Laredo Petroleum: Leverage Being Reduced To Acceptable Levels
Summary
- Laredo is projected to generate $48 million in positive cash flow in 2021 at current strip prices after hedges.
- 2021 hedges have an estimated negative $145 million in value at current strip.
- Laredo's net debt is projected to end up a bit over $1 billion by the end of 2021, which is under 2.0x unhedged EBITDAX based on $50 WTI oil.
- Laredo's Howard County inventory is strong with $50s oil, and its legacy inventory also has value at current commodity strip prices.
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Laredo Petroleum (LPI) is working on reducing its debt and rebuilding its oil production levels after it limited development activities due to the pandemic. Laredo's oil production fell from 31,241 barrels of oil per day in Q2 2020 to 21,929 barrels of oil per day in Q4 2020, but it expects to boost average oil production back over 30,000 barrels per day during the last three quarters of 2021.
Laredo's leverage should drop below 2.0x unhedged EBITDAX by the end of 2021 based on $50 WTI oil. The current commodity pricing environment also potentially gives some value to its legacy inventory again. While it still needs to continue to work on its debt, a $50s oil environment is favorable to Laredo's stock.
Various Transactions
Laredo recently announced a $75 million at-the-market equity program. The proceeds from that offering can help reduce Laredo's credit facility debt, which should also be moderately reduced by its 2021 positive cash flow. At Laredo's current $33 share price, the offering would add approximately 2.3 million shares to Laredo's outstanding share count, bringing that up to approximately 14.3 million shares outstanding.
Laredo also repurchased $61 million principal in outstanding bonds for $38 million in aggregate consideration (excluding accrued and unpaid interest) in Q4 2020.
2021 Outlook
Laredo's oil production is expected to average around 28,300 barrels per day during 2021, while its total production is expected to average around 82,500 BOEPD during the year. This includes Q1 2021 production that was noticeably affected by the freezing weather in the Permian, reducing its Q1 2021 oil production by approximately 3,000 barrels per day and its total production during the quarter by approximately 8,000 BOEPD.
Laredo's guidance suggests that its total production may average approximately 85,000 BOEPD during the last three quarters of the year, while its oil production may average approximately 30,000 barrels per day during that time.
Source: Laredo Petroleum
Thus, at current strip prices (including approximately $59 WTI) oil, Laredo may be able to generate around $893 million in revenues before hedges.
Source: Laredo Petroleum
Laredo's 2021 hedges have around negative $145 million in estimated value at current strip prices. Laredo has around 71% of its oil production hedged with swaps at approximately $51 Brent oil. Laredo also has swaps covering around 56% of its production of NGLs, and these swaps are mostly well underwater due to a hefty increase in the strip for the various components of NGLs.
| Barrels/Mcf | $ Per Barrel/Mcf (Realized) | $ Million | |
| Oil | 10,329,500 | $59.00 | $609 |
| NGLs | 9,402,225 | $16.00 | $150 |
| Natural Gas | 62,284,640 | $2.15 | $134 |
| Hedge Value | -$145 | ||
| Total Revenue | $748 |
With $360 million in capital expenditures, Laredo would end up with around $700 million in cash expenditures in 2021. Thus, it is projected to have $48 million in positive cash flow at current strip prices.
| $ Million | |
| Lease Operating Expense | $94 |
| Production and Ad Valorem Taxes | $63 |
| Marketing and Transportation | $47 |
| Cash G&A | $40 |
| Interest | $96 |
| Capital Expenditures | $360 |
| Total Expenses | $700 |
Between the positive cash flow in 2021 and the proceeds from its at-the-market equity offering, Laredo may be able to reduce its net debt to approximately $1.025 billion by the end of 2021.
This would be approximately 1.9x its unhedged EBITDAX at $50 WTI oil and 1.7x its unhedged EBITDAX at $55 WTI oil. This is also based on its EBITDAX with 85,000 BOEPD (30,000 barrels of oil per day) of production, which is around its expected average during the last three quarters of 2021. This also assumes a modest reduction in realized prices for NGLs and natural gas compared to 2021 strip prices.
Valuation
The stronger commodity price environment and Laredo's ability to push its leverage below 2.0x have resulted in its bonds trading at close to par again. Laredo's stock may have some further upside in a $50s oil environment as well.
Laredo is currently valued at around 2.8x unhedged EBITDAX at longer-term $50 WTI oil, which appears to be close to fair value for that oil price. The same multiple with longer-term $55 WTI oil would make it worth approximately $44 per share.
A bump up to a 3.0x unhedged EBITDAX multiple would make Laredo worth around $40 per share in a long-term $50 WTI oil scenario and around $52.50 per share in a long-term $55 WTI oil scenario.
Conclusion
Laredo Petroleum looks to be in decent financial shape now, with its unsecured bonds trading at close to par, and its leverage potentially dropping below 2.0x unhedged EBITDAX (at $50 WTI oil) by the end of 2021. Laredo will still need to continue working on improving its balance sheet though, as a downturn in commodity prices would leave it vulnerable.
Laredo's stock does appear to have some additional upside in a steady $50s oil price scenario. It can generate quite strong returns from its Howard County inventory at that oil price. As well, its legacy inventory becomes relevant again with $50s oil and the improved prices for natural gas and NGLs.
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