UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
For the quarterly period ended September 30, 2019
or
For the transition period from to
Commission File Number: 001-35380
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) | (Zip code) | |
(918 ) 513-4570
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
☒ | Accelerated filer | ☐ | |
Non-accelerated filer | ☐ | Smaller reporting company | |
Emerging growth company | |||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
Number of shares of registrant's common stock outstanding as of November 4, 2019: 237,133,539
LAREDO PETROLEUM, INC.
TABLE OF CONTENTS
Page | |
ii
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (this "Quarterly Report") are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include statements, projections and estimates concerning our operations, performance, business strategy, oil, natural gas liquids ("NGL") and natural gas reserves, drilling program capital expenditures, liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, derivative activities and potential financing. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "potential," "could," "may," "will," "foresee," "plan," "goal," "should," "intend," "pursue," "target," "continue," "suggest" or the negative thereof or other variations thereof or other words that convey the uncertainty of future events or outcomes. Forward-looking statements are not guarantees of performance. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Among the factors that significantly impact our business and could impact our business in the future are:
• | the volatility of oil, NGL and natural gas prices, including in our area of operation in the Permian Basin; |
• | our ability to discover, estimate, develop and replace oil, NGL and natural gas reserves and inventory; |
• | changes in domestic and global production, supply and demand for oil, NGL and natural gas; |
• | revisions to our reserve estimates as a result of changes in commodity prices, decline curves and other uncertainties; |
• | the long-term performance of wells that were completed using different technologies; |
• | the ongoing instability and uncertainty in the United States and international financial and consumer markets that could adversely affect the liquidity available to us and our customers and the demand for commodities, including oil, NGL and natural gas; |
• | the potential impact of tighter spacing of our wells on production of oil, NGL and natural gas from our wells; |
• | capital requirements for our operations and projects; |
• | impacts of impairment write-downs on our financial statements; |
• | the availability and costs of drilling and production equipment, supplies, labor and oil and natural gas processing and other services; |
• | the availability and costs of sufficient pipeline and transportation facilities and gathering and processing capacity; |
• | our ability to maintain the borrowing capacity under our Fifth Amended and Restated Senior Secured Credit Facility (as amended, the "Senior Secured Credit Facility") or access other means of obtaining capital and liquidity, especially during periods of sustained low commodity prices; |
• | our ability to successfully identify and consummate strategic acquisitions, including the pending Acquisition (as defined below), at purchase prices that are accretive to our financial results and to successfully integrate acquired businesses, assets and properties; |
• | our ability to generate sufficient cash to service our indebtedness, fund our capital requirements and generate future profits; |
• | restrictions contained in our debt agreements, including our Senior Secured Credit Facility and the indentures governing our senior unsecured notes, as well as debt that could be incurred in the future; |
• | our ability to recruit and retain the qualified personnel necessary to operate our business; |
• | the potentially insufficient refining capacity in the United States Gulf Coast to refine all of the light sweet crude oil being produced in the United States, which could result in widening price discounts to world crude prices and potential shut-in of production due to lack of sufficient markets; |
• | risks related to the geographic concentration of our assets; |
• | our ability to hedge and regulations that affect our ability to hedge; |
iii
• | changes in the regulatory environment and changes in United States or international legal, tax, political, administrative or economic conditions, including regulations that prohibit or restrict our ability to apply hydraulic fracturing to our oil and natural gas wells and to access and dispose of water used in these operations; |
• | legislation or regulations that prohibit or restrict our ability to drill new allocation wells; |
• | our ability to execute our strategies; |
• | competition in the oil and natural gas industry; |
• | drilling and operating risks, including risks related to hydraulic fracturing activities; and |
• | our ability to comply with federal, state and local regulatory requirements. |
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report, under "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 Annual Report") and those set forth from time to time in our other filings with the Securities and Exchange Commission (the "SEC"). These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report or, if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities law.
iv
Part I
Item 1. Consolidated Financial Statements (Unaudited)
Laredo Petroleum, Inc.
Consolidated balance sheets
(in thousands, except share data)
(Unaudited)
September 30, 2019 | December 31, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Accounts receivable, net | ||||||||
Derivatives | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property and equipment: | ||||||||
Oil and natural gas properties, full cost method: | ||||||||
Evaluated properties | ||||||||
Unevaluated properties not being depleted | ||||||||
Less accumulated depletion and impairment | ( | ) | ( | ) | ||||
Oil and natural gas properties, net | ||||||||
Midstream service assets, net | ||||||||
Other fixed assets, net | ||||||||
Property and equipment, net | ||||||||
Derivatives | ||||||||
Operating lease right-of-use assets | — | |||||||
Other noncurrent assets, net | ||||||||
Total assets | $ | $ | ||||||
Liabilities and stockholders' equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued liabilities | $ | $ | ||||||
Accrued capital expenditures | ||||||||
Undistributed revenue and royalties | ||||||||
Derivatives | ||||||||
Operating lease liabilities | — | |||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt, net | ||||||||
Asset retirement obligations | ||||||||
Operating lease liabilities | — | |||||||
Other noncurrent liabilities | ||||||||
Total liabilities | ||||||||
Commitments and contingencies | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of September 30, 2019 and December 31, 2018 | ||||||||
Common stock, $0.01 par value, 450,000,000 shares authorized and 237,673,895 and 233,936,358 issued and outstanding as of September 30, 2019 and December 31, 2018, respectively | ||||||||
Additional paid-in capital | ||||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total stockholders' equity | ||||||||
Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
1
Laredo Petroleum, Inc.
Consolidated statements of operations
(in thousands, except per share data)
(Unaudited)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Revenues: | ||||||||||||||||
Oil sales | $ | $ | $ | $ | ||||||||||||
NGL sales | ||||||||||||||||
Natural gas sales | ||||||||||||||||
Midstream service revenues | ||||||||||||||||
Sales of purchased oil | ||||||||||||||||
Total revenues | ||||||||||||||||
Costs and expenses: | ||||||||||||||||
Lease operating expenses | ||||||||||||||||
Production and ad valorem taxes | ||||||||||||||||
Transportation and marketing expenses | ||||||||||||||||
Midstream service expenses | ||||||||||||||||
Costs of purchased oil | ||||||||||||||||
General and administrative | ||||||||||||||||
Restructuring expenses | ||||||||||||||||
Depletion, depreciation and amortization | ||||||||||||||||
Impairment expense | ||||||||||||||||
Other operating expenses | ||||||||||||||||
Total costs and expenses | ||||||||||||||||
Operating income (loss) | ( | ) | ( | ) | ||||||||||||
Non-operating income (expense): | ||||||||||||||||
Gain (loss) on derivatives, net | ( | ) | ( | ) | ||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Litigation settlement | ||||||||||||||||
Gain (loss) on disposal of assets, net | ( | ) | ( | ) | ( | ) | ||||||||||
Other income (expense), net | ( | ) | ||||||||||||||
Total non-operating income (expense), net | ( | ) | ( | ) | ||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | ||||||||||||
Income tax benefit (expense): | ||||||||||||||||
Current | ||||||||||||||||
Deferred | ( | ) | ( | ) | ||||||||||||
Total income tax benefit (expense) | ( | ) | ( | ) | ||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Net income (loss) per common share: | ||||||||||||||||
Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Weighted-average common shares outstanding: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted | ||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
2
Laredo Petroleum, Inc.
Consolidated statements of stockholders' equity
(in thousands)
(Unaudited)
Common stock | Additional paid-in capital | Treasury stock (at cost) | Accumulated deficit | |||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||
Balance, December 31, 2018 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Restricted stock awards | ( | ) | — | — | — | — | ||||||||||||||||||||
Restricted stock forfeitures | ( | ) | — | — | — | — | — | — | ||||||||||||||||||
Stock exchanged for tax withholding | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Stock exchanged for cost of exercise of stock options | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | ( | ) | ( | ) | — | — | ||||||||||||||||
Exercise of stock options | — | — | — | — | ||||||||||||||||||||||
Stock-based compensation (See Note 6.c) | — | — | — | — | — | |||||||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Balance, March 31, 2019 | ( | ) | ||||||||||||||||||||||||
Restricted stock awards | ( | ) | — | — | — | — | ||||||||||||||||||||
Restricted stock forfeitures | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||
Stock exchanged for tax withholding | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | ( | ) | — | — | ||||||||||||||||||
Stock-based compensation (See Note 6.c) | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||
Balance, June 30, 2019 | ( | ) | ||||||||||||||||||||||||
Restricted stock awards | ( | ) | — | — | — | — | ||||||||||||||||||||
Restricted stock forfeitures | ( | ) | — | — | — | — | ||||||||||||||||||||
Stock exchanged for tax withholding | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | ( | ) | — | — | ||||||||||||||||||
Stock-based compensation (See Note 6.c) | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||
Net loss | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||
Balance, September 30, 2019 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
3
Common stock | Additional paid-in capital | Treasury stock (at cost) | Accumulated deficit | |||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||
Balance, December 31, 2017 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
Adjustment to the beginning balance of accumulated deficit upon adoption of ASC 606 (see Note 13.a) | — | — | — | — | — | |||||||||||||||||||||
Restricted stock awards | ( | ) | — | — | — | — | ||||||||||||||||||||
Restricted stock forfeitures | ( | ) | — | — | — | — | — | — | ||||||||||||||||||
Share repurchases | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Stock exchanged for tax withholding | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | ( | ) | ( | ) | — | — | ||||||||||||||||
Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||
Balance, March 31, 2018 | ( | ) | ||||||||||||||||||||||||
Restricted stock awards | ( | ) | — | — | — | — | ||||||||||||||||||||
Restricted stock forfeitures | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||
Share repurchases | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Stock exchanged for tax withholding | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | ( | ) | ( | ) | — | — | ||||||||||||||||
Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||
Balance, June 30, 2018 | ( | ) | ||||||||||||||||||||||||
Restricted stock awards | ( | ) | — | — | — | — | ||||||||||||||||||||
Restricted stock forfeitures | ( | ) | ( | ) | — | — | — | — | ||||||||||||||||||
Share repurchases | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Stock exchanged for tax withholding | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||
Retirement of treasury stock | ( | ) | ( | ) | ( | ) | ( | ) | — | — | ||||||||||||||||
Exercise of stock options | — | — | — | — | ||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | |||||||||||||||||||||
Net income | — | — | — | — | — | |||||||||||||||||||||
Balance, September 30, 2018 | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
4
Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited)
Nine months ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | ( | ) | $ | ||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Deferred income tax (benefit) expense | ( | ) | ||||||
Depletion, depreciation and amortization | ||||||||
Impairment expense | ||||||||
Non-cash stock-based compensation, net | ||||||||
Mark-to-market on derivatives: | ||||||||
(Gain) loss on derivatives, net | ( | ) | ||||||
Settlements received (paid) for matured derivatives, net | ( | ) | ||||||
Settlements paid for early terminations of derivatives, net | ( | ) | ||||||
Change in net present value of derivative deferred premiums | ||||||||
Premiums paid for derivatives | ( | ) | ( | ) | ||||
Amortization of debt issuance costs | ||||||||
Amortization of operating lease right-of-use assets | ||||||||
Other, net | ||||||||
Decrease (increase) in accounts receivable, net | ( | ) | ||||||
Increase in other current assets | ( | ) | ( | ) | ||||
Decrease in other noncurrent assets, net | ||||||||
(Decrease) increase in accounts payable and accrued liabilities | ( | ) | ||||||
(Decrease) increase in undistributed revenue and royalties | ( | ) | ||||||
Decrease in other current liabilities | ( | ) | ( | ) | ||||
Decrease in other noncurrent liabilities | ( | ) | ( | ) | ||||
Net cash provided by operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Acquisitions of oil and natural gas properties | ( | ) | ( | ) | ||||
Capital expenditures: | ||||||||
Oil and natural gas properties | ( | ) | ( | ) | ||||
Midstream service assets | ( | ) | ( | ) | ||||
Other fixed assets | ( | ) | ( | ) | ||||
Proceeds from disposition of equity method investee, net of selling costs | ||||||||
Proceeds from disposition of capital assets, net of selling costs | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings on Senior Secured Credit Facility | ||||||||
Payments on Senior Secured Credit Facility | ( | ) | ( | ) | ||||
Share repurchases | ( | ) | ||||||
Stock exchanged for tax withholding | ( | ) | ( | ) | ||||
Proceeds from exercise of stock options | ||||||||
Payments for debt issuance costs | ( | ) | ||||||
Net cash (used in) provided by financing activities | ( | ) | ||||||
Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||
Cash and cash equivalents, beginning of period | ||||||||
Cash and cash equivalents, end of period | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited consolidated financial statements.
5
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 1—Organization and basis of presentation
a. Organization
Laredo Petroleum, Inc. ("Laredo"), together with its wholly-owned subsidiaries, Laredo Midstream Services, LLC ("LMS") and Garden City Minerals, LLC ("GCM"), is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties, and midstream and marketing services, primarily in the Permian Basin of West Texas. LMS and GCM (together, the "Guarantors") guarantee all of Laredo's debt instruments. In these notes, the "Company" refers to Laredo, LMS and GCM collectively, unless the context indicates otherwise. All amounts, dollars and percentages presented in these unaudited consolidated financial statements and the related notes are rounded and, therefore, approximate.
b. Basis of presentation
The unaudited consolidated financial statements were derived from the historical accounting records of the Company and reflect the historical financial position, results of operations and cash flows for the periods described herein. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All material intercompany transactions and account balances have been eliminated in the consolidation of accounts.
The unaudited consolidated financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet as of December 31, 2018 is derived from audited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all necessary adjustments to present fairly the Company's financial position as of September 30, 2019, results of operations for the three and nine months ended September 30, 2019 and 2018 and cash flows for the nine months ended September 30, 2019 and 2018.
Certain disclosures have been condensed or omitted from the unaudited consolidated financial statements. Accordingly, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2018 Annual Report.
Significant accounting policies
See Note 2 in the 2018 Annual Report for discussion of significant accounting policies and Note 3 for those related to the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842, Leases ("ASC 842").
Use of estimates in the preparation of interim unaudited consolidated financial statements
The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ.
For further information regarding the use of estimates and assumptions, see Note 2.b in the 2018 Annual Report, Note 3 pertaining to the Company's leases and Note 6.c pertaining to the Company's 2019 performance share awards and outperformance share award.
Note 2—New accounting standards
The Company considers the applicability and impact of all accounting standard updates ("ASU") issued by the FASB and has determined there are no ASUs that are not yet adopted and meaningful to disclose as of September 30, 2019.
Accounting standard adopted
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and applying the optional transition method as of the beginning of the period of adoption. Results for the period beginning after January 1, 2019 are presented under ASC 842, while prior periods are not adjusted and continue to be reported under ASC 840, Leases ("ASC 840"). The Company utilized the transition package of expedients for leases that commenced before the effective date. ASC 842 supersedes previous lease guidance in ASC 840. The core principle of the new guidance is that a lessee should recognize on the balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term related to its leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy
6
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
election, by class of underlying asset, not to recognize lease assets and lease liabilities. See Note 3 for further discussion of the ASC 842 adoption impact on the Company's unaudited consolidated financial statements.
Note 3—Leases
Impact of ASC 842 adoption
Prior to January 1, 2019, the Company accounted for leases under ASC 840 and did not record any right-of-use assets or corresponding lease liabilities. Upon the adoption of ASC 842 on January 1, 2019, the Company recognized $22.1 million in operating lease right-of-use assets and $25.3 million in operating lease liabilities on the unaudited consolidated balance sheet for operating leases with a term greater than 12 months. The difference between the two balances of $3.2 million is mainly due to free rent and lease build-out incentives that were recorded as deferred lease liabilities under ASC 840. These deferred lease liabilities are subtracted from the right-of-use asset opening balance under ASC 842. The transition did not result in a material impact to the unaudited consolidated statements of operations nor was there a related impact to the unaudited consolidated statements of stockholders' equity.
The Company utilized the modified retrospective approach in adopting the new standard and applied the optional transition method as of the beginning of the period of adoption, along with the transition package of practical expedients, and implemented certain accounting policy decisions which include: (i) short-term lease recognition exemption, (ii) establishing a balance sheet recognition capitalization threshold, (iii) not evaluating existing or expired land easements that were not previously accounted for as leases under ASC 840 and (iv) accounting for certain asset classes at a portfolio level by not separating the lease and non-lease components and accounting for the agreement as a single lease component.
The Company determines whether a contract is or contains a lease at inception of the contract, based on answers to a series of questions that address whether an identified asset exists and whether the Company has the right to obtain substantially all of the benefit of the asset and to control its use over the full term of the agreement. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company's leases do not provide a readily determinable implicit rate. In such cases, the Company is required to use its incremental borrowing rate ("IBR"). The Company determines its IBR using both a "credit notching" approach and a "recovery method" approach. The results of these approaches are then weighted equally and averaged in order to determine the concluded IBR. This concluded IBR is utilized to discount the lease payments based on information available at lease commencement. There are no material residual value guarantees, nor any restrictions or covenants included in the Company's lease agreements.
Mineral leases, including oil and natural gas leases granting the right to explore for those natural resources and rights to use the land in which those natural resources are contained, are not included in the scope of ASC 842.
The Company has recognized operating lease right-of-use assets and operating lease liabilities on the unaudited consolidated balance sheet for leases of commercial real estate with lease terms extending into 2027 and drilling, completion, production and other equipment leases with lease terms extending through 2021. An additional drilling rig contract commenced subsequent to September 30, 2019, with a lease term extending into 2021. Accordingly, the Company will recognize an operating lease right-of-use asset and an operating lease liability on the unaudited consolidated balance sheet of $16.9 million on the drilling rig contract's commencement date. The Company has various other drilling, completion and production equipment leases on a short-term basis which are reflected in short-term lease costs.
The Company's lease costs include those that are recognized in net income (loss) during the period and capitalized as part of the cost of another asset in accordance with other GAAP.
The lease costs related to drilling, completion and production activities are reflected at the Company's net ownership, which is consistent with the principals of proportional consolidation, and lease commitments are reflected on a gross basis. As of September 30, 2019, the Company had an average working interest of 97 % in Laredo-operated active productive wells in its core operating area.
Certain of the Company's leases include provisions for variable payments. These variable payments are typically determined based on a measure of throughput, actual days or another measure of usage. For our drilling rigs, the variable lease costs include the payments that depend on the performance or usage of the underlying asset, the costs to move and the costs to repair the drilling rigs. For certain of our commercial office buildings, utilities and common area, the variable lease costs are the variable maintenance charges. For our equipment leases, the variable lease costs are the amounts incurred under our contracts that are beyond the minimum rental fee, inclusive of maintenance.
7
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The Company subleases certain office space to third parties but remains the primary obligor under the head lease. The lease terms on those subleases each contain renewal options that do not extend past the term of the head lease. The subleases do not contain residual value guarantees. Sublease income is recognized based on the contract terms and, upon the adoption of ASC 842, is included as a reduction of lease expense under the head lease.
Certain of the Company's operating lease right-of-use asset classes include options to renew on a month-to-month basis. The Company considers contract-based, asset-based, market-based, and entity-based factors to determine the term over which it is reasonably certain to extend the lease in determining its right-of-use assets and liabilities.
The Company's material leases do not include options to purchase the leased property.
The Company does not have any significant finance leases.
Lease costs
The following table presents components of total lease costs, net for the periods presented:
_____________________________________________________________________________
(in thousands) | Three months ended September 30, 2019 | Nine months ended September 30, 2019 | ||||||
Operating lease costs(1) | $ | $ | ||||||
Short-term lease costs(2) | ||||||||
Variable lease costs(3) | ||||||||
Sublease income | ( | ) | ( | ) | ||||
Total lease costs, net | $ | $ | ||||||
(1) | Amounts represent straight-line costs associated with the Company's operating lease right-of-use assets. |
(2) | Amounts include costs associated with the Company's short-term leases that are not included in the calculation of lease liabilities and right-of-use assets and, therefore, are not recorded on the unaudited consolidated balance sheets as such. |
(3) | Amounts are primarily comprised of the non-lease service component of drilling rig commitments above the minimum required payments, and are not included in the calculation of lease liabilities and right-of-use assets. Both the minimum required payments and the non-lease service component of the drilling rig commitments are capitalized as additions to oil and natural gas properties. |
Operating leases
Supplemental cash flow information
The following table presents cash paid for amounts included in the measurement of operating lease liabilities, which may not agree to operating lease costs due to timing of cash payments and costs incurred for the periods presented:
_____________________________________________________________________________
(in thousands) | Three months ended September 30, 2019 | Nine months ended September 30, 2019 | ||||||
Operating cash flows from operating leases | $ | $ | ||||||
Investing cash flows from operating leases(1) | $ | $ | ||||||
(1) | Amounts associated with drilling operations are capitalized as additions to oil and natural gas properties. |
Lease terms and discount rates
The following table presents the weighted-average remaining lease term and weighted-average discount rate for operating leases as of the date presented:
September 30, 2019 | |||
Weighted-average remaining lease term | |||
Weighted-average discount rate | % | ||
8
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Maturities
The following table reconciles the undiscounted cash flows for recognized operating lease liabilities for each of the first five years and the total remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of the date presented:
(in thousands) | September 30, 2019 | |||
Remaining 2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total minimum lease payments | ||||
Less: lease liability expense | ( | ) | ||
Present value of future minimum lease payments | ||||
Less: current operating lease liabilities | ( | ) | ||
Noncurrent operating lease liabilities | $ | |||
Other information
See Note 11 for disclosure of supplemental non-cash adjustments information related to operating leases. See Note 15 for disclosure of related-party lease amounts.
Disclosure for the period prior to adoption of ASC 842
As of December 31, 2018, the Company leased office space under operating leases expiring on various dates through 2027. The following table presents future minimum rental payments required as of the date presented:
(in thousands) | December 31, 2018 | |||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Thereafter | ||||
Total future minimum rental payments required | $ | |||
The Company has subleased certain office space with $5.9 million of total future minimum rentals to be received as of December 31, 2018. For the period prior to the adoption of ASC 842, rent income is included in "Other income, net" on the consolidated statements of operations.
9
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 4—Property and equipment
The following table presents the Company's property and equipment as of the dates presented:
(in thousands) | September 30, 2019 | December 31, 2018 | ||||||
Evaluated oil and natural gas properties | $ | $ | ||||||
Less accumulated depletion and impairment | ( | ) | ( | ) | ||||
Evaluated oil and natural gas properties, net | ||||||||
Unevaluated oil and natural gas properties not being depleted | ||||||||
Midstream service assets | ||||||||
Less accumulated depreciation and impairment | ( | ) | ( | ) | ||||
Midstream service assets, net | ||||||||
Depreciable other fixed assets | ||||||||
Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
Depreciable other fixed assets, net | ||||||||
Land | ||||||||
Total property and equipment, net | $ | $ | ||||||
The following table presents costs incurred in the acquisition, exploration and development of oil and natural gas properties, with asset retirement obligations included in evaluated property acquisition costs and development costs, for the periods presented:
_____________________________________________________________________________
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Property acquisition costs(1): | — | |||||||||||||||
Evaluated | $ | $ | $ | $ | ||||||||||||
Unevaluated | ||||||||||||||||
Exploration costs | ||||||||||||||||
Development costs | ||||||||||||||||
Total oil and natural gas properties costs incurred | $ | $ | $ | $ | ||||||||||||
(1) | See Note 3.a in the third-quarter 2018 Quarterly Report for discussion of the Company's acquisitions of evaluated and unevaluated oil and natural gas properties during the nine months ended September 30, 2018. |
10
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The following table presents capitalized related employee costs incurred for the purpose of exploring for or developing oil and natural gas properties for the periods presented:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Capitalized related employee costs | $ | $ | $ | $ | ||||||||||||
The Company excludes the costs directly associated with the acquisition and evaluation of unevaluated properties from the depletion calculation until it is determined whether or not proved reserves can be assigned to the properties. The Company capitalizes a portion of its interest costs to its unevaluated properties. Capitalized interest becomes a part of the cost of the unevaluated properties and is subject to depletion when proved reserves can be assigned to the associated properties. All items classified as unevaluated properties are assessed on a quarterly basis for possible impairment. The assessment includes consideration of the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of evaluated reserves and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion.
The following table presents our depletion expense for our evaluated oil and natural gas properties per barrel of oil equivalent ("BOE") sold for the periods presented:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Depletion expense per BOE sold | $ | $ | $ | $ | ||||||||||||
The full cost ceiling is based principally on the estimated future net revenues from proved oil and natural gas properties discounted at 10%. The SEC guidelines require companies to use the unweighted arithmetic average first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period before differentials ("Benchmark Prices"). The Benchmark Prices are then adjusted for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the delivery point ("Realized Prices"). The Realized Prices are utilized to calculate the discounted future net revenues in the full cost ceiling calculation. Significant inputs included in the calculation of discounted cash flows used in the impairment analysis include the Company's estimate of operating and development costs, anticipated production of proved reserves and other relevant data. In the event the unamortized cost of evaluated oil and natural gas properties being depleted exceeds the full cost ceiling, as defined by the SEC, the excess is charged to expense in the period such excess occurs. Once incurred, a write-down of oil and natural gas properties is not reversible.
The following table presents the Benchmark Prices and the Realized Prices as of the dates presented:
_____________________________________________________________________________
September 30, 2019 | June 30, 2019 | March 31, 2019 | December 31, 2018 | September 30, 2018 | ||||||||||||||||
Benchmark Prices: | ||||||||||||||||||||
Oil ($/Bbl) | $ | $ | $ | $ | $ | |||||||||||||||
NGL ($/Bbl)(1) | $ | $ | $ | $ | $ | |||||||||||||||
Natural gas ($/MMBtu) | $ | $ | $ | $ | $ | |||||||||||||||
Realized Prices: | ||||||||||||||||||||
Oil ($/Bbl) | $ | $ | $ | $ | $ | |||||||||||||||
NGL ($/Bbl) | $ | $ | $ | $ | $ | |||||||||||||||
Natural gas ($/Mcf) | $ | $ | $ | $ | $ | |||||||||||||||
(1) | Based on the Company's average composite NGL barrel. |
11
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 5—Debt
a. March 2023 Notes
On March 18, 2015, the Company completed an offering of $350.0 million in aggregate principal amount of 6 1/4% senior unsecured notes due 2023 (the "March 2023 Notes"). The March 2023 Notes will mature on March 15, 2023 and bear an interest rate of 6 1/4% per annum, payable semi-annually, in cash in arrears on March 15 and September 15 of each year, commencing September 15, 2015. The March 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain automatic customary releases, including the sale, disposition or transfer of all of the capital stock or of all or substantially all of the assets of a subsidiary guarantor to one or more persons that are not the Company or a restricted subsidiary, exercise of legal defeasance or covenant defeasance options or satisfaction and discharge of the applicable indenture, designation of a subsidiary guarantor as a non-guarantor restricted subsidiary or as an unrestricted subsidiary in accordance with the applicable indenture, release from guarantee under the Senior Secured Credit Facility, or liquidation or dissolution (collectively, the "Releases"). The Company may redeem, at its option, all or part of the March 2023 Notes at any time at a price of 103.125 % of face value with call premiums declining annually to 100 % of face value on March 15, 2021 and thereafter plus accrued and unpaid interest to, but not including, the date of redemption.
b. January 2022 Notes
On January 23, 2014, the Company completed an offering of $450.0 million in aggregate principal amount of 5 5/8% senior unsecured notes due 2022 (the "January 2022 Notes"). The January 2022 Notes will mature on January 15, 2022 and bear an interest rate of 5 5/8% per annum, payable semi-annually, in cash in arrears on January 15 and July 15 of each year, commencing July 15, 2014. The January 2022 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain Releases. The Company may redeem, at its option, all or part of the January 2022 Notes at any time at a price of 101.406 % of face value with call premiums declining to 100 % of face value on January 15, 2020 and thereafter plus accrued and unpaid interest to, but not including, the date of redemption.
c. Senior Secured Credit Facility
The Senior Secured Credit Facility matures on April 19, 2023, provided that if either the January 2022 Notes or March 2023 Notes have not been refinanced on or prior to the date (as applicable, the "Early Maturity Date") that is 90 days before their respective stated maturity dates, the Senior Secured Credit Facility will mature on such Early Maturity Date. As of September 30, 2019, the Senior Secured Credit Facility had a maximum credit amount of $2.0 billion, a borrowing base and an aggregate elected commitment of $1.1 billion each, with $185.0 million outstanding and was subject to an interest rate of 3.31 %. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which the Company was in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or $80.0 million. As of September 30, 2019 and December 31, 2018, the Company had one letter of credit outstanding of $14.7 million under the Senior Secured Credit Facility. The Senior Secured Credit Facility is fully and unconditionally guaranteed by LMS and GCM. For additional information see Note 7.d in the 2018 Annual Report. See Note 18.a for discussion of an additional payment on the Senior Secured Credit Facility and the semi-annual borrowing base redetermination of the Senior Secured Credit Facility subsequent to September 30, 2019.
12
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
d. Long-term debt, net
The following table summarizes the net presentation of the Company's long-term debt and debt issuance costs on the unaudited consolidated balance sheets as of the dates presented:
September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
(in thousands) | Long-term debt | Debt issuance costs, net | Long-term debt, net | Long-term debt | Debt issuance costs, net | Long-term debt, net | ||||||||||||||||||
January 2022 Notes | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
March 2023 Notes | ( | ) | ( | ) | ||||||||||||||||||||
Senior Secured Credit Facility(1) | ||||||||||||||||||||||||
Total | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
(1) | Debt issuance costs, net related to our Senior Secured Credit Facility of $ |
Note 6—Stockholders' equity and Equity Incentive Plan
a. Share repurchase program
In February 2018, the Company's board of directors authorized a $200 million share repurchase program commencing in February 2018. The repurchase program expires in February 2020. Share repurchases under the share repurchase program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions and block trades. The timing and actual number of share repurchases will depend upon several factors, including market conditions, business conditions, the trading price of the Company's common stock and the nature of other investment opportunities available to the Company. During the year ended December 31, 2018, the Company repurchased 11,048,742 shares of common stock at a weighted-average price of $8.78 per common share for a total of $97.1 million under this program. All shares were retired upon repurchase. There were no share repurchases under this program during the nine months ended September 30, 2019.
b. Treasury stock
Treasury stock is recorded at cost, which includes incremental direct transaction costs, and is retired upon acquisition as a result from (i) share repurchases under the share repurchase program, (ii) stock exchanged to satisfy tax withholding that arises upon the lapse of restrictions on incentive awards at the awardee's election and (iii) stock exchanged for the cost of exercise of stock options at the awardee's election.
c. Equity Incentive Plan
The Laredo Petroleum, Inc. Omnibus Equity Incentive Plan, as amended and restated as of May 16, 2019 (the "Equity Incentive Plan"), provides for the granting of incentive awards in the form of restricted stock awards, stock option awards, performance share awards, outperformance share awards, performance unit awards and other awards. During the nine months ended September 30, 2019, the Company's stockholders approved an amendment to the Equity Incentive Plan, among other items, to increase the maximum number of shares of the Company's common stock issuable under the Equity Incentive Plan from 24,350,000 shares to 29,850,000 shares.
13
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Restricted stock awards
All service vesting restricted stock awards are treated as issued and outstanding in the unaudited consolidated financial statements. Per the award agreement terms, if employment is terminated prior to the restriction lapse date for reasons other than death or disability, the restricted stock awards are forfeited and canceled and are no longer considered issued and outstanding. If the termination of employment is by reason of death or disability, all of the holder's restricted stock will automatically vest. Restricted stock awards granted to employees vest in a variety of schedules that mainly include (i) 33 %, 33 % and 34 % vesting per year beginning on the first anniversary of the grant date and (ii) full vesting on the first anniversary of the grant date. Stock awards granted to non-employee directors vest immediately on the grant date. See Note 17 for discussion of the Company's organizational restructuring during the three and nine months ended September 30, 2019 and expected fourth-quarter 2019 forfeitures.
The following table reflects the restricted stock award activity for the nine months ended September 30, 2019:
_____________________________________________________________________________
(in thousands, except for weighted-average grant-date fair value) | Restricted stock awards | Weighted-average grant-date fair value (per award) | |||||
Outstanding as of December 31, 2018 | $ | ||||||
Granted | $ | ||||||
Forfeited | ( | ) | $ | ||||
Vested(1) | ( | ) | $ | ||||
Outstanding as of September 30, 2019 | $ | ||||||
(1) |
The Company utilizes the closing stock price on the grant date to determine the fair value of restricted stock awards. As of September 30, 2019, unrecognized stock-based compensation related to the restricted stock awards expected to vest was $16.5 million. Such cost is expected to be recognized over a weighted-average period of 2.09 years.
Stock option awards
The following table reflects the stock option award activity for the nine months ended September 30, 2019:
_____________________________________________________________________________
(in thousands, except for weighted-average exercise price and weighted-average remaining contractual term) | Stock option awards | Weighted-average exercise price (per award) | Weighted-average remaining contractual term (years) | ||||||
Outstanding as of December 31, 2018 | $ | ||||||||
Exercised(1) | ( | ) | $ | ||||||
Expired or canceled | ( | ) | $ | ||||||
Forfeited | ( | ) | $ | ||||||
Outstanding as of September 30, 2019 | $ | ||||||||
Vested and exercisable as of September 30, 2019(2) | $ | ||||||||
Expected to vest as of September 30, 2019(3) | $ | ||||||||
(1) | The exercised stock option awards for the nine months ended September 30, 2019 had de minimis intrinsic value. |
(2) | The vested and exercisable stock option awards as of September 30, 2019 had |
(3) | The expected to vest stock option awards as of September 30, 2019 had |
As of September 30, 2019, unrecognized stock-based compensation related to stock option awards expected to vest was $0.2 million. Such cost is expected to be recognized over a weighted-average period of 1.07 years.
See Note 17 for discussion of the Company's organizational restructuring during the three and nine months ended September 30, 2019 and expected fourth-quarter 2019 forfeitures. See Note 8.c in the 2018 Annual Report for additional information on the stock option awards.
14
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Performance share awards
Performance share awards, which the Company has determined are equity awards, are subject to a combination of market, performance and service vesting criteria. For performance share awards with market criteria or portions of awards with market criteria, which include: (i) the relative three-year total shareholder return comparing the Company's shareholder return to the shareholder return of the peer group specified in each award agreement ("RTSR Performance Percentage"), (ii) the Company's absolute three-year total shareholder return ("ATSR Appreciation") and (iii) the Company's total shareholder return ("TSR"), a Monte Carlo simulation prepared by an independent third party is utilized to determine the grant-date (or modification date) fair value, and the associated expense is recognized on a straight-line basis over the three-year requisite service period of the awards. For portions of awards with performance criteria, which is the Company's three-year return on average capital employed ("ROACE Percentage"), the fair value is equal to the Company's closing stock price on the grant date (or modification date), and for each reporting period, the associated expense fluctuates and is adjusted based on an estimated payout of the number of shares of common stock to be delivered on the payment date for the three-year performance period. Any shares earned under performance share awards are expected to be issued in the first quarter following the completion of the respective requisite service periods based on the achievement of certain market and performance criteria, and the payout can range from 0 % to 200 %. Per the award agreement terms, if employment is terminated prior to the restriction lapse date for reasons other than death or disability, the performance share awards are forfeited and canceled. If the termination of employment is by reason of death or disability, and the market and performance criteria are satisfied, then the holder of the earned performance share awards will receive a prorated number of shares based on the number of days the participant was employed with the Company during the performance period. See Note 17 for discussion of the Company's organizational restructuring during the three and nine months ended September 30, 2019 and expected fourth-quarter 2019 forfeitures.
The following table reflects the performance share award activity for the nine months ended September 30, 2019:
______________________________________________________________________________
(in thousands, except for weighted-average grant-date fair value) | Performance share awards | Weighted-average grant-date fair value (per award) | |||||
Outstanding as of December 31, 2018 | $ | ||||||
Granted(1) | $ | ||||||
Converted from performance unit awards(1)(2) | $ | ||||||
Forfeited | ( | ) | $ | ||||
Vested(3) | ( | ) | $ | ||||
Outstanding as of September 30, 2019 | $ | ||||||
(1) | The amounts potentially payable in the Company's common stock at the end of the requisite service period for the performance share awards granted on February 28, 2019 and June 3, 2019 will be determined based on three criteria: (i) RTSR Performance Percentage, (ii) ATSR Appreciation and (iii) ROACE Percentage. The RTSR Performance Percentage, ATSR Appreciation and ROACE Percentage will be used to identify the "RTSR Factor," the "ATSR Factor" and the "ROACE Factor," respectively, which are used to compute the "Performance Multiple" and ultimately to determine the number of shares to be delivered on the payment date. In computing the Performance Multiple, the RTSR Factor is given a |
(2) | On May 16, 2019, the board of directors elected to change the form of payment from cash to common stock for the awards granted on February 28, 2019. This change in election triggered modification accounting, and the awards, formerly accounted for as liability awards, were converted to equity awards and, accordingly, new fair values were determined based on the May 16, 2019 modification date. |
(3) | The performance share awards granted on May 25, 2016 had a performance period of January 1, 2016 to December 31, 2018 and, as their market criteria were not satisfied, resulted in a TSR modifier of |
15
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The fair values per performance share award and the assumptions used to estimate these fair values per performance share award granted on February 28, 2019 and June 3, 2019 are as follows:
______________________________________________________________________________
February 28, 2019(1) | June 3, 2019 | |||||||
Market criteria (.25) RTSR Factor + (.25) ATSR Factor fair value assumptions: | ||||||||
Remaining performance period | ||||||||
Risk-free interest rate(2) | % | % | ||||||
Dividend yield | % | % | ||||||
Expected volatility(3) | % | % | ||||||
Closing stock price on May 16, 2019 and June 3, 2019 for the respective awards | $ | $ | ||||||
Fair value per performance share award | $ | $ | ||||||
Performance criteria (.50) ROACE Factor fair value assumption: | ||||||||
Closing stock price on May 16, 2019 and June 3, 2019 for the respective awards | $ | $ | ||||||
Fair value per performance share award | $ | $ | ||||||
Combined fair value per performance share award(4) | $ | $ | ||||||
(1) | The fair values of the performance share awards granted on February 28, 2019 are based on the May 16, 2019 modification date. The total incremental compensation expense resulting from the modification of $ |
(2) | The remaining performance period matched zero-coupon risk-free interest rate was derived from the U.S. Treasury constant maturities yield curve on May 16, 2019 and June 3, 2019 for the respective awards. |
(3) | The Company utilized its own remaining performance period matched historical volatility in order to develop the expected volatility. |
(4) | The combined fair value per performance share award is the combination of the fair value per performance share award weighted for the market and performance criteria for the respective awards. |
16
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The expense per performance share award, which is the fair value per performance share award adjusted for the estimated payout of the performance criteria, for the outstanding performance share awards as of September 30, 2019 and granted as of the dates presented are as follows:
February 17, 2017 | February 16, 2018 | February 28, 2019 | June 3, 2019 | |||||||||||||
Market Criteria: | ||||||||||||||||
(.25) RTSR Factor + (.25) ATSR Factor: | ||||||||||||||||
Fair value per performance share award | Not applicable | $ | $ | $ | ||||||||||||
Expense per performance share award as of September 30, 2019 | Not applicable | $ | $ | $ | ||||||||||||
TSR: | ||||||||||||||||
Fair value per performance share award | $ | Not applicable | Not applicable | Not applicable | ||||||||||||
Expense per performance share award as of September 30, 2019 | $ | Not applicable | Not applicable | Not applicable | ||||||||||||
Performance Criteria: | ||||||||||||||||
(.50) ROACE Factor: | ||||||||||||||||
Fair value per performance share award | Not applicable | $ | $ | $ | ||||||||||||
Estimated payout for expense as of September 30, 2019(1) | Not applicable | % | % | % | ||||||||||||
Expense per performance share award as of September 30, 2019 | Not applicable | $ | $ | $ | ||||||||||||
Combined expense per performance share award as of September 30, 2019(2) | $ | $ | $ | $ | ||||||||||||
(1) | As the (.50) ROACE Factor is based on performance criteria, the expense fluctuates based on the estimated payout and is redetermined each reporting period and the life-to-date recognized expense for the respective awards is adjusted accordingly. |
(2) | The combined expense per performance share award is the combination of the expense per performance share award for market and performance criteria for the respective awards. |
Outperformance share award
An outperformance share award was granted during the nine months ending September 30, 2019, in conjunction with the appointment of the Company's President, and is accounted for as an equity award. If earned, the payout ranges from 0 to 1,000,000 shares in the Company's common stock per the vesting schedule. This award is subject to a combination of market and service vesting criteria, therefore, a Monte Carlo simulation prepared by an independent third party was utilized to determine the grant-date fair value with the associated expense recognized over the requisite service period. The payout of this award is based on the highest 50 consecutive trading day average closing stock price of the Company that occurs during the performance period that commenced on June 3, 2019 and ends on June 3, 2022 ("Final Date"). Of the earned outperformance shares, one-third of the award will vest on the Final Date, one-third will vest on the first anniversary of the Final Date and one-third will vest on the second anniversary of the Final Date, provided that the participant has been continuously employed with the Company through the applicable vesting date. Per the award agreement terms, if employment is terminated prior to any vesting date for reasons other than death or disability, then any outperformance shares that have not vested as of such date shall be forfeited and canceled. If the participant's employment is terminated prior to any vesting date by reason of death or disability, and the market criteria is satisfied, then the participant will receive a prorated number of shares based on the number of days the employee was employed with the Company during the performance period.
17
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The total fair value of the outperformance share award and the assumptions used to estimate the fair value of the outperformance share award as of the grant date presented are as follows:
_____________________________________________________________________________
June 3, 2019 | ||||
Performance period | ||||
Risk-free interest rate(1) | % | |||
Dividend yield | % | |||
Expected volatility(2) | % | |||
Closing stock price on grant date | $ | |||
Total fair value of outperformance share award (in thousands) | $ | |||
(1) | The performance period matched zero-coupon risk-free interest rate was derived from the U.S. Treasury constant maturities yield curve on the grant date. |
(2) | The Company utilized its own performance period matched historical volatility in order to develop the expected volatility. |
Stock-based compensation expense
The following table reflects stock-based compensation expense for the periods presented:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Restricted stock award compensation | $ | $ | $ | $ | ||||||||||||
Stock option award compensation | ( | ) | ||||||||||||||
Performance share award compensation | ( | ) | ( | ) | ||||||||||||
Outperformance share award compensation | ||||||||||||||||
Total stock-based compensation, gross | ( | ) | ||||||||||||||
Less amounts capitalized in evaluated oil and natural gas properties | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total stock-based compensation, net | $ | ( | ) | $ | $ | $ | ||||||||||
See Note 17 for discussion of the Company's organizational restructuring and the related stock-based compensation reversals during the three and nine months ended September 30, 2019.
Performance unit awards
The performance unit awards, granted on February 28, 2019, were determined to be liability awards due to the board of directors election to settle the awards in cash. On May 16, 2019, the board of directors elected to change the form of payment from cash to common stock and, as a result, the performance unit awards were converted to performance share awards, which the Company determined were now equity awards. This change in election triggered modification accounting, and the performance unit award compensation for the three months ended March 31, 2019 was reversed and a new fair value was determined for the converted performance share awards and adjusted in stock-based compensation based on the May 16, 2019 modification date. For additional discussion of the modification, see "Performance share awards."
The following table reflects the performance unit award activity for the nine months ended September 30, 2019:
(in thousands) | Performance unit awards | ||
Outstanding as of December 31, 2018 | |||
Granted | |||
Forfeited | ( | ) | |
Converted to performance share awards | ( | ) | |
Outstanding as of September 30, 2019 | |||
18
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 7—Derivatives
Due to the inherent volatility in oil, NGL and natural gas prices and differences in the prices of oil, NGL and natural gas between where the Company produces and where the Company sells such commodities, the Company engages in derivative transactions, such as puts, swaps, collars and basis swaps to hedge price risk associated with a portion of the Company's anticipated production. By removing a portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flows from operations. See Notes 2.f and 9 in the 2018 Annual Report for discussion of the Company's accounting policies for derivatives and information on the transaction types and settlement indexes, respectively.
During the nine months ended September 30, 2019, the Company completed a hedge restructuring by early terminating puts and collars and entering into new swaps. The Company paid a net termination amount of $5.4 million that included the full settlement of the deferred premiums associated with these early-terminated puts and collars. The present value of these deferred premiums, classified under Level 3 of the fair value hierarchy, upon their early termination was $7.2 million. See Note 10 in the 2018 Annual Report for information about the fair value hierarchy levels.
The following table details the derivatives that were terminated:
Aggregate volumes (Bbl) | Weighted-average floor price ($/Bbl) | Weighted-average ceiling price ($/Bbl) | Contract period | ||||||||||
Oil puts | $ | $ | April 2019 - December 2019 | ||||||||||
Oil collars | $ | $ | January 2020 - December 2020 | ||||||||||
19
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The following table summarizes open derivative positions as of September 30, 2019, for derivatives that were entered into through September 30, 2019, for the settlement periods presented:
Remaining year 2019 | Year 2020 | Year 2021 | ||||||||||
Oil: | ||||||||||||
Puts: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average floor price ($/Bbl) | $ | $ | $ | |||||||||
Volume with deferred premium (Bbl) | ||||||||||||
Weighted-average deferred premium price ($/Bbl) | $ | $ | $ | |||||||||
Swaps: | ||||||||||||
Volume (Bbl) | — | |||||||||||
Weighted-average price ($/Bbl) | $ | $ | $ | — | ||||||||
Collars: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average floor price ($/Bbl) | $ | $ | $ | |||||||||
Weighted-average ceiling price ($/Bbl) | $ | $ | $ | |||||||||
Totals: | ||||||||||||
Total volume with floor price (Bbl) | ||||||||||||
Weighted-average floor price ($/Bbl) | $ | $ | $ | |||||||||
Total volume with ceiling price (Bbl) | ||||||||||||
Weighted-average ceiling price ($/Bbl) | $ | $ | $ | |||||||||
Basis Swaps: | ||||||||||||
WTI Midland to WTI NYMEX: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average price ($/Bbl) | $ | ( | ) | $ | $ | |||||||
WTI Midland to WTI formula basis: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average price ($/Bbl) | $ | ( | ) | $ | $ | |||||||
NGL: | ||||||||||||
Swaps - Purity Ethane: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average price ($/Bbl) | $ | $ | $ | |||||||||
Swaps - Non-TET Propane: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average price ($/Bbl) | $ | $ | $ | |||||||||
Swaps - Non-TET Normal Butane: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average price ($/Bbl) | $ | $ | $ | |||||||||
Swaps - Non-TET Isobutane: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average price ($/Bbl) | $ | $ | $ | |||||||||
Swaps - Non-TET Natural Gasoline: | ||||||||||||
Volume (Bbl) | ||||||||||||
Weighted-average price ($/Bbl) | $ | $ | $ | |||||||||
Total NGL volume (Bbl) | ||||||||||||
Natural gas: | ||||||||||||
Henry Hub NYMEX Swaps: | ||||||||||||
Volume (MMBtu) | ||||||||||||
TABLE CONTINUES ON NEXT PAGE | ||||||||||||
20
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Remaining year 2019 | Year 2020 | Year 2021 | ||||||||||
Weighted-average price ($/MMBtu) | $ | $ | $ | |||||||||
Basis Swaps: | ||||||||||||
Volume (MMBtu) | ||||||||||||
Weighted-average price ($/MMBtu) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
See Note 8.a for the fair value measurement of derivatives.
Note 8—Fair value measurements
See Note 10 in the 2018 Annual Report for discussion of the Company's accounting policies for fair value measurements.
a. Fair value measurement on a recurring basis
The following tables summarize the Company's derivatives' fair value hierarchy by commodity and current and noncurrent assets and liabilities on a gross basis and the net presentation included in "Derivatives" on the unaudited consolidated balance sheets as of the dates presented:
(in thousands) | Level 1 | Level 2 | Level 3 | Total gross fair value | Amounts offset | Net fair value presented on the unaudited consolidated balance sheets | ||||||||||||||||||
As of September 30, 2019: | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ( | ) | ||||||||||||||||||||||
Oil derivative deferred premiums | ( | ) | ( | ) | ||||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ||||||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ( | ) | ( | ) | ||||||||||||||||||||
Oil derivative deferred premiums | ( | ) | ( | ) | ||||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ||||||||||||||||||||||||
Net derivative asset (liability) positions | $ | $ | $ | ( | ) | $ | $ | — | $ | |||||||||||||||
21
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
(in thousands) | Level 1 | Level 2 | Level 3 | Total gross fair value | Amounts offset | Net fair value presented on the unaudited consolidated balance sheets | ||||||||||||||||||
As of December 31, 2018: | ||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | $ | $ | $ | ( | ) | $ | ||||||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ( | ) | ||||||||||||||||||||||
Oil derivative deferred premiums | ( | ) | ( | ) | ||||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ( | ) | ( | ) | ||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Oil derivative deferred premiums | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Noncurrent: | ||||||||||||||||||||||||
Oil derivatives | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
NGL derivatives | ||||||||||||||||||||||||
Natural gas derivatives | ( | ) | ( | ) | ||||||||||||||||||||
Net derivative asset (liability) positions | $ | $ | $ | ( | ) | $ | $ | — | $ | |||||||||||||||
Significant Level 2 inputs associated with the calculation of discounted cash flows used in the fair value mark-to-market analysis of derivatives include each derivative contract's corresponding commodity index price(s), appropriate risk-adjusted discount rates and forward price curve models for substantially similar instruments generated from a compilation of data gathered from third parties.
The Company's deferred premiums associated with its derivative contracts are categorized as Level 3, as the Company utilizes a net present value calculation to determine the valuation. They are considered to be measured on a recurring basis as the derivative contracts they derive from are measured on a recurring basis. As derivative contracts containing deferred premiums are entered into, the Company discounts the associated deferred premium to its net present value at the contract trade date, using the Senior Secured Credit Facility rate at the trade date (input rate), and then records the change in net present value to interest expense over the period from trade until the final settlement date at the end of the contract. After this initial valuation, the input rate of each deferred premium is not adjusted; therefore, significant increases (decreases) in the Senior Secured Credit Facility rate would result in a significantly lower (higher) fair value measurement for each new contract entered into that contained a deferred premium; however, the initial valuation for the deferred premiums already recorded would remain unaffected. While the Company believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. The deferred premiums are included in "Derivatives" on the unaudited consolidated balance sheets and, as of September 30, 2019, each of their input rates is 2.31 %.
The following table presents payments required for derivative deferred premiums as of September 30, 2019 for the periods presented:
(in thousands) | September 30, 2019 | |||
Remaining 2019 | $ | |||
2020 | ||||
Total | $ | |||
22
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The following table summarizes the changes in net assets and liabilities classified as Level 3 measurements for the periods presented:
____________________________________________________________________________
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Balance of Level 3 at beginning of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
Change in net present value of derivative deferred premiums(1) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Total purchases and settlements of derivative deferred premiums: | ||||||||||||||||
Purchases | ( | ) | ( | ) | ||||||||||||
Settlements(2) | ||||||||||||||||
Balance of Level 3 at end of period | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
(1) | These amounts are included in "Interest expense" on the unaudited consolidated statements of operations. |
(2) | The amount for the nine months ended September 30, 2019 includes $ |
See Note 2.f in the 2018 Annual Report for discussion of the Company's accounting policies for derivatives.
b. Items not accounted for at fair value
The carrying amounts reported on the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued capital expenditures, undistributed revenue and royalties and other accrued assets and liabilities approximate their fair values.
The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amounts and fair values of the Company's debt as of the dates presented:
______________________________________________________________________________
September 30, 2019 | December 31, 2018 | |||||||||||||||
(in thousands) | Long-term debt | Fair value(1) | Long-term debt | Fair value(1) | ||||||||||||
January 2022 Notes | $ | $ | $ | $ | ||||||||||||
March 2023 Notes | ||||||||||||||||
Senior Secured Credit Facility | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
(1) | The fair values of the debt outstanding on the January 2022 Notes and the March 2023 Notes were determined using the September 30, 2019 and December 31, 2018 Level 1 fair value hierarchy quoted market price for each respective instrument. The fair value of the outstanding debt on the Senior Secured Credit Facility as of September 30, 2019 and December 31, 2018 was estimated utilizing the Level 2 fair value hierarchy pricing model for similar instruments. See Note 10 in the 2018 Annual Report for information about the fair value hierarchy levels. |
Note 9—Net income (loss) per common share
23
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
The following table reflects the calculations of basic and diluted (i) weighted-average common shares outstanding and (ii) net income (loss) per common share for the periods presented:
_____________________________________________________________________________
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands, except for per share data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income (loss) (numerator): | ||||||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Weighted-average common shares outstanding (denominator): | ||||||||||||||||
Basic(1) | ||||||||||||||||
Dilutive non-vested restricted stock awards | ||||||||||||||||
Dilutive outstanding stock option awards | ||||||||||||||||
Diluted | ||||||||||||||||
Net income (loss) per common share: | ||||||||||||||||
Basic | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
Diluted | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
(1) | Weighted-average common shares outstanding used in the calculation of basic and diluted net income (loss) per common share was computed taking into account share repurchases that occurred during the three and nine months ended September 30, 2018. See Note 6.a for additional discussion of the Company's share repurchase program. |
See Note 17 for discussion of certain expected fourth-quarter 2019 forfeitures that did not affect diluted weighted-average common shares outstanding for the three or nine months ended September 30, 2019.
Note 10—Commitments and contingencies
a. Litigation
From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, the Company does not currently believe that any such legal proceedings will have a material adverse effect on the Company's business, financial position, results of operations or liquidity. During the nine months ended September 30, 2019, the Company finalized and received a favorable settlement of $42.5 million in connection with the Company's damage claims asserted in a previously disclosed litigation matter relating to a breach and wrongful termination of a crude oil purchase agreement. This settlement is included in "Litigation settlement" on the unaudited consolidated statements of operations. The Company does not anticipate the receipt of further payments in connection with this matter as this settlement constituted a full and final satisfaction of the Company's claims.
b. Drilling contracts
The Company has committed to drilling rig contracts with a third party to facilitate the Company's drilling plans. One of these contracts is for a term of multiple months and contains an early termination clause that requires the Company to potentially pay penalties to the third party should the Company cease drilling efforts. These penalties would negatively impact the Company's financial statements upon early contract termination. There were no penalties incurred for early contract termination for either of the nine months ended September 30, 2019 or 2018. As the Company's current drilling rig contracts are operating leases under the scope of ASC 842, the present value of the future commitment as of September 30, 2019 related to the drilling contract with an initial term greater than 12 months is included in "Operating lease liabilities" under "Current liabilities" on the unaudited consolidated balance sheet as of September 30, 2019. See Note 3 for further discussion of the impact of the adoption of ASC 842. Management does not currently anticipate the early termination of this contract in 2019. See Note 15 for additional information regarding the drilling rig contracts as they pertain to a related party.
c. Firm sale and transportation commitments
The Company has committed to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. If not fulfilled, the Company is subject to firm transportation payments on excess pipeline capacity and other contractual penalties. These commitments are normal and customary for the Company's business. In certain instances, the Company has used spot market purchases to meet its commitments in certain locations or due to favorable pricing. Management anticipates continuing this practice in the future. No
24
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
firm transportation payments on excess pipeline capacity or other contractual penalties were incurred during the three months ended September 30, 2019. The Company incurred firm transportation payments on excess pipeline capacity and other contractual penalties of $0.2 million during the three months ended September 30, 2018, and $1.0 million and $2.5 million during the nine months ended September 30, 2019 and 2018, respectively. These firm transportation payments on excess pipeline capacity and other contractual penalties are netted with the respective revenue stream on the unaudited consolidated statements of operations. Future firm sale and transportation commitments of $340.5 million as of September 30, 2019 are not recorded on the unaudited consolidated balance sheets.
d. Federal and state regulations
Oil and natural gas exploration, production and related operations are subject to extensive federal and state laws, rules and regulations. Failure to comply with these laws, rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the cost of doing business and affects profitability. The Company believes that it is in compliance with currently applicable federal and state regulations related to oil and natural gas exploration and production, and that compliance with the current regulations will not have a material adverse impact on the financial position or results of operations of the Company. These rules and regulations are frequently amended or reinterpreted; therefore, the Company is unable to predict the future cost or impact of complying with these regulations.
e. Environmental
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed in the period incurred. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment or remediation is probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed and readily determinable. Management believes no materially significant liabilities of this nature existed as of September 30, 2019 or December 31, 2018.
Note 11—Supplemental cash flow and non-cash information
The following table presents supplemental cash flow and non-cash information:
______________________________________________________________________________
Nine months ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Supplemental cash flow information: | ||||||||
Capitalized interest | $ | ( | ) | $ | ( | ) | ||
Net cash received (paid) for income taxes(1) | $ | $ | ( | ) | ||||
Supplemental non-cash investing information: | ||||||||
Decrease in accrued capital expenditures | $ | ( | ) | $ | ( | ) | ||
Capitalized stock-based compensation in evaluated oil and natural gas properties | $ | $ | ||||||
Capitalized asset retirement costs | $ | $ | ||||||
(1) | See Note 14 for additional discussion of the Company's income taxes. |
The following table presents supplemental non-cash adjustments information related to operating leases:
(in thousands) | Nine months ended September 30, 2019 | |||
Right-of-use assets obtained in exchange for operating lease liabilities(1) | $ | |||
(1) | See Note 3 for additional discussion of the Company's leases. |
25
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 12—Asset retirement obligations
See Note 2.k in the 2018 Annual Report for discussion of the Company's accounting policies for asset retirement obligations.
The following table reconciles the Company's asset retirement obligation liability associated with tangible long-lived assets for the periods presented:
Nine months ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Liability at beginning of period | $ | $ | ||||||
Liabilities added due to acquisitions, drilling, midstream service asset construction and other | ||||||||
Accretion expense | ||||||||
Liabilities settled due to plugging and abandonment or removed due to sale | ( | ) | ( | ) | ||||
Liability at end of period | $ | $ | ||||||
Note 13—Revenue recognition
a. Impact of ASC 606 adoption on the Medallion Sale
Medallion Gathering & Processing, LLC, a Texas limited liability company formed on October 12, 2012, which, together with its wholly-owned subsidiaries (collectively, "Medallion"), was established for the purpose of developing midstream solutions and providing midstream infrastructure to bring oil to market in the Midland Basin. Prior to the Medallion Sale (defined below), LMS held 49 % of Medallion's ownership units. On October 30, 2017, LMS, together with Medallion Midstream Holdings, LLC, which is owned and controlled by an affiliate of the third-party interest-holder, The Energy & Minerals Group, completed the sale of 100 % of the ownership interests in Medallion to an affiliate of Global Infrastructure Partners ("GIP"), for cash consideration of $1.825 billion (the "Medallion Sale"). LMS' total net cash proceeds before taxes for its 49 % ownership interest in Medallion were $831.3 million.
LMS has a Transportation Services Agreement (the "TA") with a wholly-owned subsidiary of Medallion under which LMS receives firm transportation of the Company's crude oil production from Reagan County and Glasscock County in Texas to Colorado City, Texas that continues to be in effect after the Medallion Sale. At December 31, 2017, the Medallion Sale was accounted for under the real estate guidance in ASC 360-20, Property, Plant, and Equipment ("ASC 360-20"), and the Company's maximum exposure to loss associated with future commitments under the TA was $141.1 million that was not recorded in the Company's unaudited consolidated balance sheets. Under ASC 360-20, as a result of the Company's continuing involvement with Medallion by guaranteeing cash flows under the TA, the Company recorded a deferred gain in the amount of its maximum exposure to loss related to such guarantees. This deferred gain would have been amortized over the TA's firm commitment transportation term through 2024 had the Company not adopted ASC 606, Revenue from Contracts with Customers ("ASC 606") on January 1, 2018.
In adopting ASC 606, the guidance in ASC 360-20 was superseded by ASC 860, Transfers and Servicing ("ASC 860"). The Medallion Sale is within the scope of ASC 860 and qualifies for sale accounting and recognition of the previously deferred gain because as of the date of the Medallion Sale (i) the Company transferred and legally isolated its full interests in Medallion to GIP, (ii) GIP received the right to pledge or exchange Medallion ownership interests at its full discretion and (iii) the Company did not have effective control over Medallion. Therefore, the deferred gain of $141.1 million was recognized as an adjustment to the 2018 beginning balance of accumulated deficit, presented on the unaudited consolidated statements of stockholders' equity, in accordance with the modified retrospective approach of adoption. See Notes 4.c and 5.a in the 2018 Annual Report for further discussion of the Medallion Sale, the TA and the adoption of ASC 606.
b. Revenue recognition
26
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 14—Income taxes
The Company is subject to federal and state income taxes and the Texas franchise tax. The Company had federal net operating loss carryforwards totaling $1.9 billion and state of Oklahoma net operating loss carryforwards totaling $35.8 million as of September 30, 2019, which begin expiring in 2026 and 2032, respectively. Due to the enactment of Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), $207.0 million of the federal net operating loss carryforward will not expire but may be limited in future periods. As of September 30, 2019, the Company believes it is more likely than not that a portion of the net operating loss carryforwards are not fully realizable. The Company continues to consider new evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance is needed. Such consideration includes projected future cash flows from its oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of September 30, 2019, the Company's ability to capitalize intangible drilling costs, rather than expensing these costs in order to prevent an operating loss carryforward from expiring unused and future projections of Oklahoma sourced income. As of September 30, 2019, a total valuation allowance of $256.8 million has been recorded to offset the Company's federal and Oklahoma net deferred tax assets, resulting in a Texas net deferred tax liability of $4.2 million, which is included in "Other noncurrent liabilities" on the unaudited consolidated balance sheets.
The Company paid Alternative Minimum Tax ("AMT") related to the Medallion Sale in 2017. The payment of AMT creates an AMT credit carryforward. Due to changes in the Tax Act, AMT credit carryforwards do not expire and are now refundable over a five-year period. Therefore, as of September 30, 2019, a receivable has been recorded in the amount of $4.1 million, of which $3.1 million is included in "Accounts receivable, net" and $1.0 million is included in "Other noncurrent assets, net" on the unaudited consolidated balance sheets.
Note 15—Related party
The Chairman of the Company's board of directors is on the board of directors of Helmerich & Payne, Inc. ("H&P"). The Company has drilling contracts with H&P that are long-term and short-term operating leases. One of the drilling contracts, which is accounted for as a long-term operating lease under the scope of ASC 842 due to its initial term of greater than 12 months, is capitalized and is included in "Operating lease right-of-use-assets" on the unaudited consolidated balance sheet. The present value of the future commitment is included in "Operating lease liabilities" under "Current liabilities" on the unaudited consolidated balance sheet. Capital expenditures for oil and natural gas properties are capitalized and are included in "Evaluated oil and natural gas properties" on the unaudited consolidated balance sheets. See Note 3 for additional discussion of the Company's adoption of ASC 842 and discussion of the drilling contract that was entered into with H&P during fourth-quarter 2019. See Note 10.b for additional discussion of the Company's drilling contracts.
The following table presents the operating lease liability related to H&P included in the unaudited consolidated balance sheet as of the date presented:
(in thousands) | September 30, 2019 | |||
Operating lease liabilities | $ | |||
The following table presents the capital expenditures for oil and natural gas properties paid to H&P included in the unaudited consolidated statements of cash flows for the periods presented:
Nine months ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Capital expenditures for oil and natural gas properties | $ | $ | ||||||
27
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 16—Subsidiary Guarantors
The Guarantors have fully and unconditionally guaranteed the January 2022 Notes, the March 2023 Notes and the Senior Secured Credit Facility, subject to the Releases. In accordance with practices accepted by the SEC, Laredo has prepared condensed consolidating financial statements to quantify the balance sheets, results of operations and cash flows of such subsidiaries as subsidiary Guarantors. The following unaudited condensed consolidating (i) balance sheets as of September 30, 2019 and December 31, 2018, (ii) statements of operations for the three and nine months ended September 30, 2019 and 2018 and (iii) statements of cash flows for the nine months ended September 30, 2019 and 2018 present financial information for Laredo on a stand-alone basis (carrying any investment in subsidiaries under the equity method), financial information for the subsidiary Guarantors on a stand-alone basis and the consolidation and elimination entries necessary to arrive at the financial information for the Company on a condensed consolidated basis. Income taxes for LMS and for GCM are recorded on Laredo's balance sheets, statements of operations and statements of cash flows as they are disregarded entities for income tax purposes. Laredo and the Guarantors are not restricted from making intercompany distributions to each other.
Condensed consolidating balance sheet
September 30, 2019
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Accounts receivable, net | $ | $ | $ | $ | ||||||||||||
Other current assets | ||||||||||||||||
Oil and natural gas properties, net | ( | ) | ||||||||||||||
Midstream service assets, net | ||||||||||||||||
Other fixed assets, net | ||||||||||||||||
Investment in subsidiaries | ( | ) | ||||||||||||||
Other noncurrent assets, net | ||||||||||||||||
Total assets | $ | $ | $ | ( | ) | $ | ||||||||||
Accounts payable and accrued liabilities | $ | $ | $ | $ | ||||||||||||
Other current liabilities | ||||||||||||||||
Long-term debt, net | ||||||||||||||||
Other noncurrent liabilities | ||||||||||||||||
Total stockholders' equity | ( | ) | ||||||||||||||
Total liabilities and stockholders' equity | $ | $ | $ | ( | ) | $ | ||||||||||
28
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Condensed consolidating balance sheet
December 31, 2018
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Accounts receivable, net | $ | $ | $ | $ | ||||||||||||
Other current assets | ||||||||||||||||
Oil and natural gas properties, net | ( | ) | ||||||||||||||
Midstream service assets, net | ||||||||||||||||
Other fixed assets, net | ||||||||||||||||
Investment in subsidiaries | ( | ) | ||||||||||||||
Other noncurrent assets, net | ||||||||||||||||
Total assets | $ | $ | $ | ( | ) | $ | ||||||||||
Accounts payable and accrued liabilities | $ | $ | $ | $ | ||||||||||||
Other current liabilities | ||||||||||||||||
Long-term debt, net | ||||||||||||||||
Other noncurrent liabilities | ||||||||||||||||
Total stockholders' equity | ( | ) | ||||||||||||||
Total liabilities and stockholders' equity | $ | $ | $ | ( | ) | $ | ||||||||||
Condensed consolidating statement of operations
For the three months ended September 30, 2019
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Total revenues | $ | $ | $ | ( | ) | $ | ||||||||||
Total costs and expenses | ( | ) | ||||||||||||||
Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Other non-operating income, net | ( | ) | ||||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
Total income tax benefit | ||||||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Condensed consolidating statement of operations
For the three months ended September 30, 2018
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Total revenues | $ | $ | $ | ( | ) | $ | ||||||||||
Total costs and expenses | ( | ) | ||||||||||||||
Operating income | ( | ) | ||||||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Other non-operating expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income before income taxes | ( | ) | ||||||||||||||
Total income tax expense | ( | ) | ( | ) | ||||||||||||
Net income | $ | $ | $ | ( | ) | $ | ||||||||||
29
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Condensed consolidating statement of operations
For the nine months ended September 30, 2019
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Total revenues | $ | $ | $ | ( | ) | $ | ||||||||||
Total costs and expenses | ( | ) | ||||||||||||||
Operating income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Other non-operating income, net | ( | ) | ||||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||
Total income tax benefit | ||||||||||||||||
Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||
Condensed consolidating statement of operations
For the nine months ended September 30, 2018
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Total revenues | $ | $ | $ | ( | ) | $ | ||||||||||
Total costs and expenses | ( | ) | ||||||||||||||
Operating income | ( | ) | ||||||||||||||
Interest expense | ( | ) | ( | ) | ||||||||||||
Other non-operating expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Income before income taxes | ( | ) | ||||||||||||||
Total income tax expense | ( | ) | ( | ) | ||||||||||||
Net income | $ | $ | $ | ( | ) | $ | ||||||||||
For the nine months ended September 30, 2019
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Net cash provided by operating activities | $ | $ | $ | ( | ) | $ | ||||||||||
Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||||||
Net cash used in financing activities | ( | ) | ( | ) | ||||||||||||
Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||||||||||
Cash and cash equivalents, beginning of period | ||||||||||||||||
Cash and cash equivalents, end of period | $ | $ | $ | $ | ||||||||||||
Condensed consolidating statement of cash flows
For the nine months ended September 30, 2018
(in thousands) | Laredo | Subsidiary Guarantors | Intercompany eliminations | Consolidated company | ||||||||||||
Net cash provided by operating activities | $ | $ | $ | ( | ) | $ | ||||||||||
Net cash used in investing activities | ( | ) | ( | ) | ( | ) | ||||||||||
Net cash provided by financing activities | ||||||||||||||||
Net decrease in cash and cash equivalents | ( | ) | ( | ) | ||||||||||||
Cash and cash equivalents, beginning of period | ||||||||||||||||
Cash and cash equivalents, end of period | $ | $ | $ | $ | ||||||||||||
30
Laredo Petroleum, Inc. | ||
Condensed notes to the consolidated financial statements
(Unaudited)
Note 17—Organizational restructuring
On April 2, 2019, the Company announced the retirement of two of its Senior Officers. Additionally, on April 8, 2019 (the "Effective Date"), the Company committed to a company-wide reorganization effort (the "Plan") that included a workforce reduction of approximately 20 %, which included an Executive Officer. The reduction in workforce was communicated to employees on the Effective Date and implemented immediately, subject to certain administrative procedures. The Company's board of directors approved the Plan in response to recent market conditions and to reduce costs and better position the Company for the future. All stock-based compensation awards held by the two Senior Officers, the Executive Officer and the employees who were affected by the Plan were forfeited and the corresponding stock-based compensation was reversed.
On September 27, 2019, in connection with the previously announced comprehensive succession planning process, the Company announced that, effective as of October 1, 2019, Randy A. Foutch would transition from his role as Chief Executive Officer. In connection with this transition and in recognition of his efforts as the Company's founder, Mr. Foutch entered into an agreement under which he received the following payments and benefits: (i) a "Founder's Bonus" of $5.9 million approved by the board of directors and (ii) 18 months of COBRA employer contributions following October 1, 2019. Accordingly, as of September 30, 2019, the forfeiture rate assumption applied to Mr. Foutch's non-vested restricted stock awards, non-vested stock option awards and non-vested performance share awards was adjusted for the expected fourth-quarter 2019 forfeiture of the respective non-vested awards.
Note 18—Subsequent events
a. Senior Secured Credit Facility
On October 28, 2019, the Company paid $5.0 million on the Senior Secured Credit Facility. As a result, the outstanding balance under the Senior Secured Credit Facility was $180.0 million as of November 5, 2019.
On October 30, 2019, pursuant to the semi-annual redetermination, the borrowing base and aggregate elected commitment under the Senior Secured Credit Facility were reduced to $1.0 billion each.
b. Acreage acquisition
On November 4, 2019, the Company entered into a Purchase and Sale Agreement (the "Purchase Agreement") with Cordero Energy Resources LLC ("Cordero"). Pursuant to the Purchase Agreement, the Company agreed to purchase 7,360 net acres (96 % operated) and 750 net royalty acres in Howard County, Texas for $130 million, subject to customary closing purchase price adjustments and conditions (the “Acquisition”). The Acquisition will be primarily financed through borrowings under the Senior Secured Credit Facility.
Under the terms of the Purchase Agreement, the Company has deposited an amount equal to 10 % of the unadjusted purchase price, or $13 million (the "Deposit"). The Purchase Agreement contains representations and warranties, covenants, termination rights and indemnification provisions that are typical for a transaction of this size and nature that provide the parties thereto with specified rights and obligations and allocate risk among them. The Company expects the Acquisition to close on or about December 12, 2019, subject to customary closing conditions. There can be no assurance that all of the conditions to closing the Acquisition will be satisfied.
31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report as well as our audited consolidated financial statements and notes thereto included in our 2018 Annual Report. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements." Except for purposes of the unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report, references in this Quarterly Report to "Laredo," "we," "us," "our" or similar terms refer to Laredo, LMS and GCM collectively, unless the context otherwise indicates or requires. Unless otherwise specified, references to "average sales price" refer to average sales price excluding the effects of our derivative transactions. All amounts, dollars and percentages presented in this Quarterly Report are rounded and therefore approximate.
Executive overview
We are an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties, and midstream and marketing services, primarily in the Permian Basin of West Texas. Since our inception, we have grown primarily through our drilling program coupled with select strategic acquisitions and joint ventures.
Our financial and operating performance for the three months ended September 30, 2019 included the following:
• | Oil sales volumes of 2,560 MBbl, compared to 2,651 MBbl for the three months ended September 30, 2018, a 3% decrease over the comparative period; |
• | Oil, NGL and natural gas sales of $169.8 million, compared to $225.9 million for the three months ended September 30, 2018, which is the result of a 35% decrease in average sales price per BOE and was partially offset by a 15% increase in MBOE volumes sold; |
• | Net loss of $264.6 million, including a non-cash full cost ceiling impairment of $397.9 million, compared to net income of $55.1 million for the three months ended September 30, 2018; and |
• | Adjusted EBITDA (a non-GAAP financial measure) of $146.2 million, compared to $160.6 million for the three months ended September 30, 2018. See page 47 for a discussion and reconciliation of Adjusted EBITDA. |
Our financial and operating performance for the nine months ended September 30, 2019 included the following:
• | Oil sales volumes of 7,865 MBbl, compared to 7,604 MBbl for the nine months ended September 30, 2018, a 3% increase over the comparative period; |
• | Oil, NGL and natural gas sales of $527.0 million, compared to $631.9 million for the nine months ended September 30, 2018, which is the result of a 30% decrease in average sales price per BOE and was partially offset by a 19% increase in MBOE volumes sold; |
• | Net loss of $100.7 million, including a non-cash full cost ceiling impairment of $397.9 million, compared to net income of $175.0 million for the nine months ended September 30, 2018; and |
• | Adjusted EBITDA (a non-GAAP financial measure) of $422.3 million, compared to $456.5 million for the nine months ended September 30, 2018. See page 47 for a discussion and reconciliation of Adjusted EBITDA. |
Recent developments
Acreage acquisition
On November 4, 2019, we entered into a purchase agreement with Cordero. Pursuant to the purchase agreement, we agreed to purchase 7,360 net acres (96% operated) and 750 net royalty acres in Howard County, Texas for $130 million, subject to customary closing purchase price adjustments and conditions. The acquisition will be primarily financed through borrowings under the Senior Secured Credit Facility.
Under the terms of the purchase agreement, we have deposited an amount equal to 10% of the unadjusted purchase price, or $13 million. The purchase agreement contains representations and warranties, covenants, termination rights and indemnification provisions that are typical for a transaction of this size and nature that provide the parties thereto with specified rights and obligations and allocate risk among them. We expect the acquisition to close on or about December 12, 2019, subject to customary closing conditions. There can be no assurance that all of the conditions to closing the acquisition will be satisfied.
32
Organizational restructuring
On April 2, 2019, we announced the retirement of two of our Senior Officers. Additionally, on April 8, 2019, we committed to a plan for a company-wide reorganization effort that included a workforce reduction of approximately 20%, which included an Executive Officer. Our board of directors approved the reorganization plan in response to market conditions and to reduce costs and better position us for the future. Also, in connection with the previously announced comprehensive succession planning process, effective as of October 1, 2019, Randy A. Foutch, Chairman of our board of directors, transitioned from his role as Chief Executive Officer. In connection with the retirements on April 2, 2019, the reorganization plan and the transition of Mr. Foutch, we incurred $6.0 million and $16.4 million of one-time charges during the three and nine months ended September 30, 2019, respectively. See Note 17 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of the organizational restructuring.
Core area of operations
The oil and liquids-rich Permian Basin is characterized by multiple target horizons, long-lived reserves, high drilling success rates and high initial production rates. As of September 30, 2019, we had assembled 122,398 net acres in the Permian Basin.
Pricing and reserves
Our results of operations are heavily influenced by oil, NGL and natural gas prices. Oil, NGL and natural gas price fluctuations are caused by changes in global and regional supply and demand, market uncertainty, economic conditions, transportation constraints and a variety of additional factors. Historically, commodity prices have experienced significant fluctuations, and additional changes in commodity prices may affect the economic viability of, and our ability to fund, our drilling projects, as well as the economic valuation and economic recovery of oil, NGL and natural gas reserves.
We have entered into a number of derivative contracts that have enabled us to offset a portion of the changes in our cash flow caused by fluctuations in price and basis differentials for our sales of oil, NGL and natural gas, as discussed in "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
Our reserves as of September 30, 2019 and December 31, 2018 are reported in three streams: oil, NGL and natural gas. The Realized Prices utilized to value our proved reserves as of September 30, 2019 and September 30, 2018, were $52.86 per Bbl for oil, $14.78 per Bbl for NGL and $0.52 per Mcf for natural gas, and $58.83 per Bbl for oil, $21.15 per Bbl for NGL and $1.62 per Mcf for natural gas, respectively. The Realized Prices used to estimate proved reserves do not include derivative transactions. The unamortized cost of our evaluated oil and natural gas properties exceeded the full cost ceiling as of September 30, 2019 and, as such, we recorded a third-quarter non-cash full cost ceiling impairment of $397.9 million. No such impairments were recorded during the nine months ended September 30, 2018. See Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of our full cost method of accounting.
Horizontal drilling of unconventional wells using enhanced completions techniques, including, but not limited to, hydraulic fracturing, is a relatively new process and, as such, forecasting the long-term production of such wells is inherently uncertain and subject to varying interpretations. As we receive and process geological and production data from these wells over time, we analyze such data to confirm whether previous assumptions regarding original forecasted production, inventory and reserves continue to appear accurate or require modification. While all production forecasts have elements of uncertainty over the life of the related wells, we are seeing indications that the oil portion of such reserves may be less than originally anticipated and the decline curves may be steeper than originally anticipated.
Initial production results, production decline rates, well density, completion design and operating method are examples of the numerous uncertainties and variables inherent in the estimation of proved reserves in future periods. The quantity of proved reserves is one of the many variables inherent in the calculation of depletion.
The following table presents our depletion expense for our evaluated oil and natural gas properties per BOE sold for the periods presented:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Depletion expense per BOE sold | $ | 8.67 | $ | 7.94 | $ | 8.56 | $ | 7.67 | ||||||||
33
Low commodity price impact on our third-quarter and potentially on our fourth-quarter 2019 full cost ceiling impairment test
Our results of operations are heavily influenced by oil, NGL and natural gas prices, which remain at low levels. Oil, NGL and natural gas price fluctuations are caused by changes in global and regional supply and demand, market uncertainty, economic conditions and a variety of additional factors. Since the inception of our oil and natural gas activities, commodity prices have experienced significant fluctuations, and additional changes in commodity prices may affect the economic viability of, and our ability to fund, our drilling projects, as well as the economic valuation and economic recovery of oil, NGL and natural gas reserves.
We use the full cost method of accounting for our oil and natural gas properties, with the full cost ceiling based principally on the estimated future net revenues from our proved oil and natural gas properties discounted at 10% under required SEC guidelines for pricing methodology. In the event the unamortized cost of evaluated oil and natural gas properties being depleted exceeds the full cost ceiling, as defined by the SEC, the excess is charged to expense in the period such excess occurs. Once incurred, a write-down of oil and natural gas properties is not reversible.
The net book value of our evaluated oil and natural gas properties exceeded the full cost ceiling as of September 30, 2019. As such, we recorded a third-quarter 2019 non-cash full cost ceiling impairment of $397.9 million. We did not record any similar impairments for the years ended December 31, 2018 or 2017, but did record non-cash full cost ceiling impairments of $161.1 million and $2.4 billion for the years ended December 31, 2016 and 2015, respectively.
If prices remain at or below the current levels, subject to numerous factors and inherent limitations, some of which are discussed below, and all other factors remain constant, we will incur an additional non-cash full cost ceiling impairment in the fourth quarter of 2019, which will have an adverse effect on our results of operations.
There are numerous uncertainties inherent in the estimation of proved reserves and accounting for oil and natural gas properties in future periods. In addition to unknown future commodity prices, other uncertainties include (i) changes in drilling and completions costs, (ii) changes in oilfield service costs, (iii) production results, (iv) our ability, in a low price environment, to strategically drill the most economic locations in our multi-level horizontal targets, (v) income tax impacts, (vi) potential recognition of additional proved undeveloped reserves, (vii) any potential value added to our proved reserves when testing recoverability from drilling unbooked locations, (viii) revisions to production curves based on additional data and (ix) the inherent significant volatility in the commodity prices for oil, NGL and natural gas.
Each of the above factors is evaluated on a quarterly basis and if there is a material change in any factor it is incorporated into our reserves estimation utilized in our quarterly accounting estimates. We use our reserve estimates to evaluate, also on a quarterly basis, the reasonableness of our resource development plans for our reported proved reserves. Changes in circumstance, including commodity pricing, economic factors and the other uncertainties described above may lead to changes in our development plans.
Set forth below is a calculation of a potential future impairment of our evaluated oil and natural gas properties. Such implied impairment should not be interpreted to be indicative of our development plan or of our actual future results. Each of the uncertainties noted above has been evaluated for material known trends to be potentially included in the estimation of possible fourth-quarter effects. Based on such review, we determined that the impact of decreased commodity prices is the only significant known variable necessary in calculating the following scenario.
Our hypothetical fourth-quarter 2019 full cost ceiling calculation has been prepared by substituting (i) $51.08 per Bbl for oil, (ii) $12.10 per Bbl for NGL and (iii) $0.57 per Mcf for natural gas (collectively, the "Pro Forma Fourth-Quarter Prices") for the respective Realized Prices as of September 30, 2019. All other inputs and assumptions have been held constant. Accordingly, this estimation strictly isolates the estimated impact of low commodity prices on the fourth-quarter 2019 Realized Prices that will be utilized in our full cost ceiling calculation. The Pro Forma Fourth-Quarter Prices use a slightly modified Realized Price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for oil, NGL and natural gas for the 10 months ended October 1, 2019 and holding the October 30, 2019 prices constant for the remaining eleventh and twelfth months of the calculation. Based solely on the substitution of the Pro Forma Fourth-Quarter Prices into our September 30, 2019 proved reserve estimates, the implied fourth-quarter impairment would be $170 million. We believe that substituting these prices into our September 30, 2019 proved reserve estimates may help provide users with an understanding of the potential impact on our fourth-quarter 2019 full cost ceiling test.
We have entered into a number of derivatives, which have enabled us to offset a portion of the changes in our cash flow caused by price fluctuations in our sales of oil, NGL and natural gas as discussed in “Item 3. Quantitative and Qualitative Disclosures About Market Risk.”
34
See Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for prices used to value our reserves and additional discussion of our full cost impairment. See "Part II, Item 1A. Risk Factors—Risks related to our business—As a result of the volatility in prices for oil, NGL and natural gas, we have taken and may be required to take further write-downs of the carrying values of our properties" included elsewhere in this Quarterly Report.
Results of operations
Revenues
Sources of our revenue
Our revenues are derived from the sale of produced oil, NGL and natural gas, the sale of purchased oil and providing midstream services to third parties, all within the continental United States and do not include the effects of derivatives. Our oil, NGL and natural gas revenues may vary significantly from period to period as a result of changes in volumes of production, pricing differentials and/or changes in commodity prices. Our sales of purchased oil revenue may vary due to changes in oil prices, pricing differentials and the amount of volumes purchased. Our midstream service revenues may vary due to oil throughput fees and the level of services provided to third parties for (i) oil and natural gas gathering and transportation systems and related facilities, (ii) natural gas lift, rig fuel and centralized compression infrastructure and (iii) water storage, recycling and transportation infrastructure. See Notes 2.n and 5.b to our consolidated financial statements in our 2018 Annual Report for additional information regarding our revenue recognition policies.
The following table presents our sources of revenue as a percentage of total revenues:
Three months ended September 30, | Nine months ended September 30, | |||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||
Oil sales | 73 | % | 57 | % | 70 | % | 53 | % | ||||
NGL sales | 11 | % | 18 | % | 12 | % | 13 | % | ||||
Natural gas sales | 4 | % | 5 | % | 3 | % | 5 | % | ||||
Midstream service revenues | 1 | % | 1 | % | 1 | % | 1 | % | ||||
Sales of purchased oil | 11 | % | 19 | % | 14 | % | 28 | % | ||||
Total | 100 | % | 100 | % | 100 | % | 100 | % | ||||
35
Oil, NGL and natural gas sales volumes, revenues and prices
The following table presents information regarding our oil, NGL and natural gas sales volumes, sales revenues and average sales prices:
_____________________________________________________________________________
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Sales volumes: | ||||||||||||||||
Oil (MBbl) | 2,560 | 2,651 | 7,865 | 7,604 | ||||||||||||
NGL (MBbl) | 2,344 | 1,987 | 6,643 | 5,328 | ||||||||||||
Natural gas (MMcf) | 15,790 | 11,577 | 43,731 | 32,697 | ||||||||||||
Oil equivalents (MBOE)(1)(2) | 7,537 | 6,567 | 21,797 | 18,381 | ||||||||||||
Average daily oil equivalent sales volumes (BOE/D)(2) | 81,921 | 71,382 | 79,843 | 67,330 | ||||||||||||
Average daily oil sales volumes (Bbl/D)(2) | 27,830 | 28,812 | 28,810 | 27,854 | ||||||||||||
Sales revenues (in thousands): | ||||||||||||||||
Oil | $ | 141,709 | $ | 160,007 | $ | 430,910 | $ | 469,972 | ||||||||
NGL | 20,522 | 50,814 | 74,954 | 115,979 | ||||||||||||
Natural gas | 7,520 | 15,043 | 21,126 | 45,908 | ||||||||||||
Total oil, NGL and natural gas sales revenues | $ | 169,751 | $ | 225,864 | $ | 526,990 | $ | 631,859 | ||||||||
Average sales prices(2): | ||||||||||||||||
Oil, without derivatives ($/Bbl)(3) | $ | 55.35 | $ | 60.36 | $ | 54.79 | $ | 61.80 | ||||||||
NGL, without derivatives ($/Bbl)(3) | $ | 8.75 | $ | 25.57 | $ | 11.28 | $ | 21.77 | ||||||||
Natural gas, without derivatives ($/Mcf)(3) | $ | 0.48 | $ | 1.30 | $ | 0.48 | $ | 1.40 | ||||||||
Average sales price, without derivatives ($/BOE)(3) | $ | 22.52 | $ | 34.39 | $ | 24.18 | $ | 34.38 | ||||||||
Oil, with derivatives ($/Bbl)(4) | $ | 56.15 | $ | 55.41 | $ | 53.59 | $ | 57.50 | ||||||||
NGL, with derivatives ($/Bbl)(4) | $ | 13.43 | $ | 23.99 | $ | 13.83 | $ | 20.95 | ||||||||
Natural gas, with derivatives ($/Mcf)(4) | $ | 1.01 | $ | 1.79 | $ | 1.09 | $ | 1.79 | ||||||||
Average sales price, with derivatives ($/BOE)(4) | $ | 25.38 | $ | 32.78 | $ | 25.75 | $ | 33.04 | ||||||||
(1) | BOE is calculated using a conversion rate of six Mcf per one Bbl. |
(2) | The numbers presented are based on actual amounts and are not calculated using the rounded numbers presented in the table above. |
(3) | Actual prices received when control passes to the purchaser/customer adjusted for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the delivery point. |
(4) | Price reflects the after-effects of our derivative transactions on our average sales prices. Our calculation of such after-effects includes settlements of matured derivatives during the respective periods in accordance with GAAP and an adjustment to reflect premiums incurred previously or upon settlement that are attributable to derivatives that settled during the respective periods. |
36
The following table presents settlements received (paid) for matured derivatives and premiums paid previously or upon settlement attributable to derivatives that matured during the periods utilized in our calculation of the average sales prices, with derivatives presented above:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Settlements received (paid) for matured derivatives: | ||||||||||||||||
Oil | $ | 5,813 | $ | (7,279 | ) | $ | 5,199 | $ | (16,623 | ) | ||||||
NGL | 10,964 | (3,154 | ) | 16,905 | (4,348 | ) | ||||||||||
Natural gas | 8,468 | 6,545 | 26,723 | 15,028 | ||||||||||||
Total | $ | 25,245 | $ | (3,888 | ) | $ | 48,827 | $ | (5,943 | ) | ||||||
Premiums paid previously or upon settlement attributable to derivatives that matured during the respective period: | ||||||||||||||||
Oil | $ | (3,748 | ) | $ | (5,849 | ) | $ | (14,589 | ) | $ | (16,090 | ) | ||||
Natural gas | — | (850 | ) | — | (2,536 | ) | ||||||||||
Total | $ | (3,748 | ) | $ | (6,699 | ) | $ | (14,589 | ) | $ | (18,626 | ) | ||||
Changes in average sales prices and sales volumes caused the following changes to our oil, NGL and natural gas revenues between the three months ended September 30, 2019 and 2018:
(in thousands) | Oil | NGL | Natural gas | Total net effect of change | ||||||||||||
2018 Revenues | $ | 160,007 | $ | 50,814 | $ | 15,043 | $ | 225,864 | ||||||||
Effect of changes in average sales prices | (12,846 | ) | (39,436 | ) | (12,999 | ) | (65,281 | ) | ||||||||
Effect of changes in sales volumes | (5,452 | ) | 9,144 | 5,476 | 9,168 | |||||||||||
2019 Revenues | $ | 141,709 | $ | 20,522 | $ | 7,520 | $ | 169,751 | ||||||||
Changes in average sales prices and sales volumes caused the following changes to our oil, NGL and natural gas revenues between the nine months ended September 30, 2019 and 2018:
(in thousands) | Oil | NGL | Natural gas | Total net effect of change | ||||||||||||
2018 Revenues | $ | 469,972 | $ | 115,979 | $ | 45,908 | $ | 631,859 | ||||||||
Effect of changes in average sales prices | (55,194 | ) | (69,673 | ) | (40,276 | ) | (165,143 | ) | ||||||||
Effect of changes in sales volumes | 16,132 | 28,648 | 15,494 | 60,274 | ||||||||||||
2019 Revenues | $ | 430,910 | $ | 74,954 | $ | 21,126 | $ | 526,990 | ||||||||
Oil sales revenue. Our oil sales revenue is a function of oil sales volumes and average oil sales prices received for those volumes. The decrease in oil sales revenue of $18.3 million, or 11%, for the three months ended September 30, 2019, compared to the same period in 2018 is due to an 8% decrease in average oil sales prices and a 3% decrease in oil sales volumes.
The decrease in oil sales revenue of $39.1 million, or 8%, for the nine months ended September 30, 2019, compared to the same period in 2018 is due to an 11% decrease in average oil sales prices and was partially offset by a 3% increase in oil sales volumes.
NGL sales revenue. Our NGL sales revenue is a function of NGL sales volumes and average NGL sales prices received for those volumes. The decrease in NGL sales revenue of $30.3 million, or 60%, for the three months ended September 30, 2019, compared to the same period in 2018 is due to a 66% decrease in average NGL sales prices and was partially offset by an 18% increase in NGL sales volumes.
The decrease in NGL sales revenue of $41.0 million, or 35%, for the nine months ended September 30, 2019, compared to the same period in 2018 is due to a 48% decrease in average NGL sales prices and was partially offset by a 25% increase in NGL sales volumes.
Natural gas sales revenue. Our natural gas sales revenue is a function of natural gas sales volumes and average natural gas sales prices received for those volumes. The decrease in natural gas sales revenue of $7.5 million, or 50%, for the three months ended September 30, 2019, compared to the same period in 2018 is due to a 63% decrease in average natural gas sales prices and was partially offset by a 36% increase in natural gas sales volumes.
37
The decrease in natural gas sales revenue of $24.8 million, or 54%, for the nine months ended September 30, 2019, compared to the same period in 2018 is due to a 66% decrease in average natural gas sales prices and was partially offset by a 34% increase in natural gas sales volumes.
The following table presents midstream service and sales of purchased oil revenues:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Midstream service revenues | $ | 3,079 | $ | 2,255 | $ | 8,572 | $ | 6,590 | ||||||||
Sales of purchased oil | $ | 20,739 | $ | 51,627 | $ | 83,597 | $ | 252,039 | ||||||||
Midstream service revenues. Our midstream service revenues increased by $0.8 million, or 37%, and by $2.0 million, or 30%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018 mainly due to an increase in water service revenues, which corresponds to a similar increase in water service costs included in midstream service expenses during the same periods. These revenues fluctuate and will vary due to oil throughput fees and the level of services provided to third parties.
Sales of purchased oil. These revenues are a function of the volumes and prices of purchased oil sold to customers and are offset by the volumes and costs of purchased oil. Sales of purchased oil decreased by $30.9 million, or 60%, and by $168.4 million, or 67%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018 mainly due to decreases in the volumes of purchased oil sold of 50% and 63% for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018.
We enter into purchase transactions with third parties and separate sale transactions. These transactions are presented on a gross basis as we act as the principal in the transaction by assuming control of the commodities purchased and the responsibility to deliver the commodities sold. Revenue is recognized when control transfers to the purchaser/customer at the delivery point based on the price received. The transportation costs associated with these transactions are presented as a component of costs of purchased oil. See "—Costs and expenses - Costs of purchased oil."
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Costs and expenses
The following table presents information regarding costs and expenses and average selected costs and expenses per BOE sold:
_____________________________________________________________________________
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands except for per BOE sold data) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Costs and expenses: | ||||||||||||||||
Lease operating expenses | $ | 22,597 | $ | 23,873 | $ | 68,838 | $ | 68,466 | ||||||||
Production and ad valorem taxes | 11,085 | 14,015 | 29,632 | 38,232 | ||||||||||||
Transportation and marketing expenses | 5,583 | 5,036 | 15,233 | 6,570 | ||||||||||||
Midstream service expenses | 1,191 | 728 | 3,401 | 1,824 | ||||||||||||
Costs of purchased oil | 20,741 | 51,210 | 83,604 | 252,452 | ||||||||||||
General and administrative: | ||||||||||||||||
Cash | 10,591 | 14,664 | 36,183 | 46,208 | ||||||||||||
Non-cash stock-based compensation, net(1) | (1,739 | ) | 8,733 | 5,244 | 28,748 | |||||||||||
Restructuring expenses | 5,965 | — | 16,371 | — | ||||||||||||
Depletion, depreciation and amortization | 69,099 | 55,963 | 197,900 | 152,278 | ||||||||||||
Impairment expense | 397,890 | — | 397,890 | — | ||||||||||||
Other operating expenses | 1,005 | 1,114 | 3,077 | 3,341 | ||||||||||||
Total costs and expenses | $ | 544,008 | $ | 175,336 | $ | 857,373 | $ | 598,119 | ||||||||
Average selected costs and expenses per BOE sold(2): | ||||||||||||||||
Lease operating expenses | $ | 3.00 | $ | 3.63 | $ | 3.16 | $ | 3.72 | ||||||||
Production and ad valorem taxes | 1.47 | 2.13 | 1.36 | 2.08 | ||||||||||||
Transportation and marketing expenses | 0.74 | 0.77 | 0.70 | 0.36 | ||||||||||||
Midstream service expenses | 0.16 | 0.11 | 0.16 | 0.10 | ||||||||||||
General and administrative: | ||||||||||||||||
Cash | 1.41 | 2.23 | 1.66 | 2.51 | ||||||||||||
Non-cash stock-based compensation, net(1) | (0.23 | ) | 1.33 | 0.24 | 1.56 | |||||||||||
Depletion, depreciation and amortization | 9.17 | 8.52 | 9.08 | 8.28 | ||||||||||||
Total selected costs and expenses | $ | 15.72 | $ | 18.72 | $ | 16.36 | $ | 18.61 | ||||||||
(1) | For the three and nine months ended September 30, 2019, non-cash stock-based compensation, net, excluding forfeitures related to our organizational restructuring, was $3.9 million and $16.4 million, respectively, and on a per BOE sold basis was $0.52 and $0.75, respectively. |
(2) | Average selected costs and expenses per BOE sold are based on actual amounts and are not calculated using the rounded numbers presented in the table above. |
Lease operating expenses ("LOE"). LOE, which includes workover expenses, decreased by $1.3 million, or 5%, and increased by $0.4 million, or 1%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. On a per BOE sold basis, LOE decreased by 17% and 15% for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. We continue to focus on economic efficiencies associated with the usage and procurement of products and services related to LOE.
Production and ad valorem taxes. Production and ad valorem taxes decreased by $2.9 million, or 21%, and by $8.6 million, or 22%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. The year-to-date decrease is partially attributed to a $4.5 million production tax refund, related to additional marketing costs claimed for fiscal years 2013 through 2016, recorded during the first quarter of 2019. Production taxes, which are established by federal, state or local taxing authorities, are based on and fluctuate in proportion to our oil, NGL and natural gas sales revenues. Ad valorem taxes are based on and fluctuate in proportion to the taxable value assessed by the various counties where our oil and natural gas properties are located.
Transportation and marketing expenses. Transportation and marketing expenses increased by $0.5 million, or 11%, and by $8.7 million, or 132%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. In July 2018, we began recognizing transportation and marketing expenses incurred for the delivery of produced oil to a customer in the U.S. Gulf Coast market. We expect these expenses to increase as we are a contracted firm shipper on the Gray Oak Pipeline, which is expected to be in service by the end of 2019.
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Midstream service expenses. Midstream service expenses increased by $0.5 million, or 64%, and by $1.6 million, or 86%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018 mainly due to an increase in water service costs, which corresponds to a similar increase in water service revenue included in midstream service revenues during the same periods. Midstream service expenses are costs incurred to operate and maintain our (i) oil and natural gas gathering and transportation systems and related facilities, (ii) centralized oil storage tanks, (iii) natural gas lift, rig fuel and centralized compression infrastructure and (iv) water storage, recycling and transportation facilities.
Costs of purchased oil. Costs of purchased oil decreased by $30.5 million, or 59%, and by $168.8 million, or 67%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018 mainly due to decreases in the volumes of purchased oil of 50% and 63% for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. These are costs incurred for obtaining oil from third parties and, in some cases, transporting such oil utilized in our marketing activities.
General and administrative ("G&A"). Total G&A decreased by $14.5 million, or 62%, and by $33.5 million, or 45%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018 mainly due to decreases in stock-based compensation, net and decreases in cash G&A as a result of our measures taken to align our cost structure with operational activity. Stock-based compensation, net, decreased by $10.5 million, or 120%, and by $23.5 million, or 82%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018 mainly due to the expected forfeiture related to the fourth-quarter transition of Randy A. Foutch from his role as Chief Executive Officer and our second-quarter organizational restructuring. All stock-based compensation awards held by Mr. Foutch and by officers and employees who were affected by the organizational restructuring were recorded as reversals to stock-based compensation, net of $5.6 million and $11.2 million during the three and nine months ended September 30, 2019, respectively. See Note 6.c to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our stock-based compensation.
Restructuring expenses. Organizational restructuring expenses relate to (i) the retirement of two of our Senior Officers, (ii) the Plan, which included a workforce reduction, implemented in response to recent market conditions and to reduce costs and better position ourselves for the future and (iii) our announcement, in connection with the previously announced comprehensive succession planning process, that, effective as of October 1, 2019, Randy A. Foutch would transition from his role as Chief Executive Officer. We incurred $6.0 million and $16.4 million of one-time charges during the three and nine months ended September 30, 2019, respectively, comprising of compensation, taxes, professional fees, outplacement and insurance-related expenses. As of September 30, 2019, no additional restructuring expenses are expected to be incurred. See Note 17 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of the organizational restructuring.
Depletion, depreciation and amortization ("DD&A"). The following table presents the components of DD&A:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Depletion of evaluated oil and natural gas properties | $ | 65,354 | $ | 52,169 | $ | 186,662 | $ | 140,971 | ||||||||
Depreciation of midstream service assets | 2,575 | 2,456 | 7,619 | 7,321 | ||||||||||||
Depreciation and amortization of other fixed assets | 1,170 | 1,338 | 3,619 | 3,986 | ||||||||||||
Total DD&A | $ | 69,099 | $ | 55,963 | $ | 197,900 | $ | 152,278 | ||||||||
DD&A increased by $13.1 million, or 23%, and by $45.6 million, or 30%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. These increases are mainly due to (i) the previous reduction in our December 31, 2018 proved reserve volume, (ii) an increase in the depletion base and (iii) an increase in production volumes sold. Depletion expense per BOE increased 9% and 12% for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. For further discussion of our depletion expense per BOE see Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report and "—Pricing and reserves."
Impairment expense. Our net book value of evaluated oil and natural gas properties exceeded the full cost ceiling as of September 30, 2019, and, as a result, we recorded a full cost ceiling impairment of $397.9 million for the three and nine months ended September 30, 2019. There were no full cost ceiling impairments for the nine months ended September 30, 2018. Impairment of our oil and natural gas properties is based principally on the estimated future net revenues from proved oil and natural gas properties discounted at 10%. The Realized Prices are utilized to calculate the discounted future net revenues in the full cost ceiling calculation. In the event the unamortized cost of evaluated oil and natural gas properties being depleted exceeds the full cost ceiling, as defined by the SEC, the excess is charged to expense in the period such excess occurs. Once incurred, a write-down of oil and natural gas properties is not reversible. With the continuing volatility in commodity prices, we may incur additional write-downs on our oil and natural gas properties. See Note 4 to our unaudited consolidated financial
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statements included elsewhere in this Quarterly Report and "—Recent developments" for additional information regarding our full cost ceiling calculation.
Non-operating income (expense)
The following table presents the components of non-operating income (expense), net:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Gain (loss) on derivatives, net | $ | 96,684 | $ | (32,245 | ) | $ | 136,713 | $ | (69,211 | ) | ||||||
Interest expense | (15,191 | ) | (14,845 | ) | (46,503 | ) | (42,787 | ) | ||||||||
Litigation settlement | — | — | 42,500 | — | ||||||||||||
Gain (loss) on disposal of assets, net | 1,294 | (616 | ) | (315 | ) | (4,591 | ) | |||||||||
Other income (expense), net | 556 | (267 | ) | 4,269 | 629 | |||||||||||
Total non-operating income (expense), net | $ | 83,343 | $ | (47,973 | ) | $ | 136,664 | $ | (115,960 | ) | ||||||
Gain (loss) on derivatives, net. The following table presents the changes in the components of gain (loss) on derivatives, net:
(in thousands) | Three months ended September 30, 2019 compared to 2018 | Nine months ended September 30, 2019 compared to 2018 | ||||||
Change in non-cash gain (loss) on derivatives, net | $ | 95,756 | $ | 149,297 | ||||
Change in settlements received (paid) for matured derivatives, net | 29,133 | 54,770 | ||||||
Change in settlements paid for early terminations of derivatives, net | — | (5,409 | ) | |||||
Change in premiums paid for derivatives | 4,040 | 7,266 | ||||||
Total change in gain (loss) on derivatives, net | $ | 128,929 | $ | 205,924 | ||||
The change in non-cash gain (loss) on derivatives is the result of new, matured and early-terminated contracts and the changing relationship between our outstanding contract prices and the future market prices in the forward curves, which we use to calculate the fair value of our derivatives. In general, if outstanding contracts are held constant, we experience gains during periods of decreasing market prices and losses during periods of increasing market prices. Settlements received or paid for matured derivatives are based on the settlement prices of our matured derivatives compared to the prices specified in the derivative contracts. During the nine months ended September 30, 2019, we recognized significant non-cash gains in the net fair value of our derivatives outstanding due to decreases in the applicable futures curves that we have hedged, bolstered by our hedge restructuring that increased our weighted-average oil floor prices for 2019 and 2020.
During the nine months ended September 30, 2019, we completed a hedge restructuring by early terminating puts and collars and entering into new swaps. We paid a net termination amount of $5.4 million that included the full settlement of the deferred premiums associated with these early-terminated puts and collars. The present value of these deferred premiums, classified under Level 3 of the fair value hierarchy, upon their early termination was $7.2 million.
See Notes 7 and 8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for additional information regarding our derivatives.
Interest expense. Interest expense increased by $0.3 million, or 2%, and by $3.7 million, or 9%, for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018 mainly due to increases in the amount outstanding on our Senior Secured Credit Facility.
Litigation settlement. During the nine months ended September 30, 2019, we finalized and received a favorable settlement of $42.5 million in connection with our damage claims asserted in a previously disclosed litigation matter relating to a breach and wrongful termination of a crude oil purchase agreement. We do not anticipate the receipt of further payments in connection with this matter as this settlement constituted a full and final satisfaction of our claims.
Gain (loss) on disposal of assets, net. The change in gain (loss) on disposal of assets, net was $1.9 million and $4.3 million for the three and nine months ended September 30, 2019, respectively, compared to the same periods in 2018. From time to time, we dispose of inventory, midstream service assets and other fixed assets. The associated gain or loss recorded during the period fluctuates depending upon the volume of the assets disposed, their associated net book value and, in the case of a disposal by sale, the sale price.
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Income tax benefit (expense)
Income tax benefit for the three and nine months ended September 30, 2019 was $2.5 million and $0.8 million, respectively. We are subject to federal and state income taxes and the Texas franchise tax. As of September 30, 2019, we determined it was more likely than not that our federal and Oklahoma net deferred tax assets were not realizable through future net income. As of September 30, 2019, a total valuation allowance of $256.8 million has been recorded to offset our federal and Oklahoma net deferred tax assets, resulting in a Texas net deferred tax liability of $4.2 million. During the three months ended September 30, 2019, we updated our effective tax rate to 0.8% from the 1.0% used during the first half of 2019, as fourth-quarter 2019 events have become more estimable. As such, the effective tax rate for our operations was 0.8% for the nine months ended September 30, 2019. For further discussion of our valuation allowance, see Note 14 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Liquidity and capital resources
Historically, our primary sources of liquidity have been cash flows from operations, proceeds from equity offerings, proceeds from senior unsecured note offerings, borrowings under our Senior Secured Credit Facility and proceeds from asset dispositions. We believe cash flows from operations and availability under our Senior Secured Credit Facility provide sufficient liquidity to manage our cash needs and contractual obligations and to fund our expected capital expenditures. Our primary operational uses of capital have been for the acquisition, exploration and development of oil and natural gas properties and infrastructure development.
A significant portion of our capital expenditures can be adjusted and managed by us. We continually monitor the capital markets and our capital structure and consider which financing alternatives, including equity and debt capital resources, joint ventures and asset sales, are available to meet our future planned or accelerated capital expenditures. We may make changes to our capital structure from time to time, with the goal of maintaining financial flexibility, preserving or improving liquidity and/or achieving cost efficiency. Such financing alternatives, including capital market transactions and debt and equity repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. For further discussion of our financing activities included elsewhere in this Quarterly Report, see: (i) Note 5 for our debt instruments and (ii) Note 6.a and "Part II. Item 2. Purchases of Equity Securities" below for our $200.0 million share repurchase program authorized by our board of directors and commenced in February 2018. We also continuously look for other opportunities to maximize shareholder value.
Due to the inherent volatility in oil, NGL and natural gas prices and differences in the prices of oil, NGL and natural gas between where we produce and where we sell such commodities, we engage in derivative transactions, such as puts, swaps, collars and basis swaps to hedge price risk associated with a portion of our anticipated production. By removing a portion of the price volatility associated with future production, we expect to mitigate, but not eliminate, the potential effects of variability in cash flows from operations. See "Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk" below.
See Note 7 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of our hedge restructuring during the nine months ended September 30, 2019 and corresponding summary of open derivative positions as of September 30, 2019 for derivatives that were entered into through September 30, 2019.
We continually seek to maintain a financial profile that provides operational flexibility. As of September 30, 2019, we had cash and cash equivalents of $31.7 million and available capacity under the Senior Secured Credit Facility, after the reduction for outstanding letters of credit, of $900.3 million, resulting in total liquidity of $932.0 million. As of November 4, 2019, we had cash and cash equivalents of $18.0 million and available capacity under the Senior Secured Credit Facility, after the reduction for outstanding letters of credit, of $805.3 million, resulting in total liquidity of $823.3 million. We believe that our operating cash flows and the aforementioned liquidity sources provide us with the financial resources to manage our business needs, to implement our planned capital expenditure budget and, at our discretion, to fund our share repurchase program, pay down or refinance debt or increase our planned capital expenditure budget. In addition, the pending Acquisition is expected to be primarily financed through borrowing under the Senior Secured Credit Facility. 2019 has been a transitional year as we have tailored our operational cadence and corporate cost structure, including G&A expense, to target a balance between capital expenditures and cash flows from operations. We have also aligned our personnel costs with activity levels with a reduction in force. We have restructured our oil hedges, securing additional cash flow to increase activity and substantially accelerating the time frame in which we began to generate free cash flow while also growing oil production.
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Cash flows
The following table presents our cash flows:
Nine months ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Net cash provided by operating activities | $ | 366,868 | $ | 408,528 | ||||
Net cash used in investing activities | (372,676 | ) | (536,431 | ) | ||||
Net cash (used in) provided by financing activities | (7,650 | ) | 66,151 | |||||
Net decrease in cash and cash equivalents | $ | (13,458 | ) | $ | (61,752 | ) | ||
Cash flows from operating activities
Net cash provided by operating activities decreased by $41.7 million, or 10%, for the nine months ended September 30, 2019, compared to the same period in 2018. Notable cash changes include (i) a decrease in oil, NGL and natural gas sales revenues, (ii) a decrease of $38.6 million from net working capital changes, (iii) an increase of $56.6 million in settlements received for matured and early terminations of derivatives, net of premiums paid and (iv) receipt of $42.5 million for the litigation settlement. The decrease in oil, NGL and natural gas sales revenues is due to the decrease in average sales prices without derivatives for oil, NGL and natural gas, partially offset by increased sales volumes of all production streams. See "—Results of operations" for additional discussion of changes in our oil, NGL and natural gas sales revenues.
Our operating cash flows are sensitive to a number of variables, the most significant of which are the volatility of oil, NGL and natural gas prices, mitigated to the extent of our derivatives' exposure, and sales volume levels. Regional and worldwide economic activity, weather, infrastructure, transportation capacity to reach markets, costs of operations, legislation and regulations and other variable factors significantly impact the prices of these commodities. These factors are not within our control and are difficult to predict. For additional information on risks related to our business, see "Part I. Item 1A. Risk Factors" in our 2018 Annual Report.
Cash flows from investing activities
Net cash used in investing activities decreased by $163.8 million, or 31%, for the nine months ended September 30, 2019, compared to the same period in 2018, mainly due to decreases in our capital expenditure budget and acquisitions of oil and natural gas properties, partially offset by a decrease in proceeds from disposition of capital assets, net of selling costs. Additionally, accrued capital expenditures decreased significantly during the nine months ended September 30, 2018.
The following table presents the components of our cash flows from investing activities:
Nine months ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Acquisitions of oil and natural gas properties | $ | (2,880 | ) | $ | (16,340 | ) | ||
Capital expenditures: | ||||||||
Oil and natural gas properties | (368,182 | ) | (522,470 | ) | ||||
Midstream service assets | (6,741 | ) | (5,764 | ) | ||||
Other fixed assets | (1,720 | ) | (5,945 | ) | ||||
Proceeds from disposition of equity method investee, net of selling costs | — | 1,655 | ||||||
Proceeds from disposition of capital assets, net of selling costs | 6,847 | 12,433 | ||||||
Net cash used in investing activities | $ | (372,676 | ) | $ | (536,431 | ) | ||
Cash flows from financing activities
Net cash (used in) provided by financing activities decreased by $73.8 million, or 112%, for the nine months ended September 30, 2019, compared to the same period in 2018, and is mainly attributable to decreased borrowings and increased payments on our Senior Secured Credit Facility and 2018 share repurchases under our share repurchase program. During the year ended December 31, 2018, we repurchased 11,048,742 shares of common stock at a weighted-average price of $8.78 per common share for a total of $97.1 million under this program. All shares were retired upon repurchase. There were no share repurchases under this program during the nine months ended September 30, 2019. As of September 30, 2019, we had authorization remaining to repurchase until expiration of the program in February 2020, $102.9 million of common stock.
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For further discussion of our financing activities included elsewhere in this Quarterly Report, see: (i) Note 5 for our debt instruments and (ii) Note 6.a and "Part II. Item 2. Purchases of Equity Securities" below for our $200.0 million share repurchase program authorized by our board of directors and commenced in February 2018.
The following table presents the components of our cash flows from financing activities:
Nine months ended September 30, | ||||||||
(in thousands) | 2019 | 2018 | ||||||
Borrowings on Senior Secured Credit Facility | $ | 80,000 | $ | 190,000 | ||||
Payments on Senior Secured Credit Facility | (85,000 | ) | (20,000 | ) | ||||
Share repurchases | — | (97,055 | ) | |||||
Stock exchanged for tax withholding | (2,650 | ) | (4,411 | ) | ||||
Proceeds from exercise of stock options | — | 86 | ||||||
Payments for debt issuance costs | — | (2,469 | ) | |||||
Net cash (used in) provided by financing activities | $ | (7,650 | ) | $ | 66,151 | |||
Capital expenditure budget
Our goal is to achieve cash flow neutrality at a minimum and, therefore, our capital spending in 2019 and 2020 will ultimately be influenced by commodity price changes and, among other factors, changes in service costs and drilling and completions efficiencies. Due to improving drilling and completions efficiencies, we adjusted our expected capital expenditures, excluding non-budgeted acquisitions, during the third quarter of 2019 to $490.0 million for calendar year 2019, which is an increase of $25.0 million from the previously announced level. We do not have a specific acquisition budget since the timing and size of acquisitions cannot be accurately forecasted.
The following table presents the components of our costs incurred, excluding non-budgeted acquisition costs:
_____________________________________________________________________________
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Oil and natural gas properties(1) | $ | 76,837 | $ | 147,250 | $ | 365,839 | $ | 486,329 | ||||||||
Midstream service assets | 1,147 | 383 | 7,584 | 3,649 | ||||||||||||
Other fixed assets | 999 | 1,255 | 1,966 | 6,197 | ||||||||||||
Total costs incurred, excluding non-budgeted acquisition costs | $ | 78,983 | $ | 148,888 | $ | 375,389 | $ | 496,175 | ||||||||
(1) | See Note 4 included elsewhere in this Quarterly Report for additional information regarding our costs incurred in the exploration and development of oil and natural gas properties. |
The amount, timing and allocation of capital expenditures are largely discretionary and within management's control. If oil, NGL and natural gas prices decline below our acceptable levels, or costs increase above our acceptable levels, we may choose to defer a portion of our budgeted capital expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flow. Subject to financing alternatives, we may also increase our capital expenditures significantly to take advantage of opportunities we consider to be attractive. We consistently monitor and may adjust our projected capital expenditures in response to success or lack of success in drilling activities, changes in prices, availability of financing and joint venture opportunities, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs and supplies, changes in service costs, contractual obligations, internally generated cash flow and other factors both within and outside our control.
Debt
As of September 30, 2019, we were a party only to our Senior Secured Credit Facility and the indentures governing our senior unsecured notes.
Senior Secured Credit Facility
The Senior Secured Credit Facility matures on April 19, 2023, provided that if either the January 2022 Notes or March 2023 Notes have not been refinanced on or prior to the date (as applicable, the "Early Maturity Date") that is 90 days before their respective stated maturity dates, the Senior Secured Credit Facility will mature on such Early Maturity Date. As of September 30, 2019, the Senior Secured Credit Facility had a maximum credit amount of $2.0 billion, a borrowing base and an
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aggregate elected commitment of $1.1 billion each, with $185.0 million outstanding and was subject to an interest rate of 3.31%. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which we were in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or $80.0 million. As of September 30, 2019 and December 31, 2018, we had one letter of credit outstanding of $14.7 million under the Senior Secured Credit Facility. The Senior Secured Credit Facility is fully and unconditionally guaranteed by LMS and GCM.
On October 30, 2019, pursuant to the semi-annual redetermination, the borrowing base and aggregate elected commitment under our Senior Secured Credit Facility were reduced to $1.0 billion each.
Senior unsecured notes
The following table presents principal amounts and applicable interest rates for our outstanding senior unsecured notes as of September 30, 2019:
(in millions, except for interest rates) | Principal | Interest rate | |||||
January 2022 Notes | $ | 450.0 | 5.625 | % | |||
March 2023 Notes | 350.0 | 6.250 | % | ||||
Total senior unsecured notes | $ | 800.0 | |||||
See Notes 5.a and 5.b to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of the March 2023 Notes and January 2022 Notes, respectively.
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Obligations and commitments
The following table presents significant contractual obligations and commitments as of September 30, 2019 and December 31, 2018 and their associated changes:
($ in thousands, except % change) | September 30, 2019 | December 31, 2018 | $ change | % change | |||||||||||
Senior Unsecured Notes(1) | $ | 939,844 | $ | 987,031 | $ | (47,187 | ) | (5 | )% | ||||||
Firm sale and transportation commitments(2) | 340,545 | 365,940 | (25,395 | ) | (7 | )% | |||||||||
Senior Secured Credit Facility(3) | 185,000 | 190,000 | (5,000 | ) | (3 | )% | |||||||||
Asset retirement obligations(4) | 58,025 | 56,882 | 1,143 | 2 | % | ||||||||||
Lease commitments(5) | 23,097 | 34,374 | (11,277 | ) | (33 | )% | |||||||||
Derivative deferred premiums(6) | 1,876 | 16,797 | (14,921 | ) | (89 | )% | |||||||||
Sand purchase and supply agreement(7) | — | 3,858 | (3,858 | ) | (100 | )% | |||||||||
Total | $ | 1,548,387 | $ | 1,654,882 | $ | (106,495 | ) | (6 | )% | ||||||
(1) | Values presented include both our principal and interest obligations. The decrease in such balance as of September 30, 2019 is due to our semi-annual interest payments made in January, March, July and September of 2019. See Notes 5.a and 5.b to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our March 2023 Notes and January 2022 Notes, respectively. |
(2) | We have committed to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. If not fulfilled, we are subject to firm transportation payments on excess pipeline capacity and other contractual penalties. The decrease in such commitments as of September 30, 2019 is mainly due to our fulfillment of contractual commitments, partially offset by new sale commitments and changes to existing transportation commitments. See Note 10.c to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our firm sale and transportation commitments. |
(3) | This table does not include future loan advances, repayments, commitment fees or other fees on our Senior Secured Credit Facility as we cannot determine with accuracy the timing of such items. Additionally, this table does not include interest expense as it is a floating rate instrument and we cannot determine with accuracy the future interest rates to be charged. The decrease in such balance as of September 30, 2019 is due to our payments, partially offset by our borrowings. As of September 30, 2019, the principal on our Senior Secured Credit Facility is due on April 19, 2023. |
(4) | Amounts represent our asset retirement obligation liabilities. See Note 12 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our asset retirement obligations. |
(5) | Amounts represent our minimum lease payments. See Notes 2 and 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of our adoption of ASC 842 on January 1, 2019. For simplicity, we have combined our drilling contracts into the "Lease Commitments" line item for 2019 presentation purposes. The decrease in lease commitments as of September 30, 2019 is mainly due to the settlements paid for our fulfillment of lease commitments, partially offset by new lease commitments. We have committed to drilling rig contracts with a third party to facilitate our drilling plans. Included in the value in the table is the gross amount we are committed to pay for our drilling contracts, however, we will record our proportionate share based on our working interest in our consolidated financial statements as incurred. See Note 10.b to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our drilling contracts. |
(6) | Amounts represent payments required for derivative deferred premiums on our commodity hedging contracts. The decrease in premiums as of September 30, 2019 is mainly due to premiums paid for derivatives and settlements paid for early terminations of derivatives. See Note 8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our deferred premiums. |
(7) | At September 30, 2019, we had met our commitment to purchase sand under this purchase and supply agreement. |
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Non-GAAP financial measures
The non-GAAP financial measures of Free Cash Flow and Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures used by other companies. Therefore, these non-GAAP measures should be considered in conjunction with net income or loss and other performance measures prepared in accordance with GAAP, such as operating income or loss or cash flows from operating activities. Free Cash Flow and Adjusted EBITDA should not be considered in isolation or as a substitute for GAAP measures, such as net income or loss, operating income or loss or any other GAAP measure of liquidity or financial performance.
Free Cash Flow
Free Cash Flow does not represent funds available for future discretionary use because those funds are required for future debt service, capital expenditures, acquisitions, working capital, income taxes, franchise taxes and other commitments and obligations. However, our management believes Free Cash Flow is useful to management and investors in evaluating the operating trends in its business due to production, commodity prices, operating costs and other related factors. There are significant limitations to the use of Free Cash Flow as a measure of performance, including the lack of comparability due to different methods of calculating Free Cash Flow reported by different companies.
The following table presents a reconciliation of net cash provided by operating activities (GAAP) to cash flows from operating activities before changes in assets and liabilities, net (non-GAAP), less costs incurred, excluding non-budgeted acquisition costs, for the calculation of Free Cash Flow (non-GAAP):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net cash provided by operating activities | $ | 105,599 | $ | 145,927 | $ | 366,868 | $ | 408,528 | ||||||||
Less: | ||||||||||||||||
Increase in current assets and liabilities, net | (21,183 | ) | (313 | ) | (48,305 | ) | (9,685 | ) | ||||||||
(Increase) decrease in noncurrent assets and liabilities, net | (1,124 | ) | (1,570 | ) | 1,853 | (279 | ) | |||||||||
Cash flows from operating activities before changes in assets and liabilities, net | 127,906 | 147,810 | 413,320 | 418,492 | ||||||||||||
Less costs incurred, excluding non-budgeted acquisition costs: | ||||||||||||||||
Oil and natural gas properties | 76,837 | 147,250 | 365,839 | 486,329 | ||||||||||||
Midstream service assets | 1,147 | 383 | 7,584 | 3,649 | ||||||||||||
Other fixed assets | 999 | 1,255 | 1,966 | 6,197 | ||||||||||||
Total costs incurred, excluding non-budgeted acquisition costs | 78,983 | 148,888 | 375,389 | 496,175 | ||||||||||||
Free Cash Flow | $ | 48,923 | $ | (1,078 | ) | $ | 37,931 | $ | (77,683 | ) | ||||||
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we define as net income or loss plus adjustments for income taxes, depletion, depreciation and amortization, impairment expense, non-cash stock-based compensation, net, accretion expense, mark-to-market on derivatives, premiums paid for derivatives, interest expense, gains or losses on disposal of assets and other non-recurring income and expenses. Adjusted EBITDA provides no information regarding a company's capital structure, borrowings, interest costs, capital expenditures, working capital movement or tax position. Adjusted EBITDA does not represent funds available for future discretionary use because those funds are required for future debt service, capital expenditures, working capital, income taxes, franchise taxes and other commitments and obligations. However, our management believes Adjusted EBITDA is useful to an investor in evaluating our operating performance because this measure:
• | is widely used by investors in the oil and natural gas industry to measure a company's operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods, the book value of assets, capital structure and the method by which assets were acquired, among other factors; |
• | helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and |
• | is used by our management for various purposes, including as a measure of operating performance, in presentations to our board of directors and as a basis for strategic planning and forecasting. |
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There are significant limitations to the use of Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations to different companies and the different methods of calculating Adjusted EBITDA reported by different companies. Our measurements of Adjusted EBITDA for financial reporting as compared to compliance under our debt agreements differ.
The following table presents a reconciliation of net income (loss) (GAAP) to Adjusted EBITDA (non-GAAP):
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
(in thousands) | 2019 | 2018 | 2019 | 2018 | ||||||||||||
Net income (loss) | $ | (264,629 | ) | $ | 55,050 | $ | (100,738 | ) | $ | 175,022 | ||||||
Plus: | ||||||||||||||||
Income tax (benefit) expense | (2,467 | ) | 1,387 | (812 | ) | 1,387 | ||||||||||
Depletion, depreciation and amortization | 69,099 | 55,963 | 197,900 | 152,278 | ||||||||||||
Impairment expense | 397,890 | — | 397,890 | — | ||||||||||||
Non-cash stock-based compensation, net | (1,739 | ) | 8,733 | 5,244 | 28,748 | |||||||||||
Restructuring expenses | 5,965 | — | 16,371 | — | ||||||||||||
Accretion expense | 1,005 | 1,114 | 3,077 | 3,341 | ||||||||||||
Mark-to-market on derivatives: | ||||||||||||||||
(Gain) loss on derivatives, net | (96,684 | ) | 32,245 | (136,713 | ) | 69,211 | ||||||||||
Settlements received (paid) for matured derivatives, net | 25,245 | (3,888 | ) | 48,827 | (5,943 | ) | ||||||||||
Settlements paid for early terminations of derivatives, net | — | — | (5,409 | ) | — | |||||||||||
Premiums paid for derivatives | (1,415 | ) | (5,455 | ) | (7,664 | ) | (14,930 | ) | ||||||||
Interest expense | 15,191 | 14,845 | 46,503 | 42,787 | ||||||||||||
Litigation settlement | — | — | (42,500 | ) | — | |||||||||||
(Gain) loss on disposal of assets, net | (1,294 | ) | 616 | 315 | 4,591 | |||||||||||
Adjusted EBITDA | $ | 146,167 | $ | 160,610 | $ | 422,291 | $ | 456,492 | ||||||||
Critical accounting policies and estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our unaudited consolidated financial statements.
There have been no material changes in our critical accounting policies and procedures during the nine months ended September 30, 2019. See our critical accounting policies in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2018 Annual Report. Furthermore, see Note 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of the impact of the adoption of ASC 842.
New accounting standards
For discussion of new accounting standards, see Note 2 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report. See Note 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion related to the adoption of ASC 842.
Off-balance sheet arrangements
Currently, we do not have any off-balance sheet arrangements other than our firm sale and transportation commitments, which are described in "—Obligations and commitments." In addition, we have certain operating leases with a term less than or equal to 12 months that we have made an accounting policy election to not record on the unaudited consolidated balance sheets. See
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Notes 3 and 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional information on our leases and commitments and contingencies, respectively.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risk. The term "market risk," in our case, refers to the risk of loss arising from adverse changes in oil, NGL and natural gas prices and in interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive derivative instruments were entered into for hedging purposes, rather than for speculative trading.
Commodity price exposure
Due to the inherent volatility in oil, NGL and natural gas prices and differences in the prices of oil, NGL and natural gas between where we produce and where we sell such commodities, we engage in derivative transactions, such as puts, swaps, collars and basis swaps to hedge price risk associated with a portion of our anticipated production. By removing a portion of the price volatility associated with future production, we expect to mitigate, but not eliminate, the potential effects of variability in cash flows from operations.
During a significant portion of 2018, Midland market crude oil prices experienced an increased discount to WTI Cushing and WTI Houston prices. These discounts have narrowed in 2019, however, they remain volatile. During a significant portion of 2018 and in 2019, the West Texas WAHA market natural gas prices experienced an increased discount to Henry Hub NYMEX prices and continues to remain volatile. The discounts are primarily due to limited pipeline capacity constraining transportation of crude oil and natural gas out of the Permian Basin to major market hubs including, but not limited to, Cushing, Oklahoma and the United States Gulf Coast. These pipeline constraints may continue to affect Midland market crude oil prices and West Texas WAHA market natural gas prices until further transportation capacity becomes operational or until basin-wide crude oil and natural gas production decreases from its current levels. We expect the basin differential to narrow, as new pipeline capacity is expected to become operational during the remaining portion of 2019 and the first half of 2020. We are a contracted firm shipper on the Gray Oak Pipeline, which is expected to be in service by the end of 2019. We will continue to pursue avenues to attempt to protect our oil and natural gas value from basin differentials by securing crude oil transportation capacity, which enables us to sell oil in multiple markets, and entering into basis-swap derivatives, which provides pricing protection.
The fair values of our open derivative contracts are largely determined by forward price curves of the relevant indexes. As of September 30, 2019, a 10% change in the forward curves associated with our derivatives would have changed our unaudited consolidated balance sheet's net derivative position to the following amounts:
(in thousands) | 10% Increase | 10% Decrease | ||||||
Net asset derivative position | $ | 78,579 | $ | 211,308 | ||||
As of September 30, 2019 and December 31, 2018, the net derivative positions were assets of $144.3 million and $43.5 million, respectively. See Notes 7 and 8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional disclosures regarding our derivatives.
Interest rate risk
Our Senior Secured Credit Facility bears interest at a floating rate and our January 2022 Notes and March 2023 Notes bear interest at fixed rates. The maturity years, outstanding balances and interest rates on our long-term debt as of September 30, 2019 were as follows:
_____________________________________________________________________________
Maturity year | ||||||||
(in millions except for interest rates) | 2022 | 2023(1) | ||||||
Senior Secured Credit Facility | $ | — | $ | 185.0 | ||||
Floating interest rate | — | % | 3.313 | % | ||||
January 2022 Notes | $ | 450.0 | $ | — | ||||
Fixed interest rate | 5.625 | % | — | % | ||||
March 2023 Notes | $ | — | $ | 350.0 | ||||
Fixed interest rate | — | % | 6.250 | % | ||||
(1) | The Senior Secured Credit Facility matures on April 19, 2023, provided that if either the January 2022 Notes or March 2023 Notes have not been refinanced on or prior to the applicable Early Maturity Date, the Senior Secured Credit Facility will mature on such Early Maturity Date. |
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Counterparty and customer credit risk
See Note 13 in the 2018 Annual Report for additional disclosures regarding credit risk. See Note 2.e in the 2018 Annual Report for additional disclosures regarding our accounts receivable. See Note 13 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding revenue recognition. See Notes 7 and 8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional disclosures regarding our derivatives.
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Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of Laredo's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), was performed under the supervision and with the participation of Laredo's management, including our principal executive officer and principal financial officer. Based on that evaluation, these officers concluded that Laredo's disclosure controls and procedures were effective as of September 30, 2019. Our disclosure controls and other procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to Laredo's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during the quarter ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part II
Item 1. Legal Proceedings
From time to time, we are subject to various legal proceedings arising in the ordinary course of business, including proceedings for which we may not have insurance coverage. While many of these matters involve inherent uncertainty as of the date hereof, we do not currently believe that any such legal proceedings will have a material adverse effect on our business, financial position, results of operations or liquidity.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in our 2018 Annual Report. Other than the risk factor set forth below, there have been no material changes in our risk factors from those described in the 2018 Annual Report. The risks described in such reports are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
As a result of the volatility in prices for oil, NGL and natural gas, we have taken and may be required to take further write-downs of the carrying value of our evaluated oil and natural gas properties.
Accounting rules require that we periodically review the carrying value of our evaluated oil and natural gas properties for possible impairment. Based on prevailing commodity prices and specific market factors and circumstances at the time of prospective impairment reviews, and the continuing evaluation of development plans, production data, economics and other factors, we have been required to, and may be required to further write down the carrying value of our evaluated oil and natural gas properties. A write-down constitutes a non-cash charge to earnings.
Our unamortized cost of evaluated oil and natural gas properties being depleted exceeded the full cost ceiling as of September 30, 2019 and as a result, we recorded a non-cash full cost ceiling impairment of $397.9 million for the three and nine months ended September 30, 2019. We did not record any similar impairments for the years ended December 31, 2018 or 2017, but did record non-cash full cost ceiling impairments of $161.1 million and $2.4 billion for the years ended December 31, 2016 and 2015, respectively. If prices remain at or below the current levels, subject to numerous factors and inherent limitations, and all other factors remain constant, we will incur an additional non-cash full cost ceiling impairment in the fourth quarter of 2019, which will have an adverse effect on our results of operations. See “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent developments” and Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of our full cost method of accounting.
We may be unable to consummate the Acquisition and, if we do, the Acquisition may not achieve its intended results.
The Purchase Agreement for the pending Acquisition for approximately $130 million contains customary closing conditions and is subject to customary purchase price adjustments. It is possible that one or more of the conditions in the Purchase Agreement will not be satisfied, and we may be unable or unwilling to consummate the Acquisition. The Purchase Agreement provides that upon the termination of the Purchase Agreement by the seller, under certain circumstances, the seller may be entitled to retain the $13 million deposit as liquidated damages. Furthermore, a large portion of the acreage we are acquiring is undeveloped, and our plans, development schedule and production schedule associated with the acreage may fail to materialize. As a result, our investment in these areas may not be as economic as we anticipate, and we could incur material write-downs of unevaluated properties.
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Item 2. Purchases of Equity Securities
The following table summarizes purchases of common stock by Laredo:
Period | Total number of shares purchased | Weighted-average price paid per share | Total number of shares purchased as part of publicly announced plans | Maximum value that may yet be purchased under the program as of the respective period-end date(1) | ||||||||||
July 1, 2019 - July 31, 2019 | — | $ | — | — | $ | 102,945,283 | ||||||||
August 1, 2019 - August 31, 2019 | — | $ | — | — | $ | 102,945,283 | ||||||||
September 1, 2019 - September 30, 2019 | — | $ | — | — | $ | 102,945,283 | ||||||||
Total | — | — | ||||||||||||
(1) | In February 2018, our board of directors authorized a $200 million share repurchase program commencing in February 2018. The repurchase program expires in February 2020. Share repurchases under the share repurchase program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions and block trades. The timing and actual number of shares repurchased, if any, will depend upon several factors, including market conditions, business conditions, the trading price of our common stock and the nature of other investment opportunities available to us. |
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Item 3. Defaults Upon Senior Securities
None.
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Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
Disclosures required pursuant to Section 13(r) of the Securities Exchange Act of 1934
Pursuant to Section 13(r) of the Exchange Act, we are required to include certain disclosures in our periodic reports if we or any of our "affiliates" (as defined in Rule 12b-2 under the Exchange Act) knowingly engaged in certain specified activities, transactions or dealings relating to Iran or with certain individuals or entities targeted by United States' economic sanctions during the period covered by the report. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law. Neither we nor any of our controlled affiliates or subsidiaries knowingly engaged in any of the specified activities relating to Iran or otherwise engaged in any activities associated with Iran during the reporting period. However, because the SEC defines the term "affiliate" broadly, it includes any entity controlled by us as well as any person or entity that controlled us or is under common control with us.
The description of the activities below has been provided to us by Warburg Pincus LLC ("Warburg Pincus"), affiliates of which: (i) beneficially own more than 10% of our outstanding common stock and are members of our board of directors and (ii) beneficially own more than 10% of the outstanding common stock of and are members of the board of directors of Endurance International Group Holdings, Inc. (together with its subsidiaries, "EIGI"). EIGI may therefore be deemed to be under "common control" with us; however, this statement is not meant to be an admission that common control exists.
The disclosure below relates solely to activities conducted by EIGI. The disclosure does not relate to any activities conducted by Laredo or by Warburg Pincus and does not involve our or Warburg Pincus' management. Neither Laredo nor Warburg Pincus had any involvement in or control over the disclosed activities of EIGI, and neither Laredo nor Warburg Pincus has independently verified or participated in the preparation of the disclosure. Neither Laredo nor Warburg Pincus is representing as to the accuracy or completeness of the disclosure nor do we or Warburg Pincus undertake any obligation to correct or update it.
Laredo understands that EIGI intends to disclose in its next annual or quarterly SEC report that:
On September 11, 2019, EIGI’s subsidiary P.D.R Solutions (U.S.) LLC ("PDR") suspended the domain name arabisc-haram.com, (the "Domain Name"), which was identified on September 10, 2019 by the Office of Foreign Assets Control ("OFAC"), as associated with Al Haram Commercial Company ("Al Haram"), a Specially Designated National ("SDN"), pursuant to 31 C.F.R. Part 594. The Domain Name was registered on November 13, 2017 through a third-party domain registrar that uses PDR’s platform to sell, register and manage domain names for customers of such third-party domain registrar; there was no direct financial transaction between PDR and the registrant of the Domain Name. PDR debited the account of the third-party domain registrar a total of USD sixty cents ($0.60) as a fee for such third-party domain registrar’s use of PDR’s platform in connection with the Domain Name, all of which was debited prior to OFAC’s designation of Al Haram. PDR reported the Domain Name to OFAC as potentially the property of an SDN subject to blocking pursuant to Executive Order 13224. To date, PDR has not received any correspondence from OFAC regarding this matter.
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Item 6. Exhibits
Exhibit Number | Description | ||
101 | The following financial information from Laredo’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows and (v) Condensed Notes to the Consolidated Financial Statements. | ||
104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||
XML* | Extracted XBRL Instance Document. | ||
* | Filed herewith. |
** | Furnished herewith. |
# | Management contract or compensatory plan or arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
LAREDO PETROLEUM, INC. | ||
Date: November 6, 2019 | By: | /s/ Jason Pigott |
Jason Pigott | ||
President and Chief Executive Officer | ||
(principal executive officer) | ||
Date: November 6, 2019 | By: | /s/ Michael T. Beyer |
Michael T. Beyer | ||
Senior Vice President and Chief Financial Officer | ||
(principal financial officer & principal accounting officer) | ||
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EXHIBIT 10.2
PAYMENT AND RELEASE AGREEMENT
(Randy A. Foutch)
This Payment and Release Agreement (the “Agreement”) entered into by and between Laredo Petroleum, Inc. (“Laredo”) and you, Randy A. Foutch, shall become effective on the eighth (8th) day following your execution of this Agreement if not earlier revoked by you (the “Effective Date”).
WHEREAS, Laredo and you wish to arrange for your amicable departure as an employee from Laredo, for which you served since its founding in 2006, and which benefitted from your more than 40 years of distinguished service in the exploration and production business.
NOW, THEREFORE, in consideration of the payments, mutual promises and agreements contained herein, and other good and valuable consideration the sufficiency of which is hereby acknowledged, the parties voluntarily agree as follows:
1. Separation from Employment. Your employment as the Chief Executive Officer of Laredo (the “CEO”) shall cease, effective as of October 1, 2019 (the “Separation Date”).
2. Consideration for Signing. In exchange for your execution and delivery of this Agreement without revocation, Laredo will make the payments and contributions listed on Schedule “A” to this Agreement (the “Payment Amount”). In order to receive the Payment Amount you must (i) sign and return this Agreement to Laredo and (ii) not revoke the Agreement within the seven (7) days immediately following your execution of the Agreement. You may not sign the Agreement, and Laredo will not accept your signed Agreement, until the Separation Date. Laredo agrees that it will not revoke this Agreement prior to the Separation Date. The Payment Amount will be paid in accordance with Schedule “A” to this Agreement following your unrevoked execution and delivery of this Agreement to Laredo. The Payment Amount will be subject to normal deductions, including applicable taxes and Social Security payments. Any non-cash portion of the Payment Amount will be reported to the taxing authorities in a manner recommended by Laredo’s tax advisors. By signing this Agreement, you acknowledge that the Payment Amount is of value to you and is a benefit to which you are not otherwise entitled.
3. Additional Pay and Benefits.
(a) You will receive the following payments on Laredo’s next regular payday following the Separation Date, or such later date as permitted by law: (i) compensation for all hours worked through the Separation Date, and (ii) 100% of any roll-over from a previous year and accrued, unused vacation hours on a pro-rata basis according to the number of months worked during the current year. You will receive the payments and benefits described in this Subparagraph 3(a) and a cash payment at such time as other Company employees are paid with respect to your short-term incentive performance (“STIP”) award for fiscal year 2019, based on actual performance of Laredo and prorated based on the portion of Laredo’s fiscal year 2019 elapsed as of the Separation Date (the “2019 STIP Award”), even if you choose not to sign this Agreement or if you sign and revoke this Agreement according to its terms.
(b) By signing this Agreement, (i) you are agreeing that, other than pay for hours worked since your last pay period and any accrued but unused vacation that you may be entitled under Laredo’s policies, you have been paid all compensation due to you as a result of your employment as CEO, and (ii) you acknowledge that you will not receive any benefits or payments from Laredo in connection with your cessation of employment as CEO other than the payments described in this Paragraph 3 and the payments described in Paragraph 2 above. By signing this Agreement, you do not release or discharge any right to any vested, deferred benefit in any qualified employee benefit plan which provides for retirement, pension, savings, thrift and/or employee stock ownership or any benefit due you as a participant in any employee health and welfare plan, as such terms are used under ERISA (as defined below), which is maintained by Laredo. If eligible, you will receive information permitting you to continue certain health benefits under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (“COBRA”).
For the avoidance of doubt, effective as of the Separation Date, other than (i) provided under Paragraphs 2 and 3(a) of this Agreement, (ii) your 2019 STIP Award and (iii) the cash compensation, in an amount of $250,000 based on your service on the Board of Directors of Laredo (the “Board”) until the 2020 annual meeting of the stockholders of Laredo, at which point you will not stand for reelection to the Board, any unvested restricted stock, performance unit, stock option awards or other equity, equity-based or cash incentive awards held or awarded to you shall be forfeited and cancelled for no consideration under applicable plans and programs. Nothing contained in this Agreement (or related correspondence) shall be interpreted to amend such plans or programs and shall not create additional rights under such plans or programs.
4. Waiver, Release of Claims and Covenant Not to Sue. By signing this Agreement, you are agreeing that the Payment Amount is adequate consideration for the release of the claims described in this Agreement. You are further covenanting, agreeing, representing and warranting that you have not assigned or transferred, or purported to assign or transfer, to any person or entity, any claim described herein or any portion thereof or interest therein and acknowledge that this Agreement shall be binding upon you and upon your heirs, administrators, representatives, executors, successors, and assigns, and shall inure to the benefit of each of the Released Parties (as defined below), and to their heirs, administrators, representatives, executors, successors, and assigns. You hereby agree to release Laredo and each of its past and present affiliated entities, parent companies, subsidiary companies, joint ventures, predecessors, successors, assigns and the shareholders, officers, directors, partners, agents, employees, insurers, heirs and attorneys of such entities or individuals (collectively, with Laredo, the “Released Parties”) from any and all known and unknown existing or potential claims, rights, liabilities, torts, damages, injuries, and causes of action which arise directly or indirectly from any acts, conduct, agreements or occurrences that you may have arising from or related to your employment with Laredo or in connection with your separation from Laredo and/or other claims against Laredo arising prior to the date of this Agreement. By releasing claims, you are giving up your opportunity to file a lawsuit or seek a trial by jury with respect to claims you may have against Laredo and the Released Parties.
This release extends to but is not limited to claims you may have for breach of contract, wrongful discharge, constructive wrongful discharge, breach of the implied covenant of good faith and fair dealing, negligence, breach of fiduciary duty, intentional or negligent infliction of emotional distress, fraud, misrepresentation, defamation, violation of the right of privacy, loss of
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consortium, intentional or negligent interference with prospective economic advantage, intentional or negligent interference with contract, negligent retention, personal injury, any tort, injunctive relief, and attorneys’ fees and any alleged violation of:
• | Title VII of the Civil Rights Act of 1964, as amended, The Civil Rights Act of 1991, as amended, any and all claims arising under state laws related to civil rights or discrimination, The Civil Rights Act of 1866, 1870, and 1871, as amended, and Sections 1981 through 1988 of Title 42 of the United States Code; all of which prohibit discrimination based upon race, color, national origin, religion, or sex. |
• | The Employee Retirement Income Security Act of 1974, as amended (“ERISA”) which protects certain employee benefits (except that the parties agree that by signing this Agreement, you do not waive rights under any claim for benefits that was or may have been filed prior to your execution of this Agreement); |
• | The Immigration Reform and Control Act; |
• | The Americans with Disabilities Act of 1990, as amended (including by the Americans with Disabilities Act Amendments Act of 2008) and The Rehabilitation Act of 1973, which prohibit discrimination against the disabled; |
• | The Workers Adjustment and Retraining Notification Act, which requires advance notice to be given of certain workforce reductions; |
• | The Fair Credit Reporting Act, which controls the use of certain information obtained from third parties; |
• | The Occupational Safety and Health Act of 1970, 29 United States Code § 651 et seq., which regulates workplace safety; |
• | The Family and Medical Leave Act, which requires that employers grant leaves of absence under certain circumstances; |
• | The Age Discrimination in Employment Act of 1967, as amended, which prohibits discrimination based upon age; |
• | The Older Workers Benefit Protection Act (the “OWBPA”); |
• | Any claim under the regulations of the Office of Federal Contract Compliance Programs (41 Code of Federal Regulations § 60 et seq.); |
• | The Fair Labor Standards Act, 29 United States Code § 201 et seq., which regulates wages and hours; |
• | The National Labor Relations Act, 29 United States Code § 151 et seq., which protects the right of employees to organize and bargain collectively with their employer and to engage in other protected, concerted activity; |
• | The Equal Pay Act, which prohibits pay discrimination based upon gender; and |
• | To the extent California law may apply to this Agreement, you hereby expressly waive the provisions of Section 1542 of the California Civil Code, which states: “a general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.” |
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You are also waiving and releasing:
• | any claim for wages or benefits not otherwise provided for in this Agreement; |
• | any claim for wrongful discharge for refusal to commit an act prohibited by law or public policy; |
• | any claim for intolerable working conditions or for any other reason; any claim pursuant to state or federal laws protecting against “retaliation” or “whistle-blowing”; |
• | any claim arising: (1) by reason of your employment with Laredo as CEO or the cessation of your employment as CEO or the circumstances related to such cessation; or (2) by reason of any other matter, cause or thing whatsoever, from the first date of employment to the Separation Date of this Agreement; |
• | any claim arising under the labor codes of the state in which you work and reside; |
• | any claims for violation of the civil rights and fair employment laws of all states; |
• | any claims arising under the family and medical leave laws of the state in which you work or reside; and |
• | all claims that may lawfully be released. |
Notwithstanding the foregoing, you and Laredo agree that this release does not apply to any claims you may have for workers’ compensation benefits, unemployment insurance or as provided by state law as well as any other claims that cannot lawfully be released. This Agreement does not release or discharge any claim or rights which might arise out of Laredo’s actions after the Separation Date or with respect to Laredo’s obligations under this Agreement.
This release, however, does not waive any rights or claims that may arise after you sign this Agreement. You agree not to sue or join in any suit against Laredo for any claim relating to or arising out of your employment or your separation from employment with Laredo; provided, however, that nothing will preclude you from (a) bringing a lawsuit or proceeding against the Laredo to enforce Laredo’s obligations under this Agreement or to challenge the enforceability of the release under the OWBPA, (b) filing a complaint with, providing information to or testifying or otherwise assisting in any investigation or proceeding brought by any state, federal or local regulatory or law enforcement agency or legislative body or (c) filing any claims that are not permitted to be waived or released under applicable law. However, you waive your right to receive any relief (legal or equitable) based on any charge, complaint or lawsuit against Laredo filed by you or anyone else on your behalf.
5. Release of Claims Related to Age.
(a)The ADEA. The Age Discrimination in Employment Act of 1967 (“ADEA”) is a federal statute prohibiting discrimination on the basis of age in connection with employment, benefits and benefit plans. Your signature on this Agreement is your acknowledgement that you understand you are waiving, releasing and forever giving up any claims under the ADEA, as well as all other claims that you may have against the Released Parties at the time you sign this Agreement.
(b)Opportunity to Consider Agreement and Consult Counsel. You are advised to consult with an attorney prior to signing this Agreement. By signing this Agreement you hereby acknowledge, understand and affirm that:
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•This Agreement is a binding legal document;
• | You are voluntarily signing and entering into this Agreement without reservation after having given the matter full and careful consideration; |
• | You have considered the advice of your advisors in reaching the decision to execute this Agreement; |
• | You have been advised to consult with an attorney before signing this Agreement; |
• | You have been provided twenty-one (21) days during which you may consider whether to sign this Agreement. If you elect to sign this Agreement before the end of the twenty-one (21) day review period, you do so knowingly, willingly and on the advice of counsel, with full understanding that you are waiving a statutory right to consider this Agreement for the entire twenty-one (21) days; and |
• | You warrant that after careful review and study of this Agreement, you understand that the terms set forth herein are those actually agreed upon. |
(c) Revocation Period. You acknowledge and understand that you have seven (7) days from your execution (which shall not occur prior to the Separation Date) in which to revoke or rescind this Agreement by delivering a signed and dated notice of revocation to Mark Denny, Senior Vice President & General Counsel, at Laredo Petroleum, Inc., 15 West 6th Street, Suite 900 Tulsa, Oklahoma 74119. After the expiration of such seven (7) day period, this Agreement will become effective and enforceable.
6. Confidential Information; Corporate Opportunities, Restrictive Covenants, and Statements Concerning Released Parties.
(a)Confidential Information and Corporate Opportunities. You acknowledge that you will continue as a member of the Board through the 2020 annual meeting of the stockholders of Laredo, and, in this capacity, you will continue to have access to Laredo’s confidential and proprietary information. You shall keep confidential the existence of this Agreement, its terms, contents, conditions, proceedings and negotiations, and you will make no statements (public or private) or representations relating to the Agreement, except to your attorney or tax advisor, your spouse, or as may otherwise be allowed or required by law. You further acknowledge your continuing obligation to maintain confidentiality of Released Parties’ confidential and proprietary information and you shall not use for your personal benefit, or disclose, communicate or divulge to, or use for the direct or indirect benefit of any person, firm, association or company other than the Released Parties any confidential information regarding the employees, business methods, business strategies and plans, policies, procedures, techniques, research or development projects or results, trade secrets, or other knowledge or processes of or developed by the Released Parties, or any other confidential information relating to or dealing with the business operations, employees or activities of Released Parties, made or will be made known to you or learned or will be learned or acquired or will be acquired by you while employed by Laredo or while acting as a member of the Board. For example, you agree that Laredo’s non-public exploration and production plans, progress and results are confidential, including but not limited to Laredo’s exploration and development in the following counties within the State of Texas: Howard, Glasscock and Reagan. As an officer of Laredo until the Separation Date and member of the Board, you developed and
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became aware of Laredo’s corporate opportunities. You agree that Laredo’s corporate opportunities are part of its confidential information, which you agree to keep confidential.
(b)Permitted Disclosures. Nothing in this Agreement shall be construed to prevent disclosure of confidential information as may be required by applicable law or regulation, or pursuant to the valid order of a court of competent jurisdiction or an authorized government agency; provided, that, the disclosure does not exceed the extent of disclosure required by such law, regulation, or order. You agree to promptly provide written notice of any such order to a Laredo officer. Notwithstanding any other provision of this Agreement, you acknowledge that you will not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (1) is made in confidence to a federal, state or local government official, either directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law; or (2) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding. If you file a lawsuit for retaliation against a Released Party for reporting a suspected violation of law, you may disclose such Released Party’s trade secrets to your attorney and use the trade secret information in the court proceeding if you file any document containing the trade secret under seal, and do not disclose the trade secret, except pursuant to court order.
(c)Restrictive Covenants. You agree that you shall not, without the prior written approval of Board, which approval shall not be unreasonably withheld, for yourself or on behalf of or in conjunction with any other person or entity of whatever nature, for a period of twenty-four (24) months following the Separation Date:
i. | you will not be a partner, employee, consultant, officer or agent of or to any business that competes with Laredo in the exploration, development and production of crude oil and natural gas within the following counties in the State of Texas: Howard, Glasscock and Reagan; provided, however, nothing in this Subparagraph 6(c)(i) is intended or will be interpreted to preclude you from serving as a member of the board of directors of (x) any company or business or (y) a professional organization such as the National Petroleum Council or The Association of International Petroleum Negotiators, any of which companies, businesses or organizations in clauses (x) or (y) above may have activities or a focus in any of the three such named counties in Texas; and |
ii. | you will not approach or entice or endeavor to entice any employee or consultant of Laredo to terminate his or her employment or contract for services with Laredo; |
Notwithstanding the foregoing, the above-referenced limitations in Subparagraph 6(c)(i) shall not apply within the State of Oklahoma and shall in all respects be interpreted, enforced and governed under the law of the State of Texas without reference to the conflicts of laws provisions. With respect to Subparagraph 6(c)(i), the parties agree that Laredo has substantial assets and employees in the State of Texas and that you have been significantly involved in the management and development of Laredo’s assets in the State of Texas.
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(d) Non-Disparagement. You hereby agree to refrain from making any statement about Laredo and/or the Released Parties that could harm or cause such entities or individuals to be portrayed in a false light or be interpreted as detrimental or harmful to their interests.
(e) Remedies. By signing this Agreement you are affirming that you understand and agree that this Paragraph 6 and all its subparts is a separate agreement, the breach of which will constitute a material breach of this Agreement. If you breach any of the terms of this Paragraph 6, Laredo shall have the right to recover all costs and expenses, including reasonable attorney’s fees incurred in enforcing its terms and/or recovering damages as a result of any breach.
(f) Pre-Execution Actions. You further represent to Laredo that you have not engaged in the prohibited activity described above up to and including the date you execute this Agreement.
7. Cooperation. To the extent reasonably requested by Laredo you agree to cooperate in connection with matters arising out of your employment with Laredo; provided, that, Laredo shall make reasonable efforts to minimize disruption of your other activities. Laredo agrees to reimburse you for reasonable preapproved expenses incurred in connection with such cooperation and, to the extent that Laredo requests that you spend substantial time on such matters, Laredo shall compensate you at an hourly rate calculated using your base pay rate as of the Separation Date.
8. Severability. If any provision of this Agreement is held invalid or unenforceable, either in its entirety or by virtue of its scope or application to given circumstances, the provision shall be deemed modified to the extent necessary to render it valid or inapplicable to given circumstances, as the situation may require, and this Agreement shall be construed and enforced as if such provision had been included herein as so modified in scope or application or had not been included herein, as the case may be.
9. No Admission of Liability. Both you and Laredo agree that the payment of the amounts set forth in this Agreement do not constitute an admission of liability or violation of any applicable law, contract provision or any rule or regulation.
10. Employment Inquiries. Laredo’s or the Released Parties’ refusal or failure to respond to future inquiries concerning your employment with Laredo shall not be the basis of any claim by you against Laredo or the Released Parties.
11. Entire Agreement; Indemnification. You agree that this Agreement is the only and the complete agreement between you and Laredo concerning your cessation of employment as CEO, and that Laredo has made no other representations or promises concerning your employment as CEO and/or your cessation of employment as CEO. Further, to the extent any prior statements or representations were made concerning your employment as CEO and/or your cessation of employment as CEO, they are hereby integrated into this Agreement and any contrary statements are superseded by this Agreement. Provided, (i) any indemnification rights and obligations that exist between the parties as of the Separation Date are not abrogated by the terms of this Agreement; and (ii) any prior policies or agreements concerning or the confidentiality of
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certain or all of Laredo’s information shall remain in full force and effect for all time, and any reference in this Agreement to confidential information is intended to supplement and not to supersede any prior policy or agreement.
12. Waiver. No waiver by either party with respect to any breach or default or of any right or remedy and no course of dealing, shall be deemed to constitute a continuing waiver or any other breach or default or of any other right or remedy, unless such waiver is expressed in writing signed by the party to be bound. Furthermore, the failure of a party to exercise any right shall not be deemed a waiver of such future right or rights.
13. Remedies. Laredo shall have the right to enforce this Agreement and any of its provisions by injunction, specific performance or other equitable relief, without bond and without prejudice to any other rights and remedies that it may have for a breach of this Agreement.
14. Interpretation under State Law. Except as provided in Subparagraph 6(c)(i), which shall apply the laws of the State of Texas, this Agreement shall be construed under the laws of the State of Oklahoma and shall in all respects be interpreted, enforced and governed under the law of said State without reference to the conflicts of laws provisions. Any litigation involving Subparagraph 6(c)(i) or the facts or matters described therein shall be commenced only in a court of competent jurisdiction in Midland County, Texas, and the parties hereby waive personal jurisdiction and any objections to venue. Any litigation concerning any other provision of this Agreement or the facts or matters described herein shall be brought only in a court of competent jurisdiction in Tulsa County, Oklahoma, and the parties hereby waive personal jurisdiction and any objections to venue.
15. Section 409A. This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), or an exemption thereunder and shall be construed and administered in accordance with Section 409A. Notwithstanding any other provision of this Agreement, payments provided under this Agreement may only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service or as a short-term deferral shall be excluded from Section 409A to the maximum extent possible. Notwithstanding the foregoing, Laredo makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall Company be liable for all or any portion of any taxes, penalties, interest or other expenses that you may incur on account of non-compliance with Section 409A.
YOU HEREBY STATE THAT YOU HAVE CAREFULLY READ THIS DOCUMENT AND KNOW AND UNDERSTAND THE CONTENTS HEREOF AND THAT YOU ARE SIGNING THIS AGREEMENT AS YOUR OWN FREE ACT AND DEED. UNLESS OTHERWISE REVOKED AS PROVIDED HEREIN, THE PROVISIONS OF THIS AGREEMENT SHALL BE EFFECTIVE ON THE EIGHTH (8TH) DAY FOLLOWING THE DATE ON WHICH YOU EXECUTE THE AGREEMENT.
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Laredo Petroleum, Inc.
By: /s/ Jason Pigott
Title: President & CEO
Date: October 1, 2019
Randy A. Foutch
Signature: /s/ Randy A. Foutch
Date: October 1, 2019
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SCHEDULE “A” (Agreement, Paragraph 2) PAYMENT AMOUNT Payment of the Founder’s Bonus and Supplemental COBRA Premium Contributions are subject to the unrevoked execution of the Payment and Release Agreement. | |
Founder’s Bonus | Payment of an amount equal to $5.85 million, subject to withholding as required by law, which shall be made as soon as administratively feasible, but no sooner than eight (8) days or later than fifteen (15) days following your unrevoked execution and delivery of the Payment and Release Agreement to Laredo. |
Supplemental COBRA Premium Contributions | Subject to COBRA Eligibility and Timely Election: 18 months of Employer contributions beyond October 1, 2019. The value of Laredo’s premium contribution is dependent upon your coverage election. |
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EXHIBIT 10.3
Schedule 1, amended and restated as of October 30, 2019, to the Third Amendment to Fifth Amended and Restated Credit Agreement, dated as of April 19, 2018, among Laredo Petroleum, Inc., as borrower, Wells Fargo Bank, N.A., as administrative agent, Laredo Midstream Services, LLC and Garden City Minerals, LLC, as guarantors and the banks signatory thereto.
SCHEDULE 1
Bank | Maximum Credit Amount | Elected Commitment | Commitment Percentage |
Wells Fargo Bank, N.A. | $191,666,666.67 | $95,833,333.34 | 9.583% |
Bank of America, N.A. | $166,666,666.66 | $83,333,333.32 | 8.333% |
BMO Harris Financing, Inc. | $166,666,666.66 | $83,333,333.32 | 8.333% |
Capital One, National Association | $166,666,666.66 | $83,333,333.32 | 8.333% |
The Bank of Nova Scotia, Houston Branch | $141,666,666.66 | $70,833,333.32 | 7.083% |
Societe Generale | $141,666,666.66 | $70,833,333.32 | 7.083% |
ABN AMRO Capital USA LLC | $116,666,666.66 | $58,333,333.34 | 5.833% |
Barclays Bank PLC | $116,666,666.66 | $58,333,333.34 | 5.833% |
BOKF, NA DBA Bank of Oklahoma | $116,666,666.66 | $58,333,333.34 | 5.833% |
Branch Banking and Trust Company | $116,666,666.66 | $58,333,333.34 | 5.833% |
Credit Suisse AG, Cayman Islands Branch | $116,666,666.66 | $58,333,333.34 | 5.833% |
Citibank, N.A. | $116,666,666.66 | $58,333,333.34 | 5.833% |
Compass Bank | $116,666,666.66 | $58,333,333.34 | 5.833% |
Goldman Sachs Bank USA | $116,666,666.66 | $58,333,333.34 | 5.833% |
Comerica Bank | $91,666,666.66 | $45,833,333.34 | 4.583% |
Totals: | $2,000,000,000.00 | $1,000,000,000.00 | 100.00% |
Administrative Agent | Address for Notice |
Wells Fargo Bank, N.A. | Credit Contact: 1445 Ross Ave., Suite 4500, T9216-451 Dallas, TX 75202 Attn: Muhammad A. Dhamani Tel: 214-721-6430 Email: Muhammad.dhamani@wellsfargo.com Primary Operations Contact: 1525 W WT Harris Blvd, 1st Floor Charlotte, NC 28262-8522 MAC D1109-019 Attn: Agency Services Tel: 704-590-2706 Fax: 704-590-2782 |
EXHIBIT 31.1
CERTIFICATION
I, Jason Pigott, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Laredo Petroleum, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 6, 2019 | |
/s/ Jason Pigott | |
Jason Pigott | |
President and Chief Executive Officer | |
EXHIBIT 31.2
CERTIFICATION
I, Michael T. Beyer, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Laredo Petroleum, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b. | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c. | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d. | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: November 6, 2019 | |
/s/ Michael T. Beyer | |
Michael T. Beyer | |
Senior Vice President and Chief Financial Officer | |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Jason Pigott, President and Chief Executive Officer of Laredo Petroleum, Inc. (the "Company"), and Michael T. Beyer, Senior Vice President and Chief Financial Officer of the Company, certify that, to their knowledge:
(1) | the Quarterly Report on Form 10-Q of the Company for the period ending September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
(2) | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
November 6, 2019 | |
/s/ Jason Pigott | |
Jason Pigott | |
President and Chief Executive Officer | |
November 6, 2019 | |
/s/ Michael T. Beyer | |
Michael T. Beyer | |
Senior Vice President and Chief Financial Officer | |