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LPI 63.90, info article from seeking alpha...

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littlejohn   Tuesday, 06/15/21 12:48:45 AM
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LPI 63.90, info article from seeking alpha...

fairly in depth review...

so we watch...LJ


Many thanks to seeking alpha

author for copy and paste info

from article link above...

Laredo Petroleum May Now Generate Over $250 Million In Positive Cash Flow In 2022
Jun. 14, 2021 10:56 PM ETLaredo Petroleum, Inc. (LPI)1 Comment
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Laredo Petroleum may generate around $252 million in positive cash flow in 2022 at current (mid-$60s WTI) strip prices.
This would help reduce its leverage to 1.2x by the end of 2022.
The current environment is quite favorable for its attempts to extract value out of the oil-heavy inventory it acquired, as paybacks could be under a year.
Value is estimated at around $67 per share at long-term $60 WTI oil, increasing to $79 at long-term $65 WTI oil.
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Laredo Petroleum (LPI) made a couple major moves as it attempts to transition to a more oil-heavy producer. It acquired Sabalo Energy's assets for $715 million while divesting a 37.5% working interest in its PDP legacy assets for $405 million. These combined deals appear to be generally beneficial to Laredo, at least in a scenario where oil averages $55+ for a few years. That oil price would allow Laredo to extract sufficient value out of its acquired assets. At $55+ WTI oil, Laredo's legacy inventory will also have some value.

At current strip prices (mid-$60s WTI oil), Laredo may be able to generate around $250 million in positive cash flow in 2022 as it has a smaller amount of hedges (compared to 2021).

Laredo still looks to have a bit of upside, with an estimated value of $67 at long-term $60 WTI oil and $79 at long-term $65 WTI oil. I am less bullish on it now compared to five weeks ago though since it has gone up around 65% since then.

Laredo is selling 37.5% of its working interest in its PDP legacy assets (which don't include the oil-heavy Glasscock and Howard County acreage) for $405 million in cash. It retains the undeveloped locations for its legacy assets.

The 37.5% share involves around 25,000 BOEPD (23% oil) in current production, which may decline to under 20,000 BOEPD (21% oil) by the end of next year. The $405 million sale price is approximately 2.3x estimated EBITDAX (with no G&A burden) using 25,000 BOEPD in production and commodity prices at the time of the deal announcement. The relatively low multiple is due to the production declining (so it would be a higher multiple to forward-year EBITDAX) and lack of development locations in the deal.

Source: Laredo Petroleum

Laredo is also acquiring Sabalo Energy's assets for $715 million, consisting of $625 million in cash and 2.5 million shares. Sabalo has 21,000 net acres next to Laredo's Howard County position and is currently producing approximately 14,500 BOEPD (83% oil).

Source: Laredo Petroleum

The Sabalo Assets
Earthstone Energy (ESTE) previously attempted to purchase the Sabalo assets for $950 million in October 2018. This deal fell through as oil prices declined significantly over the next couple months. Earthstone was quite optimistic about the number of new locations it would gain in the deal, but Laredo's $715 million purchase price probably more accurately reflects the viable inventory in a $55 to $65 oil environment.

Back in 2018, Earthstone mentioned that the Sabalo assets contained 488 gross operated locations with an average lateral length of 9,160' over 20,800 net acres. This was based on developing 32 wells per section over four benches (Wolfcamp A, Wolfcamp B, Lower Spraberry and Middle Spraberry).

Source: Earthstone Energy

Now Laredo indicates there are around 120 gross operated locations (with an average lateral length of 10,000') over 21,000 net acres. The significant decrease in locations is due to several factors. One change is that Laredo's development plan assumes 12 wells per section over two benches (Wolfcamp A and Lower Spraberry) now. So there is wider spacing plus a focus on the two most proven benches.

Source: Laredo Petroleum

Sabalo's development (production has gone from 11,200 BOEPD in late 2018 to 14,500 BOEPD now) and the longer average lateral length probably account for the remainder of the difference in locations.

Sabalo's acreage is close to Laredo's Howard County position, so it isn't surprising that the type curves are fairly similar. Laredo expects approximately 165,000 barrels of oil production from its Wolfcamp wells and approximately 130,000 barrels of oil production from its Lower Spraberry wells after one year of production.

Source: Laredo Petroleum

Earthstone indicated that it expected around 180,000 barrels of oil production from Sabalo's Wolfcamp A wells after a year.

Source: Earthstone Energy

The Lower Spraberry wells were expected to produce approximately 140,000 barrels of oil in their first year of production.

Source: Earthstone Energy

2022 Outlook
I estimate that Laredo will end up with 78,000 BOEPD in average production during 2022, including 40,600 barrels of oil production per day. This includes around 34,000 BOEPD in average total production from its legacy assets.

This would result in it generating $1.16 billion in oil and gas revenue before hedges and around $1.063 billion after hedges at current strip prices. Laredo's 2022 hedges (based on its last reported hedges) have an estimated negative $97 million in value at current prices.

Source: Laredo Petroleum

This is much improved from its 2021 hedges, which could end up at a negative value of over $200 million.

Barrels/Mcf $ Per Barrel/Mcf (Realized) $ Million
Oil 14,819,000 $64.50 $956
NGLs 6,825,500

Natural Gas 40,953,000 $2.15 $88
Hedge Value -$97
Total Revenue $1,063
Source: Author's Work

I have assumed that Laredo's capital expenditures go up to around $420 million in order to maintain single-digits oil production growth rates on a larger base of oil production. I am also estimating that Laredo's lease operating expenses go up to around $4 per BOE now that it has divested some of its lower LOE legacy assets and added assets that may have lease operating expenses closer to $5 per BOE. This results in an estimate of $811 million in cash expenditures for Laredo in 2022, resulting in $252 million in positive cash flow at current strip prices.

$ Million
Lease Operating Expense $115
Production and Ad Valorem Taxes $86
Marketing and Transportation $50
Cash G&A $40
Interest $100
Capital Expenditures $420
Total Expenses $811
Source: Author's Work

Debt Situation
Laredo's net debt is now forecasted to be $1.21 billion at the end of 2021 if it completes its at-the-market equity program. At current 2022 strip prices, it would be able to reduce its debt to approximately $0.96 billion by the end of 2022, which would be approximately 1.2x its 2022 EBITDAX (including hedges). Laredo's year-end 2022 leverage was projected to be fairly similar without these transactions assuming similar commodity prices for 2022.

Laredo may end up with around 16.6 million shares outstanding after completing its at-the-market equity program and issuing 2.5 million shares as part of the Sabalo acquisition.

Due to its higher amount of economic inventory now, it would probably be reasonable to value Laredo at a 3.0x EV to EBITDAX multiple (up slightly from the 2.8x multiple it traded at previously).

Based on expected 2022 production levels and subtracting the value of Laredo's 2022 hedges and its projected year-end 2021 net debt, that would result in an estimated value of $67 per share at long-term $60 WTI oil, an estimated value of $55 at long-term $55 WTI oil and an estimated value of $79 per share at long-term $65 WTI oil.

Laredo's transactions have positioned it to be a majority oil producer going forward and also increased its amount of oil-heavy inventory to near five years of inventory at its current development. This could pay off if oil prices remain reasonably strong as it could generate around $250 million in positive cash flow in 2022 (at mid-$60s oil) while also growing oil production in the single-digits range.

Laredo's upside will ultimately depend on oil prices remaining high enough for it to generate value out of the inventory it acquired. At $60 long-term WTI oil, I estimate that Laredo could be worth around $67, while its value would increase to around $79 with $65 long-term oil.

Gee Beav, rithmatic isn't usually this hard to read!
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