10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2015
 or
 o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                             to                            
Commission File Number: 001-35380
 Laredo Petroleum, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 (State or Other Jurisdiction of
Incorporation or Organization)
 
45-3007926
 (I.R.S. Employer
Identification No.)
15 W. Sixth Street, Suite 900
 
 
Tulsa, Oklahoma
 
74119
(Address of Principal Executive Offices)
 
(Zip code)
(918) 513-4570
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ý
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý 
Number of shares of registrant's common stock outstanding as of November 2, 2015: 213,804,059




TABLE OF CONTENTS 
 
 
Page
 
Part I
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Part II
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

ii


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (this "Quarterly Report") are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include statements, projections and estimates concerning our operations, performance, business strategy, oil and natural gas reserves, drilling program capital expenditures, liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, derivative activities and potential financing. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "potential," "could," "may," "will," "foresee," "plan," "goal," "should," "intend," "pursue," "target," "continue," "suggest" or the negative thereof or other variations thereof or other words that convey the uncertainty of future events or outcomes. Forward-looking statements are not guarantees of performance. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Among the factors that significantly impact our business and could impact our business in the future are:
the volatility of oil, natural gas liquids ("NGL") and natural gas prices;
revisions to our reserve estimates as a result of changes in commodity prices;
impacts to our financial statements as a result of impairment write-downs;
changes in domestic and global production, supply and demand for oil, NGL and natural gas;
the continuation of restrictions on the export of domestic oil production and its potential to cause weakness in domestic pricing;
our ability to discover, estimate, develop and replace oil, NGL and natural gas reserves;
uncertainties about the estimates of our oil, NGL and natural gas reserves;
the potentially insufficient refining capacity in the U.S. Gulf Coast to refine all of the light sweet crude oil being produced in the U.S., which, coupled with the export limitations noted above and a continuing increase in light sweet crude oil production, could result in widening price discounts to world oil prices and potential shut-in of production due to lack of sufficient markets;
the ongoing instability and uncertainty in the U.S. and international financial and consumer markets that could adversely affect the liquidity available to us and our customers and the demand for commodities, including oil, NGL and natural gas;
capital requirements for our operations and projects;
our ability to maintain the borrowing capacity under our Senior Secured Credit Facility (as defined below) or access other means of obtaining capital and liquidity;
our ability to generate sufficient cash to service our indebtedness, fund our capital requirements and generate future profits;
regulations that prohibit or restrict our ability to apply hydraulic fracturing to our oil and natural gas wells and to access and dispose of water used in these operations;
legislation or regulations that prohibit or restrict our ability to drill new allocation wells;
our ability to execute our strategies, including but not limited to our hedging strategies;
competition in the oil and natural gas industry;
changes in the regulatory environment and changes in international, legal, political, administrative or economic conditions;
drilling and operating risks, including risks related to hydraulic fracturing activities;
risks related to the geographic concentration of our assets;
the availability and costs of drilling and production equipment, labor and oil and natural gas processing and other services;
the availability of sufficient pipeline and transportation facilities and gathering and processing capacity;
our ability to comply with federal, state and local regulatory requirements;

iii


restrictions contained in our debt agreements, including our Senior Secured Credit Facility and the indentures governing our senior unsecured notes, as well as debt that could be incurred in the future, and;
our ability to recruit and retain the qualified personnel necessary to operate our business.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part II, Item 1A. Risk Factors" and elsewhere in this Quarterly Report, under "Part II, Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, under "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the "2014 Annual Report"), and those set forth from time to time in our other filings with the Securities and Exchange Commission (the "SEC"). These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report, or if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities law.

iv



PART I

Item 1.    Consolidated Financial Statements (Unaudited)

Laredo Petroleum, Inc.
Consolidated balance sheets
(in thousands, except share data)
(Unaudited)
 
 
September 30, 2015

December 31, 2014
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
76,403

 
$
29,321

Accounts receivable, net
 
100,675

 
126,929

Derivatives
 
184,157

 
194,601

Other current assets
 
14,207

 
14,402

Total current assets
 
375,442

 
365,253

Property and equipment:
 
 
 
 

Oil and natural gas properties, full cost method:
 
 
 
 

Evaluated properties
 
4,895,042

 
4,446,781

Unevaluated properties not being amortized
 
225,045

 
342,731

Midstream service assets
 
149,068

 
117,052

Other fixed assets
 
62,114

 
56,165

Total property and equipment
 
5,331,269

 
4,962,729

Less accumulated depletion, depreciation, amortization and impairment
 
(3,212,194
)
 
(1,608,647
)
Net property and equipment
 
2,119,075

 
3,354,082

Deferred income taxes
 
68,069

 

Derivatives
 
97,850

 
117,788

Investment in equity method investee
 
160,206

 
58,288

Other assets, net
 
11,853

 
15,290

Total assets
 
$
2,832,495

 
$
3,910,701

Liabilities and stockholders' equity
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable
 
$
23,647

 
$
39,008

Undistributed revenue and royalties
 
38,346

 
65,438

Accrued capital expenditures
 
49,283

 
148,241

Deferred income taxes
 
68,069

 
71,191

Derivatives
 

 
115

Other current liabilities
 
112,204

 
101,032

Total current liabilities
 
291,549

 
425,025

Long-term debt, net
 
1,415,566

 
1,779,447

Deferred income taxes
 

 
105,754

Asset retirement obligations
 
32,557

 
31,042

Other noncurrent liabilities
 
4,141

 
6,232

Total liabilities
 
1,743,813

 
2,347,500

Commitments and contingencies
 


 


Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of September 30, 2015 and December 31, 2014
 

 

Common stock, $0.01 par value, 450,000,000 shares authorized, and 213,839,893 and 143,686,491 issued, as of September 30, 2015 and December 31, 2014, respectively
 
2,138

 
1,437

Additional paid-in capital
 
2,079,240

 
1,309,171

(Accumulated deficit) retained earnings
 
(992,696
)
 
252,593

Total stockholders' equity
 
1,088,682

 
1,563,201

Total liabilities and stockholders' equity
 
$
2,832,495

 
$
3,910,701


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

1



Laredo Petroleum, Inc.
Consolidated statements of operations
(in thousands, except per share data)
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Revenues:






 
 

 
 

Oil, NGL and natural gas sales

$
104,607


$
199,490


$
348,279


$
555,576

Midstream service revenues

1,873


751


4,908


1,019

Sales of purchased oil
 
43,860

 

 
130,178

 

Total revenues

150,340


200,241


483,365


556,595

Costs and expenses:

 
 
 
 
 
 
 
Lease operating expenses

25,112


25,165


86,698


67,129

Production and ad valorem taxes
 
7,895

 
12,550

 
26,481

 
38,160

Midstream service expenses
 
1,092

 
1,225

 
4,263

 
3,596

Minimum volume commitments



675


5,235


1,779

Costs of purchased oil
 
46,961

 

 
132,578

 

General and administrative

22,913


27,078

 
67,976

 
84,284

Restructuring expenses
 

 

 
6,042

 

Accretion of asset retirement obligations

599


442


1,771


1,279

Depletion, depreciation and amortization

66,777


63,942


210,831


166,605

Impairment expense

906,850




1,397,327



Total costs and expenses

1,078,199


131,077


1,939,202


362,832

Operating income (loss)

(927,859
)

69,164


(1,455,837
)

193,763

Non-operating income (expense):




 
 
 
 
 
Gain (loss) on derivatives, net

142,580


92,790


141,836


(1,447
)
Income (loss) from equity method investee

2,104


(61
)

4,585


(86
)
Interest expense

(23,348
)

(30,549
)

(79,732
)

(90,192
)
Interest and other income

92


33


388


310

Loss on early redemption of debt
 

 

 
(31,537
)
 

Write-off of debt issuance costs




 

 
(124
)
Loss on disposal of assets, net

(94
)

(2,192
)

(1,937
)

(2,418
)
Non-operating income (expense), net

121,334


60,021


33,603


(93,957
)
Income (loss) before income taxes

(806,525
)

129,185


(1,422,234
)

99,806

Income tax (expense) benefit:












Deferred

(41,258
)

(45,778
)

176,945


(35,511
)
Total income tax (expense) benefit

(41,258
)

(45,778
)

176,945


(35,511
)
Net income (loss)

$
(847,783
)
 
$
83,407


$
(1,245,289
)

$
64,295

Net income (loss) per common share:







 




Basic

$
(4.01
)

$
0.59


$
(6.38
)
 
$
0.46

Diluted

$
(4.01
)
 
$
0.58


$
(6.38
)
 
$
0.45

Weighted-average common shares outstanding:







 

 
 

Basic

211,204


141,413


195,081

 
141,261

Diluted

211,204


143,813


195,081

 
143,583

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

2



Laredo Petroleum, Inc.
Consolidated statement of stockholders' equity
(in thousands)
(Unaudited) 
 
 
Common Stock
 
Additional
paid-in capital
 
Treasury Stock
(at cost)
 
Retained earnings (accumulated deficit)
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Total
Balance, December 31, 2014
 
143,686

 
$
1,437

 
$
1,309,171

 

 
$

 
$
252,593

 
$
1,563,201

Restricted stock awards
 
1,894

 
18

 
(18
)
 

 

 

 

Restricted stock forfeitures
 
(519
)
 
(5
)
 
5

 

 

 

 

Vested restricted stock exchanged for tax withholding
 

 

 

 
221

 
(2,749
)
 

 
(2,749
)
Retirement of treasury stock
 
(221
)
 
(2
)
 
(2,747
)
 
(221
)
 
2,749

 

 

Equity issuance, net of offering costs
 
69,000

 
690

 
753,473

 

 

 

 
754,163

Stock-based compensation
 

 

 
19,356

 

 

 

 
19,356

Net loss
 

 

 

 

 

 
(1,245,289
)
 
(1,245,289
)
Balance, September 30, 2015
 
213,840

 
$
2,138

 
$
2,079,240

 

 
$

 
$
(992,696
)
 
$
1,088,682

 
The accompanying notes are an integral part of this unaudited consolidated financial statement.

3



Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited)
 
 
Nine months ended September 30,
 
 
2015
 
2014
Cash flows from operating activities:

 


 

Net income (loss)

$
(1,245,289
)

$
64,295

Adjustments to reconcile net income (loss) to net cash provided by operating activities:






Deferred income tax (benefit) expense

(176,945
)

35,511

Depletion, depreciation and amortization

210,831


166,605

Impairment expense

1,397,327



Loss on early redemption of debt
 
31,537

 

Bad debt expense

107

 

Non-cash stock-based compensation, net of amounts capitalized

17,933


16,919

Mark-to-market on derivatives:






(Gain) loss on derivatives, net

(141,836
)

1,447

Cash settlements received (paid) for matured derivatives, net

175,879


(1,320
)
Cash settlements received for early terminations of derivatives, net



76,660

Change in net present value of deferred premiums paid for derivatives

141


170

Cash premiums paid for derivatives

(3,918
)

(5,599
)
Amortization of debt issuance costs

3,612


3,823

Cash settlement of performance unit awards
 
(2,738
)
 

Other, net

(876
)

4,137

Decrease (increase) in accounts receivable
 
26,147

 
(26,449
)
Increase in other assets
 
(1,234
)
 
(8,656
)
(Decrease) increase in accounts payable
 
(15,361
)
 
39,456

(Decrease) increase in undistributed revenues and royalties
 
(27,092
)
 
14,105

Decrease in other accrued liabilities
 
(25,676
)
 
(7,908
)
Increase in other noncurrent liabilities
 
221

 
2,373

Increase in fair value of performance unit awards
 
2,734

 
767

Net cash provided by operating activities
 
225,504

 
376,336

Cash flows from investing activities:






Capital expenditures:






Acquisition of oil and natural gas properties


 
(6,493
)
Acquisition of mineral interests



(7,305
)
Oil and natural gas properties

(490,351
)

(925,121
)
Midstream service assets

(35,237
)

(45,263
)
Other fixed assets

(8,539
)

(13,612
)
Investment in equity method investee
 
(63,011
)
 
(37,581
)
Proceeds from dispositions of capital assets, net of costs

65,261


1,627

Net cash used in investing activities

(531,877
)

(1,033,748
)
Cash flows from financing activities:






Borrowings on Senior Secured Credit Facility

310,000


75,000

Payments on Senior Secured Credit Facility

(475,000
)


Issuance of March 2023 Notes
 
350,000



Issuance of January 2022 Notes



450,000

Redemption of January 2019 Notes
 
(576,200
)
 

Proceeds from issuance of common stock, net of offering costs
 
754,163

 

Purchase of treasury stock

(2,749
)

(4,075
)
Proceeds from exercise of employee stock options



1,885

Payments for debt issuance costs

(6,759
)

(7,791
)
Net cash provided by financing activities

353,455


515,019

Net increase (decrease) in cash and cash equivalents

47,082


(142,393
)
Cash and cash equivalents, beginning of period

29,321


198,153

Cash and cash equivalents, end of period

$
76,403


$
55,760

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

4

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

Note 1—Organization
Laredo Petroleum, Inc. ("Laredo"), together with its subsidiaries, Laredo Midstream Services, LLC ("LMS") and Garden City Minerals, LLC ("GCM"), is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties primarily in the Permian Basin in West Texas. LMS and GCM (together, the "Guarantors") guarantee all of Laredo's debt instruments.
In these notes, the "Company," (i) when used in the present tense, prospectively or from October 24, 2014, refers to Laredo, LMS and GCM collectively, unless the context indicates otherwise or (ii) when used for historical periods from December 31, 2013 to October 23, 2014, refers to Laredo and LMS 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.
The Company operates in two business segments, which are (i) exploration and production and (ii) midstream and marketing. The exploration and production segment is engaged in the acquisition, exploration and development of oil and natural gas properties primarily in the Permian Basin in West Texas. The midstream and marketing segment provides Laredo's exploration and production segment and certain third parties with (i) any products and services that need to be delivered by midstream infrastructure, including oil and natural gas gathering services as well as rig fuel, natural gas lift and water in Laredo's primary drilling corridors and (ii) takeaway optionality in the field and firm service commitments to maximize Laredo's oil, NGL and natural gas revenues.
Note 2—Basis of presentation and significant accounting policies
a.    Basis of presentation
The accompanying 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 accompanying 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 Company uses the equity method of accounting to record its net interests when the Company holds 20% to 50% of the voting rights and/or has the ability to exercise significant influence but does not control the entity. Under the equity method, the Company's proportionate share of the investee's net income (loss) is included in the unaudited consolidated statements of operations. See Note 14 for additional discussion of the Company's equity method investment.
The accompanying 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, 2014 is derived from audited consolidated financial statements. See Notes 2.g, 5.g and 18 for discussion regarding the Company's early-adoption of new accounting guidance regarding the presentation of debt issuance costs. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all necessary adjustments to present fairly the Company's financial position as of September 30, 2015, results of operations for the three and nine months ended September 30, 2015 and 2014 and cash flows for the nine months ended September 30, 2015 and 2014.
Certain disclosures have been condensed or omitted from these unaudited consolidated financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2014 Annual Report.
b.    Use of estimates in the preparation of interim unaudited consolidated financial statements
The preparation of the accompanying 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. The interim results reflected in the unaudited consolidated financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year.
Significant estimates include, but are not limited to, (i) estimates of the Company's reserves of oil, NGL and natural gas, (ii) future cash flows from oil and natural gas properties, (iii) depletion, depreciation and amortization, (iv) asset retirement obligations, (v) stock-based compensation, (vi) deferred income taxes, (vii) fair value of assets acquired and liabilities assumed in an acquisition and (viii) fair values of commodity derivatives, commodity deferred premiums and performance unit awards.

5

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

As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management's best judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets and volatile equity and energy markets have combined to increase the uncertainty inherent in such estimates and assumptions. Management believes its estimates and assumptions to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual values and results could differ from these estimates. Any changes in estimates resulting from future changes in the economic environment will be reflected in the financial statements in future periods.
c.    Reclassifications
Certain amounts in the accompanying unaudited consolidated financial statements have been reclassified to conform to the 2015 presentation. These reclassifications had no impact to previously reported net income or loss, stockholders' equity or cash flows.
d.    Accounts receivable
The Company sells oil, NGL and natural gas to various customers and participates with other parties in the development and operation of oil and natural gas properties. The Company's accounts receivable are generally unsecured. Accounts receivable for joint interest billings are recorded as amounts billed to customers less an allowance for doubtful accounts.
Amounts are considered past due after 30 days. The Company determines joint interest operations accounts receivable allowances based on management's assessment of the creditworthiness of the joint interest owners. Additionally, as the operator of the majority of its wells, the Company has the ability to realize the receivables through netting of anticipated future production revenues. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivables aging and existing industry and economic data. The Company reviews its allowance for doubtful accounts quarterly. Past due amounts greater than 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is remote.
    
Accounts receivable consist of the following components for the periods presented:
(in thousands)
 
September 30, 2015
 
December 31, 2014
Oil, NGL and natural gas sales
 
$
34,512

 
$
57,070

Joint operations, net(1)
 
25,553

 
33,808

Matured derivatives
 
21,729

 
16,098

Purchased oil and other product sales
 
14,436

 
18,917

Other
 
4,445

 
1,036

Total
 
$
100,675

 
$
126,929

______________________________________________________________________________
(1)
Accounts receivable for joint operations are presented net of an allowance for doubtful accounts of $0.2 million and $0.8 million as of September 30, 2015 and December 31, 2014, respectively.
e.    Derivatives
The Company uses derivatives to reduce exposure to fluctuations in the prices of oil and natural gas. By removing a significant 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 due to fluctuations in commodity prices. These transactions are in the form of collars, swaps, puts and basis swaps.
Derivatives are recorded at fair value and are presented net on the unaudited consolidated balance sheets as assets or liabilities. The Company nets the fair value of derivatives by counterparty where the right of offset exists. The Company determines the fair value of its derivatives by utilizing pricing models for substantially similar instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties (see Notes 8 and 9). 

6

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

The Company's derivatives were not designated as hedges for accounting purposes for any of the periods presented. Accordingly, the changes in fair value are recognized in the unaudited consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities (see Note 8).
f.    Property and equipment
The following table sets forth the Company's property and equipment for the periods presented:
(in thousands)
 
September 30, 2015
 
December 31, 2014
Evaluated oil and natural gas properties
 
$
4,895,042

 
$
4,446,781

Less accumulated depletion and impairment
 
(3,180,822
)
 
(1,586,237
)
Evaluated oil and natural gas properties, net
 
1,714,220

 
2,860,544

 
 
 
 
 
Unevaluated properties not being amortized
 
225,045

 
342,731

 
 
 
 
 
Midstream service assets
 
149,068

 
117,052

Less accumulated depreciation
 
(14,057
)
 
(8,590
)
Midstream service assets, net
 
135,011

 
108,462

 
 
 
 
 
Depreciable other fixed assets
 
47,220

 
42,933

Less accumulated depreciation and amortization
 
(17,315
)
 
(13,820
)
Depreciable other fixed assets, net
 
29,905

 
29,113

 
 
 
 
 
Land
 
14,894

 
13,232

 
 
 
 
 
Total property and equipment, net
 
$
2,119,075

 
$
3,354,082

For the three months ended September 30, 2015 and 2014, depletion expense was $15.32 per barrel of oil equivalent ("BOE") sold and $20.25 per BOE sold, respectively. For the nine months ended September 30, 2015 and 2014, depletion expense was $15.87 per BOE sold and $19.83 per BOE sold, respectively.
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 finding oil and natural gas are capitalized and amortized 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 amortized 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 Company excludes the costs directly associated with 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 on 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 property are assessed on a quarterly basis for possible impairment or reduction in value. 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 cash flows from proved oil and natural gas properties discounted at 10%. Full cost companies are required 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 ("SEC Prices"), unless prices were defined by contractual arrangements, to calculate the discounted future revenues. In the event the unamortized cost of evaluated

7

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

oil and natural gas properties being amortized exceeds the full cost ceiling, as defined by the SEC, the excess is charged to expense in the period such excess occurs. Once incurred, a write-down of oil and natural gas properties is not reversible.
The full cost ceiling value of the Company's reserves was calculated based on SEC Prices as of September 30, 2015, which do not include derivative transactions, of (i) $55.73 per barrel for oil, (ii) $21.87 per barrel for NGL and (iii) $2.89 per MMBtu for natural gas, adjusted by area for energy content, transportation fees and regional price differentials. Using these SEC Prices, the Company's net book value of evaluated oil and natural gas properties exceeded the full cost ceiling amount as of September 30, 2015. As a result, the Company recorded a third-quarter non-cash full cost ceiling impairment of $906.4 million.
As of June 30, 2015, the full cost ceiling value of the Company's reserves was calculated based on SEC Prices as of June 30, 2015, which did not include derivative transactions, of (i) $68.17 per barrel for oil, (ii) $26.73 per barrel for NGL and (iii) $3.22 per MMBtu for natural gas, adjusted by area for energy content, transportation fees, and regional price differentials. Using these SEC Prices, the Company's net book value of evaluated oil and natural gas properties exceeded the full cost ceiling amount as of June 30, 2015. As a result, the Company recorded a second-quarter non-cash full cost ceiling impairment of $488.0 million.
Full cost ceiling impairment expense for the three and nine months ended September 30, 2015 in the unaudited consolidated statements of operations was $906.4 million and $1.39 billion, respectively. The Company's net book value of evaluated oil and natural gas properties did not exceed the full cost ceiling amount at March 31, 2014, June 30, 2014 or September 30, 2014. The amounts are included in "Impairment expense" in the unaudited consolidated statements of operations and in "Other operating costs and expenses" for the Company's exploration and production segment presented in Note 16.
g.    Debt issuance costs
Debt issuance fees, which are recorded at cost, net of amortization, are amortized over the life of the respective debt agreements utilizing the effective interest and straight-line methods. The Company capitalized $6.8 million of debt issuance costs during the nine months ended September 30, 2015 mainly as a result of the issuance of the March 2023 Notes (as defined below). The Company capitalized $7.8 million of debt issuance costs during the nine months ended September 30, 2014 mainly as a result of the issuance of the January 2022 Notes (as defined below). The Company had total debt issuance costs of $25.0 million and $28.5 million, net of accumulated amortization of $15.9 million and $19.4 million, as of September 30, 2015 and December 31, 2014, respectively.
The Company wrote-off approximately $6.6 million of debt issuance costs during the nine months ended September 30, 2015 as a result of the early redemption of the January 2019 Notes (as defined below), which are included in the unaudited consolidated statements of operations in the "Loss on early redemption of debt" line item. During the nine months ended September 30, 2014, the Company wrote-off approximately $0.1 million of debt issuance costs as a result of changes in the borrowing base of the Senior Secured Credit Facility (as defined below) due to the issuance of the January 2022 Notes, which are included in the unaudited consolidated statements of operations in the "Write-off of debt issuance costs" line item. See Notes 5.a, 5.b, 5.d and 5.e for definition of and information regarding the March 2023 Notes, January 2022 Notes, January 2019 Notes and the Senior Secured Credit Facility, respectively.
As of September 30, 2015, the Company has early-adopted new guidance that seeks to simplify the presentation of debt issuance costs and has applied its provisions retrospectively. The adoption of this standard resulted in the reclassification of $19.4 million and $21.8 million of unamortized debt issuance costs related to the Company's senior unsecured notes from "Other assets, net" to "Long-term debt, net" within its consolidated balance sheets as of September 30, 2015 and December 31, 2014, respectively. Other than this reclassification, the adoption of this standard did not have an impact on the Company's unaudited consolidated financial statements. Debt issuance costs related to the Senior Secured Credit Facility remain recorded in "Other assets, net" on the Company's unaudited consolidated balance sheets. See Notes 5.g and 18 for additional discussion of debt issuance costs.

8

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

Future amortization expense of debt issuance costs as of September 30, 2015 is as follows:
(in thousands)
 
 
Remaining 2015

$
1,116

2016

4,503

2017

4,575

2018

4,349

2019

2,915

Thereafter

7,589

Total

$
25,047

h.    Other current liabilities
Other current liabilities consist of the following components for the periods presented:
(in thousands)
 
September 30, 2015
 
December 31, 2014
Capital contribution payable to equity method investee(1)
 
$
34,322

 
$

Accrued interest payable
 
21,635

 
37,689

Costs of purchased oil payable
 
15,047

 
20,114

Lease operating expense payable
 
14,117

 
11,963

Other accrued liabilities
 
27,083

 
31,266

Total other current liabilities
 
$
112,204

 
$
101,032

______________________________________________________________________________
(1)
See Notes 14, 15 and 19.a for additional discussion regarding our equity method investee.
i.    Asset retirement obligations
Asset retirement obligations associated with the retirement of tangible long-lived assets are recognized as a liability in the period in which they are incurred and become determinable. The associated asset retirement costs are part of the carrying amount of the long-lived asset. Subsequently, the asset retirement cost included in the carrying amount of the related long-lived asset is charged to expense through depletion, or for midstream asset retirement cost through depreciation, of the associated asset. Changes in the liability due to the passage of time are recognized as an increase in the carrying amount of the liability and as corresponding accretion expense.
The fair value of additions to the asset retirement obligation liability is measured using valuation techniques consistent with the income approach, which converts future cash flows into a single discounted amount. Significant inputs to the valuation include: (i) estimated plug and abandonment cost per well based on Company experience, (ii) estimated remaining life per well based on the reserve life per well, (iii) estimated removal and/or remediation costs for midstream assets, (iv) estimated remaining life of midstream assets, (v) future inflation factors and (vi) the Company's average credit adjusted risk-free rate. Inherent in the fair value calculation of asset retirement obligations are numerous assumptions and judgments including, in addition to those noted above, the ultimate settlement of these amounts, the ultimate timing of such settlement and changes in legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing asset retirement obligation liability, a corresponding adjustment will be made to the asset balance.
The Company is obligated by contractual and regulatory requirements to remove certain pipeline and gas gathering assets and perform other remediation of the sites where such pipeline and gas gathering assets are located upon the retirement of those assets. However, the fair value of the asset retirement obligation cannot currently be reasonably estimated because the settlement dates are indeterminate. The Company will record an asset retirement obligation for pipeline and gas gathering assets in the periods in which settlement dates become reasonably determinable.
The following reconciles the Company's asset retirement obligation liability for the periods presented:
(in thousands)
 
Nine months ended September 30, 2015
 
Year ended December 31, 2014
Liability at beginning of period
 
$
32,198

 
$
21,743

Liabilities added due to acquisitions, drilling, midstream service asset construction and other
 
1,675

 
6,370

Accretion expense
 
1,771

 
1,787

Liabilities settled upon plugging and abandonment
 
(122
)
 
(450
)
Liabilities removed due to sale of property
 
(2,005
)
 

Revision of estimates
 

 
2,748

Liability at end of period
 
$
33,517

 
$
32,198

j.    Treasury stock
Laredo's employees may elect to have the Company withhold shares of stock to satisfy their tax withholding obligations that arise upon the lapse of restrictions on their stock awards. Such treasury stock is recorded at cost and retired upon acquisition.


9

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

k.    Fair value measurements
The carrying amounts reported in the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, undistributed revenue and royalties, accrued capital expenditures and other accrued assets and liabilities approximate their fair values. See Note 5.f for fair value disclosures related to the Company's debt obligations. The Company carries its derivatives at fair value. See Notes 8 and 9 for details regarding the fair value of the Company's derivatives.
l.    Compensation awards
Stock-based compensation expense, net of amounts capitalized, is included in "General and administrative" in the unaudited consolidated statements of operations over the awards' vesting periods and is based on the awards' grant date fair value. The Company utilizes the closing stock price on the grant date, less an expected forfeiture rate, to determine the fair value of service vesting restricted stock awards and a Black-Scholes pricing model to determine the fair values of service vesting restricted stock option awards. The Company utilizes a Monte Carlo simulation prepared by an independent third party to determine the fair values of the performance share awards and performance unit awards. The Company capitalizes a portion of stock-based compensation for employees who are directly involved in the acquisition, exploration and development of its oil and gas properties into the full cost pool. Capitalized stock-based compensation is included as an addition to "Oil and natural gas properties" in the unaudited consolidated balance sheets. See Note 6 for further discussion regarding the restricted stock awards, restricted stock option awards, performance share awards and performance unit awards.
m. Long-lived assets, materials and supplies and line-fill
Impairment losses are recorded on property and equipment used in operations and other long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Impairment is measured based on the excess of the carrying amount over the fair value of the asset.
Materials and supplies are used in developing oil and natural gas properties, are carried at the lower of cost or market ("LCM") and are included in "Other current assets" and "Other assets, net" on the unaudited consolidated balance sheets. The market price for materials and supplies is determined utilizing the Company's recent prices paid to acquire materials. During the nine months ended September 30, 2015, the Company reduced materials and supplies by $2.3 million in order to reflect the balance at LCM. The adjustment is included in "Impairment expense" in the unaudited consolidated statements of operations and in "Other operating costs and expenses" for the Company's exploration and production segment presented in Note 16. The Company determined an LCM adjustment was not necessary for materials and supplies during the three months ended September 30, 2015, or during the three and nine months ended September 30, 2014.
The minimum volume of product in a pipeline system that enables the system to operate is known as line-fill, and is generally not available to be withdrawn from the pipeline system until the expiration of the transportation contract. Beginning in the fourth quarter of 2014, the Company owns oil line-fill in third-party pipelines, which is accounted for at LCM with cost determined using the weighted-average cost method, and is included in "Other assets, net" on the unaudited consolidated balance sheets. The LCM adjustment is determined utilizing a quoted market price adjusted for regional price differentials (Level 2). For the three and nine months ended September 30, 2015, the Company recorded LCM adjustments of $0.4 million

10

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

and $0.5 million, respectively, related to its line-fill, which is included in "Impairment expense" in the unaudited consolidated statements of operations and as "Other operating costs and expenses" for the Company's midstream and marketing segment presented in Note 16.
n.    Environmental
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed in the period incurred. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment or remediation is probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed and readily determinable. Management believes no materially significant liabilities of this nature existed as of September 30, 2015 or December 31, 2014.
o.    Non-cash investing and supplemental cash flow information
The following presents the non-cash investing and supplemental cash flow information for the periods presented:
 
 
Nine months ended September 30,
(in thousands)
 
2015
 
2014
Non-cash investing information:
 
 
 
 
Change in accrued capital expenditures
 
$
(98,958
)
 
$
23,945

Change in accrued capital contribution to equity method investee(1)
 
$
34,322

 
$
(2,598
)
Capitalized asset retirement cost
 
$
1,675

 
$
4,767

Supplemental cash flow information:
 
 
 
 
Capitalized interest
 
$
227

 
$
51

______________________________________________________________________________
(1)
See Notes 14, 15 and 19.a for additional discussion regarding our equity method investee.
Note 3—Equity offering
On March 5, 2015, the Company completed the sale of 69,000,000 shares of Laredo's common stock at a price to the public of $11.05 per share (the "March 2015 Equity Offering"). The Company received net proceeds of $754.2 million, after underwriting discounts, commissions and offering expenses. Entities affiliated with Warburg Pincus LLC ("Warburg Pincus") purchased 29,800,000 shares in the March 2015 Equity Offering, following which Warburg Pincus owned 41.0% of Laredo's common stock. There were no comparative offerings of the Company's stock during the three or nine months ended September 30, 2014.
Note 4—Acquisitions
a. Divestiture of non-strategic assets
On September 15, 2015, the Company completed the sale of non-strategic and primarily non-operated properties and associated production totaling 6,060 net acres and 123 producing properties in the Midland Basin to a third-party buyer for a sales price of $65.5 million. After transaction costs and adjustments at closing reflecting an economic effective date of July 1, 2015, the net proceeds were $65.2 million, net of working capital adjustments and subject to post-closing cost adjustments. The purchase price, excluding post-closing adjustments, was allocated to oil and natural gas properties pursuant to the rules governing full cost accounting.
Effective at closing, the operations and cash flows of these properties were eliminated from the ongoing operations of the Company and the Company has no continuing involvement in the properties. This divestiture does not represent a strategic shift and will not have a major effect on the Company's operations or financial results.
    

11

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

The following table presents revenues and expenses of the oil and natural gas properties sold included in the accompanying unaudited consolidated statements of operations for the periods presented:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Oil, NGL and natural gas sales
 
$
1,371

 
$
5,644

 
$
5,419

 
$
15,574

Expenses(1)
 
1,781

 
3,042

 
6,565

 
7,789

_____________________________________________________________________________
(1)
Expenses include (i) lease operating expense, (ii) production and ad valorem tax expense, (iii) accretion expense and (iv) depletion.
b.    2014 acquisition of leasehold interests
On August 28, 2014, the Company completed a material acquisition of leasehold interests totaling 8,156 net acres in the Midland Basin, primarily within the Company's core development area, for $192.5 million. The acquisition was accounted for as an acquisition of assets.
c.    2014 acquisition of mineral interests
On February 25, 2014, the Company completed the acquisition of the mineral interests underlying 278 net acres in Glasscock County, Texas in the Midland Basin for $7.3 million. These mineral interests entitle the Company to receive royalty payments on all production from this acreage with no additional future capital or operating expenses required. As such, the purchase was accounted for as an acquisition of assets.
d.    2014 acquisitions of evaluated and unevaluated oil and natural gas properties
The Company accounts for acquisitions of evaluated and unevaluated oil and natural gas properties under the acquisition method of accounting. Accordingly, the Company conducts assessments of net assets acquired and recognizes amounts for identifiable assets acquired and liabilities assumed at the estimated acquisition date fair values, while transaction and integration costs associated with the acquisitions are expensed as incurred.
The Company makes various assumptions in estimating the fair values of assets acquired and liabilities assumed. The most significant assumptions relate to the estimated fair values of evaluated and unevaluated oil and natural gas properties. The fair values of these properties are measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices and (iv) a market-based weighted-average cost of capital rate. The market-based weighted-average cost of capital rate is subject to additional project-specific risk factors. To compensate for the inherent risk of estimating the value of the unevaluated properties, the discounted future net revenues of probable and possible reserves are reduced by additional risk-weighting factors.
On June 11, 2014, the Company completed the acquisition of evaluated and unevaluated oil and natural gas properties, totaling 460 net acres, located in Reagan County, Texas for $4.7 million, net of closing adjustments. On June 23, 2014, the Company completed the acquisition of evaluated and unevaluated oil and natural gas properties, totaling 24 net acres, located in Glasscock County, Texas for $1.8 million. The results of operations prior to June 2014 do not include results from these acquisitions.
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"), and entered into an Indenture (the "Base Indenture"), as supplemented by the Supplemental Indenture (the "Supplemental Indenture" and, together with the Base Indenture, the "Indenture"), among Laredo, LMS and GCM, as guarantors, and Wells Fargo Bank, National Association, as trustee. The March 2023 Notes will mature on March 15, 2023 with interest accruing at a rate of 6 1/4% per annum and payable semi-annually in cash in arrears on March 15 and September 15 of each year, commencing September 15, 2015. The March 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain automatic customary releases, including the sale, disposition, or transfer of all of the capital stock or of all or substantially all of the assets of a subsidiary guarantor to one or more persons that are not the Company or a restricted subsidiary, exercise of legal defeasance or covenant defeasance options or satisfaction and discharge of

12

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

the Indenture, designation of a subsidiary guarantor as a non-guarantor restricted subsidiary or as an unrestricted subsidiary in accordance with the Indenture, release from guarantee under the Senior Secured Credit Facility (as defined below), or liquidation or dissolution (collectively, the "Releases").
The March 2023 Notes were offered and sold pursuant to a prospectus supplement dated March 4, 2015 and the base prospectus dated March 22, 2013, relating to the Company's effective shelf registration statement on Form S-3 (File No. 333-187479). The Company received net proceeds of $343.6 million from the offering, after deducting the underwriters' discount and the estimated outstanding offering expenses. In April 2015, the Company used the proceeds of the offering to fund a portion of the Company's redemption of the January 2019 Notes (as defined below). See Note 5.d for additional discussion of this early redemption.
The Company may redeem, at its option, all or part of the March 2023 Notes at any time on or after March 15, 2018, at the applicable redemption price plus accrued and unpaid interest to, but not including, the date of redemption. Further, before March 15, 2018, the Company may on one or more occasions redeem up to 35% of the aggregate principal amount of the March 2023 Notes in an amount not exceeding the net proceeds from one or more private or public equity offerings at a redemption price of 106.25% of the principal amount of the March 2023 Notes, plus accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the March 2023 Notes remains outstanding immediately after such redemption and the redemption occurs within 180 days of the closing date of each such equity offering. If a change of control occurs prior to March 15, 2016, the Company may redeem all, but not less than all, of the March 2023 Notes at a redemption price equal to 110% of the principal amount of the March 2023 Notes plus any 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.
c.    May 2022 Notes
On April 27, 2012, the Company completed an offering of $500.0 million in aggregate principal amount of 7 3/8% senior unsecured notes due 2022 (the "May 2022 Notes"). The May 2022 Notes will mature on May 1, 2022 and bear an interest rate of 7 3/8% per annum, payable semi-annually, in cash in arrears on May 1 and November 1 of each year, commencing November 1, 2012. The May 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.
d.    January 2019 Notes
On January 20, 2011, the Company completed an offering of $350.0 million 9 1/2% senior unsecured notes due 2019 (the "January Notes") and on October 19, 2011, the Company completed an offering of an additional $200.0 million 9 1/2% senior unsecured notes due 2019 (the "October Notes" and together with the January Notes, the "January 2019 Notes"). The January 2019 Notes were due to mature on February 15, 2019 and bore an interest rate of 9 1/2% per annum, payable semi-annually, in cash in arrears on February 15 and August 15 of each year. The January 2019 Notes were 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.
On April 6, 2015 (the "Redemption Date"), the entire $550.0 million outstanding principal amount of the January 2019 Notes was redeemed at a redemption price of 104.750% of the principal amount of the January 2019 Notes, plus accrued and unpaid interest up to the Redemption Date. The Company recognized a loss on extinguishment of $31.5 million related to the difference between the redemption price and the net carrying amount of the extinguished January 2019 Notes.
e.    Senior Secured Credit Facility
As of September 30, 2015, the Fourth Amended and Restated Credit Agreement (as amended, the "Senior Secured Credit Facility"), which matures on November 4, 2018, had a maximum credit amount of $2.0 billion, a borrowing base of $1.25 billion and an aggregate elected commitment of $1.0 billion with $135.0 million outstanding and was subject to an interest rate of 1.7500%. It contains both financial and non-financial covenants, all of which the Company was in compliance with as of September 30, 2015. Laredo is required to pay an annual commitment fee on the unused portion of the financial institutions' commitment of 0.375% to 0.5%, based on the ratio of outstanding revolving credit to the total commitment under

13

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

the Senior Secured Credit Facility. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or $20.0 million. No letters of credit were outstanding as of September 30, 2015 or 2014.
See Note 19.b for information regarding changes, subsequent to September 30, 2015, in the Senior Secured Credit Facility's borrowing base.
f.    Fair value of debt
The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amount and fair values of the Company's debt for the periods presented:
 
 
September 30, 2015
 
December 31, 2014
(in thousands)
 
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
January 2019 Notes(1)
 
$

 
$

 
$
551,295

 
$
550,000

January 2022 Notes
 
450,000

 
405,000

 
450,000

 
396,014

May 2022 Notes
 
500,000

 
487,500

 
500,000

 
467,529

March 2023 Notes
 
350,000

 
318,500

 

 

Senior Secured Credit Facility
 
135,000

 
134,981

 
300,000

 
300,279

Total value of debt
 
$
1,435,000

 
$
1,345,981

 
$
1,801,295

 
$
1,713,822

______________________________________________________________________________
(1)
The carrying value of the January 2019 Notes includes the October Notes unamortized bond premium of $1.3 million as of December 31, 2014.
The fair values of the debt outstanding on the January 2019 Notes, January 2022 Notes, May 2022 Notes and the March 2023 Notes were determined using the September 30, 2015 and December 31, 2014 quoted market price (Level 1) for each respective instrument. The fair values of the outstanding debt on the Senior Secured Credit Facility as of September 30, 2015 and December 31, 2014 were estimated utilizing pricing models for similar instruments (Level 2). See Note 9 for information about fair value hierarchy levels.
g.    Debt issuance costs
The following tables summarize the net presentation of the Company's long-term debt and debt issuance cost on the unaudited consolidated balance sheets for the periods presented:
 
 
September 30, 2015
 
December 31, 2014
(in thousands)
 
Carrying
value
 
Debt issuance costs, net
 
Long-term debt, net
 
Carrying
value
 
Debt issuance costs, net
 
Long-term debt, net
January 2019 Notes
 
$

 
$

 
$

 
$
551,295

 
$
(7,031
)
 
$
544,264

January 2022 Notes
 
450,000

 
(6,183
)
 
443,817

 
450,000

 
(6,916
)
 
443,084

May 2022 Notes
 
500,000

 
(7,281
)
 
492,719

 
500,000

 
(7,901
)
 
492,099

March 2023 Notes
 
350,000

 
(5,970
)
 
344,030

 

 

 

Senior Secured Credit Facility(1)
 
135,000

 

 
135,000

 
300,000

 

 
300,000

Total
 
$
1,435,000

 
$
(19,434
)
 
$
1,415,566

 
$
1,801,295

 
$
(21,848
)
 
$
1,779,447

______________________________________________________________________________
(1)
Debt issuance costs related to our Senior Secured Credit Facility are recorded in "Other assets, net" on the unaudited consolidated balance sheets.
Note 6—Employee compensation
The Company has a Long-Term Incentive Plan (the "LTIP"), which provides for the granting of incentive awards in the form of restricted stock awards, restricted stock option awards, performance share awards, performance unit awards and other awards. The LTIP provides for the issuance of 10.0 million 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

14

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

accounted for as equity instruments and its performance unit awards are accounted for as liability awards. Stock-based compensation is included in "General and administrative" in 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 and development of oil and natural gas properties into the full cost pool. Capitalized stock-based compensation is included as an addition to "Oil and natural gas properties" in the unaudited consolidated balance sheets.
a.    Restricted stock awards
All restricted stock awards are treated as issued and outstanding in the accompanying unaudited consolidated financial statements. Per the award agreement terms, if an employee terminates employment prior to the restriction lapse date, for reasons other than death or disability, the awarded shares are forfeited and canceled and are no longer considered issued and outstanding. If the employee's 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 officers and employees vest in a variety of vesting schedules including (i) 20% at the grant date and then 20% annually thereafter, (ii) 33%, 33% and 34% per year beginning on the first anniversary date of the grant, (iii) 50% in year two and 50% in year three, (iv) fully on the first anniversary of the grant date and (v) fully on the third anniversary of the grant date. Restricted stock awards granted to non-employee directors vest fully on the first anniversary of the grant date.
The following table reflects the outstanding restricted stock awards for the nine months ended September 30, 2015:
(in thousands, except for weighted-average grant date fair values)
 
Restricted
stock
awards
 
Weighted-average
grant date
fair value (per award)
Outstanding as of December 31, 2014
 
2,205

 
$
22.63

Granted
 
1,894

 
$
11.98

Forfeited
 
(519
)
 
$
20.90

Vested(1)
 
(984
)
 
$
22.39

Outstanding as of September 30, 2015
 
2,596

 
$
15.32

______________________________________________________________________________
(1)
The vesting of certain restricted stock awards could result in federal and state income tax expense or benefit related to the difference between the market price of the common stock at the date of vesting and the date of grant. See Note 7 for additional discussion regarding the tax impact of vested restricted stock awards.
The Company utilizes the closing stock price on the grant date to determine the fair value of service vesting restricted stock awards. As of September 30, 2015, unrecognized stock-based compensation related to the restricted stock awards expected to vest was $26.4 million. Such cost is expected to be recognized over a weighted-average period of 1.90 years.
b.    Restricted stock option awards
Restricted stock option awards granted under the LTIP vest and are exercisable in four equal installments on each of the four anniversaries of the grant date. The following table reflects the stock option award activity for the nine months ended September 30, 2015:
(in thousands, except for weighted-average exercise price and contractual term)
 
Restricted
stock option
awards
 
Weighted-average
exercise price
(per option)
 
Weighted-average
remaining contractual term
(years)
Outstanding as of December 31, 2014
 
1,367

 
$
20.76

 
8.17
Granted
 
632

 
$
11.93

 

Exercised
 

 
$

 

Expired or canceled
 
(58
)
 
$
19.51

 

Forfeited
 
(139
)
 
$
18.17

 

Outstanding as of September 30, 2015
 
1,802

 
$
17.90

 
8.05
Vested and exercisable at end of period(1)
 
569

 
$
20.78

 
6.89
Expected to vest at end of period(2)
 
1,214

 
$
16.49

 
8.60
_____________________________________________________________________________
(1)
The vested and exercisable options as of September 30, 2015 had no aggregate intrinsic value.
(2)
The options expected to vest as of September 30, 2015 had no aggregate intrinsic value.

15

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

The Company utilizes the Black-Scholes option pricing model to determine the fair value of restricted stock option awards and is recognizing the associated expense on a straight-line basis over the four-year requisite service period of the awards. Determining the fair value of equity-based awards requires judgment, including estimating the expected term that stock option awards will be outstanding prior to exercise and the associated volatility. As of September 30, 2015, unrecognized stock-based compensation related to the restricted stock option awards expected to vest was $8.0 million. Such cost is expected to be recognized over a weighted-average period of 2.51 years.
The assumptions used to estimate the fair value of restricted stock options granted on February 27, 2015 are as follows:
Risk-free interest rate(1)
1.70
%
Expected option life(2)
6.25 years

Expected volatility(3)
52.59
%
Fair value per stock option
$
6.15

______________________________________________________________________________
(1)
U.S. Treasury yields as of the grant date were utilized for the risk-free interest rate assumption, correlating the treasury yield terms to the expected life of the option.
(2)
As the Company had limited exercise history at the time of valuation relating to terminations and modifications, expected option life assumptions were developed using the simplified method in accordance with GAAP.
(3)
The Company utilized its own volatility in order to develop the expected volatility.     
In accordance with the LTIP and stock option agreement, the options granted will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company, following the date of grant:
Full years of continuous employment
 
Incremental percentage of
option exercisable
 
Cumulative percentage of
option exercisable
Less than one
 
%
 
%
One
 
25
%
 
25
%
Two
 
25
%
 
50
%
Three
 
25
%
 
75
%
Four
 
25
%
 
100
%
No shares of common stock may be purchased unless the optionee has remained in continuous employment with the Company for one year from the grant date. Unless terminated sooner, the option will expire if and to the extent it is not exercised within 10 years from the grant date. The unvested portion of a stock option award shall expire upon termination of employment, and the vested portion of a stock option award shall remain exercisable for (i) one year following termination of employment by reason of the holder's death or disability, but not later than the expiration of the option period, or (ii) 90 days following termination of employment for any reason other than the holder's death or disability, and other than the holder's termination of employment for cause. Both the unvested and the vested but unexercised portion of a stock option award shall expire upon the termination of the option holder's employment or service by the Company for cause.
c.    Performance share awards
The performance share awards granted to management on February 27, 2015 (the "2015 Performance Share Awards") and on February 27, 2014 (the "2014 Performance Share Awards") are subject to a combination of market and service vesting criteria. A Monte Carlo simulation prepared by an independent third party was utilized to determine the grant date fair value of these awards. The Company has determined these awards are equity awards and recognizes the associated expense on a straight-line basis over the three-year requisite service period of the awards. These awards will be settled, if at all, in stock at the end of the requisite service period based on the achievement of certain performance criteria.
The 2015 Performance Share Awards have a performance period of January 1, 2015 to December 31, 2017 and any shares earned under such awards are expected to be issued in the first quarter of 2018 if the performance criteria are met. During the nine months ended September 30, 2015, 602,501 2015 Performance Share Awards were granted and all remain outstanding as of September 30, 2015. The 271,667 outstanding 2014 Performance Share Awards have a performance period of

16

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

January 1, 2014 to December 31, 2016 and any shares earned under such awards are expected to be issued in the first quarter of 2017 if the performance criteria are met.
As of September 30, 2015, unrecognized stock-based compensation related to the 2015 Performance Share Awards and the 2014 Performance Share Awards was $11.4 million. Such cost is expected to be recognized over a weighted-average period of 2.09 years.
The assumptions used to estimate the fair value of the 2015 Performance Share Awards granted on February 27, 2015 are as follows:
Risk-free rate(1)
 
0.95
%
Dividend yield
 
%
Expected volatility(2)
 
53.78
%
Laredo stock closing price as of February 27, 2015
 
$
11.93

Fair value per performance share
 
$
16.23

______________________________________________________________________________
(1)
The risk-free rate was derived using a zero-coupon yield derived from the Treasury Constant Maturities yield curve on the grant date.
(2)
The Company utilized a peer historical look-back, weighted with the Company's own volatility, to develop the expected volatility.
d.    Stock-based compensation award expense
The following has been recorded to stock-based compensation expense for the periods presented:
 
 
Three months ended September 30,

Nine months ended September 30,
(in thousands)
 
2015

2014

2015

2014
Restricted stock award compensation, net of amounts capitalized
 
$
4,588

 
$
4,866

 
$
11,724

 
$
13,303

Restricted stock option award compensation, net of amounts capitalized
 
925

 
763

 
2,740


2,226

Restricted performance share award compensation, net of amounts capitalized
 
1,364

 
565

 
3,469


1,390

Total stock-based compensation, net of amounts capitalized
 
$
6,877

 
$
6,194

 
$
17,933


$
16,919

e.    Performance unit awards
The performance unit awards issued to management on February 15, 2013 (the "2013 Performance Unit Awards") and on February 3, 2012 (the "2012 Performance Unit Awards") are subject to a combination of market and service vesting criteria. These awards are accounted for as liability awards as they are settled in cash at the end of the requisite service period based on the achievement of certain performance criteria. A Monte Carlo simulation prepared by an independent third party is utilized to determine the fair values of these awards at the grant date and to re-measure the fair values at the end of each reporting period until settlement in accordance with GAAP. The volatility criteria utilized in the Monte Carlo simulation is based on the volatility of the Company's stock price and the stock price volatilities of a group of peer companies defined in each respective award agreement. The liability and related compensation expense of these awards for each period is recognized by dividing the fair value of the total liability by the requisite service period and recording the pro rata share for the period for which service has already been provided. As there are inherent uncertainties related to these factors and the Company's judgment in applying them to the fair value determinations, there is risk that the recorded performance unit compensation may not accurately reflect the amount ultimately earned by the members of management.
The 44,481 outstanding 2013 Performance Unit Awards have a performance period of January 1, 2013 to December 31, 2015 and are expected to be paid in the first quarter of 2016 if the performance criteria are met. The 27,381 settled 2012 Performance Unit Awards had a performance period of January 1, 2012 to December 31, 2014 and, as their performance criteria were satisfied, they were paid at $100 per unit during the first quarter of 2015.
Compensation expense for the 2013 Performance Unit Awards is included in "General and administrative" in the Company's unaudited consolidated statements of operations, and the corresponding liability is included in "Other current

17

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

liabilities" on the unaudited consolidated balance sheets. Due to the quarterly re-measurement of the fair value of the 2013 Performance Unit Awards as of September 30, 2015, compensation expense for the three and nine months ended September 30, 2015 was $1.0 million and $2.7 million, respectively. Compensation expense related to the 2012 Performance Unit Awards and the 2013 Performance Unit Awards amounted to a $0.4 million reversal and $0.8 million for the three and nine months ended September 30, 2014, respectively.
Note 7—Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carry-forwards. Under this method, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is determined that it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary.
The Company evaluates uncertain tax positions for recognition and measurement in the unaudited consolidated financial statements. To recognize a tax position, the Company determines whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to be recognized in the unaudited consolidated financial statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. The Company had no unrecognized tax benefits related to uncertain tax positions in the unaudited consolidated financial statements as of September 30, 2015 or December 31, 2014.
The Company is subject to corporate income taxes and the Texas franchise tax. Income tax (expense) benefit for the periods presented consisted of the following:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)

2015
 
2014
 
2015
 
2014
Current taxes

$

 
$


$

 
$

Deferred taxes

(41,258
)
 
(45,778
)
 
176,945

 
(35,511
)
Income tax (expense) benefit

$
(41,258
)
 
$
(45,778
)

$
176,945

 
$
(35,511
)
Income tax (expense) benefit differed from amounts computed by applying the applicable federal income tax rate of 35% to pre-tax earnings as a result of the following:
 

Three months ended September 30,
 
Nine months ended September 30,
(in thousands)

2015
 
2014
 
2015
 
2014
Income tax benefit (expense) computed by applying the statutory rate

$
282,284

 
$
(45,215
)
 
$
497,782

 
$
(34,932
)
State income tax, net of federal tax benefit and increase in valuation allowance

(5,677
)
 
247

 
190

 
1,881

Non-deductible stock-based compensation

(45
)
 
(152
)
 
(151
)
 
(391
)
Stock-based compensation tax deficiency

(330
)
 
(4
)
 
(3,168
)
 
(160
)
Increase in deferred tax valuation allowance

(317,391
)
 
(22
)
 
(317,407
)
 
(1,134
)
Other items

(99
)
 
(632
)
 
(301
)
 
(775
)
Income tax (expense) benefit

$
(41,258
)
 
$
(45,778
)
 
$
176,945

 
$
(35,511
)
 
The effective tax rate on income (loss) before income taxes was 35% for the three months ended 2014 and 36% for the nine months ended September 30, 2014. The Company's effective tax rate is affected by recurring permanent differences, changes in valuation allowances and discrete items that may occur in any given year but are not consistent from year to year. For each of the three and nine months ended September 30, 2015, the Company recorded a valuation allowance of $326.2 million for its deferred tax assets due to uncertainty regarding their realization. As such, the effective tax rates on the Company's loss before income taxes for the same periods are not meaningful. No comparable amounts were recorded in the three and nine months ended September 30, 2014.

18

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

The impact of significant discrete items is separately recognized in the quarter in which they occur. The vesting of certain restricted stock awards could result in federal and state income tax expense or benefits related to the difference between the market price of the common stock at the date of vesting and the date of grant. The exercise of stock option awards could result in federal and state income tax expense or benefits related to the difference between the fair value of the stock option on the grant date and the intrinsic value of the stock option when exercised. The tax impact resulting from vestings of restricted stock awards and exercise of option awards are discrete items. During the three and nine months ended September 30, 2015 and 2014, certain shares related to restricted stock awards vested at times when the Company's stock price was lower than the fair value of those shares on the grant date. As a result, the income tax deduction related to such shares is less than the expense previously recognized for book purposes. During the three and nine months ended September 30, 2014, certain restricted stock options were exercised, for which the related income tax deduction was less than the expense previously recognized for book purposes. There were no stock options exercised during the three and nine months ended September 30, 2015. In accordance with GAAP, such shortfalls reduce additional paid-in capital to the extent windfall tax benefits have been previously recognized. However, the Company has not previously recognized any windfall tax benefits; therefore, such shortfalls are included in income tax expense.
The following table presents the tax impact of these shortfalls for the periods presented:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Vesting of restricted stock
 
$
(336
)
 
$
(4
)
 
$
(3,225
)
 
$
(5
)
Exercise of restricted stock options
 

 
(1
)
 

 
(158
)
Tax expense due to shortfalls
 
$
(336
)
 
$
(5
)
 
$
(3,225
)
 
$
(163
)
Significant components of the Company's net deferred tax asset (liability) for the periods presented are as follows:
(in thousands)
 
September 30, 2015
 
December 31, 2014
Oil and natural gas properties, midstream service assets and other fixed assets
 
$
(27,816
)
 
$
(424,712
)
Net operating loss carry-forward
 
462,324

 
353,724

Derivatives
 
(107,862
)
 
(121,365
)
Stock-based compensation
 
11,051

 
10,718

Equity method investee
 
(19,079
)
 

Accrued bonus
 
3,448

 
3,256

Capitalized interest
 
2,851

 
3,049

Other
 
2,628

 
(316
)
Net deferred tax asset (liability) before valuation allowance
 
327,545

 
(175,646
)
Valuation allowance
 
(327,545
)
 
(1,299
)
Net deferred tax asset (liability)
 
$

 
$
(176,945
)
Deferred tax assets and liabilities were classified in the unaudited consolidated balance sheets as follows for the periods presented:
(in thousands)
 
September 30, 2015
 
December 31, 2014
Deferred tax asset
 
$
68,069

 
$

Deferred tax liability
 
(68,069
)
 
(176,945
)
Deferred tax asset (liability)
 
$

 
$
(176,945
)
The Company had federal net operating loss carry-forwards totaling $1.3 billion and state of Oklahoma net operating loss carry-forwards totaling $58.9 million as of September 30, 2015. These carry-forwards begin expiring in 2026. As of September 30, 2015, the Company believes a portion of the net operating loss carry-forwards are not fully realizable. The Company considered all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance was needed. Such consideration included estimated future projected earnings based on existing reserves and projected future cash flows from its oil and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of September 30, 2015, the Company's ability to capitalize intangible drilling costs, rather than expensing these costs in order to prevent an operating loss carry-forward from expiring unused, and future projections of Oklahoma sourced income.


19

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

The Company's federal and state operating loss carry-forwards include windfall tax deductions from vestings of certain restricted stock awards and stock option exercises that were not recorded in the Company's income tax provision. The amount of windfall tax benefit recognized in additional paid-in capital is limited to the amount of benefit realized currently in income taxes payable. As of September 30, 2015, the Company had suspended additional paid-in capital credits of $4.5 million related to windfall tax deductions. Upon realization of the net operating loss carry-forwards from such windfall tax deductions, the Company would record a benefit of up to $4.5 million in additional paid-in capital.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. As of September 30, 2015, a valuation allowance of $327.5 million has been recorded against the deferred tax asset.
The Company's income tax returns for the years 2012 through 2014 remain open and subject to examination by federal tax authorities and/or the tax authorities in Oklahoma and Texas, which are the jurisdictions where the Company has operations. Additionally, the statute of limitations for examination of federal net operating loss carry-forwards typically does not begin to run until the year the attribute is utilized in a tax return.
Note 8—Derivatives
a. Commodity derivatives
The Company engages in derivative transactions such as collars, swaps, puts and basis swaps to hedge price risks due to unfavorable changes in oil and natural gas prices related to its production. As of September 30, 2015, the Company had 37 open derivative contracts with financial institutions that extend from October 2015 to December 2017. None of these contracts were designated as hedges for accounting purposes. The contracts are recorded at fair value on the balance sheet and gains and losses are recognized in current period earnings. Gains and losses on derivatives are reported on the unaudited consolidated statements of operations in the "Gain (loss) on derivatives, net" line item.
Each collar transaction has an established price floor and ceiling. When the settlement price is below the price floor established by these collars, the Company receives an amount from its counterparty equal to the difference between the settlement price and the price floor multiplied by the hedged contract volume. When the settlement price is above the price ceiling established by these collars, the Company pays its counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the hedged contract volume.
Each swap transaction has an established fixed price. When the settlement price is below the fixed price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is above the fixed price, the Company pays its counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume.
Each put transaction has an established floor price. The Company pays its counterparty a premium, which can be deferred until settlement, to enter into the put transaction. When the settlement price is below the floor price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is above the floor price, the put option expires.
The oil basis swap transactions have an established fixed basis differential. The Company's oil basis swaps' differential is between the West Texas Intermediate-Argus Americas Crude (Midland) ("WTI Midland") index crude oil price and the WTI NYMEX (defined below) index crude oil price. When the WTI NYMEX price less the fixed basis differential is greater than the actual WTI Midland price, the difference multiplied by the hedged contract volume is paid to the Company by the counterparty. When the WTI NYMEX price less the fixed basis differential is less than the actual WTI Midland price, the difference multiplied by the hedged contract volume is paid by the Company to the counterparty.
During the first quarter of 2014, the Company unwound a physical commodity contract and the associated oil basis swap financial derivative contract that hedged the differential between the Light Louisiana Sweet Argus and the Brent International Petroleum Exchange index oil prices. Prior to its unwind, the physical commodity contract qualified to be scoped out of mark-to-market accounting in accordance with the normal purchase and normal sale scope exemption. Once modified to settle financially in the unwind agreement, the contract ceased to qualify for the normal purchase and normal sale scope exemption, therefore requiring it to be marked-to-market. The Company received net proceeds of $76.7 million from the early termination of these contracts. The Company agreed to settle the contracts early due to the counterparty's decision to exit the physical commodity trading business.
    

20

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

The following represents cash settlements received (paid) for derivatives for the periods presented:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in thousands)
 
2015
 
2014
 
2015
 
2014
Cash settlements received (paid) for matured commodity derivatives
 
$
66,142

 
$
4,531

 
$
175,879

 
$
(1,320
)
Early terminations of commodity derivatives received
 

 

 

 
76,660

Cash settlements received for derivatives, net
 
$
66,142

 
$
4,531

 
$
175,879

 
$
75,340


The following table summarizes open positions as of September 30, 2015, and represents, as of such date, derivatives in place through December 2017 on annual production volumes:
 
 
Remaining Year
2015
 
Year
2016
 
Year
2017
Oil positions:(1)
 
 

 
 
 
 

Puts:
 
 

 
 

 
 

Hedged volume (Bbl)
 
114,000

 

 

Weighted-average price ($/Bbl)
 
$
75.00

 
$

 
$

Swaps:
 
 

 
 

 
 

Hedged volume (Bbl)
 
168,000

 
1,573,800

 

Weighted-average price ($/Bbl)
 
$
96.56

 
$
84.82

 
$

Collars:
 
 

 
 

 
 

Hedged volume (Bbl)
 
1,641,880

 
3,654,000

 
2,628,000

Weighted-average floor price ($/Bbl)
 
$
79.81

 
$
73.99

 
$
77.22

Weighted-average ceiling price ($/Bbl)
 
$
95.41

 
$
89.63

 
$
97.22

Totals:
 
 
 
 
 
 
Total volume hedged with ceiling price (Bbl)
 
1,809,880

 
5,227,800

 
2,628,000

Weighted-average ceiling price ($/Bbl)
 
$
95.51

 
$
88.18

 
$
97.22

Total volume hedged with floor price (Bbl)
 
1,923,880

 
5,227,800

 
2,628,000

Weighted-average floor price ($/Bbl)
 
$
80.99

 
$
77.25

 
$
77.22

Basis swaps:(2)
 
 
 
 
 
 
Hedged volume (Bbl)
 
920,000

 

 

Weighted-average price ($/Bbl)
 
$
(1.95
)
 
$

 
$

Natural gas positions:(3)
 
 

 
 

 
 

Collars:
 
 

 
 

 
 

Hedged volume (MMBtu)
 
7,192,000

 
18,666,000

 
5,475,000

Weighted-average floor price ($/MMBtu)
 
$
3.00

 
$
3.00

 
$
3.00

Weighted-average ceiling price ($/MMBtu)
 
$
5.96

 
$
5.60

 
$
4.00

_______________________________________________________________________________
(1)
Oil derivatives are settled based on the average of the daily settlement prices for the First Nearby Month of the West Texas Intermediate NYMEX Light Sweet Crude Oil Futures Contract for each NYMEX Trading Day during each month ("WTI NYMEX").
(2)
The associated oil basis swaps are settled on the differential between the WTI Midland and the WTI NYMEX index oil prices.
(3)
Natural gas derivatives are settled based on the Inside FERC index price for West Texas Waha for the calculation period.
b. Balance sheet presentation
In accordance with the Company's standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives. The Company's oil and natural gas commodity derivatives are presented on a net

21

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

basis as "Derivatives" on the unaudited consolidated balance sheets. See Note 9.a for a summary of the fair value of derivatives on a gross basis.
By using derivatives to hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. For the Company, market risk is the exposure to changes in the market price of oil and natural gas, which are subject to fluctuations from a variety of factors, including changes in supply and demand. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, thereby creating credit risk. The Company's counterparties are participants in the Senior Secured Credit Facility, which is secured by the Company's oil and natural gas reserves; therefore, the Company is not required to post any collateral. The Company does not require collateral from its derivative counterparties. The Company minimizes the credit risk in derivatives by: (i) limiting its exposure to any single counterparty, (ii) entering into derivatives only with counterparties that meet the Company's minimum credit quality standard or have a guarantee from an affiliate that meets the Company's minimum credit quality standard and (iii) monitoring the creditworthiness of the Company's counterparties on an ongoing basis.
Note 9—Fair value measurements
The Company accounts for its oil and natural gas commodity derivatives at fair value. The fair value of derivatives is determined utilizing pricing models for similar instruments. The models use a variety of techniques to arrive at fair value, including quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward curves generated from a compilation of data gathered from third parties.
The Company has categorized its assets and liabilities measured at fair value, based on the priority of inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded at fair value on the unaudited consolidated balance sheets are categorized based on inputs to the valuation techniques as follows: 
Level 1—
Assets and liabilities recorded at fair value for which values are based on unadjusted quoted prices for identical assets or liabilities in an active market that management has the ability to access. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
 
 
Level 2—
Assets and liabilities recorded at fair value for which values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the assets or liabilities. Substantially all of these inputs are observable in the marketplace throughout the full term of the price risk management instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.
 
 
Level 3—
Assets and liabilities recorded at fair value for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs are not corroborated by market data. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability.
When the inputs used to measure fair value fall within different levels of the hierarchy in a liquid environment, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company conducts a review of fair value hierarchy classifications on an annual basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Transfers between fair value hierarchy levels are recognized and reported in the period in which the transfer occurred. No transfers between fair value hierarchy levels occurred during the three or nine months ended September 30, 2015 or 2014.

22

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

a. Fair value measurement on a recurring basis
The following tables summarize the Company's fair value hierarchy by commodity on a gross basis and the net presentation on the unaudited consolidated balance sheets for derivative assets and liabilities measured at fair value on a recurring basis for the periods presented:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total gross fair value
 
Amounts offset
 
Net fair value presented on the consolidated balance sheets
As of September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
180,141

 
$

 
$
180,141

 
$
(1,805
)
 
$
178,336

Natural gas derivatives
 

 
10,747

 

 
10,747

 

 
10,747

Oil deferred premiums
 

 

 

 

 
(4,751
)
 
(4,751
)
Natural gas deferred premiums
 

 

 

 

 
(175
)
 
(175
)
Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
100,594

 
$

 
$
100,594

 
$

 
$
100,594

Natural gas derivatives
 

 
3,659

 

 
3,659

 

 
3,659

Oil deferred premiums
 

 

 

 

 
(5,964
)
 
(5,964
)
Natural gas deferred premiums
 

 

 

 

 
(439
)
 
(439
)
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
(1,805
)
 
$

 
$
(1,805
)
 
$
1,805

 
$

Natural gas derivatives
 

 

 

 

 

 

Oil deferred premiums
 

 

 
(4,751
)
 
(4,751
)
 
4,751

 

Natural gas deferred premiums
 

 

 
(175
)
 
(175
)
 
175

 

Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$

 
$

 
$

 
$

 
$

Natural gas derivatives
 

 

 

 

 

 

Oil deferred premiums
 

 

 
(5,964
)
 
(5,964
)
 
5,964

 

Natural gas deferred premiums
 

 

 
(439
)
 
(439
)
 
439

 

Net derivative position
 
$

 
$
293,336

 
$
(11,329
)
 
$
282,007

 
$

 
$
282,007


23

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

(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total gross fair value
 
Amounts offset
 
Net fair value presented on the consolidated balance sheets
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
190,303

 
$

 
$
190,303

 
$