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Laredo Petroleum Will Likely Continue Making Acquisitions

Apr. 04, 2022 6:53 AM ETVital Energy, Inc. (VTLE)23 Comments


  • Laredo Petroleum's rapid transformational strategy is about to show some big benefits.
  • The opportunistic acquisition of smaller lease positions is likely to continue.
  • Smaller lease positions tend to sell at a considerable discount even in "hot" markets.
  • Laredo's management pieced together small lease positions into a far more valuable larger contiguous position.
  • Good managements tend to surprise on the upside. Shareholders should expect more pleasant surprises from LPI.
  • This idea was discussed in more depth with members of my private investing community, Oil & Gas Value Research. Learn More »

Rise in gasoline prices concept with double exposure of digital screen with financial chart graphs and oil pumps on a field.

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The way the management of Laredo Petroleum (LPI) has opportunistically pursued acquisitions, shareholders will likely benefit significantly from a continuation of the strategy. So far, the debt ratings of the company debt have increased while the percentage

I analyze oil and gas companies like Laredo Petroleum and related companies in my service, Oil & Gas Value Research, where I look for undervalued names in the oil and gas space. I break down everything you need to know about these companies -- the balance sheet, competitive position and development prospects. This article is an example of what I do. But for Oil & Gas Value Research members, they get it first and they get analysis on some companies that is not published on the free site. Interested? Sign up here for a free two-week trial.

This article was written by

Long Player profile picture

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA.

He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of LPI either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (23)

Looks like short is certainly the way to go here
Stadtmueller profile picture
Excellent article Long Player, I'm holding 40 short put contracts at $75 strike, expiring 5-20, breakeven $68.70, looks like I'm in pretty good shape for now.
Pete Palmer profile picture
Was telling an associate a few days ago that LPI's legacy gassy acreage is jumping in value. It's been a long road for LPI, but they have made strong moves that will payoff in 2023.
@Pete Palmer But does LPI management appreciate its own gassy legacy acreage? It seems to me that they just want to buy more oily acreage at the top of the market using severely undervalued shares as currency, hedge the future oil production at $50-60/bbl despite oil being over $100 in the spot market, drill the oil and call it a day.
Long Player profile picture
@Bergerac Look at it this way, the initial acreage they got became hundreds of millions more valuable (before the oil price rise) just by adding that 20,000 or so acres to it. Done correctly, and not many do, taking sub optimal parts and putting them together like they did is going to be worth a ton of money in terms of far better profitability than many competitors.
Most competitors do not put location cost into the well breakeven. There are a lot of people paying $3 million to $6 million per drilling location. Pioneer is a prime example of this. They tout the wells profitability as if you never have to pay for the land. Here, that is not an issue. Land costs are far cheaper for comparable well profitability. That is exactly what you pay management to do.
IN doing what they have been doing, the price of the stock is up from single digits. Now the rally in and of itself is responsible for some of that. But this management has set you on a course for years of much better profitability. Already you have a much better profit picture for this year and that oil produced percentage will climb probably for years to come.
Pete Palmer profile picture
@Long Player The acquisitions LPI made also increased the value of their existing acreage because they increased the amount of contiguous acreage. The more contiguous acreage, the more wells drilled with longer laterals.
This is not the time for LPI to be acquiring additional acreage. The best time to acquire acreage was 2020, while 2021 was an "ok" time to acquire it. With WTI crude near $100/barrel, forget about it. Even for smaller properties, they are going to want top dollar compared with the prior two years.

Furthermore, LPI shares are undervalued vs. peers by almost any metric. Compare them on a price/sales basis or projected price/earnings basis vs. similar stocks such as CDEV or SM, and they are only 50-60% of the valuation of those stocks. So not only is this not a great time to buy acreage, it's not a great time for LPI to use its shares as currency. If LPI traded at $150/share, then maybe they could be thinking about using their shares to make acreage acquisitions.

And I don't agree that LPI is somehow short of acreage. They had plenty of legacy (natural gas-rich) acreage before Pigott became CEO, as noted by SailingStone on February 14, 2019. After Pigott became CEO, LPI has added large amounts of oil-rich acreage (they claim 8 years worth, at the current rate of drilling), and they still have most of their legacy acreage (other than 37.5% of their producing acreage as of July 1, 2021). And as you point out, rising natural gas prices make LPI's legacy acreage all the more worthwhile for additional exploration and production.

Also, holding unused acreage has its own costs. As a business, you pay for inventory that you don't use. LPI still has a lot of debt. Financing acreage buys now for use far into the future, doesn't make sense to me. And as noted, using undervalued shares to purchase acreage would be as bad or worse than financing it with debt. LPI has many thousands of acres now, and doesn't need to pile up even more at this point, just for potential use far in the future.

Bottom line, I don't see the rush to add even more acreage here, at what could be the top of the oil-rich acreage market. And with natural gas prices rising, it's time for LPI to respect their legacy acreage as very drillable for the future. As an LPI shareholder, I would hate to see my shares diluted at the current rather low price (vs. peers) in order to buy high-priced acreage that probably isn't needed any time within the next 10-20 years.
Limestone Cowboy profile picture
I don't know, @Long Player, it's tough to get excited about 150mbo 365 day cumulatives. Only at $100 oil does that make a ton of sense to me, but not in light of the opportunity costs. CDEV and some of the smaller Delaware basin operators have a lot more potential in this price deck. With gas pricing quietly sneaking above $5/mcf and on the way to 7-8$, gassier, high IP acreage retains its shine. DVN, OXY, and EOG are putting up numbers that put midland basin to shame. Even if costs are 50% higher per well, 5000BOPD IPs put a lot of money back on the balance sheet quickly.

M&A in Permian is pretty dead, with the bid/ask spread between buyers and sellers blowing out, and every acre under some kind of existing capital structure that someone probably paid too much for.

Go West, young man, and you will find your fortune.
Limestone Cowboy profile picture
@Long Player Agreed, I don't think you can go wrong here, as oil is headed to $150-175/bbl after the strategic reserves release authorization ends. The Russian crandangle has enlightened our political class about the benefits of natural gas, and I think the secondary bench potential is going to big. Wolfcamp D wells coming on at 2500BOPD and 15MMSCF will be huge for the operators and pipeline companies. It's pretty homogeneous, and underlies the vast majority of all acreage positions in the northern Delaware.
Long Player profile picture
@Limestone Cowboy the other thing I saw (and am watching) was the Reeves county crowd was getting dinged about $10 a barrel back in 2018 due to lack of midstream capacity. That was not happening with LPI, REI and the rest. Now what it takes to stay out of that is another matter. Shell did cancel a contract on LPI and they won about $40 million in court for the breech of contract. But am watching the pipelines to see what happens this time around.
@Long Player I looked at their presentation, but it's difficult to understand what portion of their production is hedged. Can you help me out?
Long Player profile picture
@mil6 About 78% and they are loosening those hedges as the financial strength goes up.
@Long Player Quite a lot compared to some peers. But if oil stay strong in 2023, they should profit massively.
Long Player profile picture
@mil6 The financially weaker they are, then the more they hedge. General rule.
04 Apr. 2022
Acquisitions, that will either carry more debt or delay or slow down the payment of debt. not good in the shorterm, better for only longterm.
Long Player profile picture
@blure The acquisitions have been made with a combination of stock and debt and have improved the debt ratio considerably.
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