Edgar Filing: Laredo Petroleum, Inc.

Document

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 March 31, 2019

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)

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, $0.01 par value	LPI	New York Stock Exchange ("NYSE")

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer ý	Accelerated filer o

Non-accelerated filer o	Smaller reporting company o

Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

Number of shares of registrant's common stock outstanding as of April 29, 2019: 236,555,114

LAREDO PETROLEUM, INC.

TABLE OF CONTENTS



	Page
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS	iii
Part I	1
Item 1. Consolidated Financial Statements (Unaudited)	1
Consolidated balance sheets as of March 31, 2019 and December 31, 2018	1
Consolidated statements of operations for the three months ended March 31, 2019 and 2018	2
Consolidated statements of stockholders' equity for the three months ended March 31, 2019 and 2018	3
Consolidated statements of cash flows for the three months ended March 31, 2019 and 2018	4
Condensed notes to the consolidated financial statements:	5
Note 1—Organization and basis of presentation	5
Note 2—Recently issued or adopted accounting pronouncements	5
Note 3—Leases	6
Note 4—Property and equipment	9
Note 5—Debt	10
Note 6—Stockholders' equity and Equity Incentive Plan	11
Note 7—Derivatives	15
Note 8—Fair value measurements	18
Note 9—Net income (loss) per common share	20
Note 10—Commitments and contingencies	21
Note 11—Supplemental cash flow and non-cash information	22
Note 12—Asset retirement obligations	23
Note 13—Revenue recognition	23
Note 14—Income taxes	24
Note 15—Related party	24
Note 16—Subsidiary guarantors	24
Note 17—Subsequent events	27
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3. Quantitative and Qualitative Disclosures About Market Risk	41
Item 4. Controls and Procedures	43
Part II	44
Item 1. Legal Proceedings	44
Item 1A. Risk Factors	44
Item 2. Purchases of Equity Securities	45
Item 3. Defaults Upon Senior Securities	45
Item 4. Mine Safety Disclosures	45
Item 5. Other Information	45
Item 6. Exhibits	46
SIGNATURES	47

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Various statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (this "Quarterly Report") are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include statements, projections and estimates concerning our operations, performance, business strategy, oil, natural gas liquids ("NGL") and natural gas reserves, drilling program capital expenditures, liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, derivative activities and potential financing. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "potential," "could," "may," "will," "foresee," "plan," "goal," "should," "intend," "pursue," "target," "continue," "suggest" or the negative thereof or other variations thereof or other words that convey the uncertainty of future events or outcomes. Forward-looking statements are not guarantees of performance. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Among the factors that significantly impact our business and could impact our business in the future are:


•	the volatility of oil, NGL and natural gas prices, including in our area of operation in the Permian Basin;


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


•	changes in domestic and global production, supply and demand for oil, NGL and natural gas;


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


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


•	the ongoing instability and uncertainty in the United States and international financial and consumer markets that could adversely affect the liquidity available to us and our customers and the demand for commodities, including oil, NGL and natural gas;


•	the potential impact on production of oil, NGL and natural gas from our wells due to tighter spacing of our wells;


•	capital requirements for our operations and projects;


•	impacts to our financial statements as a result of impairment write-downs;


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


•	the availability and costs of sufficient pipeline and transportation facilities and gathering and processing capacity;


•	our ability to maintain the borrowing capacity under our Fifth Amended and Restated Senior Secured Credit Facility (as amended, the "Senior Secured Credit Facility") or access other means of obtaining capital and liquidity, especially during periods of sustained low commodity prices;


•	our ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to our financial results and to successfully integrate acquired businesses, assets and properties;


•	our ability to generate sufficient cash to service our indebtedness, fund our capital requirements and generate future profits;


•	restrictions contained in our debt agreements, including our Senior Secured Credit Facility and the indentures governing our senior unsecured notes, as well as debt that could be incurred in the future;


•	our ability to recruit and retain the qualified personnel necessary to operate our business;


•	the potentially insufficient refining capacity in the United States Gulf Coast to refine all of the light sweet crude oil being produced in the United States, which could result in widening price discounts to world crude prices and potential shut-in of production due to lack of sufficient markets;


•	risks related to the geographic concentration of our assets;


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


•	changes in the regulatory environment and changes in United States or international legal, tax, political, administrative or economic conditions, including regulations that prohibit or restrict our

iii

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ability to apply hydraulic fracturing to our oil and natural gas wells and to access and dispose of water used in these operations;


•	legislation or regulations that prohibit or restrict our ability to drill new allocation wells;


•	our ability to execute our strategies;


•	competition in the oil and natural gas industry;


•	drilling and operating risks, including risks related to hydraulic fracturing activities; and


•	our ability to comply with federal, state and local regulatory requirements.

These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report, under "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 Annual Report") and those set forth from time to time in our other filings with the Securities and Exchange Commission (the "SEC"). These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report, or if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities law.

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Part I

Item 1. Consolidated Financial Statements (Unaudited)

Laredo Petroleum, Inc.

Consolidated balance sheets

(in thousands, except share data)

(Unaudited)



	March 31, 2019			December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	44,544		$	45,151
Accounts receivable, net	107,520			94,321
Derivatives	7,610			39,835
Other current assets	13,056			13,445
Total current assets	172,730			192,752
Property and equipment:
Oil and natural gas properties, full cost method:
Evaluated properties	6,951,343			6,752,631
Unevaluated properties not being depleted	92,467			130,957
Less accumulated depletion and impairment	(4,913,384		)	(4,854,017		)
Oil and natural gas properties, net	2,130,426			2,029,571
Midstream service assets, net	131,118			130,245
Other fixed assets, net	39,098			39,819
Property and equipment, net	2,300,642			2,199,635
Derivatives	5,970			11,030
Operating lease right-of-use assets	19,035			—
Other noncurrent assets, net	16,412			16,888
Total assets	$	2,514,789		$	2,420,305
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued liabilities	$	76,644		$	69,504
Accrued capital expenditures	36,418			29,975
Undistributed revenue and royalties	51,730			48,841
Derivatives	11,057			7,359
Operating lease liabilities	10,896			—
Other current liabilities	16,877			44,786
Total current liabilities	203,622			200,465
Long-term debt, net	1,064,081			983,636
Derivatives	3,563			—
Asset retirement obligations	54,555			53,387
Operating lease liabilities	11,301			—
Other noncurrent liabilities	6,235			8,587
Total liabilities	1,343,357			1,246,075
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of March 31, 2019 and December 31, 2018	—			—
Common stock, $0.01 par value, 450,000,000 shares authorized and 239,191,487 and 233,936,358 issued and outstanding as of March 31, 2019 and December 31, 2018, respectively	2,392			2,339
Additional paid-in capital	2,381,926			2,375,286
Accumulated deficit	(1,212,886		)	(1,203,395		)
Total stockholders' equity	1,171,432			1,174,230
Total liabilities and stockholders' equity	$	2,514,789		$	2,420,305

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

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Laredo Petroleum, Inc.

Consolidated statements of operations

(in thousands, except per share data)

(Unaudited)



	Three months ended March 31,
	2019			2018
Revenues:
Oil sales	$	129,171		$	150,914
NGL sales	32,235			28,360
Natural gas sales	11,970			18,160
Midstream service revenues	2,883			2,359
Sales of purchased oil	32,688			59,903
Total revenues	208,947			259,696
Costs and expenses:
Lease operating expenses	22,609			21,951
Production and ad valorem taxes	7,219			11,812
Transportation and marketing expenses	4,759			—
Midstream service expenses	1,603			693
Costs of purchased oil	32,691			60,664
General and administrative	21,519			24,725
Depletion, depreciation and amortization	63,098			45,553
Other operating expenses	1,052			1,106
Total costs and expenses	154,550			166,504
Operating income	54,397			93,192
Non-operating income (expense):
Gain (loss) on derivatives, net	(48,365		)	9,010
Interest expense	(15,547		)	(13,518		)
Loss on disposal of assets, net	(939		)	(2,617		)
Other income, net	867			453
Non-operating expense, net	(63,984		)	(6,672		)
Income (loss) before income taxes	(9,587		)	86,520
Income tax benefit:
Deferred	96			—
Total income tax benefit	96			—
Net income (loss)	$	(9,491	)	$	86,520
Net income (loss) per common share:
Basic	$	(0.04	)	$	0.36
Diluted	$	(0.04	)	$	0.36
Weighted-average common shares outstanding:
Basic	230,476			238,228
Diluted	230,476			239,319

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

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Laredo Petroleum, Inc.

Consolidated statements of stockholders' equity

(in thousands)

(Unaudited)



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



	Common Stock					Additional paid-in capital			Treasury Stock (at cost)					Accumulated deficit
	Shares		Amount			Additional paid-in capital			Shares		Amount			Accumulated deficit			Total
Balance, December 31, 2017	242,521		$	2,425		$	2,432,262		—		$	—		$	(1,669,108	)	$	765,579
Adjustment to the beginning balance of accumulated deficit upon adoption of ASC 606 (see Note 13.a)	—		—			—			—		—			141,118			141,118
Restricted stock awards	3,052		30			(30		)	—		—			—			—
Restricted stock forfeitures	(13	)	—			—			—		—			—			—
Share repurchases	—		—			—			6,728		(58,475		)	—			(58,475		)
Stock exchanged for tax withholding	—		—			—			512		(4,353		)	—			(4,353		)
Retirement of treasury stock	(7,240	)	(72		)	(62,756		)	(7,240	)	62,828			—			—
Stock-based compensation	—		—			11,441			—		—			—			11,441
Net income	—		—			—			—		—			86,520			86,520
Balance, March 31, 2018	238,320		$	2,383		$	2,380,917		—		$	—		$	(1,441,470	)	$	941,830

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

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Laredo Petroleum, Inc.

Consolidated statements of cash flows

(in thousands)

(Unaudited)



	Three months ended March 31,
	2019			2018
Cash flows from operating activities:
Net income (loss)	$	(9,491	)	$	86,520
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Deferred income tax benefit	(96		)	—
Depletion, depreciation and amortization	63,098			45,553
Non-cash stock-based compensation, net	7,406			9,339
Mark-to-market on derivatives:
(Gain) loss on derivatives, net	48,365			(9,010		)
Settlements received (paid) for matured derivatives, net	102			(2,236		)
Change in net present value of derivative deferred premiums	95			211
Premiums paid for derivatives	(4,016		)	(4,024		)
Amortization of debt issuance costs	846			793
Amortization of operating lease right-of-use assets	3,056			—
Other, net	3,779			4,304
(Increase) decrease in accounts receivable	(13,373		)	1,147
Increase in other current assets	(2,769		)	(2,483		)
Decrease (increase) in other noncurrent assets	57			(100		)
Increase in accounts payable and accrued liabilities	7,140			30,516
Increase in undistributed revenue and royalties	2,889			2,541
Decrease in other current liabilities	(30,637		)	(16,226		)
Increase (decrease) in other noncurrent liabilities	1,007			(374		)
Net cash provided by operating activities	77,458			146,471
Cash flows from investing activities:
Capital expenditures:
Oil and natural gas properties	(152,729		)	(195,025		)
Midstream service assets	(2,262		)	(3,362		)
Other fixed assets	(505		)	(3,963		)
Proceeds from disposition of equity method investee, net of selling costs	—			1,655
Proceeds from dispositions of capital assets, net of selling costs	43			1,021
Net cash used in investing activities	(155,453		)	(199,674		)
Cash flows from financing activities:
Borrowings on Senior Secured Credit Facility	80,000			55,000
Share repurchases	—			(53,714		)
Stock exchanged for tax withholding	(2,612		)	(4,353		)
Net cash provided by (used in) financing activities	77,388			(3,067		)
Net decrease in cash and cash equivalents	(607		)	(56,270		)
Cash and cash equivalents, beginning of period	45,151			112,159
Cash and cash equivalents, end of period	$	44,544		$	55,889

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



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

Note 1—Organization and basis of presentation

a. Organization

Laredo Petroleum, Inc. ("Laredo"), together with its wholly-owned subsidiaries, Laredo Midstream Services, LLC ("LMS") and Garden City Minerals, LLC ("GCM"), is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties, and midstream and marketing services, primarily in the Permian Basin of West Texas. LMS and GCM (together, the "Guarantors") guarantee all of Laredo's debt instruments. In these notes, the "Company" refers to Laredo, LMS and GCM collectively, unless the context indicates otherwise. All amounts, dollars and percentages presented in these unaudited consolidated financial statements and the related notes are rounded and, therefore, approximate.

b. Basis of presentation

The unaudited consolidated financial statements were derived from the historical accounting records of the Company and reflect the historical financial position, results of operations and cash flows for the periods described herein. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All material intercompany transactions and account balances have been eliminated in the consolidation of accounts.

The unaudited consolidated financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet as of December 31, 2018 is derived from audited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all necessary adjustments to present fairly the Company's financial position as of March 31, 2019 and results of operations and cash flows for each of the three months ended March 31, 2019 and 2018.

Certain disclosures have been condensed or omitted from the unaudited consolidated financial statements. Accordingly, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2018 Annual Report.

Significant accounting policies

See Note 2 in the 2018 Annual Report for discussion of significant accounting policies and Note 3 for those related to the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842, Leases ("ASC 842").

Use of estimates in the preparation of interim unaudited consolidated financial statements

The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ.

For further information regarding the use of estimates and assumptions, see Note 2.b in the 2018 Annual Report, Note 3 pertaining to the Company's leases and Note 6.c pertaining to the Company's 2019 performance unit awards.

Note 2—Recently issued or adopted accounting pronouncements

The Company considers the applicability and impact of all accounting standard updates ("ASU") issued by the FASB. The discussion of the ASU listed below was determined to be meaningful to the Company's unaudited consolidated financial statements and footnotes during the three months ended March 31, 2019.

a. Leases

On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and applying the optional transition method as of the beginning of the period of adoption. Results for the period beginning after January 1, 2019 are presented under ASC 842, while prior periods are not adjusted and continue to be reported under ASC 840. The Company utilized the transition package of expedients to leases that commenced before the effective date. ASC 842 supersedes previous lease guidance in ASC 840, Leases ("ASC 840"). The core principle of the new guidance is that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term related to its leases. For leases with a term of 12 months or less, a lessee is permitted to make



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

an accounting policy election, by class of underlying asset, not to recognize lease assets and lease liabilities. See Note 3 for further discussion of the ASC 842 adoption impact on the Company's unaudited consolidated financial statements.

Note 3—Leases

a. Impact of ASC 842 adoption

Prior to January 1, 2019, the Company accounted for leases under ASC 840 and did not record any right-of-use assets or corresponding lease liabilities. Upon the adoption of ASC 842 on January 1, 2019, the Company recognized $22.1 million in operating lease right-of-use assets and $25.3 million in operating lease liabilities on the unaudited consolidated balance sheets for operating leases with a term greater than 12 months. The difference between the two balances of $3.2 million is mainly due to free rent and lease build-out incentives that were recorded as deferred lease liabilities under ASC 840. These deferred lease liabilities are subtracted from the right-of-use asset opening balance under ASC 842. The transition did not result in a material impact to the unaudited consolidated statements of operations nor was there a related impact to the unaudited consolidated statements of stockholders' equity.

The Company utilized the modified retrospective approach in adopting the new standard and applied the optional transition method as of the beginning of the period of adoption, along with the transition package of practical expedients, and implemented certain accounting policy decisions which include: (i) short-term lease recognition exemption, (ii) establishing a balance sheet recognition capitalization threshold, (iii) not evaluating existing or expired land easements that were not previously accounted for as leases under ASC 840 and (iv) accounting for certain asset classes at a portfolio level by not separating the lease and non-lease components and accounting for the agreement as a single lease component.

The Company determines whether a contract is or contains a lease at inception of the contract, based on answers to a series of questions that address whether an identified asset exists and whether the Company has the right to obtain substantially all of the benefit of the asset and to control its use over the full term of the agreement. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company's leases do not provide a readily determinable implicit rate, In such cases, the Company is required to use its incremental borrowing rate ("IBR"). The Company determines its IBR using both a "credit notching" approach and a "recovery method" approach. The results of these approaches are then weighted equally and averaged in order to determine the concluded IBR. This concluded IBR is utilized to discount the lease payments based on information available at lease commencement. There are no material residual value guarantees, nor any restrictions or covenants included in the Company's lease agreements.

Mineral leases, including oil and natural gas leases granting the right to explore for those natural resources and rights to use the land in which those natural resources are contained, are not included in the scope of ASC 842.

The Company has recognized in the unaudited consolidated balance sheets leases of commercial real estate with lease terms extending through 2027 and drilling, completion, production and other equipment leases with lease terms extending through 2020. We have various other drilling, completion and production equipment leases on a short-term basis reflected in our short-term lease costs.

Certain of the Company's leases include provisions for variable payments. These variable payments are typically determined based on a measure of throughput, actual days or another measure of usage and are not included in the calculation of lease liabilities and right-of-use assets. For our drilling rigs, the variable lease costs include the payments that depend on the performance or usage of the underlying asset, the costs to move and the costs to repair the drilling rigs. For certain of our commercial office buildings, utilities and common area maintenance charges are variable and are included as an operating lease expense. For our equipment leases, the variable lease cost is the amount incurred under our contracts that are beyond the minimum rental fee, inclusive of maintenance.

The Company's short-term lease costs include those that are recognized in net income (loss) during the period and capitalized as part of the cost of another asset in accordance with other GAAP. The costs related to drilling, completion and production activities are reflected at the Company's net ownership, which is consistent with the principals of proportional consolidation, and lease commitments are reflected on a gross basis. As of March 31, 2019, the Company had an average working interest of 97% in all Laredo-operated currently producing wells in its core operating area.

The Company does not have any significant finance leases.

Certain of the Company's lease asset classes include options to renew on a month-to-month basis. The Company considers contract-based, asset-based, market-based, and entity-based factors to determine the term over which it is reasonably certain to extend the lease in determining its right-of-use assets and liabilities.



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

The Company's material leases do not include options to purchase the leased property.

Of the Company's commercial leases, the Company subleases certain office space to third parties where it is the primary obligor under the head lease. The lease terms on those subleases each contain renewal options that do not extend past the term of the head lease. The subleases do not contain residual value guarantees. Sublease income is recognized based on the contract terms and, upon the adoption of ASC 842, is included as a reduction of lease expense under our head lease.

Lease costs

The table below presents certain information related to the lease costs for the Company's operating leases for the period presented:



(in thousands)	Three months ended March 31, 2019
Components of total lease cost:
Operating lease cost	$	3,528
Short-term lease cost	46,326
Variable lease cost	518
Sublease income	(247		)
Total lease cost	$	50,125

Other information

See Note 11 for disclosure of cash paid for amounts included in the measurement of lease liabilities and supplemental non-cash adjustments. See Note 15 for disclosure of related-party lease amounts.

Lease terms and discount rates

The table below presents certain information related to the weighted-average remaining lease term and weighted-average discount rate for the Company's operating leases as of the date presented:



	March 31, 2019
Operating leases:
Weighted-average remaining lease term	4.00 years
Weighted-average discount rate	8.28	%



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

Maturities of operating lease liabilities

The table below reconciles the undiscounted cash flows for each of the first five years and the total remaining years to the operating lease liabilities recorded on the unaudited consolidated balance sheet as of the date presented:



(in thousands)	March 31, 2019
Operating leases:
Remaining 2019	$	12,260
2020	3,331
2021	3,029
2022	2,360
2023	1,252
Thereafter	4,243
Total minimum lease payments	26,475
Less: lease liability expense	(4,278		)
Present value of future minimum lease payments	22,197
Less: current obligations under leases	(10,896		)
Long-term lease obligations	$	11,301

Disclosure for the period prior to adoption of ASC 842

The Company leases office space under operating leases expiring on various dates through 2027. The following table presents future minimum rental payments required:



(in thousands)	December 31, 2018
2019	$	3,092
2020	3,179
2021	3,128
2022	2,560
2023	1,358
Thereafter	4,556
Total future minimum rental payments required	$	17,873

The Company subleases office space with $5.9 million of total future minimum rentals to be received as of December 31, 2018. For the period prior to the adoption of ASC 842, rent income is included in "Other income, net" on the unaudited consolidated statements of operations.



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

Note 4—Property and equipment

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



(in thousands)	March 31, 2019			December 31, 2018
Evaluated oil and natural gas properties	$	6,951,343		$	6,752,631
Less accumulated depletion and impairment	(4,913,384		)	(4,854,017		)
Evaluated oil and natural gas properties, net	2,037,959			1,898,614

Unevaluated oil and natural gas properties not being depleted	92,467			130,957

Midstream service assets	175,681			172,308
Less accumulated depreciation and impairment	(44,563		)	(42,063		)
Midstream service assets, net	131,118			130,245

Depreciable other fixed assets	45,591			45,431
Less accumulated depreciation and amortization	(24,752		)	(23,871		)
Depreciable other fixed assets, net	20,839			21,560

Land	18,259			18,259

Total property and equipment, net	$	2,300,642		$	2,199,635

For the three months ended March 31, 2019 and 2018, depletion expense for the Company's evaluated oil and natural gas properties was $8.76 per barrel of oil equivalent ("BOE") sold and $7.34 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 exploring for or developing oil and natural gas properties, are capitalized and depleted on a composite unit-of-production method based on proved oil, NGL and natural gas reserves. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals and other costs related to such activities. Costs, including related employee costs, associated with production and general corporate activities are expensed in the period incurred. Sales of oil and natural gas properties, whether or not being depleted currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil, NGL and natural gas.

The following table presents capitalized related employee costs incurred for the purpose of exploring for or developing oil and natural gas properties for the periods presented:



	Three months ended March 31,
(in thousands)	2019		2018
Capitalized related employee costs	$	6,682	$	6,529

The Company excludes the costs directly associated with the acquisition and evaluation of unevaluated properties from the depletion calculation until it is determined whether or not proved reserves can be assigned to the properties. The Company capitalizes a portion of its interest costs to its unevaluated properties. Capitalized interest becomes a part of the cost of the unevaluated properties and is subject to depletion when proved reserves can be assigned to the associated properties. All items classified as unevaluated properties are assessed on a quarterly basis for possible impairment. The assessment includes consideration of the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of evaluated reserves and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion.



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

The following table presents costs incurred in the acquisition, exploration and development of oil and natural gas properties, with asset retirement obligations included in development costs, for the periods presented:



	Three months ended March 31,
(in thousands)	2019		2018
Property acquisition costs:
Evaluated	$	—	$	—
Unevaluated	—		—
Exploration costs	7,505		6,137
Development costs	152,717		149,038
Total costs incurred	$	160,222	$	155,175

Note 5—Debt

a. March 2023 Notes

On March 18, 2015, the Company completed an offering of $350.0 million in aggregate principal amount of 6 1/4% senior unsecured notes due 2023 (the "March 2023 Notes"). The March 2023 Notes will mature on March 15, 2023 and bear an interest rate of 6 1/4% per annum, payable semi-annually, in cash in arrears on March 15 and September 15 of each year, commencing September 15, 2015. The March 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain automatic customary releases, including the sale, disposition or transfer of all of the capital stock or of all or substantially all of the assets of a subsidiary guarantor to one or more persons that are not the Company or a restricted subsidiary, exercise of legal defeasance or covenant defeasance options or satisfaction and discharge of the applicable indenture, designation of a subsidiary guarantor as a non-guarantor restricted subsidiary or as an unrestricted subsidiary in accordance with the applicable indenture, release from guarantee under the Senior Secured Credit Facility, or liquidation or dissolution (collectively, the "Releases"). The Company may redeem, at its option, all or part of the March 2023 Notes at any time at a price of 103.125% of face value with call premiums declining annually to 100% of face value on March 15, 2021 and thereafter plus accrued and unpaid interest to, but not including, the date of redemption.

b. January 2022 Notes

On January 23, 2014, the Company completed an offering of $450.0 million in aggregate principal amount of 5 5/8% senior unsecured notes due 2022 (the "January 2022 Notes"). The January 2022 Notes will mature on January 15, 2022 and bear an interest rate of 5 5/8% per annum, payable semi-annually, in cash in arrears on January 15 and July 15 of each year, commencing July 15, 2014. The January 2022 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain Releases. The Company may redeem, at its option, all or part of the January 2022 Notes at any time at a price of 101.406% of face value with call premiums declining to 100% of face value on January 15, 2020 and thereafter plus accrued and unpaid interest to, but not including, the date of redemption.

c. Senior Secured Credit Facility

The Senior Secured Credit Facility matures on April 19, 2023, provided that if either the January 2022 Notes or March 2023 Notes have not been refinanced on or prior to the date (as applicable, the "Early Maturity Date") that is 90 days before their respective stated maturity dates, the Senior Secured Credit Facility will mature on such Early Maturity Date. As of March 31, 2019, the Senior Secured Credit Facility had a maximum credit amount of $2.0 billion, a borrowing base of $1.3 billion and an aggregate elected commitment of $1.2 billion, with $270.0 million outstanding and was subject to an interest rate of 3.75%. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which the Company was in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or $80.0 million. As of March 31, 2019 and December 31, 2018, the Company had one letter of credit outstanding of $14.7 million under the Senior Secured Credit Facility. For additional information see Note 7.d in the 2018 Annual Report. See Note 17.a for discussion of the regular semi-annual borrowing base redetermination of the Senior Secured Credit Facility subsequent to March 31, 2019.



Table of Contents	Laredo Petroleum, Inc.

Condensed notes to the consolidated financial statements

(Unaudited)

d. Long-term debt, net

The following table summarizes the net presentation of the Company's long-term debt and debt issuance costs on the unaudited consolidated balance sheets as of the dates presented:



	March 31, 2019							December 31, 2018
(in thousands)	Long-term debt		Debt issuance costs, net			Long-term debt, net		Long-term debt		Debt issuance costs, net			Long-term debt, net
January 2022 Notes	$	450,000	$	(2,766	)	$	447,234	$	450,000	$	(3,010	)	$	446,990
March 2023 Notes	350,000		(3,153		)	346,847		350,000		(3,354		)	346,646
Senior Secured Credit Facility⁽¹⁾