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Morningstar | Laredo's Peripheral Permian Acreage Has a Relatively High Gas Content, Capping Margins

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. Initial production rates aren't quite as impressive, either. But Laredo's acreage is more contiguous than that of its peers, which means it can accommodate wells with longer laterals (and thus superior economics). A large portion of the firm's available drilling locations can support 15,000-foot laterals, and in 2018, management anticipates an average lateral length per well of 10,400 feet (roughly 20% above the basin average).The latest iteration of the 2018 budget includes $545 million for drilling and completions, funding a four-rig development program with 70 total completions. At a glance, that suggests a hefty increase in well costs when compared with last year's plan (four rigs and 70 wells with a $450 million budget). However, owing to longer laterals, the total number of lateral feet being drilled is expected to be about 30% higher this year. This confirms that like other shale producers, Laredo has learned to do more with less. As a result, the firm is anticipating year-on-year production growth of at least 15%.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 all translate to lower unit costs. In fact, Laredo reports lower production costs than any of the upstream firms in our coverage. However, as its production mix is very gassy, it also reports lower realized prices. Overall, despite impressively low operating expenses, Laredo's margins aren't much better than the peer average.