Based in Tulsa, Oklahoma, Laredo Petroleum Holdings (proposed LPI) scheduled a $333 million IPO with a market capitalization of $2.375 million at a price range mid-point of $19 for Thursday, December 15, 2011.
LPI is one of the few private equity-backed energy plays that we find interesting.
Sales were up 136% for the nine months ended September 2011 to $371mm from $157mm for the year earlier period. Earnings were up respectively 104% to $104 million from $51 million.
Endorsement from shareholders
Unlike most energy IPOs, LPI is only selling 14% on the IPO, which is an endorsement from current shareholders.
Endorsement from lenders
In addition, LPI has been able to secure considerable debt including $550 million of senior notes and a credit line of $712 million of which $375 million is currently utilized. IPO proceeds of $309 million at the price range mid-point of $19 are allocated to paying down the credit line.
Low P/E ratio for a fast growing enterprise
LPI has a relatively low annualized price/earnings multiple of 17 for a fast growing exploration and production energy company.
We believe LPI will edge up after the IPO and would indicate for it on the IPO.
LPI is an independent energy company focused on the exploration, development and acquisition of oil and natural gas in the Permian and Mid-Continent regions of the United States.
LPI’s activities are primarily focused in the Wolfberry and deeper horizons of the Permian Basin in West Texas and the Anadarko Granite Wash in the Texas Panhandle and Western Oklahoma, where LPI has assembled 127,041 net acres and 37,740 net acres, respectively.
These plays are characterized by high oil and liquids-rich natural gas content, multiple target horizons, extensive production histories, long-lived reserves, high drilling success rates and significant initial production rates.
Based upon drilling results from over 660 of gross vertical wells, LPI believes its economic vertical program in these areas has been largely de-risked.
LPI’s vertical development drilling activity is complemented by a rapidly emerging horizontal drilling program, which may add significant production and reserves in multiple producing horizons on the same acreage.
These drilling programs comprise an extensive, multi-year inventory of exploratory and development opportunities. As of November 25, 2011, LPI has drilled 25 gross horizontal wells in the Permian and 12 gross horizontal wells in the Anadarko Granite Wash.
“LPI’s senior secured credit facility and the indenture governing the senior unsecured notes prohibit LPI from paying cash dividends.”
Borrowing base increase
On October 28, 2011, LPI’s lenders approved an increase of the borrowing base under the senior secured credit facility from $650.0 million to $712.5 million. As of November 25, 2011 LPI had $375 million outstanding under the facility.
Senior unsecured notes offering
On October 19, 2011, Laredo Petroleum, Inc. completed an offering of $200 million of senior unsecured notes to eligible purchasers in a private placement. The notes were issued under the same indenture and are part of the same series as LPI’s $350 million of senior unsecured notes issued on January 20, 2011. As of November 25, 2011, LPI had $550 million of senior unsecured notes outstanding.
Acquisition of Broad Oak Energy, Inc.
On July 1, 2011, LPI completed the acquisition of Broad Oak, which became a wholly-owned subsidiary of Laredo Petroleum, Inc. Broad Oak was formed in 2006 with financial support from its management and Warburg Pincus. On July 19, 2011, LPI changed the name of Broad Oak to Laredo Petroleum—Dallas, Inc.
Capital expenditure program
Following the Broad Oak acquisition, LPI’s board of directors approved a revised capital expenditure budget of $188 million for the fourth quarter of 2011. On November 9, 2011, LPI’s board of directors approved a budget of $757 million for the calendar year 2012, excluding additional acquisitions. Approximately 92% of the budget for the remainder of 2011 and 2012 will be targeted for drilling and completion operations, 97% of which are concentrated in LPI’s Permian Basin and Anadarko Granite Wash plays.
Demand for oil and natural gas generally decreases during the spring and fall months and increases during the summer and winter months. However, seasonal anomalies such as mild winters or mild summers sometimes lessen this fluctuation.
In addition, certain natural gas users utilize natural gas storage facilities and purchase some of their anticipated winter requirements during the summer. This can also lessen seasonal demand fluctuations. These seasonal anomalies can increase competition for equipment, supplies and personnel during the spring and summer months, which could lead to shortages and increase costs or delay LPI’s operations.
The oil and natural gas industry is intensely competitive, and LPI competes with other companies in its industry that have greater resources than LPI, especially in LPI's focus areas
PRIVATE EQUITY CONTROLLED
LPI is 93% owned by Warburg Pincus Private Equity pre-IPO
USE OF PROCEEDS
Of $309 million is allocated to repay debt