Good day, ladies and gentlemen and welcome to Laredo Petroleum First Quarter 2021 Earnings Conference Call. My name is Carol 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 and 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 and presentation detailing our financial and operating results for the first quarter of 2021. 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.

I will now turn the call over to Jason Pigott, President and Chief Executive Officer..

Good morning and thank you for joining our first quarter 2021 earnings call. Our results for the first quarter are a demonstration of the solid financial management and operational execution that underpins our strategic transformation.

We generated $22 million in free cash flow in the quarter as we continued to reduce well cost which in turn reduced capital expenditures. We sold shares under the ATM program for about $27 million in net proceeds and reduced borrowings under our revolver by $35 million.

Our long-term trend of drilling and completion efficiency improvements and innovation such as our company-owned Sand Mine are indicative of our drive for continuous improvement. Capital efficiency improvements from our transition to Howard County came to fruition this quarter.

Production from our first package of wells in Howard County had a substantial impact of production during the quarter despite downtime due to February's winter storms.

Oil production grew 11% sequentially versus the fourth quarter of 2020 and we expect sequential oil growth of 9% to 13% in the second quarter as our second package of wells reaches peak production. We continue to do well on our ESG metrics flaring or venting only 0.22% of produced natural gas during the quarter.

The company has put forward an ambitious plan to reduce greenhouse gas emissions and reducing and ultimately eliminating venting, flaring is a key component of our plan. To conclude, I would like to recognize the efforts of our operational teams quickly and more importantly safely restore production after the winter storms in February.

With that, Karen will provide more details on our operations..

Thank you, Jason. I'd like to begin by seconding Jason's comments on the efforts of the entire operations team to get us back and running after the severe weather that occurred in February. It was all hands on deck and it took a lot of focus and discipline for all the teams, to work as quickly and safely as we did to minimize the impact.

Results in the first quarter continue to reflect our successful transition of activity to Howard County. We continue to make significant progress on reducing well [ph] cost. With our first two packages in Howard County being delivered at $525 per foot. One of the main drivers of the success has been company-owned Sand Mine.

We're now consistently realizing savings of $90,000 per well with the mine supplying over 85% of the sand we used in the first quarter.

We were also able to successfully source the other 15% of our sand volumes with third-party sand right after the winter storm as we were getting operations up and going down at the mine with no increase to our well cost. Additionally, we continued our long-term trend of increasing operational efficiency.

Increasing drill feet per day, per rig in the first quarter even as we were working with the new rig we added at the beginning of the year. Cost incurred in the first quarter came in lower than anticipated. This was driven by the decreased well cost just mentioned as well as some infrastructure projects that were delayed until later in the year.

Based on the first quarter cost, we believe that we are on track to spend less than $360 million capital budget.

But also planned to fully evaluate the potential for continued improvements in drilling and completion efficiencies which could positively close [ph] some activity forward in the 2021 from first quarter 2022 as we activity levels steady at our current two rigs and one frac for cadence.

In addition to delivering lower capital cost we've also been pleased with our LOE trends in Howard County. While we still expect LOE to rise as we bring on more production in Howard County and still forecast about $4 per BOE for the life of the well in Howard County. So far, our operating cost have been lower than we originally anticipated.

We've been testing the application in high rate, high pressure gas lift on few wells to evaluate the impact of both production and operating cost. We also continue to optimize [indiscernible] as we gain more production data and we traditionally majority of our facilities and wells to purchase power.

All of which could positively impact our operating cost going forward. We expect to deliver steady oil production growth throughout 2021 as we bring on one well package per quarter in Howard County running one continuous frac crew.

While there can be some lumpiness to production based on timing of the large 12 and 13 well packages in our development plan. We expect sequential oil production growth throughout 2021 as well as an increase in oil cut. The early production results to-date in Howard County are within the range of our expectations.

As we showed in the last quarter's release, the first package the 15-well Gilbert/Passow package started out in line with our average performance expectation. This package has begun to tail [ph] off a bit over the past couple of months.

But overall is still performing within a range of expectation particularly given the tighter well spacing in this package. Our second package, the 12-well Trentino/Whitmire package is well ahead of the average performance expectations early in its history. Both packages were developed on the tighter 12-well per DSU spacing in the Wolfcamp.

Subsequent packages will be up space to approximately eight wells per DSU in the Wolfcamp. We believe this will deliver more consistent performance and maximize value per DSU. We continue to make good progress building our Howard County leasehold.

Subsequent to the end of the first quarter, we acquired a full section contiguous to the section that we acquired in October 2020. This formed up two section DSU which now sets up to develop DSU with 10,000 foot laterals. I'll now hand the call to Bryan for financial update..

Thank you, Karen. Like our operational execution, we also executed on the financial side of our strategy. We maintained our capital discipline and our focus on expense control which combined with the capital efficiency of the Howard County development program drove free cash flow of $22 million for the first quarter.

In February, we initiated our at-the-market equity program. Authorized for $75 million, the ATM program allows us to opportunistically sell equity from time-to-time.

We put the program in place with the intention of using the proceeds to pay down a portion of our credit facility that have been used in the fourth quarter of 2020 to repurchase $61 million of notes at 62.5% at par and to finance a bolt-on transaction at Howard County, where we bought acreage at a little over $2,000 per undeveloped acre.

These opportunistic very accretive transactions totaled about $50 million. When we announced the ATM program, our stock was in the mid 30s. Subsequently, we were able to sell 723,000 shares at an average price of approximately $38.75 for net proceeds of $26.9 million.

These proceeds combined of the free cash flow enabled us to pay down our credit facility by $35 million during the quarter while also making an interest payment on our notes of approximately $46 million. Going forward, our goal is to continue to pay down debt and strengthen our balance sheet.

Recent commodity price increases have enhanced the free cash flow generation profile of the company. During the first quarter, we added to our 2022 oil hedges and we intent to add more as the year progresses, further increasing our confidence in our 2021 and 2022 free cash flow profile and debt reduction capabilities.

With that, I'll ask the operator to please open the line for questions..

[Operator Instructions] and your first question comes from the line of Derrick Whitfield with Stifel..

My first question, perhaps for Karen. I'd like to focus on your chart on Page 8 to understand the differences between the first two sets of wells. Other than the Winter Storm Uri impact to the first set.

Were there other noticeable or notable differences in the D&C design or flow back approach between these two sets?.

Hi, Derrick. Thanks for the question. So at a high level the answer is no. there's no real difference between those first two well packages. They were really designed on the same spacing even really looking at landing points. Basically had the same basic design, so overall both of these packages are still relatively early in the blowback.

We continue to evaluate performance of the different landing points between the Sprayberry and the Wolfcamp formation. But really no design differences in these first two packages..

And it's just again, statistically we just see packages that are little better or little worse. So it's just something it's not unusual to oil and gas - kind of put these first two wells back as they're welled [ph] out..

That makes sense and for my follow-up. I wanted to focus on the A&D market perhaps for you Jason.

In your view did the recent larger Midland transaction in the basin tilt the A&D environment from a buyer's market to a seller's market? Or do you sense sellers can see that it was somewhat of an anomaly?.

Most of the folks that we talk to and along the analyst that looked at it, think that's anomalous transaction again good say it for the purchaser there. I don't think that the expectations have been raised by that level across the basin. And there's lot of things that are on the market, so again it's a good time.

I think the bid ask is narrowing especially again, prices have risen a little bit. It was difficult to do things in a much lower price averment. But I do think we're in a price environment today where we can be successful with transactions..

Fantastic. Congrats on your success to-date and thanks for your time..

[Operator Instructions] your next question comes from the line of Noel Parks with Tuohy Brothers..

Could you just sort of review a little bit the spacing history of what you've been doing since your Howard County acquisition initially well I think it was about going on, like three years ago, memory serves me? And just what the spacing assumptions were under the legacy operator? What you started out at and where you're now? And also, could you just kind of review the geological characteristics that helped to turn and what spacing works where? I guess the completion choices.

Thanks a lot..

This is Karen. I'll be happy to kind of step back and talk a little bit about the history of the acreage. So we've acquired the acreage and kind of close on the Howard County acreage that we're developing right now. In late 2019 right at the end of 2019.

One of the reasons that disposition was very attractive to us because it really had not been developed. So there really no parent wells, so it was a good location for us to go in and go into kind of full development in this area. So real spacing kind of outlined prior to that.

We actually transitioned very quickly in 2020 to active operations in Howard County. But then the late completions in Howard County just given the environment that we were in early 2020 with COVID and other thing, so we actually started completion operations in September of 2020.

So we've always been actually operating with active completions going back since really the very end of 2020, so four to five months on the first package. So that's why we kind of refer to the early well deployments here.

We're really getting the first look at the well results coming back from Howard County and first two packages which is what we're showing on Slide 8 in the earnings release. So as we begin development in Howard County.

This spacing design that we talked about was four wells in Sprayberry, 12 wells in the Wolfcamp that was the development plan that went in for the first two packages the Passow/Gilbert and the Trentino/Whitmire as we referred to them and that's what the two packages that were plotted up for the Howard County wells on the Slide 8 are.

As we kind of got into the development continued to look at all the work that was being done by us, the offset operators. It's really a lot of technical work in completions. Clearly the drilling rig is well in front of completions crew.

And so we decided to really up space a little bit in Howard County in front of even getting any of these well results back, that's what we've been doing on the next packages that will be flowing back in subsequent quarters.

So we'll be up spacing design it's still four wells in the Sprayberry, eight wells in the Wolfcamp is currently what we're doing. Overall looking at the well results on Slide 8, overall these are strong packages. It's early in their history.

We're happy with their performance these wells that are flowing back right now are supporting our overall company strategy which is capital efficient wells, high rates return, high rates return drilling, supporting. Our strategy of free cash flow generation, paying down debt.

So these first two packages are clearly supporting that and as we continue to bring on the up-space packages which will be the packages that will move on in the next couple of quarters. We just think that they will help support more consistent results and continue to support that strategy.

So that's kind of the history that we've been on since acquiring Howard County acreage..

Great, thanks a lot. It's helpful.

And could you just talk a minute about what you're thinking of going forward on steel cost? I was wondering if you would thinking about building up your inventory or maybe already had or what are your thought maybe this was kind of a temporary blip upwards for steel - it might be in better shape turning into future quarters?.

Yes, overall. So we have a supply chain team that really works every aspect of our business and steel is an interesting one. Which is impacted by the broader global market at times, so we do see some fluctuations up and down? Overall we're not really seeing impact our well cost currently.

We do have contracts in place that we work out in time to make sure that we're managing both our cost and inventory on all [indiscernible] and everything. So really not seeing any significant impacts currently to our business..

Great..

And your next question comes from the line of Richard Tullis with Capital One Securities..

Question for maybe Jason or Bryan. Given the recent uptick in commodity prices that certainly helped the cash flow for the quarter.

Does this present an opportunity to potentially look at monetizing some of the less core acreage the 100,000 plus acres that you hold on the legacy properties outside of the current focus area in Howard? We've seen a couple of other E&P sell sort of non-core acreage over the past couple of months in the recent announcements.

So I just want to see, if maybe it heightens your interest at all and maybe look into part with some of the legacy acreage..

Yes, it's a great question. I think that it is something that's on our radar. As everyone knows, on the call we're looking to continue to bring in higher quality inventory. Today the core position provides the cash flow that funds that.

But depending on how much PDP might come in with the transaction, selling down or selling a non-op interest or carve a nano portion of the field. It's something that we would consider to again just help strengthen the balance sheet and not just bring on straight debts.

So those are things that we think about a lot of it will just depend on the M&A work in the future..

Okay, thanks Jason. Question for Karen. Obviously really nice well cost average for the packages in Howard County online year-to-date.

How sustainable do you think the $525 per lateral foot is as we go forward? I mean, is there potential to even lower than more?.

Yes, we've talked about prior that we were expecting to come in a little bit below where we were at the $540 a foot. But really the first package is coming through. We wanted to have actual clear performance as we're going in and really starting the completions operations in Howard County.

So with the first two well packages behind us at this point, we really felt comfortable coming out with actual well cost at $525. So as we all talk about, are there potential pressures on service cost? That well continues we're not seeing any really significant upward pressure there.

As far as continue to optimize our design and for performance improvement. Yes, I think there's opportunity.

So it will be really just kind of balancing, how do we continue to drive performance improvements into drilling, completions, operations and make sure that we're managing any type of cost pressure that we're getting on the sub side of the business. We talked about our sand, our owned mine that we have.

We're - just from frac service providers external companies hearing that there is pressure on the sand side. Both trucking and sand. So right now we're really insulated from that, which is a big decision to be with the sand that we're providing off of our own locations.

So overall I think we're set up pretty well and shared again the performance of both drilling and completions. We've been doing that on a quarterly basis, even with the severe winter storm that impacted us [indiscernible] in February we're seeing really good performance and continued performance. There's opportunity for that to continue with..

Thanks Karen that was helpful and thanks to everyone for their response..

And ladies and gentlemen, we've come to the conclusion of our Q&A session for today and I'll turn the call back to over to Mr. Ron Hagood for the closing comments..

Thank you for joining us for our call this morning. We appreciate your interest in Laredo. This concludes our call and have a great morning..

Ladies and gentlemen, this concludes today's conference. Thank you for participating. You have a wonderful day. You may now all disconnect..