Q4 2020 Laredo Petroleum Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to Laredo Petroleum, Inc. 's fourth quarter 2020 earnings Conference call. My name is Josh and I'll be your operator for today at this time all participants are in a listen only mode. We will be conducting a question answer session. After the financial and operations reported as a reminder, this conference is being recorded for replay purposes.
It is now my pleasure to introduce Mr. Ron Hagood, Vice President Investor Relations you May proceed Sir.
Thank you and good morning.
Joining me today are Jason.
The President and Chief Executive Officer.
The and channel Senior Vice President and Chief Operations Officer.
Brian The senior Vice President and Chief Financial Officer, as well as additional members of our management team.
Before we begin let me here.
And remind you that during today's call, we'll be making forward looking statements.
These statements, including those describing our beliefs.
Expectations forecast and assumptions are intended to be covered by the safe Harbor provision.
The private Securities Litigation Reform Act of 19 or anything.
Our actual results may differ from these forward looking statements for a variety of reasons many of which of the individual.
In addition, there'll be the nature of the reference non-GAAP financial measures reconciliations to GAAP financial measures strength.
And yesterday's news release.
Yesterday afternoon, and issued a news release and presentation detailing the financial and operating results.
For your 2020.
Please refer to the presentation and age during today's call.
And you don't have the copy of this nature of the Asia presentation, you may access it and of owner website at Www Dot and Radiosurgery and Pete.
Additionally, we published our inaugural ESG and climate risk report.
And also the access from our website under the sustainability.
I will now turn the call over to Jason Tsai, President and Chief Executive Officer.
Good morning, Thank you for joining us today.
2020% of many challenges for our industry and the team and put together and we adjust to working remotely while maintaining focus on executing on our strategy.
The culture of continuous improvement resulted in substantial improvements across all aspects of our business our transition of our account development and a great example of <unk>.
And to continuously improve the results.
All of our activity to a new area and 2020, turning the Howard County, well online as of May.
On the radio.
And we're now able to demonstrate the results rather than worst impacts for the company to more capital efficient assets.
We completed our first of two well pads.
And Howard County, and the average.
Total production for $10 and Bruce.
And until recently and that weather challenges the council of the production.
The production figures are largely driven from the Wolfcamp wells and the $4 for very well and are just now beginning to ramp the production.
And we also increased our leasehold position in Howard County during the year before.
Interest and very competitive the answer.
Take actions for the last year to manage financial risk and our balance sheet and Chris term debt maturities out to 'twenty and 'twenty.
And 2008, Opportunistically repurchased some of that debt and maintained a robust hedging position and support our development plans for 2020 and.
2020, and made significant strides to embrace of innovation as we launched for digital transformation.
And cloud based framework from the brands.
And for the future.
We are automating manual processes and partnered with.
The owners to build our intelligent well.
Which is designed to increase production and reduce operating expenses and eliminate paperwork and so much more.
Ultra and renovation is being driven at the highest levels of our company and will ultimately impact all aspects of our business.
Operationally the continued to successfully for our business across the position.
And we and G&A versus 2019 levels.
Importantly, we reduced our environmental footprint and clarity.
Net gas volumes by 58% and oil and bar sales by 29%.
Last night and along with the earnings release, and we also published our inaugural ESG and climate risk report.
And this report along with demonstrated success and our greenhouse gas emissions metrics demonstrate our commitment to environmental leadership and our target to reduce greenhouse gas emissions by 20% net.
And the machines to less than 2% of natural gas production and the elimination of routine flaring.
Mike.
And our call and these reductions are versus the levels that are already in line two forward and our industry peers.
And 2020 of the board worked with the executive team to align our compensation structure and the environmental targets and we're experiencing the gains from this environment levels of the organization.
In addition to our environmental accomplishments of calls we are very proud of the progress and social and governance issues and.
The one half of our board is now represents for minorities and we're also diversify and the brands and the board, adding legal financial and technological and executive experience to our team and our.
The reported we also emphasize the strong impact of do not work force hazard ratio with 33% of our professional rules being built.
And our work we also highlight the generous spirit of our company and our employees as we partner with agencies and our local communities tab of lasting impact.
For 2021, and they are on the strong foundation, we have put in place and activity and strategy that was communicated in November of 2019.
And 2021 budget and development plan and I will answer the capital efficiency gains from our shift to Howard County.
The consistent oil growth throughout the year, along with increasing free cash flow generation on the same D&C budget as of last year and fat.
And maintain consistent development program throughout the year when paired with the reduced costs. We expect the complete 25% more of the RFP and 2021 versus 2020 for the same D&C budget.
We remain focused on opportunities to acquire additional widening high margin and acreage at attractive prices.
We also are committed to our valuation framework and the opportunity set for accretive acquisitions of significantly stronger so far this year and we anticipate one of these opportunities will be a catalyst for the continued transformation of Corrado.
I'll now turn it over to Karen for more details of our operations.
Thank you Jason.
Despite the challenges presented the heavy.
Our 2020 development progression early and the ear.
Greg of operations.
And impressive operational for yourselves.
We transitioned from the Greg the completions program.
The average acreage.
And bringing 20 wells and the first quarter.
And completions activity and thank you.
Quarter four months.
We then restarted our completions activity and hopefully transition operations to our Howard County.
And all of this and the reduced drilling and completion costs by 21 per se.
Increased drilling efficiency for per se.
Increased completions efficiencies the 14%.
And completed our first package of wells and Powershares.
And the fourth quarter, we also commenced operations on the call.
Many of them.
And third party operated sales.
And the heart of our Howard capital range.
The first for the operator in the Permian Basin.
Hey, Brian and supply our operations for five years.
Ours reduces truck traffic and factories and the download of miles per month.
And sales of around $90.
<unk> per well for Tinder average.
Sure.
And current service costs, we are calling for the our ability to deliver wells in Howard County, and $540 per foot.
Our first well and the power tariffs were developed in the kitchen.
The 11.
Per well.
The area.
Completions operations begin of this package of wells in early September and grant.
The early be sooner.
And Jim.
Howard County, and take longer to play out and.
And on our established acreage.
Especially in the lower Sprayberry formation.
And things that we're very happy with the.
Early performance of these wells.
As Jason mentioned and performing well and are tracking with our expectations.
Even at the lower Sprayberry wells of our guests now beginning the ramp.
Production.
We are currently and finishing up the completions on our second well package as well well development and well.
And typically the lower sprayberry.
And as package was developed well.
Similar to our assets.
The package sizes to Randy to avoid parent child interaction.
Operator.
Operations of this package for ahead of schedule prior to the severe weather impacts over the past few days and.
Crude completions efficiency all of that activity.
Well the first quarter of 2020 moving into the fourth quarter of 'twenty and 'twenty on the wholesale and.
And the second Howard County, well.
And 2020, what we expect to bring a landlord.
And Howard County, and each quarter.
The for individuals well packages will consist of either 12 or 13 wells.
And will be developed on either eight or 12 wells per day issue spacing in the Wolfcamp.
Considering the rock quality and commodity pricing at the time of the items.
The decision.
And in 'twenty 'twenty, one budget and production guidance incorporate all of the items I just referenced.
Capital of slightly higher than our originally communicated and we are.
Accelerating activity in the 2021.
And we're getting more does and expected without the one frac crew.
And interestingly our oil.
Oil production expectations and also higher as the <unk>.
<unk>, our pull forward, even after adjusting for the longer cleanup times and we are seeing.
And our cash.
I also want to mention and our protect.
Production guidance for the first quarter of 'twenty and 'twenty.
Uncertainties associated with the current weather situation in the Permian basin extended freezing temperatures and severe IC and.
Thank you and our drilling.
Alicia and production of operations for the last 12 cities.
As always our commitment for the safety of Laredo as team members.
And the company's environmental impact.
First property and.
And we experienced zero safety incidents or re leases due to the weather.
Multiple challenges impeded our production and operations over the 12 day timeframe.
Including lack of kill gas and electricity.
Shudder takeaway and processing capacity.
Limited access to well sites and facilities and an amicable vapor recovery units, which are necessary for environmental compliance.
Additionally, completions operations were unable to proceed delaying the drill out of the week.
On the company's 12, well true Ciena Whitmyer package and Howard counties.
Currently drilling and completions activity and resumed normal operations and production is rapidly returning to pre storm levels.
The company currently estimates that the combined impact of shutting in production and complete.
The delay will reduce first quarter 2021 total production.
Approximately 8000 Boe per day and.
Oil production at approximately 3000 barrels of oil per day.
Lastly, I'll make a few comments on our reserves at year end 2020.
Obviously, the nature of the FTC mandated pricing and had the dramatic effect of the volume and value of proved reserves.
Sure.
Given the net.
Both of the volume the.
And the proved developed and put decreased and the economic life of well for sure.
Oh, well became uneconomic at the low benchmark prices.
That being said Howard County development and starting to have the positive impact on our reserve value of.
Already representing 11% of the company's crude.
PV 10.
On slide seven of the two.
Company earnings presentations.
And with the value of our proved developed reserves would be at various oil prices.
Remember this is all in the well count.
At year end 2020.
No additional capital is required to generate the PV 10 value and.
Higher prices.
And I suppose and thanking all of our operations team members for their hard work and dedication to the right over the past few days.
Everyone at West, Texas, and the numerous things going on.
And the weather power outages.
And her issues and <unk>.
Icy roads, both the whole landlord.
Thank you all for helping us manage through this is the whole winter storm and working to keep everyone safe.
I'll now turn the call over to Brian for a financial update.
Thank you Karen and her.
And his opening comments, Jason mentioned of our success managing financial risk and 2020.
For Us this is ongoing and the key principles of our strategic plan.
Executing on our plan in 2021 and played a big part.
<unk> cash flow generation capabilities the company.
Responding to the abnormally low oil prices driven by Covid related demand destruction.
For the patients activity of approximately four months.
And this was definitely the correct actions to take but it did result in the steep decline in oil production.
First quarter 2020, and levels of 31000 barrels a day to fourth quarter of 2020 levels of 22000 barrels a day.
Returning to the oil production levels for the 30000 barrel per day range is the key driver for future free cash flow generation and keeping our net debt to consolidated EBITDAX ratio is low.
2021 plan accomplishes what the hold on many levels and shifting the Howard County, and drive an inflection point and the well productivity and the oil production, Brian and consistent pace of two rigs and one completion crew throughout the year as highly efficient these efficiencies drive free cash flow to the 25% of $40 million range at current commodity.
The price levels, including the our hedges.
To facilitate this program we have continued of our active hedge strategy that has served us so low in the past we did not take this and price alone, we take of broadband and potential downside risk and measure the outcomes.
For the impacts on cash flow and our ability to execute our plan within cash flow.
We believe we have mitigated the downside risk to the point that we can execute our plan within cash flow and a 40% to $45 <unk> range.
Looking briefly at the cost side of the ledger.
And 2020 continued to decrease on both a Boe and and absolute dollar basis for 'twenty and 'twenty one other than the temporary increase in Q1.
10% due to production impact from the winter weather freeze offs, we expect to see a slight of.
The steady increase throughout the year as we turn in line more Howard County Wells and as our legacy production continues to decrease.
And we will also perform Workovers and we did say 2020 low price environment.
And this steady increase and OE is in line with what we have been telegraphing for the last couple of quarters.
G&A expense of 2020 also decreased on both an absolute and unit basis as we reduced activity in response to low oil prices. We made the tough decision to cut personnel to align with the new activity levels, we have maintained our discipline and managing G&A expense and expense.
And to remain relatively flat on an absolute basis in 'twenty and 'twenty, one versus 2020 levels and relatively flat on a Boe basis again other than the first quarter impact from the winter weather freeze offs.
Looking forward Anthony.
And to continue to improve our balance sheet and our ability to fund additional bolt on acquisitions with our bank facility, we plan to utilize free cash flow to pay down the revolver to increase our flexibility and we continue to look for other opportunities to reduce net debt and interest costs.
We are highly focused on accretive transactions that reduced leverage ratios and facilitate the execution of our corporate strategy.
Now I will turn the call back over to Jason for closing comments.
Thank you Brian.
I'm very excited about 2021 from the radar.
We are now positioned the demonstrate the expected capital efficiency productivity and cash flow generation capabilities of oil development in Howard County.
And we're confident and our operational capabilities and we'll continue to focus on adding additional one of the thing I'm.
Margin locations and attractive valuations.
Risk mitigation and continues to be the basic principle of out of the copper Inc, or <unk>.
Balance sheet remains strong for the challenges of 2020, and we have them.
Constrained our strong focus on ESG performance and transformation of planning and communicated just 16 months ago is working and we are determined to drive it for and build upon our success.
Operator, please open the line for questions.
Thank you as a reminder, the task a question and you'll need the press star one on your telephone to withdraw your question. Please press the pound key.
Limit yourself to one question and one follow up please stand and ballroom and compile the Q&A roster.
Our first question comes from Derrick Whitfield with Stifel. You May proceed with your question.
Thanks, and good morning all.
Good morning Derik.
For my first question I'd like to focus on Karen's comments on spacing and Howard County.
Karen and based on the limited data and you have how are you generally thinking about space and across your position at current pricing and are there any other notable adjustments or areas of opportunity like to incorporate and you give for D. C design of flowback and fruit.
Yeah. Good morning. Thanks.
Thanks for the question, yes, so we've talked about and prior releases that we wanted to look at different potential space for.
And all of the plants in the Wolfcamp.
So we're looking at both of the 12 well.
And eight well development there.
The first two packages that you talked about are based on the tighter spacing and the next couple of packages that we're developing right now will be on the wider spacing.
Really we're looking at one and getting a little bit of.
Look at the spacing configurations, and Howard County, with our first well packages and the.
And also as we mentioned and just making the decision based on spacing.
And based on the economic decision at the time and.
I like that because the the <unk>.
Packages that will be bringing on the third and the fourth packages the.
The investment and decision was made in the middle of 'twenty and 'twenty on the drilling operations of the dog, so and a little bit different commodity environment.
And so as we continue to look at the different states and different development plans and we're continuing to look at completion designs are really around the optimizing knows both for the wolfcamp at the different sites and also for the spray Berry.
At the two where we're.
Part of that is testing new completion designs and we don't have all of the cost and and we're getting the final cost and for the first package of wells and the wells. We've drilled so I think theres going to be opportunity to continue to drive costs down and we just need to get all of those cost and and fully baked and yeah. We'll look at that as the year goes on at what our cost should come.
Down from where we are today.
And that's great and for my follow up perhaps with the Jason or Karen.
With regard to your 2021 guidance are you effectively raised your old guidance. Despite the weather effects you experienced in Q1 that seemingly suggests the stronger production profiles and previously thought.
Could you, perhaps speak to the production trajectory and potentially offer color on the expected exit rate for 2021.
So I can comment on for the production profile itself.
So we actually added in the deck this time around.
The results of the first Howard Pat Howard County package of coming online and.
And we did split out the wolfcamp.
And the Sprayberry formation specific like so as we mentioned and it's early but well performance all of those on that first package is meeting expectations. So everything is looking good there I'll also comment the in addition to the production profiles that we're seeing.
And the Howard County, again, with the first packages coming in and a little bit tighter spacing and the Wolfcamp. We also awesome highlighted by our sand completions efficiencies continue to improve.
Again shows datas for the fourth quarter, which is continuing to be on the upward trend and that also is impacting net production guidance.
The because you're just getting more footage dawn and 'twenty 'twenty, one and then what we originally went out with.
So both of those two things really impacting net increase in the and the.
Yes, and Derek this is Bryan on the production rates for the out of the year I think we've talked in the past that you'll kind of state of the steady increase of throughout the throughout the year and so the the annual number will be kind of the midpoint. So.
And we're a little bit below the the guidance we gave for the year.
Today and will be above it by the end of the year and this is pretty much pro rata and we're going to see of pretty much steady increase.
The timing of it could be a little little lumpier with packages coming on but generally speaking on a quarterly basis, you should see that net oil production step up throughout the year. The increase is really just up.
And characterize it is pro rata increase over what we kind of been expecting.
And one of the big changes for US this year are the.
Pivot to co development, and Howard County, and so are our production now and when wells come on and they come on and 12 to 16, well logs versus we were doing smaller pads before and we've been tried to incorporate some of that into our weather hit and the good for care and to just kind of talk a little bit more about.
The weather and how we thought about forecasting some of that as we're moving forward.
Sure.
As you just kind of back up as temperatures warmed up and you know over this last weekend and that's really what we were able to get all of our drilling and completions operations back up and really running at full pre storm operations really through the weekend. We were also able to bring all of the majority of of production and get it all back online.
Yesterday, we were estimating that we were back at about 80% of the pre storm levels from the production standpoint.
So we talked about and the release the operations were impacted in some way of total of 12 days.
I'll also add that we were at or below 50% of our production levels before the storm for about six of those days.
So the overall.
And I mentioned, where we're getting everything back all of them.
And our production and as everyone on the call knows is very concentrated the one area. For example, all of the new wells that we're bringing on and for key really impactful one of.
The boy well package and Howard County, So our 15, well package and so any of that like the recent weather and it can really be very impactful to our total production because it is so concentrated.
So we're still getting all of our operations and production back online from the storm and we went with the higher end of the potential impact and our guidance release, and we'll continue to evaluate as we get everything that all the production I get fully back online and the launch.
And the next few days.
Great update and thanks for your detailed response.
Thanks Derek.
Thank you the and as a reminder to ask a question you'll need the press star one on your telephone. Our next question comes from Brian singer with Goldman Sachs. You May proceed and good question.
Thank you and good morning.
Good morning.
Just one question this morning, and it is a little bit of a follow up to Derek. The first question is with regards to inventory based on the results that you are you are seeing from Howard County is that impacting how you think about future locations and then how does that impact, especially with commodity prices.
Having moved higher your interest and ability to acquire more and in 2021 or beyond.
Yeah, and a lot of our inventory and we've got the range out there and it's been updated for this year.
So it will there are some impacts with spacing, but again it can be for wells are and what we're talking about is the swing for a 280 acre. So we're gonna went through that and the answer changes some with price and so we continue to look at price, where we're ahead of that and so when the 12 well packages.
Were put out there when the oil price was much lower so we were drilling those when oil was and the $40 range and so.
And we will continue to be flexible, but we also need to just get the results. We're doing our design different than some of our other peers. We've got four wells and the sprayberry wells and the Wolfcamp. Some companies are six wells and the Sprayberry six wells and the Wolfcamp. We think this is the the right design for us, but we will continue to.
The test that and I think just with respect to bringing in inventory and that's something that we need to do with the generated all of the opportunities that we've got organically, we're continuing to do some blocking and tackling there are instances where pulling in of section here or there. It gives us opportunity the drill and 12 more wells the either JV.
And with another part of our J away with another partner or purchasing that acreage. So those of the blocking and tackling types of things that we do on a regular basis and we.
Bought brought and acreage for 25 or 2500 acres last year at $2500 an acre, but just sold for $10000 an acre plus so.
We've been very good and bring it in and it's hard to say exactly how that come in each.
All of the acreage we brought in a day.
Day has been some negotiated with landowners some of his wasn't it.
And some was a negotiated transaction, so we bring opportunities and and multiple different ways, but everything that we're drilling today, we didn't have and our portfolio just over a year and a half ago. So we will continue to be.
And do well at bringing and those opportunities, but it's hard to describe exactly how they are and because we've used multiple methods to bring those and so far.
Great. Thank you very much.
Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to Ron Hagood for any further remarks.
Thank you very much for joining us today, we appreciate your interest and Laredo and this concludes this morning's call.
Okay.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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