Vital Energy

(Laredo Petroleum)
NYSE: VTLE
Permian E&P producer

Investment Highlights
November.2023
 Assemble Assets -> Develop -> Sell

 Laredo was founded in October 2006 by Randy A. Foutch.

Prior to founding Laredo, Mr. Foutch formed, built and sold three private oil
and gas companies, all of which were focused on the same general areas of the
Business Permian and Mid-Continent regions in which Laredo currently operates.
In 1991, Mr. Foutch formed Colt Resources Corporation ("Colt"), with an
model institutional sponsor. Colt was sold in a private transaction in 1996 for
approximately $33 million. In 1997, Mr. Foutch formed Lariat Petroleum, Inc.
("Lariat") with a large institutional sponsor investing approximately $74 million
in shale oil and using approximately $100 million of debt. In 2001, Lariat subsequently was
sold for approximately $333 million. Most recently, in 2002, Mr. Foutch and
several of our current managers formed Latigo Petroleum, Inc. ("Latigo"), with
institutional sponsors investing approximately $160 million, and utilizing an
additional approximately $200 million of debt. Latigo was sold in 2006 for
approximately $750 million.
All of these companies executed the same fundamental business strategy in
the same general operating areas that created significant growth in cash flow,
production and reserves.
 In potential deals, CEOs look at proved reserves

 Oil producers buy single properties and whole companies in order to

increase inventory which can be developed and turned into oil.

They assess properties by minerals which can be profitably extracted

What basis to from them or, in other words, by proved reserves.

use for asset Ryan Lance of ConocoPhillips: “...in any M&A we look at how much
barrels can be profitably produced at mid-cycle prices”.
valuation  SEC definition of proved reserves:
Proved oil and gas reserves — Proved oil and gas reserves are the
estimated quantities of crude oil, natural gas, and natural gas liquids
which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and
costs as of the date the estimate is made.
 The larger the company, the more 1 BOE is worth

Not all proved

reserves are
equal

Price of 1 BOE of proved reserves implied in market capitalization is correlated with company size.
Smallest players (proved reserves >100 MMBOE) can be valued at 1 BOE = 2 USD while larger peers
closer to 1 BOE = 18 USD.
Exxon Mobil (XOM) and Chevron (CVX) are integrated producers. They’re supposed to add more value
and their BOEs price’s at the top. The largest pure producer is ConocoPhillips (COP).
Other factors include market sentiment towards energy, oil/gas mix in reserves, basins where assets are
located.
 No consistency in Standardized Measure

Standardized
measure is not
consistent
among peers
and doesn’t
reflect price in
M&A
To help outsiders compare oil and gas companies, the SEC requires disclosure of Standardized Measure (SM) –
future after tax cash flows from proved reserves discounted at 10%. PV-10 is a similar measure but before tax.
Price of 1 BOE of proved reserves implied in SM is not indicative of market pricing or company valuation during
M&A.
(Definition of Standardized Measure – The present value of estimated future net revenue to be generated from
the production of proved reserves, determined in accordance with the rules and regulations of the SEC (using
prices and costs in effect as of the date of estimation), less future development, production and income tax
expenses, and discounted at 10% per annum to reflect the timing of future net revenue.)
 Larger size brings higher valuation
Oil companies strive to grow.
They obtain standalone assets at reasonable prices and develop them.
Single small operators often lack sophistication of a public company so
more gas and liquids can be extracted from the same assets. They prefer to
sell to smaller companies in exchange for equity because this way they can
keep upside.
How value is With time, proved reserves and cash flows grow significantly and the
market begins to put higher valuations at a company’s reserves.
created Larger companies can buy smaller peers increasing the market valuation of
the same properties.
Example.
In October, 2020, Pioneer Natural Resources acquired Parsley Energy for
$4.5 billion implying 1 BOE = 8 USD for Parsley’s proved reserves.
In October, 2023, Pioneer Natural Resources was acquired by Exxon Mobil
for $59.5 billion implying 1 BOE = 25 USD for Pioneer’s proved reserves.
 Case Study – Earthstone Energy

Earthstone Energy was small and valued at 1-2 USD per BOE before 2021. Then, in 2020-2022 after a series of
transactions the company increased proved reserves significantly. Together with improved sentiment this brought
proved reserves valuation first to 3, then to 5 USD per 1 BOE.
 Case Study – Earthstone Energy (1)

Earthstone Presentation for EnerCom Denver Conference,

August 2023

In Summer 2023, Earthstone merged with a peer Novo (1/3 of its size) and then was acquired by Permian Resources.
In Novo deal, 1 BOE = 14 USD. In Earthstone acquisition by Permian Resources, 1 BOE = 7 USD.
 Market Cap, SM, proved reserves in 2013-2023

Vital Energy
 Producing and uncompleted wells March 2023

Vital Energy
 Economics of recent deals

Vital Energy
 Proved reserves and cash flow in 2024

Vital Energy

What could be market cap in 2024?

In 2023, Vital Energy performed 5 acquisitions which materially improve company position and move it to larger
category based on proved reserves suggesting higher valuation per BOE.
QA.