Q1 2020 Earnings Call
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Good they ladies and gentlemen, and welcome to the right all petroleum incorporation first quarter 2000 at 20 earnings Conference call. My name is to Wanda and that would be operated for today.
At this time, all participants are and I listen only mode, we will be conducting they question and answer session.
For natural and operations report.
As a reminder, this conference is being recorded for replay purposes.
Now my <unk> my pleasure to introduce Mr. Raw, Hey, good Vice President Investor Relations. So you May proceed.
Thank you and good morning.
Wanting me today, or Jason pocket, President and Chief Executive Officer.
Chandler Senior Vice President Chief Operations Officer.
Michael Bar, Senior Vice President and Chief Financial Officer.
As an additional members of our management team.
Before you begin this morning.
Me remind you that during today's school will be making forward looking statements.
Statements, including those describing or beliefs goals expectations for cannot stand assumptions are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
The company's actual results may differ from these forward looking statements for a variety of reasons, many of which were beyond our control.
In addition will be making reference to non get financial measures.
Conciliations to get financial measures are included in yesterday's news release.
Yesterday afternoon, the company issued a news release and presentation detailing his financial and operating results for first quarter 22.
We will refer to the presentation by page during today's call.
You do not have a copy of this news release her presentation you may access it on the company's website and W.W.W. Dot Laredo Petru Dot com.
They'll turn to the call over Jason Vargas, President and Chief Executive Officer.
Good morning, and thank you for joining us on our call today.
You and your families are healthy and safe during these trying times.
As you written or press release, you're just you're yesterday, a radio continues to improve and nearly every aspect of our business. Despite the challenging circumstances, we're facing.
In November 2019, we put for our strategy for increasing stay color value, which we outline on something like three.
Oh this strategy was formulated and a very different commodity price environment. We believe it is still actionable in the current environment.
Results in the first quarter 2020 demonstrate our success optimizing the value of our established acreage position.
Reduced elouise from 334 between the first quarter of 2019 to to 80 per meal you this quarter.
Reduced to be into costs from $700 a foot in the first quarter of 2019 to $630 per foot or.
Are wider space wells continued to outperformer type curve, our core acreage footprint as well.
Additionally, we continue to expand our footprint how're accounting, adding 1300 acres. So far this year continuing to bolster our position at a significantly reduce.
Imperative prior transactions in the area.
Mm.
And this tough operating environment, we believe there will be opportunities scale up our operational advantages using our financial position to make capital of creative acquisitions, which improve our capital efficiency and enhance margins.
While the current environment is very different from what we saw for most of the first quarter. It was our operational capabilities and risk management that drove our results during the quarter.
Turning to slide for you see we surpassed expectations for production uncontrollable cash cost.
And very importantly in this environment are strong financial management was demonstrated as we executed 1 billion notes issue ends in a very narrow open window and our commodity derivatives settlements resulted in 34% increase versus our unhedged average sales price.
As demand destruction from efforts to mitigate the spread of covert 19 virus became apparent combined with the actions of okay, plus commodity prices dropped rapidly and we responded quickly and decisively.
One slide five we illustrate are substantial activity for the final nine months of 2020, as we reduced our anticipated capital expenditures to $265 million original guidance a $450 million.
This rapid reduction in capital expenditures drives free cash flow generation and 2020 and delays the completion of our recently acquired Howard County locations into the future when combined prices to stabilize at a higher level.
Turning to slide six since November 2019, we've executed three acquisitions and areas of higher oil productivity compared to our established anchorage position, adding 175 operate locations and these Eric.
These locations paired with our establish Klein locations position arena with 10, plus years of high margin inventory at current activity levels that can benefit from improvement in both oil and natural gas prices.
On Slideseven would demonstrate the leverage our Howard County, Anchorage to higher oil prices. Additionally, we have recently seen well costs decreased dramatically at current efficiency levels and received vendor pricing, we estimate well costs and Howard County, a $5.5 million for well.
It's 20% reduction from your in 2019 cost almost doubled the expected return to dramatically impacts value at a higher oil prices.
Expect to continue operating one drilling Reagan Howard County through the end of 2022 actually the year and with boring ducks position has to quickly resume completions activity and drive Burger capital efficient development.
Last year has withdrawn wolkoff lower we began to brief focused on the climb formation are established acreage position a deeper formation decline was more expensive than our traditional one cat in development on our establish sacred position.
As well costs declined the higher initial productivity of the Kline made its returns competitive with the Wolf camera.
And the first quarter, we completed two Klein well the first in approximately two years, our operations group performed exceptionally.
During the well costs for $7.4 million for well, 8% below expectations and current serves costs, we believe because drill Klein wells for $6.2 million per well.
<unk>, we should at these costs climb well return start to be competitive with those in Howard County.
Continue to see improvement in gas prices, resulting from the dropping associated gas as total on oil volume declines in the permission.
Material benefits to our established acreage physician demonstrate this using our climb type curve, where we observe returns approaching those in Howard counting as gas prices rise.
I would like to turn a call over to Michael now for a more indepth financial update.
Thank you, Jason and the first four months of 2020, we have taken significant actions that have have positive impact on the company's financial decision in January we strategically targeted what became a small window of opportunity to refinance are $800 million of nodes maturing and.
2022, and 2023 on fly nine we short capital structure.
We issued 1 billion him nodes, pushing our maturity out 2025, and 2028 and repaid 100 million on her I'll be all facility.
Throughout April and finalize last Thursday, we worked with the 15 banks in already surveys credit facility during our spring barring base, where you termination, which resulted in a new barring base of 725 million are approximately 25% reduction from our previous barring base <unk> $50 million.
Compares favorably.
The more severe decline in oil prices over that same period. Moreover, our main financial covenants covering the revolver remain unchanged those being our current ratio requirement of one to one and are dead to Eva dog ratio 4.25 times and as it yesterday may fit our liquidity position remains comfortable.
More than $400 million.
I would like to give a brief comment regarding how the financial ratios that govern govern our RBL facility and the financial ratios will use for managing the company and for reporting are different.
Among other items the RBL current ratio have an a calculation gives credit for the and drawn portion of the boring base. As an addition to current assets and the mark to market value in derivatives is removed from both current assets and crime liabilities similar to the current ratio the RBL debt to even Doc covenant.
Also differs from our internal and external calculations with one of the main differences is the treatment of premiums and our definition of a jesse bit off found on page 26 of today's presentation and and are reported hedge prices reflected in D.N.A., we differ recognizing derivative premiums paid.
At contract execution until the period of settlement of the underlying contract.
Looking forward when we file our form 10 q. for the first quarter you will see in M.D.N.A. that we have updated our potential future full cost impairment calculation with current commodity prices as a reminder, this disclosures designed isolate the impacted commodity prices.
Packs of lower pricing than we are now commonly seen such as lower surface costs driving lower capital costs are not included in the first quarter disclosure.
In addition to the debt refinancing and RBL retirement nation, Wesun ethically increase our commodity derivative position for 2021, we added an additional 8750 barrels per day and bring hedges.
Prized of 6007 or 50 barrels per day.
And 2000 barrels per day of swaps.
Realizing approximately 50 million of expected free cash flow for 2020, we bought up for us on the pose resulting in a total 2021, Brent heads position of 15350 barrels per day at a weighted average for price of approximately $53.
Execution of this program secure significant cash flows and 2021 supporting any potential capital program that could keep average daily oil production and 2021 flat with the fourth quarter 2020, X. rayed generating free cash flow and it W.T.I. price of $30 to $35 per barrel I will know pass the <unk>.
<unk> for discussion of operations.
Thank you Michael a casing 19 to open the call and key component of the company strategy is optimizing our <unk> anchorage.
Throughout the company's history, we've done a lot of work around optimal developments faithful and parent child impacts.
These are things drive our current Liders faced development at our strategy and <unk> in larger packages or other than his single targets are single pads.
Since we modified or development spacing and late 28 pool, we've completed a lennon packages when the lighter space wells.
Nine of these packages currently have over 60 days and production history.
<unk> that these nine packages had exceeded our upper middle Wolf can't little type care by 12%.
Helping drive five consecutive quarters at the company exceeding oil guidance.
Another significant part of the optimization story is superior operational performance.
On 512, the top chart shows are drilled feet per day parade and are completed feet per day from true.
You can see from the chart. The operations team has delivered a three year positive performance trend for both drilling on completion.
In fact, the company set yet another record for completions performance in the first quarter and our drilling performance. We may near are all time high set last quarter, even when Oliver rigs transitional to our newly acquired areas in Western Glasscock and Howard County.
And 2019, we reduce well costs by over a million dollars per well.
$680 for for that for 2400 pound per foot completion.
As shown on the bottom chart on 512 in the first quarter of 2020, we have further reduced our average well costs by 7%.
Hundred and $30 for fun.
And have them on the lowest cost and then one day.
In second cooler and 2020, and this difficult time of demand destruction and price volatility.
Related to <unk> and the actions of OPEC plus.
We've continued to work with all of our service providers to look for additional cost reduction opportunity.
At our current receives vendor pricing.
The company expects to be able to deliver wells at or below $550 for fun.
Or a total reduction of approximately 20% from our year in 2019 well costs.
Just as importantly, Laredo also maintains a competitive advantage in our operating cost structure.
Turning to slide 13.
We show that since 2015.
<unk>, 58%.
And have what we believe other lowly unit operating cost innovacyn among our peers.
A key driver is your savings we key from our company old water infrastructure.
Signed 14 shows the extent of the system always built.
And 2019, our system recycled more than 10 million barrels of our produce water.
And we use more than 11, and a half million barrels of recycled water in our completion.
This helped driving and Elouise savings and more than 50 cents per <unk>.
And reduce will cost by almost $175000 parallel.
In the current commodity price environment shedding in production either due to economics proven operating costs.
Are low prices are resulting from story issues.
Consideration for all operators.
For Laredo.
We've established a normal ongoing evaluation process to assess the economics of all of our wealth.
Since 2014.
We've shared in 205 older vertical wells as part of this process.
We expect this process to continue and this price in Ireland, but I want to stress that we do not have an inventory l. uneconomic vertical wells.
That has continued to produce uneconomically that we now need to look at harder in response to the all price decline.
But rather we will continue to evaluate wells there are ongoing evaluation process.
The second part of the shit in evaluation revolves around the structure of how we transport and market our oil.
15, we summarize how we maximize our delivery and sells point performance.
We have in place intro basin from transportation with medallion.
Which then gets us to delivery points for information from transportation on break text and gray okay.
Upon delivery to the Gulf Coast, we have contracts with large international logistics providers and receive Debbie T.I., Houston or rent based pricing.
Our conversations with all Counterparties in this process had been encouraging.
And we currently Billy that we will not have to shed in volumes did third party constraints.
On find 16, we highlight another important advantage of our historical investment in infrastructure.
Are 210 miles, an oil and gas gathering infrastructure.
Make our operation safer and reduce environmental releases.
You can see we are among the best performers in the Permian Mason and player less than half of the peer weighted average.
Oh now pass the call back over to Jason for a few closing comment.
During the quarter of the team continued to perform and improve upon the high standards, we set ourselves improving our cost structure across all aspects of our business.
These achievements were made while we're our workforce adapted to new working situations as we maintain our focus on keeping all the radio employees and service provider safe.
Prior commitments to keeping our costs structure low protecting our cash flows would hedges and appropriately timing the refinancing of our debt places that I've position to be proactive rather than reactive as we strive to create differential value for our stakeholders.
Operator rule now from the library questions.
Thank you.
Ladies and gentlemen to ask the question you we need to press start them one on your telephone.
Withdraw your question <unk> again next I want to ask the question. Please stand by while we compiled the Q. and a roster.
I first question comes on the line up Derek would fail, but stay for your line is okay.
Thanks, Morgan all I certainly commend you in your organization on a positive update.
Thanks, there are good morning.
Perhaps for Jason with the understanding that you will provide a formal 2021 got into three quarters from now would it be fair to assume that 2021 maintenance scenario drilling and complaining 30 hour county walls isn't acceptable planets turret prices or approximately 35.
Over that outlook require the higher price scenario.
I think what we've we've got out later I plan that would be maintenance again as we highlighted on that because the moment to go again, we put in place hedges for next year to protect those cash flows and those activity levels, absolutely should be able to stay egg and free cash flow positive.
Prices as low as 30 to $35.
Great and with my follow up I want it to address the statement near the end your comments in the press release regarding the potential use or free cash flow to pay down senior notes in the open market are through privately negotiated transaction.
Given the potential value this could create with the notes trading immaterial discounts to par wanting to understand how aggressively you could be inclined to pursue this and if there are any conditions are covenants within your debt capital structure that would limit your ability to pursue this action.
Yeah, I'll just talk about the ability to do and then turned over to the Michael Alma Covenant side of it but it's something that we look at it now it's a good return or.
It's hard there's not a lot of liquidity out there in those but something that we're looking at him what ultimately add value or a company that I'll turn over to Michael.
You know from our standpoint, maybe a couple of governors I think one is we're always going to manage to at a minimum being free cash flow positive. So I think that as a governor and then there is a restrictive payment basket maximum threshold in our RBL and currently that is said at $100 million cash.
Thanks for the detail very helpful guys. Thanks for your time as well.
Thank you Sir.
Thank you.
Alex question comes from a lot of catchy Harrison with him in energy Yeah line is okay.
Good morning, and thank you for taking my questions.
My first one for for Jason.
Yeah, you've been you've been pretty clever about <unk> and Oilier position. Then you know it seems like 20 dollar W.T.I., maybe a good time with any to do so if you.
If you have the capability and so I was just wondering if you can't just share your thoughts on what you're seeing in terms of.
Consolidation opportunities and how you think about financing set opportunities without.
Impairing the balance sheet.
Yeah. Thanks could work actually for US again, we're and is is a big pillar of our plan and we've been able to add acreage in our county again, so far this year we've added.
1300 acres.
Kind of multiple ways that we can pursue this they acreage I think out there you'll get it at all time.
Loads and loads for the longest beard time, we've seen so opportunities to purchase laying organically and both on again with it though that low rates.
I think all the things that we've done.
As a corporation to protect our balance sheet.
Which out our debt maturities into the future.
It just to protect our cash flows all those things work in our favor for larger type deal again, R.R.L., we talk about $2, an 80 cents again lowest.
The base in our our G.N.A.S.R. structural corporate layer is also very low so we yeah, it's hard to to say exactly what that looks like in this environment.
Well, we see ourselves is really set up to be successful.
Though price environment because of a low cost structure, we've had for such a long period of time.
Yeah.
Gotcha Gotcha, and then maybe maybe a question for Karen.
Leading edge walk costs from tracking around $550.
Can you can you share some fall on if you think that there might be more deflation to be hard when you get back to work within that 30 to $35 environment that Jason talked about or if you think you you hit the limit on service costs deportation.
Oh yeah.
I think there was costs are always topic to discuss.
So.
Significant in.
Over the long.
The last two months.
Independent.
Yeah, this parent environment with midnight little louder in.
The or Casper.
<unk> service.
So those are the but the $500 for 30 days or what you know, we we can drill well for right now.
<unk>.
Perl service providers Adam received frightful.
Potential amendment up or down.
That's what we're going into base our forecast.
Okay. That's it for me thank you.
Thank you.
Next question comes from the line up Bryan singer you align is okay.
Good morning.
Just a couple a couple of questions first can you talk to the point at.
Would you would consider bringing back on the deck and then also price point for bringing back rigs and <unk>, probably the initial thought it would be to to to consider the oil price, but could you also talk about have gas plays a role in that decision as well.
Yeah. This is Jason again, we've got.
Deck out there that just shows the new economics, again, Slideseven and slide eight which you know sensitivity different prices. So you can see with a great work Karen inner team have done again, we've been able to drive down but the oil price that we need to get positive Raider returns at Howard County, So again, there's turning on it.
I mean, you do have some some <unk> it'd be lower than we show here, but we show you know all in well cost.
Getting ended up good raider returns as low as $35.
And then the gas prices again, it's.
For US is something that was we rolled out the strategy, we're looking to get more oily as a company that still kind of our primary driver.
Or position that we've got is again about we're about or gas oil in jail.
It is where it becomes interesting or well like the line again there are oil Europe. They also have a high gas rate. So we're going to use gas prices rise you get into that three to 350 range of those Klein well have just as Raleigh economics, as we do with a with our wealth and power County, So there's a lot of options for us if you'd have to think about how.
And he's in the <unk> potentially have exposure to gas or one of those few names while a strategy has been to give it to the oil near grow we're we're more efficient with our capital structure.
Position and exposure to gas could also be a string just is.
Associated gas comes down in the army and with oil is shut and things like that occur.
Great. Thank you and then my follow up is that you talk to a in response to the early a question about that some of the optionality on buying back and.
Wondered with free cash flow and your capital flexibility in that kind of higher caught the capital environment. How you think about the choices between building cash on the balance sheets <unk> reinvesting in the business.
In back of debt Earth at the acquisition market and I see your priority.
Yeah, I'll do my best than <unk> got some.
Comments, but when we rolled out our strategy events, we're really trying to do all those things and they all change daily as oil price changes are again with the bond straight at we think through those things, but you know the company.
You know, we want to try to get our debt.
Down which is something we were.
Working on doing especially as we went to the oil your asset so again and get that debt.
By hopeful method to growing or you, but are getting then that down that.
Purchased at a discount today one was just issued in January so that's something that again, we we think a lot about but it's it's really trying to do all those things again, we're trying to balance on this free cash flow positive.
50, but dollar time, but also continue to build inventory it'd be able to grow organically at higher rates as we.
Prior to the shut down we saw.
Are experiencing now or the lower price environment, I mean, we were able to create I've been solid growth.
Out of the Howard County asset. So we're we're trying to manage all those things on a daily conversation as prices change again, oh that changes et cetera.
Yeah.
Won't add too much how to get done and get I would add is you know kind of our heads position for 2020, you know really allows us to evaluate each of those and really make the best strategic decision that needs to be made and you know from that from reducing borrowings on revolver too you know bond buybacks to using some that three cash flow to read.
Completions, rather than January under our current plans. So it's just a lot options out there as we all navigate through a really choppy time to where we are trying to get to a little bit of a point, where there's some stability out there and those makes those decisions a little easier to make where you're not trying to make you know a call on pricing or something like that so time.
To do it with our hedges and but I think each of those things obviously get evaluated on a daily basis.
It is that you have in Unbook would it be under our our real good gives us option value as well to do backed off.
<unk>.
<unk>.
As getting into the $725 million.
Thank you.
Thank you.
The next question comes from the line of cash here.
Energy.
<unk>.
I think I was already on I don't know one on again.
Oh.
And next question comes from the lineup no apart.
Warning.
<unk>.
Hi, I'm, just a a couple things.
I was.
I don't know if you touched on this earlier, sorry, sarathy to come up but at least sequentially. It look like transportation costs.
Went up a bit and I just want to check in on that.
Yeah. This is then fine couple couple movements there, we we for the quarter had the commissioning the graph I blind.
Going into full service.
Okay.
Yeah and doing so there was just a little bit of movement coming out of the the Earth. What we call early service when we were shipping under under the early service period to to the day, but but kind of what we're guiding for for this quarter is going to be reflective of what you should expect the future.
Great and you speaking of infrastructure I was wondering in in this period, where there are industry shut ins and lower activity as running are there any infrastructure projects that you might be able to get done that particularly attractive price that you might.
Sitter moving a little sooner onto the calendar instead of things, maybe we're thinking of for next year.
Not not right now I think one of the things we've really stressed over the last couple quarters and a lot of the heavy spend is behind does a lot of our buildouts have been done early on and on development program and we're we're really capturing the benefit of that and these years are infilled infrastructure.
Albums have been quite minimal. This last couple of years and we don't expect them to change in really up in Howard what we're anticipating doing his leveraging third party.
That are already in place, it's a little bit of a different landscape up there.
With us entering into more mature area that has already been built out by third parties or or plan, there's to really leverage that not employees much infield capital in that area.
Oh God. It's so so just the the overall industry Patsy just not as much capacity or competition I really capacity up there now.
Oh, certainly not having any issues being able to by the home for the oil gas in water.
Great and then just the last one you know looking back and what seemed lifetime ago into January.
You know Laredo managed to do that that that offering at a third about window, where the the markets were receptors.
So just without under your belt and looking at how things have all transpired since I just want to get some sense of what you thought about the debt markets. You you mentioned possibility of.
Buying in more of your own and.
I Wonder if you think that's something you have to be like really opportunistic on the timing of anticipating more volatility or you think it's something you just kinda plug away at throughout the year.
Yeah, I think it's you're going to be you know kind of what we talked about little early or it's just another use of cash that we have today. So I mean those uses our pay down we we've all over you know if we wanted to some open market purchases Oh go ahead, and best and bring it <unk> I think it's going to be pretty often newspeak and we're going to be just kind of watching the market.
It's not something we need to do today, obviously, we have a lot of options and 20, you know we we habit, we started to build a pretty decent head position in 21, which is starts to lock in the cash flows necessary. They really right <unk> the efficient operations that we want to do in I think that's one of our keys is if you see across all of our cost structure from the D.N.C.
Oh, we you know that utilizing that cash flow, we're always going to.
Try to make the best businesses and we can to put it to work to basically generate the best return weekend and I think all three of those buckets are out there you know in in when you're looking at where you know if you just take the bonds, specifically, where they're trading. They were all prices are you know that it can be an attractive return, but I think you also have to kind of way.
No do you want to use like cash flow and late some additional Howard County was a little earlier. So I think it's just something that as as the team and Jason kind of work through this over the next couple of month and hopefully we see some stability that I. You know we're worked incision and no just see how would he balls and the next couple of months.
Great. Thanks, a lot.
Thank you.
And next question comes from the <unk>.
Capital.
Things good morning, everyone.
Probably for Jason to Karen regarding the the continued success driving down costs.
In general terms, what is split between internally generated deficiencies versus lower service costs for both well costen L.L. or we just trying to gauge.
The level of significant savings that could be retained in say 35, 40 dollar even higher.
And I guess I'm optimistic there.
Yeah.
So you know in general we've had really significant cost savings.
Really all of 2000, and like Oh, well now obviously diverse quota 2020.
As we worked through 2000 and night.
Really seem insignificant.
That's continuing which is more pressing given you know that kind of a trend forward.
And you know 30000, I can't recall talking about that we were saying you know in in that cost reduction <unk>, well, let's versus service calls format.
Online, particularly on completion, which is where we've seen most of the cost reduction.
We moved into this year, we you know with their first quarter calls, which ill talked about delivery there living down actually about six or $8 for 50 630, a lot of that is service costs related.
Then you know our forecast forward is also costs related.
Commodity prices alright, so a lot of performance in packs knitting through 2019, and then what we're seeing on the on site, but really this year is more service costs, but well, let's just with everything going on in the log in.
That's helpful. Karen. Thank you and then just lastly for me.
Looks like you're you're able to to acquire them Howard County acreage in some very attractive prices would the typical associated royalty with that as it has it bumped up any because the lower cost or is it still pretty standard.
Say, that's pretty standard for right now, but again the world is changing a little bit. So so you go and we'll see what happens it going forth. It again the cost of come down materially that's something that works I about.
I talked with me thank you.
Thank you.
I'm, Sean no further questions in the queue.
Right.
Closing remark.
We appreciate you joining us for a call. This morning had this concludes our call and have a great Dane.
Mm.
<unk> Okay. Thank you.
And you May now disconnect everyone, everyone to for a day.
Oh.
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Oh.
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