Laredo Petroleum (LPI)

[dan_s]

I am probably going to promote LPI to the Sweet 16 from our Small-Cap Growth Portfolio. First quarter production came in above my forecast model and I now believe they have 40% year-over-year production growth locked in. Also, see what I have highlighted below. - Dan

Liquidity

On May 4, 2015, in connection with the regular semi-annual redetermination of the Company`s senior secured credit facility, lenders increased the Company`s borrowing base to $1.25 billion and the Company increased its aggregate elected commitment amount of $1.0 billion. At May 5, 2015, the Company had approximately $13 million in cash and equivalents and an outstanding balance of $60 million under the senior secured credit facility, resulting in total liquidity of approximately $950 million.

Commodity Derivatives

Laredo maintains an active hedging program to reduce the variability in its anticipated cash flow due to fluctuations in commodity prices. At March 31, 2015, the Company had hedges in place for the remaining three quarters of 2015 for 5,768,140 barrels of oil at a weighted-average floor price of $80.99 per barrel, representing approximately 100% of anticipated oil production for the last nine months of 2015. The Company has also hedged 21,520,000 MMBtu of natural gas for the remaining nine months of 2015 at a weighted-average floor price of $3.00 per MMBtu, representing approximately 60% of anticipated natural gas and natural gas liquids production for the last three quarters of 2015. Additionally, the Company has basis swaps for the remaining nine months of 2015 totaling 2,750,000 barrels of oil to hedge the Midland-West Texas Intermediate ("WTI") basis differential at WTI less $1.95 per barrel.

For 2016, the Company has hedged 4,129,800 barrels of oil at a weighted-average floor price of $81.84 per barrel and 18,666,000 MMBtu of natural gas at a weighted-average floor price of $3.00 per MMBtu. Additionally, for 2017, the Company has hedged 2,628,000 barrels of oil at a weighted-average floor price of $77.22 per barrel.

[dan_s]

I have posted my updated forecast model for LPI to the website.

My Fair Value Estimate has increased $1.45/share to $19.00/share, compared to First Call's Price Target of $14.74.
> Since 100% of their oil production for this year is hedged at $80.99/bbl and they give conservative guidance, I now have a VERY HIGH level of confidence in my forecast model.
> Their recent equity offering shores up their balance sheet and the proceeds, combined with cash flow from operations, will more than cover the company's capital programs for 2015 and 2016. < This increased the multiple of CFPS to 8X that I use to value the company. Companies with a solid balance sheet and lots of running room for continuous growth, deserve to trade at a higher multiple.
> They are doing a great job of lowering their costs and operating expenses.

NOTE that my valuation per share includes the 69 million shares they sold in March.

Bottom line is that LPI is in much better position to grow, even during an extended period of low oil prices.