Vital Energy Inc (VTLE) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Laredo Petroleum Holdings, Inc., Earnings Conference Call. My name is Karis, and I will 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 your host for today's events, Mr. Randy Foutch, Chairman and Chief Executive Officer. You may proceed, sir.

Thank you, Karis. Welcome everyone to the Laredo First Quarter 2012 Earnings Call. We do appreciate and want to thank you for taking time to participate with us on the call. We are excited about the first-quarter results, and we look forward to sharing them with you. I'll ask Mark to mention our normal disclosure wording.

Yes, I just want to remind everyone that this conference call may contain certain forward-looking statements that are intended to be covered by the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. For a detailed description of our disclaimer, please refer to our press release that was issued and posted to our website yesterday after the close of the market, as well as to our other public filings. Randy?

Thanks, Mark. I'd like to go over a summary of the positive events that we think took place in the first quarter, and then I'll ask Jerry and Mark to provide some of the details. Laredo increased our production 33% over Q1 2011, and 7% over Q4 2011. Our adjusted EBITDA is going up faster than production, 37% over Q1 2011, and 9% over Q4 2011.

We continue to be encouraged by our drilling results and production increases, especially in the horizontal plays. Laredo is realizing and enjoying strong prices driven by the oil and liquid content of our production and our hedges, which now extend out through 2015. Mark will address later our impressive liquidity position, which is something around $1 billion. The credit agencies are recognizing our progress, and they have recently upgraded our corporate and note issue ratings.

We intend to leverage these Laredo strengths to continue our exploration and development of our expanding potential location opportunity set in the Permian and Anadarko Basins. We believe we are successful in making progress in really three areas. We think we are expanding our acreage base in some areas where we think we have a proprietary knowledge and data set. We think our client activities are now being supported by others in the industry, and along with the data we have and the data they will be generating, we're optimizing our horizontal drilling and completion efforts.

We are also going to continue our 2012 guidance as is, but we have said before that we do look at our capital program often in terms of where to put the capital, and what expenditures to make in terms of acreage, drilling, and completions that give us in our view the best shareholder value. We also reallocate capital within the budget, as we've talked about before. Should we change our internal views on our budget in any meaningful way in the future, we will adjust and issue new guidance. I'll ask Jerry to make a few comments about operations.

All right, thanks Randy. Operationally, I'd characterize the quarter pretty much going as planned. I really don't have much new information since our most recent presentation at the OGIS Energy Conference in mid April. That presentation is on our website if anyone hasn't seen it.

In the Permian, we are running 12 rigs, we have eight vertical and four horizontal rigs going. On the horizontals, we are starting to step out more from our proven production areas with the Cline and we are still early in the process of optimizing the number of stages in the lateral lengths in all of our horizontal wells -- that's both for the Cline and for the Wolfcamp.

As a generalization, the increased frac density and the longer laterals are both yielding higher IPs, but it's still too early to say what's economically optimal. In the upper Wolfcamp horizontals, the early results are meeting -- and in several cases are outperforming -- our model. In the Cline, where we have completed over two dozen wells, the results continue to meet our expectations. In the Granite Wash play, in the panhandle, we are running four rigs, three horizontals and one vertical. After we finish the vertical well we are on today, our current plans are to release the rig. Our horizontal wells are basically performing as expected. With that, I'll turn it over to Mark.

Thanks, Jerry. I'd like to emphasize some of the things that Randy said, and then go over some financial information. Two things I'd like to remind you about our reporting. First is that we report on a two-stream basis. We leave the value of our natural gas liquids in the natural gas stream; second, all of our reporting all the way back to Day 1 is done on a combined Company basis. It reflects the acquisition of Broad Oak that we made in July 2011, since Laredo and Broad Oak were primarily owned by Warburg Pincus, all of our results are reflected as one combined Company.

As Randy mentioned, our production growth continued to be growing as a result of our successful drilling program. It once again delivered continued strong growth. We averaged just under 28,000 barrels of oil equivalent per day during the first quarter, which was up 33% from last year's first quarter, and up 7% from the fourth quarter. Our oil component continued to grow, reaching 42% in the first quarter, up from 37% for the first quarter of 2011. Our EBITDA continued to grow as well, driven by the growth in production and our strong price realization and hedging transactions. As an indication of our increasing efficiency, EBITDA grew at a faster clip than production. It was up 37% from the first quarter of last year, and up 9% from the fourth quarter.

Laredo has built an impressive liquidity position that now stands at approximately $1 billion. It consists of $785 million unused borrowing base on our bank revolver and over $200 million of cash on hand. As you know, our bank revolver is a senior secured credit facility with a group of about 15 banks. We've had an impressive string of increase in our borrowing base since the inception of the Company, as we continue to increase production and as we acquired Broad Oak in mid-year last year.

The borrowing base has increased from $650 million immediately following after the Broad Oak acquisition in July of 2011, to as high as $910 million in April of this year, before it was reduced to $785, its current level, in order to reflect the $500 million of senior unsecured notes that we issued at the end of last month. We've had similar success in accessing the senior unsecured note market. As covered in the earnings release, we issued $500 million of 7 3/8% notes that are due 2022 last month at par.

As Randy mentioned, we've had a couple of upgrades from the rating agencies since we sold our first notes in January of 2011. Moody's now has us at a corporate rating of B1 and a note rating of B3. Standard & Poor's has us at B plus, B minus. In summary, Laredo is in a great position to continue our very profitable growth as we work through our drilling inventory. I'll turn it back over to Randy for some closing remarks and then we'll all be available to answer any of your questions.

Thanks, Jerry. Thanks Mark. We think we have an attractive Company and we think the investment opportunity is also attractive. We think Laredo has an experienced Management team. We think we've had a long track record of delivering successful significant returns. We think we're doing what we suggested we would do and we're growing production in earnings rapidly. We are increasing our crude oil production. First quarter was 42% of our total production was crude oil and condensate. We think we're substantiating our large inventory of drilling locations in what we characterize as oil- and liquid-rich plays. Mark addressed our significant liquidity and again point out that Laredo has a very very strong hedging position in terms of several years out.

We look at this and we think that we have this large potential number of locations. We've got to convert that potential to some other higher value reserve category. We need to optimize our operations in terms of lateral length and what's the optimum number of stages for that lateral length. Part of that is to better our economics and then we need to start addressing how to bring forward the NAV of this very very large potential drilling inventory. With that, I think I'll turn it over to Karis the operator for any questions.

(Operator Instructions)

Brian Singer, Goldman Sachs.

I may have missed some of your opening remarks there, I apologize. If you didn't comment on it, could you talk about how we should think about the quarterly trajectory of CapEx over the next few quarters, relative to what we saw for the first quarter?

Yes, Joe, this is Mark -- or Brian. If you look at the CapEx number that's in the financial statements, that's of course cash CapEx that occurred during the quarter that we actually paid out. As we mentioned in the news release that included not only the capital expenditures that we paid and accrued for the well spud in the first quarter, but it also included the amount that we paid out on wells that were spud and not fully paid in the fourth quarter, as those bills came in and we paid them out.

If you subtract the first quarter or the fourth quarter spuds, and add back the first quarter spuds that were accrued and not paid, we are right on the pace of our guidance of the $700 million. The only adjustment that you may see later on is, as we mentioned, we did acquire some leases during the first quarter, and we've not yet made any decision to change that guidance -- that $700 million of drilling dollars.

Okay, that's helpful, thanks. Looking at the Wolfcamp shale, I think your comments were that your wells are performing at or above expectations. Can you just add a little bit more color regionally, and especially with some of the new wells that have come on, and then I guess to what extent better, and maybe why?

Brian, we don't have a lot of data and what we've said a couple of times and what I'll say again today is that we're obviously as we drill longer laterals seeing higher initial production rate. We're still trying to figure out where the best economics are on that. Plus we've -- as we've made the frac stages slightly more dense, in other words less spacing between them, we've seen an increase in IP. The question we have is does that necessarily translate into better economics and does the initial faster production rate translate into longer EURs and better first-year, second- and third-year rate of return kind of numbers. I think we're going to leave it just as we said, with we're seeing some optimization work that we need to do. We're seeing some positive early results, but we'll need a lot more data before we feel comfortable saying much more than that.

The data, Brian, is in that last, the OGIS presentation you have a couple 6,000-foot-long laterals with the higher-density fracs, so there's actual data out there if you want to look at it.

Okay, so your comment is based on -- is consistent with that, as opposed to versus anything incremental since then?

Why don't we just leave it with what we've said, Brian. I don't want to get into too much specifics or even point to a single well or two.

Okay, thank you.

Joe Allman, JP Morgan.

In terms of the acreage acquisition that you showed in the press release, could you talk about that, and what are the plans for buying additional acreage for the rest of this year?

We're pleased with the acreage position we've gotten. I think in the areas that we work, acreage is getting to be -- any meaningful acreage is getting to be harder and harder to accumulate. We're not interested in paying some of the prices we see some people been paying, so we're pleased with the acreage we've got. Pat's always wanting to look at other acreage, but again, our core philosophy is that for us to put much capital into acreage or for that matter an acquisition or whatever, we need to have some comfort that we think that's going to be as good as what we have. We like the acreage position we have. I wouldn't say we're not going to get a lot more but I think it's probably less likely, given the industry competition.

Got you. This acreage that you bought in the first quarter, is that targeting a specific play?

Yes, it is targeting a specific play.

Any details around that, or you just want to keep it tight for competitive reasons?

Yes, Joe, I think that's one we'll probably -- we're using what we consider some proprietary data, proprietary knowledge, and it's going to be acreage that will be in our ballpark and in our backyard.

Got you. Okay, very helpful and then--

Thank you.

Just another question if I could. Could you just review the rig plan for the rest of this year, could you just review that for us?

It's pretty much what we've said. The trade-off, I think, for us is we may reallocate, drill less vertical or more horizontal, or back and forth. We've seen little reason so far to really change our rig cadence. I think that as you would expect, drilling longer laterals and more stages for those longer laterals changes the rig cadence some, but we're basically at this point keeping the same rigs.

Got you, okay. Lastly, any incremental data from the last conference call or conference regarding service costs or any constraints you're seeing?

I don't think we're seeing constraints. There may have been some actual, Jerry, some slight cost decreases on fracking. Freeing up a couple of areas, but we haven't seen any increase, and I don't think we've seen significant decreases, but maybe directionally some.

Okay, very helpful, thank you.

Thank you.

(Operator Instructions)

Richard Tullis, Capital One Southcoast.

Thank you. Good afternoon, everybody. Randy, as we look forward into next year and beyond, I know you guys are going to continue drilling at a pretty good rate. How do you look at funding going forward, funding for the cash flow deficit beyond this year. Will it be mainly using the current credit facility, and with expectations that it grows, or how do you look at that?

I'll let Mark talk a little bit about specific numbers and liquidity, but one of the things that Richard, we really want to work on here is that we want to always have a great deal of flexibility in our ability to move money, move capital, move expenditures around. I think we try and balance that CapEx cadence with risk and knowledge. We've not signed long-term, very many long-term contracts, if any, or so on and so forth. We've got flexibility, plus with our hedge position, we have a great deal of stamina and comfort. I think I'll let Mark address some of the specifics on liquidity and funding going forward, but I think from a strategic point of view, we like our flexibility and we like our financial stamina supported by the hedges.

Yes, that's complete, what Randy said. The only thing that I might amplify is we had, as we mentioned in the press release, we had almost $500 million of liquidity when we chose to do this latest note offering. We're always playing close attention to what's available out there in the capital markets, but sitting on over $1 billion dollars of liquidity right now, we think we're well financed for the next couple of years, but that doesn't mean we won't stop watching it.

Okay, and Randy, you had mentioned acreage costs in your core Permian areas getting a bit pricey. What is it running these days that you guys are seeing in acreage costs and royalties?

We kind of viewed ourselves as wanting to be an early entry, and we bought a lot of our acreage in the Permian in what, Mark and Pat, under $500 an acre, counting bonus and brokerage, and in the Granite Wash under $600. We've not confirmed, but we hear stories of acreage out there going for five, maybe higher? Pat, do you want to comment on that? Pat Curth?

Yes, we've seen acreage costs go as high as $1,200 to $1,500 an acre out there. Our first-quarter well costs, including brokers, was $512 an acre.

Okay. How should we look at LOE and then the other expense items going forward? Is that kind of a good run rate that we saw in 1Q?

We had one work-over in the first quarter that was on one of our very high-value wells, and that one work-over, cleaning out a pump that sanded up, was a total cost of about $1.6 million or so. We think that's a one-time impact on LOE. That was a very high-value well that we needed to get it back on production, but I think our guidance that we've issued, we're still -- we look at that often, but we're still hanging with the guidance on LOEs.

Okay. Lastly, did you mention when you plan to test that new acreage?

No, we didn't mention it and I think we're still in, we'll put that in the Q along with trying to figure out some of the other zones under our current acreage. We'll be very mindful of lease expirations, but our view is again that to put much capital into the new acreage -- one, to buy the new acreage, and then two, to put much capital in it, we have to continue to think that it's of similar or more value than what we could put capital elsewhere to work.

Okay, well very good. Thank you, I appreciate it.

Thank you.

Dan McSpirit, BMO Capital Markets.

Thank you, gentlemen. Good afternoon.

Good afternoon Dan, how are you?

Doing well, thank you. On the Granite Wash, how should we look at your Granite Wash operation over the balance of 2012 from a CapEx point of view. Is it one where maybe less capital is committed over the balance of this year in favor of your west Texas operations? Ultimately, maybe, could you share some thoughts on the Granite Wash itself? Is it something that -- is it an operation that could be considered a source of proceeds, whereby those proceeds are then recycled into west Texas to bring forward that NAV?

Our view of our Granite Wash is that it's distinctly different than a lot of the Granite Wash that a lot of our brethren talk about. We view it as a very very detailed, surgical drilling kind of a play. I think we'll probably run directionally more or less three horizontal wells out there for the rest of the year. We have picked up and drilled a couple of vertical wells for various reasons. I think Jerry mentioned we'll probably drop that, but if we need to, we could pick it back up, or pick up another rig. From a CapEx point of view, I think we're looking at it as a three-rig program for the year. It has a very high rate of return.

There is a lot of value-added drilling left to be done. The question of whether we would sell that to fund something else, we're obviously going to try and put money where it makes the most sense. I think selling the Granite Wash now would be premature with the value creation we've got, but we do have those kind of conversations about every asset we have. I just don't see it happening any time soon on the Granite Wash, but I never say never.

Thanks for that context. As a follow-up here on the economic break-even oil price for your west Texas operations, have you calculated internally there what the break-even oil price is, at least on your vertical Wolfberry operation, assuming, I guess, a $2.2-million well?

Yes, we've looked at that a number of different ways and it's crude oil, and there's a lot of natural gas liquids and a little bit of gas with that, and our hedging position kind of gives us a lot of financial stamina. We're pretty comfortable that we've hedged properly so we can maintain a drilling program, should we choose to, almost for the foreseeable future, without too much regard for pricing.

Got it. Thank you.

Thank you, Dan.

At this time, there are no further questions in queue. I would now like to hand the call back over to Mr. Randy Foutch for closing remarks.

Well again, I just wanted to thank everybody for taking time out of your busy day to participate on our call. We look forward to continuing growing the Company, and we look forward to continuing as we convert this potential into something with value. Thank you very much.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.