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Laredo Petroleum (NYSE:LPI)
Q4 2020 Earnings Call
Feb 23, 2021, 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 2020 earnings conference call. My name is Josh, 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, chief operations officer; Bryan Lemmerman, 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'll be making forward-looking statements. These statements, including those describing our beliefs, goals, expectations, forecasts, and assumptions are intended to be covered by the safe harbor provisions under the Private Securities Litigation Reform Act of 1995.

Our actual results may differ from these forward-looking statements for a variety of reasons, many of which are beyond our control. In addition, we will be making reference to non-GAAP financial measures. Reconciliations to GAAP financial measures are included in yesterday's news release. Yesterday afternoon, we issued a news release and presentation detailing our financial and operating results for fourth-quarter and full-year 2020.

We will refer to the presentation by page during today's call. If you do not have a copy of this news release or presentation, you may access it on our website at www.laredopetro.com. Additionally, we published our inaugural ESG finite risk report. Which can also be accessed on our website under the sustainability tab.

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 today. 2020 presented many challenges for our industry. As a team, we pulled together to quickly adjust to working remotely by maintaining focus on executing our strategy. Our culture of continuous improvement resulted in substantial improvements across all aspects of our business.

Our transition to Howard County development is a great example of how we strive to continuously improve our results. We moved all of our activity to a new area in 2020 and turning our Howard County well online is a major milestone for Laredo. We are now able to demonstrate the results rather than worse the impacts of pivoting the company to more capital-efficient assets. We completed our first 15-well package in Howard County, and this grows in the average total production over 10,000 gross barrels of oil per day until the recent great increment weather challenges curtail some of the production.

These production figures are largely driven by the Wolfcamp wells and the four Lower Spraberry wells and are just now beginning to ramp up their production. We also increased our leasehold position in Howard County during the year, adding 4,000 net acres at a very competitive price. We also took actions early last year to manage financial risk in our balance sheet. We closed term debt maturities out to 2025 and 2028, opportunistically repurchase some of that debt, and maintained our robust hedging position to support our development plan in 2021.

In 2020, we made significant strides to embrace innovation as we launched our digital transformation. We build a cloud-based framework from the ground up that will bid a foundation for the future. We started automating manual processes and our partner with others to build our intelligent well application, which is designed to increase production, reduce operating expenses, eliminate paperwork, and so much more. Our culture of innovation is being driven at the highest levels of our company and will ultimately impact all aspects of our business.

Operationally, we continue to successfully improve our business across our core positioning, reducing well cost, LOE, and G&A versus 2019 levels. Importantly, we reduced our environmental footprint, cutting flaring and bedded gas volumes by 58% and oil and water sales by 29%. Last night, along with our earnings release, we also published our inaugural ESG and climate risk report. In this report, along with demonstrating the past success in our greenhouse gas emissions metrics we demonstrate our commitment to environmental leadership and our target to reduce springhouse gas emissions by 20%, methane additions to less than 0.2% of natural gas production, and the elimination of routine flaring all by 2025.

And recall, these reductions are versus levels that are already in line to lower than our industry peers. In 2020, the board worked with the executive team to align our compensation structure with environmental targets, and we are experiencing the game in terms of alignment at all levels of the organization. In addition to our environmental accomplishments and goals, we are very proud of our progress on social and governance issues. And nearly one-half of our board is now represented by women or minorities, and we are also diversified on the background of the board adding legal, financial, technological, and executive experience to our team.

In our quarter, we also emphasized the strong impact with email workforce has on the radio, with 33% of our professional roles they build that limit. In our report, we also felt like the generous spirit of our company and our employees as we partner with agencies in our local communities to have a lasting impact. For 2021, we built on a strong foundation we have put in place with our pivoted strategy that was communicated in November of 2019. And 2021 budget and development plan highlight the capital efficiency gains from our shift to Howard County.

We expect consistent oil growth throughout the year, along with increasing free cash flow generation on the same B&T budget as last year. In fact, by maintaining a consistent development program throughout the year when paired with reduced costs, we expect it to complete 25% more lateral feet in 2021 versus 2020 or the same D&C budget. We remain focused on opportunities to acquire additional oily, high-margin acreage at attractive prices. We also are committed to our valuation framework and the opportunity set our prudent acquisitions is significantly stronger so far this year.

And we anticipate one of these opportunities will be a catalyst for the continued transformation of Laredo. I will now turn it over to Karen for more details on our operations.

Karen Chandler -- Senior Vice President, Chief Operations Officer

Thank you, Jason. Despite the challenges presented by having to quickly pivot our 2020 development program early in the year, with regular operations team delivered impressive operational results. We transition from an impressive completions program on our established acreage, completing 28 wells in the first quarter, a holiday completing the activity in the second quarter for four months. We then restarted our completions activity by fully transitioning operations to our Howard County leasehold.

Through all of this, we reduced drilling and completion costs by 21%, increased drilling efficiencies by 4%, increased completion efficiencies by 14%, and completed our first package of wells in our county. In the fourth quarter, we also commenced operations on a company-owned third-party operated sand mine in the heart of our Howard County acreage, a first from an operator in Permian Basin. The mine can supply our operations for five years, reduces truck traffic by 300,000 miles per month. In sales around $90,000 per well for a 10,000-foot lateral.

In current service costs, we are confident in our ability to deliver wells in Howard County at $540 per foot or less. Our first well on Howard County were developed in a 15-well package with 11 wells in Wolfcamp and four wells in Lower Spraberry area. Completions operations began on this package level in early September and wrapped up in early December. In general, we're finding wells in Howard County already cleaned up than on our established acreage, especially to the Lower Spraberry progression.

That being said, we are very happy with the early performance of these wells. As Jason mentioned, they're performing well and are tracking with our expectations. Even as the Lower Spraberry wells are just now beginning to ramp up their low production. We are currently finishing up completions on our second well package, a 12-well development with 10 wells in Lower Wolfcamp and two in the Lower Spraberry.

This package was developed, we will pace things similar to our first package. Plus the package size was reduced to avoid parent-child interactions with an offsetting operator. Operations on this package were ahead of schedule prior to the severe weather impacts over the past few days, improved completions efficiencies full activity forward from the first quarter of 2021 into the fourth quarter of 2020 on a whole well pad and the second Howard County well package. In 2021, we expect to bring on one large well package in Howard County each quarter.

The four individual well packages will consist of either 12 or 13 well each and will be developed on either eight or 12 wells per DSU spacing in the Wolfcamp, continuing on our view of rock quality and commodity pricing at the time of the final investment decision. Our 2021 budget in production guidance incorporates all of the items I just referenced. Capital was slightly higher than our originally communicated as we are accelerating activity into 2021 from 2022, as we're getting more done than expected with our one frac curve. Commensurately, our oil production expectations are also higher as completions are pulled forward, even after adjusting for the longer point of times that we're seeing in Howard County.

I also want to mention that our production guidance for the first quarter of 2021 reflects uncertainties associated with the current weather situation in the Permian Basin, extended freezing temperatures and severe icing affected our drilling, completions, and production operations for the last 12 days. As always, our commitment to the safety of Laredo's team members and the company's environmental impact or our first probably. And we experienced zero safety incidents or releases due to the lever. Multiple challenges impeded our production operations over this 12-day time frame.

Including lack of fuel gas and electricity, shutter takeaway and processing capacity, limited access to well sites and facilities, and inoperable vapor recovery units, which are necessary for environmental compliance. Additionally, completions operations were unable to proceed, delaying the drill out of plug for about a week on the company's 12-well [Inaudible] package in Howard County. Currently, drilling and completions activities have resumed normal operations and production is rapidly returning to pre-storm levels. The company currently estimates that the combined impact of shut-in production and completion delays will reduce first-quarter 2021 full production approximately 8,000 BOE per day.

And oil production by approximately 3,000 barrels of oil per day. Lastly, I'll make a few comments on our reserves at year-end 2020. Obviously, the nature of SEC-mandated pricing can have a dramatic effect on the volume and value of proved reserves. Given that booked volumes, both proved developed, and cost decreased as the economic life of wells shortens or wells became uneconomic at the long benchmark prices.

That being said, Howard County development is starting to have a positive impact on our reserve value, already representing 11% of the company's prudent developed PV-10. On Slide 7 of the accompanying earnings presentation, we show with the value of our proved developed reserves would be at various oil prices. Remember, this is always the well of talent and proven developed at year-end 2020. No additional capital is required to generate the PV-10 value at the higher prices.

I'd like to close by thanking all of our operations team members for their hard work and dedication to Laredo over the past few days. Everyone in West Texas has had numerous things going on, dealing with freezing weather, power outages, water issues, and icy roads both at home and work. Thank you all for helping us manage through this difficult weather storm and working to keep everyone safe. I'll now turn the call over to Bryan for a financial update.

Bryan Lemmerman -- Senior Vice President and Chief Financial Officer

Thank you, Karen. In his opening comments, Jason mentioned our success in managing financial risk in 2020. For us, this is an ongoing key principle of our strategic plan. Executing our plan in 2021 played a big part in the future cash flow generation capabilities to company.

Responding to abnormally low oil prices driven by COVID-related demand destruction, we have the completions activity for approximately four months. This was definitely the correct action to take, but it did result in a steep decline in oil production from the second-quarter 2020 levels of 31,000 barrels a day to fourth-quarter 2020 levels of 22,000 barrels a day. Returning oil production levels to the 30,000-barrel per day range is a key driver for future free cash flow generation and keeping our net debt to consolidated EBITDAX ratios low. Our 2021 plan accomplishes our goals on many levels.

Shifting to Howard County derived an inflection point in oil productivity and oil production, running a consistent pace of two rigs and one completion throughout the year is highly efficient. These efficiencies drive free cash flow to the $25 million to $40 million range at current commodity price levels, including our hedges. To facilitate this program, we have continued our active hedge strategy that has served us so well in the past. We do not focus on price alone.

We take a broad look at potential downside risk and measure the outcomes versus the impacts on cash flow and our ability to execute our plan within cash flow. Currently, we believe we have mitigated downside risks to the point that we could execute our plan within cash flow in a $40 to $45 WTI range. Looking briefly at the cost side of the ledger, early in 2020, continued to decrease on both ideally and an absolute-dollar basis. For 2021, other than the temporal increase in Q1 of approximately 10% due to production impacts from the winter weather freeze offs, we expect to see a slight, but steady increase throughout the year as we turn in line Howard County wells and as our legacy production continues to decrease.

We will also perform a few more workovers than we did in the 2020 low price environment. This steady increase in LOE is in line with what we have been telegraphing for the last couple of quarters. G&A expense in 2020 also decreased on both an absolute and unit basis. As we reduced activity in response to lower oil prices, we made the tough decision to cut personnel to align with the new activity levels.

We have maintained our discipline in managing G&A expense and expect them to remain relatively flat on an absolute basis in 2021 versus 2020 levels and relatively flat on a BOE basis again, other than the first-quarter impact from the winter weather freeze offs. Looking forward, our goal is to continue to improve our balance sheet and further our ability to fund additional bolt-on acquisitions with our bank facility. We plan to utilize free cash flow to pay down our revolver to increase our flexibility and we continue to look for other opportunities to reduce net debt and interest costs. Ultimately, we are highly focused on accretive transactions that reduce leverage ratios and facilitate the execution of our corporate strategies.

Now, I will turn the call back over to Jason for closing comments.

Jason Pigott -- President and Chief Executive Officer

Thank you, Bryan. I am very excited about 2021 for Laredo. We are now positioned to demonstrate the expected capital efficiency, productivity, and cash flow generation capabilities of all development in Howard County. We are confident in our operational capabilities, and we'll continue to focus on adding additional oily, high-margin locations at attractive valuations.

Risk mitigation continues to be a basic principle of how to operate. Our balance sheet remains strong for the challenges of 2020, and we've demonstrated our strong focus on ESG performance. The transformational plan we communicated just 16 months ago is working, and we are determined to drive it forward and build upon our success. Operator, please open the line for questions.

Questions & Answers:


Operator

Thank you. [Operator instructions] Our first question comes from Derrick Whitfield with Stifel. You may proceed with your question.

Derrick Whitfield -- Stifel Financial Corp -- Analyst

Thanks and good morning all.

Jason Pigott -- President and Chief Executive Officer

Good morning, Derrick.

Derrick Whitfield -- Stifel Financial Corp -- Analyst

For my first question, I'd like to focus on Karen's comments on spacing and Howard County. Karen, based on the limited data you have, how are you generally thinking about spacing across your position at current pricing? And are there any other notable adjustments or areas of opportunity you like to incorporate in your go-forward D&C design or pull-back approach?

Karen Chandler -- Senior Vice President, Chief Operations Officer

Hi. Good morning. Thanks for the question. Yes.

So we've talked about in prior releases that we wanted to look at different potential spacing development plans in the Wolfcamp. So we're looking at both the 12-well and an eight-well development there. The first two packages that we talked about are based on the tighter spacing. The next couple of packages that we're developing right now will be on the wider spacing.

Really, we're looking at one, getting a little bit of different look at the spacing configurations and Howard County with our first well packages. And then also, as we mentioned, just making the decision based on spacing, based on the economic decision at the time. And I highlight that because the packages that we'll be bringing on there to the third and the fourth packages the investment decision was made in the middle of 2020 on those as drilling operations began, so a little bit different commodity environment. So as we continue to look at the different development plans, we're continuing to look at completion designs, really around optimizing those both for the Wolfcamp at the different space and also for the Spraberry.

Jason Pigott -- President and Chief Executive Officer

Actually, too, part of that is testing new completion design. I mean, we don't have all the cost in or we're getting the final cost in for the first package of wells and the wells we've drilled. So I think there's going to be opportunity to continue to drive cost down. We just need to get all those costs in and fully baked.

And we'll look at that as the year goes on, where our costs should come down from where we are today.

Derrick Whitfield -- Stifel Financial Corp -- Analyst

That's great. And for my follow-up, perhaps with Jason or Karen. With regard to your 2021 guidance, you effectively raised your oil guidance despite the weather affects you experienced in Q1 that thing at least suggests a stronger production profile than previously thought. Could you perhaps speak to the production trajectory and potentially offer color on an excited exit rate for 2021?

Karen Chandler -- Senior Vice President, Chief Operations Officer

So I can comment on the production profile itself. So we actually added in the deck this time early results of the first Howard County package coming online, and we did split out the Wolfcamp and the Spraberry formation specifically. So as we mentioned, it's early, but well performance on that first package is meeting expectations. So everything is looking good there.

I'll also comment in addition to the production profile that we're seeing in the Howard County again, with the first package coming in at a little bit tighter spacing in the Wolfcamp. We also highlighted our same completion efficiencies continue to improve. Again, show data for the fourth quarter, which is continuing to be on that upward trend. And that also is impacting that production guidance because just getting more footage done in 2021 than we originally went out with.

So both of those two things are really impacting that increase in the guidance.

Bryan Lemmerman -- Senior Vice President and Chief Financial Officer

Yes. And, Derrick, this is Bryan. On the production rates throughout the year. I think we've talked in the past that you'll kind of see it as a steady increase throughout the year.

And so the annual number will be kind of the midpoint. So we're a little bit below the guidance we gave for the year today, and we'll be above it by the end of the year. And it's pretty much pro rata. And we're going to see a pretty much steady increase.

The timing of it could be a little lumpier with packages coming on. But generally speaking, on a quarterly basis, you should see that oil production step up throughout the year. The increase is really just -- I characterize it as pro rata increase over what we've kind of been expecting.

Jason Pigott -- President and Chief Executive Officer

Yes. I mean, one of the big changes for us this year are the pivot to co-development in Howard County. And so our production when wells come on, they come on in 12 to 16 well slugs versus we were doing smaller pads before, and we've been trying to incorporate some of that into our weather hit. And it might be good for Karen to just kind of talk a little bit more about the weather and how we thought about forecasting some of that as we're moving forward.

Karen Chandler -- Senior Vice President, Chief Operations Officer

Sure. So as just kind of back up as temperatures warmed up, we're over this last weekend, that's really where we were able to get all of our drilling completions operations back up and we're running at full pre-storm operations. Well in the weekend, we were also able to bring on the majority of our production, get it all back online. Yesterday, we were estimating that we were back at about 80% of the pre-storm levels from a production standpoint.

So we talked about in the release that operations were impacted in some way, a total of 12 days. I'll also add that we were at or below 50% of our production levels before the storm for about six of those days. So the overall, as I mentioned, we're getting everything back online. Our production, as everyone on the call knows, is very concentrated to one area.

For example, all of the new wells that we're bringing on in 4Q really impacting 1Q or one well package in Howard County, so our 15-well package. So any of it, like the recent weather, can really be very impactful to our total production because it is so concentrated. So we're still getting all of our operations to invest back online from the storm, and we what with the higher end of the potential impact in our guidance release. We'll continue to evaluate as we get everything back on with production and get fully back online in the next few days.

Derrick Whitfield -- Stifel Financial Corp -- Analyst

Great update. Thanks for your detailed response.

Jason Pigott -- President and Chief Executive Officer

Thanks, Derrick.

Operator

Thank you. [Operator instructions] Our next question comes from Brian Singer with Goldman Sachs. You may proceed with your question.

Brian Singer -- Goldman Sachs -- Analyst

Thank you. Good morning. Just one question this morning, and it is a little bit of a follow-up to Derrick's first question. It's with regards to inventory.

Based on the results that you are seeing from Howard County, is that impacting how you think about future locations? And then how does that impact, especially with commodity prices having moved higher your interest and ability to acquire more in 2021 or beyond?

Jason Pigott -- President and Chief Executive Officer

Yes. And a lot of our inventory -- again, we've got the range out there that's been updated for this year. So there's some impacts with spacing, but again, it can be four wells. So what we're talking about as a swing for 1,280 acres.

So we're going through that, and the answer changes some of that price. So we continue to look at price. We're ahead of that. And so the 12-well packages were put out there when oil price was much lower.

So we were drilling those when oil was in the $40 range. So we'll continue to be flexible, but we also need to just get the results. We're doing our design different than some of our other peers. We've got four wells in the Spraberry, eight wells in the Wolfcamp.

Some companies are at six wells in the Spraberry, six wells in the Wolfcamp. We think this is the right design for us, but we'll continue to test that. And I think just with respect to bringing the inventory, it's something that we need to do. We've generated all the opportunities that we've got organically.

We're continuing to do some blocking and tackling. There are instances where pulling in a section here or there gives us opportunity to drill 12 more wells via either a JV with another partner -- JOA with another partner or purchasing that acreage. So those are the blocking-and-tackling types of things that we do on a regular basis. We brought in acreage 25 -- or 2,500 acres last year.

At $2,500 an acre that just sold for $10,000 an acre plus. So we've been very good at bringing it in. It's hard to say exactly how that come in. All the acres we brought in today has been some negotiated with landowners.

Some was a sale. Some was a negotiated transaction. So we bring opportunities in multiple different ways. But everything that we're drilling today, while we didn't have in our portfolio just over a year and a half ago.

So we'll continue to do well at bringing in those opportunities, but it's hard to describe exactly how they've been because we've used multiple methods to bring those in so far.

Brian Singer -- Goldman Sachs -- Analyst

Great. Thank you very much.

Operator

Thank you. And I'm not showing any further questions at this time. I would now like to turn the call back over to Ron Hagood for any further remarks.

Ron Hagood -- Vice President, Investor Relations

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

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Ron Hagood -- Vice President, Investor Relations

Jason Pigott -- President and Chief Executive Officer

Karen Chandler -- Senior Vice President, Chief Operations Officer

Bryan Lemmerman -- Senior Vice President and Chief Financial Officer

Derrick Whitfield -- Stifel Financial Corp -- Analyst

Brian Singer -- Goldman Sachs -- Analyst

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