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
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.
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
|
%
|
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.
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
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
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.
|
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
.
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.
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.
|
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.
|
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.
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
|
|
|
$
|
7,286
|
|
|
$
|
7,882
|
|
|
$
|
13,331
|
|
Stock option award compensation
|
|
160
|
|
|
971
|
|
|
978
|
|
|
2,040
|
|
Performance share award compensation
|
|
(3,191
|
)
|
|
4,415
|
|
|
(27
|
)
|
|
8,742
|
|
Outperformance share award compensation
|
|
13
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Total stock-based compensation, gross
|
|
(459
|
)
|
|
12,672
|
|
|
8,846
|
|
|
24,113
|
|
Less amounts capitalized in evaluated oil and natural gas properties
|
|
36
|
|
|
(1,996
|
)
|
|
(1,863
|
)
|
|
(4,098
|
)
|
Total stock-based compensation, net
|
|
$
|
(423
|
)
|
|
$
|
10,676
|
|
|
$
|
6,983
|
|
|
$
|
20,015
|
|
See Note
17
for discussion of the Company's organizational restructuring and the related stock-based compensation reversal during the three months ended
June 30, 2019
.
Performance unit awards
The performance unit awards, granted on February 28, 2019, were determined to be liability awards due to the board of directors election to settle the awards in cash. On May 16, 2019, the board of directors elected to change the form of payment from cash to common stock and, as a result, the performance unit awards were converted to performance share awards, which the Company determined were now equity awards. This change in election triggered modification accounting, and the performance unit award compensation for the three months ended March 31, 2019 was reversed and a new fair value was determined for the converted performance share awards and adjusted in stock-based compensation based on the May 16, 2019 modification date. For additional discussion of the modification, see "Performance share awards."
The following table reflects the performance unit award activity for the six months ended June 30, 2019:
|
|
|
|
|
(in thousands)
|
|
Performance unit awards
|
Outstanding as of December 31, 2018
|
|
—
|
|
Granted
|
|
2,813
|
|
Forfeited
|
|
(1,255
|
)
|
Converted to performance share awards
|
|
(1,558
|
)
|
Outstanding as of June 30, 2019
|
|
—
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
Note
7
—
Derivatives
Due to the inherent volatility in oil, NGL and natural gas prices and differences in the prices of oil, NGL and natural gas between where
the Company produces and where the Company sells
such commodities,
the Company engages
in derivative transactions, such as puts, swaps, collars and basis swaps to hedge price risk associated with a portion of
the Company's
anticipated production.
By removing a portion of the price volatility associated with future production,
the Company expects
to mitigate, but not eliminate, the potential effects of variability in cash flows from operations.
See
Notes 2.f and 9 in the
2018
Annual Report
for discussion of the Company's accounting policies for derivatives and
information on the transaction types and settlement indexes
, respectively.
During the three months ended
June 30, 2019
, the Company completed a hedge restructuring by early terminating puts and collars and entering into new swaps. The Company paid a net termination amount of
$5.4 million
that included the full settlement of the deferred premiums associated with these early-terminated puts and collars. The present value of these deferred premiums, classified under Level 3 of the fair value hierarchy, upon their early termination was
$7.2 million
. See Note 10 in the 2018 Annual Report for information about the fair value hierarchy levels.
The following table details the derivatives that were terminated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate volumes (Bbl)
|
|
Weighted-average floor price ($/Bbl)
|
|
Weighted-average ceiling price ($/Bbl)
|
|
Contract period
|
Oil puts
|
|
5,087,500
|
|
|
$
|
46.03
|
|
|
$
|
—
|
|
|
April 2019 - December 2019
|
Oil collars
|
|
1,134,600
|
|
|
$
|
45.00
|
|
|
$
|
76.13
|
|
|
January 2020 - December 2020
|
Condensed notes to the consolidated financial statements
(Unaudited)
The following table summarizes open derivative positions as of
June 30, 2019
, for derivatives that were entered into through
June 30, 2019
, for the settlement periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining year 2019
|
|
Year 2020
|
|
Year 2021
|
Oil:
|
|
|
|
|
|
|
|
Puts:
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
644,000
|
|
|
366,000
|
|
|
—
|
|
Weighted-average floor price ($/Bbl)
|
|
$
|
55.00
|
|
|
$
|
45.00
|
|
|
$
|
—
|
|
Volume with deferred premium (Bbl)
|
|
644,000
|
|
|
—
|
|
|
—
|
|
Weighted-average deferred premium price ($/Bbl)
|
|
$
|
4.39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Swaps:
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
3,956,000
|
|
|
7,173,600
|
|
|
—
|
|
Weighted-average price ($/Bbl)
|
|
$
|
61.31
|
|
|
$
|
59.50
|
|
|
$
|
—
|
|
Collars:
|
|
|
|
|
|
|
|
|
Volume (Bbl)
|
|
—
|
|
|
—
|
|
|
912,500
|
|
Weighted-average floor price ($/Bbl)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
45.00
|
|
Weighted-average ceiling price ($/Bbl)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71.00
|
|
Totals:
|
|
|
|
|
|
|
Total volume with floor price (Bbl)
|
|
4,600,000
|
|
|
7,539,600
|
|
|
912,500
|
|
Weighted-average floor price ($/Bbl)
|
|
$
|
60.42
|
|
|
$
|
58.79
|
|
|
$
|
45.00
|
|
Total volume with ceiling price (Bbl)
|
|
3,956,000
|
|
|
7,173,600
|
|
|
912,500
|
|
Weighted-average ceiling price ($/Bbl)
|
|
$
|
61.31
|
|
|
$
|
59.50
|
|
|
$
|
71.00
|
|
Basis Swaps:
|
|
|
|
|
|
|
WTI Midland to WTI NYMEX:
|
|
|
|
|
|
|
Volume (Bbl)
|
|
1,840,000
|
|
|
—
|
|
|
—
|
|
Weighted-average price ($/Bbl)
|
|
$
|
(2.89
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
WTI Midland to WTI formula basis:
|
|
|
|
|
|
|
Volume (Bbl)
|
|
552,000
|
|
|
—
|
|
|
—
|
|
Weighted-average price ($/Bbl)
|
|
$
|
(4.37
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
NGL:
|
|
|
|
|
|
|
Swaps - Purity Ethane:
|
|
|
|
|
|
|
Volume (Bbl)
|
|
1,196,000
|
|
|
366,000
|
|
|
912,500
|
|
Weighted-average price ($/Bbl)
|
|
$
|
14.22
|
|
|
$
|
13.60
|
|
|
$
|
12.01
|
|
Swaps - Non-TET Propane:
|
|
|
|
|
|
|
Volume (Bbl)
|
|
956,800
|
|
|
1,244,400
|
|
|
730,000
|
|
Weighted-average price ($/Bbl)
|
|
$
|
27.97
|
|
|
$
|
26.58
|
|
|
$
|
25.52
|
|
Swaps - Non-TET Normal Butane:
|
|
|
|
|
|
|
Volume (Bbl)
|
|
368,000
|
|
|
439,200
|
|
|
255,500
|
|
Weighted-average price ($/Bbl)
|
|
$
|
30.73
|
|
|
$
|
28.69
|
|
|
$
|
27.72
|
|
Swaps - Non-TET Isobutane:
|
|
|
|
|
|
|
Volume (Bbl)
|
|
92,000
|
|
|
109,800
|
|
|
67,525
|
|
Weighted-average price ($/Bbl)
|
|
$
|
31.08
|
|
|
$
|
29.99
|
|
|
$
|
28.79
|
|
Swaps - Non-TET Natural Gasoline:
|
|
|
|
|
|
|
Volume (Bbl)
|
|
312,800
|
|
|
402,600
|
|
|
237,250
|
|
Weighted-average price ($/Bbl)
|
|
$
|
45.80
|
|
|
$
|
45.15
|
|
|
$
|
44.31
|
|
Total NGL volume (Bbl)
|
|
2,925,600
|
|
|
2,562,000
|
|
|
2,202,775
|
|
Natural gas:
|
|
|
|
|
|
|
|
|
Henry Hub NYMEX Swaps:
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
|
19,688,000
|
|
|
23,790,000
|
|
|
14,052,500
|
|
TABLE CONTINUES ON NEXT PAGE
|
|
|
|
|
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining year 2019
|
|
Year 2020
|
|
Year 2021
|
Weighted-average price ($/MMBtu)
|
|
$
|
3.09
|
|
|
$
|
2.72
|
|
|
$
|
2.63
|
|
Basis Swaps:
|
|
|
|
|
|
|
|
|
Volume (MMBtu)
|
|
19,688,000
|
|
|
32,574,000
|
|
|
23,360,000
|
|
Weighted-average price ($/MMBtu)
|
|
$
|
(1.51
|
)
|
|
$
|
(0.76
|
)
|
|
$
|
(0.47
|
)
|
See Note
8.a
for the fair value measurement of derivatives.
Note
8
—
Fair value measurements
See Note 10 in the
2018
Annual Report for discussion of the Company's accounting policies for fair value measurements.
a.
Fair value measurement on a recurring basis
The following tables summarize the Company's derivatives' fair value hierarchy by commodity and current and noncurrent assets and liabilities on a gross basis and the net presentation included in "Derivatives" on the unaudited consolidated balance sheets as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total gross fair value
|
|
Amounts offset
|
|
Net fair value presented on the unaudited consolidated balance sheets
|
As of June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
27,192
|
|
|
$
|
—
|
|
|
$
|
27,192
|
|
|
$
|
(9,821
|
)
|
|
$
|
17,371
|
|
NGL derivatives
|
|
—
|
|
|
17,134
|
|
|
—
|
|
|
17,134
|
|
|
(1,019
|
)
|
|
16,115
|
|
Natural gas derivatives
|
|
—
|
|
|
26,229
|
|
|
—
|
|
|
26,229
|
|
|
(9,278
|
)
|
|
16,951
|
|
Oil derivative deferred premiums
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3,270
|
)
|
|
(3,270
|
)
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
18,217
|
|
|
$
|
—
|
|
|
$
|
18,217
|
|
|
$
|
(1,036
|
)
|
|
$
|
17,181
|
|
NGL derivatives
|
|
—
|
|
|
4,050
|
|
|
—
|
|
|
4,050
|
|
|
(566
|
)
|
|
3,484
|
|
Natural gas derivatives
|
|
—
|
|
|
6,049
|
|
|
—
|
|
|
6,049
|
|
|
(916
|
)
|
|
5,133
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
(11,618
|
)
|
|
$
|
—
|
|
|
$
|
(11,618
|
)
|
|
$
|
9,821
|
|
|
$
|
(1,797
|
)
|
NGL derivatives
|
|
—
|
|
|
(1,019
|
)
|
|
—
|
|
|
(1,019
|
)
|
|
1,019
|
|
|
—
|
|
Natural gas derivatives
|
|
—
|
|
|
(8,954
|
)
|
|
—
|
|
|
(8,954
|
)
|
|
9,278
|
|
|
324
|
|
Oil derivative deferred premiums
|
|
—
|
|
|
—
|
|
|
(3,270
|
)
|
|
(3,270
|
)
|
|
3,270
|
|
|
—
|
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
(1,036
|
)
|
|
$
|
—
|
|
|
$
|
(1,036
|
)
|
|
$
|
1,036
|
|
|
$
|
—
|
|
NGL derivatives
|
|
—
|
|
|
(566
|
)
|
|
—
|
|
|
(566
|
)
|
|
566
|
|
|
—
|
|
Natural gas derivatives
|
|
—
|
|
|
(916
|
)
|
|
—
|
|
|
(916
|
)
|
|
916
|
|
|
—
|
|
Net derivative asset (liability) positions
|
|
$
|
—
|
|
|
$
|
74,762
|
|
|
$
|
(3,270
|
)
|
|
$
|
71,492
|
|
|
$
|
—
|
|
|
$
|
71,492
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total gross fair value
|
|
Amounts offset
|
|
Net fair value presented on the unaudited consolidated balance sheets
|
As of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
44,425
|
|
|
$
|
—
|
|
|
$
|
44,425
|
|
|
$
|
(7,907
|
)
|
|
$
|
36,518
|
|
NGL derivatives
|
|
—
|
|
|
1,974
|
|
|
—
|
|
|
1,974
|
|
|
—
|
|
|
1,974
|
|
Natural gas derivatives
|
|
—
|
|
|
18,991
|
|
|
—
|
|
|
18,991
|
|
|
(3,267
|
)
|
|
15,724
|
|
Oil derivative deferred premiums
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,381
|
)
|
|
(14,381
|
)
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
10,626
|
|
|
$
|
—
|
|
|
$
|
10,626
|
|
|
$
|
—
|
|
|
$
|
10,626
|
|
NGL derivatives
|
|
—
|
|
|
1,024
|
|
|
—
|
|
|
1,024
|
|
|
—
|
|
|
1,024
|
|
Natural gas derivatives
|
|
—
|
|
|
108
|
|
|
—
|
|
|
108
|
|
|
(728
|
)
|
|
(620
|
)
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
(9,059
|
)
|
|
$
|
—
|
|
|
$
|
(9,059
|
)
|
|
$
|
7,907
|
|
|
$
|
(1,152
|
)
|
NGL derivatives
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Natural gas derivatives
|
|
—
|
|
|
(7,290
|
)
|
|
—
|
|
|
(7,290
|
)
|
|
3,267
|
|
|
(4,023
|
)
|
Oil derivative deferred premiums
|
|
—
|
|
|
—
|
|
|
(16,565
|
)
|
|
(16,565
|
)
|
|
14,381
|
|
|
(2,184
|
)
|
Noncurrent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil derivatives
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NGL derivatives
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Natural gas derivatives
|
|
—
|
|
|
(728
|
)
|
|
—
|
|
|
(728
|
)
|
|
728
|
|
|
—
|
|
Net derivative asset (liability) positions
|
|
$
|
—
|
|
|
$
|
60,071
|
|
|
$
|
(16,565
|
)
|
|
$
|
43,506
|
|
|
$
|
—
|
|
|
$
|
43,506
|
|
Significant Level 2 inputs associated with the calculation of discounted cash flows used in the fair value mark-to-market analysis of derivatives include each derivative contract's corresponding commodity index price(s), appropriate risk-adjusted discount rates and forward price curve models for substantially similar instruments generated from a compilation of data gathered from third parties.
The Company's deferred premiums associated with its derivative contracts are categorized as Level 3, as the Company utilizes a net present value calculation to determine the valuation. They are considered to be measured on a recurring basis as the derivative contracts they derive from are measured on a recurring basis. As derivative contracts containing deferred premiums are entered into, the Company discounts the associated deferred premium to its net present value at the contract trade date, using the Senior Secured Credit Facility rate at the trade date (input rate), and then records the change in net present value to interest expense over the period from trade until the final settlement date at the end of the contract. After this initial valuation, the input rate of each deferred premium is not adjusted; therefore, significant increases (decreases) in the Senior Secured Credit Facility rate would result in a significantly lower (higher) fair value measurement for each new contract entered into that contained a deferred premium; however, the initial valuation for the deferred premiums already recorded would remain unaffected. While the Company believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. The deferred premiums are included in "Derivatives" on the unaudited consolidated balance sheets, and as of
June 30, 2019
, each of their input rates is
2.31%
.
The following table presents
payments required for derivative deferred premiums
as of
June 30, 2019
for the periods presented:
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2019
|
Remaining 2019
|
|
$
|
2,813
|
|
2020
|
|
477
|
|
Total
|
|
$
|
3,290
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
A summary of the changes in net assets and liabilities classified as Level 3 measurements for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Balance of Level 3 at beginning of period
|
|
$
|
(12,644
|
)
|
|
$
|
(30,292
|
)
|
|
$
|
(16,565
|
)
|
|
$
|
(28,683
|
)
|
Change in net present value of derivative deferred premiums
(1)
|
|
(24
|
)
|
|
(185
|
)
|
|
(119
|
)
|
|
(396
|
)
|
Total purchases and settlements of derivative deferred premiums:
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,422
|
)
|
Settlements
(2)
|
|
9,398
|
|
|
5,451
|
|
|
13,414
|
|
|
9,475
|
|
Balance of Level 3 at end of period
|
|
$
|
(3,270
|
)
|
|
$
|
(25,026
|
)
|
|
$
|
(3,270
|
)
|
|
$
|
(25,026
|
)
|
____________________________________________________________________________
|
|
(1)
|
These amounts are included in "Interest expense" in the unaudited consolidated statements of operations.
|
|
|
(2)
|
The amounts for the three and
six
months ended
June 30, 2019
include
$7.2 million
that represents the present value of deferred premiums settled upon their early termination.
|
See Note 2.f in the
2018
Annual Report for discussion of the Company's accounting policies for derivatives.
b.
Items not accounted for at fair value
The carrying amounts reported in the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued capital expenditures, undistributed revenue and royalties and other accrued assets and liabilities approximate their fair values.
The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amounts and fair values of the Company's debt as of the dates presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
December 31, 2018
|
(in thousands)
|
|
Long-term
debt
|
|
Fair
value
(1)
|
|
Long-term
debt
|
|
Fair
value
(1)
|
January 2022 Notes
|
|
$
|
450,000
|
|
|
$
|
420,750
|
|
|
$
|
450,000
|
|
|
$
|
402,885
|
|
March 2023 Notes
|
|
350,000
|
|
|
327,355
|
|
|
350,000
|
|
|
316,624
|
|
Senior Secured Credit Facility
|
|
235,000
|
|
|
235,004
|
|
|
190,000
|
|
|
190,054
|
|
Total
|
|
$
|
1,035,000
|
|
|
$
|
983,109
|
|
|
$
|
990,000
|
|
|
$
|
909,563
|
|
______________________________________________________________________________
|
|
(1)
|
The fair values of the debt outstanding on the January 2022 Notes and the March 2023 Notes were determined using the
June 30, 2019
and
December 31, 2018
Level 1 fair value hierarchy quoted market price for each respective instrument. The fair value of the outstanding debt on the Senior Secured Credit Facility as of
June 30, 2019
and
December 31, 2018
was estimated utilizing the Level 2 fair value hierarchy pricing model for similar instruments. See Note 10 in the
2018
Annual Report for information about the fair value hierarchy levels.
|
Note
9
—
Net income per common share
Basic net income per common share is computed by dividing net income by the weighted-average common shares outstanding for the period. Diluted net income per common share reflects the potential dilution of non-vested restricted stock awards, outstanding stock option awards, non-vested performance share awards and the non-vested outperformance share award. See Note
6.c
for additional discussion of these awards. The dilutive effects of these awards were calculated utilizing the treasury stock method.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table reflects the calculations of diluted weighted-average common shares outstanding and basic and diluted net income per common share for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(in thousands, except for per share data)
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Net income (numerator):
|
|
|
|
|
|
|
|
|
|
|
Net income—basic and diluted
|
|
$
|
173,382
|
|
|
$
|
33,452
|
|
|
$
|
163,891
|
|
|
$
|
119,972
|
|
Weighted-average common shares outstanding (denominator):
|
|
|
|
|
|
|
|
|
Basic
(1)
|
|
231,406
|
|
|
230,933
|
|
|
230,943
|
|
|
234,561
|
|
Dilutive non-vested restricted stock awards
(2)
|
|
151
|
|
|
683
|
|
|
782
|
|
|
885
|
|
Dilutive outstanding stock option awards
(3)
|
|
—
|
|
|
90
|
|
|
—
|
|
|
55
|
|
Diluted
|
|
231,557
|
|
|
231,706
|
|
|
231,725
|
|
|
235,501
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.75
|
|
|
$
|
0.14
|
|
|
$
|
0.71
|
|
|
$
|
0.51
|
|
Diluted
|
|
$
|
0.75
|
|
|
$
|
0.14
|
|
|
$
|
0.71
|
|
|
$
|
0.51
|
|
_____________________________________________________________________________
|
|
(1)
|
Weighted-average common shares outstanding used in the calculation of basic and diluted net income per common share was computed taking into account share repurchases that occurred during the three and six months ended June 30, 2018. See Note
6.a
for additional discussion of the Company's share repurchase program.
|
|
|
(2)
|
The effect of a significant portion of the non-vested restricted stock awards was excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2019. The inclusion of these non-vested restricted stock awards would be anti-dilutive mainly due to the grant-date fair value per common share for the awards being greater than the average closing stock price during the period.
|
|
|
(3)
|
The effect of the outstanding stock option awards was excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2019. The inclusion of these stock option awards would be anti-dilutive as their exercise prices were greater than the average closing stock price during the period.
|
By assuming June 30, 2019 was the end of the respective performance periods of the non-vested performance share awards and the non-vested outperformance share award, the effects of these awards were excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2019, as the awards were below the respective agreements' payout thresholds, with the exception of the RTSR Performance Percentage-portion of the 2019 performance share awards, which was ultimately anti-dilutive due to the grant-date fair value per unit being greater than the average closing stock price during the periods. See Note
6.c
for discussion of the performance and market criteria of these awards.
See Note 10 in the second-quarter 2018 Quarterly Report for discussion of the awards excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2018.
Note
10
—
Commitments and contingencies
a.
Litigation
From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, as of the date hereof, the Company does not currently believe that any such legal proceedings will have a material adverse effect on the Company's business, financial position, results of operations or liquidity. During the three months ended
June 30, 2019
, the Company finalized and received a favorable settlement of
$42.5 million
in connection with the Company's damage claims asserted in a previously disclosed litigation matter relating to a breach and wrongful termination of a crude oil purchase agreement. This settlement is included in "Litigation settlement" on the unaudited consolidated statements of operations. The Company does not anticipate the receipt of further payments in connection with this matter as this settlement constituted a full and final satisfaction of the Company's claims.
b.
Drilling contracts
The Company has
committed to drilling rig contracts with third parties to facilitate
the Company's
drilling plans.
Certain of these contracts are for terms of multiple months and contain early termination clauses that require the Company to potentially pay penalties to the third party should the Company cease drilling efforts. These penalties would negatively impact the
Condensed notes to the consolidated financial statements
(Unaudited)
Company's financial statements upon early contract termination. There were
no
penalties incurred for early contract termination for either of the
six
months ended
June 30, 2019
or
2018
. As the Company's current drilling rig contracts are considered leases under the scope of ASC 842, the present value of the future commitment as of
June 30, 2019
related to drilling contracts with an initial term greater than 12 months is included in "Operating lease liabilities" under "Current liabilities" on the unaudited consolidated balance sheet as of
June 30, 2019
. See Note
3.a
for further discussion of the impact of ASC 842 adoption. Management does not currently anticipate the early termination of these contracts in 2019.
c.
Firm sale and transportation commitments
The Company has
committed to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. If not fulfilled,
the Company is
subject to firm transportation payments on excess pipeline capacity and other contractual penalties.
These commitments are normal and customary for the Company's business. In certain instances, the Company has used spot market purchases to meet its commitments in certain locations or due to favorable pricing. Management anticipates continuing this practice in the future. The Company incurred firm transportation payments on excess pipeline capacity and other contractual penalties of
$0.5 million
and
$2.2 million
during the three months ended
June 30, 2019
and
2018
, respectively, and
$1.0 million
and
$2.3 million
during the six months ended
June 30, 2019
and
2018
, respectively. These firm transportation payments on excess pipeline capacity and other contractual penalties are netted with the respective revenue stream in the unaudited consolidated statements of operations. Future commitments of
$341.5 million
as of
June 30, 2019
are not recorded in the unaudited consolidated balance sheets.
d.
Federal and state regulations
Oil and natural gas exploration, production and related operations are subject to extensive federal and state laws, rules and regulations. Failure to comply with these laws, rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the cost of doing business and affects profitability. The Company believes that it is in compliance with currently applicable federal and state regulations related to oil and natural gas exploration and production, and that compliance with the current regulations will not have a material adverse impact on the financial position or results of operations of the Company. These rules and regulations are frequently amended or reinterpreted; therefore, the Company is unable to predict the future cost or impact of complying with these regulations.
e.
Environmental
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed in the period incurred. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment or remediation is probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed and readily determinable. Management believes
no
materially significant liabilities of this nature existed as of
June 30, 2019
or
December 31, 2018
.
Note
11
—
Supplemental cash flow and non-cash information
The following table presents supplemental cash flow and non-cash information:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(in thousands)
|
|
2019
|
|
2018
|
Supplemental cash flow information:
|
|
|
|
|
Capitalized interest
|
|
$
|
(420
|
)
|
|
$
|
(498
|
)
|
Cash received (paid) for income taxes
(1)
|
|
$
|
691
|
|
|
$
|
(1,136
|
)
|
Supplemental non-cash investing information:
|
|
|
|
|
Increase (decrease) in accrued capital expenditures
|
|
$
|
2,335
|
|
|
$
|
(8,878
|
)
|
Capitalized stock-based compensation in evaluated oil and natural gas properties
|
|
$
|
1,863
|
|
|
$
|
4,098
|
|
Capitalized asset retirement costs
|
|
$
|
356
|
|
|
$
|
577
|
|
______________________________________________________________________________
|
|
(1)
|
See Note
14
for additional discussion of the Company's income taxes.
|
Condensed notes to the consolidated financial statements
(Unaudited)
The following table presents supplemental non-cash adjustments information related to leases:
|
|
|
|
|
|
(in thousands)
|
|
Six months ended June 30, 2019
|
Right-of-use assets obtained in exchange for operating lease liabilities
(1)
|
|
$
|
25,212
|
|
______________________________________________________________________________
|
|
(1)
|
See Note
3
for additional discussion of the Company's leases.
|
Note
12
—
Asset retirement obligations
See Note 2.k in the
2018
Annual Report for discussion of the Company's accounting policies for asset retirement obligations.
The following table reconciles the Company's asset retirement obligation liability associated with tangible long-lived assets for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(in thousands)
|
|
2019
|
|
2018
|
Liability at beginning of period
|
|
$
|
56,882
|
|
|
$
|
55,506
|
|
Liabilities added due to acquisitions, drilling, midstream service asset construction and other
|
|
356
|
|
|
577
|
|
Accretion expense
|
|
2,072
|
|
|
2,227
|
|
Liabilities settled due to plugging and abandonment or removed due to sale
|
|
(1,362
|
)
|
|
(1,815
|
)
|
Liability at end of period
|
|
$
|
57,948
|
|
|
$
|
56,495
|
|
Note
13
—
Revenue recognition
a.
Impact of ASC 606 adoption on the Medallion Sale
Medallion Gathering & Processing, LLC, a Texas limited liability company formed on October 12, 2012, which, together with its wholly-owned subsidiaries (collectively, "Medallion"), was established for the purpose of developing midstream solutions and providing midstream infrastructure to bring oil to market in the Midland Basin. Prior to the Medallion Sale (defined below), LMS held
49%
of Medallion's ownership units. On October 30, 2017, LMS, together with Medallion Midstream Holdings, LLC, which is owned and controlled by an affiliate of the third-party interest-holder, The Energy & Minerals Group, completed the sale of
100%
of the ownership interests in Medallion to an affiliate of Global Infrastructure Partners ("GIP"), for cash consideration of
$1.825 billion
(the "Medallion Sale"). LMS' total net cash proceeds before taxes for its
49%
ownership interest in Medallion were
$831.3 million
.
LMS has a Transportation Services Agreement (the "TA") with a wholly-owned subsidiary of Medallion under which LMS receives firm transportation of the Company's crude oil production from Reagan County and Glasscock County in Texas to Colorado City, Texas that continues to be in effect after the Medallion Sale. At December 31, 2017, the Medallion Sale was accounted for under the real estate guidance in ASC 360-20,
Property, Plant, and Equipment
("ASC 360-20"), and the Company's maximum exposure to loss associated with future commitments under the TA was
$141.1 million
that was not recorded in the Company's unaudited consolidated balance sheets. Under ASC 360-20, as a result of the Company's continuing involvement with Medallion by guaranteeing cash flows under the TA, the Company recorded a deferred gain in the amount of its maximum exposure to loss related to such guarantees. This deferred gain would have been amortized over the TA's firm commitment transportation term through 2024 had the Company not adopted ASC 606,
Revenue from Contracts with Customers
("ASC 606") on January 1, 2018.
In adopting ASC 606, the guidance in ASC 360-20 was superseded by ASC 860,
Transfers and Servicing
("ASC 860"). The Medallion Sale is within the scope of ASC 860 and qualifies for sale accounting and recognition of the previously deferred gain because as of the date of the Medallion Sale (i) the Company transferred and legally isolated its full interests in Medallion to GIP, (ii) GIP received the right to pledge or exchange Medallion ownership interests at its full discretion and (iii) the Company did not have effective control over Medallion. Therefore, the deferred gain of
$141.1 million
was recognized as an adjustment to the 2018 beginning balance of accumulated deficit, presented on the unaudited consolidated statements of stockholders' equity, in accordance with the modified retrospective approach of adoption. See Notes 4.c and 5.a in the 2018 Annual Report for further discussion of the Medallion Sale, the TA and the adoption of ASC 606.
Condensed notes to the consolidated financial statements
(Unaudited)
b.
Revenue recognition
Oil, NGL and natural gas revenues are generally recognized at the point in time that control of the product is transferred to the customer. Midstream service revenues are generated through fees for products and services that need to be delivered by midstream infrastructure, including oil and liquids-rich natural gas gathering services as well as rig fuel, natural gas lift and water delivery, recycling and takeaway and are recognized over time as the customer benefits from these services when provided. A more detailed summary of the underlying contracts that give rise to the Company's revenue and method of recognition can be found in Note 5.b in the 2018 Annual Report.
Note
14
—
Income taxes
The Company is subject to federal and state income taxes and the Texas franchise tax. The Company had federal net operating loss carryforwards totaling
$1.9 billion
and state of Oklahoma net operating loss carryforwards totaling
$35.4 million
as of
June 30, 2019
, which begin expiring in 2026 and 2032, respectively. Due to the enactment of Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"),
$180.7 million
of the federal net operating loss carryforward will not expire but may be limited in future periods. As of
June 30, 2019
, the Company believes it is more likely than not that a portion of the net operating loss carryforwards are not fully realizable. The Company continues to consider new evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance is needed. Such consideration includes projected future cash flows from its oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of
June 30, 2019
, the Company's ability to capitalize intangible drilling costs, rather than expensing these costs in order to prevent an operating loss carryforward from expiring unused and future projections of Oklahoma sourced income. As of
June 30, 2019
, a total valuation allowance of
$202.1 million
has been recorded against the net deferred tax asset, resulting in a net Texas deferred tax liability of
$6.7 million
, which is included in "Other noncurrent liabilities" on the unaudited consolidated balance sheets.
The Company paid Alternative Minimum Tax ("AMT") related to the Medallion Sale in 2017. The payment of AMT creates an AMT credit carryforward. Due to changes in the Tax Act, AMT credit carryforwards do not expire and are now refundable over a five-year period. Therefore, as of
June 30, 2019
, a receivable has been recorded in the amount of
$4.1 million
, of which
$3.1 million
is included in "Accounts receivable, net" and
$1.0 million
is included in "Other noncurrent assets, net" on the unaudited consolidated balance sheets.
Note
15
—
Related party
Laredo's Chairman and Chief Executive Officer is on the board of directors of Helmerich & Payne, Inc. ("H&P"). The Company has drilling contracts with H&P that are long-term and short-term operating leases. The drilling contract, which is accounted for as a long-term operating lease under the scope of ASC 842 due to its initial term that was greater than 12 months, is capitalized and is included in "Operating lease right-of-use-assets" on the unaudited consolidated balance sheet. The present value of the future commitment is included in "Operating lease liabilities" under "Current liabilities" on the unaudited consolidated balance sheet. See Note
3
for additional discussion of the Company's adoption of ASC 842.
The following table presents the operating lease liability related to H&P included in the unaudited consolidated balance sheet:
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2019
|
Operating lease liabilities
|
|
$
|
5,762
|
|
The following table presents the capital expenditures for oil and natural gas properties paid to H&P included in the unaudited consolidated statements of cash flows:
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
(in thousands)
|
|
2019
|
|
2018
|
Capital expenditures for oil and natural gas properties
|
|
$
|
6,293
|
|
|
$
|
—
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
Note
16
—
Subsidiary Guarantors
The Guarantors have fully and unconditionally guaranteed the January 2022 Notes, the March 2023 Notes and the Senior Secured Credit Facility, subject to the Releases. In accordance with practices accepted by the SEC, Laredo has prepared condensed consolidating financial statements to quantify the balance sheets, results of operations and cash flows of such subsidiaries as subsidiary Guarantors. The following unaudited condensed consolidating (i) balance sheets as of
June 30, 2019
and
December 31, 2018
, (ii) statements of operations for the three and six months ended
June 30, 2019
and
2018
and (iii) statements of cash flows for the
six
months ended
June 30, 2019
and
2018
present financial information for Laredo on a stand-alone basis (carrying any investment in subsidiaries under the equity method), financial information for the subsidiary Guarantors on a stand-alone basis and the consolidation and elimination entries necessary to arrive at the financial information for the Company on a condensed consolidated basis. Income taxes for LMS and for GCM are recorded on Laredo's balance sheets, statements of operations and statements of cash flows as they are disregarded entities for income tax purposes. Laredo and the Guarantors are not restricted from making intercompany distributions to each other.
Condensed consolidating balance sheet
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Accounts receivable, net
|
|
$
|
66,348
|
|
|
$
|
10,262
|
|
|
$
|
—
|
|
|
$
|
76,610
|
|
Other current assets
|
|
114,653
|
|
|
1,252
|
|
|
—
|
|
|
115,905
|
|
Oil and natural gas properties, net
|
|
2,217,151
|
|
|
9,041
|
|
|
(26,024
|
)
|
|
2,200,168
|
|
Midstream service assets, net
|
|
—
|
|
|
131,633
|
|
|
—
|
|
|
131,633
|
|
Other fixed assets, net
|
|
37,910
|
|
|
23
|
|
|
—
|
|
|
37,933
|
|
Investment in subsidiaries
|
|
139,071
|
|
|
—
|
|
|
(139,071
|
)
|
|
—
|
|
Other noncurrent assets, net
|
|
54,172
|
|
|
3,501
|
|
|
—
|
|
|
57,673
|
|
Total assets
|
|
$
|
2,629,305
|
|
|
$
|
155,712
|
|
|
$
|
(165,095
|
)
|
|
$
|
2,619,922
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
37,841
|
|
|
$
|
13,448
|
|
|
$
|
—
|
|
|
$
|
51,289
|
|
Other current liabilities
|
|
118,739
|
|
|
650
|
|
|
—
|
|
|
119,389
|
|
Long-term debt, net
|
|
1,029,526
|
|
|
—
|
|
|
—
|
|
|
1,029,526
|
|
Other noncurrent liabilities
|
|
72,854
|
|
|
2,543
|
|
|
—
|
|
|
75,397
|
|
Total stockholders' equity
|
|
1,370,345
|
|
|
139,071
|
|
|
(165,095
|
)
|
|
1,344,321
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,629,305
|
|
|
$
|
155,712
|
|
|
$
|
(165,095
|
)
|
|
$
|
2,619,922
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
Condensed consolidating balance sheet
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Accounts receivable, net
|
|
$
|
83,424
|
|
|
$
|
10,897
|
|
|
$
|
—
|
|
|
$
|
94,321
|
|
Other current assets
|
|
97,045
|
|
|
1,386
|
|
|
—
|
|
|
98,431
|
|
Oil and natural gas properties, net
|
|
2,043,009
|
|
|
9,113
|
|
|
(22,551
|
)
|
|
2,029,571
|
|
Midstream service assets, net
|
|
—
|
|
|
130,245
|
|
|
—
|
|
|
130,245
|
|
Other fixed assets, net
|
|
39,751
|
|
|
68
|
|
|
—
|
|
|
39,819
|
|
Investment in subsidiaries
|
|
128,380
|
|
|
—
|
|
|
(128,380
|
)
|
|
—
|
|
Other noncurrent assets, net
|
|
23,783
|
|
|
4,135
|
|
|
—
|
|
|
27,918
|
|
Total assets
|
|
$
|
2,415,392
|
|
|
$
|
155,844
|
|
|
$
|
(150,931
|
)
|
|
$
|
2,420,305
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
54,167
|
|
|
$
|
15,337
|
|
|
$
|
—
|
|
|
$
|
69,504
|
|
Other current liabilities
|
|
121,297
|
|
|
9,664
|
|
|
—
|
|
|
130,961
|
|
Long-term debt, net
|
|
983,636
|
|
|
—
|
|
|
—
|
|
|
983,636
|
|
Other noncurrent liabilities
|
|
59,511
|
|
|
2,463
|
|
|
—
|
|
|
61,974
|
|
Total stockholders' equity
|
|
1,196,781
|
|
|
128,380
|
|
|
(150,931
|
)
|
|
1,174,230
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,415,392
|
|
|
$
|
155,844
|
|
|
$
|
(150,931
|
)
|
|
$
|
2,420,305
|
|
Condensed consolidating statement of operations
For the three months ended
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Total revenues
|
|
$
|
184,037
|
|
|
$
|
49,251
|
|
|
$
|
(16,645
|
)
|
|
$
|
216,643
|
|
Total costs and expenses
|
|
127,310
|
|
|
46,175
|
|
|
(14,670
|
)
|
|
158,815
|
|
Operating income
|
|
56,727
|
|
|
3,076
|
|
|
(1,975
|
)
|
|
57,828
|
|
Interest expense
|
|
(15,765
|
)
|
|
—
|
|
|
—
|
|
|
(15,765
|
)
|
Other non-operating income, net
|
|
136,146
|
|
|
292
|
|
|
(3,368
|
)
|
|
133,070
|
|
Income before income taxes
|
|
177,108
|
|
|
3,368
|
|
|
(5,343
|
)
|
|
175,133
|
|
Total income tax expense
|
|
(1,751
|
)
|
|
—
|
|
|
—
|
|
|
(1,751
|
)
|
Net income
|
|
$
|
175,357
|
|
|
$
|
3,368
|
|
|
$
|
(5,343
|
)
|
|
$
|
173,382
|
|
Condensed consolidating statement of operations
For the three months ended
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Total revenues
|
|
$
|
208,624
|
|
|
$
|
163,021
|
|
|
$
|
(20,599
|
)
|
|
$
|
351,046
|
|
Total costs and expenses
|
|
115,602
|
|
|
158,433
|
|
|
(17,756
|
)
|
|
256,279
|
|
Operating income
|
|
93,022
|
|
|
4,588
|
|
|
(2,843
|
)
|
|
94,767
|
|
Interest expense
|
|
(14,424
|
)
|
|
—
|
|
|
—
|
|
|
(14,424
|
)
|
Other non-operating expense, net
|
|
(42,303
|
)
|
|
(1,025
|
)
|
|
(3,563
|
)
|
|
(46,891
|
)
|
Income before income taxes
|
|
36,295
|
|
|
3,563
|
|
|
(6,406
|
)
|
|
33,452
|
|
Total income tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
|
$
|
36,295
|
|
|
$
|
3,563
|
|
|
$
|
(6,406
|
)
|
|
$
|
33,452
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
Condensed consolidating statement of operations
For the six months ended
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Total revenues
|
|
$
|
357,558
|
|
|
$
|
103,583
|
|
|
$
|
(35,551
|
)
|
|
$
|
425,590
|
|
Total costs and expenses
|
|
247,045
|
|
|
98,398
|
|
|
(32,078
|
)
|
|
313,365
|
|
Operating income
|
|
110,513
|
|
|
5,185
|
|
|
(3,473
|
)
|
|
112,225
|
|
Interest expense
|
|
(31,312
|
)
|
|
—
|
|
|
—
|
|
|
(31,312
|
)
|
Other non-operating income, net
|
|
89,818
|
|
|
385
|
|
|
(5,570
|
)
|
|
84,633
|
|
Income before income taxes
|
|
169,019
|
|
|
5,570
|
|
|
(9,043
|
)
|
|
165,546
|
|
Total income tax expense
|
|
(1,655
|
)
|
|
—
|
|
|
—
|
|
|
(1,655
|
)
|
Net income
|
|
$
|
167,364
|
|
|
$
|
5,570
|
|
|
$
|
(9,043
|
)
|
|
$
|
163,891
|
|
Condensed consolidating statement of operations
For the six months ended
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Total revenues
|
|
$
|
406,449
|
|
|
$
|
239,321
|
|
|
$
|
(35,028
|
)
|
|
$
|
610,742
|
|
Total costs and expenses
|
|
221,290
|
|
|
232,997
|
|
|
(31,504
|
)
|
|
422,783
|
|
Operating income
|
|
185,159
|
|
|
6,324
|
|
|
(3,524
|
)
|
|
187,959
|
|
Interest expense
|
|
(27,942
|
)
|
|
—
|
|
|
—
|
|
|
(27,942
|
)
|
Other non-operating expense, net
|
|
(33,721
|
)
|
|
(1,281
|
)
|
|
(5,043
|
)
|
|
(40,045
|
)
|
Income before income taxes
|
|
123,496
|
|
|
5,043
|
|
|
(8,567
|
)
|
|
119,972
|
|
Total income tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net income
|
|
$
|
123,496
|
|
|
$
|
5,043
|
|
|
$
|
(8,567
|
)
|
|
$
|
119,972
|
|
Condensed consolidating statement of cash flows
For the
six
months ended
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Net cash provided by operating activities
|
|
$
|
266,522
|
|
|
$
|
317
|
|
|
$
|
(5,570
|
)
|
|
$
|
261,269
|
|
Capital expenditures and other, net
|
|
(298,227
|
)
|
|
(317
|
)
|
|
5,570
|
|
|
(292,974
|
)
|
Net cash provided by financing activities
|
|
42,354
|
|
|
—
|
|
|
—
|
|
|
42,354
|
|
Net increase in cash and cash equivalents
|
|
10,649
|
|
|
—
|
|
|
—
|
|
|
10,649
|
|
Cash and cash equivalents, beginning of period
|
|
45,150
|
|
|
1
|
|
|
—
|
|
|
45,151
|
|
Cash and cash equivalents, end of period
|
|
$
|
55,799
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
55,800
|
|
Condensed consolidating statement of cash flows
For the
six
months ended
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Laredo
|
|
Subsidiary
Guarantors
|
|
Intercompany
eliminations
|
|
Consolidated
company
|
Net cash provided by operating activities
|
|
$
|
254,991
|
|
|
$
|
12,653
|
|
|
$
|
(5,043
|
)
|
|
$
|
262,601
|
|
Capital expenditures and other, net
|
|
(346,462
|
)
|
|
(12,653
|
)
|
|
5,043
|
|
|
(354,072
|
)
|
Net cash provided by financing activities
|
|
15,916
|
|
|
—
|
|
|
—
|
|
|
15,916
|
|
Net decrease in cash and cash equivalents
|
|
(75,555
|
)
|
|
—
|
|
|
—
|
|
|
(75,555
|
)
|
Cash and cash equivalents, beginning of period
|
|
112,158
|
|
|
1
|
|
|
—
|
|
|
112,159
|
|
Cash and cash equivalents, end of period
|
|
$
|
36,603
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
36,604
|
|
Condensed notes to the consolidated financial statements
(Unaudited)
Note
17
—
Organizational restructuring
On April 2, 2019, the Company announced the retirement of
two
of its Senior Officers. Additionally, on April 8, 2019 (the "Effective Date"), the Company committed to a company-wide reorganization effort (the "Plan") that included a workforce reduction of approximately
20%
, which included an Executive Officer. The reduction in workforce was communicated to employees on the Effective Date and implemented immediately, subject to certain administrative procedures. The Company's board of directors approved the Plan in response to recent market conditions and to reduce costs and better position the Company for the future. In connection with the retirements on April 2, 2019 and with the Plan, the Company incurred
$10.4 million
of one-time charges during the three months ended June 30, 2019 comprising of compensation, taxes, professional fees, outplacement and insurance-related expenses. All stock-based compensation awards held by the two Senior Officers, the Executive Officer and the employees who were affected by the Plan were forfeited and the corresponding stock-based compensation totaling $
6.1 million
was reversed. See Note
6.c
for additional information on the associated forfeiture activity.
Note
18
—
Subsequent events
On July 31, 2019, the Company paid
$20.0 million
on the Senior Secured Credit Facility. As a result, the outstanding balance under the Senior Secured Credit Facility was
$215.0 million
as of July 31, 2019.