Intrinsic value of Laredo Petroleum, Inc. - LPI

Previous Close

$3.14

  Intrinsic Value

$8.48

stock screener

  Rating & Target

str. buy

+170%

Previous close

$3.14

 
Intrinsic value

$8.48

 
Up/down potential

+170%

 
Rating

str. buy

We calculate the intrinsic value of LPI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 0001), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 0.7

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  1,128
  1,154
  1,184
  1,217
  1,254
  1,294
  1,338
  1,386
  1,438
  1,493
  1,552
  1,615
  1,682
  1,753
  1,829
  1,909
  1,994
  2,083
  2,178
  2,278
  2,384
  2,495
  2,613
  2,736
  2,867
  3,004
  3,148
  3,300
  3,460
  3,628
Variable operating expenses, $m
  734
  751
  771
  792
  816
  843
  871
  902
  936
  972
  1,010
  1,051
  1,095
  1,141
  1,191
  1,243
  1,298
  1,356
  1,418
  1,483
  1,552
  1,624
  1,701
  1,781
  1,866
  1,955
  2,049
  2,148
  2,252
  2,362
Fixed operating expenses, $m
  39
  40
  41
  41
  42
  43
  44
  45
  46
  47
  48
  49
  50
  52
  53
  54
  55
  56
  57
  59
  60
  61
  63
  64
  65
  67
  68
  70
  71
  73
Total operating expenses, $m
  773
  791
  812
  833
  858
  886
  915
  947
  982
  1,019
  1,058
  1,100
  1,145
  1,193
  1,244
  1,297
  1,353
  1,412
  1,475
  1,542
  1,612
  1,685
  1,764
  1,845
  1,931
  2,022
  2,117
  2,218
  2,323
  2,435
Operating income, $m
  355
  363
  373
  383
  395
  408
  423
  439
  456
  474
  493
  514
  537
  560
  586
  612
  641
  671
  703
  736
  772
  810
  849
  891
  935
  981
  1,030
  1,082
  1,136
  1,193
EBITDA, $m
  572
  586
  601
  618
  637
  658
  681
  706
  733
  762
  793
  826
  861
  898
  938
  981
  1,025
  1,073
  1,123
  1,176
  1,232
  1,291
  1,353
  1,419
  1,488
  1,561
  1,638
  1,718
  1,803
  1,893
Interest expense (income), $m
  89
  64
  66
  67
  70
  72
  75
  78
  81
  84
  88
  92
  97
  101
  106
  111
  117
  123
  129
  136
  142
  150
  158
  166
  174
  183
  193
  203
  214
  225
  236
Earnings before tax, $m
  291
  298
  305
  314
  323
  334
  345
  358
  371
  385
  401
  418
  435
  454
  474
  495
  518
  542
  567
  594
  622
  652
  683
  717
  752
  788
  827
  868
  911
  957
Tax expense, $m
  79
  80
  82
  85
  87
  90
  93
  97
  100
  104
  108
  113
  118
  123
  128
  134
  140
  146
  153
  160
  168
  176
  185
  193
  203
  213
  223
  234
  246
  258
Net income, $m
  212
  217
  223
  229
  236
  244
  252
  261
  271
  281
  293
  305
  318
  332
  346
  362
  378
  396
  414
  434
  454
  476
  499
  523
  549
  576
  604
  634
  665
  698

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  2,469
  2,525
  2,590
  2,663
  2,744
  2,832
  2,929
  3,033
  3,146
  3,266
  3,396
  3,533
  3,680
  3,836
  4,002
  4,177
  4,363
  4,559
  4,766
  4,985
  5,216
  5,460
  5,717
  5,988
  6,273
  6,573
  6,889
  7,221
  7,571
  7,939
Adjusted assets (=assets-cash), $m
  2,469
  2,525
  2,590
  2,663
  2,744
  2,832
  2,929
  3,033
  3,146
  3,266
  3,396
  3,533
  3,680
  3,836
  4,002
  4,177
  4,363
  4,559
  4,766
  4,985
  5,216
  5,460
  5,717
  5,988
  6,273
  6,573
  6,889
  7,221
  7,571
  7,939
Revenue / Adjusted assets
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
  0.457
Average production assets, $m
  2,024
  2,070
  2,124
  2,183
  2,250
  2,322
  2,401
  2,487
  2,579
  2,678
  2,784
  2,897
  3,017
  3,145
  3,281
  3,425
  3,577
  3,738
  3,908
  4,087
  4,277
  4,477
  4,687
  4,909
  5,143
  5,389
  5,648
  5,920
  6,207
  6,509
Working capital, $m
  -54
  -55
  -57
  -58
  -60
  -62
  -64
  -67
  -69
  -72
  -74
  -78
  -81
  -84
  -88
  -92
  -96
  -100
  -105
  -109
  -114
  -120
  -125
  -131
  -138
  -144
  -151
  -158
  -166
  -174
Total debt, $m
  1,009
  1,038
  1,072
  1,109
  1,151
  1,196
  1,246
  1,300
  1,358
  1,420
  1,486
  1,557
  1,633
  1,713
  1,798
  1,889
  1,984
  2,085
  2,192
  2,305
  2,424
  2,550
  2,682
  2,821
  2,968
  3,123
  3,285
  3,456
  3,637
  3,826
Total liabilities, $m
  1,271
  1,301
  1,334
  1,371
  1,413
  1,459
  1,508
  1,562
  1,620
  1,682
  1,749
  1,820
  1,895
  1,976
  2,061
  2,151
  2,247
  2,348
  2,455
  2,567
  2,686
  2,812
  2,944
  3,084
  3,230
  3,385
  3,548
  3,719
  3,899
  4,088
Total equity, $m
  1,197
  1,225
  1,256
  1,292
  1,331
  1,374
  1,420
  1,471
  1,526
  1,584
  1,647
  1,714
  1,785
  1,861
  1,941
  2,026
  2,116
  2,211
  2,312
  2,418
  2,530
  2,648
  2,773
  2,904
  3,042
  3,188
  3,341
  3,502
  3,672
  3,850
Total liabilities and equity, $m
  2,468
  2,526
  2,590
  2,663
  2,744
  2,833
  2,928
  3,033
  3,146
  3,266
  3,396
  3,534
  3,680
  3,837
  4,002
  4,177
  4,363
  4,559
  4,767
  4,985
  5,216
  5,460
  5,717
  5,988
  6,272
  6,573
  6,889
  7,221
  7,571
  7,938
Debt-to-equity ratio
  0.840
  0.850
  0.850
  0.860
  0.860
  0.870
  0.880
  0.880
  0.890
  0.900
  0.900
  0.910
  0.910
  0.920
  0.930
  0.930
  0.940
  0.940
  0.950
  0.950
  0.960
  0.960
  0.970
  0.970
  0.980
  0.980
  0.980
  0.990
  0.990
  0.990
Adjusted equity ratio
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485
  0.485

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  212
  217
  223
  229
  236
  244
  252
  261
  271
  281
  293
  305
  318
  332
  346
  362
  378
  396
  414
  434
  454
  476
  499
  523
  549
  576
  604
  634
  665
  698
Depreciation, amort., depletion, $m
  218
  223
  228
  235
  242
  250
  258
  267
  277
  288
  299
  311
  324
  338
  353
  368
  385
  402
  420
  439
  460
  481
  504
  528
  553
  579
  607
  637
  667
  700
Funds from operations, $m
  430
  440
  451
  464
  478
  493
  510
  528
  548
  569
  592
  616
  642
  670
  699
  730
  763
  797
  834
  873
  914
  957
  1,003
  1,051
  1,102
  1,155
  1,211
  1,270
  1,333
  1,398
Change in working capital, $m
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
Cash from operations, $m
  431
  441
  452
  465
  480
  495
  512
  531
  551
  572
  595
  619
  645
  673
  703
  734
  767
  802
  839
  878
  919
  963
  1,009
  1,057
  1,108
  1,162
  1,218
  1,278
  1,340
  1,406
Maintenance CAPEX, $m
  -213
  -218
  -223
  -228
  -235
  -242
  -250
  -258
  -267
  -277
  -288
  -299
  -311
  -324
  -338
  -353
  -368
  -385
  -402
  -420
  -439
  -460
  -481
  -504
  -528
  -553
  -579
  -607
  -637
  -667
New CAPEX, $m
  -40
  -47
  -53
  -60
  -66
  -73
  -79
  -86
  -92
  -99
  -106
  -113
  -120
  -128
  -136
  -144
  -152
  -161
  -170
  -180
  -189
  -200
  -211
  -222
  -234
  -246
  -259
  -273
  -287
  -302
Cash from investing activities, $m
  -253
  -265
  -276
  -288
  -301
  -315
  -329
  -344
  -359
  -376
  -394
  -412
  -431
  -452
  -474
  -497
  -520
  -546
  -572
  -600
  -628
  -660
  -692
  -726
  -762
  -799
  -838
  -880
  -924
  -969
Free cash flow, $m
  178
  177
  177
  177
  179
  181
  183
  187
  191
  196
  201
  207
  214
  221
  229
  237
  246
  256
  267
  278
  290
  303
  317
  331
  346
  363
  380
  398
  417
  437
Issuance/(repayment) of debt, $m
  25
  29
  33
  38
  42
  46
  50
  54
  58
  62
  67
  71
  76
  80
  85
  90
  96
  101
  107
  113
  119
  126
  132
  139
  147
  155
  163
  171
  180
  189
Issuance/(repurchase) of shares, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  25
  29
  33
  38
  42
  46
  50
  54
  58
  62
  67
  71
  76
  80
  85
  90
  96
  101
  107
  113
  119
  126
  132
  139
  147
  155
  163
  171
  180
  189
Total cash flow (excl. dividends), $m
  203
  206
  210
  215
  220
  226
  233
  241
  249
  258
  268
  278
  289
  301
  314
  328
  342
  357
  374
  391
  409
  428
  449
  470
  493
  517
  542
  569
  597
  627
Retained Cash Flow (-), $m
  -23
  -28
  -31
  -35
  -39
  -43
  -47
  -51
  -55
  -59
  -63
  -67
  -71
  -76
  -80
  -85
  -90
  -95
  -101
  -106
  -112
  -118
  -125
  -131
  -138
  -146
  -153
  -161
  -170
  -178
Prev. year cash balance distribution, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
  180
  179
  179
  179
  181
  183
  186
  190
  194
  199
  205
  211
  218
  226
  234
  242
  252
  262
  273
  285
  297
  310
  324
  339
  355
  372
  389
  408
  428
  448
Discount rate, %
  4.90
  5.15
  5.40
  5.67
  5.96
  6.25
  6.57
  6.89
  7.24
  7.60
  7.98
  8.38
  8.80
  9.24
  9.70
  10.19
  10.70
  11.23
  11.79
  12.38
  13.00
  13.65
  14.33
  15.05
  15.80
  16.59
  17.42
  18.29
  19.21
  20.17
PV of cash for distribution, $m
  172
  162
  153
  144
  136
  127
  119
  111
  104
  96
  88
  80
  73
  65
  58
  51
  45
  39
  33
  28
  23
  19
  15
  12
  9
  7
  5
  4
  3
  2
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Laredo Petroleum, Inc. (Laredo) is an independent energy company. The Company is focused on the acquisition, exploration and development of oil and natural gas properties, and the transportation of oil and natural gas from such properties primarily in the Permian Basin in West Texas. It operates through two segments: Exploration and production of oil and natural gas properties, and Midstream and marketing. The exploration and production of oil and natural gas properties are conducted by it through the exploration and development of its acreage in the Permian Basin. As of December 31, 2016, it had assembled 127,847 net acres in the Permian Basin and had total proved reserves, presented on a three-stream basis, of 167,100 thousand of barrels of oil equivalent (MBOE). The Midstream and marketing segment's operations are conducted by its subsidiary, Laredo Midstream Services, LLC, which buys, sells, gathers and transports oil, natural gas and water primarily for the account of Laredo.

FINANCIAL RATIOS  of  Laredo Petroleum, Inc. (LPI)

Valuation Ratios
P/E Ratio -2.9
Price to Sales 1.3
Price to Book 4.2
Price to Tangible Book
Price to Cash Flow 2.1
Price to Free Cash Flow -5.3
Growth Rates
Sales Growth Rate -1.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -21.3%
Cap. Spend. - 3 Yr. Gr. Rate -8.5%
Financial Strength
Quick Ratio NaN
Current Ratio 0.1
LT Debt to Equity 748.1%
Total Debt to Equity 748.1%
Interest Coverage -2
Management Effectiveness
Return On Assets -9.6%
Ret/ On Assets - 3 Yr. Avg. -24.3%
Return On Total Capital -16.9%
Ret/ On T. Cap. - 3 Yr. Avg. -32.7%
Return On Equity -167.3%
Return On Equity - 3 Yr. Avg. -136.5%
Asset Turnover 0.3
Profitability Ratios
Gross Margin 53.3%
Gross Margin - 3 Yr. Avg. 57.7%
EBITDA Margin -4%
EBITDA Margin - 3 Yr. Avg. -78.2%
Operating Margin -14.9%
Oper. Margin - 3 Yr. Avg. -132.9%
Pre-Tax Margin -43.7%
Pre-Tax Margin - 3 Yr. Avg. -127.6%
Net Profit Margin -43.7%
Net Profit Margin - 3 Yr. Avg. -124.8%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 15.2%
Payout Ratio 0%

LPI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the LPI stock intrinsic value calculation we used $1106 million for the last fiscal year's total revenue generated by Laredo Petroleum, Inc.. The default revenue input number comes from 0001 income statement of Laredo Petroleum, Inc.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our LPI stock valuation model: a) initial revenue growth rate of 2% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.9%, whose default value for LPI is calculated based on our internal credit rating of Laredo Petroleum, Inc., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Laredo Petroleum, Inc..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of LPI stock the variable cost ratio is equal to 65.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $38 million in the base year in the intrinsic value calculation for LPI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 6.5% for Laredo Petroleum, Inc..

Corporate tax rate of 27% is the nominal tax rate for Laredo Petroleum, Inc.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the LPI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for LPI are equal to 179.4%.

Life of production assets of 9.3 years is the average useful life of capital assets used in Laredo Petroleum, Inc. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for LPI is equal to -4.8%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1174.23 million for Laredo Petroleum, Inc. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 233.926 million for Laredo Petroleum, Inc. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Laredo Petroleum, Inc. at the current share price and the inputted number of shares is $0.7 billion.

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