Saturday, December 6, 2014

Laredo Asset Sales Could Go a Long Way in Fixing Big Debt

This article was originally published by TheStreet on November 11, 2014
By Sarfaraz A. Khan
NEW YORK (TheStreet) -- Laredo Petroleum  (LPI) has managed to walk a tight-wire -- keeping up profit and revenue growth strong amid plunging oil prices, and now, the company may lift its shares and ease liquidity concerns, too -- by selling off assets.

The Tulsa, Okla.-based company managed to beat both revenue and earnings estimates, as per data compiled by Thomson Reuters, when it reported third-quarter 2014 earnings last week. The beats came in the face of an oil glut that has caused double-digit realized oil price declines for the company. With hedges in place to protect against steeper oil price drops, Laredo is speaking with advisers regarding the possible sale of Texas assets as part of its strategy to centralize the location of its infrastructure and reduce costs. This plan, analysts predict, is likely to make the company's shares more attractive.
Further price declines may be in store for Laredo and the industry. Many big oil players produce oil and gas from Texas' prolific Permian Basin, one of the oldest production regions of the U.S., and new drilling technology is projected to boost site production up to 3 million barrels a day, up from the current 1.7 million barrels a day.
Over the past couple of years, Laredo has been growing the size of its reserves and production at double-digit rates. In its third-quarter results -- which showed no signs of a slowdown, despite lower prices -- Laredo said it would increase its production to up to 38,000 barrels of oil equivalents a day in the fourth quarter.
For next year, the company's spokesperson Ron Hogood told TheStreet in an email that Laredo will reveal the expected production numbers in its 2015 budget in the near future, although some analysts see a 42% increase in production in 2015 from this year to more than 44,500 barrels of oil equivalents a day.
For the three months ending September, Laredo posted a 17% increase in revenue from the same quarter last year to $200 million on the back of 16% increase in sales volume to nearly 33,000 barrels of oil equivalents a day. That offset the negative impact coming from 13% drop in realized oil prices.
Laredo has hedged 90% of its expected oil production for 2015 and has significant hedges in place going into 2017, which should reduce the volatility to future cash flows from oil price fluctuations for the next 12 to 18 months.
Raising concerns about the company's ability to continue growing at double-digit rates -- even more so in an environment of deteriorating crude prices -- is its balance sheet. Laredo's financial health is not ideal. The company is twice as leveraged as most of its peers, in terms of its debt-to-equity ratio, which is 2.3 times greater than the industry's average, as per data from Thomson Reuters.
Laredo, however, appears to have worked out a plan that could fix this problem. During the Nov. 6 conference call, Randy Foutch, Laredo's CEO, hinted at a possible sale of some of the assets, saying that the company has "engaged an advisor to assist us on structuring a possible transaction involving a portion of our northern Garden City acreage."
Laredo's Hagood declined to provide any additional comments when contacted by TheStreetregarding a potential asset sale or any other transaction, "unless and until we have something definitive to disclose."
Still, Topeka Capital Markets analyst Gabriele Sorbara wrote in a note last week that such a transaction could "go a long way to lift" the concerns regarding the company's liquidity and its ability to fund its operations that have been "keeping shares depressed."
Moreover, Sorbara noted that the company is selling its underperforming assets and retaining the more lucrative ones for its future growth, which should please investors.
Laredo's stock has fallen by 34% this year, closing at $18.24 on Monday. Topeka Capital Markets has a buy rating on the stock with a price target of $26.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.