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Laredo Petroleum (NYSE:LPI)
Q4 2019 Earnings Call
Feb 13, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good day, ladies and gentlemen, and welcome to Laredo Petroleum, Inc.'s fourth-quarter 2019 earnings conference call. My name is Jimmy, and I will be your operator for today. [Operator instructions] 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.

Ron Hagood -- Vice President, Investor Relations

Thank you and good morning. Joining me today are Jason Pigott, president and chief executive officer; Karen Chandler, senior vice president and chief operations officer; and Michael Beyer, senior vice president and chief financial officer; as well as additional members of our management team. Before we begin this morning, let me remind you that during today's call, we will be making forward-looking these statements, including those describing our beliefs, goals, expectations, forecasts and assumptions are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The company's 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 non-GAAP financial measures are included in yesterday's news release. Yesterday afternoon, the company issued a news release and presentation detailing its financial and operating results for fourth quarter and full-year 2019. We'll refer to the presentation by page during today's call.

If you do not have a copy of this release or presentation, you may access it from the company's website at www.laredopetro.com. I will now turn the call over to Jason Pigott, president and chief executive officer.

Jason Pigott -- President and Chief Executive Officer

Good morning, and thank you for joining us on the call today. I would like to start off today by reviewing some of our highlights from the fourth-quarter listed on Slide 3. We again surpassed guidance for the fourth quarter in a row for both oil and total production and maintained our peer-leading cost structure. Turning to Slide 4.

Not only did we have a good quarter, but 2019 was a transformational year for Laredo, defined by a dink list of highlights too numerous to mention on this call. However, there are several significant ones that I would like to mention this morning. While many companies were talking about getting to a positive free cash flow. We achieved it in the second quarter, ultimately generating 60 million of free cash flow in 2019 as the company reduced capital expenditures by 25% from the full-year 2018.

Additionally, we were able to grow oil 2% and total production by 19% while delivering free cash flow and reduced capital program. This would not have been possible without the dedication and focus of our operation teams who cut well cost by $1 million, reduced our well cycle times and kept our operating costs at Basin leading lows as we reduced our lease operating expense from $3.08 per BOE for the full-year 2019 from our 2018 cost of $3.67 per BOE. The shift to water spacing was also a key contributor to our success. To date, water space wells have outperformed our oil type curve by 12%.

Our hedging strategy also helped mitigate the impacts of commodity declines, improving our revenue by $48.7 million. We also have a significant hedges in place for 2020, which Michael will describe in more detail shortly. Described on Slide 5. And as we've highlighted on previous calls, the most important part of our strategy is to optimize our operations on our existing footprint.

Every day, we look to improve well action, completion designs, facilities and every aspect of our business to maximize our stakeholder return. Another aspect of this strategy is to look at our inventory with fresh eyes and determine if new completion to uniques can bring fresh life to additional zones for development. As we mentioned in prior updates, we believe there is additional upside in our core footprint in the Cline. We are just turning to flow back our first two company wells.

Our preliminary field estimates indicate both wells are significantly under the $8.2 million well cost we identified when we highlighted the decline at a higher price rate target last year. Both wells are continuing to clean up from our higher intensity frac designs, and the initial results are very encouraging. I hope everyone on the call can appreciate the strength we have as a foundation and the competitive advantage it provides us as we look to the future. One of the things I found in my life is that hard work can open a lot of doors for you.

Our cost leadership and balance sheet strength opened a couple of new doors for us as we completed two accretive acquisitions last year, one in Howard County and one in Western Glasscock. These acquisitions align well with the second pillar of our strategy to increase and improve the quality of our inventory by shifting to higher margin, higher return areas of the Midland Basin, while maintaining our commitment to a strong balance sheet. As we show on Slide 7, both acquisitions were completed at valuation significantly below historic averages, allowing us to maintain a competitive leverage ratio. A close proximity to our existing acreage position allows us to use our strengths as we have drilled our first well in Howard County as expected and continue to transition our rigs to the area.

As an early bonus to the year, we were able to acquire an additional 1,100 acres in the heart of our position in Howard County for $22.5 million, increasing our total position to 8,380 acres. This acreage will increase our working interest on our operated acreage from an area from 83 to 96% and increase our net well count from 100 to 124 net wells. While cost per acre was higher than our previous purchase, the efficiency of the investment was much higher as the cost per net well was 28% lower than our previous acquisition. We are in the process of incorporating the impacts of this addition in our planning, as well as the impacts of lower commodity pricing for the next three years.

Our development plan will pivot to production maintenance mode focused on remaining cash flow positive at $50 a barrel and delivering over $100 million in free cash flow at $55 price. The high oil yield for our new acquisitions will allow us to improve our oil collection over 40% during this time period and improve our margins. I will now turn the call over to Michael for a financial update.

Michael Beyer -- Senior Vice President and Chief Financial Officer

Thank you, Jason. Continuing on Slide 8, we are very happy with the results of our recent senior notes issuance. We were able to address our pending maturities in 2022 and 2023, rolling them out to 2025 and 2028, accomplishing this in a very challenging high-yield market for E&P companies. Despite the downturn in commodity prices, we remain committed to operating within cash flow.

Excluding non-budgeted acquisitions. As Jason mentioned, we believe we can generate a modest level of free cash flow in the next three years in a $50 per barrel $2.25 per mmbtu environment. This projection grows to at least 100 million at $55 per barrel with the same natural gas price. Our plan to apply free cash flow that is generated to paying down debt with the goal of reducing debt to adjusted EBITDA to our pre-acquisition level.

Similar to the first quarter of 2019, we expect to outspend cash flow in the first quarter of 2020. By 2019, we plan to utilize free cash flow generated during the remaining three quarters to reduce debt incurred in the first quarter. Turning to Slide 9. We give details of our strong 2020 hedge position.

Our 2020 hedges are expected to generate more than $150 million of realized hedge income at $50 per barrel and $2.25 per mmbtu, supporting our cash flow for the year as we transition to our more capital-efficient Howard County acreage. We will continue to evaluate opportunities to hedge in 2021, where we have already hedged 1.5 million barrels of oil at a Brent price of $60. I will now turn the call over to Karen for our operations update.

Karen Chandler -- Senior Vice President and Chief Operations Officer

Thank you, Michael. And as Jason mentioned, the shift in our development plan to wider well spacing, driven by our returns and free cash flow focused strategy was a key driver of our success in 2019. Throughout 2019, we completed six widely spaced packages consisting of 38 wells. As shown on Slide 10, combined oil production of these widely spaced packages has outperformed our type curve by 12%, which contributed to the company exceeding oil production guidance every quarter in 2019.

Another key driver of Laredo's success last year was the continued progress made by our operations teams to improve operational efficiencies, reduce cycle times and ring cost out of our already low well cost. On Slide 11, the top graph shows our continued upward trend in both drilled feet per day per rig and completed feet per day per frac crew. In fact, we set company records for both drilling and completions performance in the fourth quarter of 2019. These improved operational efficiencies and reduced cycle times also contributed to the company exceeding production expectations as wells were consistently putting on production earlier than anticipated.

As shown on the bottom chart on Slide 11, these performance improvements and continuous focus on cost reduction has allowed us to reduce our average well cost to peer leading levels. We were also able to deliver the 2019 drilling and completions program below budget, even with additional activity. On Slides 12 and 13, we expand on the second pillar of our strategy that Jason discussed. We have now closed on three transactions in areas of the basin with higher oil productivity than our established acreage position.

On Slide 12, we show the specific locations of these acquisitions in Howard and Glasscock counties. Through these transactions, we've added 175 gross locations or approximately three years of inventory at our current activity levels. Moving to Slide 13. I'll expand on how we look at our current development opportunities.

In short, we plan to develop our highest rate of return wells first, fully leveraging our peer-leading drilling, completions and operating cost. The graph at the top of the slide demonstrates the positive impact to cash flow generation that results from putting our cash flow to work in the new Howard County and Glasscock County areas versus our existing acreage. The table at the bottom of the slide further demonstrates the well economics of the recently acquired locations that are expected to lead to a substantial improvement in capital efficiency. Turning to Slide 14.

Since our initial Howard County acquisition, our development plan has revolved around quickly and efficiently transitioning our drilling and completions activity to Howard County. To accomplish this, we have accelerated our first quarter drilling and completion activity levels, bringing in a fourth drilling rig and second completion crew. This will enable us to complete all of our activity on our established Reagan and Glasscock acreage in the first quarter of 2020 and allow us to fully transition to Howard County more quickly. We already have two rigs operating in Howard County and the third rig is expected by the end of this quarter.

We expect to begin completion activities on our first 15 well packages in Howard County during the second quarter. This month, we executed an additional bolt-on transaction on our Howard County acreage, primarily increasing working interest on existing Laredo operated acreage. The acquisition increased our location count by 24 net wells at similar values through our original Howard County acquisition, which were well below historic averages. Additionally, we are in negotiations with multiple third-party infrastructure providers that operate in Howard County.

At this point in the development life cycle of this area, sufficient infrastructure has been built to accommodate our development plans, minimizing the need for capital investment. Initial indications are confirming our expectations that transportation costs will not be significantly different from what we pay on our established acreage position in Reagan and Glasscock counties. From an operations standpoint, our transition to Howard County is on track and going well. I just want to emphasize again that our D&C activity in 2020 will be higher in the first quarter as we complete the remaining well packages on our established acreage to accelerate activity on our Howard county position.

As we work to finalize our 2020 budget, we expect activity to moderate in the second half of 2020 as we move to a normalized development pace in Howard County and balance capital expenditures and cash flow for full-year 2020. Moving to Slides 15 and 16. And I also want to highlight some of the company's key focus areas related to minimizing environmental impact of our operations. ESG is moving to the forefront of the E&P industry and rightly so.

Water management and air quality are important to all of us. Laredo has been focused on delivering on these principles for years. On Slide 15, you can see in the top chart that we have continually focused on increasing the percentage of recycled water used in our completions to significantly reduce the amount of freshwater needed for our completion operations. We've accomplished this by building out 54,000 barrels per day of water recycled capacity.

We're currently using 40% recycled water in our completion operations. Full-year 2019, this reduces our demand for freshwater by more than 11.5 million barrels. The bottom chart on Slide 15 shows the amount of flared and vented gas relative to gross gas production for 32 companies in the Permian Basin beginning in 2018. We are very proud to be on the chart where we are relative to our peers.

Our current 1.7% of flared gas is less than half of the peer average over the past two years. We're proud of our results focused on both minimizing the environmental impact of our operations and protecting the environment. In addition to the water recycle infrastructure I just mentioned, Slide 16 also highlights additional infrastructure we have in place to help reduce the environmental impacts of flaring and trucking. Importantly, this slide also shows that these investments are not only the right thing to do to protect the environment, but also to enhance our overall economics.

With that, I'll turn the call back to Jason for some closing comments.

Jason Pigott -- President and Chief Executive Officer

2019 was a transformational year for Laredo as we started to pivot our strategy using our strengths to our advantage. In 2020, we will begin to reap the rewards from our recent acquisitions as we benefit from more capital efficient development plan while being protected by our 2020 hedges and debt maturities, which have been put into the future. There aren't many companies undergoing transformation like we are while executing as planned. I'm very excited about our future.

Operator, we can now open the line for questions.

Questions & Answers:


Operator

[Operator instructions] The first question comes from Brian Singer with Goldman Sachs. Your line is now open.

Brian Singer -- Goldman Sachs -- Analyst

Thank you, good morning. Can you quantify a bit more the capex trajectory through the year? You talked about the initial ramp-up of activity happening now here in the first quarter. What are the implications of that for capex? And then how do you see that falling off extensively as we go through the remaining quarters of the year?

Jason Pigott -- President and Chief Executive Officer

Yes, this is Jason. Again, if you look at kind of what we've done in the past, I think we're going to model that very similarly to what we've done before. So we've front-loaded with the activity. I'll let Karen is going to go into some of those details.

But we're very front-loaded, and then, again, activity will kind of drop as the year progresses, but I'll let Karen give you some of the highlights of that activity.

Karen Chandler -- Senior Vice President and Chief Operations Officer

Yes, just to add to that. So Jason mentioned, 2019 was very similar for us. So our expected -- as we're trying to finalize in the 2020 budget is that we'll be running one frac crew, plus about two and a half months of an additional frac crew. So for us, in 2019, similar cadence, we front end-loaded all those additional completions.

We're doing the same thing for 2020 with the two frac crews starting in January. So expectation is that we'll be down to one frac crew by the end of first quarter. We've also picked up the fourth rig. The primary reason for that we should really get ahead and accelerate our transition to Howard County to get the drawing down so the frac crew, the single frac could move in there.

So expectation there running the four rigs to kind of make that transition as quickly as possible. Will most likely be down to two rigs by the time we move into the second half of the year.

Brian Singer -- Goldman Sachs -- Analyst

Great. But no specific numbers that you're putting out on either the first quarter or the full year?

Jason Pigott -- President and Chief Executive Officer

No, not yet. Again, we'll come out with a full budget here shortly. One of the things that we highlighted just a little while ago was that we added 1,100 acres in Howard County. It's right on top of the drilling footprint.

And so, we as a company are 100% dedicated to being free cash flow positive and staying that way. So when you've added working interest in NRI in the area that you're drilling. We just want to get tight on our budget. So we'll come out with new numbers shortly.

But it's a good thing for us to push it out because, again, we closed on this acreage just over a week ago. So just trying to factor that into our planning as we go forward, but we're excited and look forward to kind of rolling that out shortly to you.

Brian Singer -- Goldman Sachs -- Analyst

Great. And then, my follow-up is with regards to the balance sheet. Slide 6, you highlight how you compare relative to peers. And you've talked multiple times here on the free cash flow.

Can you just talk about where you ultimately see or desire your net debt to EBITDA to go or what is a steady state net debt to EBITDA that you're targeting? And then what is your tolerance level as you think about further bolt-on acquisitions to how high that at least temporarily could go?

Jason Pigott -- President and Chief Executive Officer

We've highlighted that before that our goal is to get down to pre-acquisition levels before we start it. And ultimately, again, a coupling company, you want to be driving it down to 1% or something like that. So we are, again, 100% dedicated to driving that number down. We're just working through the levers that create that opportunity for us.

We've got a water infrastructure that we look at all the time. We've got royalty minerals that we could monetize. So there's lots of options to help us push that number down. We're thinking through all those.

When we think about the kind of M&A activity. We're looking for things that would be more like the Glasscock, where you're bringing in production as you do those. In this environment, there's stress on some companies that have less healthy balance sheets. So we're looking for things where we can pick up production and get the inventory at lower rates and then be able to use our drilling machine to optimize and develop those.

So that's kind of what we're thinking about for the future. But ultimately, we are looking to push that debt to EBITDA down and not flex up, and so we're just -- we'll have to -- we'll navigate that as we start to look at these opportunities.

Operator

Our next question comes from Asit Sen with Bank of America. Your line is now open.

Asit Sen -- Bank of America Merrill Lynch -- Analyst

Thanks, good morning. So Jason, on the strategy to further expand inventory depth in the Howard County, how do you see the runway? And what's kind of the funding strategy here if you go about doing that?

Jason Pigott -- President and Chief Executive Officer

Yes. Again, we're working through that. There's lots of things that are kind of churning through the market right now. We're trying to find those things that would be a good fit for us.

Again, we've got a balance sheet that we can use to our advantage, and it's just a matter of, again, looking at what's the appropriate discount rates on PDPs. Those are getting probably a little bit higher these days than they've been in the past. So again, I think that allows you to pick up some production and not stretch our debt to EBITDA, but that maybe -- those may be things, again, where we pick up something and then look at monetizing the water system. So we are, again, just working through that right now.

But the goal is not to really increase our debt to EBITDA, just to drive it down over time.

Asit Sen -- Bank of America Merrill Lynch -- Analyst

Got it. And my follow-up is for Karen. Karen, you noted that the up spaced wells are producing more oil than originally anticipated. What's driving that delta in your opinion?

Karen Chandler -- Senior Vice President and Chief Operations Officer

Yes. So I mean, as we've got in here on the slide, I think Slide 10 in our deck, where we're kind of showing overall the well performance of all the widely spaced packages. So you're seeing kind of a variability around the type curve that we have released. On average, we're 12% above.

So we're very happy with that performance. We do think it continues to support the type curve that we have out there with well performance both above and below the curve. Performance. We went to the 13, 20.

These packages are both single and co-developed and I think that we're just getting good performance from the completion design work that we're doing, made the right decisions, I think, on the spacing.

Asit Sen -- Bank of America Merrill Lynch -- Analyst

Great, thank you.

Operator

Our next question comes from Richard Tullis with Capital One Securities. Your line is now open.

Richard Tullis -- Capital One Securities -- Analyst

Hey, thanks, good morning. Jason, looking at the 1Q production guidance, it looks like it's roughly flat quarter over quarter. How does the oil growth cadence look quarter over quarter for the rest of the year, particularly since you're planning to bring on, it looks like around 28 net wells in 1Q. So that's about 10 more than the fourth quarter.

So is that production kind of rolling into the second quarter? How do you see that playing out?

Jason Pigott -- President and Chief Executive Officer

Yes. I'll let Karen answer that. But yes, we're definitely front-end loaded, so you'll see the impacts in the following quarters.

Karen Chandler -- Senior Vice President and Chief Operations Officer

Yes. So I'm going to refer to Slide 10 again. So same slide in the deck. So our cadence looks very similar to what we did in 2019.

We're front-end loading any additional activity. Obviously, overall, that helps with the annual well growth and also cash flow for the year. So if you look at the 2019 oil production, actual production numbers on a quarterly basis. We expect to see the trend very similar to that.

So we're doing kind of the heavy front-end loading on the completions right now in the existing acreage, we'll really see that impact in second quarter. And then, the trend, therefore, going forward from there is we should again see kind of an uptick in 4Q that we didn't see this year as the Howard County wells start to come on.

Richard Tullis -- Capital One Securities -- Analyst

OK. That's helpful. And then, just lastly, Karen, Laredo's done a great job with reducing cash controllable cost over the past couple of years. You see a small uptick in the 1Q guidance compared to the fourth quarter.

How do you see the cost trending as we move through the year as you move more activity away from your kind of traditional production corridor centric areas?

Karen Chandler -- Senior Vice President and Chief Operations Officer

Yes. So as we're transitioning to Howard County. We've talked about kind of infrastructure in place and what the plans are for going in developing there. We do expect to see a little bit of an uptick as we're transitioning in, but something on the order of that $0.20.

So nothing really significantly impacting the overall LOE numbers.

Richard Tullis -- Capital One Securities -- Analyst

OK, that's all for me. Thank you.

Operator

Our next question comes from Derrick Whitfield with Stifel. Your line is now open.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Thanks. Good morning all, and congrats on a fourth consecutive strong quarter.

Jason Pigott -- President and Chief Executive Officer

Thanks, Derrick.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Thanks, Barry. Perhaps for Jason or Karen. Permian flaring is becoming a topic of increasing investor concern as outlined in your prepared comments, while flaring is less of an issue for Laredo, what are your expectations for the upcoming taxes for our commission report and what changes, if any, on flaring regulation do you expect?

Jason Pigott -- President and Chief Executive Officer

I hate to speculate again on what we see there, but I think what we're trying to emphasize is that we're -- whatever comes out, we're well ahead of it. We've had a focus on reducing emissions for a long time and built our facilities so that we don't have to flare the times we flare, when there's just some disruptions downstream from us. We don't have to flare to sell our oil. So I think that's for us, we think we're in pretty good shape.

No matter what comes out, but we'll be ready for it.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

And then as my follow-up for Karen. Could you speak to early time expectations for D&C design and cost for your Howard County wells? And more specifically, do you anticipate being able to maintain your peer-leading D&C costs as you pivot into Howard County?

Karen Chandler -- Senior Vice President and Chief Operations Officer

Yes. So we've already moved two of the rigs in into Howard County, so all the operations are going really well there. We wanted to accelerate that to take advantage of the increased oil productivity of those wells, but everything on track from just the surface, planning and then getting numbers in. So the answer is yes.

Our expectations are that we're going to be able to operate at very similar to levels to what we've been doing on the existing acreage position from D&C, and then as I've already mentioned from an LOE standpoint as well. We've done a lot of work looking at the offsets in the area. There's quite a bit of spacing tests and other things in the area that we've been able to take advantage of. So looking at completion designs.

And right now, we're doing a little bit of work, looking at a little bit bigger completion designs on the existing acreage. We plan to do that there as well, just based on what we're seeing from the offsets in our spacing plans, but overall, we expect to operate at very similar levels with a very similar cost structure.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Great. Very helpful, Karen.

Jason Pigott -- President and Chief Executive Officer

And I'll just add that we're we have been, we highlighted here some of the designs with more sand per foot. So we have been testing those on our existing acreage position with the idea there is that the cost for sand has decreased. We're also, again, we pushed wells out and have a little bit wider spacing. So the completion designs that worked in the past and we may have an opportunity to improve those.

We're just starting when I did that analysis, it was going to take about six months or so to see the results. So we're starting to get our first wells with these higher sand concentrations and new frac techniques coming in, but some early positive indications our Cline wells. I briefly mentioned it in my prepared comments, they look really good. And I think Karen's team just knocked it out of the park on the cost structure.

We haven't, we've cut I mean, from the time we originally drilled wells until now you've cut over $1 million of cost out of there. So beat expectations. There and then initially, we're only 10 days into the flow backs, but initial production is very encouraging. So when we think about inventory and runway we highlighted in the past, the Cline is something that we're excited about.

So more to come on that, but we've got some really good results, I think, starting to come in.

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Very helpful Jason. Thanks.

Operator

Our next question comes from Noel Parks with Coker and Palmer. Your line is now open.

Noel Parks -- Coker and Palmer -- Analyst

Morning. Continuing on the topic of Cline, could you just sort of review for us because even before the acquisitions you did in the fourth quarter in Howard County. On your legacy acreage, you had been putting a good deal of energy on the technical side into sort of evaluating the path for the Cline. Could you just kind of remind me of when that started and how that where that process took you to? And then how that carries over to operating in Howard County now?

Karen Chandler -- Senior Vice President and Chief Operations Officer

So, this is Karen. Yes, so we've actually drilled quite a few Clines as a company in our history. Really, the change that took place as we started to top over that Cline again. It was really the cost coming down on wells.

So the fines are deeper, more expensive. So even with really positive productivity trend, that cost difference just had us, prioritizing the Wolfcamp in front of it. As costs have come down through 2019 that really balance kind of shift where the rates of returns became very competitive with the Wolfcamp and its wells. So we decided we wanted to look at the newer completion design on the Cline with that transition because of the cost structure.

The last time that we've completed any Cline well was in 2017. The largest completion we've put on a climb was 1,800 pounds per foot. So this kind of construction design analysis that we'd go in through more with the Wolfcamp hoping for bigger jobs. So we've just pumped two 2,400-pound jobs off these two wells that Jason's talking about.

Overall, performance looks good. It's very early, but the real encouraging piece was on the off upside. We generally see a little bit more fresh, a little bit more required to get the sand away. But these two completed very well so that we can continue to drive down the cost, even from our assumptions with the cost reductions.

The rate of returns are just going to get better and better. So we do see these as definitely potentials in our inventory and a focus is high freight or returns. So we'll continue to work on them and kind of see where they fall out in our inventory.

Jason Pigott -- President and Chief Executive Officer

Yes, I think it's -- again, we saw a big jump when we went to 1,800 pounds. So we're starting to test with these 2,400 pound. What is that point of diminishing returns, because we haven't seen it yet? We got a big jump when we did 1,800 pounds. And just again, there's a lot of new frac technology techniques that have taken place since we last completed the 1,800 pound jobs.

So it's really early, pretty encouraging. I don't want to overhype it yet, but the costs are down and production looks like it's up.

Noel Parks -- Coker and Palmer -- Analyst

Great. And could you just also talk about just the status of your rig contracts at this point? Just what's going on with the service cost environment and, of course, we've seen from, look at moving the rigs you've have been planning for the whole accounting program for the rest of the year?

Karen Chandler -- Senior Vice President and Chief Operations Officer

So on our rig contracts, I mean, we're pretty much seeing pretty flat cost for the high-performance rigs. The types of rigs that we're wanting to run. We're getting a lot of performance uplift. So that's helping with the overall cost and program.

So I think I highlighted some of that, but overall, seemed pretty flat, service cost environment. Our contracts, we tend to not sign long-term contracts on the rigs. We've got three that are under contracts right now, but only one that will be under contract past this quarter, next quarter that we're in. So I guess to answer your question, not really seeing any major impact on rig costs and day rates and so since we're moving into Howard County.

Noel Parks -- Coker and Palmer -- Analyst

Great. Thanks a lot.

Operator

Our next question comes from Karl Blunden with Goldman Sachs. Your line is now open.

Karl Blunden -- Goldman Sachs -- Analyst

Thanks for taking the question. Just a quick follow-up here on the M&A trajectory going forward. Understand the desire to keep leverage in check. When you think about just the amount of potential spending.

Is there any way to frame kind of low end and high end of how much cash might go out for acquisitions over the course of this year? And then if it's something large or something strategic comes available, how would you fund that? Would that necessarily be done with divestitures?

Jason Pigott -- President and Chief Executive Officer

Yes. I'd just say we haven't -- I'm not giving any guidance really on the size that we're looking for. We're looking at things that are again, we've played these smaller things in that 4,000 to 7,000 acre range, but again, just there's a lot of things coming to market. Our real focus is, again, when we do something, it is going to keep the debt to EBITDA flat, ultimately pushing it down at the end of the day.

So that's how we'll manage that. We're also just focused on playing in our fairway. I mean all of Karen's highlights on her operational success and the success of the team is an advantage to us. I mean, when I look at some of our peer presentations, we're $500,000 to $1 million cheaper in some cases than their wells.

When you take down our per well basis, that's a $10,000 an acre advantage that we have in the basin right now. So our plans are to use our competitive advantage on the capital side to create success in this -- in the M&A world.

Karl Blunden -- Goldman Sachs -- Analyst

Got you. That makes sense. And that passes to something else it's a little premature to discuss, but in terms of using cash from the revolver to fund those acquisitions? Is there a limit on how much you would go to before you felt uncomfortable from a liquidity standpoint?

Jason Pigott -- President and Chief Executive Officer

Yes, I probably wouldn't comment on that yet. I mean, it just depends on, again, opportunities and like that, but we've again, we've with all the work we've done, we've set ourselves up to be, again, have plenty of liquidity to execute on our business. So we'll navigate that as these opportunities come available to you but it's a little bit too early to be talking about that right now.

Karl Blunden -- Goldman Sachs -- Analyst

Understood. Thanks very much.

Operator

Our next question comes from Asif Chaudhry with IV Investments. Your line is now open.

Asif Chaudhry -- IV Investments -- Analyst

Hey, guys. Congratulations on the solid quarter. Just a question around sort of asset sales. You guys mentioned sort of the water infrastructure.

Can we put some parameters around that? What sort of EBITDA or volumes and sort of what sort of profitability you generated there?

Jason Pigott -- President and Chief Executive Officer

Not yet. Looks like we're working through that process. One of the, it is an asset to us. They have been selling for good rates.

We are only customer right now on that system and so we got to think through if we monetize it, it would naturally cause your at least operating expenses to go up, which is something that we're proud of, but the team is also looking to make a few modifications to the system that could increase the revenue-generating capacity from where it is today. So we're looking at it, evaluating it. We check it all the time, but it is something, again, in our portfolio that should we find one of these acquisitions that we'd like to make that may make more sense than it does at any other incident, but it is something that's in our portfolio that we think has real value.

Asif Chaudhry -- IV Investments -- Analyst

Appreciate that. And then, just one other question around the same line of thought process. The net royalty acreage, can you just give an update on what -- how many rough approximately royalty acreage you have in the portfolio?

Jason Pigott -- President and Chief Executive Officer

So 750 net royalty acres.

Asif Chaudhry -- IV Investments -- Analyst

All right. Great. Thank you, guys appreciate it.

Operator

Our next question comes from Kashy Harrison with Simmons Energy. Your line is now open.

Kashy Harrison -- Simmons Energy -- Analyst

Good morning and thanks for taking my questions. So I think earlier in the call, you mentioned that perhaps the cost for the well cost for the Cline, we're tracking a bit lower than anticipated. Would you have an early estimate for the Cline costs on a lateral adjusted basis available?

Jason Pigott -- President and Chief Executive Officer

We won't give it out just yet. Again, again, we've just really mentioned this kind of in the comments, but again, the wells have just been drilled. We get 10 days of flow backs, so we want to get tight on all our costs. But saying as we get to our next kind of event where we release results, I think that's something that we'll be able to give you a lot more detail on, but it's, again, very encouraging early on for us.

Kashy Harrison -- Simmons Energy -- Analyst

Got you. And then, just for my follow-up question, just a quick clarification. So for 2019 spend, it looks like it came in around $482 million. What was the split between the D&C bucket? And then the other bucket that's production facilities, land, and other capitalized costs? And then I think last year, the average lateral length was maybe around 11,000, maybe 11,400, something like that.

Just wondering how we should think about average lateral length in 2020.

Jason Pigott -- President and Chief Executive Officer

Let me give a little color on 2019. So you're right. 482 million for the year. The D&C part was right around 425 million with the balance, kind of split between facilities, land, data, capitalized G&A, etc.

Karen Chandler -- Senior Vice President and Chief Operations Officer

Yes. And this is Karen. I'll answer on the lateral length. So yes, the -- on average, as we're moving to the Howard County and then also the new acquisition in Western Glasscock.

Most of those packages, the way that the DSUs are going to line up, our 10,000-foot laterals. There are some 7,500-foot laterals in there, too. We'll be looking at those forward to see if there's some way to extend those, but they really fall kind of in those two categories, 10,000, 7,500. On our existing acreage position, a lot more variability in each one of the DSUs just with the large blocking nature of that asset base.

So in general, those are the types of packages we'll be completing in 2020, 7,500 to 10,000 foot laterals. So probably averaging just below the 10,000 foot with averaging those first.

Kashy Harrison -- Simmons Energy -- Analyst

Good, that's helpful. That's all for me. Thanks guys.

Operator

And I'm showing no further questions in the queue at this time. I'd like to turn the call back to Ron Hagood for any closing remarks.

Ron Hagood -- Vice President, Investor Relations

Thank you for joining us for our discussion of our 2019 results. We appreciate your interest in Laredo, and have a great morning.

Operator

[Operator signoff]

Duration: 43 minutes

Call participants:

Ron Hagood -- Vice President, Investor Relations

Jason Pigott -- President and Chief Executive Officer

Michael Beyer -- Senior Vice President and Chief Financial Officer

Karen Chandler -- Senior Vice President and Chief Operations Officer

Brian Singer -- Goldman Sachs -- Analyst

Asit Sen -- Bank of America Merrill Lynch -- Analyst

Richard Tullis -- Capital One Securities -- Analyst

Derrick Whitfield -- Stifel Financial Corp. -- Analyst

Noel Parks -- Coker and Palmer -- Analyst

Karl Blunden -- Goldman Sachs -- Analyst

Asif Chaudhry -- IV Investments -- Analyst

Kashy Harrison -- Simmons Energy -- Analyst

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