Laredo Petroleum Inc. has locked in pricing for most of its oilfield services operations through the rest of this year to counter inflation, but costs for the diesel fuel and chemicals needed to sustain them remain harder to predict.
“We worked with our service partners to lock in 85% of expected drilling, completions, equipment and facilities spend for the remainder of the year,” CEO Jason Pigott told analysts during Laredo’s earnings call for the first quarter of 2022.
Management also said operating costs have increased about $1.00/boe. The company has raised full-year capital spending guidance to $550 million, up 6% from $520 million reported in February.
Capital spending for 1Q2022 totaled $171 million, up year/year from $69.9 million. During 1Q2022, the company spent $146 million on drilling and completions; $5 million on land, exploration and data-related costs; $13 million on infrastructure; and $15 million on other costs.
“Oil prices have been exceptionally strong, and the industry is experiencing significant inflationary headwinds,” said Pigott. “We continue to drive efficiencies to offset the inflationary pressures and secure longer-term pricing where we can.”
COO Karen Chandler said locking in pricing for about 85% of operated 2022 capital spending “will significantly reduce uncertainty…and ensures we have access to equipment and crews necessary to execute on our development program.”
She said the 6% capital budget hike “fully incorporates the inflation that we have seen to date, contracted second half pricing and expected inflation on any areas that are not yet fully locked in for the remainder of the year.”
Diesel fuel and chemical costs make up the bulk of those areas in question, said Chandler. It is “very difficult to lock those in, and clearly, there could be some float in those components,” she said. “With diesel, for example, it’s going to be where the market goes.”
Chandler added the activity levels in the revised capital budget “are exactly the same as in the original budget. So we do not plan on increasing activity.” Activity levels assume running two drilling rigs and one hydraulic fracturing crew, she said.
The company holds about 166,000 net acres in the West Texas counties of Glasscock, Howard and Reagan. Management said the producer has eight years of drilling inventory with about 460 locations, assuming current development spacing and activity levels and a $55/bbl breakeven oil price.
Howard County Focus
Laredo turned to sales 18 Howard County wells during 1Q2022. It also released one drilling rig and one completions crew during the period. The firm is operating two rigs and one completion crew, with plans to complete 11 wells and turn seven to sales during 2Q2022.
“We continue to see solid well performance for both our base and new production in Howard and western Glasscock counties,” said Chandler. “We are especially encouraged with the production from the two Middle Spraberry appraisal wells completed late last year in the North Howard area.”
She said the company has included eight Middle Spraberry wells in the 2022 development plan, which focuses exclusively on Howard County.
“These wells will be incorporated into our current activity levels of two rigs” and one fracture crew, she said. “We are simply adding wells to current planned well packages in North Howard to benefit from the efficiencies inherent in larger packages. There are no changes to our start or completion counts for the year.”
Laredoon average produced 85,118 boe/d in 1Q2022, up year/year from 78,989 boe/d.
Average 1Q2022 sales prices were $3.15/Mcf for natural gas, $95.81/bbl for oil and $32.68/bbl for natural gas liquids (NGL). In 1Q2021, prices were $2.12 for gas, $58.48 for oil and $17.96 for NGL.
The company’s production mix is becoming oilier, with an estimated 49% oil cut for full-year 2022 output. In contrast, oil cuts for 2021 and 2020 were 39% and 31%, respectively.
Laredo posted a net loss of $86.8 million (minus $5.18/share) for 1Q2022, compared with a $75.4 million loss (minus $6.33) year/year. The latest results included a $200 million loss on hedging. Revenues for 1Q2022 totaled $532.4 million, compared with $250.2 million in 1Q2021.
In terms of guidance, Laredo is projecting average production rates of 85,000-88,000 boe/d or 2Q2022 and 82,000-86,000 boe/d for full-year 2022.
In addition to the seven Howard County wells expects to be turned to sales in 2Q2022, the company plans to turn to sales 15 in 3Q2022 and another 15 in the final quarter of the year. Capital spending guidance for 2Q2022 is $125 million.
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