Quarterly Report (10-q)

Date : 08/01/2019 @ 8:35PM
Source : Edgar (US Regulatory)
Stock : Laredo Petroleum Inc (LPI)
Quote : 2.27  0.07 (3.18%) @ 12:06AM
After Hours
Last Trade
Last $ 2.27 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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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 June 30, 2019
  or
       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
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   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): 
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. 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 July 29, 2019 : 237,469,613



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;
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 on production of oil, NGL and natural gas from our wells due to tighter spacing of our wells;
capital requirements for our operations and projects;
impacts to our financial statements as a result of impairment write-downs;
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 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;
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

iii


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)
 
 
June 30, 2019

December 31, 2018
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
55,800

 
$
45,151

Accounts receivable, net
 
76,610

 
94,321

Derivatives
 
47,167

 
39,835

Other current assets
 
12,938

 
13,445

Total current assets
 
192,515

 
192,752

Property and equipment:
 
 
 
 

Oil and natural gas properties, full cost method:
 
 
 
 

Evaluated properties
 
7,080,332

 
6,752,631

Unevaluated properties not being depleted
 
95,138

 
130,957

Less accumulated depletion and impairment
 
(4,975,302
)
 
(4,854,017
)
Oil and natural gas properties, net
 
2,200,168

 
2,029,571

Midstream service assets, net
 
131,633

 
130,245

Other fixed assets, net
 
37,933

 
39,819

Property and equipment, net
 
2,369,734

 
2,199,635

Derivatives
 
25,798

 
11,030

Operating lease right-of-use assets
 
18,903

 

Other noncurrent assets, net
 
12,972

 
16,888

Total assets
 
$
2,619,922

 
$
2,420,305

Liabilities and stockholders' equity
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable and accrued liabilities
 
$
51,289

 
$
69,504

Accrued capital expenditures
 
32,310

 
29,975

Undistributed revenue and royalties
 
44,731

 
48,841

Derivatives
 
1,473

 
7,359

Operating lease liabilities
 
9,948

 

Other current liabilities
 
30,927

 
44,786

Total current liabilities
 
170,678

 
200,465

Long-term debt, net
 
1,029,526

 
983,636

Asset retirement obligations
 
55,645

 
53,387

Operating lease liabilities
 
12,055

 

Other noncurrent liabilities
 
7,697

 
8,587

Total liabilities
 
1,275,601

 
1,246,075

Commitments and contingencies
 


 


Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of June 30, 2019 and December 31, 2018
 

 

Common stock, $0.01 par value, 450,000,000 shares authorized and 237,479,812 and 233,936,358 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively
 
2,375

 
2,339

Additional paid-in capital
 
2,381,450

 
2,375,286

Accumulated deficit
 
(1,039,504
)
 
(1,203,395
)
Total stockholders' equity
 
1,344,321

 
1,174,230

Total liabilities and stockholders' equity
 
$
2,619,922

 
$
2,420,305


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 June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:






 
 

 
 

Oil sales

$
160,030


$
159,051


$
289,201


$
309,965

NGL sales
 
22,197

 
36,805

 
54,432

 
65,165

Natural gas sales
 
1,636

 
12,705

 
13,606

 
30,865

Midstream service revenues

2,610


1,976


5,493


4,335

Sales of purchased oil
 
30,170

 
140,509

 
62,858

 
200,412

Total revenues

216,643


351,046


425,590


610,742

Costs and expenses:

 
 
 
 
 
 
 
Lease operating expenses

23,632


22,642


46,241


44,593

Production and ad valorem taxes
 
11,328

 
12,405

 
18,547

 
24,217

Transportation and marketing expenses
 
4,891

 
1,534

 
9,650

 
1,534

Midstream service expenses
 
607

 
403

 
2,210

 
1,096

Costs of purchased oil
 
30,172

 
140,578

 
62,863

 
201,242

General and administrative

11,056


26,834

 
32,575

 
51,559

Restructuring expenses
 
10,406

 

 
10,406

 

Depletion, depreciation and amortization

65,703


50,762


128,801


96,315

Other operating expenses
 
1,020

 
1,121

 
2,072

 
2,227

Total costs and expenses

158,815


256,279


313,365


422,783

Operating income

57,828


94,767


112,225


187,959

Non-operating income (expense):




 
 
 
 
 
Gain (loss) on derivatives, net

88,394


(45,976
)

40,029


(36,966
)
Interest expense

(15,765
)

(14,424
)

(31,312
)

(27,942
)
Litigation settlement
 
42,500

 

 
42,500

 

Loss on disposal of assets, net
 
(670
)
 
(1,358
)
 
(1,609
)
 
(3,975
)
Other income, net

2,846


443


3,713


896

Non-operating income (expense), net

117,305


(61,315
)

53,321


(67,987
)
Income before income taxes

175,133


33,452


165,546


119,972

Income tax expense:




 






Deferred

(1,751
)



(1,655
)


Total income tax expense

(1,751
)



(1,655
)


Net income

$
173,382

 
$
33,452


$
163,891


$
119,972

Net income per common share:




 

 




Basic

$
0.75


$
0.14


$
0.71


$
0.51

Diluted

$
0.75

 
$
0.14


$
0.71


$
0.51

Weighted-average common shares outstanding:







 

 
 

Basic

231,406


230,933


230,943


234,561

Diluted

231,557


231,706


231,725


235,501

 
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
 
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

Stock-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

Restricted stock awards
 
1,064

 
11

 
(11
)
 

 

 

 

Restricted stock forfeitures
 
(2,763
)
 
(28
)
 
28

 

 

 

 

Stock exchanged for tax withholding
 

 

 

 
12

 
(34
)
 

 
(34
)
Retirement of treasury stock
 
(12
)
 

 
(34
)
 
(12
)
 
34

 

 

Stock-based compensation (See Note 6.c)
 

 

 
(459
)
 

 

 

 
(459
)
Net income
 

 

 

 

 

 
173,382

 
173,382

Balance, June 30, 2019
 
237,480

 
$
2,375

 
$
2,381,450

 

 
$

 
$
(1,039,504
)
 
$
1,344,321

 
 
 
Common stock
 
Additional
paid-in capital
 
Treasury stock
(at cost)
 
Accumulated deficit
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Total
Balance, December 31, 2017
 
242,521

 
$
2,425

 
$
2,432,262

 

 
$

 
$
(1,669,108
)
 
$
765,579

Adjustment to the beginning balance of accumulated deficit upon adoption of ASC 606 (see Note 13.a)
 

 

 

 

 

 
141,118

 
141,118

Restricted stock awards
 
3,052

 
30

 
(30
)
 

 

 

 

Restricted stock forfeitures
 
(13
)
 

 

 

 

 

 

Share repurchases
 

 

 

 
6,728

 
(58,475
)
 

 
(58,475
)
Stock exchanged for tax withholding
 

 

 

 
512

 
(4,353
)
 

 
(4,353
)
Retirement of treasury stock
 
(7,240
)
 
(72
)
 
(62,756
)
 
(7,240
)
 
62,828

 

 

Stock-based compensation
 

 

 
11,441

 

 

 

 
11,441

Net income
 

 

 

 

 

 
86,520

 
86,520

Balance, March 31, 2018
 
238,320


2,383


2,380,917






(1,441,470
)

941,830

Restricted stock awards
 
141

 
2

 
(2
)
 

 

 

 

Restricted stock forfeitures
 
(113
)
 
(1
)
 
1

 

 

 

 

Share repurchases
 

 

 

 
3,151

 
(28,743
)
 

 
(28,743
)
Stock exchanged for tax withholding
 

 

 

 
3

 
(44
)
 

 
(44
)
Retirement of treasury stock
 
(3,154
)
 
(32
)
 
(28,755
)
 
(3,154
)
 
28,787

 

 

Stock-based compensation
 

 

 
12,672

 

 

 

 
12,672

Net income
 

 

 

 

 

 
33,452

 
33,452

Balance, June 30, 2018
 
235,194


$
2,352


$
2,364,833




$


$
(1,408,018
)

$
959,167


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

3


Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited)
 
 
Six months ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:

 


 

Net income

$
163,891


$
119,972

Adjustments to reconcile net income to net cash provided by operating activities:






Deferred income tax expense

1,655



Depletion, depreciation and amortization

128,801


96,315

Non-cash stock-based compensation, net
 
6,983

 
20,015

Mark-to-market on derivatives:






(Gain) loss on derivatives, net

(40,029
)

36,966

Settlements received (paid) for matured derivatives, net

23,582


(2,055
)
Settlements paid for early terminations of derivatives, net

(5,409
)


Change in net present value of derivative deferred premiums

119


396

Premiums paid for derivatives

(6,249
)

(9,475
)
Amortization of debt issuance costs

1,693


1,638

Amortization of operating lease right-of-use assets
 
6,309

 

Other, net

4,068


6,910

Decrease (increase) in accounts receivable
 
17,537

 
(2,331
)
Increase in other current assets
 
(4,200
)
 
(10,974
)
Decrease in other noncurrent assets
 
3,077

 
1,835

(Decrease) increase in accounts payable and accrued liabilities
 
(18,215
)
 
15,911

(Decrease) increase in undistributed revenue and royalties
 
(4,110
)
 
8,146

Decrease in other current liabilities
 
(18,134
)
 
(20,124
)
Decrease in other noncurrent liabilities
 
(100
)
 
(544
)
Net cash provided by operating activities
 
261,269

 
262,601

Cash flows from investing activities:






Acquisitions of oil and natural gas properties
 
(2,880
)
 
(16,340
)
Capital expenditures:






Oil and natural gas properties

(284,616
)

(341,534
)
Midstream service assets

(5,449
)

(5,205
)
Other fixed assets

(965
)

(4,965
)
Proceeds from disposition of equity method investee, net of selling costs
 

 
1,655

Proceeds from disposition of capital assets, net of selling costs

936


12,317

Net cash used in investing activities

(292,974
)

(354,072
)
Cash flows from financing activities:






Borrowings on Senior Secured Credit Facility

80,000


110,000

Payments on Senior Secured Credit Facility

(35,000
)


Share repurchases
 

 
(87,218
)
Stock exchanged for tax withholding

(2,646
)

(4,397
)
Payments for debt issuance costs



(2,469
)
Net cash provided by financing activities

42,354


15,916

Net increase (decrease) in cash and cash equivalents

10,649


(75,555
)
Cash and cash equivalents, beginning of period

45,151


112,159

Cash and cash equivalents, end of period

$
55,800


$
36,604

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

4

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 June 30, 2019 , results of operations for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months ended June 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 Recently issued or adopted accounting pronouncements
The Company considers the applicability and impact of all accounting standard updates ("ASU") issued by the FASB. The discussion of the ASU listed below was determined to be meaningful to the Company's unaudited consolidated financial statements and footnotes during the six months ended June 30, 2019 .
Leases
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. 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, Leases ("ASC 840"). The core principle of the new guidance is that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the

5

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


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 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
a.      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 sheets 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 assets and operating lease liabilities on the unaudited consolidated balance sheets 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 2020. 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 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 June 30, 2019 , the Company had an average working interest of 97% in all Laredo-operated currently producing wells in its core operating area.
The Company's short-term lease costs are not included in the calculation of lease liabilities and right-of-use assets.
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 and are not included in the calculation of lease liabilities and right-of-use assets. 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 maintenance charges are variable. For our equipment leases, the variable lease cost is the amount incurred under our contracts that are beyond the minimum rental fee, inclusive of maintenance.

6

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


Of the Company's commercial leases, the Company subleases certain office space to third parties where it is 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.
The Company does not have any significant finance leases.
Certain of the Company's lease 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.
Lease costs
The table below presents components of total lease costs and supplemental cash flow information for the Company's operating leases for the periods presented:
(in thousands)
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
Operating lease costs (1)
 
$
3,713

 
$
7,241

Short-term lease costs (2)
 
49,108

 
95,434

Variable lease costs (3)
 
1,254

 
1,772

Sublease income
 
(247
)
 
(494
)
Total lease costs
 
$
53,828

 
$
103,953

 
 
 
 
 
Supplemental cash paid for amounts included in the measurement of lease liabilities information (4) :
 
 
 
 
Operating cash flows from operating leases
 
$
1,294

 
$
2,824

Investing cash flows from operating leases (5)
 
$
2,270

 
$
4,516

_____________________________________________________________________________
(1)
Amounts represent straight-line costs associated with the Company's operating lease right-of-use assets.
(2)
Amounts represent costs associated with short-term leases that are not recorded on the unaudited consolidated balance sheets.
(3)
Variable lease costs are primarily comprised of the non-lease service component of drilling rig commitments above the minimum required payments. 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.
(4)
Cash paid for amounts included in the measurement of lease liabilities may not agree to operating lease costs due to timing of cash payments and costs incurred.
(5)
Amounts associated with drilling operations are capitalized as additions to oil and natural gas properties.
Other information
See Note 11 for disclosure of supplemental cash paid for amounts included in the measurement of lease liabilities and supplemental non-cash adjustments. See Note 15 for disclosure of related-party lease amounts.
Lease terms and discount rates
The table below presents the weighted-average remaining lease term and weighted-average discount rate for the Company's operating leases as of the date presented:
 
 
June 30, 2019
Weighted-average remaining lease term
 
3.85 years

Weighted-average discount rate
 
8.27
%


7

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


Maturities of operating lease liabilities
The table below 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)
 
June 30, 2019
Remaining 2019
 
$
11,279

2020
 
4,729

2021
 
2,833

2022
 
2,027

2023
 
1,259

Thereafter
 
3,925

Total minimum lease payments
 
26,052

Less: lease liability expense
 
(4,049
)
Present value of future minimum lease payments
 
22,003

Less: current operating lease liabilities
 
(9,948
)
Noncurrent operating lease liabilities
 
$
12,055


Disclosure for the period prior to adoption of ASC 842
The Company leases 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
 
$
3,092

2020
 
3,179

2021
 
3,128

2022
 
2,560

2023
 
1,358

Thereafter
 
4,556

  Total future minimum rental payments required
 
$
17,873


The Company subleases 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.

8

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)
 
June 30, 2019
 
December 31, 2018
Evaluated oil and natural gas properties
 
$
7,080,332

 
$
6,752,631

Less accumulated depletion and impairment
 
(4,975,302
)
 
(4,854,017
)
Evaluated oil and natural gas properties, net
 
2,105,030

 
1,898,614

 
 
 
 
 
Unevaluated oil and natural gas properties not being depleted
 
95,138

 
130,957

 
 
 
 
 
Midstream service assets
 
178,735

 
172,308

Less accumulated depreciation and impairment
 
(47,102
)
 
(42,063
)
Midstream service assets, net
 
131,633

 
130,245

 
 
 
 
 
Depreciable other fixed assets
 
44,654

 
45,431

Less accumulated depreciation and amortization
 
(24,980
)
 
(23,871
)
Depreciable other fixed assets, net
 
19,674

 
21,560

 
 
 
 
 
Land
 
18,259

 
18,259

 
 
 
 
 
Total property and equipment, net
 
$
2,369,734

 
$
2,199,635


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 related employee costs incurred for the purpose of exploring for or developing oil and natural gas properties, are capitalized and depleted on a composite unit-of-production method based on proved oil, NGL and natural gas reserves. Such amounts 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 related employee costs, associated with production and general corporate activities are expensed in the period incurred. 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 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 June 30,
 
Six months ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Capitalized related employee costs
 
$
3,430

 
$
6,735

 
$
10,112

 
$
13,264


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 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 wellhead ("Realized Prices"). The Realized Prices are utilized

9

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


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. As the Company's Realized Prices decrease, it is reasonably possible that a material full cost ceiling impairment could occur. The unamortized cost of evaluated oil and natural gas properties did not exceed the full cost ceiling amount as of June 30, 2019 or December 31, 2018. There were no full cost ceiling impairments recorded during the six months ended June 30, 2019 or 2018.
The following table presents the Benchmark Prices and Realized Prices as of the dates presented:
 
 
June 30, 2019
 
December 31, 2018
Benchmark Prices:
 
 
 
 
   Oil ($/Bbl)
 
$
57.90

 
$
62.04

   NGL ($/Bbl) (1)
 
$
28.21

 
$
31.46

   Natural gas ($/MMBtu)
 
$
1.14

 
$
1.76

Realized Prices:
 
 
 
 
   Oil ($/Bbl)
 
$
55.69

 
$
59.29

   NGL ($/Bbl)
 
$
18.64

 
$
21.42

   Natural gas ($/Mcf)
 
$
0.70

 
$
1.38

_____________________________________________________________________________
(1)
Based on the Company's average composite NGL barrel.
The Company computes the provision for depletion of oil and natural gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. For the three months ended June 30, 2019 and 2018 , depletion expense for the Company's evaluated oil and natural gas properties was $8.27 per barrel of oil equivalent ("BOE") sold and $7.68 per BOE sold, respectively. For the six months ended June 30, 2019 and 2018 , depletion expense for the Company's evaluated oil and natural gas properties was $8.51 per BOE sold and $7.52 per BOE sold, respectively.
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 June 30,
 
Six months ended June 30,
(in thousands)
 
2019

2018
 
2019
 
2018
Property acquisition costs (1) :
 
 

 
 

 
 

 

Evaluated
 
$

 
$
13,847

 
$

 
$
13,847

Unevaluated
 
2,880

 
2,790

 
2,880

 
2,790

Exploration costs
 
5,116

 
5,108

 
12,621

 
11,245

Development costs
 
123,664

 
178,796

 
276,381

 
327,834

Total costs incurred
 
$
131,660

 
$
200,541

 
$
291,882

 
$
355,716

_____________________________________________________________________________
(1)
See Note 3.a in the second-quarter 2018 Quarterly Report for discussion of the Company's acquisitions of evaluated and unevaluated oil and natural gas properties during the three months ended June 30, 2018.
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

10

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


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 June 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 $235.0 million outstanding and was subject to an interest rate of 3.69% . 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 June 30, 2019 and December 31, 2018 , the Company had one letter of credit outstanding of $14.7 million under the Senior Secured Credit Facility. 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 subsequent to June 30, 2019 .
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:
 
 
June 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
 
$
450,000

 
$
(2,522
)
 
$
447,478

 
$
450,000

 
$
(3,010
)
 
$
446,990

March 2023 Notes
 
350,000

 
(2,952
)
 
347,048

 
350,000

 
(3,354
)
 
346,646

Senior Secured Credit Facility (1)
 
235,000

 

 
235,000

 
190,000

 

 
190,000

Total
 
$
1,035,000

 
$
(5,474
)
 
$
1,029,526

 
$
990,000

 
$
(6,364
)
 
$
983,636

______________________________________________________________________________
(1)
Debt issuance costs, net related to our Senior Secured Credit Facility of $6.1 million and $7.0 million as of June 30, 2019 and December 31, 2018 , respectively, are reported in "Other noncurrent assets, net" on the unaudited consolidated balance sheets.

11

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


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 six months ended June 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 restricted stock awards and the exercise of stock options at the awardee's election and (iii) stock exchanged for 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 second quarter of 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.
The Company recognizes the fair value of stock-based compensation awards, expected to vest over the requisite service period, as a charge against earnings, net of amounts capitalized. The Company's stock-based compensation awards are accounted for as equity awards and are included in "General and administrative" on the unaudited consolidated statements of operations. The Company capitalizes a portion of stock-based compensation for employees who are directly involved in the acquisition, exploration or development of oil and natural gas properties into the full cost pool. Capitalized stock-based compensation is included in "Evaluated properties" on the unaudited consolidated balance sheets. The Company's performance unit awards, granted in 2019, were accounted for as liability awards and included in "General and administrative", net of amounts capitalized, in the unaudited consolidated statements of operations for the three months ended March 31, 2019, and the corresponding liabilities were included in "Other noncurrent liabilities" on the unaudited consolidated balance sheet as of March 31, 2019. Upon their modification during second quarter of 2019, the performance unit awards were converted to performance share awards and the performance unit award compensation was reversed. See "Performance share awards" and "Performance unit awards" below for additional discussion of the modification.
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 vesting schedules that mainly include (i) 33% , 33% and 34% per year beginning on the first anniversary of the grant date and (ii) fully 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 months ended June 30, 2019 .

12

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


The following table reflects the restricted stock award activity for the six months ended June 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
 
4,196

 
$
9.91

Granted
 
7,050

 
$
3.32

Forfeited
 
(2,811
)
 
$
4.99

Vested (1)
 
(2,445
)
 
$
9.70

Outstanding as of June 30, 2019
 
5,990

 
$
4.55

_____________________________________________________________________________
(1)
The total intrinsic value of vested restricted stock awards for the six months ended June 30, 2019 was $9.2 million .
The Company utilizes the closing stock price on the grant date to determine the fair value of restricted stock awards. As of June 30, 2019 , unrecognized stock-based compensation related to the restricted stock awards expected to vest was $21.8 million . Such cost is expected to be recognized over a weighted-average period of 2.23 years .
Stock option awards
The following table reflects the stock option award activity for the six months ended June 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
 
2,533

 
$
12.69

 
5.99
Exercised (1)
 
(18
)
 
$
4.10

 
 
Expired or canceled
 
(49
)
 
$
18.45

 
 
Forfeited
 
(196
)
 
$
8.71

 
 
Outstanding as of June 30, 2019
 
2,270

 
$
12.98

 
3.04
Vested and exercisable as of June 30, 2019 (2)
 
2,096

 
$
13.34

 
2.70
Expected to vest as of June 30, 2019 (3)
 
174

 
$
8.72

 
7.11
_____________________________________________________________________________
(1)
The exercised stock option awards for the six months ended June 30, 2019 had de minimis intrinsic value.
(2)
The vested and exercisable stock option awards as of June 30, 2019 had no aggregate intrinsic value.
(3)
The expected to vest stock option awards as of June 30, 2019 had no aggregate intrinsic value.
As of June 30, 2019 , unrecognized stock-based compensation related to stock option awards expected to vest was $1.1 million . Such cost is expected to be recognized over a weighted-average period of 1.15 years .
See Note 17 for discussion of the Company's organizational restructuring during the three months ended June 30, 2019 . See Note 8.c in the 2018 Annual Report for additional information on the stock option awards.
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.

13

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


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 months ended June 30, 2019 .
The following table reflects the performance share award activity for the six months ended June 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
 
3,436

 
$
13.74

Granted (1)
 
588

 
$
2.52

Converted from performance unit awards (1)(2)
 
1,558

 
$
3.74

Forfeited
 
(860
)
 
$
12.26

Vested (3)
 
(1,545
)
 
$
17.31

Outstanding as of June 30, 2019
 
3,177

 
$
6.28

______________________________________________________________________________
(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 25% weight, the ATSR Factor a 25% weight and the ROACE Factor a 50% weight. These awards have a performance period of January 1, 2019 to December 31, 2021.
(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 0 % based on the Company finishing in the ninth percentile of its peer group for relative TSR. As such, the granted units lapsed and were not converted into the Company's common stock during the first quarter of 2019.

14

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
 
2.63 years

 
2.58 years

Risk-free interest rate (2)
 
2.14
%
 
1.78
%
Dividend yield
 
%
 
%
Expected volatility (3)
 
55.01
%
 
55.45
%
Closing stock price on May 16, 2019 and June 3, 2019 for the respective awards
 
$
3.49

 
$
2.59

Fair value per performance share award
 
$
3.98

 
$
2.45

 
 
 
 
 
Performance criteria:
 
 
 
 
(.50) ROACE Factor fair value assumption:
 
 
 
 
Closing stock price on May 16, 2019 and June 3, 2019 for the respective awards
 
$
3.49

 
$
2.59

Fair value per performance share award
 
$
3.49

 
$
2.59

 
 
 
 
 
Combined fair value per performance share award (4)
 
$
3.74

 
$
2.52

______________________________________________________________________________
(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 $ 1.0 million , which will be recognized over the life of the awards, is calculated utilizing (i) the difference between the March 31, 2019 fair value and the May 16, 2019 fair value and (ii) the outstanding quantity of the converted performance share awards as of June 30, 2019. Such expense excludes the estimated payout component for expense for the (.50) ROACE Factor as this is redetermined at each reporting period and the expense will fluctuate accordingly.
(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 for weighted for the market and performance criteria for the respective awards.

15

Laredo Petroleum, Inc.
 
Condensed notes to the consolidated financial statements
(Unaudited)


The expense per performance share award for the outstanding performance share awards as of June 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
 
$
10.08

 
$
3.98

 
$
2.45

Expense per performance share award as of June 30, 2019
 
Not applicable
 
$
10.08

 
$
3.98

 
$
2.45

 
 
 
 
 
 
 
 
 
TSR:
 
 
 
 
 
 
 
 
Fair value per performance share award
 
$
18.96

 
 
 
 
 
 
Expense per performance share award as of June 30, 2019
 
$
18.96

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Performance Criteria:
 
 
 
 
 
 
 
 
(.50) ROACE Factor:
 
 
 
 
 
 
 
 
Fair value per performance share award
 
Not applicable
 
$
8.36

 
$
3.49

 
$
2.59

Estimated payout for expense as of June 30, 2019 (1)
 
Not applicable
 
60
%
 
195
%
 
195
%
Expense per performance share award as of June 30, 2019
 
Not applicable
 
$
5.02

 
$
6.81

 
$
5.05

 
 
 
 
 
 
 
 
 
Combined expense per performance share award as of June 30, 2019 (2)
 
$
18.96

 
$
7.55


$
5.40


$
3.75

______________________________________________________________________________
(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.
As of June 30, 2019 , unrecognized stock-based compensation related to the performance share awards expected to vest was $13.3 million . Such cost is expected to be recognized over a weighted-average period of 2.26 years .
Outperformance share award
An outperformance share award was granted during the three months ending June 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 pro-rated number of shares based on the number of days the employee was employed with the Company during the performance period.

16

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
 
3.00 years

Risk-free interest rate (1)
 
1.77
%
Dividend yield
 
%
Expected volatility (2)
 
55.77
%
Closing stock price on grant date
 
$
2.59

Total fair value of outperformance share award (in thousands)
 
$
670

_____________________________________________________________________________
(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.
As of June 30, 2019, unrecognized stock-based compensation related to the outperformance share award expected to vest was $0.7 million . Such cost is expected to be recognized over a weighted-average period of 5.00 years .
Stock-based compensation expense
The following has been recorded to stock-based compensation expense for the periods presented:
 
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
 
2019
 
2018
 
2019
 
2018
Restricted stock award compensation
 
$
2,559