Q2 2022 Laredo Petroleum Inc Earnings Call

Okay.

Good day, everyone. My name is Kelly and I'll be your conference operator for today at this time I'd like to welcome everyone to the Laredo Petroleum incorporated Q2 2022 earnings Conference call. Today's call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If he would like to ask a question. During this time.

Simply press Star one on your telephone keypad, if he would like to withdraw. Your question. You May also press star one again. It is now my pleasure to introduce Mr. Ron Hagood, Vice President of Investor Relations. Please go ahead Sir.

Yeah.

Thank you and good morning.

Joining me today are adjacent pocket, President and Chief Executive Officer, Karen Chandler, Senior Vice President and Chief operating Officer.

Brian Lieberman Senior Vice President and 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.

Revisions of the private Securities Litigation Reform Act of 1995.

Actual results may differ from these forward looking statements for a variety of reasons.

Many of which are beyond our control.

<unk> will be making reference to non-GAAP financial measures.

Filiation to GAAP financial measures are included in the press release and presentation, we issued yesterday that detail our financial and operating results for second quarter 2022.

Press release and presentation can be accessed on our website at www Dot Laredo Petro dotcom.

I will now turn the call over to Jason <unk>, President and Chief Executive Officer.

Hey, Ron good morning.

And thank you for joining us for our discussion of our second quarter results.

So our financial and operational results for the quarter. We have also updated our 2022 outlook and given capital and oil production projections and updated free cash flow sensitivities for 2023.

I'll start with our quarterly results.

Our second quarter results exceeded expectations, delivering a company record adjusted EBITDA and free cash flow.

Second we immediately began delivering on our $200 million equity repurchase program and debt reduction targets, we announced on the.

May 31.

To date, we repurchased $16 $1 million of equity and $91 $4 million of face value term debt and.

In addition to reducing absolute debt our leverage ratio decreased from one nine times in the first quarter. The 1.4 times in the second quarter.

Third we continue to demonstrate capital discipline.

Current quarter capital came in a little higher than expected, primarily due to acceleration of operations associated with the timing of ongoing completion associated facilities and a small amount of non op activity that was expected in the second half.

Not changing our full year 2022 capital budget of $550 million.

Moving to our updated 2022 and 2023 outlet.

At the end of the second quarter, we turned into line a six well package elite 12.

Testing of 618000 foot wells and our most southeastern unit in Howard County.

These wells are still in the flow back stage the oil production ramp has taken much longer than the offset wells and the wells are underperforming our prior forecast.

Oil production for full year 2022 is now expected to be between 38, and 39000 barrels of oil per day versus prior guidance of $39 five to 42 5000 barrels of oil per day.

For year 2022 free cash flow at prices of $100 per barrel WTS <unk> for the remainder of the year is now expected to be approximately $280 million versus prior projections of $350 million.

Our initial outlook for 2023, we have incorporated the impact of the Leach package, our current capital expenditure projections additional drilling and completion efficiencies and interest savings from debt repurchases to date.

And $90 per barrel WTS price for 2023, we expect free cash flow of approximately $560 million versus prior projections of $550 million expect low single digit oil growth compared to the new 2022 oil production rate.

Our stress that nothing has changed the trajectory of the company our debt reduction in equity repurchase plan.

There is no impact inventory counts or how we execute our development plan.

We're all financial impact of all of our updates over the second half of 2022 and full year 2023 is approximately $60 million, we're committed to delivering on our $200 million equity repurchase program absolute debt reduction target of $700 million.

Our leverage ratio target of sub one point of time.

I will now turn the call over to Karen.

Hey, Jason and good morning.

In the second quarter, we completed 11 wells until seven wells.

Production was within our guided ranges, even when including the working interest adjustments to wells that reached pay out prior to the quarter that was outlined in the earnings release.

Total expenditures were slightly above expectations, mainly due to a slight acceleration of operations associated with the timing of ongoing completions and associated facilities.

And acceleration into the second quarter of a small amount of non op capital that was expected in second half.

About a quarter of the increase was due to inflation, which was primarily related to diesel expenses running over 40% higher on average than our original estimates.

Our second half we have incorporated these higher diesel cost into our capital numbers.

The capital to be approximately $120 million in both the third and fourth quarters and to maintain our full year 2022 budget of $550 million.

Jason Nathan.

Of the seven wells that we killed during the quarter were 15000 for Wolfcamp a wells in the Leach package developed on the fall our south eastern edge of our central Howard acreage position.

We generally feel that rock quality in Howard County acreage to the south.

Very good well control and data from previous packages in and around the Leach area.

I decided to take measures to Derisk the package.

Projected returns based on this information.

We developed only the Wolfcamp a formation.

<unk> traditionally co developing with the lower sprayberry.

Also widened spacing in the Wolfcamp a.

These changes resulted in a six well development and the unit versus our standard development plan of 12 wells per D issue.

Despite these efforts production results have been disappointing.

Alicia packages, and then I'll pull back for a little more than two months and it's still producing significant amounts of water and low oil production.

We're currently working on options to optimize artificial lift strategy and evaluating other potential remediation strategy as we continue to watch and gain additional understanding of the well production overtime.

Given the abundance of offsetting well data in central Howard.

The remainder of our development being west and north of the Leach Wells, we do not believe this impact any of the 23 remaining locations in central Howard.

These locations five are expected to come online in 2023.

Direct offsets to the worthy Buchanan and Connor packages completed in fourth quarter 'twenty, one in first quarter 'twenty two respectively.

18 are expected to be developed in 2024, giving us plenty of time to five <unk> from the wage package and it just has those issues are developed it needed.

Well, each well results do not impact on long term trajectory or in the door counts.

The deep inventory of high quality drill ready locations.

And flexibility in our development.

The remainder of our kilns in 2022 are all ignored Howard and more than 90% of all tools in 2023 are in your power.

Well he brought quality is substantially better in Howard County, as you move North West and as you can see on slide six in the earnings presentation, our production data bears that out.

Focus on newer power in the second half of 2022 and full year 2023 minutes.

Our oil production expectations for 2023.

In the preliminary 2023 outlook, we issued within our earnings release, our projection of low single digit oil growth.

Compared to the updated guidance for full year 2022 is driven by the expected productivity of yours Howard.

Within our preliminary 2023 outlook, we have the capital estimate of approximately $585 million.

Primary difference from the $550 million budget in 2022 is related to the spot Frac crew that is currently anticipated to operate for most of the first half of the year.

The continued performance improvements in drilling feet per day, we're anticipating being able to run the spot Frac crew for a total of five months without adding any additional drilling activity above our current two rigs.

Overall, keeping our DUC count low and using the spot frac crews as early as possible in the year provides our most capital efficient operations program.

This additional completions activity is also the reason we are able to fully offset the expected negative production impact from the Leach wells next year.

I will now turn the call over to Bob for a financial update.

Thanks, Karen.

<unk> delivered very strong financial performance in the second quarter, we generated a company record free cash flow and adjusted EBITDA, We took our revolver balance to zero.

<unk> leverage by half, a turn and we aggressively repurchased our debt and equity fulfilling our commitment to return capital to shareholders.

Taking a look at the balance sheet, we ended the quarter with $146 million of cash and as of Tuesday, we have approximately $114 million of cash with our revolving credit facility completely undrawn.

Liquidity stands at 1.1 billion with a quarter end leverage at one four times.

To reiterate our leverage goal of achieving a sub one times leverage goal, which we believe we will achieve in Q2 of 2023.

Also reiterate our absolute debt reduction target of $700 million.

Putting us at approximately $700 million of net debt.

The 700 million target leaves us in a position to be approximately one times levered and lower price environments.

Through Tuesday, Laredo has purchased 91 $4 million of our notes at an average price of 98.

These purchases have been skewed toward the 2029 and 2020 eights with approximately $52 million of the 2029.

$29 million of the 2028 and $11 million of the 2020 fives purchased to date.

We plan to repurchase a total of $250 million of notes through the end of the year.

On the equity side of the equation through Tuesday is trading we have repurchased approximately $16 million of our stock at an average price of $87 62 a share.

We will continue to repurchase shares somewhat methodically, but when our share price indicates that we can repurchase our shares which are a proxy for our assets at prices below where assets are trading on the M&A market, we will accelerate those repurchases.

For free cash flow for the second quarter came in at $110 million.

In line with our expectations and these cash flows were directed towards our debt and equity repurchases.

They did for current guidance under the same pricing scenario, we used in our last guidance Laredo is expected to generate $280 million of free cash flow for 2022, and approximately $840 million of free cash flow through the end of 2023.

Represents a decrease over the two year period of approximately $60 million over our prior guidance.

On the M&A front, we have been actively looking at opportunities in the market and have not found many that have the right mix of inventory to PDP.

Do you still believe that scale matters and that M&A will be a part of our strategy for the foreseeable future.

We will remain diligent in what we go after and how we finance it.

With that it is accretive to shareholders and does not derail our deleveraging goals.

That I will turn it over to Jason for final comments.

Thank you, Brian and thank you all for joining US today operator, please open the line for questions.

And as a reminder for everyone. If you do have a question today that will be star one well pause for just a moment.

Yeah.

We'll hear first today from Derrick Whitfield with Stifel.

Thanks, and good morning all.

Good morning, Gary and my for my first question I wanted to start with the Leach tissue. It appears that both pre and post drill data indicated this was your highest risk the issue within Howard County could.

Could you speak to your degree of confidence that the <unk> to the West which you plan to develop in 2024 would be a commercial D issue and perhaps also speak to if there is a noticeable difference in well performance from east to west within the <unk>.

Okay.

Yeah. Thanks, Derrick this is capital there.

Yes, absolutely within the <unk> itself the western most wells are the highest producing wells as you move to the east.

We see a higher water cut and lower oil production in the eastern most wells and so that combined with our current offsetting production around the undeveloped <unk> that will be developed in 2024, we have strong production around those deals use on both sides, which ultimately gives us confidence that they are unaffected by the issues that were.

Being in the Leach package.

Terrific and just as.

As a follow up to.

To put some parameters around the leach tissue.

Could you frame the NPV impact associated with it if your oil cut doesn't meaningfully appreciate it most and what you seem to be the cost of the wells, but you already trade at a discount or.

At your PDP dependent on your discount rate my thinking about that correctly.

Yes, Derek this is Bryan the capital has already been spent I think the way to think about it is the impact on cash flows.

Going forward in the largest the largest portion of that would be.

The $70 million impact in the back half of this year.

I'll get almost all of your NPV impact.

Terrific. That's all for me thanks for your time.

Okay Eric.

And at this time I'd like to turn things back to Mr. Hagan for any closing remarks.

Well. Thank you for joining us. This morning, we appreciate your interest in Laredo. This concludes this morning's call.

And again that will conclude today's conference. Thank you all for joining US you may now disconnect.

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