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Laredo Petroleum First Quarter 2020 Results

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   |    Wednesday,May 06,2020

Laredo Petroleum, Inc. reported its Q1 2020 results.

Laredo announced its first-quarter 2020 results. For the first quarter of 2020, the Company reported net income attributable to common stockholders of $235.1 million, or $1.01 per diluted share. Adjusted Net Income, a non-GAAP financial measure, for the first quarter of 2020 was $21.1 million, or $0.09 per adjusted diluted share. Adjusted EBITDA, a non-GAAP financial measure, for the first quarter of 2020 was $116.8 million.

First-Quarter 2020 Highlights

• Issued $1 billion of new debt to refinance $800 million of outstanding notes, extending maturities to 2025 and 2028, repay $100 million of the senior secured credit facility and for general corporate purposes
• Received net cash of $47.2 million on settlements of commodity derivatives, resulting in an average hedged sales price of $23.21 per barrel of oil equivalent ("BOE"), a 34% increase versus an average unhedged sales price of $17.26 per BOE
• Produced an average of 29,178 barrels of oil per day ("BOPD"), an increase of 7% from fourth-quarter 2019
• Produced an average of 86,532 BOE per day, an increase of 3% from fourth-quarter 2019
• Invested capital of $155 million during the first quarter of 2020, 11% below budget
• Reduced completed well costs 7%, to $630 per lateral foot
• Reduced unit lease operating expenses ("LOE") to $2.80 per BOE, a 1% decrease from fourth-quarter 2019

President & CEO Jason Pigott said: "The challenges presented to the oil and gas industry by the demand destruction and price volatility related to COVID-19 and OPEC+ are unprecedented. Protecting the health and safety of our employees as we operate is paramount. Our workforce has demonstrated amazing flexibility, adapting to new safety standards necessitated by COVID-19, and has continued to perform at the high standards we have set for ourselves."

"Our first-quarter results demonstrate the value of our commitment to operational excellence," continued Mr. Pigott. "For the fifth consecutive quarter, we exceeded both our oil and total production guidance, and we continued to reduce costs as we again improved both our completed well costs and operational expenses. As we operate in the current depressed commodity price environment, we are maintaining our financial discipline and balance sheet focus. We have reduced our planned capital expenditures by more than 40% versus our original budget and continue to focus on Free Cash Flow generation. We have deployed a portion of anticipated Free Cash Flow to our derivatives program to protect cash flow in 2021 and we may, from time to time, use a portion of our Free Cash Flow to reduce debt, either by paying down our senior secured credit facility or repurchasing our senior notes in open market or privately negotiated transactions, to enhance liquidity and reduce interest costs."

Operations Summary

During first-quarter 2020, the Company completed 28 gross (27.7 net) horizontal wells with an average completed lateral length of 8,300 feet. Drilling and completions costs incurred of $140 million was below budget as Laredo continued to drive down its well costs, already among the lowest in the Midland Basin. Through a combination of operational efficiencies and cost reductions, well costs for the first quarter of 2020 averaged $630 per lateral foot, a 7% reduction versus expectations.

The Company produced 86,532 BOE per day in the first quarter of 2020, including oil production of 29,178 BOPD, exceeding the high-end of guidance by 6% and 7%, respectively. The positive results versus guidance were a combination of wells being turned to sales sooner than anticipated, as completed feet per day per crew continued to increase, and well packages exceeding forecasted production levels.

Laredo's efforts to optimize its established acreage position continued to drive production and returns improvements. To date, wider-spaced packages completed since Laredo modified its development spacing in late 2018 have outperformed the Company's Upper/Middle Wolfcamp oil type curve by 12%. Additionally, two Cline wells completed in the first quarter of 2020 have performed in-line with Laredo's high-graded Cline type curve while their costs were 8% below expectations.

Unit LOE for first-quarter 2020 decreased to $2.80 per BOE, a reduction of 16% from the first quarter of 2019. Unit LOE for the remainder of 2020 is expected to remain below $3.00 per BOE as the majority of the Company's production in 2020 continues to benefit from Laredo's in-field infrastructure.

During the first quarter of 2020, the Company operated four drilling rigs and averaged 1.7 completions crews. Laredo has subsequently released two of the drilling rigs and the one remaining completions crew and is currently operating two drilling rigs, both in Howard County, and zero completions crews. The Company has completed five wells (4.6 net) in the second quarter of 2020, all in the Company's recently acquired western Glasscock County acreage, and currently does not expect to resume completions activity in 2020.

First-Quarter 2020 Costs Incurred

During the first quarter of 2020, excluding non-budgeted acquisitions, total costs incurred were $155 million, comprised of $140 million in drilling and completions activities, $6 million in land, exploration and data related costs, $3 million in infrastructure, including Laredo Midstream Services investments, and $6 million in other capitalized costs. Additionally, a non-budgeted acquisition of $22.5 million was closed during the quarter.

Credit Facility Redetermination

On April 30, 2020, in association with the semi-annual redetermination of the Company's senior secured credit facility, both the borrowing base and aggregate elected commitment under the facility were reduced to $725 million from $950 million. The net debt/EBITDAX ratio covenant of 4.25 times was left unchanged.

Increased Oil Hedges

The Company maintains an active, multi-year commodity derivatives strategy to manage commodity price risk and support cash flow. Laredo utilizes only puts, swaps and collars and does not enter into three-way collars, which can limit protection in a rapidly declining price environment.

For the remainder of 2020, Laredo has hedged 100% of expected oil production, with 5.4 million barrels swapped at a weighted-average price of $59.50 WTI and 1.8 million barrels swapped at a weighted-average price of $63.07 Brent. For 2021, the Company has hedged 5.6 million barrels of oil at a weighted-average floor price of $53.13 Brent. Please see the table in the appendix of Laredo's First-Quarter 2020 Earnings Presentation posted to the Company's website for the full details of the Company's commodity derivatives.

2020 Expected Capital Expenditures Further Reduced To $265 Million

As previously announced on March 23, 2020, to prioritize Free Cash Flow, balance sheet strength and returns in a volatile commodity price environment, the Company reduced expected capital expenditures for 2020 to $290 million from $450 million. The Company is further reducing expected capital expenditures for 2020 to $265 million, driven by additional refinements, including savings for drilling and completions services and postponements of capital projects. The updated expectation includes $220 million for drilling and completions activities and $45 million for infrastructure, land and other capitalized costs.

Laredo is reiterating previously-announced guidance for total production in 2020 to remain approximately flat versus 2019 and for oil production to decline approximately 8%. Guidance for total production and oil production in the fourth quarter of 2020 is 72,500 - 74,500 BOE per day and 20,500 - 21,500 BOPD, respectively.

At current commodity prices, the Company expected net cash received from commodity derivatives for full-year 2020 to be approximately $325 million. To strategically manage future commodity price risk and cash flow generation, Laredo has redeployed approximately $50 million of expected Free Cash Flow into oil hedges for full-year 2021, resulting in an updated full-year 2020 expectation for net cash received from commodity derivatives to be approximately $275 million. Forecasted Free Cash Flow for full-year 2020, excluding non-budgeted acquisitions, is now expected to be approximately $45 million, assuming commodity prices of approximately $27 WTI and $2.40 Henry Hub for the balance of 2020.

2021 Outlook

Remaining anticipated drilling activity in 2020 positions Laredo for capital efficient development in 2021, with the Company expecting to enter the year with approximately 40 drilled but uncompleted wells ("DUCs") on its tier-one Howard County acreage. Laredo currently estimates that completing approximately 30 Howard County DUCs in 2021 would keep average daily production for full-year 2021 flat with the expected fourth-quarter 2020 exit rate.

Liquidity

At March 31, 2020, the Company had outstanding borrowings of $275 million on its $950 million senior secured credit facility, resulting in available capacity, after the reduction for outstanding letters of credit, of $660 million. Including cash and cash equivalents of $63 million, total liquidity was $723 million.

At May 6, 2020, the Company had outstanding borrowings of $275 million on its redetermined senior secured credit facility of $725 million, resulting in available capacity, after reduction for outstanding letters of credit, of $406 million. Including cash and cash equivalents of $5 million, total liquidity was $411 million.

Second-Quarter and Full-Year 2020 Guidance

The table below reflects the Company's quarterly and full-year guidance for total and oil production for 2020.