Sweet 16 Update - May 22

Sweet 16 Update - May 22

Postby dan_s » Fri May 21, 2021 6:58 pm

The Sweet 16 finished the week ending May 21 up 87.06% year-to-day, a gain of 3.86% for the week. The S&P 500 Index lost 0.48% for the week, but is still up 10.64% YTD. Money is still rotating into the energy sector, the top preforming sector this year.

Since May 15, I have adjusted my valuations for XEC, DVN, EOG, LPI, RRC and PXD. See detailed update for LPI in the next post.

Only six of the stocks in the portfolio moved higher last week, but Laredo Petroleum's (LPI) gain of more than 24% last week carried the entire profile. All of the gassers (AR, CRK, EQT and RRC) were all up on the week as is finally sinking in that the U.S. natural gas and NGL markets are tight and about to get a lot tighter this summer. Unless we have a very mild summer, there is already almost no chance for inventories of dry gas and propane (both used for space heating) to get back to the 5-year average before the next winter heating season. And BTW we use a heck of a lot more gas for space heating than we did five years ago. The situation with propane actually looks dangerous. If you heat and cook with propane I highly recommend that you fill you tanks before the first cold wave in October and you might want to add a few extra tanks.

Talos Energy (TALO) gained over 6% with most of it coming today after their update on the big Zama Oilfield Development Project offshore Mexico. Talos will be hosting our next webinar on June 7 and I highly recommend that you get on that one. My $22 valuation has nothing in it for their significant upside at Zama and West Puma, operated by BP. Talos has lots of near-term upside because of rising commodity prices + it has HUGE long-term upside for us. We will be publishing an update profile on Talos a few days after the webinar.

Laredo's big move was caused by the "Game Changing" acquisition of producing assets from Sabalo Energy LLC that they announced on May 14. I have updated my forecast/valuation model for LPI and posted it to the EPG website. My updated valuation of $58.00 now looks too conservative to me. Laredo is on a pace to generate over $28/share of operating cash flow this year and if their realize oil price is $60/bbl in 2022 they should generate over $41/share of operating cash flow next year. If both deals they announced close in July, my valuation will go to AT LEAST $90/share. I cannot stress enough how import and valuable Laredo's relationship with EnCap is going to be. Add this one NOW to your portfolio because the Wall Street Gang is going to be head over heals in love with LPI by year-end.

Range Resources (RRC) is up 110% YTD and approaching my valuation. Might be a good time to harvest that gain and move it to AR, XEC, DVN or OVV. They all have lots of exposure to rising natural gas and NGL prices. Comstock Resources (CRK) is also poised to join the "Gas Party".

We will be sending out an updated profile on EOG Resources (EOG). I raised my valuation to $114/share today.

After I finish my podcast on Saturday morning, I will finish my review of the updated profiles for EQT, PDCE and ESTE. Steven will finish his work on Diamondback Energy (FANG) next week.
Last edited by dan_s on Sat May 22, 2021 10:40 am, edited 3 times in total.
Dan Steffens
Energy Prospectus Group
Posts: 25566
Joined: Fri Apr 23, 2010 8:22 am

Re: Sweet 16 Update - May 22

Postby dan_s » Sat May 22, 2021 9:32 am

I have updated my forecast/valuation model for Laredo Petroleum (LPI) with the assumption that the transactions announced on May 9 will close in early July. The actual date of closing is not important because the "Effective Dates" are earlier.

I have increased my valuation to $67/share, but there is significant upside if their actual results in Q3 match up with my forecast model. Laredo's production will actually go down from Q2 to Q3 on a Boepd measure, but revenues will go up because the percentage of liquids goes way up. Per Laredo, their production mix will be approximately 52% crude oil, 24% NGLs and 24% natural gas in 2022. < Assuming realized prices of $60/bbl crude oil, $15/bbl NGLs and $2.75/mcf natural gas, my model shows LPI generating $28 to $30 adjusted net income per share and $40 to $43 operating cash flow per share in 2022. If everything falls in place, a valuation of 4X operating CFPS is reasonable.

Average 2022 forecasts from 8 analysts (3 dated before May 9) per TipRanks: $23.32 EPS and $38.53 operating CFPS

Five Wall Street Firms have updated their price targets since May 9
Current Price Targets

$68.00 by Stifel on 5-10-21
$44.00 by Piper Sandler on 5-11-21
$52.00 by Raymond James on 5-11-21
$66.00 by Siebert Williams Shank & Co on 5-13-21
$52.00 by Wells Fargo on 5-19-21

TULSA, OK, May 09, 2021 (GLOBE NEWSWIRE) -- Laredo Petroleum, Inc. (NYSE: LPI) ("Laredo" or the "Company") today announced the signing of a purchase and sale agreement to acquire the assets of Sabalo Energy, LLC ("Sabalo"), a portfolio company of EnCap Investments L.P. ("EnCap"), and a non-operating partner for approximately $715 million, subject to customary closing price adjustments, comprised of $625 million in cash and approximately 2.5 million shares of Laredo common equity. Additionally, the Company announced the sale of 37.5% of its operated proved developed producing ("PDP") reserves in its legacy leasehold in Reagan and Glasscock counties ("Legacy") to an affiliate of Sixth Street Partners, LLC ("Sixth Street") for proceeds of $405 million and additional potential cash-flow based earn-out payments over the next six years. None of the PDP reserves are located in Howard or Western Glasscock counties. Both transactions are expected to close July 1, 2021.

"The transformational impact for Laredo of the combined transactions is significant," stated Jason Pigott, President and Chief Executive Officer. "Upon closing, we will be positioned for sustainable Free Cash Flow1 generation and significant deleveraging, have more than 30,000 highly productive, contiguous net acres in Howard County and a near-term pathway to increasing our oil cut to more than 50% from the current 30%. The value derived from employing our efficient, low-cost operations in Howard County has already been established on our current leasehold and we expect to perform equally well on this new acreage. Additionally, we will be applying our ESG best practices to the development of this acreage, maintaining our prior commitments to reducing greenhouse gas intensity, methane emissions and eliminating routine flaring."

Financial Highlights:

Combined transactions expected to be accretive to long-term Free Cash Flow1 and Adjusted EBITDA1 per share

Transforms the cash generation profile of the Company, expected to drive total Free Cash Flow1 through FY-25 of >$700 million at current strip prices

Anticipated deleveraging beginning in second half of 2021, with Net Debt/TTM Adjusted EBITDA1 approaching 1.5x by YE-22 and 1.0x by YE-25

Enables mid-single digit annualized oil production growth at 50%-70% reinvestment rate through FY-25

Company oil cut expected to rise to 50% of total production by YE-21, increasing margins per barrel of oil equivalent ("BOE")

Acquisition Highlights:

~21,000 contiguous net acres (86% operated, 100% held by production) directly offsetting Laredo's existing Howard County leasehold

~120 operated oil-weighted locations (91% WI) and ~150 non-operated locations (12% WI)

83% of locations are capital efficient long laterals of 10,000 feet or greater

Currently producing ~14,500 BOE per day (83% oil, three stream) of low-decline production with an estimated next 12-month oil decline of 35%

PDP reserves of approximately 30 million BOE (73% oil, three stream)

Ideally situated for Laredo's efficient, low-cost operating structure

Development and spacing assumptions of 12 wells per drilling spacing unit

"This transaction complements Laredo’s existing asset base and strategy and accelerates the Company’s transformation to becoming a leading independent operator in the Midland Basin," commented Doug Swanson, Managing Partner of EnCap. "Laredo is well positioned to maximize value from the Sabalo assets and we view this transaction as compelling for Laredo shareholders, including EnCap, as part of this transaction."

Divestiture Highlights:

Proceeds of $405 million from Sixth Street for the sale of 37.5% of Laredo's working interest in operated PDP reserves in gas-weighted Legacy assets, which does not include the Western Glasscock acreage acquired in late 2019

Divested reserves of approximately 94 million BOE (18% oil) with associated production of approximately 25,000 BOE per day (23% oil), at closing

Wellbore working interest only, Laredo retains all undeveloped locations

Acquisition Financing Details:

Funded through the partial sale of Legacy PDP reserves, borrowings on the Company's Senior Secured Credit Facility and the issuance of approximately 2.5 million common shares to EnCap

Senior Secured Credit Facility borrowing base reaffirmed at $725 million

1Non-GAAP financial measure; please see definitions of non-GAAP financial measures at the end of this release.

Citigroup and Houlihan Lokey provided advisory services on the Sabalo acquisition and Houlihan Lokey acted as financial advisor on the PDP sale to Sixth Street. Akin Gump and Willkie Farr & Gallagher served as Laredo’s legal advisors. Jefferies acted as exclusive financial advisor to Sabalo and Bracewell served as Sabalo's legal advisor. White & Case acted as legal advisor to Sixth Street.
Dan Steffens
Energy Prospectus Group
Posts: 25566
Joined: Fri Apr 23, 2010 8:22 am

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