Report
Dave Meats
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Morningstar | Laredo Undervalued After Steep Sell-Off in 2018

Laredo Petroleum is an upstream oil and gas company with operations concentrated in the eastern portion of western Texas' Midland Basin (Glasscock and Reagan counties). That's east of the play's Midland County sweet spot, in an area with a lower oil content (translating to lower realized prices). Initial production rates aren't typically as impressive there, either. So, because it does not operate in the core of the basin, Laredo does not share the cost advantage that other Permian producers enjoy.To compensate, the firm minimizes production costs. Its acreage is more contiguous than that of its peers, which means it can accommodate wells with longer laterals (and thus superior economics). In addition, management frequently highlights the benefit of its "earth model," which enables it to fine-tune the positioning of each well in the target reservoir, boosting flow rates. Laredo also benefits from its production corridor system, which centralizes infrastructure and enhances efficiency, and by utilizing higher-intensity completions it has further enhanced well performance. These innovations keep the firm profitable at midcycle prices (currently $55 a barrel for West Texas Intermediate and $3 per thousand cubic feet for natural gas). But the firm still faces higher break-evens and weaker returns than producers with better-located acreage.Laredo has also struggled with well spacing. In 2017 and 2018, it attempted to increase the value of its acreage by squeezing more wells into each drilling spacing unit (1-mile cross-section). But the strategy backfired as the reduced separation between adjacent wells eroded performance, and thus returns. Management has now pivoted back to its original spacing assumption of 16-24 wells per DSU and expects to restore the performance of its wells to the 2016 level.
Underlying
Laredo Petroleum Inc.

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.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Dave Meats

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