Quarterly / Earnings Reports | Second Quarter (2Q) Update

Laredo Petroleum Details Q2 2019 Results; Ups Production Outlook 14%

Share Print Bookmark    |    Thursday,August 01,2019

Laredo Petroleum, Inc. announced its 2019 second-quarter results, reporting net income attributable to common stockholders of $173.4 million, or $0.75 per diluted share. Adjusted Net Income, a non-GAAP financial measure, for the second quarter of 2019 was $55.5 million, or $0.24 per diluted share.

2019 Second-Quarter Highlights

• Completed the widely-spaced Yellow Rose package, which is outperforming a directly offset tightly-spaced package by 30% based on cumulative oil production per foot
  
  
• Produced a Company record 30,447 barrels of oil per day ("BOPD"), exceeding oil production guidance by 7% or almost 2,000 BOPD
  
  
• Reduced amount outstanding on the Company's credit facility by $35.0 million, lowering Net Debt to Adjusted EBITDA to 1.7 times^a
  
  
• Received net cash payments of $15.8 million on settlements of derivatives as the Company's hedges mitigated the impact of commodity price declines
  
  
• Reduced controllable cash costs of combined unit lease operating expenses ("LOE") and unit cash general and administrative expenses ("G&A") to $4.69 per barrel of oil equivalent ("BOE"), a 23% decrease from full-year 2018 results of $6.07 per BOE

Randy A. Foutch, Chairman and Chief Executive Officer, said: "The second quarter of 2019 fully demonstrated the results of the strategic transformation Laredo began late last year. Well productivity dramatically improved from 2018 as we widened spacing, unit cash G&A decreased 36% from full-year 2018 after we reduced personnel expenses, we paid down $35 million of debt as we generated free cash flow during the quarter, and now we expect to generate $30 million in free cash flow for full-year 2019."

"We believe there is still room to improve on these results," explained Jason Pigott, President. "We are refining our development focus to reduce the risk of vertical interference in our Upper/Middle Wolfcamp drilling and we are returning to areas of the Cline where economics have become competitive as costs have come down. High-grading inventory and further reducing costs to improve returns facilitate our top priorities of measured oil growth with free cash flow generation and replenishing our high-quality inventory through bolt-on transactions."

Guidance

The Company is increasing its anticipated full-year 2019 total production growth guidance to 14% and oil production guidance to flat as compared to full-year 2018. The table below reflects the Company's guidance for the third quarter of 2019.

Conference Call Details

Guidance Update

In the first half of 2019, Laredo has surpassed the Company's production and cash flow generation expectations and is in line with capital expenditure expectations. Accordingly, full-year 2019 oil and total production guidance and free cash flow expectations are being increased. Laredo now expects oil production for full-year 2019 to be flat compared to full-year 2018, an increase from previous guidance of down 2%. Total production is now expected to grow 14% versus previous guidance of 11% growth. These increases in production expectations are anticipated to drive free cash flow generation^b of $30 million for full-year 2019 while operating within our $465 million capital budget, excluding non-budgeted acquisitions.

The Company's decision to widen development spacing to improve well productivity, combined with sustainable operational efficiency gains that have shortened cycle times, is driving these increased production expectations. Increasing production assumptions, coupled with Laredo's robust 2019 commodity hedges that mitigate the impact of declining commodity prices, underpins Laredo's confidence in these free cash flow projections.

E&P Update

During the second quarter of 2019, Laredo completed 12 gross (11.5 net) horizontal wells with an average lateral length of approximately 11,600 feet. These 12 wells were developed in two packages, both utilizing the Company's wider-spaced development plan. The Yellow Rose package, an eight-well co-development package, began flowback at the end of April. After more than 100 days of production, oil productivity per lateral foot is outperforming an offset package of tighter-spaced wells completed in 2018 by more than 30%, reinforcing the Company's confidence in its Upper/Middle Wolfcamp type curve.

Oil and total production both exceeded second-quarter 2019 guidance, driven by the performance of the Yellow Rose package and wells being put on production earlier than anticipated due to reduced cycle times. Second-quarter 2019 oil production was 30,447 BOPD and total production was 82,259 BOE per day, exceeding Company-issued guidance by 7% and 5%, respectively.

In the third quarter of 2019, Laredo expects to complete 11 gross (11 net) widely-spaced horizontal wells with an average completed lateral length of approximately 10,100 feet. The first package is a four-well, single zone development package in the Middle Wolfcamp, infilling below a previous Upper Wolfcamp development package. The second is a seven-well, Middle Wolfcamp co-development package. These wells will further the Company's successful transition to wider-spacing development and will provide additional valuable information on optimal vertical spacing.

Laredo continues to sharpen its focus on high-grading development to optimize returns and minimize spacing risk. One important refinement is the Company's evolving approach to Upper/Middle Wolfcamp development. Using both proprietary and third-party vertical spacing data to quantify productivity impacts of the vertical distances between horizontal wells, the Company's Upper/Middle Wolfcamp co-development strategy will now target three landing points rather than four. Laredo expects this approach to reduce risks associated with vertical interference and increase the certainty of productivity expectations.

Additionally, the Company is planning to return to regions of higher productivity in the Cline formation that are expected to generate returns commensurate with Upper/Middle Wolfcamp targets as drilling and completions costs have decreased. These assumptions have been incorporated into a new Cline type curve for 10,000-foot lateral horizontal wells in these areas. Total production expectations for the new regional Cline type curve are 1.0 MMBOE for the life of the well, comprised of approximately 40% oil, with more than 60% of expected oil production recovered in the first five years of the life of the well. The Company expects to begin incorporating some of these Cline locations into its 2020 development program.

Laredo's successful shift to wider-spaced development is expected to drive productivity improvements versus tighter-spaced development, as demonstrated by the Yellow Rose package. High-grading inventory, prioritizing development based on the highest rate of return targets and replenishing inventory through targeted bolt-on leasing and acquisitions are expected to sustain these improvements and drive the Company's long-term goals of moderate oil production growth and free cash flow generation.

Laredo Midstream Services

Laredo's investments in field infrastructure through its wholly-owned Laredo Midstream Services LLC ("LMS") subsidiary drive both environmental and financial benefits for the Company. Through the first half of 2019, oil and water gathering pipelines owned or contracted by LMS gathered more than 18,000,000 barrels of oil and water, eliminating the need for more than 130,000 truckloads within Laredo's leasehold and producing a net financial benefit to the Company of approximately $18 million. LMS' water recycling plants processed more than 3,100,000 barrels of water in the first six months of 2019 and Laredo utilized 5,900,000 barrels of recycled water in completions activities over the same period, reducing capital expenditures and LOE by a combined $2.2 million.

The Company continues to improve upon its peer-leading unit LOE, driven by the field infrastructure providing a substantial and sustainable financial benefit. Unit LOE in the first half of 2019 was $3.24 per BOE, a 14% reduction from the first half of 2018. Laredo estimates field infrastructure benefits reduced unit LOE for the first half of 2019 by $0.57 per BOE.

2019 Capital Program

During the second quarter of 2019, Laredo invested $116 million in drilling and completions activities. Other expenditures incurred during the quarter included $4 million in land-related expenditures and data acquisition, $8 million in infrastructure, including LMS investments, and $4 million in other capitalized costs. Additionally, the Company completed property acquisitions for $3 million that were not previously budgeted.

Total costs incurred of $296 million in the first half of 2019, excluding non-budgeted acquisitions, put the Company on pace to deliver on its plan to complete 52 wells within the $465 million capital budget and deliver $30 million in free cash flow for full-year 2019, excluding non-budgeted acquisitions.

Liquidity

At June 30, 2019, the Company had outstanding borrowings of $235 million on its $1.1 billion senior secured credit facility, resulting in available capacity, after reductions for outstanding letters of credit, of $850 million. Including cash and cash equivalents of $56 million, total liquidity was $906 million.

Subsequent to the end of the second quarter of 2019, Laredo paid down an additional $20 million on its credit facility, resulting in outstanding borrowings of $215 million. Including cash and cash equivalents at July 31, 2019 of $40 million and after reductions for outstanding letters of credit, total liquidity was $910 million.

To date, the Company has repaid $55 million of the $80 million borrowed in the first quarter of 2019 and expects to fully repay the $80 million by the end of the year.

Commodity Derivatives

Laredo has hedged approximately 95% of anticipated oil production at a weighted-average floor price of $60.42 per barrel for the remainder of 2019 and approximately 75% of anticipated oil production at a weighted-average floor price of $58.79 for full-year 2020. Additionally, Laredo has hedged approximately 70% of anticipated natural gas production and 65% of anticipated natural gas liquids ("NGL") production for the remainder of 2019 and approximately 45% of anticipated natural gas production and approximately 30% of anticipated NGL production for full-year 2020.