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Laredo Petroleum Fourth Quarter, Full Year 2021 Results

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   |    Wednesday,February 23,2022

Laredo Petroleum, Inc. announced its fourth-quarter and full-year 2021 financial and operating results.

2021 Highlights:

• Grew development inventory through acquisition of ~41,000 net acres in Howard and western Glasscock counties, adding ~250 high-margin, oil-weighted locations
• Added an additional ~125 oil-weighted locations in the Middle Spraberry formation in Howard County and the Wolfcamp D formation in western Glasscock County following recent appraisal success
• Increased average daily oil production by 19% versus full-year 2020
• Increased total proved reserves by 15% in 2021, including a 78% increase in proved oil reserves. Oil now comprises 38% of total proved reserves versus 24% at year-end 2020
• Accelerated transition to oil-weighted assets through sale of ~94 million BOE of lower-margin gas-weighted reserves, primarily in Glasscock and Reagan counties
• Increased liquidity through the sale of 1.4 million shares of common stock for net proceeds of $72.5 million through the Company's at-the-market equity program and issuance of $400 million of senior notes maturing in 2029
• Reduced Net Debt/Adjusted EBITDA ratio (fourth quarter annualized)¹ to 1.9x at fourth-quarter 2021 from 2.4x at fourth-quarter 2020
• Issued two comprehensive ESG and Climate Risk Reports with data through year-end 2020, establishing goals for reducing greenhouse gas and methane emissions, as well as the elimination of routine flaring by 2025

Fourth-Quarter 2021 Highlights:

• Closed acquisition of ~20,000 net acres in western Glasscock County for ~$203 million, net of customary closing price adjustments
• Generated Adjusted EBITDA¹ of $182.2 million and Free Cash Flow¹ of $24.8 million
• Produced 41,080 barrels of oil per day ("BOPD") and 85,240 barrels of oil equivalent per day ("BOEPD"), an increase of 87% and 3%, respectively, versus fourth-quarter 2020, exceeding guidance ranges for both metrics
• Increased oil cut as a percentage of total production to 48% in fourth-quarter 2021 versus 27% in fourth-quarter 2020
• Incurred capital expenditures of $142 million, excluding non-budgeted acquisitions and leasehold expenditures, completing 18 wells with 26 turn-in lines ("TIL") during the quarter

CEO Jason Pigott commented: "We posted exceptional results in 2021 and enter 2022 with strong momentum and a clearly defined strategy to add value for shareholders. Our team identified and closed two acquisitions that significantly expanded our oil-weighted leasehold in Howard and western Glasscock counties and extended our runway of high-margin drilling locations. We strengthened our balance sheet, purposefully funding portions of the acquisitions with equity and proceeds from the divestiture of lower-margin gas-weighted reserves. Our capital today is being allocated to our highest return opportunities in Howard and western Glasscock counties. We also furthered our commitment to sustainable development, setting meaningful emissions reduction goals and allocating necessary capital to ensure their attainment."

"Our outlook for 2022 is strong and our disciplined development plan will build upon our successes from 2021," continued Mr. Pigott. "We are focused on capital efficient development, generation of Free Cash Flow¹ and leverage reduction. We expect to achieve our initial leverage target of 1.5x Net Debt/Adjusted EBITDA¹ in the third quarter of 2022 and to be below 1.0x by the second half of 2023. As we further strengthen our capital structure, we expect to be in a position to return cash to shareholders in early 2023."

4Q and Full-Year 2021 Financial Results

For the fourth quarter of 2021, the Company reported net income attributable to common stockholders of $216.3 million, or $12.84 per diluted share. Adjusted Net Income¹ for the fourth quarter of 2021 was $57.2 million, or $3.39 per adjusted diluted share. Adjusted EBITDA¹ for the fourth quarter of 2021 was $182.2 million.

For full-year 2021, the Company reported net income attributable to common stockholders of $145.0 million, or $10.03 per diluted share. Adjusted Net Income¹ for full-year 2021 was $128.9 million, or $8.91 per adjusted diluted share. Adjusted EBITDA¹ for full-year 2021 was $505.9 million.

Oil-Weighted Inventory Update

A key pillar of Laredo's strategy since 2019 has been the acquisition and development of oil-weighted, high-margin inventory. During 2021, the Company sourced and closed two transformational transactions, one in Howard County and one in western Glasscock County, significantly expanding Laredo's oil-weighted inventory.

In Howard County, pro-forma for the acquisition closed in July 2021, the Company had an estimated 225 Lower Spraberry and Wolfcamp A locations, 61 of which were developed in 2021. In late 2021, the Company drilled two appraisal wells in the Middle Spraberry with initial oil productivity far exceeding initial expectations. Based on these results, Laredo has incorporated ~35 Middle Spraberry wells, with an estimated breakeven WTI oil price of <$55 per barrel, into the Company's development inventory.

Laredo is focused on further enhancing capital efficiency in Howard County with extended-reach laterals. The Company has successfully combined 52 10,000-foot and shorter laterals into 26 highly capital efficient 15,000-foot locations. Laredo estimates current development inventory in Howard County to be ~165 locations with an average lateral length of ~11,500 feet.

In western Glasscock County, pro-forma for the acquisition closed in October 2021, the Company had an estimated 175 Lower Spraberry, Wolfcamp A and Wolfcamp B locations, eight of which were developed in 2021. As part of the western Glasscock County development package completed in the fourth quarter of 2021, Laredo developed two Wolfcamp D appraisal wells. The Company has significant experience developing the Wolfcamp D and, based on prior production data, optimized the completion of these two appraisal wells. Initial oil productivity is outperforming expectations, driving an estimated breakeven WTI oil price for Wolfcamp D wells in western Glasscock of $45 - $50 per barrel. The Company has incorporated ~90 Wolfcamp D wells into its western Glasscock inventory.

At the time of the announcement of the western Glasscock acquisition that closed in October 2021, Laredo estimated ~135 oil-weighted locations associated with the acquisition. After further evaluation, the Company now estimates ~150 locations on the acquired properties. Combining existing western Glasscock holdings with the acquired properties, Laredo now estimates an inventory of ~205 Lower Spraberry, Wolfcamp A and Wolfcamp B locations in western Glasscock County. Combined with the Wolfcamp D inventory, Laredo estimates a total of ~295 oil-weighted locations in western Glasscock County.

Laredo estimates combined Howard and western Glasscock County oil-weighted inventory of ~460 locations, with breakeven WTI oil prices ranging from <$40 to <$55 per barrel. At a current development cadence of 55 - 60 wells per year, the Company has an approximately eight-year runway of oil-weighted inventory. Laredo remains committed to a returns-focused development strategy and expects to focus primarily on higher-margin Howard County development in 2022 and 2023.

In the Company's eastern (legacy) acreage, Laredo estimates another ~150 locations with a potential WTI breakeven of <$55 per barrel. Adding these locations into inventory will require additional technical evaluation and, in many cases, the formation of drilling units to optimize returns by extending laterals.

Operations Summary

In the fourth quarter of 2021, the Company's total and oil production averaged 85,240 BOEPD and 41,080 BOPD, respectively. Both metrics exceeded the high-end of guidance, driven by strong well performance in Howard and western Glasscock counties, including the test of the Middle Spraberry in Howard County. Total and oil production for full-year 2021 averaged 81,717 BOEPD and 31,833 BOPD, respectively, with both metrics above the high-end of guidance.

Lease operating expenses ("LOE") for fourth-quarter 2021 were $4.27 per BOE, relatively flat from $4.23 in third-quarter 2021 and in-line with expectations. For full-year 2021, LOE increased to $3.42 versus $2.55 for full-year 2020 as the Company transitioned operations to higher-margin properties in Howard County. Operating expenses in Howard County are higher than the Company's gas-weighted eastern acreage because the oilier properties require different methods of artificial lift that are higher-cost, however, such costs are more than overcome by the higher-margins in Howard County.

During fourth-quarter 2021, Laredo maintained its best-in-class venting/flaring performance and made significant strides reducing venting/flaring on its acquired properties in Howard County. Excluding recently acquired assets in Howard County, Laredo vented/flared 0.38% of produced gas during the fourth-quarter 2021, down from 0.55% during the prior quarter. The Company reduced vented/flared volumes on the acquired properties in Howard County by 81% versus third-quarter 2021, and reduced total Company vented/flared volumes to 0.61% of produced gas during fourth-quarter 2021, down from 1.89% in the prior quarter. For full-year 2021, excluding acquired assets, Laredo vented/flared 0.37% of produced gas, down from 0.71% in full-year 2020.

In the fourth quarter of 2021, the Company completed 18 wells, including 26 TILs, with capital expenditures of $142 million, excluding non-budgeted and leasehold acquisitions. Capital expenditures were higher than expectations, primarily related to inflationary pressures on steel and additional non-operated investments in the recent acquisition areas. For full-year 2021, Laredo completed 67 wells, including 71 TILs, with total capital expenditures of $444 million, excluding non-budgeted acquisitions and leasehold expenditures.

Laredo is currently operating three drilling rigs and two completions crews and expects to complete and TIL 18 wells during the first quarter of 2022. Laredo expects to release one drilling rig and one completions crew by the end of the first-quarter of 2022 and to maintain a two rig/one crew cadence for the remainder of 2022.

2021 Proved Reserves

The Company's total proved reserves increased 15% in 2021, with proved oil reserves increasing 78%, benefiting from Laredo's strategy of acquiring and developing high-return oil-weighted assets. The Company's reserves were valued at $3.4 billion at year-end 2021, based on SEC benchmark pricing of $63.04 per barrel for oil and $3.35 per MMBtu for natural gas. The PV-10 value was $3.7 billion, utilizing the same benchmark prices.

The divestiture of gas-weighted reserves during 2021, combined with the oil-weighted acquisitions, contributed to the increase of oil reserves as a percentage of total reserves to 38% versus 24% the previous year, driving a significant increase in reserve value at higher oil prices. At benchmark prices of $75 WTI and $3.50 NYMEX Henry Hub, the Company estimates the PV-10 value of its year-end 2021 reserves to be $4.6 billion.

Environmental, Social, Governance

Throughout 2021, Laredo made significant strides furthering its already robust environmental, social and governance ("ESG") commitments. The Company's board of directors amended the Nominating and Corporate Governance Committee's charter to include monitoring and evaluation of programs and policies related to ESG matters. The Company established goals for meaningful reductions of greenhouse gas and methane emissions and the elimination of routine flaring by 2025. Additionally, Laredo announced the appointment of a Chief Sustainability Officer and issued two comprehensive ESG and Climate Risk Reports, utilizing reporting standards and frameworks aligned with the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures. These reports are available on the Company's website at www.laredopetro.com, under the tab for "Sustainability."

In 2022, for the third consecutive year, Laredo has incorporated environmental metrics into the Company's executive compensation program. For the 2022 short-term incentive program, the metrics have been broadened to include a safety goal, in addition to the spills and flaring goals from the previous two years. Further emphasizing the Company's commitment to sustainable development, three-year emissions reductions targets were incorporated into the long-term incentive plan portion of executive compensation.

Additionally, Laredo increased the transparency of its diversity practices, including disclosure of EEO-1 data in Laredo's 2021 ESG and Climate Risk Report and, in responding to shareholder input, implemented a majority voting standard for director elections and an executive clawback plan.

Incurred Capital Expenditures

During the fourth quarter of 2021, total incurred capital expenditures were $142 million, excluding non-budgeted acquisitions and leasehold expenditures. Investments were higher than expectations due to industry-wide oil field service inflation and non-operated investments. Total investments were comprised of $117 million in drilling and completions activities, including $8 million of non-operated capital, $7 million in land, exploration and data related costs, $10 million in infrastructure, including Laredo Midstream Services investments, and $8 million in other capitalized costs.

For full-year 2021, total incurred capital expenditures were $444 million, excluding non-budgeted acquisitions and leasehold expenditures. Total investments were comprised of $368 million in drilling and completions activities, including $9 million of non-operated capital, $23 million in land, exploration and data related costs, $28 million in infrastructure, including Laredo Midstream Services investments, and $25 million in other capitalized costs.

Liquidity

At December 31, 2021, the Company had outstanding borrowings of $105 million on its $725 million senior secured credit facility, resulting in available capacity, after the reduction for outstanding letters of credit, of $576 million. Including cash and cash equivalents of $57 million, total liquidity was $633 million.

At February 21, 2022, the Company had outstanding borrowings of $145 million on its $725 million senior secured credit facility, resulting in available capacity, after the reduction for outstanding letters of credit, of $536 million. Including cash and cash equivalents of $12 million, total liquidity was $548 million.