Laredo Petroleum, Inc.

Good day, ladies and gentlemen, and welcome to Laredo Petroleum first quarter 2021 earnings conference call. My name is Carol, and I will be your operator for today. At this time, all participants are in listen-only mode. We will be conducting a question and answer session after the financial and operations report. As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce Mr. Ron Haygood, Vice President, Investor Relations. You may proceed, sir.

Thank you and good morning. Joining me today are Jason Paget, President and Chief Executive Officer, Karen Chandler, Senior Vice President and Chief Operations Officer, and Brian Limmerman, 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 of 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 references 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 the first quarter of 2021. We will refer to the presentation 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. I will now turn the call over to Jason Pagut, President and Chief Executive Officer.

Good morning, and thank you for joining our first quarter 2021 earnings call. Our results for the first quarter are a demonstration of the solid financial management and operational execution that underpins our strategic transformation. We generated $22 million in free cash flow in the quarter as we continue to reduce well costs, which in turn reduce capital expenditures. We sold shares under the ATM program for about $27 million in net proceeds and reduced borrowings under our revolver by $35 million. Our long-term trend of drilling and completion deficiency improvements and innovations such as our company-owned sand mine are indicative of our drive for continuous improvement. Capital efficiency improvements from our transition to Howard County came to fruition this quarter. Production from our first package of wells in Howard County had a substantial impact on production during the quarter, despite downtime due to February's winter storms. Oil production grew 11% sequentially versus the fourth quarter of 2020, and we expect sequential oil growth of 9% to 13% in the second quarter as our second package of wells reaches peak production. We continue to do well on our ESG metrics, flaring or venting only 0.22% of produced natural gas during the quarter. The company has put forward an ambitious plan to reduce greenhouse gas emissions and reducing and ultimately eliminating reaching flaring is a key component of the plan. To conclude, I would like to recognize the efforts of our operational team to quickly and more importantly, safely restore production after the winter storms in February. With that, Karen will provide more details on our operations.

Thank you, Jason. I'd like to begin by seconding Jason's comments on the efforts of the entire operations team to get us back up and running after the severe weather that occurred in February. It was all hands on deck and it took a lot of focus and discipline by all of the teams to work as quickly and safely as we did to minimize the impact. Results in the first quarter continue to reflect our successful transition of activity to Howard County. We continue to make significant progress on reducing well costs, with our first two packages in Howard County being delivered at $525 per foot. One of the main drivers of this success has been our company-owned sand mine. We are now consistently realizing savings of $90,000 per well with the mine supplying over 85% of the sand we used in the first quarter. We were also able to successfully source the other 15% of our sand volumes with third-party sand right after the winter storm, as we were getting operations up and going again at the mine, with no increase to our well costs. Additionally, we continued our long-term trend of increasing operational efficiency, increasing drill feet per day per rig in the first quarter, even as we were working with the new rig we added at the beginning of the year. Cost incurred in the first quarter came in lower than anticipated. This was driven by the decreased well cost just mentioned as well as some infrastructure projects that were delayed until later in the year. Based on the first quarter cost, we believe that we are on track to spend less than our $360 million capital budget, but also plan to fully evaluate the potential for continued improvements in drilling and completion efficiencies, which could positively pull some activity forward into 2021 from first quarter 2022 as we keep activity levels steady at our current two rigs and one frac fruitatives. In addition to delivering lower capital costs, we've also been pleased with our LOE trends in Howard County. While we still expect LOE to rise as we bring on more production in Howard County and still forecast about $4 per BOE for the life of a well in Howard County, So far, our operating costs have been lower than we originally anticipated. We've been testing the application of high-rate, high-pressure gas lifts on a few wells to evaluate the impact on both production and operating costs. We also continue to optimize our water forecast as we gain more production data, and we've transitioned the majority of our facilities and wells to purchase power. all of which could positively impact our operating costs going forward. We expect to deliver steady oil production growth throughout 2021 as we bring on one well package per quarter in Howard County, running one continuous frat cruise. While there can be some lumpiness to production based on timing of the large 12 and 13 well packages in our development plan, We expect sequential oil production growth throughout 2021, as well as an increase in our oil cut. The early production results to date in Howard County are within the range of our expectations. As we showed in last quarter's release, the first package, the 15-well Gilbert Pass-Out Package, started out in line with our average performance expectations. This package has begun to tell off a bit over the past couple of months, but overall is still performing within our range of expectations, particularly given the tighter well spacing in this package. Our second package, the 12-well Trentino-Whitmire package, is well ahead of the average performance expectations early in its history. Both packages were developed on the tighter 12-well per DSU spacing in the Wolf Camp. Subsequent packages will be upspaced to approximately eight wells per DSU in the Wolf Camp. We believe this will deliver more consistent performance and maximize value per DSU. We continue to make good progress building our Howard County leasehold. Subsequent to the end of the first quarter, we acquired a full section contiguous to the section that we acquired in October 2020. This formed up a two-section DSU, which now sets us up to develop the DSU with 10,000-foot laterals. I will now hand the call to Brian for a financial update.

Thank you, Karen. Like our operational execution, we also executed on the financial side of our strategy. We maintained our capital discipline and our focus on expense control, which combined with the capital efficiency of the Howard County Development Program drove free cash flow of $22 million for the first quarter. In February, we initiated our At-the-Market Equity Program. Authorized for $75 million, the ATM program allows us to opportunistically sell equity from time to time. We put the program in place with the intention of using the proceeds to pay down the a portion of our credit facility that had been used in the fourth quarter of 2020 to repurchase 61 million of notes at 62.5% of par and to finance a bolt-on transaction in Howard County where we bought acreage at a little over $2,000 per undeveloped acre. These opportunistic, very accretive transactions totaled about $50 million. When we announced the ATM program, our stock was in the mid-30s. Subsequently, we were able to sell 723,000 shares at an average price of approximately $38.75 for net proceeds of $26.9 million. These proceeds, combined with the free cash flow, enabled us to pay down our credit facility by $35 million during the quarter, while also making an interest payment on our notes of approximately $46 million. Going forward, our goal is to continue to pay down debt and strengthen our balance sheet. Recent commodity price increases have enhanced the free cash flow generation profile of the company. During the first quarter, we added to our 2022 oil hedges, and we intend to add more as the year progresses, further increasing our confidence in our 2021 and 2022 free cash flow profile and debt reduction capabilities. With that, I will ask the operator to please open the line for questions.

Thank you. If you have a question at this time, please press star, followed by the number one from your touchstone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And we'll pause for just a moment to compile the roster. And once again, that is star one for any questions or comments. And your first question comes from the line of Derek Whitfield with Stifel.

Thanks, and good morning, all. Good morning, Derek. For my first question, perhaps for Karen, I'd like to focus on your chart on page 8 to understand the differences between the first two sets of wells. Other than the winter storm URI impact to the first set, Were there other noticeable or notable differences in the DNC design or flow-back approach between these two sets?

Hi, Derek. Yeah, thanks for the question. So, you know, at a high level, the answer is no. There's no real difference between those first two well packages. They were really designed on the same spacing. Even really looking at landing points, you know, basically had the same basic design. So, overall, you know, both of these packages are still relatively early in their flow back. We continue to evaluate performance of the different landing points between the spray berry and the wolf camp formation, but really no design differences in these first two packages.

It's just, again, statistically, we just see packages that are a little better or a little worse, so it's just something that's not unusual. kind of put these first few packages of wealth out.

That makes sense. And for my follow-up, I wanted to focus on the A&D market, perhaps for you, Jason. In your view, did the recent larger midland transaction in the basin tilt the A&D environment from a buyer's market to a seller's market, or do you sense sellers can see that it was somewhat of an anomaly?

Most of the folks that we've talked to and a lot of the analysts that looked at it think that that's an anomalous transaction. Again, good fit for the purchaser there. But I don't think that the expectations have been raised by that level across the basin. And, again, there's lots of things that are on the market. So, again, it's a good time. I think the bid ask is narrowing, especially, again, as prices have risen a little bit. It was difficult to do things. in a much lower price environment, but I do think we're in a price environment today where we can be successful with transactions.

Fantastic. Congrats on your success to date, and thanks for your time. All right. Thank you, Derek.

Thank you, Newark.

And once again, to ask a question, you may press star followed by the number one at this time. Your next question comes from the line of Noel Parks with Tuohy Brothers.

Good morning. Good morning. I just wondered, could you just sort of review a little bit the spacing history of what you've been doing since your Howard County acquisition? The initial one, I think, was going on three years ago, if memory serves me. And just sort of what the spacing assumptions were under the legacy operator, what you started out at, where you are now, and also – Could you just kind of review the geological characteristics that help determine, you know, what spacing works where? Or geological or I guess the completion choices. Thanks a lot.

Yeah, this is Karen. Yeah, I'd be happy to kind of step back and talk a little bit about the history of the acreage. So we acquired the acreage and kind of closed on the Howard County acreage that we're developing right now. in late 2019, right at the end of 2019. One of the reasons that this position was very attractive to us is it really had not been developed. So there were really no parent wells. So it was a good location for us to go in and go into kind of full development in this area. So no real space thing kind of outlined prior to that. We actually transitioned very quickly in 2020 to active operations in Howard County. but then delayed completions in Howard County just given the, you know, the environment that we were in in early 2020 with COVID and other things. So we actually started completion operations in September of 2020. So we've only been actually operating with active completions going back since really the very end of 2020, so four to five months on the first packages. So that's why we kind of refer to the early well performance here. We're really getting the first look at the well results coming back from Howard County. And the first two packages, which is what we're showing on slide eight in the earnings release. So as we began development in Howard County, this spacing design that we've talked about was four wells in the Strawberry, 12 wells in the Wolf Camp. That was the development of plan that we went in for the first two well packages, the Passau-Gilbert and the Trentino-Whitmyers as we refer to them. And that's what the two packages that are plotted up for the Howard County wells on slide 8 are. As we kind of got into that development, continued to look at all the work that was being done by us, the offset operators, just really a lot of technical work and completions. Clearly the drilling rig is well out in front of the completions completion crew. And so we decided to really upspace a little bit in Howard County in front of even getting any of these well results back. And that's what we've been doing on the next packages that will be flowing back in subsequent quarters. So what we're, you know, the upspacing design is still four wells in the Sprayberry. Eight wells in the Wolf Camp is currently what we're doing. You know, overall, looking at the well results on slide eight, overall, these are strong packages. You know, it's early in their history. We're happy with their performance. These wells that are flowing back right now are supporting our overall company strategy, which is capital efficient wells, high rates of returns, higher rates of returns, really supporting, you know, our strategy of free cash flow generation, paying down debt. So these first two packages, are clearly supporting that. And, you know, as we continue to bring on the upspace packages, which will be the packages that we're bringing on in the next couple of quarters, we just think that they will help support more consistent results and continue to support that strategy. So that's kind of the history that we've been on since acquiring the Howard County acreage.

Great. Thanks a lot. That's helpful. And Could you just talk a minute about what you're thinking of going forward on steel costs? I was wondering if you had been thinking about building up your inventory or maybe already had, or whether you thought maybe this was kind of a temporary thing. blip upwards for steel and, you know, we might be in better shape heading into future quarters.

Yeah, overall, so we have a supply chain team that really works, you know, every aspect. of our business. And, you know, still is an interesting one, which is impacted, you know, by the broader global market at times. So we do see some fluctuations up and down. Overall, we're not really seeing any impact on our well costs currently. We do have contracts in place. that we work out in time to make sure that we're managing both the cost and inventory on all of our cue dealers and everything. So really not seeing any significant impacts currently to our business.

Great.

And your next question comes from the line of Richard Cullis with Capital One Securities.

Hey, good morning, everyone. Question for maybe Jason or Brian. You know, given the recent uptick in commodity prices that certainly helped the cash flow for the quarter, does this present an opportunity to potentially look at monetizing some of the less core acreage, the 100,000-plus acres that you hold on the legacy properties, you know, outside of the current focus area in Howard? We've seen a couple of other EMPs sell sort of non-core acreage over the past couple of months in the recent announcements. I just wanted to see if maybe it heightens your interest at all in maybe looking to part with some of the legacy acreage.

Yeah, that's a great question. I think that it is something that's on our radar. As everyone knows on the call, we are looking to continue to bring in higher quality acreage. Inventory today, the core position, again, it provides the cash flow that funds that, but depending on how much PDP might come in with a transaction, selling down or selling a non-op interest or carving out a portion of the field is something that we would consider to, again, just help strengthen the balance sheet and not just bring on straight debt. So those are things that we think about. A lot of it will just depend on kind of the M&A work in the future.

Okay. Thanks, Jason. Question for Karen. Obviously, really nice well-cost average for the packages in Howard County online year to date. How sustainable do you think the 525 per lateral foot is as we go forward? And I mean, is there potential to even lower that more?

Yeah, you know, we've talked about prior that we were expecting to come in a little bit below where we were at the $540 a foot. But really, you know, again, with the first packages coming through, we wanted to have actual clear performance as we were going in and, you know, really starting the completions operations in Howard County. So with the first two well packages behind us at this point, you know, really felt comfortable coming out with actual well costs at the 525. So as we all talk about, are there potential pressures on service costs? You know, that dialogue continues. We're not seeing any really significant upward pressure there. As far as continue to optimize our designs and look for performance improvement, yeah, I think there's opportunities. So it will be really just kind of balancing, you know, You know, how do we continue to drive performance improvements into drilling and completions, operations, and make sure that we're managing any type of cost pressure that we're getting on the service side of the business. We've talked about our sand, our own mine that we have. You know, we're just from, you know, our crack service providers, external companies hearing that there is pressure on the sand side. both trucking and sand. So right now we're really insulated from that, which is a good position to be with the same that we're providing off of our own locations, our own service locations. So overall I think we're set up pretty well. We shared again the performance of both drilling and completions. We've been doing that on a quarterly basis. Even with the severe winter storm that impacted us for a few days in February, we're seeing really good performance and continued performance improvement there. So I do think there's opportunity for that to continue.

Thanks, Karen. And that was helpful. And thanks to everyone for their response. Thank you.

And ladies and gentlemen, we've come to the conclusion of our Q&A session for today. And I'll turn the call back over to Mr. Ron Haygood for the closing comments.

Thank you for joining us for our call this morning. We appreciate your interest in Laredo. This concludes our call and have a great morning.

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You have a wonderful day. You may now all disconnect.