Good day, ladies and gentlemen and welcome to Laredo Petroleum Inc.'s Fourth Quarter 2020 Earnings Conference Call. My name is Josh and I'll be your operator for today. At this time, all participants are in a 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 Hagood, Vice President Investor Relations. You may proceed sir..

Thank you and good morning. Joining me today are Jason Pigott, President and Chief Executive Officer, Karen Chandler, Senior Vice President and Chief Operations Officer, Bryan Lemmerman, 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 reference to non-GAAP financial measures. Reconciliations to GAAP financial measures are included in yesterday's news release.

Yesterday afternoon, we issued a news release presentation detailing our financial and operating results for fourth quarter for year 2020. We will refer to the presentation by page 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.

Additionally, we publish our inaugural ESG and climate-risk report, which can also be accessed on our website under the Sustainability Tab. I will now turn the call over to Jason Pigott, President and Chief Executive Officer..

Good morning and thank you for joining us today. Year 2020 presented many challenges for our industry. As a team, we pulled together to quickly adjust to working remotely while maintaining focus on executing our strategy. Our culture of continuous improvement resulted in substantial improvements across all aspects of our business.

Our transition to Howard County development is a great example of how we strive to continuously improve our results. We moved all of our activity to a new area in 2020 and turning up Howard County wells online is a major milestone for Loredo.

We're now able to demonstrate the results rather than words the impacts of tipping the company to more capital efficient assets. We completed our first 15-well package in Howard County and growth of average total production over 10,000 gross barrels of oil per day until the recent inclement weather challenges curtailed some of the production.

These production figures are largely driven by the Wolfcamp wells and lower Sprayberry wells that just now beginning to ramp up their production. We also increased our leasehold position in Howard County during the year and 4000 net acres at a very competitive price. We also took actions early last year to manage financial risks in our balance sheet.

We pushed term debt maturities out to 2025 and 2028. Opportunistically, we purchased some of debt and maintain a robust hedging position to support our development plan in 2021. In 2020, we made significant strides to embrace innovation as we launched our digital transformation.

We built a cloud-based framework from the ground up to provide a foundation for the future. We started automating manual processes and have partnered with others to build our intelligent well application, which is designed to increase production, reduce operating expenses, eliminate paperwork, and so much more.

Our culture of innovation is being driven at the highest levels of our company and will ultimately impact all aspects of our business. Operationally, we continue to successfully improve our business across our core position, producing well costs LOE and G&A versus 2019 levels.

Importantly, we reduced our environmental footprint cutting flared emitted gas volumes by 58% and oil and water spills by 29%. Last night, along with our earnings release, we also published our inaugural ESG and climate-risk report.

In this report, along with demonstrating past success in our greenhouse gas emissions metrics, we demonstrated our commitment to environmental leadership to target to reduce greenhouse gas emissions by 20%, methane emissions to less than 0.2% of natural gas production, and the elimination of routine flaring all by 2025.

These reductions are versus levels that are already in line to lower than our industry peers. In 2020, the board worked with the executive team to align our compensation structure with environmental targets and we are experiencing the gain from this alignment at all levels of the organization.

In addition to our environmental accomplishments and goals, we are very proud of our progress on social and governance issues. Nearly one-half of our board is now represented by women or minorities. We're also diversified on the backgrounds of the board adding legal, financial, technological, and executive experience to our team.

In our report, we also emphasized the strong impact the female workforce has on Loredo, with 33% of our professional roles being filled by women. In our report, we also highlight the generous spirit of our company and our employees as we partner with agencies, our local communities to have a lasting impact.

For 2021, we build on the strong foundation we have put in place with our pivoting strategy that was communicated in November of 2019. The 2021 budget and development plan highlight the capital efficiency gains from our shift to Howard County.

We expect consistent oil growth throughout the year along with increasing free cash flow generation on the same DNC budget as last year. In fact, by maintaining consistent development program throughout the year when paired up reduced costs are expected to complete 25% more lateral for year 2021 versus 2020 with the same DNC budget.

We remain focused on opportunities to acquire additional oil rig [ph], high margin acreage at attractive prices.

We also are committed to our valuation framework and the opportunity set for creative acquisitions is significantly stronger so far this year, and we anticipate one of these opportunities will be a catalyst for the continued transformation of Loredo. I will now turn it over to Karen for more details on our operations..

Thank you, Jason. Despite the challenges presented by having to quickly pivot our 2020 development program early in the year, Loredo operations team delivered impressive operational results.

We transitioned from an aggressive completions program on our established acreage, completing 28 wells in the first quarter to halting completions activity in the second quarter for four months. We then restarted our completions activity by fully transitioning operations to our Howard County leasehold.

Through all this, we reduce drilling and completion costs by 21%, increased drilling efficiencies by 4%, increased completions efficiencies by 14%, and completed our first package of wells in our county.

In the fourth quarter, we also commenced operations on a company own third party operated sand mine in the heart of our Howard County acreage, and first, from an operator in the Permian Basin. The mine can supply our operations for five years, reduce truck traffic by 39,000 miles per month and saves around $90,000 per well or $10,000 per barrel.

At current service costs, we're confident in our ability to deliver wells at Howard County at $540 per foot or less. Our first wells in Howard County were developed as a 15-well package with 11 wells in Wolfcamp and 4 wells in Lower Spraberry. Completions operations began on this package of wells in early September and wrapped up in early December.

In general, we're counting wells in Howard County take longer to clean up than on our established acreage, especially to the Lower Spraberry formation. That being said, we were very happy with the early performance of these wells.

As Jason mentioned, they're performing well and are tracking with our expectations even as the Lower Sprayberry wells are just now beginning to ramp up their oil production. We're currently finishing up completions on our second well package, a 12-well development with 10 wells in the [indiscernible] and 2 in the lower Sprayberry.

This package was developed with well spacing similar to our first package, but the package size was reduced to avoid parent-child interactions with an offsetting operator. Operations on this package were ahead of schedule prior to the severe weather impacts over the past few days.

Improved completions efficiencies full activity forward from the first quarter of 2021 into the fourth quarter of 2020 on the formal path in this second Howard County will package. In 2021, we expect to bring on one large well package in Howard County each quarter.

The four individual well packages will consist of either 12 or 13 wells each and will be developed on either 8 or 12 wells per DSU spacing in the Wolfcamp. Depending on rock quality [ph] and commodity pricing at the time of the final investment decision, our 2021 budget and production guidance incorporate all of the items I just referenced.

Capital was slightly higher than originally communicated as we're accelerating activity into 2021 from 2022, as we're getting more done than expected with our one tracker [ph].

Commensurately, our oil production expectations are also higher as completions are pulled forward, even after adjusting for the long cleanup times that we're seeing in Howard County.

I also want to share that our production guidance for the first quarter of 2021 reflects uncertainties associated with the current weather situation in the Permian Basin, extended freezing temperatures and severe icing affected our drilling completions and production operations for the last 12 days.

As always, our commitment to the safety of Loredo's team members and the company's environmental impact are first priority. We experienced zero safety incidents or releases due to the weather.

Multiple challenges impeded our production operations over this 12-day timeframe, including lack of fuel gas and electricity, shutter takeaway and processing capacity, limited access to well sites and facilities, and an optimal vapor recovery units which are necessary for environmental compliance.

Additionally, completions operations were unable to proceed delaying the drill out of plug for about a week on the company's 12-well [indiscernible] package in Howard County. Currently, drilling and completions activities have resumed normal operations and production is rapidly returning to pre-storm levels.

The company currently estimates that the combined impact of shut in production and completions delays will reduce first quarter of 2021 total production approximately 8000 BOE per day, and oil production by approximately 3000 barrels of oil per day. Lastly, few comments on our reserves at year-end 2020.

Obviously, the nature of SEC-mandated pricing can have a dramatic effect on the volume and value of proof reserves. Given that booked volumes, both through developed and cost [ph] decreased as the economic life of wells shortens or wells became uneconomic at the long benchmark prices.

That being said, Howard County development is starting to have a positive impact on our reserve value. Already representing 11% of the company's proved developed PV10. On Slide 7 of the company earnings presentation, we show what the value of our proved develop reserves would be at various oil prices.

Remember, this is only for well counted as proved developed at year-end 2020. No additional capital is required to generate the PV10 value at the higher prices. I'd like to close by thanking all of our operations team members for their hard work and dedication to Laredo over the past few days.

Everyone in West Texas has had numerous things going on, dealing with freezing weather, power outages, water issues, and icy roads, both at home and work. Thank you all for helping us manage through this difficult storm and working to keep everyone safe. I'll now turn the call over to Brian for financial update..

Thank you, Karen. In his opening comments, Jason mentioned our success in managing financial risk in 2020. For us, this is an ongoing key principle of our strategic plan. Executing our plan in 2021 played a big part in the future cash flow generation capabilities to company.

Responding to abnormally low oil prices driven by COVID related demand destruction, we have the completions activity for approximately four months.

This was definitely the correct action to take, but it did result in a steep decline in oil production from the second quarter 2020 levels of 31,000 barrels a day to fourth quarter 2020 levels of 22,000 barrels a day.

Returning oil production levels to the 30,000-barrel per day range is a key driver for future free cash flow generation and keeping our net debt to consolidated EBITDAX ratios low. Our 2021 plan accomplishes our goals on many levels.

Shifting to Howard County derived an inflection point in oil productivity and oil production, running a consistent pace of two rigs and one completion throughout the year is highly efficient. These efficiencies drive free cash flow to the $25 million to $40 million range at current commodity price levels, including our hedges.

To facilitate this program, we have continued our active hedge strategy that has served us so well in the past. We do not focus on price alone. We take a broad look at potential downside risk and measure the outcomes versus the impacts on cash flow and our ability to execute our plan within cash flow.

Currently, we believe we have mitigated downside risks to the point that we could execute our plan within cash flow in a $40 to $45 WTI range. Looking briefly at the cost side of the ledger, early in 2020 continued to decrease on both ideally and an absolute dollar basis.

For 2021, other than the temporal increase in Q1 of approximately 10% due to production impacts from the winter weather freeze offs, we expect to see a slight, but steady increase throughout the year as we turn in line Howard County wells and as our legacy production continues to decrease.

We will also perform a few more work overs than we did in the 2020 low price environment. This steady increase in LOE is in-line with what we have been telegraphing for the last couple of quarters. G&A expense in 2020 also decreased on both an absolute and unit basis.

As we reduced activity in response to lower oil prices, we made the tough decision to cut personnel to align with the new activity levels.

We have maintained our discipline in managing G&A expense and expect them to remain relatively flat on an absolute basis in 2021 versus 2020 levels and relatively flat on a BOE basis again, other than the first quarter impact from the winter weather freeze offs.

Looking forward, our goal is to continue to improve our balance sheet and further our ability to fund additional bolt-on acquisitions with our bank facility. We plan to utilize free cash flow to pay down our revolver to increase our flexibility and we continue to look for other opportunities to reduce net debt and interest costs.

Ultimately, we are highly focused on accretive transactions that reduce leverage ratios and facilitate the execution of our corporate strategies. Now, I will turn the call back over to Jason for closing comments..

Thank you, Bryan. I'm very excited about 2021 for Laredo. We are now positioned to demonstrate the expected capital efficiency, productivity and cash flow generation capabilities of co-development in Howard County.

We are confident in our operational capabilities and we'll continue to focus on adding additional welling [ph] high margin locations at attractive valuations. Risk mitigation continues to be a basic principle of how we operate. Our balance sheet remained strong for the challenges of 2020 and we've demonstrated our strong focus on ESG performance.

A transformational plan we've communicated just 16 months ago is working and we're determined to drive it forward and build upon our success. Operator, please open the line for questions..

Thank you. [Operator Instructions] Our first question comes from Derrick Whitfield with Stifel. You may proceed with your question..

Thanks and good morning, all..

Good morning, Derrick..

For my first question, I'd like to focus on Karen's comments on spacing in Howard County.

Karen, based on the limited data you have, how are you generally thinking about spacing across your position at current pricing? And are there any other notable adjustments or areas of opportunity you like to incorporate in your go forward B&C designer fullback approach?.

Hey and good morning. Thanks for the question. Yes. We've talked about in prior releases that we wanted to look at different potential spacing development plans in the Wolfcamp. So, we're looking at both 12 well, and an 8 well development there. The first two packages that we talked about are based on the tighter spacing.

The next couple of packages that we're developing right now will be on the wider spacing. Really, we're looking at one, on getting a little bit of different look at the spacing configurations in Howard County with our first well packages.

And then also, as we mentioned, just making the decision based on spacing, based on the economic decision at the time. And I highlight that because the packages that we'll be bringing on the third and the fourth packages, the investment decision was made in the middle of 2020 on those since drilling operations began.

So, a little bit different commodity environment. So, as we continue to look at the different spacing, different development plans, we're continuing to look at completion designs, really around optimizing those both for the Wolfcamp at the different space and also for the Sprayberry..

Actually, too, a part of that is testing new completion designs and then we don't have all the cost in or we're getting the final cost in for the first package of wells and the wells we've drilled. So, I think there's going to be opportunity to continue to drive cost down.

We just need to get all those costs in and fully baked and we'll look at that as the year goes on, and what our costs should come down from where we are today..

That's great. And for my follow up, perhaps with Jason or Karen, with regard to your 2021 guidance, you effectively raised your old guidance despite the weather affects you experienced in Q1. That seemingly suggests a stronger production profile than previously thought.

Could you perhaps speak to the production trajectory and potentially offer color on an expected exit rate for 2021?.

I can comment on the production profile itself. We actually added in the deck this time early results of the first Howard County package coming online and we did split out the Wolfcamp and the Sprayberry formation specifically. So, as we mentioned, it's early, but well performance on that first package is meeting expectations.

So, everything is looking good there. I'll also comment that in addition to the production profiles that we're seeing in the Howard County, again, with the first package is coming in and a little bit tighter spacing in the Wolfcamp were also highlighted by our staying completions, efficiencies continue to improve.

Again we showed data for fourth quarter, which is continuing to be on that upward trend and that also is impacting that production guidance because just getting more footage done in 2021, then, when we original went out with. So both of those two things are really impacting that increase in the guidance..

Yes. And Derrick, this is Brian. On the production rates throughout the year, I think we've talked in the past that you'll kind of see it as a steady increase throughout the year. And so, the annual number will be kind of the midpoint. So we're a little bit below the guidance we gave for the year today and we'll be above it by the end of the year.

It's pretty much pro rata and we're going to see a pretty much steady increase. The timing of it could be a little lumpy with packages coming on, but generally speaking on a quarterly basis, you should see that oil production step up throughout the year.

The increase is really just -- I characterize it as pro rata increase over what we have been expecting..

And one of the big changes for us this year are the pivot to co-development in Howard County. So our production when wells come on, they come on in 12 to 16 well slugs, versus we were doing smaller paths before. We've been trying to incorporate some of that into our weather hit.

It might be good for Karen to just kind of talk a little bit more about the weather and how we thought about forecasting some of that as we're moving forward.

Sure. So to just kind of backup as temperatures warmed up over this last weekend, that's really when we were able to get all of our drilling completions, operations back up and really running at full pre-storm operations. It was really through the weekend and we were also able to bring on the majority of our production, get it all back online.

Yesterday, we were estimating that we were back at about 80% of the pre-storm level from the production standpoint. So, we talked about in the release that operations were impacted in some way a total of 12 days. I'll also add that we were at or below 50% of our production levels before the storm for about six of those days.

So overall as I mentioned, we're getting everything back online. Our production as everyone on the call knows, is very concentrated to one area. For example, all of the new wells that we're bringing on in Q4 really impacting one tier [ph] off and one well package in Howard County, so our 15-well package.

So, any events like the recent weather can really be very impactful to our total production, because it is so concentrated. So, we're still getting all of our operations back online from the storm and we worked with the higher end of the potential impact in our guidance release.

We'll continue to evaluate as we get everything back on with production, get fully back online in the next few days..

Great update, thanks for your detailed response..

Thanks, Derrick..

Thank you. [Operator Instructions] Our next question comes from Brian Singer with Goldman Sachs. You may proceed with your question..

Thank you. Good morning. One question this morning and it is a little bit of a follow up to Derrick's first question. It's with regards to inventory.

Based on the results that you are seeing from Howard County, is that impacting how you think about future locations? And then how does that impact specially with commodity prices having moved higher your interest and ability to acquire more in 2021 or beyond?.

Yes, and a lot of our inventory and we've got the range out there and that's been updated for this year. So, there is some impacts with spacing, but again, it can be four wells. What we're talking about as a swing for 1,280 acres. So, we're going through that and the answer changes, some with price. So, we continue to look at price. We're ahead of that.

So, the 12 well packages were put out there when oil price was much lower, so we were drilling those when oil was in the $40 range. So, we'll continue to be flexible, but we also need to just get the results. We're doing our design different than some of our other peers.

We've got four wells in the Sprayberry, eight wells and the Wolfcamp, some companies are at six wells in the Sprayberry, six wells in the Wolfcamp. We think this is the right design for us, but we'll continue to test that. And I think just with respect to bringing in inventory, it's something that we need to do.

We've generated all the opportunities that we've got organically. We're continuing to do some blocking and tackling. There are instances where pulling in a section here or there gives us opportunity to drill 12 more wells, be either JV with another, or JOA [ph] with another partner, or purchasing that acreage.

So those are the blocking and tackling types of things that we do on a regular basis. We brought in acreage 2,500 acres last year at $2,500 an acre that just sold for $10,000 an acre plus. So, we've been very good at bringing it in. It's hard to say exactly how that come in.

Each of the acreage we brought in today has been some negotiated with landowners, some was a sale, some was a negotiated transaction. So, we bring opportunities in multiple different ways, but everything that we're drilling today, we didn't have in our portfolio just over a year and-a-half ago.

So, continue to do well at bringing in those opportunities, but it's hard to describe exactly how they've been because we've used multiple methods to bring those in so far..

Great, thank you very much..

Thank you. I'm not showing any further questions at this time. I would now like to turn the call back over to Ron Hagood for any further remarks..

Thank you very much for joining us today. We appreciate your interest in Laredo, and this concludes this morning's call..

Thank you, ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..