Q1 2022 Laredo Petroleum Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the Laredo Petroleum incorporated first quarter 2022 earnings Conference call.
My name is Amanda 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 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 adjacent Pigott, President and Chief Executive Officer.
Karen Chandler Senior Vice President and Chief operating Officer.
And Brian let Murray senior.
Senior Vice President and Chief Financial Officer as.
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 $19 95, 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.
Conciliations to GAAP financial measures are included in the press release and presentation.
You'd yesterday that detail, our financial and operating results for first quarter 2022.
Press release and presentation can be accessed on our website at.
<unk> got Laredo, Petro Dot com.
I will turn the call over to Jason <unk>, President and Chief Executive Officer.
Thank you Ron.
Good morning, and thank you for joining us today for a discussion of our first quarter results.
We performed extremely well in the first quarter continuing the momentum we generated in 2021.
First total oil and total production of capital were in line with guidance as the teams continue to execute our investments in Howard in Western Glasscock counties.
We generated free cash flow of $23 million and consolidated EBITDAX of $222 million.
Third we reduced leverage from two one times debt to EBITDA at the end of the year to one nine times at the end of the first quarter.
We also continue to move forward on our initiatives to achieve responsibly sourced gas and oil designation or a portion of our production which was awarded in April Laredo. Now has 31500 BLA per day attributed to a gold rating, which is required for oil to be considered responsibly sourced where.
We are the first Permian operator to receive trust well certifications.
In addition to delivering on our projections in the first quarter, we have positioned ourselves to further deliver on our value creation strategy for the remainder of 2022.
And materially increase liquidity at the value of our assets support a 38% increase in our elected commitment as part of the RVO Redetermination.
We worked with our service partners to lock in 85% of expected drilling completions equipment and facility spend for the remainder of the year and we anticipate achieving our leverage target of one <unk> times by the first quarter of 2023 at current commodity prices.
These successes support the objectives of our near term strategy to utilize free cash flow to pay down $300 million of debt in 2022 equivalent to approximately $17 per share on our current outstanding share count.
This amount of debt repayment would achieve our leverage target of one five times by early third quarter and 1.0 tons for the first quarter 2023.
Our commitment to leverage reduction supports the opportunity to Institute our program to return cash to shareholders by early 2023.
I think prices have been exceptionally strong and the industry is experiencing significant inflationary headwinds.
We continue to drive efficiencies to offset inflationary pressures and secure longer term pricing, where we can.
Work of the team has enabled us to maintain our projection of greater than $300 million of free cash flow in 2022, despite increasing our capital budget to approximately $550 million and seeing our operating costs increased by approximately $1 per Boe.
We remain intensely focused on executing on our strategy to accelerate value creation for our shareholders and delivering our objectives in 2022.
Now have Karen provide an operations update.
Thank you Jason.
As you can see from our first quarter results. Our operating teams performed very well again this quarter.
Our production capital expenditures and number of wells completed and turned in line or all in line with guidance. We did see a couple of days of weather disruptions early in the quarter, but the overall impact was relatively small decreasing quarterly oil production by about 150 barrels of oil per day.
We continue to see solid well performance from both our base and new production empowered in Western Glasscock County.
We are especially encouraged with the production from the two middle Sprayberry appraisal wells.
We did late last year and the North Howard area.
The performance of these two wells strongly supports the essentials, we made when adding middle sprayberry locations to our Howard County inventory.
Based on the strong performance of these two wells.
And their strong economics.
It included eight middle Sprayberry wells into our 2022 development plan. These.
These wells will be incorporated into our current activity levels.
Two rigs and one frac crew and are not being added as additional activity.
We are simply adding wells to currently planned well packages in north Howard.
From the efficiencies inherent in larger packages.
No changes to our spud our completion count for the year.
During the first quarter LOE was higher than we anticipated.
Selecting both inflation and additional costs associated with integration of our recently acquired properties.
A majority of the increase was associated with artificial lift and all that management on newer wells on Howard in Western Glasscock County.
These included higher generator and fuel costs associated with running our USP on new wells in Howard County, using additional flowback crews on Oliver Chabal batteries with limited automation and higher compression and fuel gas costs are running gas lift on new wells in western Glasscock other.
Cost pressures impacting early include higher rates for compression and VR, you rentals workover rigs diesel and power.
We are currently working to manage costs associated with power by switching to LNG generators systems in Howard County, and reallocating facilities and artificial lift to highlight power as soon as it is available in our operating areas.
Also expect to see cost benefits from the work we are doing to retrofit older batteries and consolidate production into new Laredo built facilities in the acquisition of heritage with our cost mitigation efforts, we expect to hold total LOE expense relatively flat for the remainder of the year.
This is reflected in our second quarter 2020 to low <unk> guidance of $5 35 per Boe flat.
Flat to first quarter.
Capital expenditures for the first quarter or $171 million in line with guidance, reflecting the work the supply chain team has done to lock in as much pricing and supply are required Disney services as possible as.
As we continue to mitigate inflationary pressures impacting the industry, we have a locked in second half pricing for about 85% of our operated capital expenditures for the remainder of the year, including completion services <unk> and <unk>.
This will significantly reduce the uncertainty in the remainder of our 2022 capital expenditures and ensures we have access to equipment and crews necessary to execute on our development program we.
We have adjusted our 2022 capital budget to $550 million up about 6%. This updated capital budget fully incorporates the inflation that we've seen to date contracted second half pricing and expected inflation or any areas that are not yet fully locked in for the remainder of the year.
Importantly, with the strength of commodity prices and our strong margins, even with a 6% increase in our capital budget, our cash flow forecast for the year remains unchanged.
I'll now turn the call over to Brian for a financial update.
Thank you Karen.
During the first quarter, we continued to make progress on our overarching financial goal of generating free cash flow, reducing leverage and ultimately positioning the company to return cash to shareholders in early 2023.
When described and inflationary pressures have been impacting the industry and it pushed our operating expenses and capital expenditures above our original expectations for 2022.
We're fortunate that commodity price strength and efficiencies at the field level have fully offset these inflationary pressures as our free cash flow outlook for the year remains unchanged at greater than $300 million in the current price environment. Our investments. This year by design. We're front end loaded so we expect our free cash flow to increase significantly.
Secondly throughout the remainder of the year as quarterly capital investment levels moderate.
Primary focus for the use of our free cash flow remains debt reduction.
Obviously stated leverage goal of one five times net debt to EBITDAX should be achieved during the third quarter and at current commodity prices, we expect that ratio to decrease rapidly and to be at one times by the end of the first quarter of 2023. Our plan is still to utilize our free cash flow to reduce debt.
<unk> $300 million buy.
By year end 2022, our recently re determined RVO demonstrates our bank groups confidence in our ability to deliver on our goals.
Besides increasing our borrowing base to $1 $2 5 billion and our elected commitment to $1 billion. They built in additional flexibility for us to determine how we pay down debt through the end of this year as long as our net debt to EBITDAX ratio is below two five times, we have the flexibility to utilize $250 million of.
Our elected commitment to purchase our call term debt.
This structure provides us with maximum flexibility to determine the best course for repaying debt as we generate cash throughout the rest of this year as we achieve our debt repayment and leverage goals, we expect to be in a position to return capital to shareholders. In early 2023 with that I will now turn the call over to Jason.
For closing comments.
Results in the first quarter, our collection of our accomplishments over the past three years.
Outstanding returns on our wells in Howard in Western Glasscock County has powered our free cash flow generation and deleveraging. The remainder of 2022 will further accelerate this trend as we pursue our goals of $300 million in debt reduction and leverage at or below one <unk> times for the first quarter of 2023.
We believe paying down debt throughout 2020 to deliver substantial value for our shareholders and positions us to begin substantially returning capital to shareholders in early 2023.
Operator, please open the line for questions.
Thank you to ask a question please press star and the number one on your telephone keypad.
Withdraw your question press the pound key.
Please standby will be compile the Q&A roster.
Our first question is from Derrick Whitfield from Stifel. Your line is now open.
Thanks, and good morning all.
Good morning Bernie.
With my first question I wanted to focus on your 2022 plan and your confidence in executing against it.
Consideration of the operating environment.
Fitness and services supplies and labor have.
There been or do you expect any business impacts beyond inflation.
Great question Derek.
I think we feel really confident with locking in the capital where we did right now again, it and it was a factor there or an uncertainty for the future. So again blocking and those completion services and some of the other items is going to be good for us.
As far as the other factors I'm really excited about the wells that we've got coming.
Coming online in Howard County, we've got our first 15000 foot wells coming online.
And some new stimulation techniques that appear to be doing well those wells are just really early in their flowback. So we look forward to talking more about it then.
But that's probably the next quarter, but feel really good about where the company is right now and I think the steps we took on the capital front.
Mitigate a lot of the risk that we would face for the remainder of the year.
Our next question is from the line of John Daniel with Daniel Energy Partners. Your line is now open.
Alright, thanks for letting the dumb oil service Guy asked a couple of questions I appreciate it.
I guess I just wanted to be for Karen.
Can you just.
Walk us through what the opportunity set is in patents.
Production could be with.
Of course, the greater Workover activity.
Yes, so clearly.
Commodity prices has moved around we keep a really close eye on what we're doing from a.
Workover standpoint on all of our operations I was talking about in the past I mean, we really look at it on an ongoing basis in any environment to make sure that.
What we talk about it no ill, let behind that we're looking at each individual well and making the right economic decision for that well.
As commodity prices have moved around it really hasnt impacted our builder activity as much as you might expect just because we have that ongoing.
Ongoing program in place, Okay, but when you look at it like the new well completion designs today versus maybe.
Four to five years ago, just throwing that out.
Is there a material uplift at all when you go back then to the sort of the original horizontal wells that were drilled in.
When do you do that yes.
Yes.
So in general we had done very little work over activity.
Recent horizontal well so mean recent in the last four wells had been doing the last four or five years, that's very unusual activity for us.
There have been a few instances, but it's on something operationally thats very different than the standard well that we've completed.
Okay, Great and then just one final one for me.
So I'll look up at 23, and I know, we're still a ways away at what point do you start.
Reaching out to your contractors.
Negotiate pricing or lock that does that too early.
Yes, so as we've talked about a long as we were talking about in the last call locking in second half.
I really think it's a call on a service by service basis.
What we've been doing is <unk>.
Very rigorous way the supply chain team has been evaluating both the industry and us specifically as far as services and what our expectations are with cost trends and then also availability of services and.
Jason pointed out that locking in second half, we believe really gives us a lot more certainty really reduces risks on cost, but it also gives us more certainty and reduces risk around service availability.
<unk> on a case by case basis, depending on services and our goal is definitely to get 2022 as locked up as possible to give us certainty around the capital budget that we're executing on there are services that we've started to talk about 2023, but I think it's just a case by case basis as we see those services.
Expectations change.
Okay. Thanks.
Okay.
Yes, just getting an understanding of oil for so much volatility in oil price you don't want to be in a situation where you've locked in services at a high price and then oil dropped. So I think we will just as we get closer to next year with that.
Fair enough. Thank you very very much.
Our next question is from the line of Jordan Stewart with Golden Tree. Your line is now open.
Hey, guys. Thanks for taking the question just would love to get an update on the eastern acreage block.
Obviously with the move in gas prices would assume needs continue to look more and more attractive, but just any more color you guys could provide on that inventory.
Okay, Yes.
The gas prices are definitely helping out there when we look at economics, though.
Howard County is so good that they still fall behind that sequentially. So are our economic priority as the Howard County, Western Glasscock, and then the core assets, but again, they do look better with higher gas prices Western gas Glasscock is also a little bit gas here than Howard is it supported as well, but we really.
We really tried to drill our best economics, first and right now Thats Howard County, and we're I'd say, we're where we're drilling some really good wells out there right now.
Awesome.
And then maybe just in terms of <unk>.
M&A just curious the opportunity set that's out there. If you guys are kind of continuing to explore additional opportunities. Obviously the bid ask is kind of wide. According to others, but just curious to get more color on that front, how you're thinking about and how any deal could potentially be financed.
I'll just start with the opportunity set and then Brian can speak on how we might finance it but.
We continue to want to grow and achieve scale as a company. We also want to delever at the same time, so anything that we would look at has to.
Delever us in line with what we're doing today a lot of the packages that are out there that we've looked at have been a little bit more PDP heavy so those don't really fit what were looking at as a company. We want to build continue to build a robust inventory of wells with kind of a lower breakeven that can survive.
<unk>. So that's the priority for us and there just haven't been a lot of those on the market right now with respect to financing I'll turn it over to Brian Yes, I think Jason hit on the fact that you only would still need to be deleveraging along the same lines that we are projecting today. So as we look at those opportunities.
The bid ask or are quite wide right now.
And then I think the type of assets that are out there year to date haven't been what we're looking for but anything that we do.
It would be.
Financed in a way that we would still achieve our debt our leverage reduction goals materially on the same timeline that we've laid out here today. So.
That's how we look at it as Jason said debt reductions.
Primary.
And then you get to return of capital at some point.
The wildcard is when you find an opportunity on the acquisition side to do it needs it.
It needs to not derail those goals. So that's how we're approaching.
This year.
Awesome. That's helpful. And then last one from me it sounds like you guys have done a great job walking in.
Your budget for the second half of the year, even though.
I guess, 15% variable just curious to dig in a little bit more is there any potential for that 550 number to be biased higher at any point or we feel pretty good about that number now.
Yes so.
We've incorporated in the air again as service cost.
As we've seen inflation lock those in.
So what's remaining.
85% is activity forward for the year, so with the activity that's been completed today, we're over 90% kind of locked in on the service side.
So what's in the remaining primarily are areas around chemicals and diesel.
Any difficult to lock those in and clearly there could be some load in those components. So areas that even though we haven't fully locked in that we think that we believe directionally where market may go we've incorporated that into the budget. So we feel really good about this budget. We think it is very tight.
It will be impacted by changes in for example diesel being the most impactful if we're seeing significant changes there and clearly that I can point to the positive or negative depending on what commodity prices are doing the only other add that I would make to that is the activity levels. In this budget are exactly the same as in the original budget.
So we do not plan on increasing activity.
We talked about kind of what the rest of the outlook looks like it's based on our two rigs one frac crew.
But we do focus on maintaining that activity with only having the two rigs in the wound presenting so if we see continued performance improvement.
Activity being pulled into the year, there might be a little bit of that as we continue through the year and really work on getting our performance improvement into the drilling completions program.
That makes sense I guess just in terms of the inflation assumption, obviously harder to lock in Mckenzie in diesel pricing it sounds like but what is the underlying assumption is it 10%, 15%. Just how are you guys thinking about that just if I could have kind of a ballpark.
Yes.
Services I'll give you one additional example, so out of the two rigs that were running right now we will be contracted in the second one of the two rigs.
Working on contract through second half of the year.
And that's in the 15%, but we do feel like we have a very clear line of sight overall on where pricing will be and have that incorporate a resale fully into this budget.
Any areas like that that you will have some line of sight on we have incorporated into the budget.
With diesel for example.
It's going to be where the market goes.
Awesome. Thanks for the time guys.
Thank you.
Our next question is from Joseph Mccain Wells Fargo. Your line is now open.
Hey, guys. Thanks for taking my questions.
Sorry, I hopped on a little bit late so I apologize. If this was covered but I was just wondering if you could talk about kind of the Howard County, well performance.
Given where one to actual shook out in <unk> guidance.
Kind of what your expectations are for the trajectory of volumes for the balance of the year.
And just a business council there so in terms of the well performance in Howard County, we are still really encouraged by what we're seeing from our Howard County, North acreage.
Both the Wolfcamp, a lower sprayberry really are performing well for us up there and we've been especially encouraged by.
Our two middle Sprayberry wells, which we've highlighted in the deck those it really surprised us to the upside relative to our expectations and as a result, we've added eight of those wells to our development program in 202022.
And Howard County, and Central we're still seeing consistent behavior in terms of the wider spacing packages outperforming so we feel like we've got the spacing kind of locked down there in a way that's attractive for us and so we're going to continue on that path.
Got it. Thank you that's very helpful. My other questions were asked so I'll turn it back over to you.
Thank you guys.
Our next question is from Nicholas Pope from Seaport Research your.
Your line is now open.
Good morning, everyone.
Good morning.
I was hoping you could talk a little bit.
On these longer laterals here youre focusing on.
You mentioned, a 15000 foot lateral is going to come.
Coming soon.
How should we think about those just like pure scale up in terms of cost and performance and I guess really maybe you could talk a little bit about like what.
I guess the drivers for these longer laterals is there a limit that you guys think you can you could push towards or is it purely geometry of acreage.
Okay.
Yes, yes, I'll talk a little bit about cost and performance. So we are.
Drilling the first shipping thousands of atlantica and complained that we've done in some time, but as a company we've actually drove the number of wells that those lateral lengths.
As we transition to <unk>.
What are they going with our an area. We're integrating in more of a 15000 foot laterals into the program one of the well packages that we brought on this quarter.
We will first quarter included the first 15000 foot lateral so from an operation standpoint.
Dan Smith will just finishing operations completion operations on the second set to 10000 foot laterals for the year.
There is certainly cost savings on a per foot basis.
So.
It's really the driver for drilling the longer laterals and we're seeing that work into our overall program on a cost basis based on the capital numbers that are that have been provided.
And then from a production standpoint, I mean, we're assuming that we'll see comparable performance on a per foot basis.
And getting the first initial results in the first 10000 foot laterals.
From the standpoint of.
Or can you give us a lot of operators are pushing further than 15, we do not think that the technical limit but overall.
It's really dependent on how the acreage position plays out as much as anything.
An example, there in central Howard.
Went into operation with primarily 10000 foot laterals, because the acreage is laid out perfectly for that.
We move to North Howard, it's a little bit block here has given us opportunities to extend those lateral lengths and so 15 again as is.
Is it.
Is it good layout for the development from that standpoint.
Got it I appreciate it that's very helpful.
Additionally, could you talk about.
The fourth quarter, you guys had.
I had a handful of.
Of wells in Glasscock County.
And obviously, it's not a it's not the focus this year the drilling program as you kind of get more data on the Wolfcamp D. In some of these newer.
Formations that you're targeting where do you think that.
That sits kind of in the hierarchy of wells.
Kind of the total company like how do you how do you how is performance kind of bid and then some.
I know you have the slides here, but.
Where do you think kind of these wolfcamp D, maybe specifically slots into the hierarchy.
Yes, I think it's kind of like I said.
You look at our we got it in the slide deck kind of where we're drilling. So we're we're going to the northern Howard area. It's again, it's got the best economics in the company a lot of that again is <unk> performance is much stronger in the north so the whole package just have great economics, all around and as we mentioned we are even more went into some of these metals.
Sprayberry wells because they perform so well.
So we would drill up Howard County, and then we go to Western Glasscock, and we will co develop it with the Wolfcamp B and all the other formations down there. So that's kind of our plan is to fully drill up north tower, sometimes we've got some lease obligations and we may need to go down and put a few wells down here and there but.
Cause us to move around but the priority is thrilled northern Howard then go to western Glasscock.
Got it that makes sense, that's all really helpful.
Yes.
I always say that.
Performance is good we are updated in our slide deck. So those wells are performing as expected excited about the Wolfcamp D is just the economics and northern Howard are so good that is.
Hard to do anything else, but those.
Got it alright.
Appreciate the time, thanks, everyone alright, thank you.
Thank you you have a follow up from the line of Derrick Whitfield from Stifel. Your line is now open.
Thanks, and apologies for being disconnected earlier.
You guys touched on project Canary in Q&A.
Yes, we got David Ferris, our Chief Sustainability officer here to talk a little bit about it though.
Hey, Dara good morning, Scott.
I was just going to add.
<unk>.
While not asking you to take a position on whether a methane C will pass in legislation.
Could you speak to the benefits of the certification.
Do you think it will improve downstream uptake options and potentially realizations based on your industry discussions.
Sure and.
Good question.
Thank the approach that we're taking is this is the right thing to do to meet our 2025 emissions reductions targets that we've put out there.
So understanding the emissions on locations mitigating those those emissions events.
In line with trying to reduce our overall emissions. That's just the right thing to do and we're focused on that.
In particular, we do think that there is and had seen historically opportunities in the gas market for small premiums to be to be paid youre seeing.
Certain industries certain countries be more interested in.
Acquiring certified responsibly sourced gas. So we think from a gas perspective that market is a bit more mature and there are opportunities there from the oil side that market. We're seeing that emerge we are the first.
Permian operator to certify our production.
And believe we are at the kind of on the leading edge of that right now.
And so we are seeing.
Early indication of interest on additional opportunities on the oil side for small premiums as well.
That's terrific and thanks for your time and that's all from me guys.
Thanks, Sir Thank you Eric.
Thank you I would now like to turn the call back over to Mr. Ron Hagood for closing remarks.
Thank you for joining us for our update call today. We appreciate your interest in Laredo and this now concludes our call have a great morning.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
Okay.
Okay.
Yes.
[music].
Okay.
[music].
Okay.
Yes.
Yeah.
Okay.
Yes.
Okay.
Okay.
Yes.
Yes.
Yes.
Yes.
Okay.
Sure.
Yes.
Okay.
Okay.
[music].
Okay.
Yes.
Yes.
Okay.
Yes.
Okay.
Sure.
Okay.
Okay.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
Yes.
Yeah.
[music].
Thanks.
Okay.
[music].
Yes.
Okay.
Okay.
Yes.
Yes.
[music].
Okay.
Yes.
Sure.
Okay.
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
[music].
Okay.
Yes.
Yes.
Sure.
[music].
Yes.
[music].
Yes.
[music].
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Yes.
Okay.
Okay.
[music].
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
Okay.
Yes.
Yes.
Yes.
Yes.
Yes.
Okay.
Okay.
Sure.
Okay.
Yes.
Yes.
Thanks.
Okay.
Yes.
Okay.
Yes.
Yes.
Sure.
Okay.
Yes.
Yes.
Yes.
Okay.
Yes.
Yes.
Okay.
Okay.
Yes.
Yes.
Okay.
Okay.
Thanks.
Okay.
Okay.
Yes.
Thanks.
Okay.
Okay.
Okay.
Yes.
Okay.
Okay.
Okay.
Okay.
[music].
Okay.
[music].
Okay.
Yes.
Yes.
Thanks.
Yes.
Okay.
Okay.
Okay.
Okay.
Yes.
Okay.
Thanks.
Okay.
Yes.
Okay.
Okay.
Okay.
Sure.
[music].
Yes.
Okay.
Okay.
Yes.
[music].
Yes.
Yes.
Okay.
Yes.
Okay.
Yes.
Yes.
Okay.
Yes.
Okay.
Okay.
[music].
Yes.
Okay.
Yes.