Oil prices went from bad to worse last quarter, slumping another 17%. However, despite that slump, Laredo Petroleum's (LPI +0.00%) operating cash flow actually increased, going from $89.8 million in the third quarter to $90.4 million in the fourth quarter. Here are the three numbers that made that pretty remarkable fete a reality.
1. $13.03 per barrel of oil equivalent (BOE)
Laredo Petroleum was able to drive its unit cash costs down in the fourth quarter to just $13.03 per BOE. That's 23% less than the year-ago quarter, helping the company mute some of the sting of falling oil prices. In addition to that, the company pushed general and administrative expenses down to $5.53 per BOE, which is 28% lower than the year-ago quarter. The company reduced its costs by pulling a variety of levers, including driving efficiency gains, reducing its headcount by 20%, as well as capturing lower variable expenses like taxes and fuel.
2. 40,368 BOE/day
Laredo Petroleum's production averaged 40,368 BOE/d during the fourth quarter, which was 2% ahead of the 39,722 BOE/d it averaged during the year-ago quarter. Overall, average daily production was up 18% year over year. Driving this higher production were new wells drilled into the Upper Wolfcamp and Middle Wolfcamp, which are performing better than type-curve expectations.
3. $43.64 per barrel of oil
Slumping oil prices dropped Laredo Petroleum's average realized oil price down to just $36.97 per barrel in the quarter, which is 43% lower than the fourth quarter of last year. However, thanks to its oil hedges, the company was able to capture $80.61 per barrel during the quarter, which is actually ahead of the $74.41 it realized per barrel in the fourth quarter of last year. Overall, Laredo's oil hedges added $43.64 per barrel to its realized oil price last quarter, which is more than double what it would have brought in otherwise.
Laredo wasn't the only oil company that benefited from strong oil hedges in the quarter. Devon Energy (DVN +1.85%), for example, collected $24.36 per barrel from its oil hedges, which boosted its average realized oil price up to $53.67 per barrel. Those strong oil hedges, as well as Devon Energy's cost reductions and higher production, enabled it to actually grow its cash flow 12% year over year. These companies are seeing firsthand the benefit from having strong oil hedges, which have been a major factor in keeping cash flow from falling as steeply as the price of oil.
A quick look ahead
Unlike a lot of its peers, including Devon Energy, Laredo Petroleum has a pretty strong hedge program in place for 2016. As of the end of last year, the company had 85% to 90% of its 2016 oil production hedged at $70.84 per barrel, along with 70% to 75% of its natural gas hedged at $3 per MMBtu. While that's not as robust as its hedges last year, it's still expected to supply the company with a substantial amount of cash flow in 2016 should oil remain weak.
Because of that solid base of cash flow, Laredo Petroleum is only reducing its capex budget in 2016 by 39% over last year's amount. While that's a steep cut, it's nowhere near the 75% reduction that Devon Energy is making to its capex plan, nor the 90% reductions some of its even-weaker peers are making. Only 75% to 80% of Laredo Petroleum's capex budget is currently covered with its expected cash flow, while 100% of Devon's is covered.
Investor takeaway
The formula for an oil company to keep its head above water during the downturn is simple: Cut costs, boost production, and hedge as much as possible. That's what enabled Laredo Petroleum to turn in a pretty solid fourth quarter, and is providing the company with a solid base of cash flow for next year so that it doesn't have to dramatically cut back spending.
