Laredo Petroleum, Inc. announced its fourth-quarter and full-year 2020 financial and operating results.
Full-Year 2020 Highlights
- Fully transitioned development operations to Howard County acreage and successfully completed the Company's first well package
- Added 4,000 net acres in Howard County at an average price of $7,200 per net undeveloped acre
- Produced an average of 87,750 barrels of oil equivalent ("BOE") per day and 26,849 barrels of oil per day ("BOPD"), an increase of 8% and a decrease of 6%, respectively, from full-year 2019, while reducing capital expenditures by 27% over the same period
- Reduced drilling and completions costs during the year by 21%, to $540 per foot from $680 per foot
- Reduced unit lease operating expenses ("LOE") by 17% from full-year 2019
- Reduced unit general and administrative expenses ("G&A"), excluding long-term incentive plan expenses ("LTIP"), by 21% from full-year 2019
- Reduced volume of flared/vented natural gas by 58% from full-year 2019, flaring/venting only 0.71% of the Company's produced natural gas during full-year 2020
- Received $234.1 million from settlements of matured/terminated derivatives
- Extended all term-debt maturities to 2025 and 2028 and repurchased $61 million of term-debt in open market purchases for 62.5% of par
"Despite the unprecedented challenges of COVID and the resulting energy demand and commodity price weakness during 2020, the Laredo team adapted to working remotely and executed on the transformational strategy we communicated in November 2019," stated Jason Pigott, President and Chief Executive Officer. "We continued to deliver by driving down drilling and completions costs, reducing both unit LOE and G&A expenses, adding additional acreage in Howard County and managing financial risk by extending our term-debt maturities and maintaining a robust commodity hedging program."
Full-Year 2021 Outlook and Highlights
- 2021 capital budget is expected to generate $25 million to $40 million of Free Cash Flow1 at $52.50 WTI and $2.75 Henry Hub
- 2021 capital budget is expected to maximize capital efficiency with consistent activity throughout the year, which, combined with lower costs, results in 25% more completed lateral feet than 2020, with the same drilling and completions budget
- Focus on oily development in Howard County expected to generate consistent oil production growth
- Release of the Company's inaugural ESG and Climate Risk Report, which outlines reduction targets for GHG emissions, methane emissions and flaring and discloses data in alignment with Sustainability Accounting Standards Board ("SASB"), the Task Force on Climate-related Financial Disclosures ("TCFD") and the International Petroleum Industry Environmental Conservation Association ("IPIECA") frameworks
"We are very excited about our budgeted plan for 2021," continued Mr. Pigott. "Our first development package in Howard County continues to perform well and we began completions operations on our second package in the fourth quarter of 2020. Focusing our capital in Howard County during 2021 is expected to result in meaningful capital efficiency gains and Free Cash Flow generation. We have also released our inaugural ESG and Climate Risk Report and are pleased to highlight our successes in all ESG practices and demonstrate our commitment to sustainable development by setting year-end 2025 GHG intensity, flaring and methane emission reduction targets. As we move forward with our plan, we expect the sustainable, highly productive development strategy we have implemented to create value for all of our stakeholders."
2020 Financial Results
For the fourth quarter of 2020, the Company reported a net loss attributable to common stockholders of $165.9 million, or $14.18 per diluted share, which includes a non-cash full cost ceiling impairment charge of $109.8 million. Adjusted Net Income, a non-GAAP financial measure, for the fourth quarter of 2020 was $37.8 million, or $3.22 per adjusted diluted share. Adjusted EBITDA, a non-GAAP financial measure, for the fourth quarter of 2020 was $120.0 million.
For full-year 2020, the Company reported a net loss attributable to common stockholders of $874.2 million, or $74.92 per diluted share, which includes a non-cash full cost ceiling impairment charge of $889.5 million. Adjusted Net Income for full-year 2020 was $134.3 million, or $11.47 per adjusted diluted share, and Adjusted EBITDA was $506.9 million.
Environmental, Social, Governance
Laredo has consistently demonstrated its commitment to sustainable development, investing in the infrastructure and equipment required to minimize the flaring and venting of produced natural gas and reduce spills of both oil and water. During 2020, Laredo reduced its flared/vented natural gas volumes by 58% from full-year 2019, decreasing flared/vented natural gas as a percentage of produced natural gas from 1.95% in 2019 to 0.71% in 2020. Relatedly, in the second half of 2020, the Company flared/vented just 0.12% of its produced natural gas, further demonstrating its position as one of the best operators in the basin. Additionally, Laredo reduced its oil/water spill rate by 29% during 2020, employing improved monitoring technology to quicken response times.
Although Laredo's flaring and venting practices are already among the best in the Permian Basin, the Board furthered the Company's commitment in 2020 by including flaring/venting and oil/water spills metrics in the executive compensation program. These metrics will be further aligned in 2021 with the emission reductions targets announced in our inaugural ESG and Climate Risk Report.
Laredo is determined to maintain its leadership in sustainability practices and, accordingly, today released its inaugural ESG and Climate Risk Report, based on 2019 data. The Company's disclosures are in alignment with SASB, TCFD and IPIECA reporting frameworks and highlight Laredo's Board diversity and women in leadership, as well as the Company's emissions reduction targets. The Company is proud of its commitment to reduce GHG intensity by 20%, reduce methane emissions to less than 0.20% of natural gas production and eliminate routine flaring, all by 2025. Enhancing this commitment, the Board amended the Nominating and Corporate Governance Committee charter to include the monitoring and evaluation of programs and policies relating to ESG matters and has updated the committee name to the Nominating, Corporate Governance, Social and Environmental Committee to reflect these responsibilities.
Additionally, the Company named David Ferris as Vice President and Chief Sustainability Officer. David will join Laredo in late February and brings a wealth of operational and ESG leadership experience. As a consultant, David was instrumental in the completion of the Company's inaugural ESG and Climate Risk Report and will be managing future efforts related to the Company's emissions reduction targets and the implementation of its ESG strategies.
Operations Summary
In the fourth quarter of 2020, Laredo's total production averaged 82,552 BOE per day, including oil production of 21,929 BOPD. During the quarter, the Company completed 15 wells, all in Howard County. Additionally, completions activities on the Company's second well package were ahead of schedule, as work on four wells was accelerated into the fourth quarter of 2020 from the first quarter of 2021.
Laredo's first wells in Howard County, the 15-well Passow/Gilbert package, are expected to reach peak rates during the first quarter of 2021 and have a significant impact on first-quarter 2021 oil production. All wells in the package have begun producing oil and oil production on the four Lower Spraberry wells is still increasing. The package maintained average production of 10,000 gross BOPD for 26 consecutive days prior to the arrival of the winter storms currently impacting the Permian Basin.
Extended freezing temperatures and severe icing have affected the Company's Permian Basin operations for the last 12 days. As always, Laredo's commitment to the safety of its team members and managing its environmental impact is the Company's first priority, and Laredo has experienced zero safety incidents and fluid releases due to the weather.
Multiple challenges, including lack of field gas and electricity needed for power, shuttered takeaway and processing capacity, access to well sites and facilities, and inoperable vapor recovery units necessary for environmental compliance, have impeded production operations over this 12-day time frame. Additionally, completions operations were unable to proceed, delaying the drilling out of plugs on the Company's 12-well Trentino/Whitmire package in Howard County.
Through the hard work and dedication of our team members, drilling and completions operations have resumed and production is returning to pre-storm levels. The Company currently estimates that the combined impact of shut-in production and completions delays will reduce first-quarter 2021 total production by approximately 8,000 BOE per day and oil production by approximately 3,000 BOPD.
The Company is currently operating two drilling rigs and one completions crew in Howard County. Laredo expects to complete 12 wells in Howard County during the first quarter of 2021, although they will be pushed to the end of the quarter due to weather delays.
2020 Reserves
Laredo grew proved developed reserves by 4% in 2020, an increase of 10.0 million BOE from volumes at year-end 2019. The primary driver of this increase was the shift in development to Howard County, where the Company booked 7.4 million BOE (65% oil) of proved developed reserves, representing 10% of Laredo's proved developed reserves value.
Proved undeveloped reserves ("PUDs") declined by 25.1 million BOE in 2020, primarily as a result of PUD reserves being converted to proved developed reserves and fewer new PUD locations being booked in a low commodity price environment. Laredo has traditionally been conservative in booking PUDs, which now represent only 9% of proved reserves by volume and 5% by value.
Laredo's proved reserves were valued at $1.01 billion at year-end 2020, based on SEC benchmark pricing of $36.04 for oil and $1.21 for natural gas. The PV-10 value, a non-GAAP financial measure, of the Company's proved reserves at year-end 2020 was $1.03 billion, of which $971 million was proved developed reserves. At benchmark prices of $50 WTI and $2.75 Henry Hub, Laredo estimates the PV-10 value of its year-end 2020 proved developed reserves to be $1.76 billion.
Expenses
Laredo substantially reduced both operating and G&A expenses during 2020. Combined unit LOE and G&A, excluding LTIP, were $3.84 per BOE during 2020, a reduction of 18% from $4.71 per BOE in 2019.
In 2021, the Company expects unit LOE to increase from 2020 levels and to average of slightly more than $3.00 per BOE. Utilization of ESPs for artificial lift in Howard County is expected to result in higher operating expenses compared to the Company's established leasehold, but is minimal compared to the higher margins generated in Howard County.
Total G&A, including LTIP, during 2021 is expected to remain flat on a total dollar basis as the Company remains focused on maintaining current staffing levels, but will likely increase slightly on a unit basis as total production is expected to be lower versus 2020.
Fourth-Quarter and Full-Year 2020 Costs Incurred
During the fourth quarter of 2020, total costs incurred were $76 million, excluding non-budgeted acquisitions, comprised of $66 million in drilling and completions activities, $1 million in land, exploration and data related costs, $2 million in infrastructure, including Laredo Midstream Services investments, and $7 million in other capitalized costs. Costs incurred during the fourth quarter of 2020 slightly exceeded the high end of Company expectations due to completions activity that was planned for first-quarter 2021 being accelerated into fourth-quarter 2020.
Total costs incurred for full-year 2020 were $351 million, a reduction of $131 million from 2019.
2021 Budget and Production Expectations
The Company's capital program for 2021 is almost entirely focused on the development of its highly productive Howard County leasehold. Operations are designed to maximize capital efficiency by consistently running one completions crew for the entire year. Continued improvements in drilled and completed feet per day in the Company's Howard County operations and innovations such as the Company-owned sand mine are driving additional productivity gains and higher activity levels, without adding additional completions crews or drilling rigs.
Laredo expects to invest $360 million in 2021, excluding non-budgeted acquisitions. The components of the capital program include $300 million for drilling, completions and equipment, $30 million for production facilities and equipment and land, and $30 million for other capitalized items.
The Company expects its 2021 development plan to result in a significant improvement in overall capital efficiency with a full-year of operations directed to Howard County. Oil production for full-year 2021 is expected to average 27,250 - 29,250 BOPD, reduced for weather impact of 750 BOPD, with steady growth anticipated throughout the year. Total production is expected to decline to an average of 80,000 - 85,000 BOE per day, reduced for weather impact of 2,000 BOE per day, as the Company moves development from its gassier, established acreage position to its oilier, new acreage position in Howard County.
The 2021 capital plan is supported by a very robust hedging program, with 78% of expected 2021 oil production and 68% of expected 2021 total production hedged, based on the midpoint of guidance. At benchmark pricing of $52.50 WTI and $2.75 Henry Hub, Laredo expects to generate $25 million to $40 million of Free Cash Flow1. The Company remains committed to maintaining a consistent development program and plans to utilize Free Cash Flow to reduce debt.
Please see the table in the appendix of Laredo's Fourth-Quarter 2020 Earnings Presentation posted to the Company's website for the full details of the Company's commodity derivatives.
Liquidity
At December 31, 2020, the Company had outstanding borrowings of $255 million on its $725 million senior secured credit facility, resulting in available capacity, after the reduction for outstanding letters of credit, of $426 million. Including cash and cash equivalents of $49 million, total liquidity was $475 million.
At February 22, 2021, the Company had outstanding borrowings of $250 million on its $725 million senior secured credit facility, resulting in available capacity, after the reduction for outstanding letters of credit, of $431 million. Including cash and cash equivalents of $47 million, total liquidity was $478 million.
First-Quarter and Full-Year 2021 Guidance
The table below reflects the Company's first-quarter and full-year guidance for total and oil production for 2021. Guidance for first-quarter and full-year 2021 adjusts for recent severe freezing weather in the Permian Basin operating area. The Company estimates total production and oil production for the first quarter of 2021 were reduced by 8,000 BOE per day and 3,000 BOPD, respectively, for weather impact. The Company estimates total production and oil production for full-year 2021 were reduced by 2,000 BOE per day and 750 BOPD, respectively, for weather impact.
