May 10, 2012
Operator
Good day, ladies and gentlemen, and welcome to the First Quarter 2012 Laredo Petroleum Holdings Inc. Conference Call.
My name is Karis, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes.
It is now my pleasure to introduce your host for today's event, Mr. Randy Foutch, Chairman and Chief Executive Officer.
You may proceed, sir.
Randy Foutch
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.
W. Womble
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 Foutch
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 prospects -- our progress and they have recently upgraded our corporate and note issue ratings.
Randy Foutch
We intend to leverage these Laredo strengths to continue our exploration and development of our expanding potential location opportunities set in the Permian and Anadarko basins. We believe we are successful in making progress in really 3 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 we'll 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.
Jerry Schuyler
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 Synergy 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 8 vertical and 4 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 and the lateral links in all of our horizontal wells.
That's both for the Cline and for the Wolfcamp.
Jerry Schuyler
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 2 dozen wells, the results continue to meet our expectations. In the Granite Wash play in the Panhandle, we are running 4 rigs; 3 horizontals and 1 vertical.
And after we finished 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.
W. Womble
Thanks, Jerry. I'd like to emphasize some of the things that Randy did 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 2-stream basis.
We leave the value of our natural gas liquids in the natural gas stream. And second, all of our reporting all the way back to Day 1 is going on a combined company basis.
It reflects the acquisition of Bronto that we made in July 2011. Since Laredo and Bronto were primarily owned by Warburg Pincus, they’re reflected -- all of our results are reflected as one combined company.
W. Womble
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 continue to grow as well, driven by the growth in production and our strong price realizations and hedging transactions.
W. Womble
As an indication of our increasing efficiency, EBITDA grew in 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.
W. Womble
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 increases in our borrowing base since the inception of the company as we continue to increase production and as we acquired Bronto in mid-year last year.
The borrowing base has increased from $650 million, immediately following after the Bronto acquisition in July 2011, to as high as $910 million in April of this year, before it was reduced to $785 million, its current level, in order to reflect the $500 million of senior unsecured notes that we issued at the end of last month.
W. Womble
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 agency since we sold our first note in January 2011. Moody's now has us at a corporate rating of B1 and a note rating of B3, and Standard & Poor's has us at B+, B-.
W. Womble
So 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.
Randy Foutch
Thanks, Jerry. Thanks, Mark.
We think we have an attractive company, and we think the investment opportunity is also attractive, and 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'd characterize as oil and liquid-rich plays.
Randy Foutch
Mark addressed our significant liquidity, and again point out that Laredo has a very, very strong hedging position in terms of several years out. So 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.
Then 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
[Operator Instructions] And your first question comes from the line of Brian Singer with Goldman Sachs.
Brian Singer
I may have missed some of your opening remarks there. I apologize.
But if you didn't comment on it, could you talk about how we should think about the quarterly trajectory of CapEx over the last few quarters relative to what we saw for the first quarter?
W. Womble
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. And as we mentioned in the news release, that included not only the capital expenditures that we paid in accrued for the wells spud in the first quarter, but it also included the amounts 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, 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.
Brian Singer
Okay, that's helpful. And then 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 then maybe why?
Randy Foutch
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, as we've made the frac stages slightly more dense, in other words less space in between them, we've seen an increase in IP.
The question we have is, does that necessarily translate into better economics? And does an initial, faster production rate translate into longer EURs and better first year, second, third-year rate of return numbers?
So 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're going to need a lot more data before we feel comfortable saying much more than that.
Jerry Schuyler
Yes. And the data, Brian, is in that last -- the OGIS presentation you have a couple of 6,000-foot long laterals with the higher density fracs, so there's actual data out there if you want to look at it.
Brian Singer
Okay. So your comment is based on, it's consistent with that as supposed to -- versus anything incremental since then?
Randy Foutch
Why don't we just leave it at what we said, Brian. I don't want to get into too much specifics or even point to a single well or 2.
Operator
And your next question comes from the line of Joe Allman with JPMorgan.
Joseph Allman
So 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?
Randy Foutch
We're pleased with the acreage position we've gotten. I think in the areas that we work, acreage is getting to be -- getting 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. And we like the acreage business we have.
I wouldn't say we're not going to get a lot more, but I'm thinking it's probably less likely given the industry competition.
Joseph Allman
And this acreage that you bought in the first quarter, is that targeting a specific play or...
Randy Foutch
Yes, it is targeting a specific play.
Joseph Allman
Any details around that? Or no, you just want to keep it tight for competitive reasons?
Randy Foutch
Yes, Joe. I think that's one we'll probably -- we're using what we consider some proprietary data, some proprietary knowledge.
And it’s going to be acreage that will be in our ballpark and in our backyard.
Joseph Allman
Got. Okay, very helpful.
And then just another question, if I could. Can you just review the -- so the rig plan for the Investor Day of this year, could you just review that for us?
Randy Foutch
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.
Joseph Allman
Yes. Okay.
And then lastly, any -- just any incremental data from the last conference call or conference regarding service costs or any constraints you're seeing?
Randy Foutch
I don't think we're seeing any constraints. There may have been some actual -- Jerry, some slide caused decreases on frac-ing, freeing up a couple of areas.
But we haven't seen any increase. And I don't think we've seen significant decreases.
But that may be directionally, some.
Operator
[Operator Instructions] And your next question comes from the line of Richard Tullis with Capital One Southcoast.
Richard Tullis
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 through the cash flow, deficits beyond this year? I mean, will it be mainly using the current credit facility with expectations that it grows, or how do you look at that?
Randy Foutch
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. And I think we tried and balanced that CapEx cadence with risk and knowledge.
And so we've not signed long-term, very many long-term contracts, if any, or so on and so forth. So we've got flexibility.
Plus, with our hedge position, we have a great deal of stamina and comfort. So 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.
W. Womble
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.
So we're always paying close attention to what's available out there in the capital markets. But sitting on over $1 billion of liquidity right now, we think we're well financed for the next couple of years, but that doesn't mean he won't stop watching it.
Richard Tullis
Okay. And Randy, you'd mentioned acreage cost in your core Permian areas getting a bit pricey.
What is the -- what is it running these days that you guys are seeing in acreage costs and royalties?
Randy Foutch
We've 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. And we've not confirmed but we hear stories of acreage out there going for $500, maybe higher.
Pat, do you want to comment on that acreage?
W. Womble
We've seen acreage cost go as high as $1,200 to $1,500 an acre out there. Our first quarter well cost, including brokers, was $512 an acre.
Richard Tullis
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?
Randy Foutch
We had one workover in the first quarter that was on one of our very, very high value wells. And that, that one workover, cleaning out pump that sanded up, was a total cost of about $1.6 million or so.
We think that's a onetime 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 issued, we’re still -- we look at that often but we're still hanging with the guidance on LOEs.
Richard Tullis
Okay. And lastly, did you mention when you plan to test that new acreage?
Randy Foutch
No, we didn't mention it, and I think we're still -- we'll put that in the queue 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 in the new acreage.
One, to buy the new acreage, and then 2, to put much capital in. We have to continue to think that it's a similar or more value than what we could put capital elsewhere to work
Operator
And your next question comes from the line of Dan McSpirit with BMO Capital Markets.
Dan McSpirit
On the Granite Wash, how should we look at your Granite Wash operation over the balance of 2012? On 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?
And then ultimately, maybe could you share some thoughts on the Granite Wash itself? Is it something that's -- 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?
Randy Foutch
I'll answer that. The -- 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 very, very detailed surgical drilling kind of a play. I think we'll probably run directionally more or less 3 horizontal wells out there for the rest of the year.
We have picked up and drilled a couple of vertical wells for various reasons. And 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.
So from a CapEx point of view, I think we're looking at is a 3-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. So 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 pretty mature with a 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 anytime soon on the Granite Wash, but I never say never.
Dan McSpirit
Right. And then us a follow up here, on the economic breakeven oil price for your West Texas operations, have you calculated internally there what the breakeven oil price is, at least on your vertical Wolfberry operation?
Assuming, I guess, a $2.2 million well.
Randy Foutch
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.
So we're pretty comfortable that we’ve hedged properly so we can maintain the drilling program, should we choose to almost for the foreseeable future without too much regard for pricing.
Operator
And at this time, there are no further questions in queue, and I would now like to hand the call back over to Mr. Rany Fourtch for closing remarks.
Randy Foutch
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.
So thank you very much.
Operator
And ladies and gentlemen, that concludes today's conference. Thank you for your participation.
You may now disconnect. Have a wonderful day.