As the oil rally matures, we’re likely to see more secondary-type names kick into gear — not real leaders, but firms that are thriving in today’s high-price environment, observes Mike Cintolo, editor of Cabot Top Ten Trader.
Laredo Petroleum (LPI) is the poster child for that, a small (market cap less than $2 billion) operator in the Permian Basin that, like many in the group, took on a lot of debt as it expanded production rapidly in years past.
But it’s tightened its belt during the past three years, added some high-return acreage (it bought 57,000 oily acres in the Midland Basin last year), has been chipping away at its liabilities (no debt maturities until 2025) and cash flow is set to go through the roof as CapEx declines (like most producers, it’s targeting flat-ish output) and hedging losses vanish.
At $80 oil and current natural gas prices, the firm sees free cash flow of around $16 per share this year, and that figure should rise to $22.50 or so in 2023, and of course the figures could be much bigger if oil stays in the triple digits.
To be fair, most of that is still likely to be dedicated to debt reduction; Laredo is hoping to pay off another $700 million of debt by year-end 2023 and have debt total less than one times cash flow a year from now.
But what kicked the stock into gear (besides the recent free cash flow estimates) was a whopping $200 million share buyback program, which is around 11% of the market cap; there’s no time table on the authorization, but management seems eager to get involved right away.
And the cherry on top of the story is Laredo’s acreage, which likely has eight years of drilling inventory even at $55 oil, with plenty of upside to the number of potential wells if oil stays up here. Who knows how the company will do during the sector’s next dry spell, but it’s cash flow story looks promising now that the sun is shining on the group.
Technically, LPI’s post-crash run halted around $100 last July, and it thrashed around wildly for a few months, with an initial plunge below $40, a rally back toward $100, and a couple more 30% to 40% dips after that — including a plunge back to $54 in early May.
But the cash flow/buyback news has caused another rush higher, with LPI breaking out on huge volume last week. We think it wants to go higher, but given the stock’s history and the big recent move, you should aim to enter on dips.