Laredo Petroleum ends Q4 with over $800 million liquidity, cuts debt

By Paul Deckelman

New York, Feb. 17 – Laredo Petroleum, Inc. ended the 2015 fourth quarter and full fiscal year with more than $800 million of liquidity and is confident that its energy reserves are more than adequate to provide sufficient collateral when its lenders conduct their semiannual redetermination of the borrowing base on the company’s revolving credit facility this spring.

The Tulsa, Okla.-based oil and natural gas exploration and production company and midstream services provider’s chairman and chief executive officer, Randy A. Foutch, told analysts during a Wednesday conference call following the release of results for the quarter and fiscal year ended Dec. 31 that “the steps we took early in 2015 to restructure our balance sheet and slash costs have paid off, as we operated approximately within cash flow during the second half of 2015.”

Foutch said that the company started the new year with more than $800 million in liquidity and hedges covering 85% to 90% of its anticipated 2016 oil production and 70% to 75% of its anticipated 2016 natural gas production.

He also noted that “we have no long-term debt due until 2022” and said that Laredo had again reduced its capital program in the face of weak oil prices “to better align expenditures with cash flow.”

Transactions cut total debt

As of the end of the quarter and fiscal year, Laredo’s balance sheet showed some $1.42 billion of long-term debt.

This included three series of outstanding senior junk bonds – $500 million of 7 3/8% notes due 2022 that the company sold in April of 2012, $450 million of 5 5/8% notes due 2022 that it sold in January of 2014 and $350 million of 6¼% notes due 2023 that it sold last year. The latter issue priced at par in a quick-to-market transaction last March 4.

Besides the outstanding bonds, the capital structure included $170 million drawn against its credit facility due 2018, which has a $1 billion elected commitment and a $1.15 billion borrowing base.

The year-end debt figure was down by some $363 million from the $1.78 billion of long-term debt on the balance sheet at the end of 2014. During the intervening year, in addition to tapping the capital markets for the new 6¼% 2023 notes, Laredo called all $550 million of its then-outstanding 9½% senior notes due 2019, which were redeemed on April 6, 2015 at a price of 104.75 plus accrued and unpaid interest.

Loan enough for needs

The company’s executive vice president and chief financial officer, Richard C. Buterbaugh, said that Laredo had achieved efficiency gains and service-cost reductions which have reduced its anticipated budgeted costs for its wells in the Wolfcamp geological formation in the Permian Basin drilling area in western Texas where the company operates.

He said he expects that “cash flow from operations will fund 75% to 80% of our budgeted capital expenditures. The balance is expected to be funded through our revolving credit facility, divestitures, or capital infusions.”

During the question-and-answer portion of the conference call following the formal presentations by Foutch, Buterbaugh and by Dan. C. Schooley, Laredo’s senior vice president for midstream and marketing operations, an analyst asked Buterbaugh and Foutch to elaborate on the possibility of divestitures funding operations – and if so, what kind?

The CFO said that what the company projected is “a slight outspend anticipated in 2016. We think we have sufficient liquidity on our credit facility today to handle that and really to do that for multiple years. But we continually look at utilization of that versus other options and what you have seen the company do in the past as far as divestitures from time to time as well as accessing the capital markets.”

Buterbaugh continued that Laredo would “look at each of those options as the need may occur – but our overall goal is that we're going to self-fund a significant portion of our capital program going forward.”

No borrowing-base problem

Another analyst wanted to know whether certain downward revisions the company made in the overall amount and value of its proved undeveloped (PUD) petroleum reserves – which Buterbaugh said were undertaken to give Laredo greater flexibility in deciding where to drill in order to generate maximum returns – would likely have any impact when Laredo’s lenders redetermine the borrowing base for the company’s credit facility this coming May.

The CFO replied that “we have always taken a very active approach with our banks within our credit facility, and we’ve also taken a fairly conservative approach.”

He noted that during the last two borrowing base redeterminations, “we’ve had a borrowing base assigned by our bank group well above what we actually elected in our total commitment. When we’re looking at making that elected commitment, we’re looking out at multiple redeterminations – not just looking at what is the value that we could get at the next redetermination.”

He cautioned that the value of the reserves associated with the borrowing base, as calculated by the lenders, differs from the PV-10 present value calculation that the company submits in its quarterly and annual filings to the Securities and Exchange Commission.

“The credit facility group gives credit for our hedges, which are substantial – as I said earlier, it’s about $280 million today in value.”

He also pointed out that the $1.15 billion borrowing-base that the lenders set at the last redetermination, back in the fall is mostly based on the value of the company’s proved developed reserves, rather than the undeveloped reserves where most of the revisions took place.

“With the large inventory [of potential drilling properties] that we have and with the success that we have had in our total acreage, where we have yet to drill an unproductive well, the banks recognized that the fact that our SEC reserves have gone down on a PUD basis does not impact the value enhancement opportunities that the company has in its overall drilling program for multiple years.”

He added that another large company asset – its 49% stake in the Medallion pipeline network in Texas – “is not part of our borrowing base today. And so, we believe that there is still substantial value supporting whatever the banks may choose in the next redetermination – but certainly, we have a very high level of confidence that we have adequate liquidity for multiple years with the type of programs that we’re running.”

Buterbaugh concluded that “we have reduced our capital program to be more in line with expected cash flow. We have a strong hedge position valued at more than $280 million today, protecting cash flow for multiple years. Our credit facility is underpinned with conservative reserve values, 95% of which is PDP [proved developed producing reserves].”

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