As of 2:45 p.m. EST on Dec. 3, shares of independent oil producer Laredo Petroleum (NYSE: LPI) are up 14.9% in very heavy trading. In short, Laredo's stock price is riding the big wave created by the latest news out of Canada, which has crude oil prices up more than 3% today.
Image source: Getty Images.
Alberta, Canada's main oil-producing province, would be enforcing a nearly 9% production cut beginning next month. Oil markets are rejoicing at this news, which will help bring Alberta's oil output with what its pipelines can actually ship to refiners and export terminals. Recently, that production has outpaced pipeline capacity by nearly 200,000 barrels per day. This reduced supply should significantly boost the price Canadian producers can realize for their product, but could also -- as today's oil price surge shows -- help stabilize global oil prices, which have been falling for a couple of months now.
The interesting thing about this move today with regards to Laredo Petroleum is that it has no "dog" in the Canadian oil production fight. Nearly all of the company's oil and gas production takes place in the massive Permian shale formation, located in west Texas and eastern New Mexico.
So why is it riding so high today? In short, because it's one of the most beaten-down of the Permian producers. Even with today's big double-digit jump, its share price is still down well over half this year and far more than other Permian producers.
At the same time, none of these other Permian producers are seeing their stock prices jump by double digits. On average, most are up around 5% or so today.
Higher oil prices are certainly very good news for Laredo Petroleum, particularly since a large portion of its crude is shipped by truck or rail, which cuts into the price it realizes. And that's going to remain the case until late 2019, when Phillips 66 Partners' Gray Oak pipeline is scheduled to come on line.
In the interim, management has established a number of hedges that have -- and should continue -- to mitigate the downside to some extent, though they also offset some of the potential gains from higher prices.
But Laredo also carries a relatively high debt load, and its debt level has continued to increase over the past year, even as its cash flows are set to continue to be squeezed by the Permian's pipeline woes over the next year.
Put it all together, and even with its hedges, Laredo is one of the riskier small, independent producers out there.
Think about it this way: If you're bullish on oil prices rebounding, and willing to ride out the next year as it waits on Gray Oak to come on line and cut its transportation costs significantly, Laredo could be worth buying even after today's big jump. But if oil prices continue to fall -- the cut by Alberta is a veritable drop in the global bucket -- then Laredo has a little less margin of safety than others, and would likely be one of the hardest hit. Keep that in mind.
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