Morningstar | Laredo Makes Substantial Personnel Cost Reductions
Laredo's stock rallied in early trading following the April 8 announcement that the company has reduced its personnel costs by 25%. But at the time of writing the price increase of approximately 10% looks like an under-reaction. The cost-cuts are expected to deliver annualized savings of around $30 million, which equates to a margin improvement of $1.10 per barrel of oil equivalent (based on our 2019 guidance calling for production of 74 boe/d). After incorporating the change we have increased our fair value estimate to $4 per share.The saving stems from a 20% headcount reduction, which includes a 40% reduction at the vice president level or higher. This underscores the firm's commitment to its new strategy of maximizing shareholder returns and maintaining capital discipline. The stock has been a laggard in the past six months as investors digested the impact of the firm's failed experiment with tighter spacing, leaving it with more modest performance expectations and fewer potential drilling locations in inventory.
Nevertheless, the company's acreage can comfortably support multiple decades of drilling at the current cadence, and we believe the company can consistently generate free cash flows under midcycle conditions (with WTI at $55/bbl). We believe the reduction in administrative costs is sustainable, and this improvement makes the recent sell-off look overdone. Though its too soon to update our extreme uncertainty rating, we note that shares are attractive at the current price.
Laredo Petroleum is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties, and midstream and marketing services, primarily in the Permian Basin of West Texas. The Permian Basin is comprised of several distinct geological provinces, including the Midland Basin to the east, the Delaware Basin to the west and the Central Platform in the middle. The company's primary development and production fairway is located on the east side of the Midland Basin, 35 miles east of Midland, TX. The company's acreage is contiguous in the neighboring Texas counties of Howard, Glasscock, Reagan, Sterling and Irion.
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