
The company's actual results may differ from these forward looking statements for a variety of reasons many of which are beyond our control.
Additionally, we will be making reference to non-GAAP financial measures reconciliations to GAAP financial measures are included in yesterday's news release.
Yesterday afternoon, the company issued a news release and presentation dealing with financial and operating results for third quarter 2019.
We will refer to the presentation by age during today's call.
And do not have a copy of this news release. Your presentation you may access it on the company's website www Dot Laredo Petro Dot com.
I'll now turn the call over to Jason <unk>, President and Chief Executive Officer.
Thank you Ron.
Good morning, Thank you for joining us from called today, beginning in late 2018, Reno began to transition from a development strategy focused on net asset value accretion to one driven by returned to free cash flow generation.
Accomplish this we wind spacing moderated our pace of development and made it difficult decision to align GSK with the slower development pace throughout 2019, we execute on these initiatives and results have steadily improved throughout the year.
On our website, we have posted an earnings deck referred to during my prepared comments I'd encourage you to follow alone.
My free Wi Lan updated strategy, we plan to continue building on the work we've done in 2019 to further accelerate growth and free cash flow.
Adjusted per share basis to increase the value per se or stakeholders.
First of all of this strategy is to continue building on the great work the team has done and optimize our existing operations.
Hi, grading inventory in optimizing completion designs to maximize oil productivity and maintaining our focus on cost and operational efficiency to further improve our base in low cost structure is our top priority.
Intend to Opportunistically pursue transactions like the one we will discuss in a moment to target high margin inventory that we moved it up front.
By applying our cash flow to the acquired high margin development opportunities, we expect to increase corporate returns improve gross.
Cash flow generation.
We believe that the current environment is presenting an opportunity to at high quality acreage at multi year low valuations.
Being very selective on acreage quality and price we tend to make acquisitions that are quickly accretive.
Secured while maintaining a competitive balance sheets.
And with the acquisition paid off in a short amount of time.
Additionally, we see opportunities to increase scale through consolidation.
Mining operations to eliminate redundancies and leveraging our basin, leading low cost structure to achieve synergies and drive increased returned to our stakeholders any transaction, we need to make operational sense. The accrete common debt adjusted per share metrics and ultimately result in a stronger balance sheet.
Turning to slide four results in the third quarter illustrated pillar of our updated strategy that optimizing our existing acreage and operations.
Third quarter in a row, we'd be both oil and total production guidance for the quarter, we continue to reduce controllable cost of lease operating expenses and Cascade.
So far are similarly sized tiers on it or unit basis.
These results combined with disciplined capital expenditures, which are about 17% a low street estimates and robust hedging gains generated 49 million of free cash flow during the quarter.
On slide five this further confirmation of our success optimizing existing acreage on the top graph, we have the results from our four packages a wider spaced wells completed in the second and third quarters of 2019.
In total these 23 wells outperforming both our initial expectations and our Wolfcamp oil type curve.
I can see that to packages are outperforming the type curve on a two or below.
Distribution is what we expected or range of results when we established our wolfcamp oil type curve and reinforces our confidence at this time urban accurate.
The bottom graph deal item data from our SCG demonstrates the success, we have had driving down our drilling and completion cost and enhancing our capital efficiency.
During 2019, we have demonstrated the lowest average cost per lateral foot in the basin amongst this peer group.
And are moving even lower we're currently delivering average DNC cost.
Our lateral foot $660 for our standard completion design.
Slide six demonstrates how the success has driven increasing oil production and free cash flow estimates, while improving debt levels as we used the free cash flow to pay down our revolver.
From our initial budget expectations in February 2019 oil production estimates for the year have increased 1600 barrels per day.
Free cash flow estimates have increased by more than $40 million.
We've also delivered on a commitment to pay down the $80 million, we drew on our revolver in the first quarter 2019 by the end of the year.
In fact, we delivered on the commitment by the end of the third quarter and is currently pay down another $10 million more than what we drew on the first quarter not including the pending acquisition.
These results have been supported by a barrel best hedge book in 2019 that is generated $36 million and cash from hedge settlements to the end of the third quarter of 2019.
Our 2020 hedges are similarly robust.
Slide seven we show the hedge is currently in place for 2020.
As a significant amount of our expected oil natural gas and natural gas liquids production at prices that are currently above 2020 levels.
Our 2020 hedges are valued at 99 million at the end of the third quarter of 2019 and help to drive our confidence in cash flow projections as we finalize our 2020 development plans.
Turning to slide eight we have made an acquisition of tier one high margin acreage in Howard County expected to close in December and it represents the first step on the radar strategy to target consistent free cash flow generation and all grown per adjusted share.
This acquisition opens up a new operating area from a radio that transforms our near term development plan acreage is an area of high oil productivity with offsetting wells, indicating first year production that is 80% oil and first year oil productivity this 55% higher than our wolfcamp well type curve on our existing.
Rich.
This is not acres that is being acquired to languishing our development to you as we expect to begin drilling our first package in the first quarter of 2020.
40 of our completions will beyond this acreage in the 2020 to 2022 timeframe.
Development is expected to focus on the lower Spraberry.
Upper and middle Wolfcamp formations, we estimate for lower Spraberry locations, six upper Wolfcamp and six middle Wolfcamp locations per DS you totaling 16 wells per DS you in these primary zones and 120 primary locations on the acreage.
This acreage has practically no horizontal drilling and thus limited existing parent child considerations to work around the.
We currently expect to develop the locations in 16, well packages targeting primary zones to limit future parent trial interactions.
As we are evaluating this acreage in assessing potential productivity, we had a substantial amount of information from offsetting wells to work with a.
The blowout map on slide eight shows the locations around the acreage we deem relevant after an extensive review prior to drilling in this area.
The Green light on the graph at the bottom of the slide demonstrates the two year cumulative oil productivity of the relevant offset locations adjusted to a 10000 foot lateral links.
With this transaction, we believe we have purchased tier one acreage at a conservative multi year low valuation.
We had the advantage of substantial offsetting production with which to judge productivity without value, destroying parent child issues to work around the actual leasehold.
The transaction is not just for 7360 net acres, which are 96% operated but also includes 750 return enhancing net royalty acres within the operated acreage.
Applying our basin low DNC and operating cost of the development of this acreage. We believe makes the transaction accretive very quickly and drives improved corporate returns as soon as 2020.
Moving to slide nine I will expand on that statement.
The graph on the upper left hand portion of the slide demonstrates the dramatic positive impact of cash flow generation that results from putting our cash flow to work developing the Howard county acreage versus our existing acreage our existing extra is as good economics. The acquired acreage is superior.
The table at the bottom. This line further demonstrates the higher expected oil productivity over two year period.
Based on these assumptions, we expect to become substantially more capital efficient in the 2020 to 2021 time period.
Versus previous indications for 2020 to 2021, we now expect to be able to generate mid to high single digit annual will.
Increase our oil cut to 40% and generate free cash flow of $100 million.
We expect to fund the transaction with our credit facility, which based on our net debt to adjusted EBITDA at the end of the third quarter of 2019 when move our ratio to only 1.9 times from our current 1.7 times.
Further we intend to utilize free cash flow to pay the revolver back down to current levels by 2021 and maintain a competitive leverage profile.
It's an exciting time from the radio progress we've made over 12 months is evident in our financial results.
Howard County acquisition positions us for a step change in our capital efficiency and we've implemented an updated go forward strategy that is directly correlated to increased stakeholder value.
All of US are extremely proud of what we've accomplished thus far and are energized by what lies in front of us.
Four to sharing our progress with you in the months to come.
Operator, please open the call for questions.
Thank you.
The question you would need to press Star then one on your telephone to withdraw your question. Please press the pound Keith.
Thank you please limit yourself to one question and one follow up question.
Please standby, we composite culinary roster.
Our first.
Question comes from the line of Derrick Whitfield with Stifel. Your line is now open.
Thanks, Good morning, all congrats on a third consecutive strong quarter, an accretive acquisition.
Is there.
Perhaps for Jason regarding your increasing scale through consolidation bolt on page three could you speak to your guiding principles for M&A than the degree of opportunities available to market.
Yes, well on that I think one of the things that we tried to emphasize and what we see in that quarter continuous quarterly improvement that we've got a great drilling and completion machine they've got low Ela, we and low DNA.
These are all things that would take work to our advantage.
Thinking about consolidations.
We should be the company of choice. So we don't have anything that is as particularly in the queue today, but it's something that we just.
As we think of transforming the company and getting more oil eight or should be opportunities.
For a company like ours and take advantage.
That makes sense and then as my follow up perhaps looking into 2020, how would you frame expected your expected activity levels and the allocation of activity across your asset base, assuming the successful close though the Howard County asset.
Yeah, as we mentioned.
Prepared comments I mean, this is something that comes to the front of our Q.
When I wanted to talk about the company in the strategy.
We we spend $7 million, a well and deliver roughly 35% oil. So for US. This opportunity is to take that same $6.5 million to $7 million and apply it Ana.
Okay that makes 80% oil so for US again, we've become much more capital efficient.
In the same capital spend on these assets and I'll turn it over to carrying as you can talk to you more about kind of the timing and things like that.
As we as we plan for the close by end of the year as Jason said, we want to move these assets is early lucky and into our rig schedule. So we're running three rigs right now our expectation would be that will transition measuring first quarter over to the new AD said and then continual with with completions activity.
Hello.
We can standpoint.
Alright, Thank you bye.
This asset base, and then second half will be fully transitioned over to the in Howard County.
Very helpful. Thanks for your time guys.
Okay. Thanks.
Thank you. Our next question comes from the line of Blind singer with Goldman Sachs. Your line is now open.
Thank you good morning.
Good morning, Brian and follow up on the acquisition question as you look to further enhance.
Your oil mix with opportunities like the one that you announced in Howard County, strategically or is there a specific focus to try to gain scale around the Howard County acreage that that you've just bought or would you look for similar type.
Similar type transactions elsewhere elsewhere in the men in the Midland Basin broader Permian basin, or and even wider are kept that even wider net.
Okay, and we've got this acreage position it'd be a great position to expand so again that will definitely be a priority for us.
For US again, it is high quality wells.
That are have high oil content those are the things to think about close to our core position. If we can do those.
So those are the things it's going to as we look at our matrix and how we great opportunities those are things that at the top and why you see this opportunity here.
We're going we're open to things we need to achieve scale.
This opportunity it gives us we talk about a 120 gross wells 100 net wells. So provides about two years of inventory as hard as we're going to go on this that will need to we called loading the conveyor belt. So we're looking to fill a conveyor belt full of kind of these opportunities that come down but the key is we're not going to put a lot of debt on the balance sheet. So just how.
Being measured growth and considering all those things we don't want to we've done a lot of work to get the balance sheet healthy and so we don't want to destroy it.
Through.
Acquisition process that is too aggressive so those are all the things that we look at when were considerably.
Great. Thanks, and then my follow up is on some of the free cash flow objective that you have can you just talk a little bit to how you see 2020 sequentially playing out it seems with the new.
Assets that you're acquiring.
The the real impact from an oil mix perspective.
There's a little bit more back half of the year or or fourth quarter, but can you just talked to how you see.
The capital investment relative to the oil.
Oil production through the year.
Yeah as we stated our goal is ultimately to be free cash flow.
Positive to neutral, but as you suggest the benefit of this.
As in the late third quarter and fourth quarter and that's when you really see the acceleration of cash flow of these wells are starting to come online. So again, it's it's over that two year period, but it's really have to be a benefit from these wells to apply the majority of the cash flow back to the balance sheet.
Do you have any target for year end 2020 oil mix exit rate or just some sense as to based on how you're thinking about investing.
How add to what the magnitude of.
Oil mix change could be.
Well, we'll kind of we'll start to lay out the budget in the next couple of months and we'll have more clarity on what those looked like it will be we're doing larger packages. So our production profile will be lumpy or and you'll see I say large slug of oil coming on late third and while the third and fourth quarter. So.
Those are again here, you're kind of hitting around a bit will play out clear guidance as we get closer to going to have our budget.
Great. Thank you.
Thank you. My next question comes from the line Noel Parks with Coker and Palmer. Your line is now open.
Good morning.
Good morning Noel.
Just a couple of questions.
In the.
New Records you acquired is there a lot of.
Cleanup to do.
On the property before you get out there I don't know if it was.
Any recent activity out there you sounded like theres that haven't been horizontal activity out there.
Yes, the one of the reason that the acreage position was really attracted to us.
You guys had very little operational activity no horizontal wells.
Very limited vertical.
So theres very little.
Yes from from your question and other cleanup activities, but yes, it's pretty much on drill today.
Well that's.
Just what was that land issues that sort of kept that out of playfirst no longer.
Yes, I know that none of though I get opportunity just came to us so the history is.
Thats helpful. We speak do but for us it's a great opportunity there isn't a lot of production on it so that.
And allow the issues other operators base of these parent child issues. So for US we don't have to deal with.
Any of those type of thing so will should don't have to put a lot of risk on.
Future wells in quantity of well, so thats perfect opportunity that fits the strategy.
Okay, and then just I was wondering you.
Put a lot of energy into one.
You improving their results in the climate and.
Wondering how.
Much of that work also going to be applicable to.
To what you'll be doing on the on the new acreage there.
Our geology, similar enough et cetera depth and so far.
For the Corporation.
Got a couple of clients in progress on the existing acreage, so where we were being able to get that those in and get this operation and get the new completion design on the Cline.
As we kind of going forward.
Recent discussions so quite as a potential on the new acquisition.
But is assumed to be an upside so it wasn't part of the valuation. So we'll continue to evaluate that we're really focusing the original.
The initial development plan on lower Spraberry, the upper Wolfcamp in the middle Wolfcamp in Howard County acreage.
Oh got so the location count you're identifying is does not include Cline potential at this point.
Thats correct.
Okay. Okay, great. That's all for me, Thanks, and I'll just follow up do though I mean I think.
Alluding to your question, we spent a lot of time as we're working that client thinking on completing this technology.
What sand concentration does to performance those are things that we considered and this acreage on slide eight we've got all the wells that we used in those are completion technology is a factor that kind of elevates the performance that we expect on.
These wells so we're excited about it and expect to use all works for US here is just again all the legacy work, we've done to optimize our drilling and completion machine, we're not moving or away from an area that were very familiar with so expect to be able to hit the ground running there.
Great. Thanks.
Thank you. Our next question comes from the line of Richard Tullis with capital One Securities. Your line is now open.
Good morning.
Jason Congratulations on a nice quarter.
Two quick questions for you.
The rate has been doing.
Very good job.
On keeping opex.
Cost down DNA costs down.
How do you how do you see those costs trending say in 2020 and into 2021 as you move a little bit away from the production corridors already in place and likely Oilier production mix.
So this care and I'll just I'll just answer.
Start the start of the discussion here so yes, as we move to the Howard County.
So the there's there's considerable infrastructure already in place in the area. Obviously, we're entering.
This area development and different Kindle and then when we entered our heritage acreage position existing acreage position. So from an oil water gas gathering theres a lot of third party facilities in place and we tend to fully utilize those to manage our costs and keep everything down.
Overall, we feel like we're going to be able to live and maintain our DNC efficiencies. This is in a good location for us what we can get oilier, but at the same time use our resource base.
On the standpoint as just.
All the people.
Everything that we had in place out there. So overall, we think we'll be able to transition pretty much similar cost.
You can see an opex is what we're doing on our current acreage position.
Thank you Karen it's helpful in and just lastly.
It just to fully understand it.
You plan to run that three rigs.
Exclusively on the new acreage until you basically exhaust the that drilling inventory that you identified and maybe any any additional.
Locations or do you see the rigs transition in somewhat back to the legacy acreage and does that does it also opened up the opportunity to maybe monetize some of the legacy position.
Jason I mean, we'll we'll we'll be running three rigs, they're carrying give any update on timing and a lot of it depends on I guess that we're looking to execute on our strategy. As we mentioned this is provide us about two good years of inventory and for US we need to again low low the conveyor belt. So.
We look forward for a future discussion like this where we're talking about the next deal or an expansion here and how our of it keeps that conveyor belt.
Loaded so we'll consider future opportunities as they come and what that.
How we want to operate our existing acreage position, having challenges with the current position, our lower gas prices and lower NGL prices those returns than our returns will boost up our legacy positions. So what kind of worked through that as we exit continue to execute on the strategy.
All right Chase.
Okay bowed out is that a little bit on the details of the of the rig schedule. So as we've talked about a lot in the past manual wanted.
Of our existing acreage position as well almost 90% held by production. We've got six wells that we need 2020 to meet our obligations there and what not those out all very early in the year as we're transitioning over to the new acreage position. So we can do that easily in first quarter and then transition all the rigs. So that is the plan right now.
Transitional three rigs I will be around those through to accelerate these high rate of return wells through 2021, maybe 2021.
Okay. Thanks, a bunch appreciate it.
Thank you.
Thank you. Our next question comes from the line Gregg Brody with Bank of America. Your line is now open.
Good morning, guys Hi, Greg.
Just you commented earlier about your comfort level with.
How you're thinking about funding future acquisitions.
Can you could you talk about.
So far are you willing to stretch sort of your target leverage metrics.
And.
Before the acquisition and then how does.
As equity play into potential funding.
Yes, I mean, what we're working through right now as Brian bringing these and.
Again sideboards are probably around that two times debt to EBITDA, we don't want to go much above that x. I want to keep our balance sheet unhealthy shape. So we've got to see this as.
And acquiring properties paying it down.
Go back up to 1.9 pay it down so those are that those are ways to think about it we're not going to go.
Too far above a 2.0, but we'll be opportunistic as those come about.
Got it and then I notice your borrowing base came down the smudge there.
It.
They were there any indications of sort of from Europe .
As you look at what happened with that borrowing base, what does that potentially tell you about.
Yes, one in the spring.
I think that theres potential for partly still up or down.
Right.
Yeah, you know, we do a spring and fall bank meeting and what we kind of the walked in 2019, just a couple of comments on the reduction of borrowing base everyone knows we've seen about a 10% drop in oil price and that really is the main driver.
For that reduction, but with the potential acquisition closing in the fourth quarter, that's going to load up that future drilling with some higher oil properties, which will just continue to help support that borrowing base going forward.
Okay.
Got it and that and just last one from me you you mentioned.
A minimum.
Drilling and legacy assets to hold acreage Im just curious are there any commitments associated with medallion.
Why are you to keep production a certain level or.
Drill in that area.
To meet.
Any sort of.
He sees or anything like that.
Yes. This has been Klein and we've obviously.
Centering on marketing and midstream.
Management.
While we do commitments.
With certain midstream companies, there's very ancillary concerns or whatnot in regards to fulfilling our commitments with our existing.
Based production.
So you don't expect any any penalties associated with.
Upon and that would push up some of your cost more than we would expect.
Strictly minimal if any.
Got it.
Thanks for talking to us.
Okay.
Thank you.
Next question comes from the line of Kashy Harrison with some energy your line is now open.
Turning and thanks for taking my questions.
Hey, guys.
Hey, So just a few quick ones from me.
Can you walk us through.
The strategy on the on the net royalty acreage I'm, just wondering whether that could be a candidate for monetization.
To help accelerate value for shareholders.
Yes. This later when we were again working through this acquisition with this value that.
As a whole with it but as we move forward and Thats something that we need to consider theres, a higher value than we would place on it again everything's for sale at the right price. So for US we like the incremental royalty in production that comes with early on but.
Well can definitely consider that as part of our strategy and with the right next step it.
Got it and then and then switching gears a little bit I know, it's certainly.
Not if it's not anything coming anytime soon but I was just wondering if right now you all had some high level thoughts on how you might attack the 2020 to 2023.
Sure debt maturities that are that are coming.
Yes. This is Michael.
The 2020 twos come in January and we're actively walks in the market.
Yes premium on that front rolls off in January So I think where we're at today is that where we've been out for the last six or nine months is we're beginning to watch the market and we're just to be really tactical.
About refinancing the 2020 twos when the time is right. We don't know much pressure today, but as you roll into next year, we're not going to allow them to go current.
So we're just trying to keep watching the market and.
What happens.
Sounds good and then final one from me.
More of a modeling question than anything I was just wondering if you could remind us how we should be thinking about.
Oil base declines entering 2020 and also how we should be thinking about.
Just maintenance capex to hold oil volumes flat over the next several years given all the improvements in the cost structure lately. Thank you.
Yeah. This is Jason I mean, what we'll we'll have to get to one we've got these my end of the maintenance capital just changed with these assets. So we will will African to run through those numbers are different than anything we've done in the past just because these are so much more productive than the legacy assets that we've got.
Okay Gotcha. Thank you. Thank you.
Thank you. This concludes today's question and answer session I would now like to turn the call back to Mr., Ron Hager for closing remarks.
We appreciate you joining us this morning for our call and this concludes the incurs conclude the call for today. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.