EUR 850.00 For Business Accounts Only

Morningstar | Slight Increase to Laredo FVE Based on Better-Than-Expected Efficiency Gains

We have nudged our fair value estimate for Laredo to $8 per share from $7 after a closer look at the firm's second-quarter earnings release. This reflects an increase in operating efficiency (indicated by a net decrease in drilling days) and a decrease in overall well costs (another benefit of shorter cycle times, supported by a switch to locally sourced sand for fracking). These benefits were partially offset by lowering our long-term rig count forecast to four from six to be more consistent with our bearish outlook for oil, which is unlikely to support a ramp in operations. Management was previously planning to add a fifth rig during the current calendar year, but these plans have been shelved for now as the efficiency gains discussed above are enabling the company to drill more wells without adding rigs.

As a reminder, the company smashed its own production guidance in the period with total volumes of 67.2 thousand barrels of oil equivalent per day, 6% higher sequentially and 15% higher year over year. The beat was attributed to efficiency gains enabling faster completions, which resulted in more wells being turned to sales in the period than planned. And on the marketing side, the firm has secured 25 mb/d of firm capacity on the Gray Oak pipeline during the first year of service (rising to 35 mb/d for the following six years). Thus the firm has significantly expanded its access to premium Gulf Coast pricing. But as the pipeline won't enter service until late 2019, this won't help in the next year or so, when the regional takeaway bottleneck is at its worst. The good news is that the firm’s existing contract with Medallion enables it to ship "substantially all" of its crude to Cushing, Houston, or Corpus Christi markets, enabling it to minimize the damage from a potential Midland basis blowout.