At work and on my iPad so don't have time to go through this article.Im sure it will have something relative in it.Also I don't think I have posted this before it's been sitting in my LPI file.There has been discussions about "net back" etc and costings of which I am no specialist. This rundown on LPI numbers and costs as well as "net back" talk should be in order and good for some comparisons or at the very least something which GGP can aspire to in the PB.
Investment Thesis We are initiating coverage on Laredo Petroleum with an OUTPERFORM rating. We fall back on our old and general investment thesis for guidance in the current environment of heightened volatility: we recommend investors be long those producers that have captured inventories of low-cost, low-risk reinvestment opportunities. This describes the Laredo story in no uncertain terms, one rooted in the oil-rich and proven Permian Basin where the company retains ~135k net acres prospective for the Wolfberry (vertical), Wolfcamp Shale (horizontal) and Cline Shale (horizontal), among other intervals in what is a prolific oil stack. To this we add exploration appeal and a management team led by Mr. Randy Foutch, who has “been there, done that.” There’s not much history to Laredo as a publicly traded entity (IPO in December; ~23MM shares priced at $17 per share), but the track record of management is long. So, too, is the backing of private equity. To understand Laredo Petroleum is to understand the history of management is to understand the process of creating value through resource exploitation, ultimately to be realized through the sale of the enterprise. That is at once the framework and appeal of the Laredo story, in our opinion. What follows are the tenets to our investment thesis, from management’s background to a sketch of the asset base to thoughts on valuation. Deeper in the report you will find greater analysis on much of the same. o Been there, done that and doing it again – The story of Laredo Petroleum begins with Mr. Randy Foutch, CEO. Mr. Foutch has more than 30 years of experience that includes the formation, capitalization and sale of two other independents. In 2001, Mr. Foutch founded Latigo Petroleum, Inc., and served as its president and CEO. The company was sold to Pogo Producing Co. in May 2006 for ~$750 million (~$360 million capitalization). In 1996, Mr. Foutch founded Lariat Petroleum and served as its president. Lariat was sold to Newfield Exploration (NFX, OUTPERFORM) in 2001 for ~$333 million (~$174 million capitalization). Mr. Foutch is serving on the board of directors of Helmerich and Payne (HP, $52.22, OUTPERFORM, by Michael Mazar). Besides management, the common denominator with all three companies – Laredo, Latigo and Lariat, or the “L” companies as they are generally referred – are West Texas and the Midcontinent regions or, less generally, the Permian and Anadarko basins. This is where each company leased acreage. This is where each company drilled oil wells. From this activity Latigo and Lariat created value, enough to attract bids at multiples of invested capital. This is where Laredo plans to build in an effort to do the same. Today, Laredo controls leasehold totaling ~135k net acres in the Permian Basin prospective for the Wolfberry (vertical wells), Wolfcamp Shale (horizontal wells) and Cline Shale (horizontal wells), among other horizons in the oil stack. Approximately 64k net acres of this total came from the acquisition of Warburg-backed Broad Oak Energy in July 2011.
Concentrated ownership, little float – No ignoring it. Warburg Pincus did not sell any shares on the December 2011 IPO, resulting in an ownership position of ~80% upon the exercise of the overallotment option. Management and employees retained ~5% combined. That leaves only ~15% in public float. Warburg Pincus and management invested ~$710 million of equity in Laredo as a private concern. Warburg Pincus backed Mr. Foutch at his previous two ventures, Latigo Petroleum and Lariat Petroleum. That’s one investor. We like the trust factor here. Has meaning. What this also means, however, is that a potential “overhang” is present. We can’t speculate on if/when Warburg Pincus will sell down its position, only opine that this unknown potentially caps share price appreciation. Come June this year (180-day lockup after the closing of the IPO), Warburg Pincus is free and clear to sell stock. That’s a lot of stock, potentially. That’s the overhang, potentially. Increased trading liquidity is one positive outcome. What follows is greater detail on the company’s asset base, plus greater valuation analysis, both absolute and relative. Actual production history is compared to the applied type curves that drive our absolute valuation. We find this step key to our due diligence process.
Laredo Petroleum: Permian Shale Offers Opportunities For Investors
August 20, 2012
In late June Seeking Alpha published "Five Lessons on Picking the Low-Hanging Fruit," an article on stock selection with specific reference to opportunities in the oil shale industry. The advice was to go where the money is and pick the companies that offer the most leverage to the investor. Activity in West Texas is giving investors plenty of choices.
One possibility is Laredo Petroleum Holdings, Inc. (NYSE:LPI), an independent oil and gas company headquartered in Tulsa, Oklahoma. CEO Randy Foutch founded the company in 2006 and took it public in December 2011 at an initial price of $17 a share. He had previously developed three E&P companies that he sold to public companies.
LPI's growth in the last five years has been excellent. Last year's 10-K shows that total revenues climbed to $510.3 million in 2012. Operating income last year was $201.9 million, and pretax income was $164.9 million. The growth has been exceptional, but the drop in oil and gas prices took a toll this year. Second quarter revenues increased 7% from the comparable 2011 period, but net income fell 24%. LPI had a 13% decline in oil prices, a 40% decline in gas prices and a 54% increase in lease operating expenses compared to last year's second quarter.
Production hit record volumes with a 36% jump from last year's comparable period and 12% from the first quarter of this year. Crude oil production increased 44%. EPS was $0.24 on 128.2 million fully diluted common shares. The average estimate of a select group of analysts covering the stock is $0.85 in 2012 and $1.40 in 2013. This places the P/E ratio at 16 times next year's earnings.
The numbers belie the potential. To place the issue in perspective, investors need to understand what is happening in the Permian "oil patch." The Permian Basin refers to a region near Midland in West Texas with a long history of oil production. More recently there has been an explosion in activity. New drilling techniques offer access to oil, gas and liquids in tight shale formations previously infeasible for economic production.
The perfection of horizontal drilling and high-pressure hydraulic fracturing of the shale has been the catalyst. Within the last few years drilling in fields such as the Bakken in North Dakota and Eagle Ford in south-central Texas have resulted in huge increases in domestic oil and gas supplies. Now the Permian plays are in full force.
An article in the Houston Chronicle on August 13 titled "West Texas taking an 'intelligent approach' to oil boom" shows why investors are taking notice. According to the article, the current Baker Hughes rig count in the Permian is 442 versus a 1999 low of 51. The same article reported that there are 155,000 wells in the area producing about one million barrels of oil per day, plus gas.
The impact on the infrastructure has been huge. Companies have formed "man camps" of trailers in vacant lots, and some workers are forced to drive huge distances to find available housing. The article claims that a "freshly graduated petroleum engineer can expect an annual salary of $80,000 sometimes with a $10,000 to $20,000 signing bonus." Roughnecks and truckers who will put in the hours are earning $100,000 a year. Unemployment in the area is a choice, not the result of regional economics.
A first reaction might be to say this is like a "shooting star," a phenomenon that is exciting to watch but unlikely to last. Industry experts disagree, and they are backing their assessment with big bucks. Laredo's recent success shows why. The company completed 69 Permian wells in the second quarter with a 100% success rate. That is unheard of in the normally high-risk drilling business. LPI's CEO, Randy Foutch, told the Oil and Gas Investor in an interview in April of this year that the company has 3500 vertical locations and 2500 horizontal locations as potential drilling sights.
Again, skeptics can play "Yes, but . . ." games: oil prices can fall; shale fuel is too costly; there are green substitutes, and political resistance may limit "fracking." Maybe, but this may also be an opportunity for astute investors.
Everyone recognizes the huge gap in U.S. energy consumption and our domestic supply. Jerry Schuyler, Laredo's president, addressed this point in a June 13th presentation to the IPAA-TIPRO "Leaders in Industry" luncheon at the Petroleum Club in Houston. Schuyler shows that imports provided 55% of our demand in 2005. Shale provided none. The U.S. and Canada, which he sees as a reliable source, provided 45%. By 2010 we had actually cut our consumption slightly through conservation efforts. Shale had emerged as a minor factor, and our reliance on imports had fallen to 42%. The projections are that by 2015 our demand will be approximately the same as current levels, and imports will only represent 18% of our demand. Shale from Permian, Bakken and Eagle Ford formations will be providing about 40% of the total.
There is no credible source that thinks renewable energy from solar, hydro, wind and biofuels combined can ever provide more than 2% of U.S. needs. Green cannot kill this growth, and oil production costs are comfortably below supply prices, which currently are approximately $86/bbl for West Texas Intermediate crude. LPI's Q2 report shows a cost per barrel of oil equivalent of $34.34. Does anyone think that supply from the Middle East will be cheaper . . . or more reliable? And if you are concerned about the politics, you can do your part to protect the industry's future in November.
Markets reflect global economics. We would be naïve to ignore top down analyses, but stock prices will respond to individual companies' opportunities. Permian plays seem to offer those opportunities, and that is where we are likely to find alpha.
Disclosure: I am long LPI.
GGP Price at posting:
1.1¢ Sentiment: Buy Disclosure: Held
