Imperial Capital Initiates Midcap E&P Laredo In-Line

Laredo Petroleum Inc LPI seems to be well positioned in the current environment, given its favorable liquidity and capex near cash flow, Imperial Capital’s Kim Pacanovsky said in a report. The analyst initiating coverage of the company with an In-Line rating and a price target of $12.50.

Laredo is a Permian Basin pure-play operating in the Midland Basin sub-basin, analyst Kim Pacanovsky said.

Capex Down

The company had earlier scaled back planned capex to $345mn, down 39 percent from the 2015 levels, before increasing its capex budget to $420mn, which is still 25 percent below the 2015 levels. The analyst said, however, that the company’s annual production is expected to remain flat.

Hedge Position Strong

Laredo has among the strongest hedge books in the industry, and this hedge position helps protect cash flows, Pacanovsky noted.

Solid Liquidity

Laredo had significantly curtained its activity in early 2015, while raising $762.5mn in equity, redeeming $550mn in 2019 Senior Notes, and reducing its workforce by 20 percent; all in an effort to position itself for a long-term commodity downturn. Earlier in 2016, the company raised $120mn and also had $195mn drawn on a current $815mn credit facility commitment.

Laredo has an estimated $752mn of liquidity. “We believe that LPI’s Medallion midstream assets could serve as a liquidity raising measure should crude prices remain weak or even retrench. Additionally, LPI has no debt maturities until 2022,” Pacanovsky wrote.

IRR Lower Than Group

Due to its eastern location in the Basin, Laredo’s production mix has a higher gas/NGL component than its Midland Basin peers, and its IRRs reflects this higher gas component.

“While we believe the company is executing well, this gassier weighting combined with a lower liquidity cushion than peers, along with higher F&D costs, support our In-Line rating,” the analyst wrote.