Ronald Hagood - Director-Investor Relations Randy A. Foutch - Chairman & Chief Executive Officer Richard C. Buterbaugh - Executive Vice President & Chief Financial Officer Jay P. Still - President, Chief Operating Officer & Director Daniel C. Schooley - Senior Vice President—Midstream and Marketing.
Neal D. Dingmann - SunTrust Robinson Humphrey, Inc. Brian A. Singer - Goldman Sachs & Co. Matthew Merrel Portillo - Tudor, Pickering, Holt & Co. Securities, Inc. Richard M. Tullis - Capital One Securities, Inc. Jeffrey R.
Connolly - Clarkson Capital Markets Parisa Alizadeh - Simmons & Company International Joseph Gregory Dawson - Waddell & Reed Investment Management Co. John P. Herrlin - SG Americas Securities LLC Andrew Parr - Surveyor Capital Ltd. Jason Smith - Bank of America Merrill Lynch.
Good day, ladies and gentlemen and welcome to Laredo Petroleum, Inc.'s Second Quarter 2015 Earnings Conference Call. My name is Michelle and I'll 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 operational report.
As a reminder, this conference is being recorded for replay purposes. It is now my pleasure to introduce Mr. Ron Hagood, Director, Investor Relations. You may proceed, sir..
Thank you and good morning. Joining me today are Randy Foutch, Chairman and Chief Executive Officer; Rick Buterbaugh, Executive Vice President and Chief Financial Officer; Jay Still, President and Chief Operating Officer; Dan Schooley, Senior Vice President, Midstream and Marketing; as well as additional members of our management team.
Before we begin this morning, let me remind you that during today's call, we will 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.
The company's 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 reference to adjusted net income and adjusted EBITDA, which are non-GAAP financial measures.
Reconciliations of GAAP net income to these non-GAAP financial measures are included in today's news release. Beginning January 1, 2015, Laredo began reporting production in proved reserves on a three-stream basis. In the news release issued this morning, financial and operating results and well results have been reported on a three-stream basis.
In the 10-Q issued this morning, second quarter 2015 results are reported on a three-stream basis, but second quarter 2014 results are on a two-stream basis. A conversion of production and unit cost data for 2014 from two-stream to three-stream has been provided in the appendix of the updated corporate presentation released this morning.
In the news release and in comments on this call, when volume-based comparisons between 2014 and 2015 are made, 2014 results have been converted to a comparable three-stream figure. Earlier this morning, the company issued a news release detailing its financial and operating results for the second quarter of 2015.
If you do not have a copy of this news release, you may access it on the company's website at www.laredopetro.com. I will now turn the call over to Randy Foutch, Chairman and Chief Executive Officer..
Thanks, Ron, and good morning, everyone. Thank you for joining Laredo's second quarter 2015 earnings conference call. In the second quarter, the company produced 46,532 barrels of oil equivalent per day, coming in above the high end of our guidance range.
Solid well performance, coupled with the benefits of our infrastructure that supports field operation and minimizes weather-related downtime, drove the higher results. We now expect production in 2015 to grow between 16% and 19%, an increase from our previous guidance of 13% to 16%.
We are seeing substantial operating and capital cost savings which benefited from our focus on efficiently developing our contiguous, high-quality acreage base.
Infrastructure investments and other long-term initiatives, such as the Earth Model, that were begun several years ago are coming to fruition as more wells come online along our production corridors.
Additionally, efficiency gains from applying best practices across all of our operations are improving drilling times as much as 25% from spud to rig release. While service cost reductions of 20% to 25% are driving substantial savings, the efficiency gains are lasting and independent of service pricing.
Jay will provide more detail in his operational overview. We are taking advantage of the knowledge gained from drilling approximately 200 horizontal wells in the Midland Basin, and our blocked up acreage position, to begin drilling 10,000 foot laterals to further maximize our capital efficiency.
The enhanced economic returns from drilling longer laterals, coupled with the cost savings from utilizing multi-well pads on our production corridors, justified the adding of rigs to drill an 11-well program on the Reagan North production corridor.
These wells will target the Upper and Middle Wolfcamp zone, and be drilled from cost-efficient multiple-well pads. The Medallion pipeline system, in which we own a 49% interest, is rapidly being recognized by other operators as a premier pipeline for transporting oil out of the Midland Basin to price-advantaged markets.
The system continues to add dedicated acreage, and Medallion now estimates that volumes will exceed 100,000 barrels of oil per day during the fourth quarter of 2015, with almost 85,000 barrels of oil per day being delivered by operators other than Laredo. Financially, the company is well positioned.
At the end of the second quarter, we had more than $900 million of liquidity and a robust hedge position. In the first six months of 2015, our hedges have generated approximately $110 million in cash flow. Rick will provide more details in his financial overview.
The benefits Laredo is realizing from our commodity hedging program, our development plans to maximize NAV by building production corridors and utilizing the Earth Model, and our ownership of the Medallion pipeline system, are hallmarks of the long-term strategic planning the company employs.
While commodity price levels in 2015 have proven to be challenging, low prices highlight the benefits of our planning. Our strategy of consistently hedging anticipated production has provided substantial cash flow this year, and provides visibility into 2016 and beyond.
Our production corridors and full field development strategy utilizing the Earth Model enhances the efficiencies and produces well returns commensurate with those seen in 2014, and enables the company to efficiently increase drilling activity.
Additionally, the Medallion system is providing a profitable multiyear investment opportunity that is growing value despite the current price environment. I would now like to turn the call over to Rick for the financial overview..
Thank you, Randy and good morning. As stated in our news release this morning, the company reported second quarter 2015 adjusted net income of $9.8 million, or $0.05 per diluted share, excluding a $488 million pre-tax, non-cash impairment charge on the company's full cost pool due to lower commodity prices.
Production volumes for the quarter totaled approximately 4.23 million barrels of oil equivalent, slightly exceeding expectations and resulting in a 38% increase from comparable three-stream volumes in the 2014 quarter.
Even with the higher production volumes, the significant drop in prices for all commodities resulted in a 31% decline in oil and gas sales for the second quarter of 2015 on a year-over-year basis.
However, our strong hedge position for both oil and natural gas, coupled with our continued focus on cost controls, resulted in adjusted EBITDA of approximately $118 million for the second quarter of 2015, which was essentially flat with the prior year amount. The company's continued focus on reducing our cost structure is paying dividends.
Total unit cash costs for second quarter 2015 were $13.52 per BOE, a reduction of 28% from the prior year rate of $18.85 per BOE on a three-stream basis, and a reduction of $0.55 per BOE sequentially from the first quarter of 2015.
Unit lease operating costs for the 2015 second quarter decreased 9% sequentially from the first quarter to $6.90 per BOE as prior investments in corridor infrastructure such as water handling and recycling, field electricity generation and centralized compression had a positive impact.
Unit cash G&A expenses decreased approximately 47% from the second quarter of 2014 as a result of cost cutting initiatives implemented earlier this year, including an approximate 20% reduction in total head count and the closing of our Dallas office. Total cash G&A cost are essentially flat with the first quarter.
Interest expense in the second quarter of 2015 dropped 26% from the prior quarter, resulting in an $8.4 million quarterly savings. This savings reflects the lower interest cost of the $350 million of 6.25% notes due in 2023 that were issued in March of this year.
The proceeds from those notes, combined with then existing cash were used to fully redeem the $550 million of 9.5% notes due in 2019. The $26 million premium paid to retire the 9.5% notes is included in the line item loss for early redemption of debt on our income statement.
The combination of paying down total debt and a coupon rate that is 325 basis points lower on the new notes is expected to produce annual savings of approximately $40 million from reduced interest payments. Laredo's Board of Directors has approved an increase in the company's capital budget to $595 million.
Approximately two-thirds of this increase is allocated to additional drilling in the second half of this year and the remainder is related to expansions of the Medallion pipeline system.
Additionally, on August 3, the company entered into an agreement to sell non-strategic, primarily non-operated properties and their associated production of approximately 670 BOE per day for a total of $65 million. The transaction is expected to close by the end of third quarter.
It is expected that a combination of these proceeds and borrowings on our senior secured credit facility will fund the increased capital investments.
As a reminder, on May 4 of this year, in connection with the regular, semi-annual redetermination of the company's senior secured credit facility, our lenders increased Laredo's borrowing base to $1.25 billion.
Working closely with our banks, we took a conservative approach to valuing our reserves and believe our reserves could have justified a higher borrowing base. Adding another level of conservatism, we chose an aggregate elected commitment of $1 billion on this credit facility.
We believe that the $1 billion elected commitment will remain intact through the fall redetermination process. In this morning's press release, we provided guidance for the third and fourth quarters of 2015.
As Randy mentioned, we have increased our production guidance for the full year of 2015 to a range of 6.1 million to 6.5 million barrels of oil equivalent, an increase from our prior guidance. The increase in production guidance is primarily attributable to stronger performance from our base developed reserves.
As Jay will explain, the additional drilling activities, which are all on multi-well pads, will have minimal production impact in 2015. Additionally, guidance for unit lease operating expense and G&A expenses has been reduced from our prior guidance.
Laredo views hedging as an ongoing long-term core strategy of the company and has continued to utilize commodity derivatives to reduce the variability of its anticipated cash flow due to fluctuations in commodity prices.
These derivatives consist of puts, swaps and collars, none of which are part of three-way or knockout collars or put spreads so they truly provide protection in a volatile commodity price environment. In the first half of 2015, our oil hedges have provided nearly $25 per barrel uplift to our average realized price or a 54% increase.
And our gas hedges have provided an 18% uplift to our realized gas prices. In total, Laredo has realized $110 million from our hedging program during the first half of 2015. We continued to add to our multi-year hedging program on future production.
Details of our hedge positions are shown in the appendix of our corporate presentation that was furbished this morning and is available on our website. At this time, I will turn the call over to Jay Still for an operational update..
10 targeted the Upper Wolfcamp; six the Lower Wolfcamp; four the Cline; and one the Canyon. The Canyon well experienced mechanical issues with collapsed casing, which only allowed access to two stages. Although only two stages are producing, we're still very encouraged with results and the potential of the Canyon formation development.
Additionally, we completed seven vertical wells in the quarter, with an average working interest of 91%. 12 of the horizontal wells completed during the quarter were in the JE Cox/Blanco Corridor and one full section in Reagan County. These wells were drilled as two stacked laterals and completed concurrently.
The water management system in this corridor has a 5-mile interconnect to our Reagan North Corridor. This allowed access to the water handling and recycling infrastructure from the Reagan North Corridor, enabling the company to deliver over 3 million barrels of water needed for completions of the wells in less than 30 days.
This demonstrates the flexibility of the company's production corridor infrastructure system that deliver water for completions and take flow back and produce water to be recycled, or to multiple saltwater disposal wells, all on pipe. During the second quarter, an additional 26 horizontal wells achieved 180 days of cumulative production.
These wells in aggregate were performing above type curve in each zone.
As demonstrated in the production chart contained in this morning's press release, at the end of the quarter, 119 of the company's horizontal wells of at least 6,000 feet and completed with at least 24 stages excluding for exploratory wells have reached 180 days of cumulative production.
On average, all wells in our four initially targeted zones are averaging at or above type curve. The company is seeing the benefits of our efforts to reduce operating expenses, driven by the prior year's investments in our corridor infrastructure.
We have been able to reduce water handling and disposal costs, consolidate well pad compressors into larger and more efficient centralized compressors and optimize our field electrical system to lower cost. Capital cost improvements are being driven by a combination of service cost reductions and operational efficiencies.
In addition to service cost reductions of approximately 25%, our focus on operational efficiencies has further reduced drilling costs (17:02) by approximately 25%.
As more wells are drilled on multi-well pads on production corridors, we expect to continue to see additional efficiency gains and believe further service cost reductions can be recognized.
The combination of cost reduction and efficiencies associated with our production corridor investment and multi-well pad development coupled with the ability to drill 10,000-foot laterals on our contiguous acreage base has enhanced returns to approximately 2014 levels.
As a result, the company is drilling an 11-well project on the Reagan North corridor, capitalizing on the efficiencies of multi-well pad development and a production corridor with 10,000-foot laterals.
Completion of these wells is expected late in the fourth quarter of 2015 with a substantial portion of the production impact occurring in the first quarter of 2016. I'll now turn the call over to Dan Schooley, Senior Vice President of Midstream Services and Marketing..
Thank you, Jay. As Randy mentioned, the Medallion pipeline system in which we own a 49% interest is rapidly becoming the premier pipeline within the Midland basin. In less than one year after being operational, Medallion expects to transporting more than 100,000 barrels of oil per day by the end of the fourth quarter.
The growth is being driven by the recognition of operators in the basin that Medallion is uniquely positioned to transport oil to multiple markets and provide optionality in marketing crude oil at the most price-advantaged delivery points. The Medallion pipeline system has continued to grow rapidly.
In May of this year, we discussed how the pipeline had grown from the initial 88 miles traversing Laredo's acreage in Reagan and Glasscock County, Texas to over 230 miles, covering third-party acreage dedications in excess of 100,000 net acres in four counties.
With the expansion to connect the recently announced dedications of several producers in the Midland Basin, the Medallion pipeline will again expand to over 400 miles of pipeline with acreage dedications in excess of 290,000 net acres. The second quarter of 2015 was the system's first full quarter of operations.
During the quarter, Medallion pipeline shipped approximately 3.1 million barrels of oil with June volumes exceeding 38,000 barrels of oil per day. Cash flow from crude oil operations net to Laredo's interest in the second quarter totaled approximately $1.9 million.
As projected volumes rise into the fourth quarter of 2015, projected cash flow to Laredo is expected to be approximately $5.5 million in the fourth quarter. Financial results for Laredo's interest in Medallion are reported on the income statement as income or loss from equity method investee.
In the second quarter, we reported approximately $2.9 million in income, which included our share of the buyout of the China grow (20:07) volume commitment. Pipeline operations generated net income of approximately $1.1 million and net cash flow of approximately $1.9 million to our interest.
Our total investment in Medallion is reported on the balance sheet as investment in equity method investee. This number increases or decreases with net income or loss when it is passed through or when it is contributed or distributed.
In the second quarter, this item increased by $30.8 million as we contributed $27.9 million in capital combined with a gain of $2.9 million against no cash distributions. LMS financials are now segmented to show revenues and expenses before intercompany eliminations. Midstream Service revenues represent all revenues received by LMS.
Intercompany eliminations are revenues that are generated from Laredo. And the remaining consolidated revenues are almost entirely attributable to third parties. General and administrative and DD&A expenses are allocated to LMS from Laredo, to give an accurate representation of expenses as a standalone entity.
At this time, operator, I'd like to turn the call over for questions..
Our first question comes from Neal Dingmann of SunTrust. Your line is open..
Morning, guys..
Good morning, Neal..
Just I had a question. When you look at – I was looking at the slide before you guys are – that projects on that Reagan North corridor. Your thoughts as you look in that area, as far as dividing that up between targeting the Upper and the Middle Wolfcamp.
I mean, do you favor one or the other, or do you think there's as much opportunity on each?.
We know that we have a, as we've talked about, a number of zones and a very, very thick section to look at. And the 11 wells that we've added to the budget is going to be concentrating on the Upper and Middle Wolfcamp, and that's kind of a bet on the efficiencies of our corridor, in some ways.
But that allows us to – with our infrastructure already in place, that allows us to pretty efficiently drill those wells, complete them toward the end of the year. And so, we really haven't distinguished a favorite between Upper and Middle, but that's where we're going to be drilling those additional wells.
That's all in one section, one 640-acre section.
Did that help answer your question?.
Yeah, that's exactly what I was looking for. And then, just lastly, I think you know the answer to this. I mean, you guys announced obviously that agreement to sell some non-strategic properties.
Anything else you have in the inventory that you would classify as potential sales like that?.
The acreage that we just sold was – if you look at our presentation, I think it's page 4, it's pretty scattered, and it didn't have, in all cases, high working interest. And for various reasons, we didn't have the ability to drill long laterals or it wasn't in the drilling inventory that we thought we'd be looking at for perhaps decades to come.
But we've said – so that was a pretty easy one. It was all mostly non-operated. Kind of a separate, unique deal, but we've also said that, in terms of financing the company, that we think one of our options is, is additional acreage sales, when you have the long inventory that we have..
No, that makes sense. Thank you all..
Thank you..
Our next question comes from Brian Singer of Goldman Sachs. Your line is open..
Thanks. Good morning..
Hello, Brian..
Good morning, Brian..
Could you talk to the oil in the mix, and how you see that evolving? It looks like there was a shift down in terms of a lower oil as a percent of the total.
Is that related at all to the asset sales, or how are you thinking about that mix going forward?.
It's not at all related to the asset sales. There was very, very little production. That was mostly pretty low interest, working interest stuff. I think there's kind of three factors in – as you know, our base production, we started drilling out there six plus years ago.
I think, as we see lower pressure on that, that has a little bit of a gassier, over time, input. And that's especially kind of accented when you don't drill very many new wells with very, very high oil content.
And the other factor is that, in this quarter, about half of our drilling, I think about half, was drilled in deeper zones, lower Cline and Canyon, which have a little bit of a lower oil cut to start with. So it's a combination of those three things that caused us to move that down..
Okay. So from your vantage point then, when you look across the program and the opportunity set, your oil mix hasn't changed.
Your point is that the oil mix is at least temporarily lower because of the timing of – and the types of wells you're bringing on?.
I think what we did was – caused us to lower that oil content. I think if we – if you look at our initial drilling and the oil content, if we were to go back to drilling a lot of shallower – Upper and Middle wells, that oil content would change. But I don't know that I would call this temporary, given what I consider reduced activity..
Got it. Okay. Thank you.
And then, I guess just – as you think about the longer-term strategy, how do you think about the need or opportunity for further consolidation within the Permian, and the role that Laredo may play in that?.
I think our answer to that has been pretty consistent, in that we think we have a tremendous acreage set. We think we have decades of drilling.
We think we see huge advantages with our blocked up acreage in our corridor and the infrastructure, and certainly Laredo Midstream Services and the Medallion ownership, all of those catalysts are kind of coming to fruition now. But having said that, we want to do what's right for shareholders.
I think across the basin, we're seeing some people make kind of an add-on, very selective acquisitions. I don't know that I have insight into much broader consolidation than that..
Great. Thank you so much..
Thank you, Brian..
Our next question comes from Matt Portillo of TPH. Your line is open..
Good morning, guys..
Good morning, Matt..
Just a follow-up question, I guess, in regards to capital allocation decisions. The market to-date really hasn't responded very well to capital increasing or companies that are drilling into expanded leverage profiles into 2016.
So, I was hoping you could provide a little bit more color on the thought process of accelerating the capital program this year and then maybe some color into 2016 as you're thinking about balancing cash flow and CapEx versus your leverage profile.
How do things stand for you today as you try to balance kind of the returns that you're seeing at the well level versus kind of the balance sheet as it stands at the moment?.
Yeah, Brian, this is – or Matt, this is Rick. We have set the initial budget at $525 million. We have seen service cost reductions that has enabled us to reduce that to about $475 million. With that initial capital program, we anticipated and knew that we were doing more of the activity in the first half of the year.
We had a lot of carryover activity from the fourth quarter where we were drilling multi-well pads that were being finished drilling at the end of the year and we did more of the completions in the first half of 2015.
As that activity was finished up, we knew that the outspend that we were doing in the first half would come down significantly and we would be effectively balancing or a little bit slightly positive on our expected cash flow in the second half of the year relative to our capital expenditures.
We felt confident even with the outspend that we're doing because of the strong hedge position that we had.
The divestiture and acceleration of this 11-well program that we're doing in the second half of the year, we think really increases the efficiency and enables us to use the benefits that we have in the corridor, that's focused on just the Upper and Middle Wolfcamp, which are higher return projects.
And that 11-well program, it's also capitalizing on our acreage position, of being able to drill 10,000 foot laterals, which also (30:37) the efficiency and returns on those wells. So those 11 wells are roughly a $75 million program.
That's being funded effectively through divestiture of these non-core properties and non-operated properties, we're receiving $65 million for that. Now, in addition to that $65 million, we will also be reimbursed for two wells that have been drilled but are not part of our production at this point.
So, you are seeing the capital cost of those wells in our cost incurred through the first half of the year. We will receive additional cash flow beyond that $65 million as we are reimbursed for those additional wells in the neighborhood of $8 million to $10 million for those wells.
So we think we have essentially funded that expanded capital program on the drilling side. On the LMS portion of the increase, that's really related to expansions of the Medallion pipeline system as it builds out to access greater acreage throughout the Midland basin.
We think those investments are certainly going to be value-enhancing to the company, and have taken on or are willing to take on slightly additional debt on our credit facility to be able to fund that. Now, on our credit facility, keep in mind that we have $1 billion line on that. We have about $135 million drawn on that today.
The outspend that we anticipate for 2015, we expect that to be somewhere in the $150 million to $200 million balance by the end of 2015. Moving forward into 2016, I think it's a little premature to set our capital program, but we have said before that we want to keep it as self-funded as possible.
That is probably going to include some outspend to a certain extent, but we are hedged in 2016 as well as 2017 with solid hedges, not knockouts that we're worried about prices dropping further, but our hedge position has about two-thirds or so of our expected volumes in 2016 covered at a floor price. It's going to be in the high-70s.
And in 2017, even today, we're hedged with about 35% to 40% of our expected production covered at similar type prices, so about $77 floor prices. So, we feel comfortable with a slight outspend, recognizing that we don't have – we will still have significant liquidity.
We do not have any debt due prior to 2022, so that gives us a little bit more comfort. And in discussions with our bank group, we are satisfied that our credit facility will stay intact even in this type of environment..
Great. That's extremely helpful. So, as we think about kind of the characterization of this, this is more of a one-off opportunity with the asset sale you've been able to achieve.
Going back into 2016, strategically still managing a very tight capital program with a moderate level or very slight level of outspend versus your cash flow stream at strip price but not a strict change to kind of the strategic vision of maintaining balance sheet flexibility or kind of keeping a close eye on the leverage side of things..
That's correct..
You got it, Matt. Keep in mind our philosophy has always been to – we're not signing up, for us a long-term contract is one year. So, we've gotten great flexibility in that activity increase or not.
But this is really a one-off paid for by the divestiture that's in one section, in one corridor in which we've already spent all the money really needed for infrastructure, compression, water, anything you need to produce the well and complete them. So, it's kind of a one-off opportunity, we think, with our built-in efficiencies..
And one more point I'd like to make on that, Matt, the increase in the capital in the 11-well project that we're undertaking with that increased capital is all done on multi-well pads, so, similar to what you saw in 2014.
When we're drilling four wells on a pad, it's going to take several months to get those wells drilled and to then do the completion activity. So, as we begin that program, we do not expect virtually any impact in our production volumes in 2015 from that program.
Those wells will begin flowing back very late in the year, we may see some volume from it but not a meaningful amount. They will really impact 2016 production volumes. So, the volume increase and the production guidance increase that we've given for 2015 is not in any way impacted by this 11-well program.
And it's still increasing even with the divestiture of these properties. Now, as Randy mentioned, it's not a meaningful amount of volume, but it's about 670,000 or 670 BOE per day from those divested properties..
Thank you very much..
Our next question comes from Richard Tullis of Capital One Securities. Your line is open..
Hey. Thanks. Good morning, everyone..
Good morning..
Rick or Randy, just continuing with what you were just discussing, what would the outlook for, say, first half 2016 production look like given the 11-well program coming on say late fourth quarter. Say, you can give it in reference to your 4Q expectations or year-end exit rate for this year..
Well, we have not given guidance at all yet for 2016 and it's obviously going to be dependent upon where we set our capital program for 2016.
We had said early on this year that as we brought capital and cash flow much closer in line, and coming off the wave of activity that we had in 2014, that production would decline and the guidance that we have shown for the rest of the year does in fact show a slight decline over the third and fourth quarter relative to the second quarter volumes.
We do believe that that production will flatten out even with the lower level of capital spend that we have and the lower rig activity that that production will – or decline and will stabilize very early in 2016 and then begin a slow growth without any additional change in the capital program from that point forward..
Rick, was that prior to this 11-well program or that's really the impact of this 11-well program?.
The 11-well program will allow production to stabilize quicker, earlier in 2016, but not a significant change to it..
Okay. And then just....
Obviously, bringing on 11 wells at once, you will see an uptick in volumes associated with that..
Okay. And then jumping over to the production corridors. I know you had a nice decrease in unit well – unit cost per barrel this quarter.
What percentage roughly do you attribute to the production corridors and what's been your total investment to date in those corridors?.
Richard, this is Dan Schooley. Investment to date has been right at, in the corridors, it's been about $90 million, in four active corridors..
All right..
Yeah. This is Jay. Just to follow up on that, the benefits that we see in just water-handling alone is about a little over $1 a barrel of water associated with the completion activity and flowback in production, just getting that water on pipe and on trucks.
Also, in that corridor, with those corridors, one important aspect is it's really allowed us to decrease our generators, our compressor pad, single-well pad compressors, consolidate those into larger centralized compression facilities.
And that's the – that's $2,500 a month per well that you're taking out of the equation right there in addition to the centralized electrical grid. But right now, we've got about 45% of our oil and pipe as well, and that's about $1.40 savings a barrel..
Thank you. That's helpful. Appreciate it..
Our next question comes from Jeffrey Connolly of Clarkson. Your line is open..
Hey. Good morning, guys..
Good morning..
On the two rigs that you picked up for the 11-well project in Reagan North, do you plan on keeping those two running into 2016, or do you plan on dropping them once the 11 well pad's done?.
The only plans we have today are those – is that 11 well pad within the one section, and the contracts are such that we can shrink our rig fleet back down..
Okay. Got it.
And then, can you talk a little bit more about how Medallion fits with the company longer term? What the remaining capital investment looks like in the second half of 2015, and maybe in 2016? And any thoughts on monetizing that asset?.
We're pretty excited about Medallion. That's been something that we literally started investing in a number of years ago. And we're excited to do it.
We wanted that investment principally, initially, because we recognized that the Permian was such a good basin, and our acreage was such a good acreage, that there was a chance that we would want to take crude a number of different places. In past calls, we've talked about how that optionality is important to us.
So, our original investment was just designed to make sure that we had – not that we were trying to pick winners and losers on markets, but we wanted to be able to take our crude a number of different places. And as you know, with Medallion, we can take it – we can sell it within Midland, we can sell it at Cushing, we can take it to the Gulf.
So that's been very helpful. What we've seen over the last year or so is, Medallion has done an extraordinarily good job of putting that pipeline into position where it's probably the premier pipeline in that part of the Midland basin, with lots and lots of growth opportunities.
So, we've recognized that not only does it have tremendous operational benefit to us, we are creating significant value there. We think – I think there's still – I think it's early in the value creation cycle with Medallion, so I don't think we view that as – I think we'll be putting capital in it. Don't know how much, but I hope we do, as it grows.
Don't have a clear view on how we capitalize on that value generation over time, other than obviously EBITDA, but it works out at Medallion. We think that's really a pretty meaningful part of our business..
Okay. Got it. Thanks. And then just in the release, you guys mentioned a Canyon well that was completed in the second quarter.
Can you give us any details on that?.
Yeah, this is Jay. Yeah. Unfortunately, we had drilled and completed that well. That was a 10,000-foot lateral. And we went back in to drill out the plugs. We got the second plug drilled out and realized the casing had collapsed. We've done a lot of investigative work on trying to understand how that casing could collapse after production.
But we did – we're able to bring on just a couple of stages of that well, and it was doing about – we brought it on as high as close to 90 barrels of oil a day, and 500 cubic foot (44:46). We did see that the gas cut – the oil cut was a lot lower than the Wolfcamp zone; however, for a stage or two on production, it's still a pretty decent well.
We think there's a lot of upside development opportunity in the Canyon. Unfortunately, we lost this well..
Okay. Thanks, guys. I'll hop back in the queue..
Thank you, Jeff..
Our next question comes from Parisa Alizadeh of Simmons. Your line is open..
Hi. Good morning..
Good morning..
Hi. So, it looks like there's been more of a focus on drilling like the 10,000-foot laterals in the contiguous acreage, with plans to drill in the Reagan North production corridor.
Can you discuss what the plan for 2016 is with respect to your horizontal well drilling program, versus your previously stated strategy of focusing on HVP and single well pads?.
No, we haven't talked publicly about 2016. But what I will say is that, as you know, we've been very careful over the last six years to make sure that we put as much of our acreage in the held by production category as possible.
So, while we still have some continuous drilling obligations, drilling to hold the acreage isn't a significant part of our planning. As you know, we started off drilling 4,000-foot laterals early in the play and completing them within (46:26) stages, and over time, being the first entry is kind of – we've learned we like the 10,000-foot laterals.
With that acreage base, we think we have a really great opportunity to drill 7,500-foot and 10,000-foot laterals. We're not yet ready to talk about 2016. Jay, you want to....
The 10,000 – because of our acreage position, it allows us to drill those longer laterals. And we've drilled – we average, probably the last year, 32 days, 35 days to drill a cline well. We're drilling – and that's a 7,500-foot cline well. We drilled 10,000 foot cline wells in about 21 days. So, our drilling efficiency is dramatically improved.
We're drilling 10,000-foot wells in all zones today for less than what we drilled 7,500-foot laterals last year. So, the economics of that extra 2,500 foot is a tremendous incremental return on that investment..
Okay. Thanks. And my follow up just is, like you've stated previously that you want to see continued improvement in margins before ramping up activity.
Is there any way you could maybe quantify what level of margin improvement, and what other factors are most important for you to consider before increasing activity levels?.
We talked about, early on – as you know, we pretty much as soon as we saw the decline in prices, we cut our capital programs such that we were comfortable that we could more or less live within our cash flow over time. We were very, very, as you know, fully hedged, so we have some comfort in how we go about doing that.
We talked about the impact that would have on production, dropping that many rigs. I think we still view ourselves as being very, very (48:46-48:49) if we have a couple more years of low prices, we come out of this cycle with a company that's still well-funded and growing production, albeit, at a much slower production growth rate..
Okay. Thanks so much. I appreciate it..
Thank you..
Our next question comes from Joe Dawson of Waddell. Your line is open..
Good morning. Thanks for taking the question. It looks to me like your stock price is implying an acreage valuation. It's below the per value acre that folks have been paying for small chunks of acreage in the Midland recently. And I think that you also probably traded a premium to that given that you spent a fair amount on infrastructure.
I think someone asked about how much you spent on the corridors recently. Can you add any color as to how much you spent on infrastructure total since the inception of the company? I just want to make sure I'm – when I do my value calculation I'm crediting you for everything you've done..
The total infrastructure spend, Joe, for LMS just traditional services has been about $148 million. The investment that we show on the balance sheet for Medallion is right at $103 million..
Okay.
And those two things together kind of total up to the total investment in infrastructure?.
Total investment of LMS infrastructure, yes..
Okay..
There's still infrastructure that we, as a course of business at this company and prior companies, we think that there is often advantages to thinking ahead. And the company has spent money over time such that once we add drilling locations and so on and so forth, we get the benefit of that infrastructure.
And that's for simple things as how we run electric lines, how we set up meter stations. I mean, it's kind of coursed throughout the company. And early in our life here, people were comparing our AFEs to others and our AFEs were complete with everything you need to produce the well.
And some of it was just making sure that on our pads, for example, we built pads such that we could come back in and drill multiple well off a pad and had the power to do that kind of stuff. So, it's – the infrastructure spend is not just within LMS, it's also within LPI.
Jay, you want to add anything to that?.
No. I think it is important that, like we talked about earlier, the different areas of our field are interconnected with our well water management system. So, it allows us to take advantage of a water recycle plant that we built that can service multiple areas of the field.
How we've interconnected our saltwater disposal wells, where we need to dispose which means we have multiple options and flexibility throughout the system..
Okay. Thanks. That's helpful. Also, I guess our market doesn't understand your land position as well as they do for some of your neighbors to the west. To my understanding, you're targeting some of the same formations that your competitors a little to the west of you are.
Do the formations that you're targeting thicken or thin as you move from the Central Basin platform east across the Midland Basin?.
As you come off the eastern margin, that section thickens. Like in the – so in the Cline formation, we probably have the thickest Cline and it thins going west. The Wolfcamp section thickens very rapidly as you come off that margin. And so that equivalent maybe even thicker on the east, however, it was uplifted over time.
So, the Western Wolfcamp, it's going to be deeper than the Wolfcamp in our acreage position..
Okay. That makes sense.
How are your recent well results comparing to guys like in Midland County a little bit to the west of you?.
We started pushing out our EURs I think four years ago or so, based upon a lot of data collection and so on and so forth, and pushed out our economics. And those have held up pretty well across the area. And we've kind of said there's some wells that we have that are exceptional wells.
We've got some that aren't quite as good, but the EURs we pushed out are the ones that we kind of rely on. The thing that I think you need to keep in mind is there's going to be some good zones in that whole Permian complex, but our acreage has a lot of section, a lot of oil in place, and a number of different zones for us to look at..
Okay. That's helpful.
Can you remind me, how many years of inventory do you estimate you have?.
We have decades of inventory. It obviously depends on the pace that you run, but the inventory is not an issue..
Joe. Thank you very much. Thanks..
Okay. Thanks..
Our next question comes from John Herrlin of Société Générale. Your line is open..
Yeah. Hi, guys..
Good morning, John..
Most of my questions have been asked. I just have one question about your release regarding the Medallion expansion with again that (55:20) you say here that you may participate in the project. Obviously, there are going to be a lot of other third party E&P's interested in Medallion.
So what's your strategy going forward with that, going ahead in terms of expansion or participating in the expansion of Medallion?.
Our view is, John, thank you for the question, a good question. Our view is that we think there's significant value creation being added to Medallion, especially in the areas where the expansions are. We think, and clearly, it's Medallion to run, we think that's going to be – there's going to be additional expansion opportunities.
And I think Laredo's point of view is that we'll look at those. We very much view many of those as things that we definitely want to participate in. It's Medallion's job to run Medallion. And we're a 49% owner but they do that. And we get capital calls from them and then we take it to our board for approval. And it's a good, a very good relationship.
So we're pretty excited about how that's going. One of the key things, I think, there that perhaps is underlooked, some of the people that have dedicated their acreage to Medallion, the Medallion system, have an issue in which that a lot of their acreage is not held by production. And so, we're comforted by whatever you see today.
Some of the other operators are going to have to continue drilling and accelerate drilling to get that acreage that's dedicated to Medallion held by production and keep the acreage. So, I think our view is we're excited about Medallion.
We've been in it from day one a couple of years, and we're finally starting to see the positive results of those investments we've made over the years..
Well, that's what I thought, Randy. It's just your language in the release was a little circumspect, so I was just curious. Thanks..
Thank you..
Our next question comes from Andy Parr of Surveyor. Your line is open..
A couple of quick questions.
First off, what is the mix on – what was the mix on the assets that were sold in that production?.
The production was 650 barrels..
The production volumes were 670 Boe. The mix is not going to be different, significantly different, than our overall mix. They were primarily vertical wells, non-operated vertical wells and some, a small portion, corporate-operated wells. But of those 119 property wells that were included in that, the bulk of those were verticals.
I think there were just a handful of horizontals..
Okay. Thanks. And secondly on the CapEx side. If I'm doing the math right, am I getting $75 million for D&C increase – the $120 million CapEx increase, the $75 million to D&C and that's gross number.
You might get some money back – you're going to get some money back for the wells, but that leaves $65 million – is the incremental other CapEx $65 million for LMS? Is that correct?.
There'll be a little bit more than just that $75 million in the drilling complete. Part of doing that 11-well program is we, in order to facilitate doing that program, we did hold a rig that was going off, that it really finished its contract. We held that to do a couple of wells prior to starting this 11-well program.
So, it's a little bit above probably closer to $90 million associated with true D&C cost..
Okay..
But the remainder is associated primarily with the expansions in Medallion that we have participated in this year, since those require board approval. Participation in Medallion and future expansions are really not part of our overall capital budget initially..
Okay.
And on that note, and piggybacking on the last question, the language that you could opt into another expansion, what are we talking about in terms of potential CapEx there?.
Well, we haven't received calls from Medallion yet at this point. At that point, it would go to our board for approval on whether we would participate in that or not..
Okay. So, I'll stay tuned for what the actual amount to be. And then lastly, just sticking with the framework for 2016, I've watched a bunch of E&Ps here who had big liquidity numbers, I guess, on the balance sheet between the banks and cash, elect to stay within cash flow.
I mean, is that what you're saying as well basically in 2016?.
We think we will be funding a greater percent and one of our internal goals is that we will fund a high percent of our capital expenditures. We do anticipate that that will still include probably $100 million to $150 million of outspend..
Okay..
But that is obviously going to be very dependent as we go through our overall capital allocation process, which we are slowly beginning but really don't come out with a final number on that until late in the year..
Okay. And then last quick one. On the completion cadence, I think in your February presentation, you were talking about 49 wells, horizontal wells completed for the year.
Should I just add 11 to that number in the fourth quarter, recognizing that yeah, those 11 will come on heavily back-end weighted?.
Yeah, that's about correct. So, you'll see the cost incurred being accrued on that with the cash flow going out from those completions probably early in 2016..
Okay, great. Thanks for the opportunity. Appreciate it..
Thank you..
Our next question comes from Jason Smith of Bank of America Merrill Lynch. Your line is open..
Hey, good morning, everyone..
Good morning, Jason..
So most of mine have been answered as well but just a really quick one, in terms of the Canyon and maybe the Spraberry as well.
Any plans at this point to go back and test near those zones again?.
We recognize and it's not just those, there are other zones that we – because of our database, are testing those zones and vertical wells, the Earth Model that there's other zones that we need to go look at. But I don't think we have any immediate plans to test them..
Got it. Okay. Thanks. And, Randy, I think earlier on one of the questions on monetizations, you mentioned that other options beyond acreage sales. And I know you've been asked about Medallion already.
But can you maybe just expand upon your comment as to what else is potentially under consideration at this point?.
I don't think there's anything. I don't want to take anything immediate. But we've talked in the past about selling acreage that we're not going to get to for decades. We've talked about not, maybe not today, but we think there's still ways to finance the company, with perhaps a drilling fund or things like that.
So I think our view was, consistently over the years that, we've got a lot of ways of financing the company. With this much acreage and this much drilling inventory, it's just a question of making sure what we do is accretive and the best thing for shareholders..
Got it. That's all for me. Thanks for squeezing me in here..
Thank you, Jason..
Thank you..
There are no further questions. I'd like to turn the call back over to Ron Hagood for any closing remarks..
Thank you, Michelle. We appreciate you joining us for our second quarter financial and operations update and thank you for your interest. Have a good morning..
Ladies and gentlemen, Thank you for your participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..