Q3 2020 Laredo Petroleum Inc Earnings Call
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Ladies and gentlemen business to offer anything today's conference. This is scheduled to begin momentarily I'm sounds at times your lines would be placed on hold until the conference ticket.
Again, ladies and gentlemen, this is the offering is.
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Good day, ladies and gentlemen, and welcome to Laredo Petroleum Incorporated's third <unk> when did Wendy or evenings conference call. My name is Fred Z and that will be your upper eastern for you today at this time all participants are in a listen only mode, we will be conducting.
A question and answer session. After I got financial and operations report. It's a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce Mister Ron hate good byes precedent Investor Relations give me procedure.
Thank you and good morning George.
Me today, and adjacent <unk>, President and Chief Executive Officer, Harry Chandler, Senior Vice President and Chief Operations Officer, Brian Lieberman, 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 her beliefs.
Expectations forecast and assumptions are intended to be covered by the safe Harbor provisions will get a prize private Securities Litigation Reform Act of 1995.
Actual results may differ from these forward looking statements for a variety of reasons many of which are beyond our control.
In addition, we will be making reference to non-GAAP financial measures reconsider.
[noise] reconciliations to get financial measures are included in yesterday's news release.
Yesterday afternoon, we issued a news release and presentation detailing or financial and operating results for third quarter 2020.
We will refer to the presentation my page during today's call.
You do not have a copy of this news release your presentation you may access it on our website at Www Dot Laredo Petro Dot com.
Oh now turn the call over to Jason plug, It President and Chief Executive Officer.
Thank you Ron I appreciate everybody joining us for the third quarter Twenty-twenty earnings call.
I hope everybody who's staying safe and our country perseveres through the challenges posed by the pandemic.
The radio his performance during the third quarter exemplified what our strategy is all about our actions not words demonstrate how we manage financial risk.
Based on continuous improvement optimize existing assets and execute are on our planet developing expanding high margin inventory.
A strong hedge physician continues to support cashflows contributing to $71 million in free cash flow generation during the quarter, which was we used to reduce net debt by $64 million.
We also added to a robust 2021 hedge position that prices above the current strip that supports our future development activities and enables us to operate through volatile commodity price environment.
We continue to drive operational improvements keeping employees related expenses in check with costs down 21% from this time, a year ago and equally impressive reduction or at least operating expenses of 18% as we strive to maintain our operational pole position.
Despite the move from our established position to are required position in Howard County, there's been no let up in our efficiency and we are a company record or near record levels in both drilled and completed feet per day as our completion teams returned to action.
These wells come on line by the end of the year. They will help to drive an inflection point in capital efficiency journey 2021, as we focus on our activities in Howard County.
Additionally are based production continues to outperform expectations, primarily driven by white gas production from our established acreage physician. Please.
This outperformance is driving additional cash flows, especially as well how pricing improves we.
We are increasing our full year 2020 production guns for both oil in total production with no increase in our capital budget Mark and the second time. This year, we have increased bull your total production guidance.
In October we announced a bolt on acquisition of over 20, 710 acres in Howard County, and extremely low prices for the undeveloped acreage.
We've put together a very talented team that excels at being both persistent and patient to create these wins for Laredo.
In less than one year, we have added almost 16000 acres of high quality oil waited inventory and significantly amplifies the impact of our capital investments as a company.
This will remain one of our top focus areas as we look to continue extending our inventory with these types of transactions, which we have funded with our credit facility and are immediately accretive to shareholder value.
Brian will now give some more details on our financial performance.
Thank you Jason.
<unk> 21, as we move to higher margin more capital efficient acreage are 2021 program will better position us for 2022.
This dynamic supports our EBITDA in debt ratios in the future years and it enables accompany to progress towards the consistent free cash flow generation with that I will turn the call over to Karen for an operational update.
Thank you and good morning, everyone.
Throughout 2020, our operations tables had done an amazing job of maintaining efficiencies and lowering costs.
Even as we've gone through a series of the deceleration and acceleration of our program during the year.
Added on top of that this accomplishment has been achieved as we move from our establish acreage position two hour acquired acreage positions in both western Glasscock and Howard counties.
On slide six the top chart shows that we set another company record for eight drilled per day per ring.
And we are also very near a new record for completed feet per day per curve.
On the completion side the performance in the third quarter is even more impressive.
The principal of our strategy.
In the last 12 months, we have been extremely successful, adding oily high margin inventory at accretive prices.
With five combined transactions in Western Glasscock, and Howard County, we've added almost 16000 net acres.
1600 Boe per day of production at the time of purchase and a 165 to 200 undeveloped locations.
2021, all completions are currently planned in either Howard County, or Western Glasscock with the vast majority being in Howard.
On slide 10, the increase in capital efficiency show as we move from our established acreage to the acquired acreage positions.
As shown on the chart on the right.
The first year oil productivity in Howard and Western Glasscock is about 40% higher than our established acreage.
At the same well cost.
As Brian mentioned earlier this ties directly to our objective of consistently generating free cash flow in the future.
As we build a production base in Howard County, and support that with increased inventory from bolt on transactions that have been financed with our credit facility.
I will now turn the call back over to Jason for some closing comments.
Thank you Karen.
Very exciting times for Laredo.
The plan that we communicated about a year ago continues to build momentum.
We are focused on execution and building shareholder value.
So I sit down T.
We have a question coming from the line Bryan singer of Goldman Sachs. Your line is now open thank.
Thank you and good morning.
Good morning, Brian Natural gas has historically been you have a reason for it in some ways concern on natural gas mix, but with natural gas prices high and oil prices not can you talk about how if at all that changes either where you choose to drill wells in the prioritization or if that has it.
If that could have an impact on capex plants into next year.
Yeah. Thank you Brian Great question.
Yeah, we look at it all the time. So we you know real choices at the moment are to drill in Howard County, or the western Glasscock acreage that.
We picked up again, there's been a significant reduction in the Ah differentials for awhile, so that is definitely adding some.
Since it seems like this is largely on the Howard County, well ramp up what you see is the upside and downside risks to getting to that 27 to 29000 barrel a day range next year.
I get for US I think it just just a new area for us and so we are continuing to modify completions out there as as we highlighted we have actually drilled faster and completed faster in Howard County than we have a core position so great work by the teams there.
Were those victories screeched positive momentum by beginning being able to get wells on quicker potentially it also means that our cost have potential to come down spacing is one of the things that we look at is the ano.
Korea and working for several months with a drilling rig continued so really we weren't seeing anything from the subsurface standpoint now that the frat crew has started up we have about two months of operations, you know behind us and well over half of that first package completed.
We're really not seeing anything that would you know really cause us to have any different forecast over how we've been completing packages I N at on our legacy acreage physician.
Great and it's my phone off perhaps for for your Jason.
Light of your success with a bolt on an ounce during the quarter could you share your views from a broader A&D environment in Midland and the potential you see for additional Bolton's.
File environment right now and we as a company has been fairly hitch heavy.
But we really want to protect the cat and the cash flows.
Which is protecting that downside when things go that they can go bad really quick what you see with all the companies that are in those distress states today I can we we made conscious decisions in the past it really to start to lock up our budget as we get closer to the year. So as we looked at 2021.
There's there's not a lot that could derail and other running the two fractures to start to to re drilling rigs Infract crew. So us we we may lose some upside, but losing that upside is not nearly as bad as what happens when things just start to get them to even get in that downward spiral. So we consider it more protecting the down.
And even I mean are wedges, even hedged with the hedge level that we've got today to protect that program.
Gotcha, and and just to check and that's on the gas side as well sort of the same thinking basically.
Gas presently is not hedged quite as heavily as oil I think we're roughly 62% on the gas side today for 2021, where where 80% on the oil side, but it's something that will consider as we go forward and do we lock in prices as we've seen them higher.
Great and you mentioned.
In the future.
Development, you might be looking at altering the spacing a bit and you were saying maybe the next one would be more like a.
A 12, well spacing and I think he said that you're you're looking at doing a little bit different wine rack style.
Array of of drawing the world compared to your parents could you just talk a little bit more about what's driving you're thinking on that and what you think or hope you might might find.
Yeah, Hi, this is Karen Yeah. So is we've continued to look at all the offsets in Howard County, and then you know obviously going into our own development. We're really looking at spacing incompletion design across our Howard County acreage Uhm, yeah kind of east to west as somewhere.
So we talked about the original development at 880 spacing in the upper Wolfcamp Middle Wolfcamp and 13 20 in the in the Sprayberry, so still in that range, but really thinking of all of us know somewhere between 880 and 13 20.
So really just optimization for each one of our will cancel any points and also looking at sprayberry Uhm. So we still see those as the three primary landing point.
<unk> all of our experienced in the legacy acreage, we still definitely planned to co develop those three lending points to minimize infill parent child. So it's just optimizing as we look at the individual D issues as you move through the package and the same thing completion design right now we're pumping kind of on the high end.
Of the completion sizes sand, then and water in the area. So again when it continue to look at with it in our spacing how to optimize that is designed you guys. We just moved to the development.
Great. Thanks, if I can just ask one more you you did mention that with some of the mergers would've happened recently.
Maybe some of the.
Other operators were in your backyard might have acreage that might not be non-core for them. It's been awhile since I've looked at a map showing whose whose near you in your area. I'll go deals. We've had announced recently are there any in particular, you think my uhm.
Might have acreage that would qualify.
Yeah, I can't speculate uhm right now again those those companies are in the the heat of getting their deals done, but you know as.
As we talked about gas prices being higher the Midland Basin starts to look good I'm Howard County, again, it's still where we're focused today, but all of those companies more or less have acreage uhm that is in the Midland Western Glasscock area enough up through Howard, but you know when we think of acquisitions things that we are looking for are.
Little blocky greater than 5000 acres. They they traditionally have been more than 55% on the oil from we may be a little more flexible with that going forward, but those are the types of things that we look for in again, there there should be plenty of opportunity in our backyard I can we are heavily hedged uhm.
There's a lot of other companies that are not hedged to the degree we are there will be more financially stressed next year. So those those are things that we think create these opportunities for us we've got the liquidity to go pick up acreage at all time lows or discounts. So those things all work in our favor and like I don't I don't see any reason that we won't.
Have continued success doing what we've done over the last year.
Gotcha, and just do any of those that you you do might have on your radar screen would any of those be non up where you might you know with changes going on around you might be able to pick up operator ship.
It's probably don't focus much as much on non up with once we get the operations I mean, we're working deals that you know we want to extend laterals from 5000 feet to 10000 feet and those create opportunities for either J O as or opportunities to purchase the acres because or two two companies with a 5000 foot.
Steady gains quarter over quarter, and so you kind of run your average around that 28000 midpoint.
I'll get you pretty close to what you're talking about on your Q4 number.
We're hoping the difference I see with our.
Our DSMB, we've we've kind of last year, So we're front loading activity, which created.
Stark contrast, and production profile, but this year with the steady crew, it's a fairly uniform increase in production profile, we except for this first batch that Clint you've got a 15, well slug coming on it.
It will be a big jump early.
Okay. That's helpful. Jason.
Follow up.
Not taking into account any additional savings around sand or service cost or completion designs. The other things that we're also beginning to work on now that we're back active in Howard County, with our completion.
I understand you're saying again like we mentioned, we we pump 2400 pounds per foot theres, an offset operator. This comps 2000, so if we decide to make that.
That move it's going to it's one of the things that can happen overnight to sell but we're looking at it with that.