Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations is for the three months ended March 31, 2022 and 2021, and should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report as well as our audited consolidated financial statements and notes thereto included in our 2021 Annual Report. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements" and "Part II, Item 1A. Risk Factors." Except for purposes of the unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report, references in this Quarterly Report to "Laredo," "we," "us," "our" or similar terms refer to Laredo, LMS and GCM collectively, unless the context otherwise indicates or requires. Unless otherwise specified, references to "average sales price" refer to average sales price excluding the effects of our derivative transactions. All amounts, dollars and percentages presented in this Quarterly Report are rounded and therefore approximate.
Executive overview
We are an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties, primarily in the Permian Basin of West Texas. The oil and liquids-rich Permian Basin is characterized by multiple target horizons, extensive production histories, long-lived reserves, high drilling success rates and high initial production rates. Since our inception, we have grown primarily through our drilling program, coupled with select strategic acquisitions and joint ventures. As of March 31, 2022, we had assembled 165,518 net acres in the Permian Basin.
We are currently operating two drilling rigs and one completions crew and expect to maintain two drilling rigs and one completions crew for the remainder of 2022. Our planned capital expenditures for 2022 are expected to be approximately $550.0 million. However, we will continue to monitor commodity prices and service costs and adjust activity levels in order to proactively manage our cash flows and preserve liquidity. Below is a summary and comparative analysis of our financial and operating performance for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | | 2022 compared to 2021 | | |
| (in thousands) | | 2022 | | 2021 | | | | | | Change (#) | | Change (%) | | | | |
| Oil sales volumes (MBbl) | | 3,627 | | | 2,183 | | | | | | | 1,444 | | | 66 | % | | | | |
| Oil equivalents sales volumes (MBOE) | | 7,661 | | | 7,109 | | | | | | | 552 | | | 8 | % | | | | |
Oil, NGL and natural gas sales(1) | | $ | 451,187 | | | $ | 202,457 | | | | | | | $ | 248,730 | | | 123 | % | | | | |
Net loss(2) | | $ | (86,781) | | | $ | (75,439) | | | | | | | $ | (11,342) | | | (15) | % | | | | |
Free Cash Flow (a non-GAAP financial measure)(3) | | $ | 23,207 | | | $ | 21,760 | | | | | | | $ | 1,447 | | | 7 | % | | | | |
Adjusted EBITDA (a non-GAAP financial measure)(3) | | $ | 222,089 | | | $ | 93,323 | | | | | | | $ | 128,766 | | | 138 | % | | | | |
| | | | | | | | | | | | | | | | |
_____________________________________________________________________________
(1)Our oil, NGL and natural gas sales increased as a result of a 107% increase in average sales price per BOE and an 8% increase in total volumes sold.
(2)We incurred a net loss for the three months ended March 31, 2022 largely as a result of a non-cash loss on derivatives, net of $200.4 million. See page 29 for further discussion and analysis of our loss on derivatives, net.
(3)See pages 34-36 for discussion and calculations of these non-GAAP financial measures.
Recent developments
Volatility in commodity prices
Commodity prices remained strong during the first of quarter 2022, as increased commodity demand outpaced increased supply. Although the COVID-19 pandemic remains a global health crisis and continues to evolve, consumer demand strengthened as cases of the Omicron variant of COVID-19 decreased from winter levels. Supply was constrained and pricing was affected, in part, by the impact of the Russian-Ukrainian military conflict on global commodity and financial markets, and the resulting effect of sanctions by the European Union, United Kingdom and U.S. on imports of oil and gas from Russia. Supply was also restrained, to a degree, by the continued cooperation of OPEC+ and its commitment to steady and predictable production increases throughout 2022. However, because any of the above factors could suddenly change or
reverse, global commodity and financial markets remain subject to heightened levels of uncertainty and volatility, and future disruptions and industry-specific impacts could result.
Senior Secured Credit Facility
On April 6, 2022, we borrowed an additional $30.0 million and on April 25, 2022 we repaid $80.0 million on our Senior Secured Credit Facility. As a result, the outstanding balance under our Senior Secured Credit Facility was $50.0 million as of May 1, 2022. See Note 5 for additional discussion of our Senior Secured Credit Facility.
On April 13, 2022, we entered into the Eighth Amendment to our Senior Secured Credit Facility which, among other things, (i) increased the borrowing base and aggregate elected commitment under our Senior Secured Credit Facility to $1.25 billion and $1.0 billion, respectively, (ii) increased, from closing through December 31, 2022, the $50.0 million bond buyback and distributions baskets to $250.0 million, subject to certain conditions, (iii) added an energy transition and technology commercialization investment basket of $25.0 million, subject to certain conditions, (iv) allowed for the designation of unrestricted subsidiaries and (v) amended certain other provisions relating to certain commercial agreements and the administration of the Company's loans, in each case, subject to the terms of the Eighth Amendment and the Senior Secured Credit Facility.
Pricing and reserves
Our results of operations are heavily influenced by oil, NGL and natural gas prices. Historically, commodity prices have experienced significant fluctuations; however, the volatility in prices has substantially increased in recent years. We maintain an active, multi-year commodity derivatives strategy to minimize commodity price volatility and support cash flows needed for operations. We have entered into a number of commodity derivative contracts that have enabled us to offset a portion of the changes in our cash flow caused by fluctuations in price and basis differentials for our sales of oil, NGL and natural gas, as discussed in "Item 3. Quantitative and Qualitative Disclosures About Market Risk." See Notes 8 and 9 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our commodity derivatives. Notwithstanding our derivatives strategy, another collapse in commodity prices may affect the economic viability of, and our ability to fund, our drilling projects, as well as the economic recovery of oil, NGL and natural gas reserves. See "Critical accounting estimates" in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 2021 Annual Report for further discussion of our oil, NGL and natural gas reserve quantities and standardized measure of discounted future net cash flows.
Our reserves are reported in three streams: oil, NGL and natural gas. The Realized Prices, which are utilized to value our proved reserves and calculated using the average first-day-of-the-month prices for each month within the 12-month period prior to the end of the reporting period, adjusted for factors affecting price received at the delivery point, as of March 31, 2022 were $75.42 for oil, $26.85 for NGL and $2.93 for natural gas. The unamortized cost of evaluated oil and natural gas properties being depleted did not exceed the full cost ceiling as of March 31, 2022 and March 31, 2021. As such, no full cost ceiling impairments were recorded during the three months ending March 31, 2022 and March 31, 2021. Additionally, if prices remain at current levels we do not anticipate recording any full cost ceiling impairments for the foreseeable future. See Notes 2 and 6 in our 2021 Annual Report for discussion of the full cost method of accounting and our Realized Prices.
Results of operations
Revenues
Sources of our revenue
Our revenues are derived from the sale of produced oil, NGL and natural gas, the sale of purchased oil and providing midstream services to third parties, all within the continental U.S. and do not include the effects of derivatives. See Note 2 in our 2021 Annual Report for additional information regarding our revenue recognition policies.
The following table presents our sources of revenue as a percentage of total revenues for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | 2022 compared to 2021 | | |
| | 2022 | | 2021 | | Change (#) | | Change (%) | | | | |
| | | | | | | | | | | | |
| Oil sales | | 65 | % | | 51 | % | | 14 | % | | 27 | % | | | | |
| NGL sales | | 12 | % | | 17 | % | | (5) | % | | (29) | % | | | | |
| Natural gas sales | | 7 | % | | 13 | % | | (6) | % | | (46) | % | | | | |
| Midstream service revenues | | 1 | % | | 1 | % | | — | % | | — | % | | | | |
| Sales of purchased oil | | 15 | % | | 18 | % | | (3) | % | | (17) | % | | | | |
| Total | | 100 | % | | 100 | % | | | | | | | | |
Oil, NGL and natural gas sales volumes, revenues and prices
The following table presents information regarding our oil, NGL and natural gas sales volumes, sales revenues and average sales prices for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three months ended March 31, | | 2022 compared to 2021 |
| | | | | | 2022 | | 2021 | | Change (#) | | Change (%) |
| Sales volumes: | | | | | | | | | | | | |
| Oil (MBbl) | | | | | | 3,627 | | | 2,183 | | | 1,444 | | | 66 | % |
| NGL (MBbl) | | | | | | 1,994 | | | 2,321 | | | (327) | | | (14) | % |
| Natural gas (MMcf) | | | | | | 12,243 | | | 15,630 | | | (3,387) | | | (22) | % |
Oil equivalents (MBOE)(1)(2) | | | | | | 7,661 | | | 7,109 | | | 552 | | | 8 | % |
Average daily oil equivalent sales volumes (BOE/D)(2) | | | | | | 85,118 | | | 78,989 | | | 6,129 | | | 8 | % |
Average daily oil sales volumes (Bbl/D)(2) | | | | | | 40,295 | | | 24,261 | | | 16,034 | | | 66 | % |
| Sales revenues (in thousands): | | | | | | | | | | | | |
| Oil | | | | | | $ | 347,443 | | | $ | 127,701 | | | $ | 219,742 | | | 172 | % |
| NGL | | | | | | 65,155 | | | 41,678 | | | 23,477 | | | 56 | % |
| Natural gas | | | | | | 38,589 | | | 33,078 | | | 5,511 | | | 17 | % |
| Total oil, NGL and natural gas sales revenues | | | | | | $ | 451,187 | | | $ | 202,457 | | | $ | 248,730 | | | 123 | % |
Average sales prices(2): | | | | | | | | | | | | |
Oil ($/Bbl)(3) | | | | | | $ | 95.81 | | | $ | 58.48 | | | $ | 37.33 | | | 64 | % |
NGL ($/Bbl)(3) | | | | | | $ | 32.68 | | | $ | 17.96 | | | $ | 14.72 | | | 82 | % |
Natural gas ($/Mcf)(3) | | | | | | $ | 3.15 | | | $ | 2.12 | | | $ | 1.03 | | | 49 | % |
Average sales price ($/BOE)(3) | | | | | | $ | 58.90 | | | $ | 28.48 | | | $ | 30.42 | | | 107 | % |
Oil, with commodity derivatives ($/Bbl)(4) | | | | | | $ | 67.24 | | | $ | 45.03 | | | $ | 22.21 | | | 49 | % |
NGL, with commodity derivatives ($/Bbl)(4) | | | | | | $ | 26.04 | | | $ | 11.25 | | | $ | 14.79 | | | 131 | % |
Natural gas, with commodity derivatives ($/Mcf)(4) | | | | | | $ | 2.46 | | | $ | 1.66 | | | $ | 0.80 | | | 48 | % |
Average sales price, with commodity derivatives ($/BOE)(4) | | | | | | $ | 42.54 | | | $ | 21.15 | | | $ | 21.39 | | | 101 | % |
__________________________________________________________________________
(1)BOE is calculated using a conversion rate of six Mcf per one Bbl.
(2)The numbers presented in the three months ended March 31, 2022 and 2021 columns are based on actual amounts and are not calculated using the rounded numbers presented in the table above or the table below.
(3)Price reflects the average of actual sales prices received when control passes to the purchaser/customer adjusted for quality, certain transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the delivery point.
(4)Price reflects the after-effects of our commodity derivative transactions on our average sales prices. Our calculation of such after-effects includes settlements of matured commodity derivatives during the respective periods in accordance with GAAP and an adjustment to reflect premiums incurred previously or upon settlement that are attributable to commodity derivatives that settled during the respective periods.
The following table presents net settlements paid for matured commodity derivatives and net premiums paid previously or upon settlement attributable to commodity derivatives that matured during the periods utilized in our calculation of the average sales prices, with commodity derivatives, for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | 2022 compared to 2021 | |
| (in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) | |
| Net settlements paid for matured commodity derivatives: | | | | | | | | | |
| Oil | | $ | (103,612) | | | $ | (18,371) | | | $ | (85,241) | | | (464) | % | |
| NGL | | (13,240) | | | (15,576) | | | 2,336 | | | 15 | % | |
| Natural gas | | (8,474) | | | (7,173) | | | (1,301) | | | (18) | % | |
| Total | | $ | (125,326) | | | $ | (41,120) | | | $ | (84,206) | | | 205 | % | |
| Net premiums paid previously or upon settlement attributable to commodity derivatives that matured during the respective period: | | | | | | | | | |
| Oil | | $ | — | | | $ | (11,005) | | | $ | 11,005 | | | 100 | % | |
| | | | | | | | | |
| | | | | | | | | |
Changes in average sales prices and sales volumes caused the following changes to our oil, NGL and natural gas revenues between the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in thousands) | | Oil | | NGL | | Natural gas | | Total |
| First-quarter 2021 Revenues | | $ | 127,701 | | | $ | 41,678 | | | $ | 33,078 | |
| $ | 202,457 | |
| Effect of changes in average sales prices | | 135,347 | | | 29,350 | | | 12,678 | | | 177,375 | |
| Effect of changes in sales volumes | | 84,395 | | | (5,873) | | | (7,167) | | | 71,355 | |
| | | | | | | | |
| First-quarter 2022 Revenues | | $ | 347,443 | | | $ | 65,155 | | | $ | 38,589 | | | $ | 451,187 | |
| Change ($) | | $ | 219,742 | | | $ | 23,477 | | | $ | 5,511 | | | $ | 248,730 | |
| Change (%) | | 172 | % | | 56 | % | | 17 | % | | 123 | % |
The increase in our first-quarter 2022 oil revenues as compared to the same period in 2021 is primarily due to (i) an increase in oil price and (ii) the Sabalo/Shad Acquisition and Pioneer Acquisition, both of which occurred during the second half of 2021, and the related increase in our oil sales volumes. The increase in our first-quarter NGL and natural gas revenues as compared to the same period in 2021 is primarily due to increases in NGL and natural gas prices, partially offset by the Working Interest Sale, which occurred during the second half of 2021, and the related decrease in our NGL and natural gas sales volumes.
The following table presents midstream service revenues and sales of purchased oil for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | | | 2022 compared to 2021 |
| (in thousands) | | 2022 | | 2021 | | | | | | Change ($) | | Change (%) |
| Midstream service revenues | | $ | 2,344 | | | $ | 1,296 | | | | | | | $ | 1,048 | | | 81 | % |
| Sales of purchased oil | | $ | 78,864 | | | $ | 46,477 | | | | | | | $ | 32,387 | | | 70 | % |
Midstream service revenues. Our midstream service revenues increased for the three months ended March 31, 2022 compared to the same period in 2021. Midstream service revenues are generated by oil throughput fees and services provided to third parties for (i) integrated oil and natural gas gathering and transportation systems and related facilities, (ii) natural gas lift, fuel for drilling and completions activities and centralized compression infrastructure and (iii) water storage, recycling and transportation infrastructure, and are recognized over time as the customer benefits from these services when provided. These revenues vary and will fluctuate due to oil throughput fees and the level of services provided to third parties.
Sales of purchased oil. Sales of purchased oil are a function of the volumes and prices of purchased oil sold to customers and are offset by the volumes and costs of purchased oil. During the three months ended March 31, 2022 and 2021, we were a firm shipper on the Bridgetex and Gray Oak pipelines and we utilized purchased oil to fulfill portions of our commitments. Our Bridgetex pipeline commitment ended on March 31, 2022. The continuance of this practice in the future is based upon, among other factors, our pipeline capacity as a firm shipper and the quantity of our lease production which may contribute to
our pipeline commitments. Sales of purchased oil increased during the three months ended March 31, 2022 compared to the same periods in 2021 primarily due to an increase in sales prices and volumes for purchased oil sold.
We enter into purchase transactions with third parties and separate sale transactions. These transactions are presented on a gross basis as we act as the principal in the transaction by assuming control of the commodities purchased and the responsibility to deliver the commodities sold. Revenue is recognized when control transfers to the purchaser/customer at the delivery point based on the price received. The transportation costs associated with these transactions are presented as a component of costs of purchased oil. See "—Costs and expenses - Costs of purchased oil."
Costs and expenses
The following table presents information regarding costs and expenses and selected average costs and expenses per BOE sold for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, | | 2022 compared to 2021 |
| (in thousands except for per BOE sold data) | | 2022 | | 2021 | | Change ($) | | Change (%) |
| Costs and expenses: | | | | | | | | |
| Lease operating expenses | | $ | 40,876 | | | $ | 18,918 | | | $ | 21,958 | | | 116 | % |
| Production and ad valorem taxes | | 27,487 | | | 13,283 | | | 14,204 | | | 107 | % |
| Transportation and marketing expenses | | 14,743 | | | 12,127 | | | 2,616 | | | 22 | % |
| Midstream service expenses | | 1,414 | | | 858 | | | 556 | | | 65 | % |
| Costs of purchased oil | | 82,964 | | | 49,916 | | | 33,048 | | | 66 | % |
| | | | | | | | |
| General and administrative (excluding LTIP) | | 13,393 | | | 9,635 | | | 3,758 | | | 39 | % |
| General and administrative (LTIP): | | | | | | | | |
| LTIP cash | | 6,499 | | | 1,620 | | | 4,879 | | | 301 | % |
| LTIP non-cash | | 2,052 | | | 1,818 | | | 234 | | | 13 | % |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Depletion, depreciation and amortization | | 73,492 | | | 38,109 | | | 35,383 | | | 93 | % |
| | | | | | | | |
| Other operating expenses | | 1,019 | | | 1,143 | | | (124) | | | (11) | % |
| Total costs and expenses | | $ | 263,939 | | | $ | 147,427 | | | $ | 116,512 | | | 79 | % |
Selected average costs and expenses per BOE sold(1): | | | | | | | | |
| Lease operating expenses | | $ | 5.34 | | | $ | 2.66 | | | $ | 2.68 | | | 101 | % |
| Production and ad valorem taxes | | 3.59 | | | 1.87 | | | 1.72 | | | 92 | % |
| Transportation and marketing expenses | | 1.92 | | | 1.71 | | | 0.21 | | | 12 | % |
| Midstream service expenses | | 0.18 | | | 0.12 | | | 0.06 | | | 50 | % |
| General and administrative (excluding LTIP) | | 1.75 | | | 1.36 | | | 0.39 | | | 29 | % |
| Total selected operating expenses | | $ | 12.78 | | | $ | 7.72 | | | $ | 5.06 | | | 66 | % |
| General and administrative (LTIP): | | | | | | | | |
| LTIP cash | | $ | 0.85 | | | $ | 0.23 | | | $ | 0.62 | | | 270 | % |
| LTIP non-cash | | $ | 0.27 | | | $ | 0.26 | | | $ | 0.01 | | | 4 | % |
| Depletion, depreciation and amortization | | $ | 9.59 | | | $ | 5.36 | | | $ | 4.23 | | | 79 | % |
_____________________________________________________________________________
(1)Selected average costs and expenses per BOE sold are based on actual amounts and are not calculated using the rounded numbers presented in the table above.
Lease operating expenses ("LOE"). LOE, which includes workover expenses, increased for the three months ended March 31, 2022, compared to the same period in 2021. LOE are daily expenses incurred to bring oil, NGL and natural gas out of the ground and to market, together with the daily expenses incurred to maintain our producing properties. Such costs also include maintenance, repairs and non-routine workover expenses related to our oil and natural gas properties. LOE increased in first-quarter 2022 due to inflationary pressures and costs associated with integrating our recently acquired assets from the Sabalo/Shad Acquisition and Pioneer Acquisition, primarily driven by costs related to artificial lift and flowback management. We continue to focus on economic efficiencies associated with the usage and procurement of products and services related to LOE.
Production and ad valorem taxes. Production and ad valorem taxes increased for the three months ended March 31, 2022, compared to the same period in 2021, due to increased oil, NGL and natural gas sales revenues. Production taxes are based on and fluctuate in proportion to our oil, NGL and natural gas sales revenues, and are established by federal, state or local taxing authorities. We take full advantage of all credits and exemptions in our various taxing jurisdictions. Ad valorem taxes are based on and fluctuate in proportion to the taxable value assessed by the various counties where our oil and natural gas properties are located.
Transportation and marketing expenses. Transportation and marketing expenses increased for the three months ended March 31, 2022, compared to the same period in 2021. These are expenses incurred for the delivery of produced oil to customers in the U.S. Gulf Coast market via the Bridgetex pipeline and the Gray Oak pipeline. We ship the majority of our produced oil to the U.S. Gulf Coast, which we believe provides a long-term pricing advantage versus the Midland market. Additionally, firm transportation payments on excess pipeline capacity associated with transportation agreements are included in transportation and marketing expenses. See Note 11 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our transportation commitments.
Midstream service expenses. Midstream service expenses increased for the three months ended March 31, 2022, compared to the same period in 2021. These are expenses incurred to operate and maintain our (i) integrated oil and natural gas gathering and transportation systems and related facilities, (ii) centralized oil storage tanks, (iii) natural gas lift, fuel for drilling and completion activities and centralized compression infrastructure and (iv) water storage, recycling and transportation facilities.
Costs of purchased oil. Costs of purchased oil increased for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to increased contracted prices and volumes of purchased oil on pipelines. During the three months ended March 31, 2022 and 2021, we were a firm shipper on the Bridgetex and Gray Oak pipelines and we utilized purchased oil to fulfill portions of our commitments. Our Bridgetex pipeline commitment ended on March 31, 2022. In the event our long-haul transportation capacity on the Gray Oak pipeline is expected to exceed our net production, consistent with our historic practice, we expect to continue to purchase third-party oil at the trading hubs to satisfy the deficit in our associated long-haul transportation commitments.
General and administrative ("G&A"). G&A, excluding employee compensation expenses from our long-term incentive plan ("LTIP"), increased for the three months ended March 31, 2022, compared to the same period in 2021, mainly due to (i) increases in compensation and professional expenses and (ii) inflationary pressures.
LTIP cash expense increased for the three months ended March 31, 2022, compared to the same period in 2021, mainly due to the 2021 performance unit awards being expensed for a partial quarter that are now being expensed for a full quarter in 2022. Additionally, the value of our cash-settled performance unit awards and phantom unit awards, granted in prior years, increased significantly during the three months ended March 31, 2022 compared to 2021, mainly due to the performance of our stock, as compared to the same period in 2021.
LTIP non-cash expense increased slightly for the three months ended March 31, 2022, compared to the same periods in 2021. The increase in LTIP non-cash expense for the three months ended March 31, 2022 was due to new restricted stock awards and performance share awards granted to our employees during the second half of 2021 and 2022. See Note 7 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our equity-based compensation.
Depletion, depreciation and amortization ("DD&A"). The following table presents the components of our DD&A and depletion expense per BOE sold for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | 2022 compared to 2021 |
| (in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
| Depletion of evaluated oil and natural gas properties | | $ | 69,922 | | | $ | 34,725 | | | $ | 35,197 | | | 101 | % |
| Depreciation of midstream service assets | | 2,206 | | | 2,422 | | | (216) | | | (9) | % |
| Depreciation and amortization of other fixed assets | | 1,364 | | | 962 | | | 402 | | | 42 | % |
| Total DD&A | | $ | 73,492 | | | $ | 38,109 | | | $ | 35,383 | | | 93 | % |
| Depletion expense per BOE sold | | $ | 9.13 | | | $ | 4.88 | | | $ | 4.25 | | | 87 | % |
Depletion expense per BOE increased for the three months ended March 31, 2022, compared to the same period in 2021, primarily due to the increased future development costs and volumes of our proved reserves as a result of the Sabalo/Shad Acquisition and Pioneer Acquisition and improvements in commodity prices. See Note 6 to our consolidated financial statements included in our 2021 Annual Report and "—Pricing and reserves" for additional information regarding the full cost method of accounting.
Non-operating income (expense)
The following table presents the components of non-operating income (expense), net for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, | | 2022 compared to 2021 |
| (in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
| Loss on derivatives, net | | $ | (325,816) | | | $ | (154,365) | | | $ | (171,451) | | | (111) | % |
| Interest expense | | (32,477) | | | (25,946) | | | (6,531) | | | (25) | % |
| | | | | | | | |
| | | | | | | | |
| Loss on disposal of assets, net | | (260) | | | (72) | | | (188) | | | (261) | % |
| Other income, net | | 2,439 | | | 1,379 | | | 1,060 | | | 77 | % |
| | | | | | | | |
| Total non-operating expense, net | | $ | (356,114) | | | $ | (179,004) | | | $ | (177,110) | | | (99) | % |
Loss on derivatives, net. The following table presents the changes in the components of loss on derivatives, net for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | 2022 compared to 2021 |
| (in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
| Non-cash loss on derivatives, net | | $ | (200,446) | | | $ | (122,232) | | | $ | (78,214) | | | (64) | % |
| Settlements paid for matured derivatives, net | | (125,370) | | | (41,174) | | | (84,196) | | | (204) | % |
| | | | | | | | |
| Premiums received for commodity derivatives | | — | | | 9,041 | | | (9,041) | | | (100) | % |
| Loss on derivatives, net | | $ | (325,816) | | | $ | (154,365) | | | $ | (171,451) | | | (111) | % |
Non-cash loss on derivatives, net is the result of (i) new and matured contracts, including contingent consideration derivatives for the period subsequent to the initial valuation date and through the end of the contingency period, and the changing relationship between our outstanding contract prices and the future market prices in the forward curves, which we use to calculate the fair value of our derivatives and (ii) matured interest rate swaps and the changing relationship between the contract interest rate and the LIBOR interest rate forward curve. In general, if outstanding commodity contracts are held constant, we experience gains during periods of decreasing market prices and losses during periods of increasing market prices. Settlements paid or received for matured derivatives are for our (i) commodity derivative contracts, which are based on the settlement prices compared to the prices specified in the derivative contracts, (ii) interest rate derivative and (iii) contingent consideration derivatives.
See Notes 8 and 9 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for additional information regarding our derivatives.
Interest expense. Interest expense increased for the three months ended March 31, 2022, compared to the same period in 2021. See Notes 5 and 16 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding our long-term debt.
Income tax (expense) benefit
The following table presents income tax (expense) benefit for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | 2022 compared to 2021 |
| (in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
| Current | | $ | (1,218) | | | $ | — | | | $ | (1,218) | | | (100) | % |
| Deferred | | $ | 2,095 | | | $ | 762 | | | $ | 1,333 | | | 175 | % |
| | | | | | | | |
We are subject to federal and state income taxes and the Texas franchise tax. The income tax expense for the three months ended March 31, 2022 is attributed to Texas franchise tax. With the rise in oil prices and the addition of oily, high- margin inventory, we have recently seen positive indications that we will use a portion of our NOLs. However, as of March 31, 2022, we believe it is more likely than not that a portion of the NOL loss carryforwards are not fully realizable. We continue to consider new evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance is needed. Such consideration includes projected future cash flows from our oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of March 31, 2022 and our ability to capitalize intangible drilling costs, rather than expensing these costs and future projections of Oklahoma sourced income. As of March 31, 2022, a total valuation allowance of $455.3 million has been recorded to offset our federal and Oklahoma net deferred tax assets, resulting in a nominal Texas net deferred asset. The effective tax rate for our operations was 1%, due to the Texas franchise tax. Our effective tax rate is affected by changes in valuation allowances, recurring permanent differences and discrete items that may occur in any given year, but are not consistent from year to year.
Issuances, sales and/or exchanges of our common stock, taken together with prior transactions with respect to our common stock, could trigger an ownership change and therefore a limitation on our ability to utilize our net operating loss carryforwards which could result in taxable income in future years. For additional discussion of our income taxes, see Note 14 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Liquidity and capital resources
Historically, our primary sources of liquidity have been cash flows from operations, proceeds from equity offerings, proceeds from senior unsecured note offerings, borrowings under our Senior Secured Credit Facility and proceeds from asset dispositions. Our primary operational uses of capital have been for the acquisition, exploration and development of oil and natural gas properties and infrastructure development.
We continually seek to maintain a financial profile that provides operational flexibility and monitor the markets to consider which financing alternatives, including debt and equity capital resources, joint ventures and asset sales, are available to meet our future planned capital expenditures, a significant portion of which we are able to adjust and manage. We also continually evaluate opportunities with respect to our capital structure, including issuances of new securities, as well as transactions involving our outstanding senior notes, which could take the form of open market or private repurchases, exchange or tender offers, or other similar transactions, and our common stock, which could take the form of open market or private repurchases. We may make changes to our capital structure from time to time, with the goal of maintaining financial flexibility, preserving or improving liquidity and/or achieving cost efficiency. Such financing alternatives, or combination of alternatives, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. We continuously look for other opportunities to maximize shareholder value. For further discussion of our financing activities related to debt instruments, see Notes 5 and 16 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Due to the inherent volatility in the prices of oil, NGL and natural gas and the sometimes wide pricing differentials between where we produce and sell such commodities, we engage in commodity derivative transactions to hedge price risk associated with a portion of our anticipated sales volumes. Due to the inherent volatility in interest rates, we have entered into an interest rate derivative swap to hedge interest rate risk associated with a portion of our anticipated outstanding debt under the Senior Secured Credit Facility. We will pay a fixed rate over the contract term for such portion. By removing a portion of the (i) price volatility associated with future sales volumes and (ii) interest rate volatility associated with anticipated outstanding debt, we expect to mitigate, but not eliminate, the potential effects of variability in cash flows from operations. See "Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk" below. See Notes 9 and 16 to our consolidated financial statements included elsewhere in this Quarterly Report for discussion of our open commodity positions.
As of March 31, 2022, we had cash and cash equivalents of $65.1 million and available capacity under the Senior Secured Credit Facility, after the reduction of outstanding letters of credit, of $580.9 million, resulting in total liquidity of $646.0 million. As of May 3, 2022, we had cash and cash equivalents of $104.3 million and available capacity under the Senior Secured Credit Facility, after the reduction for outstanding letters of credit, of $905.9 million, resulting in total liquidity of $1.01 billion. We believe that our operating cash flows and the aforementioned liquidity sources provide us with sufficient liquidity and financial resources to manage our cash needs and contractual obligations, to implement our currently planned capital expenditure budget and, at our discretion, to fund any share repurchases, pay down, repurchase or refinance debt or
adjust our planned capital expenditure budget.
Cash requirements for known contractual and other obligations
The following table presents significant cash requirements for known contractual and other obligations as of March 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | |
| (in thousands) | | Short-term(1) | | Long-term | | Total |
Senior unsecured notes(2) | | $ | 122,457 | | | $ | 1,833,039 | | | $ | 1,955,496 | |
Senior Secured Credit Facility(3) | | — | | | 100,000 | | | 100,000 | |
Asset retirement obligations(4) | | 2,971 | | | 69,677 | | | 72,648 | |
Performance unit award cash payout(5) | | 13,077 | | | 13,466 | | | 26,543 | |
Lease commitments(6) | | 14,335 | | | 7,193 | | | 21,528 | |
| Total | | $ | 152,840 | | | $ | 2,023,375 | | | $ | 2,176,215 | |
_____________________________________________________________________________ (1)We expect to satisfy our short-term contractual and other obligations with cash flows from operations.
(2)Amounts presented include both our principal and interest obligations. The July 2029 Notes consist of $400.0 million principal and interest payments totaling $31.0 million each year with interest payments due semi-annually on January 31 and July 31 of each year until July 31, 2029, commencing January 31, 2022 with interest from closing to such date. The January 2025 Notes and January 2028 Notes consist of $577.9 million and $361.0 million in principal, respectively, and interest payments totaling $54.9 million and $36.6 million each year, respectively, with interest payments due semi-annually on January 15 and July 15 of each year until January 15, 2025 and January 15, 2028, respectively.
(3)The $100.0 million principal on our Senior Secured Credit facility is due on July 16, 2025. Amounts presented do not include future loan advances, repayments, commitment fees or other fees on our Senior Secured Credit Facility as we cannot determine with accuracy the timing of such items. Additionally, amounts presented do not include interest expense as it is a floating rate instrument and we cannot determine with accuracy the future interest rates to be charged. See Notes 5 and 16 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our Senior Secured Credit Facility.
(4)Asset retirement obligations represent future costs associated with the retirement of tangible long-lived assets. See Note 13 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our asset retirement obligations.
(5)Amounts represent the estimated cash payout as of March 31, 2021 for our performance unit awards granted on March 5, 2020 and March 9, 2021, utilizing our March 31, 2021 closing stock price. See Note 9 to our consolidated financial statements included in our 2021 Annual Report for additional discussion of our performance unit awards.
(6)Lease commitment amounts represent our minimum lease payments for our operating lease liabilities. We have committed to drilling rig contracts with third parties to facilitate our drilling plans. Amounts presented include the gross amount we are committed to pay for the drilling rig contract. However, we will record our proportionate share based on our working interest in our consolidated financial statements as incurred. Management does not currently anticipate the early termination of these contracts in 2022. See Note 5 to our consolidated financial statements included in our 2021 Annual Report for additional discussion of our leases and Note 11 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our drilling rig contracts.
Cash flows
The following table presents our cash flows for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, | | 2022 compared to 2021 |
| (in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
| Net cash provided by operating activities | | $ | 170,882 | | | $ | 71,151 | | | $ | 99,731 | | | 140 | % |
| Net cash used in investing activities | | (151,696) | | | (69,020) | | | (82,676) | | | (120) | % |
| Net cash used in financing activities | | (10,847) | | | (6,626) | | | (4,221) | | | (64) | % |
| Net increase (decrease) in cash and cash equivalents | | $ | 8,339 | | | $ | (4,495) | | | $ | 12,834 | | | 286 | % |
Cash flows from operating activities
Net cash provided by operating activities increased during the three months ended March 31, 2022, compared to the same period in 2021. Notable cash changes include (i) an increase in total oil, NGL and natural gas sales revenues of $248.7 million, (ii) a decrease of $93.2 million due to changes in net settlements for matured derivatives, net of premiums, mainly due to increases in commodity prices and (iii) a decrease of $2.7 million due to net changes in operating assets and liabilities. Other significant changes include an increase in costs of purchased oil and transportation and marketing expenses, partially offset by sales of purchased oil. The increase in total oil, NGL and natural gas sales revenues was due to a 107% increase in average sales price per BOE and was partially offset by an 8% increase in total volumes sold. For additional information, see "—Results of operations."
Our operating cash flows are sensitive to a number of variables, the most significant of which are the volatility of oil, NGL and natural gas prices, mitigated to the extent of our commodity derivatives' exposure, and sales volume levels. Regional and worldwide economic activity, weather, infrastructure, transportation capacity to reach markets, costs of operations, legislation and regulations, including potential government production curtailments, and other variable factors significantly impact the prices of these commodities. For additional information on risks related to our business, see "Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II. Item 1A. Risk Factors" included elsewhere in this Quarterly Report and "Part I. Item 1A. Risk Factors" in our 2021 Annual Report.
Cash flows from investing activities
Net cash used in investing activities increased for the three months ended March 31, 2022, compared to the same period in 2021, mainly due to (i) an increase in drilling and completions activity, (ii) an increase in inflationary pressures and non-operated capital expenditures and (iii) an increase in acquisitions of oil and natural gas properties. See Note 3 to our unaudited consolidated financial statements included elsewhere in the Quarterly Report for additional discussion of our acquisitions of oil and natural gas properties.
The following table presents the components of our incurred capital expenditures, excluding non-budgeted acquisition costs, for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | 2022 compared to 2021 | | |
| (in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) | | | | |
Oil and natural gas properties(1) | | $ | 168,368 | | | $ | 68,449 | | | $ | 99,919 | | | 146 | % | | | | |
| Midstream service assets | | 459 | | | 876 | | | (417) | | | (48) | % | | | | |
| Other fixed assets | | 2,072 | | | 600 | | | 1,472 | | | 245 | % | | | | |
| Total incurred capital expenditures, excluding non-budgeted acquisition costs | | $ | 170,899 | | | $ | 69,925 | | | $ | 100,974 | | | 144 | % | | | | |
_____________________________________________________________________________
(1)See Note 4 to our consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding our incurred capital expenditures in the exploration and development of oil and natural gas properties.
The amount, timing and allocation of capital expenditures are largely discretionary and within management's control. If oil, NGL and natural gas prices are below our acceptable levels, or costs are above our acceptable levels, we may choose to defer
a portion of our capital expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flow. Subject to financing alternatives, we may also increase our capital expenditures significantly to take advantage of opportunities we consider to be attractive. We continually monitor and may adjust our projected capital expenditures in response to world developments, as well as success or lack of success in drilling activities, changes in prices, availability of financing and joint venture opportunities, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs and supplies, changes in service costs, contractual obligations, internally generated cash flow and other factors both within and outside our control.
Cash flows from financing activities
Net cash used in financing activities increased for the three months ended March 31, 2022, compared to the same period in 2021. Notable 2022 activity includes (i) borrowings on our Senior Secured Credit Facility of $50.0 million, (ii) payments on our Senior Secured Credit Facility of $55.0 million and (iii) stock exchanged for tax withholding of $5.8 million. For further discussion of our financing activities related to debt instruments, see Notes 5 and 16 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Sources of Liquidity
Senior Secured Credit Facility
As of March 31, 2022, the Senior Secured Credit Facility, which matures on July 16, 2025, had a maximum credit amount of $2.0 billion, a borrowing base and an aggregate elected commitment of $1.0 billion and $725.0 million respectively, with $100.0 million outstanding, and was subject to an interest rate of 3.000%. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which we were in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or $80.0 million. As of March 31, 2022 and December 31, 2021, we had one letter of credit outstanding of $44.1 million under the Senior Secured Credit Facility. The Senior Secured Credit Facility is fully and unconditionally guaranteed by LMS and GCM. On April 6, 2022,we borrowed an additional $30.0 million and on April 25, 2022, we repaid $80.0 million on the Senior Secured Credit Facility. As a result, the outstanding balance under the Senior Secured Credit Facility was $50.0 million as of May 3, 2022. On April 13, 2022, we entered into the Eighth Amendment to our Senior Secured Credit Facility which, among other things, (i) increased the borrowing base and aggregate elected commitment under our Senior Secured Credit Facility to $1.25 billion and $1.0 billion, respectively, (ii) increased, from closing through December 31, 2022, the $50.0 million bond buyback and distributions baskets to $250.0 million, subject to certain conditions, (iii) added an energy transition and technology commercialization investment basket of $25.0 million, subject to certain conditions, (iv) allowed for the designation of unrestricted subsidiaries and (v) amended certain other provisions relating to certain commercial agreements and the administration of our loans, in each case, subject to the terms of the Eighth Amendment and the Senior Secured Credit Facility.
See Notes 5 and 16 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of our Senior Secured Credit Facility.
January 2025 Notes, January 2028 Notes and July 2029 Notes
The following table presents principal amounts and applicable interest rates for our outstanding January 2025 Notes, January 2028 Notes and July 2029 Notes as of March 31, 2022:
| | | | | | | | | | | | | | |
| (in millions, except for interest rates) | | Principal | | Interest rate |
| January 2025 Notes | | $ | 577.9 | | | 9.500 | % |
| January 2028 Notes | | 361.0 | | | 10.125 | % |
| July 2029 Notes | | 400.0 | | | 7.750 | % |
| Total senior unsecured notes | | $ | 1,338.9 | | | |
The net proceeds from the January 2025 Notes and January 2028 Notes were used to fund the tender offers and redemptions of the remaining principle amounts of the January 2022 Notes and March 2023 Notes. On July 16, 2021, we closed a private offering and sale of $400.0 million in aggregate principal amount of our 7.750% senior unsecured notes due 2029. See Note 5
to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of our senior unsecured notes.
Supplemental Guarantor information
As discussed in Note 5 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report, on January 24, 2020, we issued $600.0 million in aggregate principal amount of the January 2025 Notes and $400.0 million in aggregate principal amount of the January 2028 Notes. On July 16, 2021, we issued $400.0 million in aggregate principal amount of the July 2029 Notes. As of March 31, 2022, $1.3 billion of our senior unsecured notes remained outstanding. Each of our wholly owned subsidiaries, LMS and GCM (each, a "Guarantor," and together, the "Guarantors"), jointly and severally, and fully and unconditionally, guarantees the January 2025 Notes, January 2028 Notes and July 2029 Notes. We do not have any non-guarantor subsidiaries.
The guarantees are senior unsecured obligations of each Guarantor and rank equally in right of payment with other existing and future senior indebtedness of such Guarantor, and senior in right of payment to all existing and future subordinated indebtedness of such Guarantor. The guarantees of the senior unsecured notes by the Guarantors are subject to certain Releases. The obligations of each Guarantor under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. Further, the rights of holders of the senior unsecured notes against the Guarantors may be limited under the U.S. Bankruptcy Code or state fraudulent transfer or conveyance law. Laredo is not restricted from making investments in the Guarantors and the Guarantors are not restricted from making intercompany distributions to Laredo or each other.
As we do not have any non-guarantor subsidiaries, the assets, liabilities and results of operations of the combined issuer and Guarantors are not materially different than the corresponding amounts presented in our unaudited consolidated financial statements included elsewhere in this Quarterly Report. Accordingly, we have omitted the summarized financial information of the issuer and the Guarantors that would otherwise be required.
Non-GAAP financial measures
The non-GAAP financial measures of Free Cash Flow and Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures used by other companies. Furthermore, these non-GAAP financial measures should not be considered in isolation or as a substitute for GAAP measures of liquidity or financial performance, but rather should be considered in conjunction with GAAP measures, such as net income or loss, operating income or loss or cash flows from operating activities.
Free Cash Flow
Free Cash Flow is a non-GAAP financial measure that we define as net cash provided by operating activities (GAAP) before changes in operating assets and liabilities, net, less incurred capital expenditures, excluding non-budgeted acquisition costs. Free Cash Flow does not represent funds available for future discretionary use because it excludes funds required for future debt service, capital expenditures, acquisitions, working capital, income taxes, franchise taxes and other commitments and obligations. However, our management believes Free Cash Flow is useful to management and investors in evaluating operating trends in our business that are affected by production, commodity prices, operating costs and other related factors. There are significant limitations to the use of Free Cash Flow as a measure of performance, including the lack of comparability due to the different methods of calculating Free Cash Flow reported by different companies.
The following table presents a reconciliation of net cash provided by operating activities (GAAP) to Free Cash Flow (non-GAAP) for the periods presented: