With oil prices on the rebound, Permian Basin pure-plays Laredo Petroleum Inc. and Parsley Energy Inc. reported taking different approaches toward getting into free cash flow (FCF) sooner rather than later.
Tulsa-based Laredo updated its operating plan -- and raised its capital expenditures (capex) after restructuring its oil hedges for the remainder of fiscal year (FY) 2019 and FY2020. The move ensures that the company will secure additional cash flow and focus on growing its overall production by 11% year/year. It also comes less than one month after the company shed about 20% of its employees and named new executive leadership.
Under the updated plan, the weighted-average West Texas Intermediate (WTI) floor price was raised to $60.42/bbl for the rest of FY2019 and $58.79 for FY2020. Previous hedges had the weighted-average WTI floor price at $47.91 for FY2019 and $47.27 for FY2020.
Laredo’s capex is now set at $465 million in 2019, with $400 million for drilling and completion (D&C) and $65 million for production facilities, land and other costs. The company last February had trimmed overall capex to $365 million.
Laredo said it now expects to be cash flow positive beginning in 2Q2019 and to balance cash flow and capex for the full year. Although Laredo's moves are designed to reinvest in the business to mitigate a decline in commodity prices, CEO Randy Foutch disclosed that the company had considered other options, including paying down debt and returning capital to shareholders.
"Obviously, all of those options were on the table and considered," Foutch said during an earnings call on Thursday. "We're still in 2019 drilling well within cash flow -- cash flow neutral. And we think this substantively puts us in a very good position going forward, of having more free cash flow and actually more growth."
CFO Michael Beyer said capex is expected to be flat in 2020 and "about flat again" in 2021, compared to 2019. "Really, what we're doing today is to set this up to start growing oil as we go through 2020 and especially into 2021," he said.
Laredo reported record production of 75,276 boe/d in 1Q2019, up nearly 19% from the year-ago quarter and 6.5% sequentially; the product mix was 37.4% oil, 31.6% natural gas and 31% natural gas liquids. Production is expected to average 78,500 boe/d (36% oil) in 2Q2019.
During the first quarter, Laredo completed almost 20 net horizontal wells with an average completed lateral length of 10,900 feet. The wells were completed as two 10-well packages and were the last of the tight-spacing packages that the company had drilled previously.
Laredo plans to complete in two packages, 11.5 net horizontal wells developed under a wider-spaced plan in 2Q2019. The updated plan calls for Laredo to deploy two rigs to spud 34 wells and complete 32 wells through the rest of the year.
Laredo reported a net loss of $9.5 million (minus 4 cents) in 1Q2019, compared with net income of $86.5 million (36 cents) in the year-ago quarter. Revenues totaled $208.9 million, versus $259.7 million in 1Q2018.
Austin, TX-based Parsley reaffirmed plans it outlined last February, based on $50 WTI, to spend $1.35-1.55 billion on capex in 2019, with a focus on developing acreage in the northern part of Midland County in West Texas. Full-year production guidance of 124,000-134,000 boe/d is also unchanged.
Parsley said its rate of return-driven approach to well selection is designed to accelerate FCF. The company said it is on track with improving capital efficiency by 8-10%, with improved drilling efficiency in the Midland and Delaware sub-basins of the Permian by about 15% sequentially, and increased footage drilled/rig by about 10% versus FY2018 levels.
"As a reminder, this plan was underwritten on $50 WTI oil with an aim to deliver improved capital efficiency, disciplined oil growth and progress towards sustainable free cash flow by the end of the year," CFO Ryan Dalton said during an earnings call on Thursday. "Oil prices are north of $50 today, but I want to reiterate that Parsley has no plans to increase 2019 equipment levels beyond our baseline budget. If oil prices hold, it simply provides an opportunity to compress our timeline to self-funded growth."
CEO Matt Gallagher added "we are in a market that recognizes actions and has little patience for words." He then weighed in on the growing belief that the Permian could see a spate of large mergers and acquisitions.
"Recently, there has been a growing narrative that sufficient scale is needed to efficiently compete in shale," Gallagher said. "We agree and believe we are living in that scale sweet spot of sorts."
"There are more than 50 operators in the Permian running two rigs or fewer. It is tough to compete at that size. We know because that was us many years ago...However, in our view at a certain point the marginal operational benefits of scale begin to level off. A move from two rigs to 12 rigs can have a tangible benefit to cost structure and efficiency levels, but a move from 30 rigs to 40 rigs is less likely to move the needle on those fronts.
"Furthermore, pushing into mega-scale territory may start to introduce unique challenges of its own erasing many benefits of shales short cycle unconventional resource playing model."
Production averaged 125,400 boe/d in 1Q2019, up 34.2% from the year-ago quarter and 4.6% sequentially. Natural gas production averaged 116.5 MMcf/d in 1Q2019, up 22.6% from the year-ago quarter and 8.2% sequentially. Oil production averaged 78,900 b/d in 1Q2019, up 33% year/year and 2.5% sequentially. The company said it expects oil production to average 81,000-85,000 b/d in 2Q2019.
Parsley placed 34 operated horizontal wells into production, with 25 in the Midland. The company expects development activity to be more heavily weighted toward the Midland for the remainder of the year. The company dropped two rigs and expects to run a 12-rig program and up to four completion crews for the rest of 2019.
Parsley reported a net loss of $24.1 million (minus 9 cents) in 1Q2019, compared with year-ago net income of $82.9 million (32 cents) in the year-ago quarter. Revenues totaled $427.7 million, versus $392.7 million in 1Q2018.