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Laredo Petroleum: Leverage Being Reduced To Acceptable Levels

Mar. 02, 2021 7:16 PM ETVital Energy, Inc. (VTLE)13 Comments


  • 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

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This article was written by

Elephant Analytics profile picture
Aaron Chow, aka Elephant Analytics has 15+ years of analytical experience and is a top rated analyst on TipRanks. Aaron previously co-founded a mobile gaming company (Absolute Games) that was acquired by PENN Entertainment. He used his analytical and modeling skills to design the in-game economic models for two mobile apps with over 30 million in combined installs. He is the author of the investing group Distressed Value Investing, which focuses on both value opportunities and distressed plays, with a significant focus on the energy sector. Learn more>>

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Comments (13)

With $60-70 oil, what do you think LPI should be worth on a share price basis? Seems pretty cheap now with such a low p/e. My shares become LT capital gains in the Fall. Scary to have to wait, but earnings seem to be very robust. Was considering selling covered options that expire in the fall, but would I be giving up a lot of appreciation during that time period, or would I be playing it safe. What holding period should I be looking at to maximize gains on LPI?
@stocksman99 12-24 months from now.
Wells Fargo upgrades LPI to a "Buy" with target $46/sh! The ATM is paying off....Mgt let WF handle a $2MM ATM, and WF raises the Rating! The 'System' is working just fine.....HaHa!
@CHAZAGE both LPI and Wells Fargo defy the small investors.
So true that management has done a terrible job for investors, and they don't seem to care. Otherwise this stock should be so much higher, including today where its peers SM, CDEV and CPE are flying (each up 12% or more just today), while LPI is merely tracing back somewhat toward where it was 2 weeks ago.

Soostefan is right that LPI blew a golden opportunity last year to buy back bond debt when it was trading at extremely low levels. Sddmack is correct that the ATM announcement and its timing were absolutely horrendous. Daniel07 is spot on in observing that with different management the stock should be 300-400% higher. He's also right that a projected $15+/share EPS in 2022 (and likely $18-22/share in 2023 IMO) should translate to a higher stock price than the low $30s as it is today.

Elephant Analytics as always did a nice thorough presentation here. Though I think the valuation of $44/share is too low, mainly because I think $55/bbl oil is too low. Also the natural gas component is a wild card - it is being valued at virtually zero by the market, but if ng rises to $4/mcf and above, then LPI suddenly becomes a very lucrative natural gas play along with the oil.
Interesting. What sort of oil prices would you need to assume to get to $18-$22 of EPS in '23?
@18070142 I think that $65-70/bbl could do that for LPI, pretty easily. WTI is $64+/bbl right now and the world economies have yet to truly open up.

Also realize that one analyst is projecting $22+/share EPS for 2022, and 2022 still has LPI with perhaps 35% of their oil production "swapped" (pre-sold) at $47+/bbl.

So take off those hedges and push oil slightly higher from where it is now, and $18-22/share EPS is quite reachable in 2023. Or it was until the ATM share offering threatened to add 2 million or so new shares to LPI. But if LPI has a smart plan to use the cash generated (unlikely but who knows) then they might make up for the dilution via increased overall profitability.
@Bergerac Wow, that's some serious earnings power. What have you heard on the ATM. I assumed it was starting once announced but honestly don't know. Seems like a more orderly secondary would make more sense. With all the tailwinds seems like it would be easy enough to get done.
soostefan profile picture
Current management has done a poor job and definitely they do not work for shareholders.. Instead of using the fcf and facility to repurchase notes at deep discount in 2020 (bonds were trading between 0.3-0.4) they bought more land. They could have repurchased notes at discount and issue new debt in late 2020/ early 2021 to repay the facility. The lack of activist investors allowed a lot of value destruction in the oil and gas sector while management teams took home huge salaries and bonuses. Normally now we should have seen a proxy fight and a management change after so much value destruction...
Thank you for the great analysis!

I see on SA that analysts estimate EPS of $15.44 for next year for LPI. How can a company which generates EPS of $15.44 be valued at $40 ?? That is a P/E < 2.8

While it currently has a P/E < 2.07 :)

Why such a low valuation?? Under normal condition LPI should be worth over $125-$150.

The only topic I do not like about LPI is its management, who is not listening to shareholders to focus on free cash flow generation and faster debt reduction. That is why I currently do NOT own LPI. Maybe this is the cause of undervaluation :) Change the top management and the share price should increase by 300-400%.
@Daniel07 it has high leverage. You need to look at EBITDA or free cashflow to Ev
Thanks for the article. Was there any specific reason they couldnt hold off until 2nd or 3rd qtr to announce the ATM? Terrible timing for the shareholders....especially if OPEC also announces increases in production this thursday.

/owner with a cost basis in the 12s
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