How Strong Is the Outlook for Laredo Petroleum?

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Independent oil and gas producer Laredo Petroleum Inc. (NYSE: LPI) has a reputation as one of the most efficient producers in the Permian Basin, where it sits on proved reserves of more than 125 million barrels of oil equivalent. In a presentation last week to investors and analysts, the company increased its production guidance for 2016 by 6% and reduced its estimate on unit lease operating expenses by 7% at the midpoint of the $4.50 to $5.25 per barrel range.

The company said that it had knocked an average of 23% off its drilling and completion (D&C) costs since the end of 2015. D&C costs have fallen from $5.9 million to $4.6 million per 7,500-foot lateral well and sand costs have fallen from $1.1 million per well to $800,000. For a 10,000-foot lateral well, D&C costs have dropped from $6.8 million to $5.4 million and sand costs are down from $1.4 million to $900,000.

Laredo said that it has evaluated 2,800 drilling locations and identified more than 1,500 that will yield a greater than 10% rate of return at current prices. The company said it has drilling inventory of at least 30 years at $50 a barrel for West Texas Intermediate (WTI) crude.

Last week, analysts Brian Downey and Lloyd Byrne at Nomura Securities raised their price target from $10 to $11 and maintained their Neutral rating on the stock. They concluded that nothing the company said during the presentation contained any “thesis-changing” elements. They noted, however, some discussion among other attendees on both the bull and bear sides of the outlook for Laredo:

Bulls’ theses included the commodity upside leverage to the company’s efficient, contiguous acreage footprint, upside to NGL pricing, management’s strong strategic track record, and the idea that “absolute multiples don’t matter if crude’s moving higher.’ Bears’ arguments included [Laredo’s] more rich valuation relative to growth vs. Permian peers, lower oil cut in eastern Glasscock & Reagan Counties, and lack of strong growth visibility as this year’s strong hedges partially wane next year.

Rob Thummel, portfolio manager at Tortoise Capital, had an interesting note Tuesday morning on what makes the Permian Basin unique among U.S. shale plays:

[M]ost oil and gas basins only have one or two prospective layers of successful drilling opportunities. In addition, the Permian has experienced the most significant improvements in drilling productivity. For example, since 2014, Pioneer [Natural Resources Inc. (NYSE: PXD)] has reduced its drilling cost per foot by over 30% as well as recently increasing the volume of oil they expect to recover by 35%. Lower costs and higher recovered volumes reduce the absolute oil price required to economically produce oil allowing Pioneer and others in the Permian Basin to grow production volumes and gain market share in 2016, 2017, and beyond.

In its investor presentation, Laredo said it has lowered horizontal drilling costs by approximately 35% per foot.

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Laredo stock was started at Overweight Tuesday morning at Barclays with a price target of $14. The consensus price target on the stock is $12.09 and the 52-week range is $3.90 to $14.39.

Shares traded down about 0.8% in the late morning Tuesday at $11.29.