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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-35380

Laredo Petroleum, Inc.

(Exact name of registrant as specified in its charter)



Delaware	45-3007926
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)



15 W. Sixth Street	Suite 900
Tulsa	Oklahoma	74119
(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
Common stock, $0.01 par value per share	LPI	New York Stock Exchange

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 ☒ No ☐

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 ☒ No ☐

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.



Large accelerated filer	☒	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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of registrant's common stock outstanding as of May 4, 2020: 239,398,217

LAREDO PETROLEUM, INC.

TABLE OF CONTENTS



	Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS	iii
Part I	1
Item 1. Consolidated Financial Statements (Unaudited)	1
Consolidated balance sheets as of March 31, 2020 and December 31, 2019	1
Consolidated statements of operations for the three months ended March 31, 2020 and 2019	2
Consolidated statements of stockholders' equity continuous quarterly presentation ended March 31, 2020 and 2019	3
Consolidated statements of cash flows for the three months ended March 31, 2020 and 2019	4
Condensed notes to the consolidated financial statements:	5
Note 1—Organization and basis of presentation	5
Note 2—New accounting standards	5
Note 3—Acquisitions and divestiture	6
Note 4—Property and equipment	7
Note 5—Leases	9
Note 6—Debt	9
Note 7—Stockholders' equity	11
Note 8—Equity Incentive Plan	12
Note 9—Derivatives	17
Note 10—Fair value measurements	20
Note 11—Net income (loss) per common share	22
Note 12—Commitments and contingencies	23
Note 13—Supplemental cash flow and non-cash information	24
Note 14—Asset retirement obligations	25
Note 15—Revenue recognition	25
Note 16—Income taxes	25
Note 17—Related parties	26
Note 18—Subsequent events	26
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	46
Item 4. Controls and Procedures	48
Part II	49
Item 1. Legal Proceedings	49
Item 1A. Risk Factors	49
Item 2. Purchases of Equity Securities	52
Item 3. Defaults Upon Senior Securities	53
Item 4. Mine Safety Disclosures	54
Item 5. Other Information	55
Item 6. Exhibits	56
SIGNATURES	57

Table of Contents

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, and the extent and duration of price reductions and increased production by the Organization of the Petroleum Exporting Countries members and other oil exporting nations ("OPEC+");


•	the threat, occurrence, potential duration or other implications of epidemic or pandemic diseases, including the recent outbreak of a novel strain of coronavirus ("COVID-19"), or any government response to such occurrence or threat;


•	changes in domestic and global production, supply and demand for oil, NGL and natural gas, including the recent decrease in demand and oversupply of oil and natural gas as a result of the COVID-19 pandemic and actions by OPEC+;


•	the pipeline and storage constraints in the Permian Basin and the possibility of future production curtailment in the State of Texas;


•	revisions to our reserve estimates as a result of changes in commodity prices, decline curves and other uncertainties;


•	impacts of impairment write-downs on our financial statements;


•	the potential impact of suspending drilling programs and completions activities or shutting in a portion of our wells, as well as costs to later restart, and co‐development considerations such as horizontal spacing, vertical spacing and parent‐child interactions on production of oil, NGL and natural gas from our wells;

•

conditions of the energy industry and changes in the regulatory environment and in United States or international legal, tax, political, administrative or economic conditions, including trade policies or regulations that restrict imports or exports from the United States or 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;


•	the ongoing instability and uncertainty in the United States and international energy, 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;


•	our ability to maintain listing on the New York Stock Exchange ("NYSE") and to prevent the decrease in market price and liquidity of our common stock;


•	our ability to discover, estimate, develop and replace oil, NGL and natural gas reserves and inventory;


•	capital requirements for our operations and projects;


•	the long-term performance of wells that were completed using different technologies;


•	the availability and costs of drilling and production equipment, supplies, labor and oil and natural gas processing and other services;

iii

Table of Contents


•	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 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;


•	the impact of repurchases, if any, of securities from time to time;


•	restrictions contained in our debt agreements, including our Senior Secured Credit Facility and the indentures governing our Senior Unsecured Notes (as defined below), as well as debt that could be incurred in the future;


•	our ability to maintain the health and safety of, as well as recruit and retain, 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 oil 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 secure or generate sufficient electricity to produce our wells without limitations;


•	our ability to hedge and regulations that affect our ability to hedge;


•	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;


•	drilling and operating risks, including risks related to inclement weather impacting our ability to produce existing wells and/or drill and complete new wells over an extended period of time; 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," under "Part II, Item 1A. Risk Factors" 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, 2019 (the "2019 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.

Table of Contents

Part I

Item 1. Consolidated Financial Statements (Unaudited)

Laredo Petroleum, Inc.

Consolidated balance sheets

(in thousands, except share data)

(Unaudited)



	March 31, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	62,777		$	40,857
Accounts receivable, net	75,588			85,223
Derivatives	270,686			51,929
Other current assets	18,245			22,470
Total current assets	427,296			200,479
Property and equipment:
Oil and natural gas properties, full cost method:
Evaluated properties	7,610,086			7,421,799
Unevaluated properties not being depleted	130,077			142,354
Less accumulated depletion and impairment	(5,799,703		)	(5,725,114		)
Oil and natural gas properties, net	1,940,460			1,839,039
Midstream service assets, net	118,539			128,678
Other fixed assets, net	32,148			32,504
Property and equipment, net	2,091,147			2,000,221
Derivatives	48,397			23,387
Operating lease right-of-use assets	24,381			28,343
Other noncurrent assets, net	12,871			12,007
Total assets	$	2,604,092		$	2,264,437
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities	$	65,580		$	40,521
Accrued capital expenditures	52,600			36,328
Undistributed revenue and royalties	28,186			33,123
Derivatives	875			7,698
Operating lease liabilities	12,891			14,042
Other current liabilities	25,552			39,184
Total current liabilities	185,684			170,896
Long-term debt, net	1,257,382			1,170,417
Asset retirement obligations	61,679			60,691
Operating lease liabilities	13,913			17,208
Other noncurrent liabilities	5,764			3,351
Total liabilities	1,524,422			1,422,563
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of March 31, 2020 and December 31, 2019	—			—
Common stock, $0.01 par value, 450,000,000 shares authorized and 239,400,163 and 237,292,086 issued and outstanding as of March 31, 2020 and December 31, 2019, respectively	2,394			2,373
Additional paid-in capital	2,388,035			2,385,355
Accumulated deficit	(1,310,759		)	(1,545,854		)
Total stockholders' equity	1,079,670			841,874
Total liabilities and stockholders' equity	$	2,604,092		$	2,264,437

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Laredo Petroleum, Inc.

Consolidated statements of operations

(in thousands, except per share data)

(Unaudited)



	Three months ended March 31,
	2020			2019
Revenues:
Oil sales	$	119,978		$	129,171
NGL sales	11,558			32,235
Natural gas sales	4,349			11,970
Midstream service revenues	2,683			2,883
Sales of purchased oil	66,424			32,688
Total revenues	204,992			208,947
Costs and expenses:
Lease operating expenses	22,040			22,609
Production and ad valorem taxes	9,244			7,219
Transportation and marketing expenses	13,544			4,759
Midstream service expenses	1,170			1,603
Costs of purchased oil	79,297			32,691
General and administrative	12,562			21,519
Depletion, depreciation and amortization	61,302			63,098
Impairment expense	26,250			—
Other operating expenses	1,106			1,052
Total costs and expenses	226,515			154,550
Operating income (loss)	(21,523		)	54,397
Non-operating income (expense):
Gain (loss) on derivatives, net	297,836			(48,365		)
Interest expense	(24,970		)	(15,547		)
Loss on extinguishment of debt	(13,320		)	—
Loss on disposal of assets, net	(602		)	(939		)
Other income, net	91			867
Total non-operating income (expense), net	259,035			(63,984		)
Income (loss) before income taxes	237,512			(9,587		)
Income tax (expense) benefit:
Deferred	(2,417		)	96
Total income tax (expense) benefit	(2,417		)	96
Net income (loss)	$	235,095		$	(9,491	)
Net income (loss) per common share:
Basic	$	1.01		$	(0.04	)
Diluted	$	1.01		$	(0.04	)
Weighted-average common shares outstanding:
Basic	232,351			230,476
Diluted	233,458			230,476

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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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			Additional paid-in capital			Shares		Amount			Accumulated deficit			Total
Balance, December 31, 2019	237,292		$	2,373		$	2,385,355		—		$	—		$	(1,545,854	)	$	841,874
Restricted stock awards	2,771		28			(28		)	—		—			—			—
Restricted stock forfeitures	(139	)	(2		)	2			—		—			—			—
Stock exchanged for tax withholding	—		—			—			524		(640		)	—			(640		)
Retirement of treasury stock	(524	)	(5		)	(635		)	(524	)	640			—			—
Share-settled equity-based compensation	—		—			3,341			—		—			—			3,341
Net income	—		—			—			—		—			235,095			235,095
Balance, March 31, 2020	239,400		$	2,394		$	2,388,035		—		$	—		$	(1,310,759	)	$	1,079,670



	Common stock					Additional paid-in capital			Treasury stock (at cost)					Accumulated deficit
	Shares		Amount			Additional paid-in capital			Shares		Amount			Accumulated deficit			Total
Balance, December 31, 2018	233,936		$	2,339		$	2,375,286		—		$	—		$	(1,203,395	)	$	1,174,230
Restricted stock awards	5,986		60			(60		)	—		—			—			—
Restricted stock forfeitures	(48	)	—			—			—		—			—			—
Stock exchanged for tax withholding	—		—			—			683		(2,612		)	—			(2,612		)
Stock exchanged for cost of exercise of stock options	—		—			—			18		(76		)	—			(76		)
Retirement of treasury stock	(701	)	(7		)	(2,681		)	(701	)	2,688			—			—
Exercise of stock options	18		—			76			—		—			—			76
Share-settled equity-based compensation	—		—			9,305			—		—			—			9,305
Net loss	—		—			—			—		—			(9,491		)	(9,491		)
Balance, March 31, 2019	239,191		$	2,392		$	2,381,926		—		$	—		$	(1,212,886	)	$	1,171,432

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

Laredo Petroleum, Inc.

Consolidated statements of cash flows

(in thousands)

(Unaudited)



	Three months ended March 31,
	2020			2019
Cash flows from operating activities:
Net income (loss)	$	235,095		$	(9,491	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Share-settled equity-based compensation, net	2,376			7,406
Depletion, depreciation and amortization	61,302			63,098
Impairment expense	26,250			—
Mark-to-market on derivatives:
(Gain) loss on derivatives, net	(297,836		)	48,365
Settlements received for matured commodity derivatives, net	47,723			102
Premiums paid for commodity derivatives	(477		)	(4,016		)
Amortization of debt issuance costs	1,217			846
Amortization of operating lease right-of-use assets	4,377			3,056
Loss on extinguishment of debt	13,320			—
Deferred income tax expense (benefit)	2,417			(96		)
Other, net	1,327			3,874
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable, net	9,635			(13,373		)
Decrease (increase) in other current assets	4,033			(2,769		)
(Increase) decrease in other noncurrent assets, net	(2,964		)	57
Increase in accounts payable and accrued liabilities	25,059			7,140
(Decrease) increase in undistributed revenue and royalties	(4,937		)	2,889
Decrease in other current liabilities	(15,082		)	(30,637		)
(Decrease) increase in other noncurrent liabilities	(3,246		)	1,007
Net cash provided by operating activities	109,589			77,458
Cash flows from investing activities:
Acquisitions of oil and natural gas properties, net	(22,876		)	—
Capital expenditures:
Oil and natural gas properties	(135,376		)	(152,729		)
Midstream service assets	(761		)	(2,262		)
Other fixed assets	(829		)	(505		)
Proceeds from dispositions of capital assets, net of selling costs	51			43
Net cash used in investing activities	(159,791		)	(155,453		)
Cash flows from financing activities:
Borrowings on Senior Secured Credit Facility	—			80,000
Payments on Senior Secured Credit Facility	(100,000		)	—
Issuance of January 2025 Notes and January 2028 Notes	1,000,000			—
Extinguishment of debt	(808,855		)	—
Stock exchanged for tax withholding	(640		)	(2,612		)
Payments for debt issuance costs	(18,383		)	—
Net cash provided by financing activities	72,122			77,388
Net increase (decrease) in cash and cash equivalents	21,920			(607		)
Cash and cash equivalents, beginning of period	40,857			45,151
Cash and cash equivalents, end of period	$	62,777		$	44,544

The accompanying notes are an integral part of these unaudited consolidated financial statements.



Table of Contents	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, primarily in the Permian Basin of West Texas. 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, 2019 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 March 31, 2020, results of operations for the three months ended March 31, 2020 and 2019 and cash flows for the three months ended March 31, 2020 and 2019.

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 2019 Annual Report.

Significant accounting policies

See Note 2 in the 2019 Annual Report for discussion of significant accounting policies.

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 2019 Annual Report and Note 8 pertaining to the Company's 2020 performance unit awards and phantom unit awards.

Reclassifications

Certain amounts in the accompanying consolidated financial statements have been reclassified to conform to the 2020 presentation. These reclassifications had no impact on previously reported total assets, total liabilities, net income (loss), stockholders' equity or total operating, investing or financing cash flows.

Note 2—New accounting standards

The Company considers the applicability and impact of all accounting standard updates ("ASU") issued by the Financial Accounting Standards Board ("FASB") to the Accounting Standards Codification ("ASC") and has determined there are no ASUs that are not yet adopted and meaningful to disclose as of March 31, 2020.

On January 1, 2020, the Company adopted ASU 2016-13 to Topic 326, Financial Instruments—Credit Losses, that requires an allowance for expected credit losses to be recorded against newly recognized financial assets measured at an amortized cost



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

basis. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The Company has included these factors in its analysis and determined there was minimal impact to the unaudited consolidated financial statements for the three months ended March 31, 2020.

Note 3—Acquisitions and divestiture of evaluated and unevaluated oil and natural gas properties

a. 2020 Asset acquisition and divestiture

On February 4, 2020, the Company closed a transaction for $22.5 million, subject to post-closing purchase price adjustments, acquiring 1,180 net acres and divesting 80 net acres in Howard County, Texas. All transaction costs were capitalized and were included in "Oil and natural gas properties" on the consolidated balance sheet.

b. 2019 Acquisitions

Asset acquisitions

On December 12, 2019, the Company closed an acquisition of 7,360 net acres and 750 net royalty acres in Howard County, Texas for $131.7 million, net of customary closing purchase price adjustments and subject to customary post-closing purchase price adjustments. The acquisition also provides for a potential contingent payment, where the Company is required to pay $20 million if the arithmetic average of the monthly settlement West Texas Intermediate ("WTI") NYMEX prices for each consecutive calendar month for the one-year period beginning January 1, 2020 through December 31, 2020 exceeds $60.00 per barrel. The fair value of the contingent consideration was $6.2 million as of the acquisition date, which is recorded as part of the basis in the oil and natural gas properties acquired. See Note 10.a for the fair value of the contingent consideration as of March 31, 2020. All transaction costs were capitalized and were included in "Oil and natural gas properties" on the consolidated balance sheet. This acquisition was primarily financed through borrowings under the Senior Secured Credit Facility. Post-closing is expected to be finalized during the second quarter of 2020.

On June 20, 2019, the Company acquired 640 net acres in Reagan County, Texas for $2.9 million.

Business combination

On December 6, 2019, the Company closed a bolt-on acquisition of 4,475 contiguous net acres and working interests in 49 producing wells in western Glasscock County, Texas, which included net production of 1,400 barrels of oil equivalent ("BOE") per day at the time of acquisition, for $64.6 million, net of customary closing purchase price adjustments and subject to customary post-closing purchase price adjustments. This acquisition was financed through borrowings under the Senior Secured Credit Facility. Post-closing is expected to be finalized during the second quarter of 2020.

This acquisition was accounted for as a business combination. Accordingly, the Company conducted assessments of net assets acquired and recognized amounts for identifiable assets acquired and liabilities assumed at the estimated acquisition date fair values, while transaction costs associated with the acquisition were expensed. The Company makes various assumptions in estimating the fair values of assets acquired and liabilities assumed. The most significant assumptions relate to the estimated fair values of evaluated and unevaluated oil and natural gas properties. The fair values of these properties were measured using a discounted cash flow model that converts future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) forecasted oil, NGL and natural gas reserve quantities; (ii) future commodity strip prices as of the closing dates adjusted for transportation and regional price differentials; (iii) forecasted ad valorem taxes, production taxes, income taxes, operating expenses and development costs; and (iv) a peer group weighted-average cost of capital rate subject to additional project-specific risk factors. To compensate for the inherent risk of estimating the value of the unevaluated properties, the discounted future net revenues of proved undeveloped and probable reserves are reduced by additional reserve adjustment factors. These assumptions represent Level 3 inputs under the fair value hierarchy, as described in Note 10 in the 2019 Annual Report.



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

The following table reflects an aggregate of the final estimate of the fair values of the assets acquired and liabilities assumed in this business combination on December 6, 2019:



(in thousands)	Fair values of acquisition
Fair values of net assets:
Evaluated oil and natural gas properties	$	29,921
Unevaluated oil and natural gas properties	34,700
Asset retirement cost	2,728
Total assets acquired	67,349
Asset retirement obligations	(2,728		)
Net assets acquired	$	64,621
Fair values of consideration paid for net assets:
Cash consideration	$	64,621

c. Exchange of unevaluated oil and natural gas properties

From time to time, the Company exchanges undeveloped acreage with third parties. The exchanges are recorded at fair value and the difference is accounted for as an adjustment of capitalized costs with no gain or loss recognized pursuant to the rules governing full cost accounting, unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil, NGL and natural gas.

Note 4—Property and equipment

The following table presents the Company's property and equipment as of the dates presented:



(in thousands)	March 31, 2020			December 31, 2019
Evaluated oil and natural gas properties	$	7,610,086		$	7,421,799
Less accumulated depletion and impairment	(5,799,703		)	(5,725,114		)
Evaluated oil and natural gas properties, net	1,810,383			1,696,685

Unevaluated oil and natural gas properties not being depleted	130,077			142,354

Midstream service assets	180,992			180,932
Less accumulated depreciation and impairment	(62,453		)	(52,254		)
Midstream service assets, net	118,539			128,678

Depreciable other fixed assets	37,515			37,894
Less accumulated depreciation and amortization	(24,051		)	(23,649		)
Depreciable other fixed assets, net	13,464			14,245

Land	18,684			18,259

Total property and equipment, net	$	2,091,147		$	2,000,221

See Note 10.b for discussion of impairments of long-lived assets during the three months ended March 31, 2020. See Note 6 in the 2019 Annual Report for additional discussion of the Company's property and equipment.

The Company uses the full cost method of accounting for its oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain employee-related costs, incurred for the purpose of acquiring, exploring for or developing oil and natural gas properties, are capitalized and, once evaluated, depleted on a composite unit-of-production method based on estimates of proved oil, NGL and natural gas reserves. The depletion base includes estimated future development costs and dismantlement, restoration and abandonment costs, net of estimated salvage values.



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

Capitalized costs include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals and other costs related to such activities. Costs, including employee-related costs, associated with production and general corporate activities are expensed in the period incurred.

The Company excludes unevaluated property acquisition costs and exploration costs 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 and such costs become 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 proved 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.

Sales of oil and natural gas properties, whether or not being depleted currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil, NGL and natural gas.

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 March 31,
(in thousands)	2020		2019
Property acquisition costs:
Evaluated	$	7,586	$	—
Unevaluated	15,556		—
Exploration costs	6,710		7,505
Development costs	146,158		152,717
Total oil and natural gas properties costs incurred	$	176,010	$	160,222

The aforementioned total oil and natural gas properties costs incurred included certain employee-related costs as shown in the table below.

The following table presents capitalized employee-related costs incurred in the acquisition, exploration and development of oil and natural gas properties for the periods presented:



	Three months ended March 31,
(in thousands)	2020		2019
Capitalized employee-related costs	$	4,505	$	6,682

The following table presents depletion expense, which is included in "Depletion, depreciation and amortization" on the unaudited consolidated statements of operations, and depletion expense per BOE sold of evaluated oil and natural gas properties for the periods presented:



	Three months ended March 31,
	2020		2019
Depletion expense of evaluated oil and natural gas properties	$	57,752	$	59,370
Depletion expense per BOE sold	$	7.33	$	8.76

The full cost ceiling is based principally on the estimated future net revenues from proved oil, NGL and natural gas reserves, which exclude the effect of the Company's commodity derivative transactions, 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 wellhead ("Realized Prices") without giving effect to the Company's commodity derivative transactions. The



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

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 expensed 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:



	March 31, 2020		December 31, 2019		September 30, 2019		June 30, 2019		March 31, 2019
Benchmark Prices:
Oil ($/Bbl)	$	52.23	$	52.19	$	54.27	$	57.90	$	59.52
NGL ($/Bbl)⁽¹⁾	$	19.36