Permian Basin-focused driller Laredo Petroleum (LPI -0.07%) tumbled 12.2% last month despite a more than 5% improvement in oil prices. That's because investors just couldn't shake what they saw in the company's third-quarter results.
On the surface, that report looked just fine. Laredo reported adjusted net income of $33.1 million, or $0.13 per share, which matched analysts' expectations. Further, the oil driller noted that production rose 17% year over year to a record 60,011 barrels of oil equivalent per day (BOE/D) while lease operating costs fell 8% to a new low of $3.55 per BOE.
However, investors seemed to overlook those solid numbers after hearing about Laredo Petroleum's expansion plans. The driller stated that it expects to deliver a double-digit oil production growth rate over the next two years, but that it would have to outspend cash flow to achieve that plan. In fact, it didn't think it would be able to live within operating cash flow until the end of 2019. While Laredo has the financial resources to finance that expansion after selling its interest in the Medallion-Midland Basin pipeline system, the decision to outspend cash flow to fuel production growth is aggressive compared to peers and suggests the company isn't getting the same production bang for its capital dollars.
For example, fellow Permian producer Concho Resources (CXO) is on pace to boost production by a 20% compound annual growth rate through 2020 while living within cash flow. In fact, Concho has generated $440 million in free cash flow over the past two years even as it has increased production, which has enabled it to pay down debt. That ability to grow production at a rapid pace without spending everything that comes in and then some puts Concho on a much firmer footing in what remains a volatile oil price environment.
Laredo Petroleum's ambitious growth strategy could pay off if oil cooperates. However, plenty of other oil stocks can achieve similar, if not better, growth rates while living comfortably within cash flow. That makes them much safer bets in what remains an uncertain oil market.