Shares of Laredo Petroleum (NYSE: [stock_market_widget type=”inline” template=”generic” color=”default” assets=”LPI” markup=”{symbol} {currency_symbol}{price} ({change_pct})” api=”yf”]) fell sharply after the company disappointed investors with a weak performance in the fourth quarter of fiscal 2018. The company’s fourth-quarter revenue declined on an annual basis despite an increase in production, while an increase in expenses hit the bottom line hard.
Oil Price and Production Cost Woes
Laredo delivered adjusted earnings of $0.16 per share on revenue of $215.2 million. That compares unfavourably to the prior-year period’s earnings of $0.19 per share and revenue of $240.3 million. Analysts were originally expecting Laredo’s top line to increase to $265 million during the fourth quarter and expected the company to deliver $0.21 in earnings per share.
Clearly, Laredo missed estimates by a wide margin as revenue from oil, natural gas, and natural gas liquids declined year over year. That might seem surprising as the company’s fourth-quarter sales volume averaged 70,653 barrels of oil equivalent per day, an increase of 14% from the prior-year period. Oil accounted for 40% of sales.
However, the problem for Laredo was pricing. The company’s average realized sales price per barrel of oil equivalent dropped from $32.19 in the fourth quarter of 2017 to $27.18 in the previous quarter, a decline of 15.5%. Additionally, its lease operating expenses increased from $3.22 per barrel of oil equivalent sold last year to $3.51 in the fourth quarter of 2018. The company’s total costs and expenses rose to $18.74 per barrel as compared to $17.42 in the prior-year period.
In the end, the lower realized prices and higher costs pushed the company’s cash margins down to $18.91 per barrel of oil equivalent from $24.23 in the fourth quarter of 2017.
Laredo’s Stock Price in for a Rough 2019
Laredo’s 2019 production guidance turned out to be a weak one. The company expects oil production to decline 5% this fiscal year to 27,500 barrels per day, though overall production is expected to increase 9% to 74,000 barrels of oil equivalent per day.
The good thing is that its lease operating expenses will drop to $3.50 per barrel in 2019 as compared to $3.67 in 2018. However, transportation and marketing expenses and midstream service expenses will increase to a combined $0.95 per barrel of oil equivalent from $0.59 in 2018, erasing that drop.
Laredo is taking steps to arrest the decline in oil production that it experienced last year. The company believes that the tighter spacing of the wells that were drilled in 2017 and 2018 caused a decline in productivity. As a result, Laredo has started widening the spacing between the well spuds during the current quarter to address the decline.
However, the tight oil pricing scenario seems to have forced the company into reducing its capital budget by a big margin for 2019. It plans to spend $365 million on capital expenses this year, down substantially from the $575 million it spent on exploration and development activities last year.
In all, Laredo expects 2019 to be a transitional year so that it can focus on driving long-term capital efficiency improvements and generate higher returns while achieving neutral cash flow. As such, Laredo investors could experience more pains throughout 2019 on account of the company’s moves to improve the production profile, as well as the uncertain oil pricing scenario.
