Q3 2022 Laredo Petroleum Inc Earnings Call

Okay.

Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 to Laredo Petroleum, Inc Earnings Conference call.

I would now like to turn the call over to Ron Hagood, Vice President of Investor Relations. Please go ahead.

Okay.

Thank you and good morning, joining.

Joining me today are adjacent pilot President and Chief Executive Officer, Bryan Lemmerman, 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 provisions 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.

In addition, we will be making reference to non-GAAP financial measures.

Reconciliations to GAAP financial measures are included in the press release and presentation, we issued yesterday detailing our financial and operating results for third quarter 2022.

The press release and presentation can be accessed on our website at www Dot Laredo Petro Dot com.

I'll now turn the call over to Jason Pigott, President and Chief Executive Officer.

Thanks, Ron and good morning, everyone. Thanks for joining us today, we appreciate your interest in our company.

Actually the third quarter was another good one for Laredo as we continued to execute our proven plan to add long term value.

We continued to benefit from strong commodity prices and maintain capital discipline to preserve our margins and manage our ongoing inflationary pressures.

A few highlights I would like to review.

First we generated $51 million of free cash flow in the third quarter.

Second we used this cash flow and cash on hand to repurchase a combined $170 million of debt and equity strengthening our balance sheet to a leverage ratio of one five times.

And finally, the investments in the quarter were similar to last quarter.

You're drilling rigs and one completion crew.

We will maintain similar levels of activity in the fourth quarter and plan to invest $135 million to $145 million.

Third quarter production was pre released two weeks ago.

Total production was within our previous range oil volumes came in below expectation.

From Howard County was negatively impacted by high levels of completions activity by offset operators.

In fact that some of our larger volume recently developed.

And coordinate the management of producing wells with offset operators, but the recent impacts were greater than modeled.

The strong returns industry is staying in Howard County, we have no reason to believe that activity levels will decrease in the near future.

We've adjusted our forecast to ensure that our estimates in the future better reflect the timing and impact of offset activity.

We include the production graph on slide five of our earnings presentation flooding all Dorado operated wells in Howard County, and Bryan impacted.

Could demonstrate.

Following the Frac impact wells returned the repack Bryan impacted production.

Timing and radius of the impacted well on a larger drivers of our forecasted range rather than reduced post frac well alright.

We've taken significant steps to ensure that our future performance will be stronger and more predictable.

Recently restructured our operations team, eliminating the CFO position.

These duties were immediately assumed like I am called Iron VP of subsurface and business development.

Remember Katie Hill VP of operation.

These leaders now report directly to me and increase our focus on these two distinct parts of our business.

I'm extremely confident in their ability to deliver in the coming quarters.

Well, we've had some challenges this quarter I would like to reiterate some of the progress we've made on our journey over the last couple of years.

On page three of our Investor deck lists a few of the more dramatic changes we have made as a company since 2019 compared to current year to date performance.

Just to name a few of those highlights first we increased our liquidity, 61% to $1.050 billion.

Crude oil production, 28%.

We reduced our leverage ratio, 38% to one five times.

Before I turn the call over to Bryan I would like to cover two items concerning 2023.

First we are highly confident in our business plan.

All the key components in place today to create value high quality asset.

Deep inventory effective risk management, and a team of professionals aligned on the importance of delivering our key objectives.

Our focus on capital discipline remain unchanged in 2023, and we expect that we will again deliver free cash flow.

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Our balance sheet and methodically return cash to shareholders through our buyback program.

Or activity levels in 2023, we expect to continue to run our current two rig drilling program for the full year.

At a spot crew in addition to the existing Peru similar to 2022.

Drilling efficiency improvements experienced year to date when they wanted to complete six more wells in 'twenty three than we did in 'twenty two.

This activity level is expected to generate mid single digit oil production growth full year 2023, compared to the fourth quarter of 2022.

We are working with all of our service providers to ensure the radios high safety standards, while securing quality equipment and labor at the best rate in.

In addition, we are monitoring commodity markets and will continue to utilize derivative market.

Sure we lock in returns that have high certainty in our cash flows.

Consistent with past practice, we plan to issue 2023 guidance early next year following our internal reviews and board approval.

I'll now turn the call over to Bryan for a financial update.

Thank you Jason.

Third quarter, we continued to strengthen our balance sheet and return cash to shareholders.

Tuesday November 2nd we have repurchased a total of 245 million face value of term debt at 99, 2% of bar.

The repurchases 90.9 million face value have been of our 125 notes increasing our flexibility as these notes need to be refinanced or redeemed in the next year or so.

These repurchases have been funded through cash on hand, and free cash flow, enabling us to it.

Dos annual interest expense by approximately $21 million.

During the quarter, we reduced total net debt to 1.14 billion.

We ended the quarter with $40 million drawn on our $1 billion credit facility and had roughly $50 million of cash on hand.

As of November 2nd we had paid our revolver balance to zero and hold cash of approximately $54 million.

On November one we finalized our semi annual RV, all redetermination process with our bank group as part of this process. Our borrowing base was increased to $1 3 billion from one point to $5 billion and our elected commitments were maintained at $1 billion.

The other significant change was that our restricted payments baskets have been simplified and brought in line with where the market is today. This gives us more flexibility with regard to debt and equity repurchases as long as we remain in compliance with standard ratio tests.

During the quarter, we returned 17 $5 million of cash to shareholders through our equity repurchase program.

November 2nd we have repurchased a total of $34 million of equity were approximately 442000 shares at an average price of $77.

That I will turn the call over to the operator, please open the line for questions.

Okay.

The floor is now opened for your questions.

To ask a question at this time, please press star one on your telephone keypad.

Any point you would like to withdraw from the queue. Please press star one again.

We've provided the opportunity to ask one question and one further follow up questions. We will take a moment to render our roster.

Our first question comes from the line of John Ennis from Stifel. Your line is open.

Hey, good morning, all for my first question Bryan wondering John focused on slide five good morning, I wanted to focus on slide five and specifically the Frac impact period, you saw in Howard County can you share your expectations on whether you expect similar impacts to us.

<unk> in the future and how you are approaching this from an operational planning and guidance perspective.

Yes, good morning.

Coal buyer who's head of our planning and subsurface.

About that yeah, thanks, Doug so.

Ultimately the way that we did this analysis and what we're communicating here is that we went back and looked at all of our wells in Howard County that have experienced a frac impact over the last four years, and we basically kind of normalize them in terms of the pre frac hit period and in the post Frac hit kind of after they've cleaned up and experience.

The bracket and what you can see here is that the wells ultimately return to their prior production rates.

And we're not seeing a long term impact as a result of that bracket. So ultimately this wells that has both wells that are older that had been online for a number of years and wells that are newer.

Only been online for a few months and so you can see across that that type of wells that we're not seeing a big impact. So we have decided to increase the radius of our expectation of wells that will be impacted by offsetting bracken impact we've effectively doubled that from what we've assumed in the past.

And we've also given older wells a little bit longer time that are in our modeling to clean up.

Returning to their previous rates. So that's some of the changes that we've made in our and our expectations going forward, but the key takeaway here is that the wells return to their previous rates and really what we're seeing is a deferral of production not a loss of production due to well productivity.

That makes sense and then for my follow up there's been a lot of attention. This earning season on co development approaches and impacts on well productivity can you provide some details on how you view your program differently versus peers and their approaches that are now just changing.

Yes, so ultimately.

What we think we found the right mix.

As completion size and well spacing.

If you look at our development in North tower. They are on slide five you can see our north tower at well performance is very strong.

Our original two packages in central Howard, which are the Orange lines. You can see it is there a little bit tightly spaced relative to what we're doing today and you can see the result of that on that plot. So we feel like we've got a good combination of well spacing and frac size other operators, sometimes Ken Ken space tighter with smaller Fracs. Some go a little bit.

Wider with bigger fracs, but ultimately with our acreage in our footprint. We think we found the right combination.

Great. That's it for me thanks for taking my questions.

Thanks, Sean.

Your next question comes from the line of Karl Blunden from Goldman Sachs. Your line is open.

Hi, good morning, Thanks, so much for the time and really good work on addressing your liabilities and moving your maturity wall back and cutting it down I was just interested on the 2020 fives.

You know those do become well the call price steps down in January as you think about liquidity that's something that.

It would be a priority for you to take out when when the call price steps down or would you like to maintain a bit more liquidity and be more measured about the further reduction of that maturity.

Sure. This is Bryan as we said.

Plan to do is pay these down pretty much in line with cash flow. So as we approach 2023 with prices a bit lower than than they had been predicted a few months back I think we will we will address this as it gets closer.

As you mentioned that liquidity is a key key key.

A key component right now we have.

$1 billion of liquidity, which puts us in a good space for acquisitions. So we want to be careful to maintain that.

With the RBS Redetermination process completed earlier this week, we have the flexibility to basically.

Those bonds whenever we want and bring them onto the revolver. So there's there's not a there's not a rush I can do at any time between now and.

A year from January the <unk>.

The main item would be maintaining that flexibility and making the right financial decision. So we'll monitor that as we get closer.

And address it that way.

That's helpful. Thanks very much.

Okay.

Your next question.

Comes from the line of Zach Power Ham from Jpmorgan. Your line is open.

Hey, guys. Thanks for taking my question.

Jason you talked a little bit about your production expectations for 2023 in your prepared comments.

Could you give us a little color on how youre thinking about capital in 'twenty, three maybe what you're thinking as far as year over year inflation compared to what you are seeing this year.

Yes, thanks for the question.

We expect to be around $590 million for the year right now I can best estimates are around 10% inflation would be a good factor to put in there and that puts us right around where consensus is so.

I think that's where we are today, we're still going through the budgeting.

Process right now and we will have I got a few more completions, but we'll also have less wells being drilled because we've built some kind of ducks as we've gone into the end of this year. So that's kind of the plan and I think where we'll be but we're still going through the process of finalizing our budget and we'll come out with those details in early next year exactly to clarify when Jason said $5 90 for the year. He is.

You're referring to 2022 and the 10% is relative to in 'twenty three relative to 'twenty two.

Got it thanks for that color and then I guess, just a follow up on the buyback with with the commodity strip in backwardation.

Leverage still above one <unk>.

Have any thoughts on.

Potentially slow in the buyback in the near term too.

To focus more on debt reduction.

I guess in general thoughts on how you think about the buyback over that the pace of the buyback over the near and longer term.

Yes, I think as we've seen price come back that Leon slowing it down is as the ratio of debt to total cap.

Cash go into both the bond and the equity repurchase programs. It has come back a little bit.

As we move into next year.

We'll definitely use tomorrow.

Commodity price and free cash flow as the determining factor of how much and what ratio.

Right now I'd say keep that the ratio we were as a decent plan.

That would still not put us at <unk> using the whole thing.

Are you using the whole $200 million by the end of next year, but.

If prices move higher I think we need to get more aggressive as tight as prices move down we get less aggressive in our primary focus is still on debt reduction that is that is the most important thing to us.

And just keeping the equity repurchase program on a methodical pace.

Thanks, a lot.

Yeah.

Thanks, Ed.

That does conclude today's questions I would now like to turn the call over to the company for closing remarks.

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

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