Laredo Petroleum Holdings

LPI : NYSE : US$29.56
Target: US$43.00 

Laredo Petroleum Holdings is a Tulsa, OK-headquartered E&P with core producing assets in the Midland Basin. From 4k net acres in 2008, the company now has interest in 200k net Midland acres. As of YE2012, Laredo has 189mmboe of proved reserves, of which 40% is classified as PDP. 52% of proved reserves are liquids (two-stream).
All amounts in US$ unless otherwise noted.

Development and production growth is a priority
In LPI’s first NDR post-Q3 earnings, Mr. Jay Still (COO) and Mr. Ron Hagood (IR) spent a few days on the road with us. A constant recurring theme from LPI was production growth through drilling. With one rig out of six dedicated to delineation in 2014, NAV growth through addition of inventory and derisking of acreage is important to the company, but effective use of capital to grow production and generate cash flows is the near-term priority. In addition, with substantial science and data behind their plan, and the lateral stacked pilot and down-spacing complete, LPI can meet its prod growth rate of 30-35% (Fig 1), as much as any Permian peer.
NAV acceleration and uplift will go hand in hand
While acceleration of drilling plan by adding 2 rigs/year from ‘15 onwards will advance NAV, derisking acreage both laterally (Wolfcamp in N Glasscock) and vertically (Lower Spraberry well in Glasscock) will increase the NAV notably. During its Analyst Day, LPI mentioned it has currently derisked only 52% of Wolfcamp and none of Spraberry (Fig 2).
Sweet spot for Wolfcamp / Cline
In a series of meetings, Jay explained the Basin geology, Wolfcamp / Cline depositional axis, and the movement of the axis with time. In our understanding, LPI has some of the best acreage for deeper zones of Wolfcamp, Cline, and ABW. We note the impressive Cline (Wolfcamp D) rates published by PXD recently, but these are 24-hour rates and, as seen below (Fig 4), on a 30-day basis, LPI still holds the best wells.
Other key highlights of the trip were: 1) ‘14 guidance will be provided in December; 2) two stacked 10,000ft laterals in Upper Wolfcamp and Cline will be drilled shortly; 3) Warburg is flexible in its ownership structure; and finally 4) LPI will be active on bolt-on acquisitions around its acreage. Overall, LPI is a company with strong production growth and a substantial NAV upside. This is our top S/MID-cap Midland Basin pick. We raise price target to $43 primarily on drilling acceleration. Reiterate BUY.


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