Q3 2021 Laredo Petroleum Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Laredo Petroleum, Inc. 's third quarter 2021 earnings conference call. My name is Bryan and I will 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 report as a reminder, this conference call is being recorded for REIT.
Play 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 probably got President and Chief Executive Officer.
Karen Chandler Senior Vice President and Chief Operations Officer, and Bryan Lieberman Senior Vice President Chief Financial Officer, as well as additional members of our management team.
During today's call, we'll be making forward looking statements. These statements, including those describing our beliefs goals expectations forecast and assumptions are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1995.
Our 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.
Reconciliations to these GAAP financial measures are included in our press release and presentation, which we issued yesterday the details of our financial and operating results for the third quarter of 2021.
Do not have a copy of this press release or presentation, you may access it on our website at www Dot Laredo Petro Dot com.
I'll now turn the call over to Jason <unk>, President and Chief Executive Officer.
Good morning, and thank you for joining us today, our strong third quarter results demonstrate our success integrating the <unk> acquisition.
We're entering the fourth quarter in 2022 with strong momentum, both operationally and financially before jumping into our quarterly results. Let me take a few moments to reflect on our key strategic accomplishments over the last two years.
Like most of our industry prior to 2019 Laredo is stuck in a cycle of outspending cash flow to pursue growth and to maximize production.
Our balance sheet was heavily levered, our inventory was largely gas weighted and the prospect of generating sustainable free cash flow was far in the future. We are much better positioned today in two short years, we have fundamentally transformed Laredo and are now focused on generating free cash flow improving our margins strengthen our balance sheet and operating with a <unk>.
ESG standards.
Radio has always been fortunate to have a strong operational team with a track record of creating efficiencies and optimizing the development of our assets. We have all the key ingredients required for sustaining long term value creation, let's review some of the key highlights.
First we have a car T assets that lengthen our inventory life and grew margins through increased oil cuts.
We've added more than 55000 net acres of oil weighted high margin inventory underwritten that oil prices well below today's strip.
With seven years of quality oil weighted inventory, we fully transitioned our development program to the highest rate of return projects.
With an improved asset portfolio and disciplined capital investments, we're now positioned to deliver sustainable free cash flow beginning in the fourth quarter of 2021 at current commodity prices.
We recognize the importance of this to investors and we'll continue to run the company with this goal in mind.
Third our capital structure has significantly improved and we are focused on reducing leverage to under one times net debt to adjusted EBITDA potentially as soon as 2023. This trajectory will allow us to consider more shareholder friendly actions in the near future and return cash to our owners.
All options are on the table and finally, we recognize that simply producing our products and delivering returns is not enough. We have redoubled our commitment to ESG excellence and are proud to be pursuing multiple projects that will reduce our environmental footprint.
We have proven our ability to capture value, adding transactions in todays competitive A&D market. Our operating teams are second to none and we will seek to continue to find innovative ways to create value on new acreage, while improving margins and maximizing inventory, we will continue to seek accretive leverage reducing transactions to accelerate and further increase the competitiveness of our company.
<unk>.
While we are proud of our collective accomplishments our management team and employees are hardly satisfied and we recognize the great opportunity that lies before us.
Just getting started and are working hard everyday to capture value for our stakeholders I will now hand, the call over to Karen for an operational update.
Thank you, Jason and good morning.
Our operating performance in the third quarter was strong and as Jason mentioned in his opening remarks is indicative of our ability to integrate our acquisitions efficiently and profitably with focus on applying our ESG best practices to the acquired assets.
Just over a year ago, our drilling and completions operations shifted from our legacy leasehold acquired Howard County acreage position.
Our operations teams were able to maintain Laredo has long term positive trajectory of drilling and completion efficiency gains.
Allowing us to further reduce our total drilling completions and equipment cost.
$525 per foot throughout 2021.
Further our innovative approach to sourcing sand for our completions operations continues to pay dividends.
In late 2020, we opened a company owned and operated.
Operated by a third party located within our Howard County leasehold.
Insulated us from rising sand prices and eliminated about 300000 miles per month a truckload.
Further reducing costs and emissions associated with truckload at the time, we expected savings of approximately $90000 per well.
Due to the inflationary pressures in saying our savings now a little over $250000 per well relative to current market prices.
With the recent strength in commodity prices, we are today seeing more pervasive cost pressures and pressure pumping rig rate casing diesel and chemicals to name a few items.
Our teams are working hard to offset inflation with new efficiency gains.
<unk> drilling longer laterals utilizing offline cementing and implementing fast line technology for faster transition times during tracking operations.
We are anticipating inflation of around 15% in 2022 versus our mid year expectations. When we communicated our initial thoughts for 2022 capital expenditures.
With our move to Howard County.
Higher oil cuts are driving not only higher margins, but also somewhat higher ltvs.
Third quarter operating costs were impacted primarily by higher workover expenses as well as required in north Howard experienced higher than anticipated ESP failures.
Going forward low.
Expenses are expected to remain higher driven by increased diesel costs from generator usage anticipated increased workover activity and continued optimization of artificial lift designs associated with the new acquisition areas.
We expect full company yellow to be around $4 or 25 cents per <unk> for full year 2022.
Our team's knowledge and experience operating in the Midland basin jobs more than a low cost.
Our development experience in the Midland Basin also enables real time analysis and application of learnings.
Our first two well packages in central Howard were developed on a spacing of 16 wells per D issue we.
We believed it was important to test tighter as well as lighter spacing in the early development packages.
In the subsequent two well packages, we began to transition our states central wider spaced development, including 14, and then ultimately 12 wells per <unk>.
The third and fourth well packages, which were developed at wider spacing are currently performing 24% and 36% better than the first two well packages driving superior economics and value per section.
In our recently acquired North Howard position results from two well packages are showing very positive results as we gain longer dated production data, we will continue to optimize our development in this area.
Importantly, these packages are confirming our assumptions on spacing and the entire range is co developed bounded semi bounded and unbounded development that can occur in the area.
Laredo is continuing to stay at the forefront of emissions performance in the Midland Basin during.
During the third quarter, we flared and vented 189% of produced gas well.
While higher than past performance. This was driven by the integration of the acquired assets in North Howard <unk>.
Excluding the north Howard assets, we flared and vented 0.55% of produced gas during the quarter. We are now upgrading the acquired facilities to meet our high emission standards and are working with our gas gathering and processing partner to ensure better performance to maximize production and eliminate flue.
Hearing.
Once the facility upgrades are complete and assuming no additional third party gas takeaway constraints, we expect total company performance to strengthen to previous levels.
We've also entered into agreements that further our already robust commitment to emissions reduction we have initiated the responsibly sourced gas certification process on all horizontal wells in our <unk>.
Howard in Western Glasscock County development areas.
Significantly this will cover the development areas that are expected to receive the entirety of our development capital in the foreseeable future.
Conjunction with the RFP process, we have initiated a continuous emissions monitoring pilot on selected facilities in Howard County, furthering our commitment to measure and reduce greenhouse gas emissions.
We have set aggressive goals for the reduction of greenhouse gas and methane emissions.
Along with the elimination of routine flaring by 2025, we are committed to achieving these goals and we will continue to employ state of the art processes and maintained high quality facilities as we deliver on our commitments.
Our performance over the last two years has been impressive.
Our team has proven that we can create value through the sourcing and pricing transactions in a fluid A&D market and then quickly integrate and improve the acquired assets. Further we can accomplish the integration in a responsible and sustainable manner and improve the.
Our rental performance from the acquired assets.
I will now hand, the call over to Bryan for a financial update.
Thank you Karen.
<unk> operations or financial performance. This year has also been strong and has helped drive the transformation of the company.
Taking a look at our third quarter highlights first we closed the transformative <unk> acquisition and parcel legacy PDP divestiture on July one.
And in mid July we issued $400 million of notes due in 2029 terming out our credit facility.
As part of that process, we also renewed and extended the maturity of our credit facility to 2025 and restructured our bank group dropping eight banks that wanted to reduce our energy exposure and adding four banks strongly committed to the sector.
Lastly, we announced our second significant acquisition of 2021 with the agreement to purchase approximately 20000 net acres in Western Glasscock County.
Extending our oil weighted development runway to seven years. This acquisition has since closed in the fourth quarter.
We will enter 2022 with an improved capital structure, a longer runway of high quality oil inventory.
And strong operating and ESG performance.
Minimum stems from our recent strategic and accretive acquisitions.
Our pivot to this inventory is driving an increase oil cut.
Higher margins lower leverage and an improved outlook for free cash flow I.
I would point you to slide seven where we show you the improvement in our oil cut and margin uplift attributable to the increased oil cut.
We have not pursued our acquisition strategy and our commodity mix had remained at historic levels, our cash margin, even with the dramatic increase in natural gas and NGL realizations would have been more than 20% lower than our reported numbers.
At current commodity prices, we are on track to be below one five times net debt to adjusted EBITDA by the end of 2022 and below one times by the end of 2023 to two step process of reducing leverage and reducing our interest burden will position us to consider other sustainable options to return cash to our own.
<unk> sooner than previously planned.
And the third quarter highlights we are seeing continued improving fundamentals, which continue to help strengthen our capital structure going forward.
As I mentioned previously we issued $400 million of notes due in 2029 with a coupon of 2.25% lower than our previous benchmark note.
In October our borrowing base of our credit facility was increased from 725 million to $1 billion.
Our current liquidity based on the $725 million of elected commitments.
Approximately $600 million and at current commodity prices, including our hedges our free cash flow generation in 2022 is approximately $300 million.
While these improvements are impressive we are not nearly content to rest on our success. We continue to look for acquisitions that like the two already closed in 2020, one are accretive on a per share basis, and our deleveraging to the company.
As Karen mentioned, we have demonstrated our ability to integrate acquisitions profitably and efficiently and when combined with our ESG leadership makes us a preferred buyer of assets in the Midland Basin.
I will now turn the call over to Jason for some closing remarks.
Before we take your questions I would like to reiterate a few key points.
Over the last two years, we have made significant strides transforming our company and positioning it for success.
We've acquired high margin oil weighted assets, leading to a higher oil cut and higher margins.
Put ourselves on a path to reducing our leverage ratio to below one times.
Our operations team is successfully integrating our acquisitions and we're focused on sustainable development practices that support our environmental and safety commitments.
We have a group of employees that are second to none and that is motivated to come in every day and deliver on our strategy and create value for all our stakeholders.
Operator, please open the line for questions.
Thank you at this time, if you would like to ask a question over the phone. Please press star and then one on your telephone keypad. If your questions have been answered with should move yourself the queue simply press the pound key and we kindly ask that everyone who is participating in the question answer session. Today. Please limit yourself to one question and a follow up.
First question will come from line of Derrick Whitfield with Stifel. Your line is now open.
Thanks, and good morning all.
Good morning.
For my first question I wanted to focus on a bigger picture topic that you referenced in your prepared comments, perhaps for yourself, Jason or Bryan.
Now that you've obtained seven years of oil inventory and have line of sight to be sub one five net debt to EBITDA ratio by year end 2022, and likely sub one by 2023.
How should we think about your preference for capital allocation between M&A debt reduction and return of capital as we look forward in time.
Yeah.
For us the debt reduction is the top priority M&A can come and go and it's an interesting time right now and were assets that were not worth very much in the past.
Might be waiting for $100 oil before they sell them. So.
It's an interesting environment out there there are plenty of packages coming to the market, but again those those can come and go I think what we've demonstrated in the past is that we've.
<unk> been very thoughtful about the deals that we've done and they have again added value to the company at the time and it's been right.
Been able to use some equity to keep from levering up so.
I think debt reduction as the primary focus if.
If we see good deals, we'll continue to act and grow again, where we're still working on receiving a greater materiality.
The industry, but I think the team has just done a really good job of timing these deals well and doing things that make a lot of logical sense.
Great and as my follow up I'd like to.
Maybe shift over to your production trajectory for 2022.
On last quarter's 2022 disclosure suggested flattish, perhaps slightly down full year 2022 volumes relative to your Q4 guidance is that still a reasonable projection following the most recent acquisition.
Yeah, Yeah, I mean, it's it will be.
It would be fairly flat year over year, and I say, well, we'll give more guidance come February we do have a lot of moving parts. I mean, there are wells that are outperforming, but they're also unbounded wells that but other than the ones that are outperforming so we're going to continue to digest, the new information in Howard County.
We're just now getting in our data from the pioneer acquisition and we've got some good test on.
Wells that are being completed now in four west So theres just a lot of moving parts with all the deals that we've done.
I would say for us we look to the.
Cash flow for 2021, we're expecting about $300 million of free cash flow.
$75 oil.
So it's still going to be a very robust year for us next year. We are working on the capital side, we will upgrade the facilities.
And the newly acquired areas and Theres things like a pipeline that may or may not be in our budget. We fund it versus a third party. So there's just there's still a lot of moving parts, but expect cash flow for next year to be a very robust even with all these moving parts.
Understood Great update and thanks for your time.
Okay.
Thank you and our next question will come from the line of Noel Parks with Tuohy Brothers. Your line is now open.
Okay.
Hi, good morning.
Good morning.
I just had a couple of questions on the.
In your discussion on.
Admissions and ER and flaring and your goal is to eliminate that going forward.
You mentioned I believe that you're piloting some emissions monitoring technologies I Wonder if you could just talk a little bit about that sort of.
What the costs look like and and.
And.
Whether there is a lot to choose from in terms of different vendors.
And equipment out there or whether you pretty much.
No what would work best.
In your facilities.
And I'm, just trying to sort of test out how how well it might work.
Okay.
Hey, good morning. This is comparable burn so our pilot project, we're actually using three different vendors for the continuous emissions monitoring and the objectives of that pilot is to determine which of those vendors kind of provides us the best product and the best.
View of data.
There's a lot of different.
The variables that we're looking for in terms of kind.
What a successful pilot looks like and so that's really the objective of this pilot it's a year long effort. Some locations. We have all three vendors putting their monitoring stations on facilities and in other cases, we have just a single measure.
Monitoring that facility.
Using 10 different facilities to monitor and then we're going to start observing the data as it comes in looking at sampling frequency and the amount of kind of real time observation that we have.
Or any kind of emissions.
It's really the objective is to figure out which of those vendors that provide the best product.
I'd also add we've done a really good job with our.
Our digital transformation here at Laredo, We've actually got some in house Covid that we've written we've got both thermal and optical cameras were.
Focused on these tank batteries, and they're actually able to start recognizing some of these admission.
Emissions as well so we're using both internal and external technology to really again try to reduce our carbon footprint as much as possible.
Oh, great interesting.
And also.
Discussing Emma.
M&A and as you mentioned there are lot of moving parts different moving parts with the transactions you've done to date and I'm just curious for what remains out there on the market.
Do you do any of those.
Operators or have any of them made any strides on working on.
Emissions or flaring or other ESG issues or or is it is it pretty is it pretty unusual to see.
See smaller operators have you made any progress.
So again when I was at a conference in Houston last week. So I do believe some of the smaller operators are.
They must get caught up I think they've been a little bit behind its hard to speak for everybody, there's but again, even in public space theyre going to be some that are.
Greenwashing or ESG efforts and then there's some that are really focused on doing the right thing and I think for some of these small operators. It is a very broad spectrum.
Youre going to see as they put assets to market.
Okay.
And just one last one for me.
<unk>.
As I've mentioned earlier.
In the North Hollywood area.
Learning about.
Founded in semi bounded.
<unk>.
Development of the.
What parts of it.
Talk a little bit more about that just what you've learned and weapons anything sort of non non intuitive.
That's implied by your your work there.
So I think.
Really nothing not intuitive and it is what we would expect to see I think what we're kind of getting into their assessment Josephine packages, which you can see in our in our release you can see that they are performing.
Well.
And so what we're trying to communicate is that.
We're very happy with their performance.
Our unbounded.
Parent wells a single wells.
They are not reflective of our expectations for co developed packages, which is our development spacing pattern plan going forward.
Fair enough.
Thanks, a lot.
Thank you.
Thank you and this concludes our question and answer session for today. So now it is my pleasure to hand, the conference back over to Mr. Ron Hagood, Vice President Investor Relations for any closing comments or remarks.
Thank you for joining us today, we appreciate your interest in Laredo. This concludes our call and have a great morning.
Yeah.
Thank you. This concludes our conference call and webcast for today you may now disconnect everybody have a wonderful day.
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Good day, ladies and gentlemen, and welcome to the Laredo Petroleum, Inc. Third quarter 2021 earnings conference call. My name is Bryan and I will be your operator for today at this time all participants are in a listen only mode. We will be conducting a question and answer session. After the financial and operations report as a reminder, this conference call is being recorded for replay purposes.
It's 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 probably got President and Chief Executive Officer.
Karen Chandler Senior Vice President and Chief Operations Officer, and Bryan Lieberman Senior Vice President Chief Financial Officer, as well as additional members of our management team.
During today's call, we will be making forward looking statements. These statements, including those describing our beliefs goals expectations forecast and assumptions are intended to be covered by the safe Harbor provisions of the private Securities Litigation Reform Act of 1095.
Our 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 brick.
Reconciliations to these GAAP financial measures are included in our press release and presentation, which we issued yesterday the details of our financial and operating results for the third quarter of 2021.
Do not have a copy of this press release or presentation, you may access it on our website at www Dot Laredo Petro Dot com.
I will now turn the call over to Jason <unk>, President and Chief Executive Officer.
Good morning, and thank you for joining us today, our strong third quarter results demonstrate our success integrating the <unk> acquisition.
We're entering the fourth quarter in 2022 with strong momentum, both operationally and financially before jumping into our quarterly results. Let me take a few moments to reflect on our key strategic accomplishments over the last two years.
Like most of our industry prior to 2019 Laredo is stuck in a cycle of outspending cash flow to pursue growth and to maximize production.
Our balance sheet was heavily levered, our inventory was largely gas weighted and the prospect of generating sustainable free cash flow was far in the future. We are much better positioned today in two short years, we have fundamentally transformed Laredo and are now focused on generating free cash flow improving our margins strengthen our balance sheet and operating with a <unk>.
ESG standards.
Radio has always been fortunate to have a strong operational team with a track record of creating efficiencies and optimizing the development of our assets. We have all the key ingredients required for sustaining long term value creation, let's review some of the key highlights.
First we have a car T assets that lengthen our inventory life and grew margins through increased oil cuts.
We have added more than 55000 net acres of oil weighted high margin inventory underwritten that oil prices well below today's strip.
With seven years of quality oil weighted inventory, we have fully transitioned our development program to the highest rate of return projects.
With an improved asset portfolio and disciplined capital investments, we are now positioned to deliver sustainable free cash flow beginning in the fourth quarter of 2021 at current commodity prices.
We recognize the importance of this to investors and we will continue to run the company with this goal in mind.
Third our capital structure has significantly improved and we are focused on reducing leverage to under one times net debt to adjusted EBITDA potentially as soon as 2023. This trajectory will allow us to consider more shareholder friendly actions in the near future and return cash to our owners.
All options are on the table and finally, we recognize that simply producing our products and delivering returns is not enough. We have redoubled our commitment to ESG excellence and are proud to be pursuing multiple projects that will reduce our environmental footprint.
We have proven our ability to capture value, adding transactions in todays competitive A&D market. Our operating teams are second to none and will seek to continue to find innovative ways to create value on new acreage, while improving margins and maximizing inventory, we will continue to seek accretive leverage reducing transactions to accelerate and further increase the competitiveness of our company.
<unk>.
While we are proud of our collective accomplishments our management team and employees are hardly satisfied and we recognize the great opportunity that lies before us.
Just getting started and are working hard every day to capture value for our stakeholders I will now hand, the call over to Karen for an operational update.
Thank you, Jason and good morning.
Our operating performance in the third quarter was strong and as Jason mentioned in his opening remarks is indicative of our ability to integrate our acquisitions efficiently and profitably with focus on applying our ESG best practices to the acquired assets.
Just over a year ago, our drilling and completions operations shifted from our legacy leasehold acquired Howard County acreage position.
Our operations teams were able to maintain Laredo has long term positive trajectory of drilling and completions efficiency gains.
Allowing us to further reduce our total drilling completions and equipment costs.
$525 per foot throughout 2021.
Further our innovative approach to sourcing sand for our completions operations continues to pay dividends.
In late 2020, we opened a company owned sand mine operated by third party located within our Howard County leasehold. This insulated us from rising sand prices and eliminated about 300000 miles per month of truckload.
Further reducing cost and the emissions associated with truckload.
At the time, we expected savings of approximately $90000 per well.
Due to the inflationary pressures in sand our savings now a little over $250000 per well relative to current market prices.
With the recent strength in commodity prices, we are today seeing more pervasive cost pressures and pressure pumping rig rate casing diesel and chemicals to name a few items.
Our teams are working hard to offset inflation with new efficiency gains such as drilling longer laterals utilizing offline cementing and implementing SaaS line technology for faster transition times during tracking operations.
But we are anticipating inflation of around 15% in 2022 versus our mid year expectations. When we communicated our initial thoughts for 2022 capital expenditures.
With our move to Howard County.
Higher oil cuts are driving not only higher margins, but also somewhat higher or lower.
Third quarter operating costs were impacted primarily by higher workover expenses as well as we acquired a north Howard experienced higher than anticipated ESP failures.
Going forward expenses are expected to remain higher driven by increased diesel costs and generator usage anticipated increased workover activity.
Optimization of artificial lift designs associated with the new acquisition areas.
We expect full company <unk> to be around $4 25 per Boe for full year 2022.
Our team's knowledge and experience operating in the Midland basin drives more than a low cost.
Our development experienced in the Midland Basin also enables real time analysis and application of learnings.
Our first two well packages in central Howard or developed on a spacing of 16 wells per <unk>.
We believed it was important to test tighter as well as lighter spacing in the early development packages.
In the subsequent two well packages, we began to transition our spacing to wider spaced development, including 14, and then ultimately 12 wells per <unk>.
The third and fourth well packages, which were developed at wider spacing are currently performing 24% and 36% better than the first two well packages driving superior economics and value perception.
In our recently acquired North Howard position results from two well packages are showing very positive results as we gain longer data production data, we will continue to optimize our development in this area.
Importantly, these packages are confirming our assumptions on spacing and the entire range is co developed bounded semi bounded and unbounded development that can occur in the area.
Laredo is continuing to stay at the forefront of emissions performance in the Midland Basin.
During the third quarter, we flared or vintage 189% of produced gas well.
While higher than past performance. This was driven by the integration of the acquired assets and North Howard <unk>.
Excluding the north Howard assets, we acquired are vintage 0.55% of produced gas during the quarter. We are now upgrading the acquired facilities to meet our high emission standards and are working with our gas gathering and processing partner to ensure better performance to maximize production and eliminate flue.
Hearing.
Once the facility upgrades are complete and assuming no additional third party gas takeaway constraints, we expect total company performance to strengthen to previous levels.
We've also entered into agreements that further our already robust commitment to emissions reduction we have initiated the responsibly sourced gas certification process on all horizontal wells and our Howard in Western Glasscock County development areas.
Significantly this will cover the development areas that are expected to receive the entirety of our development capital in the foreseeable future.
Conjunction with the RFP process, we have initiated a continuous emissions monitoring pilot on selected facilities in Howard County, furthering our commitment to measure and reduce greenhouse gas emissions.
We have set aggressive goals for the reduction of greenhouse gas and methane emissions.
Along with the elimination of routine flaring by 2025, we are committed to achieving these goals and we will continue to employ state of the art processes and maintain high quality facilities as we deliver on our commitments.
Our performance over the last few years has been impressive.
Our team has proven that we can create value through the sourcing and pricing of transactions in a fluid A&D market and then quickly integrate and improve the acquired assets. Further we can accomplish the integration in a responsible and sustainable manner and improve the.
Our rental performance from the acquired assets.
I'll now hand, the call over to Bryan for a financial update.
Thank you Karen.
Like operations or financial performance. This year has also been strong and has helped drive the transformation of the company.
Taking a look at our third quarter highlights first we closed the transformative <unk> acquisition and parcel legacy PDP divestiture on July one.
Then in mid July we issued $400 million of notes due in 2029 terming out our credit facility.
As part of that process, we also renewed and extended the maturity of our credit facility to 2025 and restructured our bank group dropping eight banks that wanted to reduce our energy exposure and adding four banks strongly committed to the sector.
Lastly, we announced our second significant acquisition of 2021 with the agreement to purchase approximately 20000 net acres in Western Glasscock County.
Standing our oil weighted development runway to seven years. This acquisition has since closed in the fourth quarter.
We will enter 2022 with an improved capital structure, a longer runway of high quality oil inventory.
And strong operating and ESG performance.
Momentum stems from our recent strategic and accretive acquisitions.
Our pivot to this inventory is driving an increase oil cut higher margins lower leverage and an improved outlook for free cash flow.
I would point you to slide seven where we show you the improvement in our oil cut and margin uplift attributable to the increased oil cut.
We have not pursued our acquisition strategy and our commodity mix had remained at historic levels, our cash margin, even with the dramatic increase in natural gas and NGL realizations would have been more than 20% lower than our reported numbers.
At current commodity prices, we are on track to be below one five times net debt to adjusted EBITDA by the end of 2022 and below one times by the end of 2023 to two step process of reducing leverage and reducing our interest burden will position us to consider other sustainable options to return cash to our owners.
Sooner than previously planned beyond the third quarter highlights we are seeing continued improving fundamentals, which continue to help strengthen our capital structure going forward.
As I mentioned previously we issued $400 million of notes due in 2029 with a coupon 2.25% lower than our previous benchmark note.
In October our borrowing base of our credit facility was increased from $725 million to $1 billion.
Our current liquidity based on the $725 million of elected commitments is approximately $600 million and at current commodity prices, including our hedges are free cash flow generation in 2022 is approximately $300 million.
While these improvements are impressive we are not nearly content to rest on our success. We continue to look for acquisitions that likely to already closed in 2021 are accretive on a per share basis, and our deleveraging to the company as.
As Karen mentioned, we have demonstrated our ability to integrate acquisitions profitably and efficiently and when combined with our ESG leadership makes us a preferred buyer of assets in the Midland Basin.
I will now turn the call over to Jason for some closing remarks.
Before we take your questions I would like to reiterate a few key points.
Over the last two years, we have made significant strides transforming our company and positioning it for success.
We've acquired high margin oil weighted assets, leading to a higher oil cut and higher margins.
Put ourselves on a path to reducing our leverage ratio to below one times.
Our operations team is successfully integrating our acquisitions and we are focused on sustainable development practices that support our environmental and safety commitments.
We have a group of employees that are second to none and is motivated to come in every day and deliver on our strategy and create value for all our stakeholders.
Operator, please open the line for questions.
Thank you at this time, if you would like to ask a question over the phone. Please press star and then one on your telephone keypad. If your questions have been answered with should move yourself the queue simply press the pound key and we kindly ask that everyone who is participating in the question and answer session. Today. Please limit yourself to one question and a follow up.
First question will come from line of Derrick Whitfield with Stifel. Your line is now open.
Thanks, and good morning all.
Good morning.
For my first question I wanted to focus on a bigger picture topic that you referenced in your prepared comments, perhaps for yourself, Jason or Bryan.
Now that you've obtained seven years of oil inventory and have line of sight to each sub one five net debt to EBITDA ratio by year end 2022, and likely sub one by 2023.
How should we think about your preference for capital allocation between M&A debt reduction and return of capital as we look forward in time.
Yeah, again, I think for us the debt reduction is the top priority M&A can come and go and it's an interesting time right now where assets that were not worth very much in the past.
People might be waiting for $100 oil before they sell them. So.
It's an interesting environment out there there are plenty of packages coming to the market, but again those those can come and go I think what we've demonstrated in the past is that we have.
<unk> been very thoughtful about the deals that we've done and they have again added value to the company at the time and it's been right.
Been able to use some equity to keep from levering up so.
I think debt reduction as the primary focus if.
If we see good deals, we'll continue to act and grow again, where we're still working on receiving a greater materiality.
In the industry, but I think the team has just done a really good job of timing these deals well and doing things that make a lot of logical sense.
Great and as my follow up I'd like to do.
Maybe shift over to your production trajectory for 2022.
Last quarter's 2022 disclosure suggested flattish, perhaps slightly down full year 2022 volumes relative to your Q4.
<unk>.
Is that still a reasonable projection following the most recent acquisition.
Yes.
Yes, yes, it will be it.
It would be fairly flat year over year, I'd say, we'll give more guidance come February we do have a lot of moving parts. I mean, there are wells that are outperforming but they're also unbounded wells.
I don't know the ones that are outperforming so we're going to continue to digest, the new information in Howard County.
We're just now getting in our data from the pioneer acquisition and we've got some good test on.
Wells that are being completed now in four west So theres just a lot of moving parts with all the deals that we've done.
I would say for us we look to the cash.
Cash flow for 2021, we're expecting about $300 million of free cash flow.
$75 oil.
So it's still going to be a very robust year for us next year. We are working on the capital side, we will upgrade the facilities.
And the newly acquired areas and there's things like a pipeline that may or may not be in our budget, we funded versus a third party. So there's just there's still a lot of moving parts, but expect cash flow for next year to be a very robust even with all these moving parts.
Understood great. Thanks for your time.
Okay.
Thank you and our next question will come from the line of Noel Parks with Tuohy Brothers. Your line is now open.
Okay.
Good morning.
Good morning.
I just had a couple of questions on the.
On your discussion on.
Emissions and flaring and your goal is to eliminate that going forward.
You mentioned I believe that you're piloting some emissions monitoring technologies I Wonder if you can just talk a little bit about that sort of.
What the costs look like and.
And.
Whether there is a lot to choose from in terms of different vendors.
And equipment out there or whether you pretty much.
No what would work best.
In your facilities.
And I'm, just trying to sort of test out how how well it might work.
Okay.
Hey, good morning. This is comparable burn so are our pilot project, we're actually using three different vendors for the continuous emissions monitoring and the objectives of that pilot is to determine which of those vendors kind of provides us the best product and the best.
View of data.
There's a lot of different.
The variables that we're looking for in terms of.
Kind of what a successful pilot looks like and so that's really the objective of this pilot is a year long effort. Some locations we have all three vendors putting their monitoring stations.
Facility and in other cases, we have just a single vendor.
Monitoring of that facility.
Using 10 different facilities to monitor in the Morningstar observing the data comes in looking at sampling frequency and the amount of kind of real time observation that we have.
Or any kind of emissions. So that's really the objective is to figure out which of those vendors provide the best product.
I'd also add we've done a really good job with our R. R.
Our digital transformation here at Laredo, We've actually got some in house Covid that we've written we've got both thermal and optical cameras were.
We got focused on these tank batteries and they're actually able to start recognizing some of these admission.
Emissions as well so we're using both internal and external technology to really try.
Try to reduce our carbon footprint as much as possible.
Oh, great interesting.
And also.
Discussing.
M&A and as you mentioned there are lot of moving parts different moving parts with the transactions you've done to date and I'm just curious for what remains out there on the market.
Do you do any of those.
Operators or have any of them made any strides on working on.
Emissions or flaring or other ESG issues.
Or is it is it pretty is it pretty unusual to see.
See small operators.
It made any progress.
So again when I was at a conference in Houston last week. So I do believe some of the smaller operators are again.
Must get caught up I think there has been a little bit behind its hard to speak for everybody, there's but again, even if you're a public space theyre going to be some that.
Greenwashing or ESG efforts and then there are some that are really focused on doing the right thing and I think for some of these small operators. It is a very broad spectrum.
But youre going to see as they put assets to market.
Okay, Great and just one last one for me I think.
Mentioned earlier.
In the North Hollywood area.
About.
Founded in semi bounded.
Development of the.
Different parts of it please.
Can you talk a little bit more about that just.
What you've learned on weapons anything sort of non non intuitive.
That's implied by your your work there.
So I think.
Really nothing not intuitive and it's what we would expect to see I think what we're kind of getting into there the satin and Josephine packages, which you can see in our in our release you can see that they are performing.
Well.
And so what we're trying to kind of communicate is that.
We're very happy with their performance as well, our unbounded and so they're kind of Aflac parent wells a single wells.
And they are not reflective of our expectations for co developed packages, which is our development spacing pattern plan going forward.
Fair enough okay, great. Thanks, a lot.
Thank you.
Thank you and this concludes our question and answer session for today. So now it is my pleasure to hand, the conference back over to Mr. Ron Hagood, Vice President Investor Relations for any closing comments or remarks.
Thank you for joining us today, we appreciate your interest in Laredo. This concludes our call and have a great morning.
Thank you. This concludes our conference call and webcast for today you may now disconnect everybody have a wonderful day.