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 SeptemberJune 30, 20182019
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 | 45-3007926 |
Delaware
(State(State or other jurisdiction of
incorporation or organization) | | 45-3007926
(I.R.S.(I.R.S. Employer
Identification No.) |
|
| | |
15 W. Sixth Street | Suite 900 | | |
Tulsa Oklahoma | Oklahoma | 74119 |
(Address of principal executive offices) | | (Zip code) |
(918) (918) 513-4570
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act: |
| | |
Title of each class | Trading symbol | Name of each exchange on which registered |
Common stock, $0.01 par value | LPI | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filerý | ☒ | Accelerated filer o | ☐ |
| | | |
Non-accelerated filer o | ☐ | Smaller reporting company o | ☐ |
| | | |
Emerging growth companyo | ☐ | | |
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 November 1, 2018: 233,882,020July 29, 2019: 237,469,613
LAREDO PETROLEUM, INC.
TABLE OF CONTENTS
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, natural gas liquids ("NGL")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;
the long-term performance of wells that were completed using different technologies;
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 in the Permian Basin, including the impact on steel costs and supplies following the Administration's imposed 25% global tariffs on certain imported steel mill products;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;
our ability to generate sufficient cash to service our indebtedness, fund our capital requirements and generate future profits;
the impact of share repurchases or our suspension or discontinuation of the share repurchase program at any time;
the potential negative impact on production of oil, NGL and natural gas from our wells due to tighter spacing of our wells;
the potential impact on our inventory of future wells from increased spacing and/or decreased well performance;
our ability to hedge and regulations that affect our ability to hedge;
revisions to our reserve estimates as a result of changes in commodity prices and other uncertainties;
impacts to our financial statements as a result of impairment write-downs;
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
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;
the adverse outcome and impact of litigation, legal proceedings, investigations and insurance or other claims, including the adverse outcome and impact of pending or protracted litigation;
drilling and operating risks, including risks related to hydraulic fracturing activities;
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 comply with federal, state and local regulatory requirements; and
the impact of the new tax laws enacted on December 22, 2017.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, 2017 (the "2017 Annual Report"), and under "Part II, Item 1A. Risk Factors" in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 (the "Second Quarter 2018 Quarterly"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.
Part I
Item 1. Consolidated Financial Statements (Unaudited)
Laredo Petroleum, Inc.
Consolidated balance sheets
(in thousands, except share data)
(Unaudited)
| | | | September 30, 2018 |
| December 31, 2017 | | June 30, 2019 |
| December 31, 2018 |
Assets | | |
| | |
| | |
| | |
|
Current assets: | | |
| | |
| | |
| | |
|
Cash and cash equivalents | | $ | 50,407 |
| | $ | 112,159 |
| | $ | 55,800 |
| | $ | 45,151 |
|
Accounts receivable, net | | 117,581 |
| | 100,645 |
| | 76,610 |
| | 94,321 |
|
Derivatives | | 3,074 |
| | 6,892 |
| | 47,167 |
| | 39,835 |
|
Other current assets | | 18,465 |
| | 15,686 |
| | 12,938 |
| | 13,445 |
|
Total current assets | | 189,527 |
| | 235,382 |
| | 192,515 |
| | 192,752 |
|
Property and equipment: | | | | |
| | | | |
|
Oil and natural gas properties, full cost method: | | | | |
| | | | |
|
Evaluated properties | | 6,589,327 |
| | 6,070,940 |
| | 7,080,332 |
| | 6,752,631 |
|
Unevaluated properties not being depleted | | 147,690 |
| | 175,865 |
| | 95,138 |
| | 130,957 |
|
Less accumulated depletion and impairment | | (4,798,527 | ) | | (4,657,466 | ) | | (4,975,302 | ) | | (4,854,017 | ) |
Oil and natural gas properties, net | | 1,938,490 |
| | 1,589,339 |
| | 2,200,168 |
| | 2,029,571 |
|
Midstream service assets, net | | 132,415 |
| | 138,325 |
| | 131,633 |
| | 130,245 |
|
Other fixed assets, net | | 42,264 |
| | 40,721 |
| | 37,933 |
| | 39,819 |
|
Property and equipment, net | | 2,113,169 |
| | 1,768,385 |
| | 2,369,734 |
| | 2,199,635 |
|
Derivatives | | — |
| | 3,413 |
| | 25,798 |
| | 11,030 |
|
Operating lease right-of-use assets | | | 18,903 |
| | — |
|
Other noncurrent assets, net | | 17,078 |
| | 16,109 |
| | 12,972 |
| | 16,888 |
|
Total assets | | $ | 2,319,774 |
| | $ | 2,023,289 |
| | $ | 2,619,922 |
| | $ | 2,420,305 |
|
Liabilities and stockholders' equity | | | | |
| | | | |
|
Current liabilities: | | | | |
| | | | |
|
Accounts payable and accrued liabilities | | $ | 86,637 |
| | $ | 58,341 |
| | $ | 51,289 |
| | $ | 69,504 |
|
Accrued capital expenditures | | 38,188 |
| | 82,721 |
| | 32,310 |
| | 29,975 |
|
Undistributed revenue and royalties | | 53,239 |
| | 37,852 |
| | 44,731 |
| | 48,841 |
|
Derivatives | | 44,060 |
| | 22,950 |
| | 1,473 |
| | 7,359 |
|
Operating lease liabilities | | | 9,948 |
| | — |
|
Other current liabilities | | 37,145 |
| | 75,555 |
| | 30,927 |
| | 44,786 |
|
Total current liabilities | | 259,269 |
| | 277,419 |
| | 170,678 |
| | 200,465 |
|
Long-term debt, net | | 963,191 |
| | 791,855 |
| | 1,029,526 |
| | 983,636 |
|
Derivatives | | 20,945 |
| | 384 |
| |
Asset retirement obligations | | 55,684 |
| | 53,962 |
| | 55,645 |
| | 53,387 |
|
Operating lease liabilities | | | 12,055 |
| | — |
|
Other noncurrent liabilities | | 5,573 |
| | 134,090 |
| | 7,697 |
| | 8,587 |
|
Total liabilities | | 1,304,662 |
| | 1,257,710 |
| | 1,275,601 |
| | 1,246,075 |
|
Commitments and contingencies | |
|
| |
|
| |
|
| |
|
|
Stockholders' equity: | | | | | | | | |
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of September 30, 2018 and December 31, 2017 | | — |
| | — |
| |
Common stock, $0.01 par value, 450,000,000 shares authorized and 233,957,811 and 242,521,143 issued and outstanding as of September 30, 2018 and December 31, 2017, respectively | | 2,340 |
| | 2,425 |
| |
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of June 30, 2019 and December 31, 2018 | | | — |
| | — |
|
Common stock, $0.01 par value, 450,000,000 shares authorized and 237,479,812 and 233,936,358 issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | | 2,375 |
| | 2,339 |
|
Additional paid-in capital | | 2,365,740 |
| | 2,432,262 |
| | 2,381,450 |
| | 2,375,286 |
|
Accumulated deficit | | (1,352,968 | ) | | (1,669,108 | ) | | (1,039,504 | ) | | (1,203,395 | ) |
Total stockholders' equity | | 1,015,112 |
| | 765,579 |
| | 1,344,321 |
| | 1,174,230 |
|
Total liabilities and stockholders' equity | | $ | 2,319,774 |
| | $ | 2,023,289 |
| | $ | 2,619,922 |
| | $ | 2,420,305 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Laredo Petroleum, Inc.
Consolidated statements of operations
(in thousands, except per share data)
(Unaudited)
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Revenues: |
|
|
|
|
|
| | |
| | |
|
|
|
|
|
|
| | |
| | |
|
Oil sales |
| $ | 160,007 |
|
| $ | 110,194 |
|
| $ | 469,972 |
|
| $ | 313,875 |
|
| $ | 160,030 |
|
| $ | 159,051 |
|
| $ | 289,201 |
|
| $ | 309,965 |
|
NGL sales | | 50,814 |
| | 27,700 |
| | 115,979 |
| | 68,329 |
| | 22,197 |
| | 36,805 |
| | 54,432 |
| | 65,165 |
|
Natural gas sales | | 15,043 |
| | 19,664 |
| | 45,908 |
| | 55,927 |
| | 1,636 |
| | 12,705 |
| | 13,606 |
| | 30,865 |
|
Midstream service revenues |
| 2,255 |
|
| 2,446 |
|
| 6,590 |
|
| 8,148 |
|
| 2,610 |
|
| 1,976 |
|
| 5,493 |
|
| 4,335 |
|
Sales of purchased oil | | 51,627 |
| | 45,814 |
| | 252,039 |
| | 135,546 |
| | 30,170 |
| | 140,509 |
| | 62,858 |
| | 200,412 |
|
Total revenues |
| 279,746 |
|
| 205,818 |
|
| 890,488 |
|
| 581,825 |
|
| 216,643 |
|
| 351,046 |
|
| 425,590 |
|
| 610,742 |
|
Costs and expenses: |
| | | | | | | |
| | | | | | | |
Lease operating expenses |
| 23,873 |
|
| 19,594 |
|
| 68,466 |
|
| 56,690 |
|
| 23,632 |
|
| 22,642 |
|
| 46,241 |
|
| 44,593 |
|
Production and ad valorem taxes | | 14,015 |
| | 9,558 |
| | 38,232 |
| | 26,811 |
| | 11,328 |
| | 12,405 |
| | 18,547 |
| | 24,217 |
|
Transportation and marketing expenses | | 5,036 |
| | — |
| | 6,570 |
| | — |
| | 4,891 |
| | 1,534 |
| | 9,650 |
| | 1,534 |
|
Midstream service expenses | | 728 |
| | 1,174 |
| | 1,824 |
| | 2,986 |
| | 607 |
| | 403 |
| | 2,210 |
| | 1,096 |
|
Costs of purchased oil | | 51,210 |
| | 47,385 |
| | 252,452 |
| | 141,661 |
| | 30,172 |
| | 140,578 |
| | 62,863 |
| | 201,242 |
|
General and administrative |
| 23,397 |
|
| 25,000 |
| | 74,956 |
| | 72,605 |
|
| 11,056 |
|
| 26,834 |
| | 32,575 |
| | 51,559 |
|
Restructuring expenses | | | 10,406 |
| | — |
| | 10,406 |
| | — |
|
Depletion, depreciation and amortization |
| 55,963 |
|
| 41,212 |
|
| 152,278 |
|
| 113,327 |
|
| 65,703 |
|
| 50,762 |
|
| 128,801 |
|
| 96,315 |
|
Other operating expenses | | 1,114 |
| | 1,443 |
| | 3,341 |
| | 3,906 |
| | 1,020 |
| | 1,121 |
| | 2,072 |
| | 2,227 |
|
Total costs and expenses |
| 175,336 |
|
| 145,366 |
|
| 598,119 |
|
| 417,986 |
|
| 158,815 |
|
| 256,279 |
|
| 313,365 |
|
| 422,783 |
|
Operating income |
| 104,410 |
|
| 60,452 |
|
| 292,369 |
|
| 163,839 |
|
| 57,828 |
|
| 94,767 |
|
| 112,225 |
|
| 187,959 |
|
Non-operating income (expense): |
|
|
|
| | | | | |
|
|
|
| | | | | |
Gain (loss) on derivatives, net |
| (32,245 | ) |
| (27,441 | ) |
| (69,211 | ) |
| 38,127 |
|
| 88,394 |
|
| (45,976 | ) |
| 40,029 |
|
| (36,966 | ) |
Income from equity method investee (see Note 3.c) |
| — |
|
| 2,371 |
|
| — |
|
| 7,910 |
| |
Interest expense |
| (14,845 | ) |
| (23,697 | ) |
| (42,787 | ) |
| (69,590 | ) |
| (15,765 | ) |
| (14,424 | ) |
| (31,312 | ) |
| (27,942 | ) |
Other (expense) income |
| (267 | ) |
| 333 |
|
| 629 |
|
| 527 |
| |
Litigation settlement | | | 42,500 |
| | — |
| | 42,500 |
| | — |
|
Loss on disposal of assets, net |
| (616 | ) |
| (991 | ) |
| (4,591 | ) |
| (400 | ) | | (670 | ) | | (1,358 | ) | | (1,609 | ) | | (3,975 | ) |
Non-operating expense, net |
| (47,973 | ) |
| (49,425 | ) |
| (115,960 | ) |
| (23,426 | ) | |
Other income, net | |
| 2,846 |
|
| 443 |
|
| 3,713 |
|
| 896 |
|
Non-operating income (expense), net | |
| 117,305 |
|
| (61,315 | ) |
| 53,321 |
|
| (67,987 | ) |
Income before income taxes |
| 56,437 |
|
| 11,027 |
|
| 176,409 |
|
| 140,413 |
|
| 175,133 |
|
| 33,452 |
|
| 165,546 |
|
| 119,972 |
|
Income tax benefit (expense): |
|
|
|
| |
|
|
|
|
|
| |
Current | | 381 |
| | — |
| | 381 |
| | — |
| |
Income tax expense: | |
|
|
|
| |
|
|
|
|
|
|
Deferred |
| (1,768 | ) |
| — |
|
| (1,768 | ) |
| — |
|
| (1,751 | ) |
| — |
|
| (1,655 | ) |
| — |
|
Total income tax expense: |
| (1,387 | ) |
| — |
|
| (1,387 | ) |
| — |
| |
Total income tax expense | |
| (1,751 | ) |
| — |
|
| (1,655 | ) |
| — |
|
Net income |
| $ | 55,050 |
| | $ | 11,027 |
|
| $ | 175,022 |
|
| $ | 140,413 |
|
| $ | 173,382 |
| | $ | 33,452 |
|
| $ | 163,891 |
|
| $ | 119,972 |
|
Net income per common share: |
|
|
|
| |
| |
|
|
|
|
|
|
|
| |
| |
|
|
|
|
Basic |
| $ | 0.24 |
|
| $ | 0.05 |
|
| $ | 0.75 |
| | $ | 0.59 |
|
| $ | 0.75 |
|
| $ | 0.14 |
|
| $ | 0.71 |
|
| $ | 0.51 |
|
Diluted |
| $ | 0.24 |
| | $ | 0.05 |
|
| $ | 0.75 |
| | $ | 0.57 |
|
| $ | 0.75 |
| | $ | 0.14 |
|
| $ | 0.71 |
|
| $ | 0.51 |
|
Weighted-average common shares outstanding: |
|
|
|
|
|
|
| |
| | |
|
|
|
|
|
|
|
| |
| | |
|
Basic |
| 230,605 |
|
| 239,306 |
|
| 233,228 |
| | 239,017 |
|
| 231,406 |
|
| 230,933 |
|
| 230,943 |
|
| 234,561 |
|
Diluted |
| 231,639 |
|
| 244,887 |
|
| 234,207 |
| | 244,693 |
|
| 231,557 |
|
| 231,706 |
|
| 231,725 |
|
| 235,501 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Laredo Petroleum, Inc.
Consolidated statementstatements of stockholders' equity
(in thousands)
(Unaudited)
| | | | Common Stock | | Additional paid-in capital | | Treasury Stock (at cost) | | Accumulated deficit | | | | Common stock | | Additional paid-in capital | | Treasury stock (at cost) | | Accumulated deficit | | |
| | Shares | | Amount | | Shares | | Amount | | Total | | Shares | | Amount | | Shares | | Amount | | Total |
Balance, December 31, 2017 | | 242,521 |
| | $ | 2,425 |
| | $ | 2,432,262 |
| | — |
| | $ | — |
| | $ | (1,669,108 | ) | | $ | 765,579 |
| |
Adjustment to the beginning balance of accumulated deficit upon adoption of ASC 606 (see Note 4.a) | | — |
| | — |
| | — |
| | — |
| | — |
| | 141,118 |
| | 141,118 |
| |
Balance, December 31, 2018 | | | 233,936 |
| | $ | 2,339 |
| | $ | 2,375,286 |
| | — |
| | $ | — |
| | $ | (1,203,395 | ) | | $ | 1,174,230 |
|
Restricted stock awards | | 3,248 |
| | 33 |
| | (33 | ) | | — |
| | — |
| | — |
| | — |
| | 5,986 |
| | 60 |
| | (60 | ) | | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeitures | | (266 | ) | | (3 | ) | | 3 |
| | — |
| | — |
| | — |
| | — |
| | (48 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Share repurchases | | — |
| | — |
| | — |
| | 11,049 |
| | (97,055 | ) | | — |
| | (97,055 | ) | |
Vested stock exchanged for tax withholding | | — |
| | — |
| | — |
| | 517 |
| | (4,411 | ) | | — |
| | (4,411 | ) | |
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 | | (11,566 | ) | | (115 | ) | | (101,351 | ) | | (11,566 | ) | | 101,466 |
| | — |
| | — |
| | (701 | ) | | (7 | ) | | (2,681 | ) | | (701 | ) | | 2,688 |
| | — |
| | — |
|
Exercise of stock options | | 21 |
| | — |
| | 86 |
| | — |
| | — |
| | — |
| | 86 |
| | 18 |
| | — |
| | 76 |
| | — |
| | — |
| | — |
| | 76 |
|
Stock-based compensation | | — |
| | — |
| | 34,773 |
| | — |
| | — |
| | — |
| | 34,773 |
| | — |
| | — |
| | 9,305 |
| | — |
| | — |
| | — |
| | 9,305 |
|
Net loss | | | — |
| | — |
| | — |
| | — |
| | — |
| | (9,491 | ) | | (9,491 | ) |
Balance, March 31, 2019 | | | 239,191 |
| | 2,392 |
| | 2,381,926 |
| | — |
| | — |
| | (1,212,886 | ) | | 1,171,432 |
|
Restricted stock awards | | | 1,064 |
| | 11 |
| | (11 | ) | | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeitures | | | (2,763 | ) | | (28 | ) | | 28 |
| | — |
| | — |
| | — |
| | — |
|
Stock exchanged for tax withholding | | | — |
| | — |
| | — |
| | 12 |
| | (34 | ) | | — |
| | (34 | ) |
Retirement of treasury stock | | | (12 | ) | | — |
| | (34 | ) | | (12 | ) | | 34 |
| | — |
| | — |
|
Stock-based compensation (See Note 6.c) | | | — |
| | — |
| | (459 | ) | | — |
| | — |
| | — |
| | (459 | ) |
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 175,022 |
| | 175,022 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 173,382 |
| | 173,382 |
|
Balance, September 30, 2018 | | 233,958 |
| | $ | 2,340 |
| | $ | 2,365,740 |
| | — |
| | $ | — |
| | $ | (1,352,968 | ) | | $ | 1,015,112 |
| |
Balance, June 30, 2019 | | | 237,480 |
| | $ | 2,375 |
| | $ | 2,381,450 |
| | — |
| | $ | — |
| | $ | (1,039,504 | ) | | $ | 1,344,321 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Additional paid-in capital | | Treasury stock (at cost) | | Accumulated deficit | | |
| | Shares | | Amount | | | Shares | | Amount | | | Total |
Balance, December 31, 2017 | | 242,521 |
| | $ | 2,425 |
| | $ | 2,432,262 |
| | — |
| | $ | — |
| | $ | (1,669,108 | ) | | $ | 765,579 |
|
Adjustment to the beginning balance of accumulated deficit upon adoption of ASC 606 (see Note 13.a) | | — |
| | — |
| | — |
| | — |
| | — |
| | 141,118 |
| | 141,118 |
|
Restricted stock awards | | 3,052 |
| | 30 |
| | (30 | ) | | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeitures | | (13 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Share repurchases | | — |
| | — |
| | — |
| | 6,728 |
| | (58,475 | ) | | — |
| | (58,475 | ) |
Stock exchanged for tax withholding | | — |
| | — |
| | — |
| | 512 |
| | (4,353 | ) | | — |
| | (4,353 | ) |
Retirement of treasury stock | | (7,240 | ) | | (72 | ) | | (62,756 | ) | | (7,240 | ) | | 62,828 |
| | — |
| | — |
|
Stock-based compensation | | — |
| | — |
| | 11,441 |
| | — |
| | — |
| | — |
| | 11,441 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 86,520 |
| | 86,520 |
|
Balance, March 31, 2018 | | 238,320 |
|
| 2,383 |
|
| 2,380,917 |
|
| — |
|
| — |
|
| (1,441,470 | ) |
| 941,830 |
|
Restricted stock awards | | 141 |
| | 2 |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
Restricted stock forfeitures | | (113 | ) | | (1 | ) | | 1 |
| | — |
| | — |
| | — |
| | — |
|
Share repurchases | | — |
| | — |
| | — |
| | 3,151 |
| | (28,743 | ) | | — |
| | (28,743 | ) |
Stock exchanged for tax withholding | | — |
| | — |
| | — |
| | 3 |
| | (44 | ) | | — |
| | (44 | ) |
Retirement of treasury stock | | (3,154 | ) | | (32 | ) | | (28,755 | ) | | (3,154 | ) | | 28,787 |
| | — |
| | — |
|
Stock-based compensation | | — |
| | — |
| | 12,672 |
| | — |
| | — |
| | — |
| | 12,672 |
|
Net income | | — |
| | — |
| | — |
| | — |
| | — |
| | 33,452 |
| | 33,452 |
|
Balance, June 30, 2018 | | 235,194 |
|
| $ | 2,352 |
|
| $ | 2,364,833 |
|
| — |
|
| $ | — |
|
| $ | (1,408,018 | ) |
| $ | 959,167 |
|
The accompanying notes are an integral part of thisthese unaudited consolidated financial statement.statements.
Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited)
| | | | Nine months ended September 30, | | Six months ended June 30, |
| | 2018 | | 2017 | | 2019 | | 2018 |
Cash flows from operating activities: |
| |
|
| |
|
| |
|
| |
|
Net income |
| $ | 175,022 |
|
| $ | 140,413 |
|
| $ | 163,891 |
|
| $ | 119,972 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense |
| 1,768 |
|
| — |
|
| 1,655 |
|
| — |
|
Depletion, depreciation and amortization |
| 152,278 |
|
| 113,327 |
|
| 128,801 |
|
| 96,315 |
|
Non-cash stock-based compensation, net |
| 28,748 |
|
| 26,877 |
| | 6,983 |
| | 20,015 |
|
Mark-to-market on derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
(Gain) loss on derivatives, net |
| 69,211 |
|
| (38,127 | ) |
| (40,029 | ) |
| 36,966 |
|
Settlements (paid) received for matured derivatives, net |
| (5,943 | ) |
| 34,791 |
| |
Settlements received for early terminations of derivatives, net |
| — |
|
| 4,234 |
| |
Settlements received (paid) for matured derivatives, net | |
| 23,582 |
|
| (2,055 | ) |
Settlements paid for early terminations of derivatives, net | |
| (5,409 | ) |
| — |
|
Change in net present value of derivative deferred premiums |
| 564 |
|
| 199 |
|
| 119 |
|
| 396 |
|
Premiums paid for derivatives |
| (14,930 | ) |
| (13,542 | ) |
| (6,249 | ) |
| (9,475 | ) |
Amortization of debt issuance costs |
| 2,484 |
|
| 3,132 |
|
| 1,693 |
|
| 1,638 |
|
Income from equity method investee (see Note 3.c) |
| — |
|
| (7,910 | ) | |
Amortization of operating lease right-of-use assets | | | 6,309 |
| | — |
|
Other, net |
| 9,290 |
|
| 3,445 |
|
| 4,068 |
|
| 6,910 |
|
Increase in accounts receivable | | (18,591 | ) | | (2,973 | ) | |
Decrease (increase) in accounts receivable | | | 17,537 |
| | (2,331 | ) |
Increase in other current assets | | (6,479 | ) | | (3,143 | ) | | (4,200 | ) | | (10,974 | ) |
Decrease (increase) in other noncurrent assets | | 346 |
| | (77 | ) | |
Increase in accounts payable and accrued liabilities | | 28,296 |
| | 11,575 |
| |
Increase in undistributed revenues and royalties | | 15,387 |
| | 6,384 |
| |
Decrease in other noncurrent assets | | | 3,077 |
| | 1,835 |
|
(Decrease) increase in accounts payable and accrued liabilities | | | (18,215 | ) | | 15,911 |
|
(Decrease) increase in undistributed revenue and royalties | | | (4,110 | ) | | 8,146 |
|
Decrease in other current liabilities | | (28,298 | ) | | (6,264 | ) | | (18,134 | ) | | (20,124 | ) |
Decrease in other noncurrent liabilities | | (625 | ) | | (290 | ) | | (100 | ) | | (544 | ) |
Net cash provided by operating activities | | 408,528 |
| | 272,051 |
| | 261,269 |
| | 262,601 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of oil and natural gas properties | | (16,340 | ) | | — |
| | (2,880 | ) | | (16,340 | ) |
Capital expenditures: |
|
|
|
|
|
|
|
|
|
|
|
|
Oil and natural gas properties |
| (522,470 | ) |
| (381,165 | ) |
| (284,616 | ) |
| (341,534 | ) |
Midstream service assets |
| (5,764 | ) |
| (11,680 | ) |
| (5,449 | ) |
| (5,205 | ) |
Other fixed assets |
| (5,945 | ) |
| (3,604 | ) |
| (965 | ) |
| (4,965 | ) |
Investment in equity method investee (see Note 3.c) | | — |
| | (24,572 | ) | |
Proceeds from disposition of equity method investee, net of selling costs (see Note 3.c) | | 1,655 |
| | — |
| |
Proceeds from dispositions of capital assets, net of selling costs |
| 12,433 |
|
| 64,128 |
| |
Proceeds from disposition of equity method investee, net of selling costs | | | — |
| | 1,655 |
|
Proceeds from disposition of capital assets, net of selling costs | |
| 936 |
|
| 12,317 |
|
Net cash used in investing activities |
| (536,431 | ) |
| (356,893 | ) |
| (292,974 | ) |
| (354,072 | ) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on Senior Secured Credit Facility |
| 190,000 |
|
| 155,000 |
|
| 80,000 |
|
| 110,000 |
|
Payments on Senior Secured Credit Facility |
| (20,000 | ) |
| (70,000 | ) |
| (35,000 | ) |
| — |
|
Share repurchases | | (97,055 | ) | | — |
| | — |
| | (87,218 | ) |
Vested stock exchanged for tax withholding |
| (4,411 | ) |
| (7,638 | ) | |
Proceeds from exercise of stock options |
| 86 |
|
| 358 |
| |
Stock exchanged for tax withholding | |
| (2,646 | ) |
| (4,397 | ) |
Payments for debt issuance costs |
| (2,469 | ) |
| (4,732 | ) |
| — |
|
| (2,469 | ) |
Net cash provided by financing activities |
| 66,151 |
|
| 72,988 |
|
| 42,354 |
|
| 15,916 |
|
Net decrease in cash and cash equivalents |
| (61,752 | ) |
| (11,854 | ) | |
Net increase (decrease) in cash and cash equivalents | |
| 10,649 |
|
| (75,555 | ) |
Cash and cash equivalents, beginning of period |
| 112,159 |
|
| 32,672 |
|
| 45,151 |
|
| 112,159 |
|
Cash and cash equivalents, end of period |
| $ | 50,407 |
|
| $ | 20,818 |
|
| $ | 55,800 |
|
| $ | 36,604 |
|
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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 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 accompanying 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, 20172018 is derived from audited consolidated financial statements. 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 SeptemberJune 30, 2018,2019, results of operations for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 and cash flows for the ninesix months ended SeptemberJune 30, 20182019 and 2017.2018.
Certain disclosures have been condensed or omitted from thesethe unaudited consolidated financial statements. Accordingly, thesethe unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 20172018 Annual Report.
Significant accounting policies
See Note 2 "Basis of presentation and significant accounting policies" in the 20172018 Annual Report for discussion of significant accounting policies.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 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.
For further information regarding the use of estimates and assumptions, see Note 2.b "Use of estimates in the preparation of consolidated financial statements" in the 20172018 Annual Report. Furthermore, seeReport, Note 7.c for a discussion of estimates3 pertaining to the Company's 2018leases and Note 6.c pertaining to the Company's 2019 performance share awards.
Reclassifications
Certain amounts in the accompanying unaudited consolidated financial statements have been reclassified to conform to the 2018 presentation. These reclassifications had no impact on previously reported total assets, total liabilities, net income, stockholders' equity or total operating, investing or financing cash flows.awards and outperformance share award.
Note 2—Recently issued or adopted accounting pronouncements
The Company considers the applicability and impact of all accounting standard updates ("ASU") issued by the Financial Accounting Standards Board ("FASB") to the FASB Accounting Standards Codification ("ASC").FASB. The discussion of the ASUs and a final rule issued by the SECASU listed below werewas determined to be meaningful to the Company's unaudited consolidated financial statements and/orand footnotes during the ninesix months ended SeptemberJune 30, 2018. 2019.
Condensed notes to the consolidated financial statements
(Unaudited)
a. Revenue recognition
On January 1, 2018,2019, the Company adopted ASC 606, Revenue from Contracts with Customers ("ASC 606"),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 606842, while prior periods are not adjusted and continue to be reported under ASC 840. The Company utilized the transition package of expedients for leases that commenced before the effective date. ASC 842 supersedes previous revenue recognition requirements in ASC 605, Revenue Recognition ("ASC 605"), and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In addition, the new standard requires significantly expanded disclosures related to the nature, timing, amount and uncertainty of revenue and cash flows arising from contracts with customers. See Note 4 for further discussion of the ASC 606 adoption impact on the Company's unaudited consolidated financial statements and the Company's revenue recognition policies.
b. Leases
In February 2016, the FASB issued new guidance in ASC 842, Leases ("ASC 842"), which will supersede the currentlease guidance in ASC 840, Leases(" ("ASC 840"). The core principle of the new guidance is that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the
Condensed notes to the consolidated financial statements
(Unaudited)
underlying asset for the lease term for leases currently classified as operatingrelated to its leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and lease liabilities. In January 2018,See Note 3 for further discussion of the FASB issued new guidance in ASC 842 adoption impact on the Company's unaudited consolidated financial statements.
Note 3—Leases
a. Impact of ASC 842 adoption
Prior to provide anJanuary 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 ina 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 expedient toexpedients, and implemented certain accounting policy decisions which include: (i) short-term lease recognition exemption, (ii) establishing a balance sheet recognition capitalization threshold, (iii) not evaluateevaluating existing or expired land easements that were not previously accounted for as leases under ASC 840.
In July 2018, the FASB issued new guidance in ASC 842 to provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date840 and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with ASC 840. An entity that elects this transition method must provide the required ASC 840 disclosures for all periods that continue to be reported in accordance with ASC 840.
The amendments in these ASUs are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The primary effect on the Company's consolidated financial statements will be to record assets and obligations for contracts currently recognized as operating leases with a term greater than 12 months and to evaluate operating leases with a term less than or equal to 12 months for accounting policy election. The Company has a team, including third-party consultants, to implement the standard and is implementing the software that will be used to track and account for lease activity. The Company anticipates that the adoption and implementation of ASC 842 will result in a material increase in assets and liabilities on the consolidated balance sheet but will not result in a material impact to the consolidated statement of operations. The estimate of the dollar value impact of the adoption is on-going.
The Company has made certain accounting policy decisions including that it plans to adopt the short-term lease recognition exemption,(iv) accounting for certain asset classes at a portfolio level and establishing a balance sheet recognition capitalization threshold. The transition will utilizeby not separating the modified retrospective approach to adopting the new standard that will be applied at the beginning of the period adopted (January 1, 2019). The Company will utilize the transition package of expedients to leases that commenced before the effective date. The Company expects for certain lessee asset classes to elect the practical expedient and not separate lease and non-lease components. For these asset classes,components and accounting for the agreements will be accounted foragreement as a single lease component.
c. Business combinations
In January 2017,The Company determines whether a contract is or contains a lease at inception of the FASB issued new guidance in ASC 805, Business Combinations,contract, based on answers to clarifya series of questions that address whether an identified asset exists and whether the definition of a business withCompany has the objective of adding guidanceright to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this ASU provide a screen to determine when a set of assets and activities is not a business. The screen requires that whenobtain substantially all of the fair valuebenefit of the gross assets acquired (or disposed of) is concentratedasset and to control its use over the full term of the agreement. When available, the Company uses the rate implicit in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amendments in this ASU require thatlease to be considered a business, a set must include, at a minimum, an input and a substantive process that, together, significantly contributediscount lease payments to the ability to create an output.
The primary effect of adoption of this ASU is that, depending on the facts and circumstances of each transaction, more transactions could be accounted for as acquisitions of assets. The Company adopted this ASU on January 1, 2018 on a prospective basis, and the adoption did not have an effect on its unaudited consolidated financial statements. See Note 3.a for discussionpresent value; however, most of the Company's 2018 acquisitionsleases 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 evaluatedthese approaches are then weighted equally and unevaluatedaveraged 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 properties,leases granting the right to explore for those natural resources and rights to use the land in which were accountedthose natural resources are contained, are not included in the scope of ASC 842.
The Company has recognized operating lease assets and operating lease liabilities on the unaudited consolidated balance sheets for leases of commercial real estate with lease terms extending into 2027 and drilling, completion, production and other equipment leases with lease terms extending through 2020. The Company has various other drilling, completion and production equipment leases on a short-term basis which are reflected in short-term lease costs.
The Company's lease costs include those that are recognized in net income (loss) during the period and capitalized as part of the cost of another asset acquisitionsin accordance with other GAAP.
The costs related to drilling, completion and production activities are reflected at the Company's net ownership, which is consistent with the principals of proportional consolidation, and lease commitments are reflected on a gross basis. As of June 30, 2019, the Company had an average working interest of 97% in all Laredo-operated currently producing wells in its core operating area.
The Company's short-term lease costs are not included in the calculation of lease liabilities and right-of-use assets.
Certain of the Company's leases include provisions for variable payments. These variable payments are typically determined based on a measure of throughput, actual days or another measure of usage and are not included in the calculation of lease liabilities and right-of-use assets. For our drilling rigs, the variable lease costs include the payments that depend on the performance or usage of the underlying asset, the costs to move and the costs to repair the drilling rigs. For certain of our commercial office buildings, utilities and common area maintenance charges are variable. For our equipment leases, the variable lease cost is the amount incurred under this ASU.our contracts that are beyond the minimum rental fee, inclusive of maintenance.
Condensed notes to the consolidated financial statements
(Unaudited)
d. Fair value measurements
In August 2018, the FASB issued new guidance in ASC 820, Fair Value Measurement, to modify disclosure requirements. Of the amendmentsCompany's commercial leases, the Company subleases certain office space to third parties where it is the primary obligor under the head lease. The lease terms on those subleases each contain renewal options that do not extend past the term of the head lease. The subleases do not contain residual value guarantees. Sublease income is recognized based on the contract terms and, upon the adoption of ASC 842, is included as a reduction of lease expense under the head lease.
The Company does not have any significant finance leases.
Certain of the Company's lease asset classes include options to renew on a month-to-month basis. The Company considers contract-based, asset-based, market-based, and entity-based factors to determine the term over which it is reasonably certain to extend the lease in determining its right-of-use assets and liabilities.
The Company's material leases do not include options to purchase the leased property.
Lease costs
The table below presents components of total lease costs and supplemental cash flow information for the Company's operating leases for the periods presented:
|
| | | | | | | | |
(in thousands) | | Three months ended June 30, 2019 | | Six months ended June 30, 2019 |
Operating lease costs(1) | | $ | 3,713 |
| | $ | 7,241 |
|
Short-term lease costs(2) | | 49,108 |
| | 95,434 |
|
Variable lease costs(3) | | 1,254 |
| | 1,772 |
|
Sublease income | | (247 | ) | | (494 | ) |
Total lease costs | | $ | 53,828 |
| | $ | 103,953 |
|
| | | | |
Supplemental cash paid for amounts included in the measurement of lease liabilities information(4): | | | | |
Operating cash flows from operating leases | | $ | 1,294 |
| | $ | 2,824 |
|
Investing cash flows from operating leases(5) | | $ | 2,270 |
| | $ | 4,516 |
|
_____________________________________________________________________________ | |
(1) | Amounts represent straight-line costs associated with the Company's operating lease right-of-use assets. |
| |
(2) | Amounts represent costs associated with short-term leases that are not recorded on the unaudited consolidated balance sheets. |
| |
(3) | Variable lease costs are primarily comprised of the non-lease service component of drilling rig commitments above the minimum required payments. Both the minimum required payments and the non-lease service component of the drilling rig commitments are capitalized as additions to oil and natural gas properties. |
| |
(4) | Cash paid for amounts included in the measurement of lease liabilities may not agree to operating lease costs due to timing of cash payments and costs incurred. |
| |
(5) | Amounts associated with drilling operations are capitalized as additions to oil and natural gas properties. |
Other information
See Note 11 for disclosure of supplemental cash paid for amounts included in the ASU,measurement of lease liabilities and supplemental non-cash adjustments. See Note 15 for disclosure of related-party lease amounts.
Lease terms and discount rates
The table below presents the below items affectedweighted-average remaining lease term and weighted-average discount rate for the Company's fair value measurement disclosures in Note 9. Removed disclosure requirements that should be applied retrospectively to all periods presented are: (i) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfers between levels and (iii) the valuation processes for Level 3 fair value measurements. A modified disclosure requirement that should be applied prospectively is to clarify that the measurement uncertainty disclosure communicates information about the uncertainty in measurementoperating leases as of the reporting date. A new disclosure requirement that should be applied prospectively is to disclose the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company has elected to early adopt this guidance upon the issuance of the ASU and has modified its disclosures accordingly in this Quarterly Report.date presented: |
| | | |
| | June 30, 2019 |
Weighted-average remaining lease term | | 3.85 years |
|
Weighted-average discount rate | | 8.27 | % |
e. SEC disclosure update and simplification
In August 2018, the SEC issued Final Rule Release No. 33-10532, Disclosure Update and Simplification, which amends various SEC disclosure requirements that they have determined to be redundant, duplicative, overlapping, outdated or superseded. The amendments also extend the annual disclosure requirement of presenting the changes in stockholders' equity to interim periods. An analysis of changes in stockholders’ equity will now be required for the current and comparative year-to-date interim periods. The Company has incorporated certain aspects of the final rule in this Quarterly Report and will complete the implementation of the final rule in the fourth quarter of 2018.
Note 3—Acquisitions and divestitures
a. 2018 Acquisitions of evaluated and unevaluated oil and natural gas properties
During the nine months ended September 30, 2018, through multiple transactions, the Company acquired 895 net acres of additional leasehold interests and working interests in 47 producing horizontal and vertical wells in Glasscock County, Texas for an aggregate purchase price of $16.3 million, net of post-closing adjustments. These acquisitions were accounted for as asset acquisitions.
b. 2018 Divestitures of evaluated and unevaluated oil and natural gas properties and midstream service assets
During the nine months ended September 30, 2018, through multiple transactions, the Company completed the sale of 3,070 net acres and working interests in 24 producing vertical and horizontal wells and associated midstream service assets in Glasscock County and Howard County in Texas to third-party buyers for an aggregate sales price of $12.0 million, net of post-closing adjustments. Of this amount, $11.5 million, net of post-closing adjustments, was recorded as adjustments to oil and natural gas properties pursuant to the rules governing full cost accounting. A loss of $1.0 million from the sale of the associated midstream service assets was included in the line item "Loss on disposal of assets, net" in the unaudited consolidated statements of operations. Effective at the closings, the operations and cash flows of these oil and natural gas properties and midstream service assets were eliminated from the ongoing operations of the Company, and the Company has no continuing involvement in the properties. These divestitures did not represent a strategic shift and will not have a major effect on the Company's future operations or financial results.
c. 2017 Medallion sale
Medallion Gathering & Processing, LLC, a Texas limited liability company formed on October 12, 2012, which, together with its wholly-owned subsidiaries (collectively, "Medallion"), was established for the purpose of developing midstream solutions and providing midstream infrastructure to bring oil to market from the Midland Basin. Prior to the Medallion Sale (defined below), LMS held 49% of Medallion's ownership units. LMS and the third-party 51% interest-holder agreed that the voting rights of Medallion, the profit and loss sharing and the additional capital contribution requirements would be equal to the ownership unit percentage held. Additionally, Medallion required a super-majority vote of 75% for many key operating and business decisions. The Company determined that Medallion was a variable interest entity ("VIE"). However, LMS was not considered to be the primary beneficiary of the VIE because LMS did not have the power to direct the activities that most significantly affected Medallion's economic performance. As such, prior to the Medallion Sale, Medallion was accounted for under the equity method of accounting. The Company's proportionate share of Medallion's net income is reflected in the unaudited consolidated statements of operations on the "Income from equity method investee" line item.
On October 30, 2017, LMS, together with Medallion Midstream Holdings, LLC, which is owned and controlled by an affiliate of the third-party interest-holder, The Energy & Minerals Group, completed the sale of 100% of the ownership interests
Condensed notes to the consolidated financial statements
(Unaudited)
in Medallion to an affiliateMaturities of Global Infrastructure Partners ("GIP")operating lease liabilities
The table below reconciles the undiscounted cash flows for cash considerationrecognized operating lease liabilities for each of $1.825 billion (the "Medallion Sale"). LMS' net cash proceeds for its 49% ownership interest in Medallion in 2017 were $829.6 million, before post-closing adjustmentsthe first five years and taxes, but after deduction of its proportionate share of fees and other expenses associated with the Medallion Sale. On February 1, 2018, closing adjustments were finalized and LMS received additional net cash of $1.7 million for total net cash proceeds before taxes of $831.3 million. The proceeds were used to pay borrowings on the Senior Secured Credit Facility in full, to redeem the May 2022 Notes (as defined below) and for working capital purposes. The Medallion Sale closed pursuantremaining years to the membership interest purchase and sale agreement, which provides for potential post-closing additional cash consideration that is structured basedoperating lease liabilities recorded on GIP's realized profit at exit. There can be no assurance as to when and whether the additional consideration will be paid. The Medallion Sale did not represent a strategic shift and will not have a major effect on the Company's future operations or financial results.
LMS has a Transportation Services Agreement (the "TA") with a wholly-owned subsidiary of Medallion under which LMS receives firm transportation of the Company's crude oil production from Reagan County and Glasscock County in Texas to Colorado City, Texas that continues to be in effect after the Medallion Sale. Historically, the Company's crude oil purchasers have fulfilled the commitment by transporting crude oil, purchased from the Company, under the TA, as agent. As a result of the Company's continuing involvement with Medallion by guaranteeing cash flows under the TA, the Company recorded a deferred gain in the amount of its maximum exposure to loss related to such guarantees that would have been amortized over the TA's firm commitment transportation term through 2024 had the Company not adopted new revenue recognition guidance on January 1, 2018. The deferred gain is included in the unaudited consolidated balance sheets in eachsheet as of the "Other current liabilities" and "Other noncurrent liabilities" line itemsdate presented:
|
| | | | |
(in thousands) | | June 30, 2019 |
Remaining 2019 | | $ | 11,279 |
|
2020 | | 4,729 |
|
2021 | | 2,833 |
|
2022 | | 2,027 |
|
2023 | | 1,259 |
|
Thereafter | | 3,925 |
|
Total minimum lease payments | | 26,052 |
|
Less: lease liability expense | | (4,049 | ) |
Present value of future minimum lease payments | | 22,003 |
|
Less: current operating lease liabilities | | (9,948 | ) |
Noncurrent operating lease liabilities | | $ | 12,055 |
|
Disclosure for the period prior to adoption of ASC 842
The Company leases office space under operating leases expiring on various dates through 2027. The following table presents future minimum rental payments required as of the date presented: |
| | | | |
(in thousands) | | December 31, 2018 |
2019 | | $ | 3,092 |
|
2020 | | 3,179 |
|
2021 | | 3,128 |
|
2022 | | 2,560 |
|
2023 | | 1,358 |
|
Thereafter | | 4,556 |
|
Total future minimum rental payments required | | $ | 17,873 |
|
The Company subleases office space with $5.9 million of total future minimum rentals to be received as of December 31, 2017. See Note 4.a for discussion of2018. For the impactperiod prior to the deferred gain upon the adoption of ASC 606.
d. 2017 Divestiture of evaluated and unevaluated oil and natural gas properties
In January 2017, the Company completed the sale of 2,900 net acres and working interests842, rent income is included in 16 producing vertical wells in the Midland Basin to a third-party buyer for a purchase price of $59.7 million. After transaction costs reflecting an economic effective date of October 1, 2016, the proceeds were $59.5 million, net of working capital and post-closing adjustments. A significant portion of these proceeds was used to pay down borrowings"Other income, net" on the Senior Secured Credit Facility. The purchase price was recorded as an adjustment to oil and natural gas properties pursuant to the rules governing full cost accounting. Effective at closing, the operations and cash flows of these oil and natural gas properties were eliminated from the ongoing operations of the Company, and the Company has no continuing involvement in the properties. This divestiture did not represent a strategic shift and will not have a major effect on the Company's future operations or financial results.
e. Exchange of unevaluated oil and natural gas properties
From time to time, the Company exchanges undeveloped acreage with third parties. The exchanges are recorded at fair value and the difference is accounted for as an adjustment of capitalized costs with no gain or loss recognized pursuant to the rules governing full cost accounting, unless such adjustment would significantly alter the relationship between capitalized costs and proved reserves of oil, NGL and natural gas.
Note 4—Revenue recognition
a. Impact of ASC 606 adoption
Upon adoption of ASC 606 on January 1, 2018, for the three and nine months ended September 30, 2018, the Company reclassified certain firm transportation payments on excess pipeline capacity and other contractual penalties due to customers, historically included in the "Other operating expenses" line item in the unaudited consolidated statements of operations, and netted them with the revenue stream from which they derive as these payments to customers do not relate to the provision of a distinct good or service to the customer. In addition, there was an impact upon adoption related to the treatment of the gain on the Medallion Sale.operations.
Condensed notes to the consolidated financial statements
(Unaudited)
The impact of the adoption of ASC 606 on the results of operations for the periods presented is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2018 | | Nine months ended September 30, 2018 |
(in thousands) | | As computed under ASC 605 |
| As reported under ASC 606 |
| Increase/(decrease) | | As computed under ASC 605 | | As reported under ASC 606 | | Increase/(decrease) |
Revenues: | | | | | | | | | | | | |
Oil sales | | $ | 160,246 |
| | $ | 160,007 |
| | $ | (239 | ) | | $ | 472,496 |
| | $ | 469,972 |
| | $ | (2,524 | ) |
NGL sales | | $ | 50,814 |
| | $ | 50,814 |
| | $ | — |
| | $ | 115,979 |
| | $ | 115,979 |
| | $ | — |
|
Natural gas sales | | $ | 15,043 |
| | $ | 15,043 |
| | $ | — |
| | $ | 45,908 |
| | $ | 45,908 |
| | $ | — |
|
Costs and expenses: | | | | | | | | | | | | |
Other operating expenses | | $ | 1,353 |
| | $ | 1,114 |
| | $ | (239 | ) | | $ | 5,865 |
| | $ | 3,341 |
| | $ | (2,524 | ) |
| | | | | | | | | | | | |
Net income | | $ | 55,050 |
| | $ | 55,050 |
| | $ | — |
| | $ | 175,022 |
| | $ | 175,022 |
| | $ | — |
|
At December 31, 2017, the Medallion Sale was accounted for under the real estate guidance in ASC 360-20, Property, Plant, and Equipment ("ASC 360-20"), and the Company's maximum exposure to loss associated with future commitments under the TA was $141.1 million that was not recorded in the Company's unaudited consolidated balance sheets. Under ASC 360-20, as a result of the Company's continuing involvement with Medallion by guaranteeing cash flows under the TA, the Company recorded a deferred gain in the amount of its maximum exposure to loss related to such guarantees. This deferred gain would have been amortized over the TA's firm commitment transportation term through 2024 had the Company not adopted ASC 606 on January 1, 2018. See Note 3.c for further discussion of the Medallion Sale and the TA.
Upon the adoption of ASC 606, the guidance in ASC 360-20 was superseded by ASC 860, Transfers and Servicing ("ASC 860"). The Medallion Sale is within the scope of ASC 860 and qualifies for sale accounting and recognition of the previously deferred gain because as of the date of the Medallion Sale (i) the Company transferred and legally isolated its full interests in Medallion to GIP, (ii) GIP received the right to pledge or exchange Medallion ownership interests at its full discretion and (iii) the Company did not have effective control over Medallion. Therefore, the deferred gain of $141.1 million was recognized as an adjustment to the beginning balance of accumulated deficit, presented in the unaudited consolidated statements of stockholders' equity, in accordance with the modified retrospective approach of adoption.
b. Revenue recognition
Oil, NGL and natural gas revenues are generally recognized at the point in time that control of the product is transferred to the customer. Midstream service revenues are generated through fees for products and services that need to be delivered by midstream infrastructure, including oil and liquids-rich natural gas gathering services as well as rig fuel, gas lift and water delivery, recycling and takeaway (collectively, "Midstream Services") and are recognized over time as the customer benefits from these services when provided. A more detailed summary of the underlying contracts that give rise to the Company's revenue and method of recognition is included below.
Oil sales and sales of purchased oil
Under its oil sales contracts, the Company sells produced or purchased oil at the delivery point specified in the contract and collects an agreed-upon index price, net of pricing differentials. The delivery point may be at the wellhead, the inlet of the purchaser's pipeline or nominated pipeline or the Company's truck unloading facility. At the delivery point, the purchaser typically takes custody, title and risk of loss of the product and, therefore, control as defined under ASC 606 typically passes at the delivery point. The Company recognizes revenue at the net price received when control transfers to the purchaser.
From time to time, the Company engages in transactions in which it sells oil at the lease and subsequently repurchases the same volume of oil from that customer at a downstream delivery point under a separate agreement ("Repurchase Agreement") for use in the sale to the final customer. The commercial reasoning for such transactions may vary. Where a Repurchase Agreement exists, the Company must evaluate whether the customer obtains control of the oil at the lease and therefore whether it is appropriate to recognize revenue for the lease sale. Where the Company has an obligation or a right to repurchase the oil, the customer does not obtain control of the oil because it is limited in its ability to direct the use of, and obtain substantially all of the remaining benefits from the oil even though it may have physical possession of the oil. If the Company repurchases the oil for less than the original selling price, such a transaction will be classified as a lease. If the Company repurchases the oil for equal to or more than the original selling price, then the transaction represents a financing arrangement unless there is only a short passage of time between the sale and repurchase, in which case any excess amount paid
Condensed notes to the consolidated financial statements
(Unaudited)
represents an expense associated with the sale of oil to the final customer. The Company recognizes such repurchase expense and any transportation expenses incurred for the delivery of the oil to the final customer in the "Transportation and marketing expenses" line item in the accompanying unaudited consolidated statements of operations.
Under certain of its customer contracts, the Company is subject to firm transportation payments on excess pipeline capacity and other contractual penalties if it fails to deliver contractual minimum volumes to its customers. Such amounts are recorded as a reduction to the transaction price as these amounts do not represent payments to the customer for distinct goods or services and instead relate specifically to the failure to perform under the specific customer contract. Such amounts are recorded as a reduction to the transaction price when payment is determined as probable, typically when such a deficiency occurs.
NGL and natural gas sales
Under its natural gas processing contracts, the Company delivers produced natural gas to a midstream processing entity at the wellhead or the inlet of the processing entity's system. The processing entity processes the natural gas, sells the resulting NGL and residue gas to third parties and pays the Company for the NGL and residue gas with deductions that may include gathering, compression, processing and transportation fees. In these scenarios, the Company evaluates whether it is the principal or the agent in the transaction. For existing contracts, the Company has concluded that it is the agent in the ultimate sale to the third party and the midstream processing entity is the principal and that we have transferred control of unprocessed natural gas to the midstream processing entity; therefore, the Company recognizes revenue based on the net amount of the proceeds received from the midstream processing entity who represents the Company's customer. If for future contracts the Company was to conclude that it was the principal with the ultimate third party being the customer, the Company would recognize revenue for those contracts on a gross basis, with gathering, compression, processing, and transportation fees presented as an expense.
Midstream Services
Revenue from oil throughput agreements is recognized based on a rate per barrel for volumes transported. Under the Company's oil throughput agreements, a volumetric deduction is taken from customer oil as a pipeline loss allowance. While these amounts represent non-cash consideration under ASC 606, such deductions are immaterial. Revenue from natural gas throughput agreements is recognized based on a rate per MMbtu for volumes transported. Revenue from water delivery, recycling and takeaway is recognized based on the volumes of water for which the services are provided at the applicable contractual rate.
Imbalances
The Company recognizes revenue for all oil, NGL and natural gas sold to purchasers regardless of whether the sales are proportionate to the Company's ownership interest in the property. Production imbalances are recognized as a liability to the extent an imbalance on a specific property exceeds the Company's share of remaining proved oil, NGL and natural gas reserves. The Company is also subject to natural gas pipeline imbalances, which are recorded as accounts receivable or payable at values consistent with contractual arrangements with the owner of the pipeline. The Company did not have any producer or pipeline imbalance positions as of September 30, 2018 or December 31, 2017.
Significant judgments
The Company engages in various types of transactions in which unaffiliated midstream entities process the Company's liquids-rich natural gas and, in some scenarios, subsequently market resulting NGL and residue gas to third-party customers on the Company's behalf. These types of transactions require judgment to determine whether the Company is the principal or the agent in the contract and, as a result, whether revenues are recorded gross or net. For existing contracts, the Company has determined that it serves as the agent in the sale of products under certain natural gas processing and marketing agreements with unaffiliated midstream entities in accordance with the control model in ASC 606. As a result, the Company presents revenue on a net basis for amounts expected to be received from third-party customers through the marketing process, with expenses and deductions incurred subsequent to control of the product(s) transferring to the unaffiliated midstream entity being netted against revenue.
Transaction price allocated to remaining performance obligations
A significant number of the Company's product sales are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14 that exempts the Company from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.
Condensed notes to the consolidated financial statements
(Unaudited)
For the Company's product sales that have a contract term greater than one year and for its Midstream Services, the Company has utilized the practical expedient in ASC 606-10-50-14A that states that it is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under the Company's product sales contracts, each unit of product generally represents a separate performance obligation; therefore, future volumes are wholly unsatisfied. Under the Midstream Services contracts each unit of service represents a separate performance obligation and therefore performance obligations in respect of future services are wholly unsatisfied.
Contract balances
Under the Company's customer contracts, invoicing occurs once the Company's performance obligations have been satisfied, at which point payment is unconditional. Accordingly, the Company's contracts do not give rise to contract assets or liabilities under ASC 606.
Prior-period performance obligations
For sales of oil, NGL, natural gas and purchased oil, the Company records revenue in the month production is delivered to the purchaser. However, settlement statements and payment may not be received for 30 to 90 days after the date production is delivered and, as a result, the Company is required to estimate the amount of production that was delivered to the purchaser and the price that will be received for the sale of the product. The Company records the differences between estimates and the actual amounts received for product sales once payment is received from the purchaser. Such differences have historically not been significant. The Company uses knowledge of its properties, its properties' historical performance, spot market prices and other factors as the basis for these estimates. For the three and nine months ended September 30, 2018, revenue recognized related to performance obligations satisfied in prior reporting periods was not material.
Note 5—4—Property and equipment
The following table presents the Company's property and equipment as of the dates presented: |
| | | | | | | | |
(in thousands) | | June 30, 2019 | | December 31, 2018 |
Evaluated oil and natural gas properties | | $ | 7,080,332 |
| | $ | 6,752,631 |
|
Less accumulated depletion and impairment | | (4,975,302 | ) | | (4,854,017 | ) |
Evaluated oil and natural gas properties, net | | 2,105,030 |
| | 1,898,614 |
|
| | | | |
Unevaluated oil and natural gas properties not being depleted | | 95,138 |
| | 130,957 |
|
| | | | |
Midstream service assets | | 178,735 |
| | 172,308 |
|
Less accumulated depreciation and impairment | | (47,102 | ) | | (42,063 | ) |
Midstream service assets, net | | 131,633 |
| | 130,245 |
|
| | | | |
Depreciable other fixed assets | | 44,654 |
| | 45,431 |
|
Less accumulated depreciation and amortization | | (24,980 | ) | | (23,871 | ) |
Depreciable other fixed assets, net | | 19,674 |
| | 21,560 |
|
| | | | |
Land | | 18,259 |
| | 18,259 |
|
| | | | |
Total property and equipment, net | | $ | 2,369,734 |
| | $ | 2,199,635 |
|
|
| | | | | | | | |
(in thousands) | | September 30, 2018 | | December 31, 2017 |
Evaluated oil and natural gas properties | | $ | 6,589,327 |
| | $ | 6,070,940 |
|
Less accumulated depletion and impairment | | (4,798,527 | ) | | (4,657,466 | ) |
Evaluated oil and natural gas properties, net | | 1,790,800 |
| | 1,413,474 |
|
| | | | |
Unevaluated oil and natural gas properties not being depleted | | 147,690 |
| | 175,865 |
|
| | | | |
Midstream service assets | | 171,740 |
| | 171,427 |
|
Less accumulated depreciation and impairment | | (39,325 | ) | | (33,102 | ) |
Midstream service assets, net | | 132,415 |
| | 138,325 |
|
| | | | |
Depreciable other fixed assets | | 50,420 |
| | 48,957 |
|
Less accumulated depreciation and amortization | | (26,415 | ) | | (23,150 | ) |
Depreciable other fixed assets, net | | 24,005 |
| | 25,807 |
|
| | | | |
Land | | 18,259 |
| | 14,914 |
|
| | | | |
Total property and equipment, net | | $ | 2,113,169 |
| | $ | 1,768,385 |
|
For the three months ended September 30, 2018 and 2017, depletion expense for the Company's evaluated oil and natural gas properties was $7.94 per barrel of oil equivalent ("BOE") sold and $6.80 per BOE sold, respectively. For the nine months ended September 30, 2018 and 2017, depletion expense for the Company's evaluated oil and natural gas properties was $7.67 per BOE sold and $6.57 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 employee-relatedrelated 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
Condensed notes to the consolidated financial statements
(Unaudited)
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 employee-relatedrelated 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 employee-relatedrelated employee costs incurred for the purpose of exploring for or developing oil and natural gas properties for the periods presented: |
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Capitalized related employee costs | | $ | 3,430 |
| | $ | 6,735 |
| | $ | 10,112 |
| | $ | 13,264 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Capitalized employee-related costs | | $ | 5,837 |
| | $ | 6,938 |
| | $ | 19,101 |
| | $ | 17,911 |
|
The Company excludes the costs directly associated with the acquisition and evaluation of unevaluated properties from the depletion calculation until it is determined whether or not proved reserves can be assigned to the properties. The Company capitalizes a portion of its interest costs to its unevaluated properties. Capitalized interest becomes a part of the cost of the unevaluated properties and is subject to depletion when proved reserves can be assigned to the associated properties. All items classified as unevaluated properties are assessed on a quarterly basis for possible impairment. The assessment includes consideration of the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of evaluated reserves and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion.
The full cost ceiling is based principally on the estimated future net revenues from proved oil and natural gas properties discounted at 10%. The SEC guidelines require companies to use the unweighted arithmetic average first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period before differentials ("Benchmark Prices"). The Benchmark Prices are then adjusted for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the wellhead ("Realized Prices"). The Realized Prices are utilized
Condensed notes to the consolidated financial statements
(Unaudited)
to calculate the discounted future net revenues in the full cost ceiling calculation. Significant inputs included in the calculation of discounted cash flows used in the impairment analysis include the Company's estimate of operating and development costs, anticipated production of proved reserves and other relevant data.
In the event the unamortized cost of evaluated oil and natural gas properties being depleted exceeds the full cost ceiling, as defined by the SEC, the excess is charged to expense in the period such excess occurs. Once incurred, a write-down of oil and natural gas properties is not reversible. As the Company's Realized Prices decrease, it is reasonably possible that a material full cost ceiling impairment could occur. The unamortized cost of evaluated oil and natural gas properties did not exceed the full cost ceiling amount as of June 30, 2019 or December 31, 2018. There were no full cost ceiling impairments recorded during the six months ended June 30, 2019 or 2018.
The following table presents the Benchmark Prices and Realized Prices as of the dates presented: |
| | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Benchmark Prices: | | | | |
Oil ($/Bbl) | | $ | 57.90 |
| | $ | 62.04 |
|
NGL ($/Bbl)(1) | | $ | 28.21 |
| | $ | 31.46 |
|
Natural gas ($/MMBtu) | | $ | 1.14 |
| | $ | 1.76 |
|
Realized Prices: | | | | |
Oil ($/Bbl) | | $ | 55.69 |
| | $ | 59.29 |
|
NGL ($/Bbl) | | $ | 18.64 |
| | $ | 21.42 |
|
Natural gas ($/Mcf) | | $ | 0.70 |
| | $ | 1.38 |
|
_____________________________________________________________________________ | |
(1) | Based on the Company's average composite NGL barrel. |
The Company computes the provision for depletion of oil and natural gas properties using the unit-of-production method based upon production and estimates of proved reserve quantities. For the three months ended June 30, 2019 and 2018, depletion expense for the Company's evaluated oil and natural gas properties was $8.27 per barrel of oil equivalent ("BOE") sold and $7.68 per BOE sold, respectively. For the six months ended June 30, 2019 and 2018, depletion expense for the Company's evaluated oil and natural gas properties was $8.51 per BOE sold and $7.52 per BOE sold, respectively.
The following table presents costs incurred in the acquisition, exploration and development of oil and natural gas properties, with asset retirement obligations included in evaluated property acquisition costs and development costs, for the periods presented: |
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2019 |
| 2018 | | 2019 | | 2018 |
Property acquisition costs(1): | | |
| | |
| | |
| | — |
|
Evaluated | | $ | — |
| | $ | 13,847 |
| | $ | — |
| | $ | 13,847 |
|
Unevaluated | | 2,880 |
| | 2,790 |
| | 2,880 |
| | 2,790 |
|
Exploration costs | | 5,116 |
| | 5,108 |
| | 12,621 |
| | 11,245 |
|
Development costs | | 123,664 |
| | 178,796 |
| | 276,381 |
| | 327,834 |
|
Total costs incurred | | $ | 131,660 |
| | $ | 200,541 |
| | $ | 291,882 |
| | $ | 355,716 |
|
_____________________________________________________________________________
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 |
Property acquisition costs (see Note 3.a): | | |
| | |
| | |
| | — |
|
Evaluated | | $ | — |
| | $ | — |
| | $ | 13,847 |
| | $ | — |
|
Unevaluated | | — |
| | — |
| | 2,790 |
| | — |
|
Exploration costs | | 7,502 |
| | 7,136 |
| | 18,747 |
| | 28,337 |
|
Development costs | | 139,748 |
| | 160,359 |
| | 467,582 |
| | 397,255 |
|
Total costs incurred | | $ | 147,250 |
| | $ | 167,495 |
| | $ | 502,966 |
| | $ | 425,592 |
|
| |
(1) | See Note 3.a in the second-quarter 2018 Quarterly Report for discussion of the Company's acquisitions of evaluated and unevaluated oil and natural gas properties during the three months ended June 30, 2018. |
Note 6—5—Debt
a. March 2023 Notes
On March 18, 2015, the Company completed an offering of $350.0 million in aggregate principal amount of 6 1/4% senior unsecured notes due 2023 (the "March 2023 Notes"). The March 2023 Notes will mature on March 15, 2023 and bear an interest rate of 6 1/4% per annum, payable semi-annually, in cash in arrears on March 15 and September 15 of each year, commencing September 15, 2015. The March 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis
Condensed notes to the consolidated financial statements
(Unaudited)
by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain automatic customary releases, including the sale, disposition or transfer of all of the capital stock or of all or substantially all of the assets of a subsidiary guarantor to one or more persons that are not the Company or a restricted subsidiary, exercise of legal defeasance or covenant defeasance options or satisfaction and discharge of the applicable indenture, designation of a subsidiary guarantor as a non-guarantor restricted subsidiary or as an unrestricted subsidiary in accordance with the applicable indenture, release from guarantee under the Senior Secured Credit Facility, or liquidation or dissolution (collectively, the "Releases"). The Company may redeem, at its option, all or part of the March 2023 Notes at any time after March 15, 2018, at a price of 104.688%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.
Condensed notes to the consolidated financial statements
(Unaudited)
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 after January 15, 2018, at a price of 102.813%101.406% of face value with call premiums declining annually 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. 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 were due to mature on May 1, 2022 and bore 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 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 November 29, 2017 (the "May 2022 Notes Redemption Date"), utilizing a portion of the proceeds from the Medallion Sale, the entire $500.0 million outstanding principal amount of the May 2022 Notes was redeemed at a redemption price of 103.688% of the principal amount of the May 2022 Notes, plus accrued and unpaid interest up to, but not including, the May 2022 Notes Redemption Date. The Company recognized a loss on extinguishment of $23.8 million related to the difference between the redemption price and the net carrying amount of the extinguished May 2022 Notes.
d. 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 SeptemberJune 30, 2018,2019, 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$1.1 billion each, with $170.0$235.0 million outstanding and was subject to an interest rate of 3.44%3.69%. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which the Company was in compliance with as of September 30, 2018. Laredo is required to pay a 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 aggregate elected commitment under the Senior Secured Credit Facility.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. No lettersAs of June 30, 2019 and December 31, 2018, the Company had one letter of credit were outstanding as of September 30,$14.7 million under the Senior Secured Credit Facility. For additional information see Note 7.d in the 2018 or December 31, 2017.Annual Report. See Note 1618.a for discussion of items affectingan additional payment on the Senior Secured Credit Facility subsequent to SeptemberJune 30, 2018.2019.
e.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:
| | | | September 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
(in thousands) | | Long-term debt | | Debt issuance costs, net | | Long-term debt, net | | Long-term debt | | Debt issuance costs, net | | Long-term debt, net | | 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 |
| | $ | (3,254 | ) | | $ | 446,746 |
| | $ | 450,000 |
| | $ | (3,987 | ) | | $ | 446,013 |
| | $ | 450,000 |
| | $ | (2,522 | ) | | $ | 447,478 |
| | $ | 450,000 |
| | $ | (3,010 | ) | | $ | 446,990 |
|
March 2023 Notes | | 350,000 |
| | (3,555 | ) | | 346,445 |
| | 350,000 |
| | (4,158 | ) | | 345,842 |
| | 350,000 |
| | (2,952 | ) | | 347,048 |
| | 350,000 |
| | (3,354 | ) | | 346,646 |
|
Senior Secured Credit Facility(1) | | 170,000 |
| | — |
| | 170,000 |
| | — |
| | — |
| | — |
| | 235,000 |
| | — |
| | 235,000 |
| | 190,000 |
| | — |
| | 190,000 |
|
Total | | $ | 970,000 |
| | $ | (6,809 | ) | | $ | 963,191 |
| | $ | 800,000 |
| | $ | (8,145 | ) | | $ | 791,855 |
| | $ | 1,035,000 |
| | $ | (5,474 | ) | | $ | 1,029,526 |
| | $ | 990,000 |
| | $ | (6,364 | ) | | $ | 983,636 |
|
______________________________________________________________________________ | |
(1) | Debt issuance costs, net related to our Senior Secured Credit Facility of $7.4$6.1 million and $6.0$7.0 million as of SeptemberJune 30, 20182019 and December 31, 2017,2018, respectively, are reported in "Other noncurrent assets, net" on the unaudited consolidated balance sheets. |
Condensed notes to the consolidated financial statements
(Unaudited)
Note 7—6—Stockholders' equity and stock-based compensationEquity Incentive Plan
a. Share repurchase program
In February 2018, the Company's board of directors authorized a $200 million share repurchase program commencing in February 2018. The repurchase program expires in February 2020. Share repurchases under the share repurchase program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions and block trades. The timing and actual number of share repurchases will depend upon several factors, including market conditions, business conditions, the trading price of the Company's common stock and the nature of other investment opportunities available to the Company. During the three monthsyear ended September 30, 2018, the Company repurchased 1,170,190 shares of common stock at a weighted-average price of $8.41 per common share for a total of $9.9 million under this program. During the nine months ended September 30,December 31, 2018, the Company repurchased 11,048,742 shares of common stock at a weighted-average price of $8.78 per common share for a total of $97.1 million under this program. All shares were retired upon repurchase. There were no share repurchases under this program during the six months ended June 30, 2019.
b. Treasury stock
Treasury stock is recorded at cost, which includes incremental direct transaction costs, and is retired upon acquisition as a result from (i) share repurchases under the share repurchase program, or from the withholding of shares of(ii) stock exchanged to satisfy employee tax withholding obligations that arisearises upon the lapse of restrictions on their stock-basedrestricted stock awards and the exercise of stock options at the employees'awardee's election and (iii) stock exchanged for cost of exercise of stock options at the awardee's election.
c. Stock-based compensationEquity Incentive Plan
The Company's Long-TermLaredo Petroleum, Inc. Omnibus Equity Incentive Plan, as amended and restated as of May 16, 2019 (the "LTIP""Equity Incentive Plan"), provides for the granting of incentive awards in the form of restricted stock awards, stock option awards, performance share awards, outperformance share awards, performance unit awards and other awards. The LTIP provides forDuring the issuancesecond quarter of up2019, the Company's stockholders approved an amendment to the Equity Incentive Plan, among other items, to increase the maximum number of shares of the Company's common stock issuable under the Equity Incentive Plan from 24,350,000 shares of Laredo's common stock.to 29,850,000 shares.
The Company recognizes the fair value of stock-based compensation awards, expected to vest over the requisite service period, as a charge against earnings, net of amounts capitalized. The Company's stock-based compensation awards are accounted for as equity instrumentsawards and are included in the "General and administrative" line item inon the unaudited consolidated statements of operations. The Company capitalizes a portion of stock-based compensation for employees who are directly involved in the acquisition, exploration or development of oil and natural gas properties into the full cost pool. Capitalized stock-based compensation is included in the "Evaluated properties" line item on the unaudited consolidated balance sheets. The Company's performance unit awards, granted in 2019, were accounted for as liability awards and included in "General and administrative", net of amounts capitalized, in the unaudited consolidated statements of operations for the three months ended March 31, 2019, and the corresponding liabilities were included in "Other noncurrent liabilities" on the unaudited consolidated balance sheet as of March 31, 2019. Upon their modification during second quarter of 2019, the performance unit awards were converted to performance share awards and the performance unit award compensation was reversed. See "Performance share awards" and "Performance unit awards" below for additional discussion of the modification.
Restricted stock awards
All service vesting restricted stock awards are treated as issued and outstanding in the accompanying unaudited consolidated financial statements. Per the award agreement terms, if an employee terminates employment is terminated prior to the restriction lapse date for reasons other than death or disability, the awarded sharesrestricted stock awards 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 that mainly include (i) 33%, 33% and 34% per year beginning on the first anniversary of the grant date and (ii) fully on the first anniversary of the grant date. Beginning August 2017, stockStock awards granted to non-employee directors vest immediately on the grant date. Restricted stock awards granted to non-employee directors prior to August 2017 vested on the first anniversarySee Note 17 for discussion of the grant date.
Company's organizational restructuring during the three months ended June 30, 2019.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table reflects the restricted stock award activity for the ninesix months ended SeptemberJune 30, 2018:2019: | | (in thousands, except for weighted-average grant-date fair value) | | Restricted stock awards | | Weighted-average grant-date fair value (per award) | | Restricted stock awards | | Weighted-average grant-date fair value (per award) |
Outstanding as of December 31, 2017 | | 3,169 |
| | $ | 12.81 |
| |
Outstanding as of December 31, 2018 | | | 4,196 |
| | $ | 9.91 |
|
Granted | | 3,248 |
| | $ | 8.42 |
| | 7,050 |
| | $ | 3.32 |
|
Forfeited | | (266 | ) | | $ | 10.35 |
| | (2,811 | ) | | $ | 4.99 |
|
Vested(1) | | (1,851 | ) | | $ | 12.21 |
| | (2,445 | ) | | $ | 9.70 |
|
Outstanding as of September 30, 2018 | | 4,300 |
| | $ | 9.90 |
| |
Outstanding as of June 30, 2019 | | | 5,990 |
| | $ | 4.55 |
|
_____________________________________________________________________________ | |
(1) | The total intrinsic value of vested restricted stock awards for the ninesix months ended SeptemberJune 30, 20182019 was $16.1$9.2 million. |
The Company utilizes the closing stock price on the grant date to determine the fair value of service vesting restricted stock awards. As of SeptemberJune 30, 2018,2019, unrecognized stock-based compensation related to the restricted stock awards expected to vest was $26.5$21.8 million. Such cost is expected to be recognized over a weighted-average period of 1.872.23 years.
Stock option awards
StockThe following table reflects the stock option awards granted underaward activity for the LTIP vest and become exercisable in four equal installments on each of the four anniversaries of the grant date. six months ended June 30, 2019: |
| | | | | | | | | |
(in thousands, except for weighted-average exercise price and weighted-average remaining contractual term) | | Stock option awards | | Weighted-average exercise price (per award) | | Weighted-average remaining contractual term (years) |
Outstanding as of December 31, 2018 | | 2,533 |
| | $ | 12.69 |
| | 5.99 |
Exercised(1) | | (18 | ) | | $ | 4.10 |
| | |
Expired or canceled | | (49 | ) | | $ | 18.45 |
| | |
Forfeited | | (196 | ) | | $ | 8.71 |
| | |
Outstanding as of June 30, 2019 | | 2,270 |
| | $ | 12.98 |
| | 3.04 |
Vested and exercisable as of June 30, 2019(2) | | 2,096 |
| | $ | 13.34 |
| | 2.70 |
Expected to vest as of June 30, 2019(3) | | 174 |
| | $ | 8.72 |
| | 7.11 |
_____________________________________________________________________________ | |
(1) | The exercised stock option awards for the six months ended June 30, 2019 had de minimis intrinsic value. |
| |
(2) | The vested and exercisable stock option awards as of June 30, 2019 had no aggregate intrinsic value. |
| |
(3) | The expected to vest stock option awards as of June 30, 2019 had no aggregate intrinsic value. |
As of SeptemberJune 30, 2018, the 2,577,205 outstanding stock option awards have a weighted-average exercise price of $12.66 and a weighted-average remaining contractual term of 6.37 years. There were de minimis exercises, forfeitures and cancellations of stock option awards during the nine months ended September 30, 2018. There were no grants of stock option awards during the nine months ended September 30, 2018.
The Company utilizes the Black-Scholes option pricing model to determine the fair value of stock option awards and recognizes 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 expected volatility. As of September 30, 2018,2019, unrecognized stock-based compensation related to stock option awards expected to vest was $5.0$1.1 million. Such cost is expected to be recognized over a weighted-average period of 1.671.15 years.
See Note 17 for discussion of the Company's organizational restructuring during the three months ended June 30, 2019. See Note 8.c in the 2018 Annual Report for additional information on the stock option awards.
Performance share awards
Performance share awards, which the Company has determined are equity awards, are subject to a combination of market, performance and service vesting criteria. For performance share awards with market criteria or portions of awards with market criteria, which includeinclude: (i) the relative three-year total shareholder return comparing the Company's shareholder return to the shareholder return of the peer group specified in each award agreement ("RTSR Performance Percentage (as defined below)Percentage"), (ii) the Company's absolute three-year total shareholder return ("ATSR Appreciation (as defined below)Appreciation") and (iii) the Company's total shareholder return ("TSR"), a Monte Carlo simulation prepared by an independent third party is utilized to determine the grant-date (or modification date) fair value, and the associated expense is recognized on a straight-line basis over the three-year requisite service period of the awards. For portions of awards with performance criteria, which is the Company's three-year return on average capital employed ("ROACE Percentage (as defined below)Percentage"), the grant-date fair value is equal to the Company's closing stock price on the grant date (or modification date), and for each reporting period, the associated expense fluctuates and is trued-upadjusted based on an estimated probabilitypayout of how manythe number of shares willof common stock to be earned atdelivered on the end ofpayment date for the three-year performance period.
Condensed notes to the consolidated financial statements
(Unaudited)
Any shares earned under performance share awards are expected to be issued in the first quarter following the completion of the respective requisite service periodperiods based on the achievement of certain market and performance criteria.
Condensed notescriteria, and the payout can range from 0% to 200%. Per the award agreement terms, if employment is terminated prior to the consolidated financial statementsrestriction lapse date for reasons other than death or disability, the performance share awards are forfeited and canceled. If the termination of employment is by reason of death or disability, and the market and performance criteria are satisfied, then the holder of the earned performance share awards will receive a prorated number of shares based on the number of days the participant was employed with the Company during the performance period. See Note 17 for discussion of the Company's organizational restructuring during the three months ended June 30, 2019.
(Unaudited)
The following table reflects the performance share award activity for the ninesix months ended SeptemberJune 30, 2018:2019: |
| | | | | | | |
(in thousands, except for weighted-average grant-date fair value) | | Performance share awards | | Weighted-average grant-date fair value (per award) |
Outstanding as of December 31, 2018 | | 3,436 |
| | $ | 13.74 |
|
Granted(1) | | 588 |
| | $ | 2.52 |
|
Converted from performance unit awards(1)(2) | | 1,558 |
| | $ | 3.74 |
|
Forfeited | | (860 | ) | | $ | 12.26 |
|
Vested(3) | | (1,545 | ) | | $ | 17.31 |
|
Outstanding as of June 30, 2019 | | 3,177 |
| | $ | 6.28 |
|
|
| | | | | | | |
(in thousands, except for weighted-average grant-date fair value) | | Performance share awards | | Weighted-average grant-date fair value (per award) |
Outstanding as of December 31, 2017 | | 2,745 |
| | $ | 17.77 |
|
Granted(1) | | 1,389 |
| | $ | 9.22 |
|
Forfeited | | (149 | ) | | $ | 14.83 |
|
Vested(2) | | (454 | ) | | $ | 16.23 |
|
Outstanding as of September 30, 2018 | | 3,531 |
| | $ | 14.55 |
|
______________________________________________________________________________ | |
(1) | The amount of stockamounts potentially payable in the Company's common stock at the end of the performancerequisite service period for the performance share awards granted on February 16, 201828, 2019 and June 3, 2019 will be determined based on three criteria: (i) relative three-year total shareholder return comparing the Company's shareholder return to the shareholder return of the peer group specified in the award agreement ("RTSR Performance Percentage"),Percentage, (ii) absolute three-year total shareholder return ("ATSR Appreciation")Appreciation and (iii) three-year return on average capital employed ("ROACE Percentage").Percentage. The RTSR Performance Percentage, ATSR Appreciation and ROACE Percentage will be used to identify the "RTSR Factor," the "ATSR Factor" and the "ROACE Factor," respectively, which are used to compute the "Performance Multiple" and ultimately to determine the final number of shares associated with each performance share unit granted atto be delivered on the maturity date (with all partial shares rounded, as appropriate).payment date. In computing the Performance Multiple, the RTSR Factor is given a 25% weight, the ATSR Factor a 25% weight and the ROACE Factor a 50% weight. The $9.22 per unit grant-date fair value consists of a (i) $10.08 per unit grant-date fair value, determined utilizing a Monte Carlo simulation, for the combined (.25) RTSR Factor and (.25) ATSR Factor and (ii) $8.36 per unit grant-date fair value for the (.50) ROACE Factor determined based on the closing price of the Company's common stock on the New York Stock Exchange on February 16, 2018. These awards have a performance period of January 1, 20182019 to December 31, 2020.2021. |
| |
(2) | On May 16, 2019, the board of directors elected to change the form of payment from cash to common stock for the awards granted on February 28, 2019. This change in election triggered modification accounting, and the awards, formerly accounted for as liability awards, were converted to equity awards and, accordingly, new fair values were determined based on the May 16, 2019 modification date. |
| |
(3) | The performance share awards granted on February 27, 2015May 25, 2016 had a performance period of January 1, 20152016 to December 31, 20172018 and, as their performancemarket criteria were not satisfied, resulted in a TSR modifier of 0% based on the Company finishing in the 36thninth percentile of its peer group for relative TSR. As such, the granted units lapsed and were not converted into the Company's common stock during the first quarter of 2018.2019. |
Condensed notes to the consolidated financial statements
(Unaudited)
The fair values per performance share award and the assumptions used to estimate these fair values per performance share award granted on February 28, 2019 and June 3, 2019 are as follows: |
| | | | | | | | |
| | February 28, 2019(1) | | June 3, 2019 |
Market criteria: | | | | |
(.25) RTSR Factor + (.25) ATSR Factor fair value assumptions: | | | | |
Remaining performance period | | 2.63 years |
| | 2.58 years |
|
Risk-free interest rate(2) | | 2.14 | % | | 1.78 | % |
Dividend yield | | — | % | | — | % |
Expected volatility(3) | | 55.01 | % | | 55.45 | % |
Closing stock price on May 16, 2019 and June 3, 2019 for the respective awards | | $ | 3.49 |
| | $ | 2.59 |
|
Fair value per performance share award | | $ | 3.98 |
| | $ | 2.45 |
|
| | | | |
Performance criteria: | | | | |
(.50) ROACE Factor fair value assumption: | | | | |
Closing stock price on May 16, 2019 and June 3, 2019 for the respective awards | | $ | 3.49 |
| | $ | 2.59 |
|
Fair value per performance share award | | $ | 3.49 |
| | $ | 2.59 |
|
| | | | |
Combined fair value per performance share award(4) | | $ | 3.74 |
| | $ | 2.52 |
|
______________________________________________________________________________ | |
(1) | The fair values of the performance share awards granted on February 28, 2019 are based on the May 16, 2019 modification date. The total incremental compensation expense resulting from the modification of $1.0 million, which will be recognized over the life of the awards, is calculated utilizing (i) the difference between the March 31, 2019 fair value and the May 16, 2019 fair value and (ii) the outstanding quantity of the converted performance share awards as of June 30, 2019. Such expense excludes the estimated payout component for expense for the (.50) ROACE Factor as this is redetermined at each reporting period and the expense will fluctuate accordingly. |
| |
(2) | The remaining performance period matched zero-coupon risk-free interest rate was derived from the U.S. Treasury constant maturities yield curve on May 16, 2019 and June 3, 2019 for the respective awards. |
| |
(3) | The Company utilized its own remaining performance period matched historical volatility in order to develop the expected volatility. |
| |
(4) | The combined fair value per performance share award is the combination of the fair value per performance share award for weighted for the market and performance criteria for the respective awards. |
Condensed notes to the consolidated financial statements
(Unaudited)
The expense per performance share award for the outstanding performance share awards as of June 30, 2019 and granted as of the dates presented are as follows:
|
| | | | | | | | | | | | | | | | |
| | February 17, 2017 | | February 16, 2018 | | February 28, 2019 | | June 3, 2019 |
Market Criteria: | | | | | | | | |
(.25) RTSR Factor + (.25) ATSR Factor: | | | | | | | | |
Fair value per performance share award | | Not applicable | | $ | 10.08 |
| | $ | 3.98 |
| | $ | 2.45 |
|
Expense per performance share award as of June 30, 2019 | | Not applicable | | $ | 10.08 |
| | $ | 3.98 |
| | $ | 2.45 |
|
| | | | | | | | |
TSR: | | | | | | | | |
Fair value per performance share award | | $ | 18.96 |
| | | | | | |
Expense per performance share award as of June 30, 2019 | | $ | 18.96 |
| | | | | | |
| | | | | | | | |
Performance Criteria: | | | | | | | | |
(.50) ROACE Factor: | | | | | | | | |
Fair value per performance share award | | Not applicable | | $ | 8.36 |
| | $ | 3.49 |
| | $ | 2.59 |
|
Estimated payout for expense as of June 30, 2019(1) | | Not applicable | | 60 | % | | 195 | % | | 195 | % |
Expense per performance share award as of June 30, 2019 | | Not applicable | | $ | 5.02 |
| | $ | 6.81 |
| | $ | 5.05 |
|
| | | | | | | | |
Combined expense per performance share award as of June 30, 2019(2) | | $ | 18.96 |
| | $ | 7.55 |
|
| $ | 5.40 |
|
| $ | 3.75 |
|
______________________________________________________________________________ | |
(1) | As the (.50) ROACE Factor is based on performance criteria, the expense fluctuates based on the estimated payout and is redetermined each reporting period and the life-to-date recognized expense for the respective awards is adjusted accordingly. |
| |
(2) | The combined expense per performance share award is the combination of the expense per performance share award for market and performance criteria for the respective awards. |
As of SeptemberJune 30, 2018,2019, unrecognized stock-based compensation related to the performance share awards expected to vest was $18.6$13.3 million. Such cost is expected to be recognized over a weighted-average period of 1.722.26 years.
Outperformance share award
An outperformance share award was granted during the three months ending June 30, 2019, in conjunction with the appointment of the Company's President, and is accounted for as an equity award. If earned, the payout ranges from 0 to 1,000,000 shares in the Company's common stock per the vesting schedule. This award is subject to a combination of market and service vesting criteria, therefore, a Monte Carlo simulation prepared by an independent third party was utilized to determine the grant-date fair value with the associated expense recognized over the requisite service period. The payout of this award is based on the highest 50 consecutive trading day average closing stock price of the Company that occurs during the performance period that commenced on June 3, 2019 and ends on June 3, 2022 ("Final Date"). Of the earned outperformance shares, one-third of the award will vest on the Final Date, one-third will vest on the first anniversary of the Final Date and one-third will vest on the second anniversary of the Final Date, provided that the participant has been continuously employed with the Company through the applicable vesting date. Per the award agreement terms, if employment is terminated prior to any vesting date for reasons other than death or disability, then any outperformance shares that have not vested as of such date shall be forfeited and canceled. If the participant's employment is terminated prior to any vesting date by reason of death or disability, and the market criteria is satisfied, then the participant will receive a pro-rated number of shares based on the number of days the employee was employed with the Company during the performance period.
Condensed notes to the consolidated financial statements
(Unaudited)
The total fair value of the outperformance share award and the assumptions used to estimate the combined fair value for the (.25) RTSR Factor and the (.25) ATSR Factor for the market criteria portion of the performanceoutperformance share awards granted onaward as of the grant date presented are as follows: | | | | February 16, 2018 | | June 3, 2019 |
Performance period | | | 3.00 years |
|
Risk-free interest rate(1) | | 2.34 | % | | 1.77 | % |
Dividend yield | | — | % | | — | % |
Expected volatility(2) | | 65.49 | % | | 55.77 | % |
Laredo stock closing price on grant date | | $ | 8.36 |
| |
Combined fair value per performance share award for the (.25) RTSR Factor and the (.25) ATSR Factor(3) | | $ | 10.08 |
| |
Closing stock price on grant date | | | $ | 2.59 |
|
Total fair value of outperformance share award (in thousands) | | | $ | 670 |
|
_____________________________________________________________________________ | |
(1) | The performance period matched zero-coupon risk-free interest rate was derived using a term-matched zero-coupon yield derived from the U.S. Treasury constant maturities yield curve on the grant date. |
| |
(2) | The Company utilized its own performance period matched historical volatility in order to develop the expected volatility. |
As of June 30, 2019, unrecognized stock-based compensation related to the outperformance share award expected to vest was $0.7 million. Such cost is expected to be recognized over a weighted-average period of 5.00 years.
Stock-based compensation expense
The following has been recorded to stock-based compensation expense for the periods presented: |
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Restricted stock award compensation | | $ | 2,559 |
| | $ | 7,286 |
| | $ | 7,882 |
| | $ | 13,331 |
|
Stock option award compensation | | 160 |
| | 971 |
| | 978 |
| | 2,040 |
|
Performance share award compensation | | (3,191 | ) | | 4,415 |
| | (27 | ) | | 8,742 |
|
Outperformance share award compensation | | 13 |
| | — |
| | 13 |
| | — |
|
Total stock-based compensation, gross | | (459 | ) | | 12,672 |
| | 8,846 |
| | 24,113 |
|
Less amounts capitalized in evaluated oil and natural gas properties | | 36 |
| | (1,996 | ) | | (1,863 | ) | | (4,098 | ) |
Total stock-based compensation, net | | $ | (423 | ) | | $ | 10,676 |
| | $ | 6,983 |
| | $ | 20,015 |
|
See Note 17 for discussion of the Company's organizational restructuring and the related stock-based compensation reversal during the three months ended June 30, 2019.
Performance unit awards
The performance unit awards, granted on February 28, 2019, were determined to be liability awards due to the board of directors election to settle the awards in cash. On May 16, 2019, the board of directors elected to change the form of payment from cash to common stock and, as a result, the performance unit awards were converted to performance share awards, which the Company determined were now equity awards. This change in election triggered modification accounting, and the performance unit award compensation for the three months ended March 31, 2019 was reversed and a new fair value was determined for the converted performance share awards and adjusted in stock-based compensation based on the May 16, 2019 modification date. For additional discussion of the modification, see "Performance share awards."
The following table reflects the performance unit award activity for the six months ended June 30, 2019: |
| | | |
(3)(in thousands) | The market criteria portion | Performance unit awards |
Outstanding as of theDecember 31, 2018 | | — |
|
Granted | | 2,813 |
|
Forfeited | | (1,255 | ) |
Converted to performance share award represents 50%awards | | (1,558 | ) |
Outstanding as of each of the amount of stock potentially payable, if any, and the grant-date fair value of the award.June 30, 2019 | | — |
|
Condensed notes to the consolidated financial statements
(Unaudited)
Stock-based compensation 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) | | 2018 | | 2017 | | 2018 | | 2017 |
Restricted stock award compensation | | $ | 6,001 |
| | $ | 5,422 |
| | $ | 19,332 |
| | $ | 16,856 |
|
Stock option award compensation | | 970 |
| | 1,159 |
| | 3,010 |
| | 3,600 |
|
Performance share award compensation | | 3,689 |
| | 4,255 |
| | 12,431 |
| | 12,063 |
|
Total stock-based compensation, gross | | 10,660 |
| | 10,836 |
| | 34,773 |
| | 32,519 |
|
Less amounts capitalized in oil and natural gas properties | | (1,927 | ) | | (1,870 | ) | | (6,025 | ) | | (5,642 | ) |
Total stock-based compensation, net | | $ | 8,733 |
| | $ | 8,966 |
| | $ | 28,748 |
| | $ | 26,877 |
|
Note 8—7—Derivatives
Due to the inherent volatility in oil, NGL and natural gas prices commodity transportation costs and differences in the prices of oil, NGL and natural gas between where the Company produces and where the Company sells such commodities, the Company engages in derivative transactions, such as puts, swaps, collars and basis swaps and, in the past, call spreads to hedge price risk associated with a portion of the Company's anticipated production. By removing a portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flows from operations due to fluctuationsoperations. See Notes 2.f and 9 in commodity prices, commodity transportation coststhe 2018 Annual Report for discussion of the Company's accounting policies for derivatives and differences in commodity prices between whereinformation on the transaction types and settlement indexes, respectively.
During the three months ended June 30, 2019, the Company producescompleted a hedge restructuring by early terminating puts and where the Company sells its products.
Each put transaction has an established floor price.collars and entering into new swaps. The Company pays its counterpartypaid a premium, which can be paid at inception ornet termination amount of $5.4 million that included the full settlement of the deferred until settlement, to enter intopremiums associated with these early-terminated puts and collars. The present value of these deferred premiums, classified under Level 3 of 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 floor price multiplied by the hedged contract volume. When the settlement price is at or above the floor price in an individual monthfair value hierarchy, upon their early termination was $7.2 million. See Note 10 in the contract period,2018 Annual Report for information about the put option expires with no settlement forfair value hierarchy levels.
The following table details the derivatives that particular month, except with regard to the deferred premium, if any.were terminated:
Each swap transaction has an established fixed price. When the settlement price is below the fixed price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is above the fixed price, the Company pays its counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. |
| | | | | | | | | | | | | |
| | Aggregate volumes (Bbl) | | Weighted-average floor price ($/Bbl) | | Weighted-average ceiling price ($/Bbl) | | Contract period |
Oil puts | | 5,087,500 |
| | $ | 46.03 |
| | $ | — |
| | April 2019 - December 2019 |
Oil collars | | 1,134,600 |
| | $ | 45.00 |
| | $ | 76.13 |
| | January 2020 - December 2020 |
Each collar transaction has an established price floor and ceiling. Depending on the terms, the Company may pay its counterparty a premium, which can be paid at inception or deferred until settlement. When the settlement price is below the price floor established by these collars, the counterparty pays the Company an amount 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. When the settlement price is between the price floor and price ceiling established by these collars in an individual month in the contract period, the collar expires with no settlement paid by either the Company or the counterparty for that particular month, except with regard to the deferred premium, if any.
Each basis swap transaction has an established fixed basis differential corresponding to two floating index prices. Depending on the difference of the two floating index prices in relationship to the fixed basis differential, the Company either receives an amount from its counterparty, or pays an amount to its counterparty, equal to the difference multiplied by the hedged contract volume.
Each call spread transaction has an established short call price and long call price. Depending on the terms, the counterparty may pay a premium to the Company to enter into the transaction. When the settlement price is above the short call price and less than or equal to the long call price, the Company pays its counterparty an amount equal to the difference between the settlement price and the short call price multiplied by the hedged contract volume. When the settlement price is above the long call price, the Company pays the counterparty an amount equal to the difference between the long call price and the short call price multiplied by the hedged contract volume. When the settlement price is at or below the short call price in an individual month in the contract period, the call option expires with no settlement paid by either the Company or the counterparty for that particular month, except with regard to the deferred premium, if any.
Condensed notes to the consolidated financial statements
(Unaudited)
Other than the oil basis swaps, the Company's oilThe following table summarizes open derivative positions as of June 30, 2019, for derivatives are settled based on the month's average daily NYMEX index pricethat were entered into through June 30, 2019, for the first nearby month of the West Texas Intermediate Light Sweet Crude Oil Futures Contract. The oil basis swaps are settled based on either (i) the differential between the Argus Americas Crude West Texas Intermediate ("WTI") index prices for WTI Midland-weighted average for the trade month and WTI Cushing-WTI formula basis for the trade month as compared to the basis swaps' fixed differential price or (ii) the differential between the Argus Americas Crude WTI Houston-weighted average price for the trade month and the WTI Midland-weighted average price for the trade month as compared to the basis swaps' fixed differential price. The Company's NGL derivatives are settled based on the month's average daily OPIS index price for Mont Belvieu Purity Ethane, TET and Non-TET Propane, Non-TET Normal Butane, Non-TET Isobutane and Non-TET Natural Gasoline. Other than the natural gas basis swaps, the Company's natural gas derivatives are settled based on the Inside FERC index price for West Texas WAHA for the calculation period. The natural gas basis swaps are settled based on the differential between the Inside FERC index price for West Texas WAHA for the calculation period and the NYMEX Henry Hub index price for the calculation period as compared to the basis swaps' fixed differential price.settlement periods presented: |
| | | | | | | | | | | | |
| | Remaining year 2019 | | Year 2020 | | Year 2021 |
Oil: | | | | |
| | |
Puts: | | |
| | |
| | |
Volume (Bbl) | | 644,000 |
| | 366,000 |
| | — |
|
Weighted-average floor price ($/Bbl) | | $ | 55.00 |
| | $ | 45.00 |
| | $ | — |
|
Volume with deferred premium (Bbl) | | 644,000 |
| | — |
| | — |
|
Weighted-average deferred premium price ($/Bbl) | | $ | 4.39 |
| | $ | — |
| | $ | — |
|
Swaps: | | |
| | |
| | |
Volume (Bbl) | | 3,956,000 |
| | 7,173,600 |
| | — |
|
Weighted-average price ($/Bbl) | | $ | 61.31 |
| | $ | 59.50 |
| | $ | — |
|
Collars: | | |
| | |
| | |
Volume (Bbl) | | — |
| | — |
| | 912,500 |
|
Weighted-average floor price ($/Bbl) | | $ | — |
| | $ | — |
| | $ | 45.00 |
|
Weighted-average ceiling price ($/Bbl) | | $ | — |
| | $ | — |
| | $ | 71.00 |
|
Totals: | | | | | | |
Total volume with floor price (Bbl) | | 4,600,000 |
| | 7,539,600 |
| | 912,500 |
|
Weighted-average floor price ($/Bbl) | | $ | 60.42 |
| | $ | 58.79 |
| | $ | 45.00 |
|
Total volume with ceiling price (Bbl) | | 3,956,000 |
| | 7,173,600 |
| | 912,500 |
|
Weighted-average ceiling price ($/Bbl) | | $ | 61.31 |
| | $ | 59.50 |
| | $ | 71.00 |
|
Basis Swaps: | | | | | | |
WTI Midland to WTI NYMEX: | | | | | | |
Volume (Bbl) | | 1,840,000 |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | (2.89 | ) | | $ | — |
| | $ | — |
|
WTI Midland to WTI formula basis: | | | | | | |
Volume (Bbl) | | 552,000 |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | (4.37 | ) | | $ | — |
| | $ | — |
|
NGL: | | | | | | |
Swaps - Purity Ethane: | | | | | | |
Volume (Bbl) | | 1,196,000 |
| | 366,000 |
| | 912,500 |
|
Weighted-average price ($/Bbl) | | $ | 14.22 |
| | $ | 13.60 |
| | $ | 12.01 |
|
Swaps - Non-TET Propane: | | | | | | |
Volume (Bbl) | | 956,800 |
| | 1,244,400 |
| | 730,000 |
|
Weighted-average price ($/Bbl) | | $ | 27.97 |
| | $ | 26.58 |
| | $ | 25.52 |
|
Swaps - Non-TET Normal Butane: | | | | | | |
Volume (Bbl) | | 368,000 |
| | 439,200 |
| | 255,500 |
|
Weighted-average price ($/Bbl) | | $ | 30.73 |
| | $ | 28.69 |
| | $ | 27.72 |
|
Swaps - Non-TET Isobutane: | | | | | | |
Volume (Bbl) | | 92,000 |
| | 109,800 |
| | 67,525 |
|
Weighted-average price ($/Bbl) | | $ | 31.08 |
| | $ | 29.99 |
| | $ | 28.79 |
|
Swaps - Non-TET Natural Gasoline: | | | | | | |
Volume (Bbl) | | 312,800 |
| | 402,600 |
| | 237,250 |
|
Weighted-average price ($/Bbl) | | $ | 45.80 |
| | $ | 45.15 |
| | $ | 44.31 |
|
Total NGL volume (Bbl) | | 2,925,600 |
| | 2,562,000 |
| | 2,202,775 |
|
Natural gas: | | |
| | |
| | |
Henry Hub NYMEX Swaps: | | |
| | |
| | |
Volume (MMBtu) | | 19,688,000 |
| | 23,790,000 |
| | 14,052,500 |
|
TABLE CONTINUES ON NEXT PAGE | | | | | | |
During the nine months ended September 30, 2017, the Company completed a hedge restructuring by early terminating a swap that resulted in a termination amount to the Company of $4.2 million that was settled in full by applying the proceeds to pay the premium on one new collar entered into during the restructuring. The following details the derivative that was terminated:
|
| | | | | | | | | | | | | |
| | Aggregate volumes (Bbl) | | Floor price ($/Bbl) | | Ceiling price ($/Bbl) | | Contract period |
Oil swap | | 1,095,000 |
| | $ | 52.12 |
| | $ | 52.12 |
| | January 2018 - December 2018 |
Condensed notes to the consolidated financial statements
(Unaudited)
The following table summarizes open positions as of September 30, 2018, and represents, as of such date, derivatives in place through December 2021 on annual production volumes:
|
| | | | | | | | | | | | |
| | Remaining year 2019 | | Year 2020 | | Year 2021 |
Weighted-average price ($/MMBtu) | | $ | 3.09 |
| | $ | 2.72 |
| | $ | 2.63 |
|
Basis Swaps: | | |
| | |
| | |
Volume (MMBtu) | | 19,688,000 |
| | 32,574,000 |
| | 23,360,000 |
|
Weighted-average price ($/MMBtu) | | $ | (1.51 | ) | | $ | (0.76 | ) | | $ | (0.47 | ) |
|
| | | | | | | | | | | | | | | | |
| | Remaining year 2018 | | Year 2019 | | Year 2020 | | Year 2021 |
Oil: | | | | |
| | | | |
Puts: | | |
| | |
| | | | |
Hedged volume (Bbl) | | 1,367,775 |
| | 8,030,000 |
| | 366,000 |
| | — |
|
Weighted-average floor price ($/Bbl) | | $ | 51.93 |
| | $ | 47.45 |
| | $ | 45.00 |
| | $ | — |
|
Swaps: | | |
| | |
| | | | |
Hedged volume (Bbl) | | — |
| | 657,000 |
| | 695,400 |
| | — |
|
Weighted-average price ($/Bbl) | | $ | — |
| | $ | 53.45 |
| | $ | 52.18 |
| | $ | — |
|
Collars: | | |
| | |
| | | | |
Hedged volume (Bbl) | | 1,030,400 |
| | — |
| | 1,134,600 |
| | 912,500 |
|
Weighted-average floor price ($/Bbl) | | $ | 41.43 |
| | $ | — |
| | $ | 45.00 |
| | $ | 45.00 |
|
Weighted-average ceiling price ($/Bbl) | | $ | 60.00 |
| | $ | — |
| | $ | 76.13 |
| | $ | 71.00 |
|
Totals: | | | | | | | | |
Total volume hedged with floor price (Bbl) | | 2,398,175 |
| | 8,687,000 |
| | 2,196,000 |
| | 912,500 |
|
Weighted-average floor price ($/Bbl) | | $ | 47.42 |
| | $ | 47.91 |
| | $ | 47.27 |
| | $ | 45.00 |
|
Total volume hedged with ceiling price (Bbl) | | 1,030,400 |
| | 657,000 |
| | 1,830,000 |
| | 912,500 |
|
Weighted-average ceiling price ($/Bbl) | | $ | 60.00 |
| | $ | 53.45 |
| | $ | 67.03 |
| | $ | 71.00 |
|
Basis Swaps: | | | | | | | | |
WTI Midland to WTI Cushing: | | | | | | | | |
Hedged volume (Bbl) | | 920,000 |
| | 552,000 |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | (0.56 | ) | | $ | (4.37 | ) | | $ | — |
| | $ | — |
|
WTI Houston to WTI Midland: | | | | | | | | |
Hedged volume (Bbl) | | 920,000 |
| | 1,810,000 |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | 7.30 |
| | $ | 7.30 |
| | $ | — |
| | $ | — |
|
NGL: | | | | | | | | |
Swaps - Purity Ethane: | | | | | | | | |
Hedged volume (Bbl) | | 156,400 |
| | — |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | 11.66 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Swaps - Non-TET Propane: | | | | | | | | |
Hedged volume (Bbl) | | 128,800 |
| | — |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | 33.92 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Swaps - Non-TET Normal Butane: | | | | | | | | |
Hedged volume (Bbl) | | 46,000 |
| | — |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | 38.22 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Swaps - Non-TET Isobutane: | | | | | | | | |
Hedged volume (Bbl) | | 18,400 |
| | — |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | 38.33 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Swaps - Non-TET Natural Gasoline: | | | | | | | | |
Hedged volume (Bbl) | | 46,000 |
| | — |
| | — |
| | — |
|
Weighted-average price ($/Bbl) | | $ | 57.02 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total NGL volume hedged (Bbl) | | 395,600 |
| | — |
| | — |
| | — |
|
TABLE CONTINUES ON NEXT PAGE | | | | | | | | |
Condensed notes to the consolidated financial statements
(Unaudited)
|
| | | | | | | | | | | | | | | | |
| | Remaining year 2018 | | Year 2019 | | Year 2020 | | Year 2021 |
Natural gas: | | |
| | |
| | | | |
Puts: | | | | | | | | |
Hedged volume (MMBtu) | | 2,055,000 |
| | — |
| | — |
| | — |
|
Weighted-average floor price ($/MMBtu) | | $ | 2.50 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Collars: | | |
| | |
| | | | |
Hedged volume (MMBtu) | | 3,928,400 |
| | — |
| | — |
| | — |
|
Weighted-average floor price ($/MMBtu) | | $ | 2.50 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Weighted-average ceiling price ($/MMBtu) | | $ | 3.35 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Totals: | | | | | | | | |
Total volume hedged with floor price (MMBtu) | | 5,983,400 |
| | — |
| | — |
| | — |
|
Weighted-average floor price ($/MMBtu) | | $ | 2.50 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Total volume hedged with ceiling price (MMBtu) | | 3,928,400 |
| | — |
| | — |
| | — |
|
Weighted-average ceiling price ($/MMBtu) | | $ | 3.35 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Basis Swaps: | | |
| | |
| | | | |
Hedged volume (MMBtu) | | 2,300,000 |
| | 20,075,000 |
| | 25,254,000 |
| | — |
|
Weighted-average price ($/MMBtu) | | $ | (0.62 | ) | | $ | (1.05 | ) | | $ | (0.76 | ) | | $ | — |
|
At each period end, the Company netsSee Note 8.a for the fair value measurement of derivatives by counterparty where the right of offset exists and reports this net basis on the "Derivatives" line items on the unaudited consolidated balance sheets as assets and/or liabilities. See derivatives.
Note 9.a for a summary of the fair value of derivatives on a gross basis. The Company's derivatives were not designated as hedges for accounting purposes. Accordingly, the changes in fair value are recognized in the unaudited consolidated statements of operations in the "Gain (loss) on derivatives, net" line item. Gains and losses on derivatives are included in cash flows from operating activities.
Condensed notes to the consolidated financial statements
(Unaudited)
Note 9—8—Fair value measurements
See Note 10 "Fair value measurements" in the 20172018 Annual Report for discussion onof the Company's accounting policies for fair value measurements.
a. Fair value measurement on a recurring basis
The following tables summarize the Company's derivatives' fair value hierarchy by commodity and current and noncurrent assets and liabilities on a gross basis and the net presentation included in the "Derivatives" line items on the unaudited consolidated balance sheets as of the dates presented:
| | (in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the unaudited consolidated balance sheets | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the unaudited consolidated balance sheets |
As of September 30, 2018: | | | | | | | | | | | | | |
As of June 30, 2019: | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | 10,390 |
| | $ | — |
| | $ | 10,390 |
| | $ | (10,390 | ) | | $ | — |
| | $ | — |
| | $ | 27,192 |
| | $ | — |
| | $ | 27,192 |
| | $ | (9,821 | ) | | $ | 17,371 |
|
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 17,134 |
| | — |
| | 17,134 |
| | (1,019 | ) | | 16,115 |
|
Natural gas derivatives | | — |
| | 13,002 |
| | — |
| | 13,002 |
| | (9,309 | ) | | 3,693 |
| | — |
| | 26,229 |
| | — |
| | 26,229 |
| | (9,278 | ) | | 16,951 |
|
Oil derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,270 | ) | | (3,270 | ) |
Natural gas derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | (619 | ) | | (619 | ) | |
Noncurrent: | | | | | | | | | | | | | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | 2,056 |
| | $ | — |
| | $ | 2,056 |
| | $ | (2,056 | ) | | $ | — |
| | $ | — |
| | $ | 18,217 |
| | $ | — |
| | $ | 18,217 |
| | $ | (1,036 | ) | | $ | 17,181 |
|
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,050 |
| | — |
| | 4,050 |
| | (566 | ) | | 3,484 |
|
Natural gas derivatives | | — |
| | 474 |
| | — |
| | 474 |
| | (474 | ) | | — |
| | — |
| | 6,049 |
| | — |
| | 6,049 |
| | (916 | ) | | 5,133 |
|
Oil derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Natural gas derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | |
Current: | | | | | | | | | | | | | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | (41,692 | ) | | $ | — |
| | $ | (41,692 | ) | | $ | 10,390 |
| | $ | (31,302 | ) | | $ | — |
| | $ | (11,618 | ) | | $ | — |
| | $ | (11,618 | ) | | $ | 9,821 |
| | $ | (1,797 | ) |
NGL derivatives | | — |
| | (4,807 | ) | | — |
| | (4,807 | ) | | — |
| | (4,807 | ) | | — |
| | (1,019 | ) | | — |
| | (1,019 | ) | | 1,019 |
| | — |
|
Natural gas derivatives | | — |
| | 233 |
| | — |
| | 233 |
| | 9,309 |
| | 9,542 |
| | — |
| | (8,954 | ) | | — |
| | (8,954 | ) | | 9,278 |
| | 324 |
|
Oil derivative deferred premiums | | — |
| | — |
| | (17,265 | ) | | (17,265 | ) | | — |
| | (17,265 | ) | | — |
| | — |
| | (3,270 | ) | | (3,270 | ) | | 3,270 |
| | — |
|
Natural gas derivative deferred premiums | | — |
| | — |
| | (847 | ) | | (847 | ) | | 619 |
| | (228 | ) | |
Noncurrent: | | | | | | | | | | | | | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | (17,279 | ) | | $ | — |
| | $ | (17,279 | ) | | $ | 2,056 |
| | $ | (15,223 | ) | | $ | — |
| | $ | (1,036 | ) | | $ | — |
| | $ | (1,036 | ) | | $ | 1,036 |
| | $ | — |
|
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (566 | ) | | — |
| | (566 | ) | | 566 |
| | — |
|
Natural gas derivatives | | — |
| | (2,468 | ) | | — |
| | (2,468 | ) | | 474 |
| | (1,994 | ) | | — |
| | (916 | ) | | — |
| | (916 | ) | | 916 |
| | — |
|
Oil derivative deferred premiums | | — |
| | — |
| | (3,728 | ) | | (3,728 | ) | | — |
| | (3,728 | ) | |
Natural gas derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Net derivative liability positions | | $ | — |
| | $ | (40,091 | ) | | $ | (21,840 | ) | | $ | (61,931 | ) | | $ | — |
| | $ | (61,931 | ) | |
Net derivative asset (liability) positions | | | $ | — |
| | $ | 74,762 |
| | $ | (3,270 | ) | | $ | 71,492 |
| | $ | — |
| | $ | 71,492 |
|
Condensed notes to the consolidated financial statements
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the unaudited consolidated balance sheets |
As of December 31, 2018: | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | 44,425 |
| | $ | — |
| | $ | 44,425 |
| | $ | (7,907 | ) | | $ | 36,518 |
|
NGL derivatives | | — |
| | 1,974 |
| | — |
| | 1,974 |
| | — |
| | 1,974 |
|
Natural gas derivatives | | — |
| | 18,991 |
| | — |
| | 18,991 |
| | (3,267 | ) | | 15,724 |
|
Oil derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | (14,381 | ) | | (14,381 | ) |
Noncurrent: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | 10,626 |
| | $ | — |
| | $ | 10,626 |
| | $ | — |
| | $ | 10,626 |
|
NGL derivatives | | — |
| | 1,024 |
| | — |
| | 1,024 |
| | — |
| | 1,024 |
|
Natural gas derivatives | | — |
| | 108 |
| | — |
| | 108 |
| | (728 | ) | | (620 | ) |
Liabilities: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | (9,059 | ) | | $ | — |
| | $ | (9,059 | ) | | $ | 7,907 |
| | $ | (1,152 | ) |
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Natural gas derivatives | | — |
| | (7,290 | ) | | — |
| | (7,290 | ) | | 3,267 |
| | (4,023 | ) |
Oil derivative deferred premiums | | — |
| | — |
| | (16,565 | ) | | (16,565 | ) | | 14,381 |
| | (2,184 | ) |
Noncurrent: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Natural gas derivatives | | — |
| | (728 | ) | | — |
| | (728 | ) | | 728 |
| | — |
|
Net derivative asset (liability) positions | | $ | — |
| | $ | 60,071 |
| | $ | (16,565 | ) | | $ | 43,506 |
| | $ | — |
| | $ | 43,506 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the unaudited consolidated balance sheets |
As of December 31, 2017: | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | 7,427 |
| | $ | — |
| | $ | 7,427 |
| | $ | (3,721 | ) | | $ | 3,706 |
|
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Natural gas derivatives | | — |
| | 10,546 |
| | — |
| | 10,546 |
| | (4,817 | ) | | 5,729 |
|
Oil derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | (87 | ) | | (87 | ) |
Natural gas derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | (2,456 | ) | | (2,456 | ) |
Noncurrent: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | 11,613 |
| | $ | — |
| | $ | 11,613 |
| | $ | (6,087 | ) | | $ | 5,526 |
|
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Natural gas derivatives | | — |
| | 934 |
| | — |
| | 934 |
| | (934 | ) | | — |
|
Oil derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | (2,113 | ) | | (2,113 | ) |
Natural gas derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Liabilities: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | (12,477 | ) | | $ | — |
| | $ | (12,477 | ) | | $ | 3,721 |
| | $ | (8,756 | ) |
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Natural gas derivatives | | — |
| | — |
| | — |
| | — |
| | 4,817 |
| | 4,817 |
|
Oil derivative deferred premiums | | — |
| | — |
| | (18,202 | ) | | (18,202 | ) | | 87 |
| | (18,115 | ) |
Natural gas derivative deferred premiums | | — |
| | — |
| | (3,352 | ) | | (3,352 | ) | | 2,456 |
| | (896 | ) |
Noncurrent: | | | | | | | | | | | | |
Oil derivatives | | $ | — |
| | $ | (2,389 | ) | | $ | — |
| | $ | (2,389 | ) | | $ | 6,087 |
| | $ | 3,698 |
|
NGL derivatives | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Natural gas derivatives | | — |
| | — |
| | — |
| | — |
| | 934 |
| | 934 |
|
Oil derivative deferred premiums | | — |
| | — |
| | (7,129 | ) | | (7,129 | ) | | 2,113 |
| | (5,016 | ) |
Natural gas derivative deferred premiums | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net derivative asset (liability) positions | | $ | — |
| | $ | 15,654 |
| | $ | (28,683 | ) | | $ | (13,029 | ) | | $ | — |
| | $ | (13,029 | ) |
Significant Level 2 inputs associated with the calculation of discounted cash flows used in the fair value mark-to-market analysis of derivatives include each derivative contract's corresponding commodity index price(s), appropriate risk-adjusted discount rates and forward price curve models for substantially similar instruments generated from a compilation of data gathered from third parties.
The Company's deferred premiums associated with its derivative contracts are categorized as Level 3, as the Company utilizes a net present value calculation to determine the valuation. They are considered to be measured on a recurring basis as the derivative contracts they derive from are measured on a recurring basis. As derivative contracts containing deferred premiums are entered into, the Company discounts the associated deferred premium to its net present value at the contract trade date, using the Senior Secured Credit Facility rate at the trade date (input rate), and then records the change in net present value to interest expense over the period from the trade date until the final settlement date at the end of the contract. After this initial valuation, the net present valueinput rate of each deferred premium is not adjusted; therefore, significant increases (decreases) in the Senior Secured Credit Facility rate would result in a significantly lower (higher) fair value measurement for each new contract entered into that contained a deferred premium; however, the initial valuation for the deferred premiums already recorded would remain unaffected. While the Company believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. The deferred premiums are included in the "Derivatives" line items on the unaudited consolidated balance sheets, and as of SeptemberJune 30, 2018,2019, each of their input rates range from 1.91% to 3.32% with a net fair value weighted-average rateis 2.31%.
The following table presents payments required for derivative deferred premiums as of 2.78%.June 30, 2019 for the periods presented: |
| | | | |
(in thousands) | | June 30, 2019 |
Remaining 2019 | | $ | 2,813 |
|
2020 | | 477 |
|
Total | | $ | 3,290 |
|
Condensed notes to the consolidated financial statements
(Unaudited)
The following table presents payments required for derivative deferred premiums as of September 30, 2018 for the periods presented: |
| | | | |
(in thousands) | | September 30, 2018 |
Remaining 2018 | | $ | 5,405 |
|
2019 | | 15,502 |
|
2020 | | 1,295 |
|
Total | | $ | 22,202 |
|
A summary of the changes in net assets and liabilities classified as Level 3 measurements for the periods presented are as follows: | | |
| Three months ended September 30, | | Nine months ended September 30, |
| Three months ended June 30, | | Six months ended June 30, |
(in thousands) |
| 2018 | | 2017 | | 2018 | | 2017 |
| 2019 | | 2018 | | 2019 | | 2018 |
Balance of Level 3 at beginning of period |
| $ | (25,026 | ) | | $ | (12,554 | ) | | $ | (28,683 | ) |
| $ | (8,998 | ) |
| $ | (12,644 | ) | | $ | (30,292 | ) | | $ | (16,565 | ) |
| $ | (28,683 | ) |
Change in net present value of derivative deferred premiums(1) |
| (168 | ) | | (88 | ) | | (564 | ) |
| (199 | ) |
| (24 | ) | | (185 | ) | | (119 | ) |
| (396 | ) |
Total purchases and settlements of derivative deferred premiums: |
| | | | | |
|
|
|
| | | | | |
|
|
|
Purchases |
| (2,101 | ) | | (15,996 | ) | | (7,523 | ) |
| (22,994 | ) |
| — |
| | — |
| | — |
|
| (5,422 | ) |
Settlements(2) |
| 5,455 |
| | 1,448 |
| | 14,930 |
|
| 5,001 |
|
| 9,398 |
| | 5,451 |
| | 13,414 |
|
| 9,475 |
|
Balance of Level 3 at end of period |
| $ | (21,840 | ) | | $ | (27,190 | ) | | $ | (21,840 | ) |
| $ | (27,190 | ) |
| $ | (3,270 | ) | | $ | (25,026 | ) | | $ | (3,270 | ) |
| $ | (25,026 | ) |
____________________________________________________________________________ | |
(1) | These amounts are included in the "Interest expense" line item in the unaudited consolidated statements of operations. |
b. Fair value measurement on a nonrecurring basis | |
(2) | The amounts for the three and six months ended June 30, 2019 include $7.2 million that represents the present value of deferred premiums settled upon their early termination. |
See Note 10.b "Fair value measurement on a nonrecurring basis" and Note 4.c "2016 acquisitions of evaluated and unevaluated oil and natural gas properties"2.f in the 20172018 Annual Report for discussion of the Company's accounting policies and assumptions in estimating the fair values of assets acquired and liabilities assumed for acquisitions of evaluated and unevaluated oil and natural gas properties. See Note 3.a for additional discussion of the Company's acquisitions of evaluated and unevaluated oil and natural gas properties for the nine months ended September 30, 2018.derivatives.
c.b. Items not accounted for at fair value
The carrying amounts reported in the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued capital expenditures, undistributed revenue and royalties and other accrued assets and liabilities approximate their fair values.
The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amounts and fair values of the Company's debt as of the dates presented: | | | | September 30, 2018 | | December 31, 2017 | | June 30, 2019 | | December 31, 2018 |
(in thousands) | | Long-term debt | | Fair value(1) | | Long-term debt | | Fair value(1) | | Long-term debt | | Fair value(1) | | Long-term debt | | Fair value(1) |
January 2022 Notes | | $ | 450,000 |
| | $ | 448,875 |
| | $ | 450,000 |
| | $ | 454,500 |
| | $ | 450,000 |
| | $ | 420,750 |
| | $ | 450,000 |
| | $ | 402,885 |
|
March 2023 Notes | | 350,000 |
| | 352,730 |
| | 350,000 |
| | 364,105 |
| | 350,000 |
| | 327,355 |
| | 350,000 |
| | 316,624 |
|
Senior Secured Credit Facility | | 170,000 |
| | 170,084 |
| | — |
| | — |
| | 235,000 |
| | 235,004 |
| | 190,000 |
| | 190,054 |
|
Total | | $ | 970,000 |
| | $ | 971,689 |
| | $ | 800,000 |
| | $ | 818,605 |
| | $ | 1,035,000 |
| | $ | 983,109 |
| | $ | 990,000 |
| | $ | 909,563 |
|
______________________________________________________________________________ | |
(1) | The fair values of the debt outstanding on the January 2022 Notes and the March 2023 Notes were determined using the SeptemberJune 30, 20182019 and December 31, 20172018 Level 1 fair value hierarchy quoted market price (Level 1) for each respective instrument. The fair value of the outstanding debt on the Senior Secured Credit Facility as of SeptemberJune 30, 2019 and December 31, 2018 was estimated utilizing athe Level 2 fair value hierarchy pricing model for similar instruments (Level 2).instruments. See Note 10 in the 2018 Annual Report for information about the fair value hierarchy levels. |
Condensed notes to the consolidated financial statements
(Unaudited)
Note 10—9—Net income per common share
Basic net income per common share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution of non-vested restricted stock awards, outstanding stock option awards, and non-vested performance share awards and the non-vested outperformance share award. See Note 6.c for additional discussion of these awards. The dilutive effects of these awards were calculated utilizing the treasury stock method. See Note 7.c for additional discussion on these awards.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table reflects the calculationcalculations of basic and diluted weighted-average common shares outstanding and basic and diluted net income per common share for the periods presented: | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
(in thousands, except for per share data) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Net income (numerator): | | | | | | |
| | |
| | | | | | |
| | |
|
Net income—basic and diluted | | $ | 55,050 |
| | $ | 11,027 |
| | $ | 175,022 |
| | $ | 140,413 |
| | $ | 173,382 |
| | $ | 33,452 |
| | $ | 163,891 |
| | $ | 119,972 |
|
Weighted-average common shares outstanding (denominator): | | | | | | | | | | | | | | | | |
Basic(1) | | 230,605 |
|
| 239,306 |
| | 233,228 |
| | 239,017 |
| | 231,406 |
|
| 230,933 |
| | 230,943 |
| | 234,561 |
|
Non-vested restricted stock awards(2) | | 935 |
| | 650 |
| | 911 |
| | 845 |
| |
Outstanding stock option awards(3) | | 99 |
| | 130 |
| | 68 |
| | 129 |
| |
Non-vested performance share awards(4) | | — |
| | 4,801 |
| | — |
| | 4,702 |
| |
Dilutive non-vested restricted stock awards(2) | | | 151 |
| | 683 |
| | 782 |
| | 885 |
|
Dilutive outstanding stock option awards(3) | | | — |
| | 90 |
| | — |
| | 55 |
|
Diluted | | 231,639 |
|
| 244,887 |
| | 234,207 |
| | 244,693 |
| | 231,557 |
|
| 231,706 |
| | 231,725 |
| | 235,501 |
|
Net income per common share: | | | | | | | | |
| | | | | | | | |
|
Basic | | $ | 0.24 |
| | $ | 0.05 |
| | $ | 0.75 |
| | $ | 0.59 |
| | $ | 0.75 |
| | $ | 0.14 |
| | $ | 0.71 |
| | $ | 0.51 |
|
Diluted | | $ | 0.24 |
| | $ | 0.05 |
| | $ | 0.75 |
| | $ | 0.57 |
| | $ | 0.75 |
| | $ | 0.14 |
| | $ | 0.71 |
| | $ | 0.51 |
|
_____________________________________________________________________________ | |
(1) | Weighted-average common shares outstanding used in the computationcalculation of basic and diluted net income per common share was computed taking into account share repurchases that occurred during the three and ninesix months ended SeptemberJune 30, 2018. See Note 7.a6.a for additional discussion of the Company's share repurchase program. |
| |
(2) | The effect of a significant portion of the non-vested restricted stock awards was excluded from the calculation of diluted net income per common share for the three and ninesix months ended SeptemberJune 30, 2018.2019. The inclusion of these non-vested restricted stock awards would be anti-dilutive mainly due to the sum ofgrant-date fair value per common share for the assumed proceeds exceedingawards being greater than the average closing stock price during the period. |
| |
(3) | The effect of the outstanding stock option awards with the exception of those granted in 2016, was excluded from the calculation of diluted net income per common share for the three and ninesix months ended SeptemberJune 30, 2018.2019. The inclusion of these stock option awards would be anti-dilutive as their exercise prices were greater than the average closing stock price during the period. |
| |
(4) | The effect of the non-vested performance share awards was excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2018 as the awards were below the respective agreements' payout thresholds. The effect of the non-vested performance share awards granted in 2018 was calculated utilizing the following criteria defined in Note 7.c: (i) the RTSR Performance Percentage, (ii) the ATSR Appreciation and (iii) the ROACE Percentage from the beginning of the performance period to September 30, 2018 for each of the criteria to identify the RTSR Factor, the ATSR Factor and the ROACE Factor, respectively, which were used to compute the Performance Multiple to determine the number of shares for the dilutive effect. The effects of the non-vested performance share awards granted in 2016 and 2017 were calculated utilizing the Company's TSR from the beginning of each performance share awards' respective performance period to September 30, 2018 in comparison to the TSR of the peers specified in each respective performance share awards' agreement. |
By assuming June 30, 2019 was the end of the respective performance periods of the non-vested performance share awards and the non-vested outperformance share award, the effects of these awards were excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2019, as the awards were below the respective agreements' payout thresholds, with the exception of the RTSR Performance Percentage-portion of the 2019 performance share awards, which was ultimately anti-dilutive due to the grant-date fair value per unit being greater than the average closing stock price during the periods. See Note 6.c for discussion of the performance and market criteria of these awards.
See Note 10 in the second-quarter 2018 Quarterly Report for discussion of the awards excluded from the calculation of diluted net income per common share for the three and six months ended June 30, 2018.
Note 11—10—Commitments and contingencies
a. Litigation
From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including proceedings for which the Company may not have insurance coverage. While many of these matters involve inherent uncertainty, except with regard to the specific litigation noted below, as of the date hereof, the Company does not currently
Condensed notes to the consolidated financial statements
(Unaudited)
believe that any such legal proceedings will have a material adverse effect on the Company's business, financial position, results of operations or liquidity.
On May 3, 2017, Shell Trading (US) Company ("Shell") filed an Original Petition and Request for Disclosure in During the District Court of Harris County, Texas, alleging that the crude oil purchase agreement entered into between Shell and Laredo effective October 1, 2016 throughthree months ended June 30, 2020 does not accurately reflect2019, the compensation to be paid to Shell under certain circumstances due toCompany finalized and received a drafting mistake. Shell seeks reformationfavorable settlement of one clause of the crude oil purchase agreement on the grounds of alleged mutual mistake or,$42.5 million in the alternative, unilateral mistake, an award of the amounts Shell alleges it should have been or should be paid under the crude oil purchase agreement, court costs and attorneys' fees. The Company does not believe there was a drafting mistake made in the crude oil purchase agreement, which covered the sale to Shell of 19,000 barrels of crude oil per day ofconnection with the Company's gross production as well as the purchase by the Company of like-quantity crude oil from Shell. On December 11, 2017, Shell filed its First Amended Petition,damage claims asserted in which it asserted nine causes of action, including multiple new claims for breach of contract and fraud.
Effective May 1, 2018, Shell terminated the crude oil purchase agreement and ceased purchasing the Company's crude oil and selling crude oila previously disclosed litigation matter relating to the Company under the terms of such agreement. As a result, the Company filed its Second Amended Answer and Original Counterclaim against Shell on June 15, 2018, in which the Company denies all allegations by Shell and seeks damages in excess of $150.0 million resulting from Shell's breach and wrongful termination of thea crude oil purchase agreement. Shell filedThis settlement is included in "Litigation settlement" on the unaudited consolidated statements of operations. The Company does not anticipate the receipt of further payments in connection with this matter as this settlement constituted a Second Amended Petition on June 1, 2018, in which it asserted a new cause of action against the Company for alleged repudiation of Shell's proposed reformed versionfull and final satisfaction of the crude oil purchase agreement, a version never signed or agreed to by the Company.
Through April 30, 2018, the date on which Shell wrongfully terminated the crude oil purchase agreement, the Company had accounted for the costs and crude oil price realization as reflected in the terms of the crude oil purchase agreement. The accompanying unaudited consolidated balance sheets do not include any amounts for damage claims or attorneys' fees sought by Shell. As of September 30, 2018, the Company had estimated an aggregate amount of $37.4 million that is the subject of Shell's claims, which is generally based on the contractual amount in dispute under the pricing election that is the subject of Shell's claims applied to the barrels of crude oil purchased and sold through the date on which Shell wrongfully terminated the crude oil purchase agreement. As a result of such termination, the Company's estimate of this unrecorded amount is not anticipated to materially increase in the future. This estimate does not include damages sought by Shell pursuant to its latest repudiation claim asserted in its Second Amended Petition or amounts sought by Shell for recovery of attorneys' fees incurred for the prosecution of its claims.
The Company is unable to determine a probability of the outcome of this litigation at this time. The Company believes Shell's claims are meritless and the termination by Shell is improper and a breach of the crude oil purchase agreement. The Company therefore intends to vigorously defend itself against Shell's claims and pursue its rights under the terminated crude oil purchase agreement to seek all appropriate damages from Shell.
b. Drilling contracts
The Company has committed to several drilling rig contracts with third parties to facilitate the Company's drilling plans. Certain of these contracts are for a termterms of multiple months and contain early termination clauses that require the Company to potentially pay penalties to the third party should the Company cease drilling efforts. These penalties would negatively impact the
Condensed notes to the consolidated financial statements
(Unaudited)
Company's financial statements upon early contract termination. There were no penalties incurred for early contract termination for either of the ninesix months ended SeptemberJune 30, 20182019 or 2017. The2018. As the Company's current drilling rig contracts are considered leases under the scope of ASC 842, the present value of the future commitment of $22.9 million as of SeptemberJune 30, 20182019 related to drilling contracts with an initial term greater than 12 months is not recordedincluded in "Operating lease liabilities" under "Current liabilities" on the accompanying unaudited consolidated balance sheets.sheet as of June 30, 2019. See Note 3.a for further discussion of the impact of ASC 842 adoption. Management does not currently anticipate the early termination of these contracts in 2018.2019.
c. Firm sale and transportation commitments
The Company has committed to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. If not fulfilled, the Company is subject to firm transportation payments on excess pipeline capacity and other contractual penalties. These commitments are normal and customary for the Company's business. In certain instances, the Company has used spot market purchases to meet its commitments in certain locations or due to favorable pricing. Management anticipates continuing this practice in the future. The Company incurred firm transportation payments on excess pipeline capacity and other contractual penalties of $0.2$0.5 million and $0.5$2.2 million during the three months ended SeptemberJune 30, 20182019 and 2017,2018, respectively, and $2.5$1.0 million and $1.1$2.3 million during the ninesix months ended SeptemberJune 30, 2019 and 2018, and 2017, respectively. For the three and nine months ended September 30, 2018, theseThese firm transportation payments on excess pipeline capacity and other contractual penalties are netted with the respective revenue stream in the unaudited consolidated statements of operations. For the three and nine months ended
Condensed notes to the consolidated financial statements
(Unaudited)
September 30, 2017, these firm transportation payments on excess pipeline capacity and other penalties are included in the "Other operating expenses" line item in the unaudited consolidated statements of operations. See Note 4.a for additional information regarding the presentation of firm transportation payments on excess pipeline capacity and other contractual penalties. Future commitments of $367.7$341.5 million as of SeptemberJune 30, 20182019 are not recorded in the accompanying unaudited consolidated balance sheets. For information regarding the TA related to Medallion, see Note 3.c.
d. Sand purchase and supply agreement
During the second quarter of 2018, the Company entered into a sand purchase and supply agreement, for a term of one year, whereby it has committed to buy a certain volume of in-basin sand, utilized in the Company's completion activities, for a fixed price. As of September 30, 2018, under the terms of this agreement, the Company is required to purchase a certain percentage of the volume commitment or it would incur a shortfall payment of $5.7 million at the end of the contract period.
e. Federal and state regulations
Oil and natural gas exploration, production and related operations are subject to extensive federal and state laws, rules and regulations. Failure to comply with these laws, rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the cost of doing business and affects profitability. The Company believes that it is in compliance with currently applicable federal and state regulations related to oil and natural gas exploration and production, and that compliance with the current regulations will not have a material adverse impact on the financial position or results of operations of the Company. These rules and regulations are frequently amended or reinterpreted; therefore, the Company is unable to predict the future cost or impact of complying with these regulations.
f.e. Environmental
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed in the period incurred. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment or remediation is probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed and readily determinable. Management believes no materially significant liabilities of this nature existed as of SeptemberJune 30, 20182019 or December 31, 2017.2018.
Note 12—11—Supplemental cash flow and non-cash information
The following table presents supplemental cash flow and non-cash information: |
| | | | | | | | |
| | Six months ended June 30, |
(in thousands) | | 2019 | | 2018 |
Supplemental cash flow information: | | | | |
Capitalized interest | | $ | (420 | ) | | $ | (498 | ) |
Cash received (paid) for income taxes(1) | | $ | 691 |
| | $ | (1,136 | ) |
Supplemental non-cash investing information: | | | | |
Increase (decrease) in accrued capital expenditures | | $ | 2,335 |
| | $ | (8,878 | ) |
Capitalized stock-based compensation in evaluated oil and natural gas properties | | $ | 1,863 |
| | $ | 4,098 |
|
Capitalized asset retirement costs | | $ | 356 |
| | $ | 577 |
|
______________________________________________________________________________ | |
(1) | See Note 14 for additional discussion of the Company's income taxes. |
|
| | | | | | | | |
| | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 |
Non-cash investing activities: | | | | |
(Decrease) increase in accrued capital expenditures | | $ | (44,533 | ) | | $ | 39,156 |
|
Capitalized stock-based compensation | | $ | 6,025 |
| | $ | 5,642 |
|
Capitalized asset retirement costs | | $ | 719 |
| | $ | 670 |
|
Other supplemental cash flow information: | | | | |
Capitalized interest | | $ | 710 |
| | $ | 756 |
|
Condensed notes to the consolidated financial statements
(Unaudited)
The following table presents supplemental non-cash adjustments information related to leases:
|
| | | | |
(in thousands) | | Six months ended June 30, 2019 |
Right-of-use assets obtained in exchange for operating lease liabilities(1) | | $ | 25,212 |
|
______________________________________________________________________________ | |
(1) | See Note 3 for additional discussion of the Company's leases. |
Note 13—12—Asset retirement obligations
See Note 2.m "Asset retirement obligations"2.k in the 20172018 Annual Report for discussion onof the Company's accounting policies for asset retirement obligations.
The following table reconciles the Company's asset retirement obligation liability associated with tangible long-lived assets:assets for the periods presented: |
| | | | | | | | |
| | Six months ended June 30, |
(in thousands) | | 2019 | | 2018 |
Liability at beginning of period | | $ | 56,882 |
| | $ | 55,506 |
|
Liabilities added due to acquisitions, drilling, midstream service asset construction and other | | 356 |
| | 577 |
|
Accretion expense | | 2,072 |
| | 2,227 |
|
Liabilities settled due to plugging and abandonment or removed due to sale | | (1,362 | ) | | (1,815 | ) |
Liability at end of period | | $ | 57,948 |
| | $ | 56,495 |
|
Note 13—Revenue recognition
a. Impact of ASC 606 adoption on the Medallion Sale
Medallion Gathering & Processing, LLC, a Texas limited liability company formed on October 12, 2012, which, together with its wholly-owned subsidiaries (collectively, "Medallion"), was established for the purpose of developing midstream solutions and providing midstream infrastructure to bring oil to market in the Midland Basin. Prior to the Medallion Sale (defined below), LMS held 49% of Medallion's ownership units. On October 30, 2017, LMS, together with Medallion Midstream Holdings, LLC, which is owned and controlled by an affiliate of the third-party interest-holder, The Energy & Minerals Group, completed the sale of 100% of the ownership interests in Medallion to an affiliate of Global Infrastructure Partners ("GIP"), for cash consideration of $1.825 billion (the "Medallion Sale"). LMS' total net cash proceeds before taxes for its 49% ownership interest in Medallion were $831.3 million.
LMS has a Transportation Services Agreement (the "TA") with a wholly-owned subsidiary of Medallion under which LMS receives firm transportation of the Company's crude oil production from Reagan County and Glasscock County in Texas to Colorado City, Texas that continues to be in effect after the Medallion Sale. At December 31, 2017, the Medallion Sale was accounted for under the real estate guidance in ASC 360-20, Property, Plant, and Equipment ("ASC 360-20"), and the Company's maximum exposure to loss associated with future commitments under the TA was $141.1 million that was not recorded in the Company's unaudited consolidated balance sheets. Under ASC 360-20, as a result of the Company's continuing involvement with Medallion by guaranteeing cash flows under the TA, the Company recorded a deferred gain in the amount of its maximum exposure to loss related to such guarantees. This deferred gain would have been amortized over the TA's firm commitment transportation term through 2024 had the Company not adopted ASC 606, Revenue from Contracts with Customers ("ASC 606") on January 1, 2018.
In adopting ASC 606, the guidance in ASC 360-20 was superseded by ASC 860, Transfers and Servicing ("ASC 860"). The Medallion Sale is within the scope of ASC 860 and qualifies for sale accounting and recognition of the previously deferred gain because as of the date of the Medallion Sale (i) the Company transferred and legally isolated its full interests in Medallion to GIP, (ii) GIP received the right to pledge or exchange Medallion ownership interests at its full discretion and (iii) the Company did not have effective control over Medallion. Therefore, the deferred gain of $141.1 million was recognized as an adjustment to the 2018 beginning balance of accumulated deficit, presented on the unaudited consolidated statements of stockholders' equity, in accordance with the modified retrospective approach of adoption. See Notes 4.c and 5.a in the 2018 Annual Report for further discussion of the Medallion Sale, the TA and the adoption of ASC 606.
|
| | | | | | | | |
| | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 |
Liability at beginning of period | | $ | 55,506 |
| | $ | 52,207 |
|
Liabilities added due to acquisitions, drilling, midstream service asset construction and other | | 719 |
| | 492 |
|
Accretion expense | | 3,341 |
| | 2,822 |
|
Liabilities settled due to plugging and abandonment or sale | | (2,246 | ) | | (1,228 | ) |
Revision of estimates | | — |
| | 178 |
|
Liability at end of period | | $ | 57,320 |
| | $ | 54,471 |
|
Condensed notes to the consolidated financial statements(Unaudited)
b. Revenue recognition
Oil, NGL and natural gas revenues are generally recognized at the point in time that control of the product is transferred to the customer. Midstream service revenues are generated through fees for products and services that need to be delivered by midstream infrastructure, including oil and liquids-rich natural gas gathering services as well as rig fuel, natural gas lift and water delivery, recycling and takeaway and are recognized over time as the customer benefits from these services when provided. A more detailed summary of the underlying contracts that give rise to the Company's revenue and method of recognition can be found in Note 5.b in the 2018 Annual Report.
Note 14—Income taxes
The Company is subject to federal and state income taxes and the Texas franchise tax. The Company had federal net operating loss carry-forwardscarryforwards totaling $1.8$1.9 billion and state of Oklahoma net operating loss carry-forwardscarryforwards totaling $36.3$35.4 million as of SeptemberJune 30, 2018,2019, which begin expiring in 2026 and 2032, respectively. Due to the passingenactment of Public Law No. 115-97, a comprehensive tax reform bill commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"), $86.4$180.7 million of the federal net operating loss carry-forwardcarryforward will not expire but may be limited in future periods. As of SeptemberJune 30, 2018,2019, the Company believes it is more likely than not that a portion of the net operating loss carry-forwardscarryforwards are not fully realizable. The Company continues to consider new evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance is needed. Such consideration includes projected future cash flows from its oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of SeptemberJune 30, 2018,2019, the Company's ability to capitalize intangible drilling costs, rather than expensing these costs in order to prevent an operating loss carry-forwardcarryforward from expiring unused and future projections of Oklahoma sourced income. As of SeptemberJune 30, 2018,2019, a fulltotal valuation allowance of $298.8$202.1 million has been recorded against the Company's federal and state of Oklahoma net deferred tax assets. As of September 30, 2018,asset, resulting in a net Texas deferred tax liability of $1.8$6.7 million, which is included in "Other noncurrent liabilities" on the unaudited consolidated balance sheets.
The Company paid Alternative Minimum Tax ("AMT") related to the Medallion Sale in 2017. The payment of AMT creates an AMT credit carryforward. Due to changes in the Tax Act, AMT credit carryforwards do not expire and are now refundable over a five-year period. Therefore, as of June 30, 2019, a receivable has been recorded along within the corresponding deferred income tax expense. Additionally, a current tax refundamount of $0.4$4.1 million, of Texas franchise taxwhich $3.1 million is expected as a result of differencesincluded in estimated versus actual taxable income from the gain"Accounts receivable, net" and $1.0 million is included in "Other noncurrent assets, net" on the Medallion Sale and is recorded as a current income tax benefit.unaudited consolidated balance sheets.
Note 15—Related party
Laredo's Chairman and Chief Executive Officer is on the board of directors of Helmerich & Payne, Inc. ("H&P"). The Company has drilling contracts with H&P that are long-term and short-term operating leases. The drilling contract, which is accounted for as a long-term operating lease under the scope of ASC 842 due to its initial term that was greater than 12 months, is capitalized and is included in "Operating lease right-of-use-assets" on the unaudited consolidated balance sheet. The present value of the future commitment is included in "Operating lease liabilities" under "Current liabilities" on the unaudited consolidated balance sheet. See Note 3 for additional discussion of the Company's adoption of ASC 842.
The following table presents the operating lease liability related to H&P included in the unaudited consolidated balance sheet: |
| | | | |
(in thousands) | | June 30, 2019 |
Operating lease liabilities | | $ | 5,762 |
|
The following table presents the capital expenditures for oil and natural gas properties paid to H&P included in the unaudited consolidated statements of cash flows: |
| | | | | | | | |
| | Six months ended June 30, |
(in thousands) | | 2019 | | 2018 |
Capital expenditures for oil and natural gas properties | | $ | 6,293 |
| | $ | — |
|
Condensed notes to the consolidated financial statements
(Unaudited)
Note 16—Subsidiary guarantorsGuarantors
The Guarantors have fully and unconditionally guaranteed the January 2022 Notes, the March 2023 Notes and the Senior Secured Credit Facility, (and had guaranteed the May 2022 Notes until the May 2022 Notes Redemption Date), subject to the Releases. In accordance with practices accepted by the SEC, Laredo has prepared condensed consolidating financial statements to quantify the balance sheets, results of operations and cash flows of such subsidiaries as subsidiary guarantors.Guarantors. The following unaudited condensed consolidating (i) balance sheets as of SeptemberJune 30, 20182019 and December 31, 2017,2018, (ii) statements of operations for the three and ninesix months ended SeptemberJune 30, 20182019 and 20172018 and (iii) statements of cash flows for the ninesix months ended SeptemberJune 30, 20182019 and 20172018 present financial information for Laredo on a stand-alone basis (carrying any investment in subsidiaries under the equity method), financial information for the subsidiary guarantorsGuarantors on a stand-alone basis (carrying any investment in subsidiaries under the equity method), and the consolidation and elimination entries necessary to arrive at the financial information for the Company on a condensed consolidated basis. Income taxes for LMS and for GCM are recorded on Laredo's balance sheets, statements of operations and statements of cash flows as they are disregarded entities for income tax purposes. Laredo and the Guarantors are not restricted from making intercompany distributions to each other.
Condensed consolidating balance sheet
June 30, 2019
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo |
| Subsidiary Guarantors |
| Intercompany eliminations |
| Consolidated company |
Accounts receivable, net | | $ | 66,348 |
| | $ | 10,262 |
| | $ | — |
| | $ | 76,610 |
|
Other current assets | | 114,653 |
| | 1,252 |
| | — |
| | 115,905 |
|
Oil and natural gas properties, net | | 2,217,151 |
| | 9,041 |
| | (26,024 | ) | | 2,200,168 |
|
Midstream service assets, net | | — |
| | 131,633 |
| | — |
| | 131,633 |
|
Other fixed assets, net | | 37,910 |
| | 23 |
| | — |
| | 37,933 |
|
Investment in subsidiaries | | 139,071 |
| | — |
| | (139,071 | ) | | — |
|
Other noncurrent assets, net | | 54,172 |
| | 3,501 |
| | — |
| | 57,673 |
|
Total assets | | $ | 2,629,305 |
| | $ | 155,712 |
| | $ | (165,095 | ) | | $ | 2,619,922 |
|
| | | | | | | | |
Accounts payable and accrued liabilities | | $ | 37,841 |
| | $ | 13,448 |
| | $ | — |
| | $ | 51,289 |
|
Other current liabilities | | 118,739 |
| | 650 |
| | — |
| | 119,389 |
|
Long-term debt, net | | 1,029,526 |
| | — |
| | — |
| | 1,029,526 |
|
Other noncurrent liabilities | | 72,854 |
| | 2,543 |
| | — |
| | 75,397 |
|
Total stockholders' equity | | 1,370,345 |
| | 139,071 |
| | (165,095 | ) | | 1,344,321 |
|
Total liabilities and stockholders' equity | | $ | 2,629,305 |
| | $ | 155,712 |
| | $ | (165,095 | ) | | $ | 2,619,922 |
|
Condensed notes to the consolidated financial statements
(Unaudited)
Condensed consolidating balance sheet
SeptemberDecember 31, 2018
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Accounts receivable, net | | $ | 83,424 |
| | $ | 10,897 |
| | $ | — |
| | $ | 94,321 |
|
Other current assets | | 97,045 |
| | 1,386 |
| | — |
| | 98,431 |
|
Oil and natural gas properties, net | | 2,043,009 |
| | 9,113 |
| | (22,551 | ) | | 2,029,571 |
|
Midstream service assets, net | | — |
| | 130,245 |
| | — |
| | 130,245 |
|
Other fixed assets, net | | 39,751 |
| | 68 |
| | — |
| | 39,819 |
|
Investment in subsidiaries | | 128,380 |
| | — |
| | (128,380 | ) | | — |
|
Other noncurrent assets, net | | 23,783 |
| | 4,135 |
| | — |
| | 27,918 |
|
Total assets | | $ | 2,415,392 |
| | $ | 155,844 |
| | $ | (150,931 | ) | | $ | 2,420,305 |
|
| | | | | | | | |
Accounts payable and accrued liabilities | | $ | 54,167 |
| | $ | 15,337 |
| | $ | — |
| | $ | 69,504 |
|
Other current liabilities | | 121,297 |
| | 9,664 |
| | — |
| | 130,961 |
|
Long-term debt, net | | 983,636 |
| | — |
| | — |
| | 983,636 |
|
Other noncurrent liabilities | | 59,511 |
| | 2,463 |
| | — |
| | 61,974 |
|
Total stockholders' equity | | 1,196,781 |
| | 128,380 |
| | (150,931 | ) | | 1,174,230 |
|
Total liabilities and stockholders' equity | | $ | 2,415,392 |
| | $ | 155,844 |
| | $ | (150,931 | ) | | $ | 2,420,305 |
|
Condensed consolidating statement of operations
For the three months ended June 30, 20182019
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo |
| Subsidiary Guarantors |
| Intercompany eliminations |
| Consolidated company |
Accounts receivable, net | | $ | 103,109 |
| | $ | 14,472 |
| | $ | — |
| | $ | 117,581 |
|
Other current assets | | 70,413 |
| | 1,533 |
| | — |
| | 71,946 |
|
Oil and natural gas properties, net | | 1,951,518 |
| | 9,146 |
| | (22,174 | ) | | 1,938,490 |
|
Midstream service assets, net | | — |
| | 132,415 |
| | — |
| | 132,415 |
|
Other fixed assets, net | | 42,071 |
| | 193 |
| | — |
| | 42,264 |
|
Investment in subsidiaries | | 130,439 |
| | — |
| | (130,439 | ) | | — |
|
Other noncurrent assets, net | | 13,113 |
| | 3,965 |
| | — |
| | 17,078 |
|
Total assets | | $ | 2,310,663 |
| | $ | 161,724 |
| | $ | (152,613 | ) | | $ | 2,319,774 |
|
| | | | | | | | |
Accounts payable and accrued liabilities | | $ | 68,037 |
| | $ | 18,600 |
| | $ | — |
| | $ | 86,637 |
|
Other current liabilities | | 162,893 |
| | 9,739 |
| | — |
| | 172,632 |
|
Long-term debt, net | | 963,191 |
| | — |
| | — |
| | 963,191 |
|
Other noncurrent liabilities | | 79,256 |
| | 2,946 |
| | — |
| | 82,202 |
|
Stockholders' equity | | 1,037,286 |
| | 130,439 |
| | (152,613 | ) | | 1,015,112 |
|
Total liabilities and stockholders' equity | | $ | 2,310,663 |
| | $ | 161,724 |
| | $ | (152,613 | ) | | $ | 2,319,774 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) |
| Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Total revenues |
| $ | 184,037 |
|
| $ | 49,251 |
|
| $ | (16,645 | ) |
| $ | 216,643 |
|
Total costs and expenses |
| 127,310 |
|
| 46,175 |
|
| (14,670 | ) |
| 158,815 |
|
Operating income |
| 56,727 |
|
| 3,076 |
|
| (1,975 | ) |
| 57,828 |
|
Interest expense |
| (15,765 | ) |
| — |
|
| — |
|
| (15,765 | ) |
Other non-operating income, net |
| 136,146 |
|
| 292 |
|
| (3,368 | ) |
| 133,070 |
|
Income before income taxes |
| 177,108 |
|
| 3,368 |
|
| (5,343 | ) |
| 175,133 |
|
Total income tax expense |
| (1,751 | ) |
| — |
|
| — |
|
| (1,751 | ) |
Net income |
| $ | 175,357 |
|
| $ | 3,368 |
|
| $ | (5,343 | ) |
| $ | 173,382 |
|
Condensed consolidating balance sheetstatement of operations
December 31, 2017For the three months ended June 30, 2018
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Total revenues | | $ | 208,624 |
| | $ | 163,021 |
| | $ | (20,599 | ) | | $ | 351,046 |
|
Total costs and expenses | | 115,602 |
| | 158,433 |
| | (17,756 | ) | | 256,279 |
|
Operating income | | 93,022 |
| | 4,588 |
| | (2,843 | ) | | 94,767 |
|
Interest expense | | (14,424 | ) | | — |
| | — |
| | (14,424 | ) |
Other non-operating expense, net | | (42,303 | ) | | (1,025 | ) | | (3,563 | ) | | (46,891 | ) |
Income before income taxes | | 36,295 |
| | 3,563 |
| | (6,406 | ) | | 33,452 |
|
Total income tax | | — |
| | — |
| | — |
| | — |
|
Net income | | $ | 36,295 |
| | $ | 3,563 |
| | $ | (6,406 | ) | | $ | 33,452 |
|
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Accounts receivable, net | | $ | 79,413 |
| | $ | 21,232 |
| | $ | — |
| | $ | 100,645 |
|
Other current assets | | 132,219 |
| | 2,518 |
| | — |
| | 134,737 |
|
Oil and natural gas properties, net | | 1,596,834 |
| | 9,220 |
| | (16,715 | ) | | 1,589,339 |
|
Midstream service assets, net | | — |
| | 138,325 |
| | — |
| | 138,325 |
|
Other fixed assets, net | | 40,344 |
| | 377 |
| | — |
| | 40,721 |
|
Investment in subsidiaries | | (7,566 | ) | | — |
| | 7,566 |
| | — |
|
Other noncurrent assets, net | | 15,526 |
| | 3,996 |
| | — |
| | 19,522 |
|
Total assets | | $ | 1,856,770 |
| | $ | 175,668 |
| | $ | (9,149 | ) | | $ | 2,023,289 |
|
| | | | | | | | |
Accounts payable and accrued liabilities | | $ | 34,550 |
| | $ | 23,791 |
| | $ | — |
| | $ | 58,341 |
|
Other current liabilities | | 193,104 |
| | 25,974 |
| | — |
| | 219,078 |
|
Long-term debt, net | | 791,855 |
| | — |
| | — |
| | 791,855 |
|
Other noncurrent liabilities | | 54,967 |
| | 133,469 |
| | — |
| | 188,436 |
|
Stockholders' equity | | 782,294 |
| | (7,566 | ) | | (9,149 | ) | | 765,579 |
|
Total liabilities and stockholders' equity | | $ | 1,856,770 |
| | $ | 175,668 |
| | $ | (9,149 | ) | | $ | 2,023,289 |
|
Condensed notes to the consolidated financial statements
(Unaudited)
Condensed consolidating statement of operations
For the three months ended September 30, 2018
|
| | | | | | | | | | | | | | | | |
(in thousands) |
| Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Total revenues |
| $ | 225,970 |
|
| $ | 73,463 |
|
| $ | (19,687 | ) |
| $ | 279,746 |
|
Total costs and expenses |
| 123,942 |
|
| 69,146 |
|
| (17,752 | ) |
| 175,336 |
|
Operating income |
| 102,028 |
|
| 4,317 |
|
| (1,935 | ) |
| 104,410 |
|
Interest expense |
| (14,845 | ) |
| — |
|
| — |
|
| (14,845 | ) |
Other non-operating expense |
| (28,811 | ) |
| (26 | ) |
| (4,291 | ) |
| (33,128 | ) |
Income before income taxes |
| 58,372 |
|
| 4,291 |
|
| (6,226 | ) |
| 56,437 |
|
Income tax expense |
| (1,387 | ) |
| — |
|
| — |
|
| (1,387 | ) |
Net income |
| $ | 56,985 |
|
| $ | 4,291 |
|
| $ | (6,226 | ) |
| $ | 55,050 |
|
Condensed consolidating statement of operations
For the three months ended September 30, 2017
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Total revenues | | $ | 157,902 |
| | $ | 63,686 |
| | $ | (15,770 | ) | | $ | 205,818 |
|
Total costs and expenses | | 97,686 |
| | 62,245 |
| | (14,565 | ) | | 145,366 |
|
Operating income | | 60,216 |
| | 1,441 |
| | (1,205 | ) | | 60,452 |
|
Interest expense | | (23,697 | ) | | — |
| | — |
| | (23,697 | ) |
Other non-operating income (expense) | | (24,287 | ) | | 2,290 |
| | (3,731 | ) | | (25,728 | ) |
Income before income taxes | | 12,232 |
| | 3,731 |
| | (4,936 | ) | | 11,027 |
|
Income tax | | — |
| | — |
| | — |
| | — |
|
Net income | | $ | 12,232 |
| | $ | 3,731 |
| | $ | (4,936 | ) | | $ | 11,027 |
|
Condensed consolidating statement of operations
For the ninesix months ended SeptemberJune 30, 2019
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Total revenues | | $ | 357,558 |
| | $ | 103,583 |
| | $ | (35,551 | ) | | $ | 425,590 |
|
Total costs and expenses | | 247,045 |
| | 98,398 |
| | (32,078 | ) | | 313,365 |
|
Operating income | | 110,513 |
| | 5,185 |
| | (3,473 | ) | | 112,225 |
|
Interest expense | | (31,312 | ) | | — |
| | — |
| | (31,312 | ) |
Other non-operating income, net | | 89,818 |
| | 385 |
| | (5,570 | ) | | 84,633 |
|
Income before income taxes | | 169,019 |
| | 5,570 |
| | (9,043 | ) | | 165,546 |
|
Total income tax expense | | (1,655 | ) | | — |
| | — |
| | (1,655 | ) |
Net income | | $ | 167,364 |
| | $ | 5,570 |
| | $ | (9,043 | ) | | $ | 163,891 |
|
Condensed consolidating statement of operations
For the six months ended June 30, 2018
| | (in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Total revenues | | $ | 632,419 |
| | $ | 312,784 |
| | $ | (54,715 | ) | | $ | 890,488 |
| | $ | 406,449 |
| | $ | 239,321 |
| | $ | (35,028 | ) | | $ | 610,742 |
|
Total costs and expenses | | 345,232 |
| | 302,143 |
| | (49,256 | ) | | 598,119 |
| | 221,290 |
| | 232,997 |
| | (31,504 | ) | | 422,783 |
|
Operating income | | 287,187 |
| | 10,641 |
| | (5,459 | ) | | 292,369 |
| | 185,159 |
| | 6,324 |
| | (3,524 | ) | | 187,959 |
|
Interest expense | | (42,787 | ) | | — |
| | — |
| | (42,787 | ) | | (27,942 | ) | | — |
| | — |
| | (27,942 | ) |
Other non-operating expense | | (62,532 | ) | | (1,307 | ) | | (9,334 | ) | | (73,173 | ) | |
Other non-operating expense, net | | | (33,721 | ) | | (1,281 | ) | | (5,043 | ) | | (40,045 | ) |
Income before income taxes | | 181,868 |
| | 9,334 |
| | (14,793 | ) | | 176,409 |
| | 123,496 |
| | 5,043 |
| | (8,567 | ) | | 119,972 |
|
Income tax expense | | (1,387 | ) | | — |
| | — |
| | (1,387 | ) | |
Total income tax | | | — |
| | — |
| | — |
| | — |
|
Net income | | $ | 180,481 |
| | $ | 9,334 |
| | $ | (14,793 | ) | | $ | 175,022 |
| | $ | 123,496 |
| | $ | 5,043 |
| | $ | (8,567 | ) | | $ | 119,972 |
|
Condensed consolidating statement of cash flows
For the six months ended June 30, 2019
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Net cash provided by operating activities | | $ | 266,522 |
| | $ | 317 |
| | $ | (5,570 | ) | | $ | 261,269 |
|
Capital expenditures and other, net | | (298,227 | ) | | (317 | ) | | 5,570 |
| | (292,974 | ) |
Net cash provided by financing activities | | 42,354 |
| | — |
| | — |
| | 42,354 |
|
Net increase in cash and cash equivalents | | 10,649 |
| | — |
| | — |
| | 10,649 |
|
Cash and cash equivalents, beginning of period | | 45,150 |
| | 1 |
| | — |
| | 45,151 |
|
Cash and cash equivalents, end of period | | $ | 55,799 |
| | $ | 1 |
| | $ | — |
| | $ | 55,800 |
|
Condensed consolidating statement of cash flows
For the six months ended June 30, 2018
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Net cash provided by operating activities | | $ | 254,991 |
| | $ | 12,653 |
| | $ | (5,043 | ) | | $ | 262,601 |
|
Capital expenditures and other, net | | (346,462 | ) | | (12,653 | ) | | 5,043 |
| | (354,072 | ) |
Net cash provided by financing activities | | 15,916 |
| | — |
| | — |
| | 15,916 |
|
Net decrease in cash and cash equivalents | | (75,555 | ) | | — |
| | — |
| | (75,555 | ) |
Cash and cash equivalents, beginning of period | | 112,158 |
| | 1 |
| | — |
| | 112,159 |
|
Cash and cash equivalents, end of period | | $ | 36,603 |
| | $ | 1 |
| | $ | — |
| | $ | 36,604 |
|
Condensed notes to the consolidated financial statements
(Unaudited)
Condensed consolidating statementNote 17—Organizational restructuring
On April 2, 2019, the Company announced the retirement of operations
Fortwo of its Senior Officers. Additionally, on April 8, 2019 (the "Effective Date"), the nineCompany committed to a company-wide reorganization effort (the "Plan") that included a workforce reduction of approximately 20%, which included an Executive Officer. The reduction in workforce was communicated to employees on the Effective Date and implemented immediately, subject to certain administrative procedures. The Company's board of directors approved the Plan in response to recent market conditions and to reduce costs and better position the Company for the future. In connection with the retirements on April 2, 2019 and with the Plan, the Company incurred $10.4 million of one-time charges during the three months ended SeptemberJune 30, 2017
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Total revenues | | $ | 439,269 |
| | $ | 190,926 |
| | $ | (48,370 | ) | | $ | 581,825 |
|
Total costs and expenses | | 276,855 |
| | 183,310 |
| | (42,179 | ) | | 417,986 |
|
Operating income | | 162,414 |
| | 7,616 |
| | (6,191 | ) | | 163,839 |
|
Interest expense | | (69,590 | ) | | — |
| | — |
| | (69,590 | ) |
Other non-operating income | | 53,780 |
| | 7,622 |
| | (15,238 | ) | | 46,164 |
|
Income before income taxes | | 146,604 |
| | 15,238 |
| | (21,429 | ) | | 140,413 |
|
Income tax | | — |
| | — |
| | — |
| | — |
|
Net income | | $ | 146,604 |
| | $ | 15,238 |
| | $ | (21,429 | ) | | $ | 140,413 |
|
Condensed consolidating statement2019 comprising of cash flows
Forcompensation, taxes, professional fees, outplacement and insurance-related expenses. All stock-based compensation awards held by the nine months ended September 30, 2018
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Net cash provided by operating activities | | $ | 402,065 |
| | $ | 15,797 |
| | $ | (9,334 | ) | | $ | 408,528 |
|
Change in investment between affiliates | | 3,115 |
| | (12,449 | ) | | 9,334 |
| | — |
|
Capital expenditures and other | | (533,083 | ) | | (3,348 | ) | | — |
| | (536,431 | ) |
Net cash provided by financing activities | | 66,151 |
| | — |
| | — |
| | 66,151 |
|
Net decrease in cash and cash equivalents | | (61,752 | ) | | — |
| | — |
| | (61,752 | ) |
Cash and cash equivalents, beginning of period | | 112,158 |
| | 1 |
| | — |
| | 112,159 |
|
Cash and cash equivalents, end of period | | $ | 50,406 |
| | $ | 1 |
| | $ | — |
| | $ | 50,407 |
|
Condensed consolidating statement of cash flows
Fortwo Senior Officers, the nine months ended September 30, 2017
|
| | | | | | | | | | | | | | | | |
(in thousands) | | Laredo | | Subsidiary Guarantors | | Intercompany eliminations | | Consolidated company |
Net cash provided by operating activities | | $ | 273,309 |
| | $ | 13,980 |
| | $ | (15,238 | ) | | $ | 272,051 |
|
Change in investment between affiliates | | (36,890 | ) | | 21,652 |
| | 15,238 |
| | — |
|
Capital expenditures and other | | (321,261 | ) | | (35,632 | ) | | — |
| | (356,893 | ) |
Net cash provided by financing activities | | 72,988 |
| | — |
| | — |
| | 72,988 |
|
Net decrease in cash and cash equivalents | | (11,854 | ) | | — |
| | — |
| | (11,854 | ) |
Cash and cash equivalents, beginning of period | | 32,671 |
| | 1 |
| | — |
| | 32,672 |
|
Cash and cash equivalents, end of period | | $ | 20,817 |
| | $ | 1 |
| | $ | — |
| | $ | 20,818 |
|
Executive Officer and the employees who were affected by the Plan were forfeited and the corresponding stock-based compensation totaling $6.1 million was reversed. See Note 6.c for additional information on the associated forfeiture activity.Note 16—18—Subsequent events
On October 15, 2018,July 31, 2019, the Company borrowedpaid $20.0 million on the Senior Secured Credit Facility. As a result, the outstanding balance under the Senior Secured Credit Facility was $190.0$215.0 million as of November 5, 2018.July 31, 2019.
On October 23, 2018, pursuant to the regular semi-annual redetermination, the lenders reaffirmed the borrowing base of $1.3 billion under the Senior Secured Credit Facility. The Company's aggregate elected commitment of $1.2 billion remains unchanged.As of November 5, 2018, the Company had one letter of credit outstanding of $14.7 million under the Senior Secured Credit Facility.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report as well as our audited consolidated financial statements and notes thereto included in our 20172018 Annual Report. The following discussion contains "forward-looking statements" that reflect our future plans, estimates, beliefs and expected performance. We caution that assumptions, expectations, projections, intentions or beliefs about future events may, and often do, vary from actual results and the differences can be material. Please see "Cautionary Statement Regarding Forward-Looking Statements." Except for purposes of the unaudited consolidated financial statements and condensed notes thereto included elsewhere in this Quarterly Report, references in this Quarterly Report to "Laredo,""we,""us,""our" or similar terms refer to Laredo, LMS and GCM collectively, unless the context otherwise indicates or requires. All amounts, dollars and percentages presented in this Quarterly Report are rounded and therefore approximate.
Executive overview
We are an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties, and midstream and marketing services, primarily in the Permian Basin of West Texas. Since our inception, we have grown primarily through our drilling program coupled with select strategic acquisitions and joint ventures.
Our financial and operating performance for the three months ended SeptemberJune 30, 2019 included the following:
Oil sales volumes of 2,771 MBbl, compared to 2,514 MBbl for the three months ended June 30, 2018, includeda 10% increase over the following:comparative period;
Oil, NGL and natural gas sales of $225.9$183.9 million, compared to $157.6$208.6 million for the three months ended SeptemberJune 30, 2017;
Average daily2018, which is the result of a 28% decrease in average sales price per BOE and was partially offset by a 22% increase in MBOE volumes of 71,382 BOE/D, compared to 60,011 BOE/D for the three months ended September 30, 2017;sold;
Net income of $55.1$173.4 million, compared to $11.0$33.5 million for the three months ended SeptemberJune 30, 2017;2018; and
Adjusted EBITDA (a non-GAAP financial measure) of $160.6$153.2 million, compared to $130.9$152.5 million for the three months ended SeptemberJune 30, 2017.2018. See page 4244 for a discussion and reconciliation of Adjusted EBITDA.
Our financial and operating performance for the ninesix months ended SeptemberJune 30, 2019 included the following:
Oil sales volumes of 5,305 MBbl, compared to 4,953 MBbl for the six months ended June 30, 2018, includeda 7% increase over the following:comparative period;
Oil, NGL and natural gas sales of $631.9$357.2 million, compared to $438.1$406.0 million for the ninesix months ended SeptemberJune 30, 2017;
Average daily2018, which is the result of a 27% decrease in average sales price per BOE and was partially offset by a 21% increase in MBOE volumes of 67,330 BOE/D, compared to 57,044 BOE/D for the nine months ended September 30, 2017;sold;
Net income of $175.0$163.9 million, compared to $140.4$120.0 million for the ninesix months ended SeptemberJune 30, 2017;2018; and
Adjusted EBITDA (a non-GAAP financial measure) of $456.5$276.1 million, compared to $352.6$295.9 million for the ninesix months ended SeptemberJune 30, 2017.2018. See page 4244 for a discussion and reconciliation of Adjusted EBITDA.
Recent developments
Potential future low commodity price impact on our third-quarter 2019 full cost ceiling impairment test
Oil, NGL and natural gas prices have remained low in the third quarter of 2019. If prices remain at or below the current levels, subject to numerous factors and inherent limitations, some of which are discussed below, and all other factors remain constant, we will incur a non-cash full cost ceiling impairment in the third quarter of 2019, which will have an adverse effect on our results of operations.
There are numerous uncertainties inherent in the estimation of proved reserves and accounting for oil and natural gas properties in future periods. In addition to unknown future commodity prices, other uncertainties include (i) changes in drilling and completions costs, (ii) changes in oilfield service costs, (iii) production results, (iv) our ability, in a low price environment, to strategically drill the most economic locations in our multi-stack horizontal targets, (v) income tax impacts, (vi) potential recognition of additional proved undeveloped reserves, (vii) any potential value added to our proved reserves when testing recoverability from drilling unbooked locations, (viii) revisions to production curves based on additional data and (ix) the inherent significant volatility in the commodity prices for oil, NGL and natural gas.
Each of the above factors is evaluated on a quarterly basis and if there is a material change in any factor it is incorporated into our reserves estimation utilized in our quarterly accounting estimates. We use our reserve estimates to evaluate, also on a quarterly basis, the reasonableness of our resource development plans for our reported reserves. Changes in circumstance,
including commodity pricing, economic factors and the other uncertainties described above may lead to changes in our development plans.
Set forth below is a calculation of a potential future impairment of our evaluated oil and natural gas properties. Such implied impairment should not be interpreted to be indicative of our development plan or of our actual future results. Each of the uncertainties noted above has been evaluated for material known trends to be potentially included in the estimation of possible third-quarter effects. Based on such review, we determined that the impact of decreased commodity prices is the only significant known variable necessary in calculating the following scenario.
Our hypothetical third-quarter 2019 full cost ceiling calculation has been prepared by substituting (i) $53.01 per Bbl for oil, (ii) $14.86 per Bbl for NGL and (iii) $0.48 per Mcf for natural gas (collectively, the "Pro Forma Third-Quarter Prices") for the respective Realized Prices as of June 30, 2019. All other inputs and assumptions have been held constant. Accordingly, this estimation strictly isolates the estimated impact of low commodity prices on the third-quarter 2019 Realized Prices that will be utilized in our full cost ceiling calculation. The Pro Forma Third-Quarter Prices use a slightly modified Realized Price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for oil, NGL and natural gas for the 10 months ended July 1, 2019 and holding the July 26, 2019 prices constant for the remaining eleventh and twelfth months of the calculation. Based solely on the substitution of the Pro Forma Third-Quarter Prices into our June 30, 2019 reserve estimates, the implied third-quarter impairment would be $300 million. We believe that substituting these prices into our June 30, 2019 reserve estimates may help provide users with an understanding of the potential impact on our third-quarter 2019 full cost ceiling test.
See "Part I, Item 1A. Risk Factors—Risks related to our business—As a result of the volatility in prices for oil, NGL and natural gas, we have taken and may be required to take further write-downs of the carrying values of our properties" in our 2018 Annual Report.
Core area of operations
The oil and liquids-rich Permian Basin is characterized by multiple target horizons, long-lived reserves, high drilling success rates and high initial production rates. As of SeptemberJune 30, 2018,2019, we had assembled 120,465122,787 net acres in the Permian Basin.
Pricing and reserves
Our results of operations are heavily influenced by oil, NGL and natural gas prices. Oil, NGL and natural gas price fluctuations are caused by changes in global and regional supply and demand, market uncertainty, economic conditions, transportation constraints and a variety of additional factors. Historically, commodity prices have experienced significant fluctuations, and additional changes in commodity prices may affect the economic viability of, and our ability to fund, our drilling projects, as well as the economic valuation and economic recovery of oil, NGL and natural gas reserves.
During the second and third quarters of 2018, the Midland market crude oil price experienced an increased discount to WTI-Cushing prices, with the August 31, 2018 discount for prompt month delivery at $18 per Bbl of oil, primarily due to limited pipeline capacity constraining transportation of crude oil out of the Permian Basin to major marketing hubs including, but not limited to, Cushing, Oklahoma and the United States Gulf Coast. As of October 31, 2018, this Midland discount for prompt month delivery was $6 per Bbl of oil. This pipeline constraint is expected to continue to affect the Midland market oil price until further transportation capacity becomes operational or until basin-wide crude oil production decreases from its current levels. We will continue to pursue avenues to attempt to protect our oil value from basin differentials by securing transportation capacity, enabling us to sell oil in multiple markets, and entering into basis-swap derivatives.
We have entered into a number of derivative contracts that have enabled us to offset a portion of the changes in our cash flow caused by fluctuations in price and basis differentials for our sales of oil, NGL and natural gas, as discussed in "Item 3. Quantitative and Qualitative Disclosures About Market Risk."
The unweighted arithmetic average first-day-of-the-month prices for each month within the 12-month period prior to the end of the reporting period before pricing differentials, adjusted for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received when control passes to the purchaser/customer (the "Realized Prices"),Realized Prices utilized to value our reserves as of SeptemberJune 30, 2019 and June 30, 2018, and September 30, 2017, were $58.83$55.69 per Bbl for oil, $21.15$18.64 per Bbl for NGL and $1.62$0.70 per Mcf for natural gas, and $44.59$55.36 per Bbl for oil, $16.55$19.15 per Bbl for NGL and $2.16$1.80 per Mcf for natural gas, respectively. The Realized Prices used to estimate proved reserves do not include derivative transactions. See "—Costs and expenses - Transportation and marketing expenses" for costs incurred prior to control passing to the final customer. The unamortized cost of our evaluated oil and natural gas properties did not exceed the full cost ceiling amount as of SeptemberJune 30, 20182019 or SeptemberJune 30, 2017.2018. See Note 54 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of our full cost method of accounting.
Horizontal drilling inof unconventional wells using enhanced completions techniques, including, but not limited to, hydraulic fracturing, is a relatively new process and, as such, forecasting the long-term production of such wells is inherently uncertain and subject to varying interpretations. As we receive and process geological and production data from these wells over time, we analyze such data to confirm whether previous assumptions regarding original forecasted production and reserves continue to appear accurate or require modification. While all production forecasts have elements of uncertainty over the life of the related wells, we are seeing indications that the oil portion of such reserves may be less than originally anticipated and the decline curves may be steeper than originally anticipated.
Initial production results, production decline rates, well density, completion design and operating method are examples of the numerous uncertainties and variables inherent in the estimation of proved reserves in future periods. The quantity of proved reserves is one of the many variables inherent in the calculation of depletion. Negative revisions in the estimated quantities of proved reserves have the effect of increasing the rates of depletion on the affected properties, which decreases earnings and increases losses through higher depletion expense. We have experienced increased depletion per BOE sold for each of the last three quarters of 2018.
The table below presents our depletion expense for our evaluated oil and natural gas properties per BOE sold for the periods presented:
|
| | | | | | | | | | | | |
| | For the quarters ended |
| | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
Depletion per BOE sold | | $ | 7.94 |
| | $ | 7.68 |
| | $ | 7.34 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
Depletion expense per BOE sold | | $ | 8.27 |
| | $ | 7.68 |
| | $ | 8.51 |
| | $ | 7.52 |
|
Sources of our revenue
Our revenues are derived from the sale of produced oil, NGL and natural gas, the sale of purchased oil and providing midstream services to third parties, all within the continental United States and do not include the effects of derivatives. Our oil, NGL and natural gas revenues may vary significantly from period to period as a result of changes in volumes of production, pricing differentials and/or changes in commodity prices. Our sales of purchased oil revenue may vary due to changes in oil prices, pricing differentials and the amount of volumes purchased. Our midstream service revenues may vary due to oil throughput fees and the level of services provided to third parties for (i) oil and natural gas gathering and transportation systems and related facilities, (ii) natural gas lift, rig fuel and centralized compression infrastructure and (iii) water storage, recycling and transportation infrastructure. See Notes 2.n and 5.b to our consolidated financial statements in our 2018 Annual Report for additional information regarding our revenue recognition policies.
The following table presents our sources of revenue as a percentage of total revenues:
| | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Oil sales | | 57 | % | | 54 | % | | 53 | % | | 54 | % | | 74 | % | | 45 | % | | 68 | % | | 51 | % |
NGL sales | | 18 | % | | 13 | % | | 13 | % | | 12 | % | | 10 | % | | 10 | % | | 13 | % | | 10 | % |
Natural gas sales | | 5 | % | | 10 | % | | 5 | % | | 10 | % | | 1 | % | | 4 | % | | 3 | % | | 5 | % |
Midstream service revenues | | 1 | % | | 1 | % | | 1 | % | | 1 | % | | 1 | % | | 1 | % | | 1 | % | | 1 | % |
Sales of purchased oil | | 19 | % | | 22 | % | | 28 | % | | 23 | % | | 14 | % | | 40 | % | | 15 | % | | 33 | % |
Total | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Results of operations
For the three and ninesix months ended SeptemberJune 30, 20182019 as compared to the three and ninesix months ended SeptemberJune 30, 20172018
Oil, NGL and natural gas sales volumes, revenues and prices
The following table presents information regarding producedour oil, NGL and natural gas sales volumes, revenues and average sales prices: | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Sales volumes: | | |
|
| |
| | |
| | |
| | |
|
| |
| | |
| | |
|
Oil (MBbl) | | 2,651 |
|
| 2,425 |
| | 7,604 |
| | 7,027 |
| | 2,771 |
|
| 2,514 |
| | 5,305 |
| | 4,953 |
|
NGL (MBbl) | | 1,987 |
| | 1,491 |
| | 5,328 |
| | 4,187 |
| | 2,200 |
| | 1,778 |
| | 4,299 |
| | 3,341 |
|
Natural gas (MMcf) | | 11,577 |
|
| 9,630 |
| | 32,697 |
| | 26,154 |
| | 15,092 |
|
| 10,947 |
| | 27,941 |
| | 21,120 |
|
Oil equivalents (MBOE)(1)(2) | | 6,567 |
|
| 5,521 |
| | 18,381 |
| | 15,573 |
| | 7,485 |
|
| 6,116 |
| | 14,260 |
| | 11,814 |
|
Average daily sales volumes (BOE/D)(2) | | 71,382 |
|
| 60,011 |
| | 67,330 |
| | 57,044 |
| | 82,259 |
|
| 67,206 |
| | 78,787 |
| | 65,270 |
|
% Oil(2) | | 40 | % |
| 44 | % | | 41 | % | | 45 | % | | 37 | % |
| 41 | % | | 37 | % | | 42 | % |
Sales revenues (in thousands): | |
|
|
| | | |
| | |
| |
|
|
| | | |
| | |
|
Oil | | $ | 160,007 |
|
| $ | 110,194 |
| | $ | 469,972 |
| | $ | 313,875 |
| | $ | 160,030 |
|
| $ | 159,051 |
| | $ | 289,201 |
| | $ | 309,965 |
|
NGL | | 50,814 |
| | 27,700 |
| | 115,979 |
| | 68,329 |
| | 22,197 |
| | 36,805 |
| | 54,432 |
| | 65,165 |
|
Natural gas | | 15,043 |
|
| 19,664 |
| | 45,908 |
| | 55,927 |
| | 1,636 |
|
| 12,705 |
| | 13,606 |
| | 30,865 |
|
Total oil, NGL and natural gas sales revenues | | $ | 225,864 |
|
| $ | 157,558 |
| | $ | 631,859 |
| | $ | 438,131 |
| | $ | 183,863 |
|
| $ | 208,561 |
| | $ | 357,239 |
| | $ | 405,995 |
|
Average sales Realized Prices(2): | |
|
|
| | | |
| | |
| |
Average sales prices(2): | | |
|
|
| | | |
| | |
|
Oil, without derivatives ($/Bbl)(3) | | $ | 60.36 |
|
| $ | 45.44 |
| | $ | 61.80 |
| | $ | 44.67 |
| | $ | 57.76 |
|
| $ | 63.26 |
| | $ | 54.52 |
| | $ | 62.58 |
|
NGL, without derivatives ($/Bbl)(3) | | $ | 25.57 |
|
| $ | 18.58 |
| | $ | 21.77 |
| | $ | 16.32 |
| | $ | 10.09 |
|
| $ | 20.71 |
| | $ | 12.66 |
| | $ | 19.51 |
|
Natural gas, without derivatives ($/Mcf)(3) | | $ | 1.30 |
|
| $ | 2.04 |
| | $ | 1.40 |
| | $ | 2.14 |
| | $ | 0.11 |
|
| $ | 1.16 |
| | $ | 0.49 |
| | $ | 1.46 |
|
Average price, without derivatives ($/BOE)(3) | | $ | 34.39 |
|
| $ | 28.54 |
| | $ | 34.38 |
| | $ | 28.13 |
| |
Average sales price, without derivatives ($/BOE)(3) | | | $ | 24.56 |
|
| $ | 34.10 |
| | $ | 25.05 |
| | $ | 34.37 |
|
Oil, with derivatives ($/Bbl)(4) | | $ | 55.41 |
|
| $ | 50.72 |
| | $ | 57.50 |
| | $ | 49.08 |
| | $ | 56.65 |
|
| $ | 58.71 |
| | $ | 52.36 |
| | $ | 58.62 |
|
NGL, with derivatives ($/Bbl)(4) | | $ | 23.99 |
|
| $ | 17.98 |
| | $ | 20.95 |
| | $ | 15.90 |
| | $ | 12.82 |
|
| $ | 20.07 |
| | $ | 14.04 |
| | $ | 19.15 |
|
Natural gas, with derivatives ($/Mcf)(4) | | $ | 1.79 |
|
| $ | 2.10 |
| | $ | 1.79 |
| | $ | 2.17 |
| | $ | 1.17 |
|
| $ | 1.72 |
| | $ | 1.14 |
| | $ | 1.78 |
|
Average price, with derivatives ($/BOE)(4) | | $ | 32.78 |
|
| $ | 30.80 |
| | $ | 33.04 |
| | $ | 30.07 |
| |
Average sales price, with derivatives ($/BOE)(4) | | | $ | 27.09 |
|
| $ | 33.04 |
| | $ | 25.94 |
| | $ | 33.18 |
|
_____________________________________________________________________________ | |
(1) | BOE is calculated using a conversion rate of six Mcf per one Bbl. |
| |
(2) | The numbers presented are based on actual resultsamounts and are not calculated using the rounded numbers presented in the table above. |
| |
(3) | Realized oil, NGL and natural gas prices are the actualActual prices received when control passes to the purchaser/customer adjusted for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the wellhead. See "—Costs and expenses - Transportation and marketing expenses" for costs incurred prior to control passing to the final customer.
|
| |
(4) | Price reflects the after-effects of our derivative transactions on our average Realized Prices.sales prices. Our calculation of such after-effects includes settlements of matured derivatives during the respective periods in accordance with GAAP and an adjustment to reflect premiums incurred previously or upon settlement that are attributable to derivatives that settled during the respective periods. |
The following table presents settlements received (paid) received for matured derivatives and premiums paid previously or upon settlement attributable to derivatives that matured during the periods utilized in our calculation of the average sales Realized Pricesprices with derivatives presented above: | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, |
| Six months ended June 30, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Settlements (paid) received for matured derivatives: | |
|
|
|
|
| | | | | |
Settlements received (paid) for matured derivatives: | | |
|
|
|
|
| | | | |
Oil | | $ | (7,279 | ) |
| $ | 13,182 |
| | $ | (16,623 | ) | | $ | 33,399 |
| | $ | 1,481 |
|
| $ | (5,608 | ) | | $ | (614 | ) | | $ | (9,344 | ) |
NGL | | (3,154 | ) | | (897 | ) | | (4,348 | ) | | (1,761 | ) | | 5,998 |
| | (1,147 | ) | | 5,941 |
| | (1,194 | ) |
Natural gas | | 6,545 |
|
| 1,350 |
| | 15,028 |
| | 3,153 |
| | 16,001 |
|
| 6,936 |
| | 18,255 |
| | 8,483 |
|
Total | | $ | (3,888 | ) |
| $ | 13,635 |
| | $ | (5,943 | ) | | $ | 34,791 |
| | $ | 23,480 |
|
| $ | 181 |
| | $ | 23,582 |
| | $ | (2,055 | ) |
Premiums paid previously or upon settlement attributable to derivatives that matured during the respective period: | |
|
|
|
|
| | | | | |
|
|
|
|
| | | | |
Oil | | $ | (5,849 | ) |
| $ | (362 | ) | | $ | (16,090 | ) | | $ | (2,383 | ) | | $ | (4,541 | ) |
| $ | (5,838 | ) | | $ | (10,841 | ) | | $ | (10,241 | ) |
Natural gas | | (850 | ) |
| (769 | ) | | (2,536 | ) | | (2,301 | ) | | — |
|
| (845 | ) | | — |
| | (1,686 | ) |
Total | | $ | (6,699 | ) |
| $ | (1,131 | ) | | $ | (18,626 | ) | | $ | (4,684 | ) | | $ | (4,541 | ) |
| $ | (6,683 | ) | | $ | (10,841 | ) | | $ | (11,927 | ) |
Changes in average sales Realized Pricesprices without derivatives and sales volumes caused the following changes to our oil, NGL and natural gas revenues between the three months ended SeptemberJune 30, 20182019 and 2017:2018: | | (in thousands) | | Oil | | NGL | | Natural gas | | Total net effect of change | | Oil | | NGL | | Natural gas | | Total net effect of change |
2017 Revenues | | $ | 110,194 |
| | $ | 27,700 |
| | $ | 19,664 |
|
| $ | 157,558 |
| |
Effect of changes in average sales Realized Prices | | 39,565 |
| | 13,895 |
| | (8,596 | ) | | 44,864 |
| |
2018 Revenues | | | $ | 159,051 |
| | $ | 36,805 |
| | $ | 12,705 |
|
| $ | 208,561 |
|
Effect of changes in average sales prices | | | (15,257 | ) | | (23,358 | ) | | (15,880 | ) | | (54,495 | ) |
Effect of changes in sales volumes | | 10,248 |
| | 9,219 |
| | 3,975 |
| | 23,442 |
| | 16,236 |
| | 8,750 |
| | 4,811 |
| | 29,797 |
|
2018 Revenues | | $ | 160,007 |
| | $ | 50,814 |
| | $ | 15,043 |
| | $ | 225,864 |
| |
2019 Revenues | | | $ | 160,030 |
| | $ | 22,197 |
| | $ | 1,636 |
| | $ | 183,863 |
|
Changes in average sales Realized Pricesprices without derivatives and sales volumes caused the following changes to our oil, NGL and natural gas revenues between the ninesix months ended SeptemberJune 30, 20182019 and 2017:2018: | | (in thousands) | | Oil | | NGL | | Natural gas | | Total net effect of change | | Oil | | NGL | | Natural gas | | Total net effect of change |
2017 Revenues | | $ | 313,875 |
| | $ | 68,329 |
| | $ | 55,927 |
| | $ | 438,131 |
| |
Effect of changes in average sales Realized Prices | | 130,314 |
| | 29,039 |
| | (24,009 | ) | | 135,344 |
| |
2018 Revenues | | | $ | 309,965 |
| | $ | 65,165 |
| | $ | 30,865 |
| | $ | 405,995 |
|
Effect of changes in average sales prices | | | (42,750 | ) | | (29,430 | ) | | (27,228 | ) | | (99,408 | ) |
Effect of changes in sales volumes | | 25,783 |
| | 18,611 |
| | 13,990 |
| | 58,384 |
| | 21,986 |
| | 18,697 |
| | 9,969 |
| | 50,652 |
|
2018 Revenues | | $ | 469,972 |
| | $ | 115,979 |
| | $ | 45,908 |
| | $ | 631,859 |
| |
2019 Revenues | | | $ | 289,201 |
| | $ | 54,432 |
| | $ | 13,606 |
| | $ | 357,239 |
|
Oil sales revenue. Our oil sales revenue is a function of oil production volumes sold and average oil sales Realized Pricesprices received for those volumes. The increase in oil sales revenue of $49.8$1.0 million, or 45%1%, for the three months ended SeptemberJune 30, 20182019 as compared to the same period in 20172018 is due to a 33%10% increase in oil sales volumes and was offset by a 9% decrease in average oil sales Realized Prices and a 9% increase in oil sales volumes.prices.
The increasedecrease in oil sales revenue of $156.1$20.8 million, or 50%7%, for the ninesix months ended SeptemberJune 30, 20182019 as compared to the same period in 20172018 is due to a 38% increase13% decrease in average oil sales Realized Pricesprices and an 8%was partially offset by a 7% increase in oil sales volumes.
NGL sales revenue. Our NGL sales revenue is a function of NGL production volumes sold and average NGL sales Realized Pricesprices received for those volumes. The increasedecrease in NGL sales revenue of $23.1$14.6 million, or 83%40%, for the three months ended SeptemberJune 30, 20182019 as compared to the same period in 20172018 is due to a 38% increase51% decrease in average NGL sales Realized Pricesprices and was partially offset by a 33%24% increase in NGL sales volumes.
The increasedecrease in NGL sales revenue of $47.7$10.7 million, or 70%16%, for the ninesix months ended SeptemberJune 30, 20182019 as compared to the same period in 20172018 is due to a 33% increase35% decrease in average NGL sales Realized Pricesprices and was partially offset by a 27%29% increase in NGL sales volumes.
Natural gas sales revenue. Our natural gas sales revenue is a function of natural gas production volumes sold and average natural gas sales Realized Pricesprices received for those volumes. The decrease in natural gas sales revenue of $4.6$11.1 million, or 23%87%, for the three months ended SeptemberJune 30, 20182019 as compared to the same period in 20172018 is due to a 36%91% decrease in average natural gas sales Realized Prices,prices and was partially offset by a 20%38% increase in natural gas sales volumes.
The decrease in natural gas sales revenue of $10.0$17.3 million, or 18%56%, for the ninesix months ended SeptemberJune 30, 20182019 as compared to the same period in 20172018 is due to a 35%66% decrease in average natural gas sales Realized Prices,prices and was partially offset by a 25%32% increase in natural gas sales volumes.
The following table presents midstream service and sales of purchased oil revenues: | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Midstream service revenues | | $ | 2,255 |
| | $ | 2,446 |
| | $ | 6,590 |
| | $ | 8,148 |
| | $ | 2,610 |
| | $ | 1,976 |
| | $ | 5,493 |
| | $ | 4,335 |
|
Sales of purchased oil | | $ | 51,627 |
| | $ | 45,814 |
| | $ | 252,039 |
| | $ | 135,546 |
| | $ | 30,170 |
| | $ | 140,509 |
| | $ | 62,858 |
| | $ | 200,412 |
|
Midstream service revenues. Our midstream service revenues decreasedincreased by $0.2$0.6 million, or 8%32%, and by $1.6$1.2 million, or 19%27%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, as compared to the same periods in 2017. 2018. These revenues fluctuate and will vary due to oil throughput fees and the level of services provided to third parties.
Sales of purchased oil. These revenues are a function of the services provided through our (i)volumes and prices of purchased oil sold to customers and natural gas gatheringare offset by the costs of purchased oil. Sales of purchased oil decreased by $110.3 million, or 79%, and transportation systems and related facilities, (ii) gas lift, rig fuel and centralized compression infrastructure and (iii) water storage, recycling and transportation infrastructure. The decrease in midstream service revenuesby $137.6 million, or 69%, for the ninethree and six months ended SeptemberJune 30, 2019, respectively, as compared to the same periods in 2018 mainly due to decreases in the volumes of purchased oil sold. During the three months ended June 30, 2018, our volume of purchased oil sold to customers increased by 131%, as compared to the same period in 2017, is mainly due to decreased oil throughput revenue.
Sales2017. This second-quarter 2018 increase in the volume of purchased oil. oil sold declined to levels typical of previous periods in the third quarter of 2018.
We enter into purchase transactions with third parties and separate sale transactions with purchasers/customers to diversify a portion of the sales of our oil production to the Gulf Coast market.transactions. These transactions are presented on a gross basis as we act as the principal in the transaction by assuming control of the commodities purchased and the responsibility to deliver the commodities sold. Revenue is recognized when control transfers to the purchaser/customer at the delivery point based on the price received. The transportation costs associated with these transactions are presented as a component of costs of purchased oil. These revenues are a function of the volumeSee "—Costs and priceexpenses - Costs of purchased oil sold to customers and are offset by the increased costs of purchased oil.
Sales of purchased oil increased by $5.8 million, or 13%, and by $116.5 million, or 86%, for the three and nine months ended September 30, 2018, respectively, as compared to the same periods in 2017. The increase in the sale of purchased oil for the three months ended September 30, 2018, as compared to the same period in 2017, is mainly due to increased price, partially offset by a 27% decrease in volume of purchased oil sold. During the nine months ended September 30, 2018, our volume of purchased oil sold to customers increased by 33%, as compared to the same period in 2017, due to an increase in the volume of purchased oil sold during the second quarter of 2018."
Costs and expenses
The following table presents information regarding costs and expenses and selected average costs and expenses per BOE sold: | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, |
| Six months ended June 30, |
(in thousands except for per BOE sold data) | | 2018 | | 2017 | | 2018 |
| 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Costs and expenses: | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Lease operating expenses | | $ | 23,873 |
| | $ | 19,594 |
| | $ | 68,466 |
| | $ | 56,690 |
| | $ | 23,632 |
| | $ | 22,642 |
| | $ | 46,241 |
| | $ | 44,593 |
|
Production and ad valorem taxes | | 14,015 |
| | 9,558 |
| | 38,232 |
| | 26,811 |
| | 11,328 |
| | 12,405 |
| | 18,547 |
| | 24,217 |
|
Transportation and marketing expenses | | 5,036 |
| | — |
| | 6,570 |
| | — |
| | 4,891 |
| | 1,534 |
| | 9,650 |
| | 1,534 |
|
Midstream service expenses | | 728 |
| | 1,174 |
| | 1,824 |
| | 2,986 |
| | 607 |
| | 403 |
| | 2,210 |
| | 1,096 |
|
Costs of purchased oil | | 51,210 |
| | 47,385 |
| | 252,452 |
| | 141,661 |
| | 30,172 |
| | 140,578 |
| | 62,863 |
| | 201,242 |
|
General and administrative: | | | | | | | | | | | | | | | | |
Cash | | 14,664 |
| | 16,034 |
| | 46,208 |
| | 45,728 |
| | 11,479 |
| | 16,158 |
| | 25,592 |
| | 31,544 |
|
Non-cash stock-based compensation, net | | 8,733 |
| | 8,966 |
| | 28,748 |
| | 26,877 |
| |
Non-cash stock-based compensation, net(1) | | | (423 | ) | | 10,676 |
| | 6,983 |
| | 20,015 |
|
Restructuring expenses | | | 10,406 |
| | — |
| | 10,406 |
| | — |
|
Depletion, depreciation and amortization | | 55,963 |
| | 41,212 |
| | 152,278 |
| | 113,327 |
| | 65,703 |
| | 50,762 |
| | 128,801 |
| | 96,315 |
|
Other operating expenses | | 1,114 |
| | 1,443 |
| | 3,341 |
| | 3,906 |
| | 1,020 |
| | 1,121 |
| | 2,072 |
| | 2,227 |
|
Total costs and expenses | | $ | 175,336 |
| | $ | 145,366 |
| | $ | 598,119 |
| | $ | 417,986 |
| | $ | 158,815 |
| | $ | 256,279 |
| | $ | 313,365 |
| | $ | 422,783 |
|
Average costs per BOE sold(1): |
|
|
|
|
|
| | | | | |
Selected average costs and expenses per BOE sold(2): | |
|
|
|
|
|
| | | | |
Lease operating expenses |
| $ | 3.63 |
|
| $ | 3.55 |
|
| $ | 3.72 |
|
| $ | 3.64 |
|
| $ | 3.16 |
|
| $ | 3.70 |
|
| $ | 3.24 |
|
| $ | 3.78 |
|
Production and ad valorem taxes | | 2.13 |
| | 1.73 |
| | 2.08 |
| | 1.72 |
| | 1.51 |
| | 2.03 |
| | 1.30 |
| | 2.05 |
|
Transportation and marketing expenses | | 0.77 |
| | — |
| | 0.36 |
| | — |
| | 0.65 |
| | 0.25 |
| | 0.68 |
| | 0.13 |
|
Midstream service expenses | | 0.11 |
| | 0.21 |
| | 0.10 |
| | 0.19 |
| | 0.08 |
| | 0.07 |
| | 0.15 |
| | 0.09 |
|
General and administrative: | | | | | | | | | | | | | | | | |
Cash | | 2.23 |
|
| 2.90 |
|
| 2.51 |
|
| 2.94 |
| | 1.53 |
|
| 2.64 |
|
| 1.79 |
|
| 2.67 |
|
Non-cash stock-based compensation, net | | 1.33 |
|
| 1.62 |
|
| 1.56 |
|
| 1.73 |
| |
Non-cash stock-based compensation, net(1) | | | (0.06 | ) |
| 1.75 |
|
| 0.49 |
|
| 1.69 |
|
Depletion, depreciation and amortization | | 8.52 |
|
| 7.46 |
|
| 8.28 |
|
| 7.28 |
| | 8.78 |
|
| 8.30 |
|
| 9.03 |
|
| 8.15 |
|
Total costs and expenses | | $ | 18.72 |
|
| $ | 17.47 |
|
| $ | 18.61 |
|
| $ | 17.50 |
| |
Total selected costs and expenses | | | $ | 15.65 |
|
| $ | 18.74 |
|
| $ | 16.68 |
|
| $ | 18.56 |
|
_____________________________________________________________________________ | |
(1) | AverageFor the three and six months ended June 30, 2019, non-cash stock-based compensation, net, excluding forfeitures related to our April 2019 organizational restructuring, was $5.6 million and $13.0 million, respectively, and on a per BOE sold basis was $0.75 and $0.91, respectively. |
| |
(2) | Selected average costs and expenses per BOE sold are based on actual amounts and are not calculated using the rounded numbers presented in the table above. |
Lease operating expenses. Lease operating expenses, which include workover expenses, increased by $4.3$1.0 million, or 22%4%, and by $11.8$1.6 million, or 21%4%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017.2018. These increases are mainly due to increased costs for water gathering and handling activities and workover expenses during 2019. On a per BOE sold basis, lease operating expenses remained relatively flatdecreased by 15% and 14% for the three and ninesix months ended SeptemberJune 30, 20182019, respectively, compared to the same periods in 2017.2018. We continue to focus on economic efficiencies associated with the usage and procurement of products and services related to lease operating expenses.
Production and ad valorem taxes. Production and ad valorem taxes increaseddecreased by $4.5$1.1 million, or 47%9%, and by $11.4$5.7 million, or 43%23%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017.2018. The increases areyear-to-date decrease is mainly due to increases ina $4.5 million production tax refund, related to additional marketing costs claimed for fiscal years 2013 through 2016, recorded during the first quarter of 2019. Production taxes, which are established by federal, state or local taxing authorities, are based on and fluctuate in proportion to our oil, NGL and natural gas sales revenue. Ad valorem taxes are based on and fluctuate in proportion to the taxable value assessed by the various counties where our oil and natural gas properties are located.
Transportation and marketing expenses. Transportation and marketing expenses were $5.0$4.9 million and $6.6$9.7 million for the three and ninesix months ended SeptemberJune 30, 2019, respectively. In July 2018, respectively. There were no comparable amounts recorded during the same periods in 2017. Transportationwe began recognizing transportation and marketing expenses areexpense incurred for the costs incurreddelivery of produced oil to transport a portion of our production tocustomer in the favorableU.S. Gulf Coast market.
Midstream service expenses. Midstream service expenses decreasedincreased by $0.4$0.2 million, or 38%51%, and by $1.2$1.1 million, or 39%102%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017.2018. These increases are mainly due to an increase in water service costs during the three and six months ended June 30, 2019, which corresponds to a similar increase in water service revenue included in midstream service revenues during the same periods. Midstream service expenses primarily representare costs incurred to operate and maintain our (i) oil and natural gas gathering and transportation systems and related facilities, (ii) centralized oil storage tanks, (iii) natural gas lift, rig fuel and centralized compression infrastructure and (iv) water storage, recycling and transportation facilities.
Costs of purchased oil. Costs of purchased oil increaseddecreased by $3.8$110.4 million, or 8%79%, and by $110.8$138.4 million, or 78%69%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017.2018 mainly due to decreases in the volumes of purchased oil. These are costs include
the cost ofincurred for obtaining oil from third parties and, in some cases, transporting such oil utilized in our marketing activities. Our costs of purchased oil may vary due to changes in oil prices, pricing differentials, the amount of volumes purchased and fluctuations in transportation fees. The quarter-over-quarter increase is mainly due to increases in oil prices, partially offset by a decrease in transportation fees. During the ninethree months ended SeptemberJune 30, 2018, our volume of purchased oil increased by 33%132%, as compared to the same period in 2017, due to an2017. This second-quarter 2018 increase in the volume of purchased oil duringdeclined to levels typical of previous periods in the secondthird quarter of 2018.
General and administrative ("G&A"). TotalG&A decreased by $1.6$15.8 million, or 6%59%, and increased by $2.4$19.0 million, or 3%37%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017. The quarter-over-quarter decrease is2018 mainly due to decreases in employee-related costs. The year-over-year increase is mainly due to increases in stock-based compensation, and professional fees.net. Stock-based compensation, net, decreased by $0.2$11.1 million, or 3%104%, and increased by $1.9$13.0 million, or 7%65%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017. A significant portion of the year-to-date increase is2018 mainly due to our April 2019 organizational restructuring. All stock-based compensation awards held by officers and employees who were affected by the immediate vesting of stock awards granted to our non-employee directors in May 2018 compared to a one-year cliff-vest in May 2017.
organizational restructuring were forfeited and the corresponding stock-based compensation, net was reversed. See Note 7.c6.c to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our stock-based compensation.
Restructuring expenses. Organizational restructuring expenses relate to our workforce reduction, which was an effort to reduce costs and better position ourselves for the future, in response to recent market conditions and the retirement of two of our Senior Officers. In connection with the organizational restructuring, we incurred $10.4 million of one-time charges during the three months ended June 30, 2019 comprising of compensation, taxes, professional fees, outplacement and insurance-related expenses. As of June 30, 2019, no additional restructuring expenses are expected to be incurred. See Note 17 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of the organizational restructuring.
Depletion, depreciation and amortization ("DD&A"). The following table presents the components of our DD&A expense: | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2018 | | 2017 | | 2018 | | 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Depletion of evaluated oil and natural gas properties | | $ | 52,169 |
| | $ | 37,538 |
| | $ | 140,971 |
| | $ | 102,290 |
| | $ | 61,938 |
| | $ | 46,985 |
| | $ | 121,308 |
| | $ | 88,802 |
|
Depreciation of midstream service assets | | 2,456 |
| | 2,241 |
| | 7,321 |
| | 6,569 |
| | 2,543 |
| | 2,460 |
| | 5,044 |
| | 4,865 |
|
Depreciation and amortization of other fixed assets | | 1,338 |
| | 1,433 |
| | 3,986 |
| | 4,468 |
| | 1,222 |
| | 1,317 |
| | 2,449 |
| | 2,648 |
|
Total DD&A | | $ | 55,963 |
| | $ | 41,212 |
| | $ | 152,278 |
| | $ | 113,327 |
| | $ | 65,703 |
| | $ | 50,762 |
| | $ | 128,801 |
| | $ | 96,315 |
|
DD&A increased by $14.8$14.9 million, or 36%29%, and by $39.0$32.5 million, or 34%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017. The2018. These increases are mainly due to increases(i) the previous reduction in our December 31, 2018 reserve volume, (ii) an increase in the depletion base and (iii) an increase in production volumes sold. Based on indications from our historical depletion trends, current well resultsDepletion expense per BOE increased 8% and forecasted production we expect DD&A13% for the three and six months ended June 30, 2019, respectively, compared to continue to increase.the same periods in 2018. For further discussion onof our depletion expense per BOE see "—Pricing and reserves."
Non-operating income (expense). The following table presents the components of non-operating income (expense): | | | | Three months ended September 30, | | Nine months ended September 30, | | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2018 | | 2017 | | 2018 |
| 2017 | | 2019 | | 2018 | | 2019 | | 2018 |
Gain (loss) on derivatives, net | | $ | (32,245 | ) | | $ | (27,441 | ) | | $ | (69,211 | ) | | $ | 38,127 |
| | $ | 88,394 |
| | $ | (45,976 | ) | | $ | 40,029 |
| | $ | (36,966 | ) |
Income from equity method investee (see Note 3.c) | | — |
| | 2,371 |
| | — |
| | 7,910 |
| |
Interest expense | | (14,845 | ) | | (23,697 | ) | | (42,787 | ) | | (69,590 | ) | | (15,765 | ) | | (14,424 | ) | | (31,312 | ) | | (27,942 | ) |
Other (expense) income | | (267 | ) | | 333 |
| | 629 |
| | 527 |
| |
Litigation settlement | | | 42,500 |
| | — |
| | 42,500 |
| | — |
|
Loss on disposal of assets, net | | (616 | ) | | (991 | ) | | (4,591 | ) | | (400 | ) | | (670 | ) | | (1,358 | ) | | (1,609 | ) | | (3,975 | ) |
Non-operating expense, net | | $ | (47,973 | ) | | $ | (49,425 | ) | | $ | (115,960 | ) | | $ | (23,426 | ) | |
Other income, net | | | 2,846 |
| | 443 |
| | 3,713 |
| | 896 |
|
Non-operating income (expense), net | | | $ | 117,305 |
| | $ | (61,315 | ) | | $ | 53,321 |
| | $ | (67,987 | ) |
Gain (loss) on derivatives, net. net. The following table presents the changes in the components of gain (loss) on derivatives, net: |
| | | | | | | | |
(in thousands) | | Three months ended September 30, 2018 compared to 2017 | | Nine months ended September 30, 2018 compared to 2017 |
Increase (decrease) in fair value of derivatives outstanding | | $ | 12,719 |
| | $ | (62,370 | ) |
Decrease in settlements received for matured derivatives, net | | (17,523 | ) | | (40,734 | ) |
Decrease in settlements received for early terminations of derivatives, net | | — |
| | (4,234 | ) |
Total change in gain (loss) on derivatives, net | | $ | (4,804 | ) | | $ | (107,338 | ) |
|
| | | | | | | | |
(in thousands) | | Three months ended June 30, 2019 compared to 2018 | | Six months ended June 30, 2019 compared to 2018 |
Change in mark-to-market gain (loss) on derivatives | | $ | 116,480 |
| | $ | 56,767 |
|
Change in settlements received (paid) for matured derivatives, net | | 23,299 |
| | 25,637 |
|
Change in settlements paid for early terminations of derivatives, net | | (5,409 | ) | | (5,409 | ) |
Total change in gain (loss) on derivatives, net | | $ | 134,370 |
| | $ | 76,995 |
|
The change in fair value ofmark-to-market gain (loss) on derivatives outstanding is the result of new, early-terminatedmatured and expiringearly-terminated contracts and the changing relationship between our outstanding contract prices and the future market prices in the forward curves, which we use to calculate the fair value of our derivatives. In general, if no newoutstanding contracts are entered into or terminated,held constant, we experience gains during periods of decreasing market prices and losses during periods of increasing market prices. Settlements received or paid
for matured derivatives are based on the settlement prices of our matured derivatives compared to the prices specified in the derivative contracts. During the three months ended June 30, 2019, we recognized significant mark-to-market gains in the net fair value of our derivatives outstanding due to decreases in the applicable futures curves that we have hedged, bolstered by our hedge restructuring that increased our weighted-average oil floor prices for 2019 and 2020.
During the ninethree months ended SeptemberJune 30, 2017,2019, we completed a hedge restructuring by early terminating puts and collars and entering into new swaps. We paid a swap that resulted in anet termination amount to us of $4.2$5.4 million that included the full settlement of the deferred premiums associated with these early-terminated puts and collars. The present value of these deferred premiums, classified under Level 3 of the fair value hierarchy, upon their early termination was settled in full by applying the proceeds to pay the premium on one new collar entered into during the restructuring.$7.2 million.
See Notes 87 and 9.a8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report and "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for additional information regarding our derivatives.
Income from equity method investee. Prior to the Medallion Sale on October 30, 2017, we owned 49% of the ownership interests of Medallion. As such, we previously accounted for this investment under the equity method of accounting with our proportionate share of Medallion's net income reflected in the unaudited consolidated statements of operations as "Income from equity method investee." For further discussion of the Medallion Sale, see Note 3.c to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Interest expense. Interest expense decreasedincreased by $8.9$1.3 million, or 37%9%, and by $26.8$3.4 million, or 39%12%, for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017,2018 mainly due to increases in the early redemptionamount outstanding on our Senior Secured Credit Facility.
Litigation settlement. During the three months ended June 30, 2019, we finalized and received a favorable settlement of $42.5 million in connection with our damage claims asserted in a previously disclosed litigation matter relating to a breach and wrongful termination of a crude oil purchase agreement. We do not anticipate the May 2022 Notes on November 29, 2017.receipt of further payments in connection with this matter as this settlement constituted a full and final satisfaction of our claims.
Loss on disposal of assets, net. Loss on disposal of assets, net decreased by $0.4$0.7 million and increased by $4.2$2.4 million for the three and ninesix months ended SeptemberJune 30, 2018,2019, respectively, compared to the same periods in 2017.2018. From time to time, we dispose of materials and supplies inventory, midstream service assets and other fixed assets. The associated gain or loss recorded during the period fluctuates depending upon the volume of the assets disposed, their associated net book value and, in the case of a disposal by sale, the sale price.
Income tax. Since SeptemberIncome tax expense for the three and six months ended June 30, 2015,2019 was $1.8 million and $1.7 million, respectively. We are subject to federal and state income taxes and the Texas franchise tax. As of June 30, 2019, we determined it was more likely than not that our deferred tax assets were not realizable through future net income. We maintain a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized and as of June 30, 2019, we have recorded a fulltotal valuation allowance of $202.1 million against our netfederal and Oklahoma deferred tax assets. As of December 31, 2017, we have recorded a full valuation allowance against our federal, state of Oklahoma and state of Texas net deferred tax assets. As of September 30, 2018, we have recorded a full valuation allowance against our federal and state of Oklahoma net deferred tax assets and have recorded a Texas deferred tax liability of $1.8 million. Additionally, a current tax refund of $0.4 million of Texas franchise tax is expected as a result of differences in estimated versus actual taxable income fromsuch, the gain on the Medallion Sale. As such, our effective tax rates for our operations were 2% and 1% for the three and nine months ended September 30, 2018, respectively, and 0% for each of the three and ninesix months ended SeptemberJune 30, 2017.2019. For further discussion of our valuation allowance, see Note 14 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Liquidity and capital resources
Historically, our primary sources of liquidity have been cash flows from operations, proceeds from equity offerings, proceeds from senior unsecured note offerings, borrowings under our Senior Secured Credit Facility and proceeds from the Medallion Sale and other asset dispositions. We believe cash flows from operations and availability under our Senior Secured Credit Facility provide sufficient liquidity to manage our cash needs and contractual obligations and to fund our expected capital expenditures. Our primary operational uses of capital have been for the acquisition, exploration and development of oil and natural gas properties and infrastructure development and investments in Medallion until its sale on October 30, 2017.development.
A significant portion of our capital expenditures can be adjusted and managed by us. We continually monitor the capital markets and our capital structure and consider which financing alternatives, including equity and debt capital resources, joint
ventures and asset sales, are available to meet our future planned or accelerated capital expenditures. We may make changes to our capital structure from time to time, with the goal of maintaining financial flexibility, preserving or improving liquidity and/or achieving cost efficiency. Such financing alternatives, including capital market transactions and debt and equity repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. See Notes 3, 6.c and 7.a toFor further discussion of our unaudited consolidated financial statementsfinancing activities included elsewhere in this Quarterly Report, see: (i) Note 5 for our debt instruments and (ii) Note 6.a and "Part II. Item 2. Purchases of Equity Securities" below for additional discussion of our acquisitions and divestitures of oil and natural gas properties and midstream service assets, the Medallion Sale, the redemption of our May 2022 Notes and our $200.0 million share repurchase program authorized by our board of directors and commenced in February 2018. We also continuously look for other opportunities to maximize shareholder value.
Due to the inherent volatility in oil, NGL and natural gas prices commodity transportation costs and differences in the prices of oil, NGL and natural gas between where we produce and where we sell such commodities, we engage in derivative transactions, such as puts, swaps, collars and basis swaps and, in the past, call spreads to hedge price risk associated with a portion of our anticipated production. By removing a portion of the price volatility associated with future production, we expect to
mitigate, but not eliminate, the potential effects of variability in cash flows from operations due to fluctuations in commodity prices, commodity transportation costs and differences in commodity prices between where we produce and where we sell our products.operations. See "Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk" below.
See Note 87 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regardingdiscussion of our derivative settlement indiceshedge restructuring during the three months ended June 30, 2019 and ourcorresponding summary of open hedgederivative positions as of SeptemberJune 30, 2018.2019 for derivatives that were entered into through June 30, 2019.
We continually seek to maintain a financial profile that provides operational flexibility. As of SeptemberJune 30, 2018,2019, we had cash and cash equivalents of $50.4 million and undrawn capacity under the Senior Secured Credit Facility of $1.03 billion, resulting in total liquidity of $1.08 billion. As of November 5, 2018, we had cash and cash equivalents of $46.0$55.8 million and available capacity under the Senior Secured Credit Facility, after the reduction for outstanding letters of $1.00 billion,credit, of $850.3 million, resulting in total available liquidity of $1.04 billion.$906.1 million. As of July 31, 2019, we had cash and cash equivalents of $40.0 million and available capacity under the Senior Secured Credit Facility, after the reduction for outstanding letters of credit, of $870.3 million, resulting in total liquidity of $910.3 million. We believe that our operating cash flow, the receipt of the litigation settlement proceeds and the aforementioned liquidity sources provide us with the financial resources to manage our business needs, to implement our planned capital expenditure budget and, at our discretion, to fund our share repurchase program.program, pay down debt or increase our planned capital expenditure budget. 2019 has been a transitional year as we have attempted to tailor our operational cadence and corporate cost structure, including G&A expense, to target a balance between capital expenditures and cash flow from operations. We have also attempted to align personnel costs with activity levels with a recent reduction in force. We have restructured our oil hedges, securing additional cash flow to increase activity and substantially accelerating the time frame in which we expect to generate free cash flow while growing oil production.
Cash flows
The following table presents our cash flows: | | | | Nine months ended September 30, | | Six months ended June 30, |
(in thousands) | | 2018 | | 2017 | | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 408,528 |
| | $ | 272,051 |
| | $ | 261,269 |
| | $ | 262,601 |
|
Net cash used in investing activities | | (536,431 | ) | | (356,893 | ) | | (292,974 | ) | | (354,072 | ) |
Net cash provided by financing activities | | 66,151 |
| | 72,988 |
| | 42,354 |
| | 15,916 |
|
Net decrease in cash and cash equivalents | | $ | (61,752 | ) | | $ | (11,854 | ) | |
Net increase (decrease) in cash and cash equivalents | | | $ | 10,649 |
| | $ | (75,555 | ) |
Cash flows from operating activities
Net cash provided by operating activities increaseddecreased by $136.5$1.3 million, or 50%1%, for the ninesix months ended SeptemberJune 30, 2018,2019, compared to the same period in 2017, mainly due to increased revenues due to the increase in average realized sales prices for oil and NGL and increased sales volumes of all production streams with additional details included at "—Results of operations consolidated"; however, other notable2018. Notable cash changes includedinclude (i) a decrease in oil, NGL and natural gas sales revenues, (ii) a decrease of $46.4$17.8 million from net working capital changes, (iii) receipt of $42.5 million for the litigation settlement and (iv) an increase of $23.5 million in settlements received for matured derivatives and early terminations of derivatives, net of premiums paidpaid. The decrease in oil, NGL and (ii) anatural gas sales revenues is due to the decrease in average sales prices without derivatives for oil, NGL and natural gas, partially offset by increased sales volumes of $15.3 million from net working capital changes.all production streams. See "—Results of operations" for additional discussion of changes in our oil, NGL and natural gas sales revenues.
Our operating cash flows are sensitive to a number of variables, the most significant of which are the volatility of oil, NGL and natural gas prices, mitigated to the extent of our derivatives' exposure, and sales volume levels. Regional and worldwide economic activity, weather, infrastructure, transportation capacity to reach markets, costs of operations, legislation and regulations and other variable factors significantly impact the prices of these commodities. These factors are not within our control and are difficult to predict. For additional information on risks related to our business, see "Part I. Item 1A. Risk Factors" in our 20172018 Annual Report.
Cash flows from investing activities
Net cash used in investing activities increaseddecreased by $179.5$61.1 million, or 50%17%, for the ninesix months ended SeptemberJune 30, 2018,2019, compared to the same period in 2017, and is2018, mainly attributabledue to (i) an increasea decrease in capital expenditures on oil and natural gas properties and (ii) a decrease in proceeds from dispositions of capital assets. See Note 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of our acquisitions and divestitures of oil and natural gas properties, and midstream servicepartially offset by a decrease in proceeds from disposition of capital assets, and the Medallion Sale.net of selling costs.
The following table presents the components of our cash flows from investing activities: | | | | Nine months ended September 30, | | Six months ended June 30, |
(in thousands) | | 2018 | | 2017 | | 2019 | | 2018 |
Acquisitions of oil and natural gas properties | | $ | (16,340 | ) | | $ | — |
| | $ | (2,880 | ) | | $ | (16,340 | ) |
Capital expenditures: | | | | | | | | |
Oil and natural gas properties | | (522,470 | ) | | (381,165 | ) | | (284,616 | ) | | (341,534 | ) |
Midstream service assets | | (5,764 | ) | | (11,680 | ) | | (5,449 | ) | | (5,205 | ) |
Other fixed assets | | (5,945 | ) | | (3,604 | ) | | (965 | ) | | (4,965 | ) |
Investment in equity method investee (see Note 3.c) | | — |
| | (24,572 | ) | |
Proceeds from disposition of equity method investee, net of selling costs (see Note 3.c) | | 1,655 |
| | — |
| |
Proceeds from dispositions of capital assets, net of selling costs | | 12,433 |
| | 64,128 |
| |
Proceeds from disposition of equity method investee, net of selling costs | | | — |
| | 1,655 |
|
Proceeds from disposition of capital assets, net of selling costs | | | 936 |
| | 12,317 |
|
Net cash used in investing activities | | $ | (536,431 | ) | | $ | (356,893 | ) | | $ | (292,974 | ) | | $ | (354,072 | ) |
Capital expenditure budget
Our goal is to achieve cash flow neutrality and, therefore, our capital spending in 2019 will ultimately be influenced by commodity price changes, as well as any changes in service costs and drilling and completions efficiencies. Due to the increase in operational efficienciesincreased cash flow secured from the successful execution of our WTI NYMEX hedge restructuring and expected completions,litigation settlement proceeds received, both of which occurred during the thirdthree months ended June 30, 2019, we adjusted our expected capital expenditures, excluding non-budgeted acquisitions, during the second quarter of 2018 we increased the drilling and completion portion of our capital budget2019 to $545.0$465.0 million for calendar year 2019, which is an increase of $45.0$100.0 million from the previously announced level. Other capital expenditures remained unchanged at $85.0 million, bringing our total annual budgeted capital expenditures, excluding non-budgeted acquisitions, to $630.0 million. We are monitoring the impact of the steel import tariffs recently imposed by the Administration; however, we currently do not believe there will be an impact to us in 2018. We do not have a specific acquisition budget since the timing and size of acquisitions cannot be accurately forecasted.
The amount, timing and allocation of capital expenditures are largely discretionary and within management's control. If oil, NGL and natural gas prices decline below our acceptable levels, or costs increase above our acceptable levels, we may choose to defer a portion of our budgeted capital expenditures until later periods to achieve the desired balance between sources and uses of liquidity and prioritize capital projects that we believe have the highest expected returns and potential to generate near-term cash flow. Subject to financing alternatives, we may also increase our capital expenditures significantly to take advantage of opportunities we consider to be attractive. We consistently monitor and may adjust our projected capital expenditures in response to success or lack of success in drilling activities, changes in prices, availability of financing and joint venture opportunities, drilling and acquisition costs, industry conditions, the timing of regulatory approvals, the availability of rigs and supplies, changes in service costs, contractual obligations, internally generated cash flow and other factors both within and outside our control.
Cash flows from financing activities
Net cash provided by financing activities decreasedincreased by $6.8$26.4 million or 9%, for the ninesix months ended SeptemberJune 30, 2018,2019, compared to the same period in 2017,2018, and is mainly attributable to first-quarter 2018 share repurchases under our share repurchase program that commenced in February 2018, and was partially offset by decreasedincreased payments on our Senior Secured Credit Facility and increaseddecreased borrowings on our Senior Secured Credit Facility. Through September 30,During the year ended December 31, 2018, we have repurchased 11,048,742 shares of common stock at a weighted-average price of $8.78 per common share for a total of $97.1 million under this program and, upon repurchase, theprogram. All shares were retired.retired upon repurchase. There were no share repurchases under this program during the six months ended June 30, 2019. As of SeptemberJune 30, 2018,2019, we had authorization remaining to repurchase until its expiration in February 2020, approximately $102.9 million of common stock.
For further discussion of our financing activities included elsewhere in this Quarterly Report, see: (i) Note 5 for our debt instruments and (ii) Note 6.a and "Part II. Item 2. Purchases of Equity Securities" below for our $200.0 million share repurchase program authorized by our board of directors and commenced in February 2018.
The following table presents the components of our cash flows from financing activities: | | | | Nine months ended September 30, | | Six months ended June 30, |
(in thousands) | | 2018 | | 2017 | | 2019 | | 2018 |
Borrowings on Senior Secured Credit Facility | | $ | 190,000 |
| | $ | 155,000 |
| | $ | 80,000 |
| | $ | 110,000 |
|
Payments on Senior Secured Credit Facility | | (20,000 | ) | | (70,000 | ) | | (35,000 | ) | | — |
|
Share repurchases | | (97,055 | ) | | — |
| | — |
| | (87,218 | ) |
Vested stock exchanged for tax withholding | | (4,411 | ) | | (7,638 | ) | |
Proceeds from exercise of stock options | | 86 |
| | 358 |
| |
Stock exchanged for tax withholding | | | (2,646 | ) | | (4,397 | ) |
Payments for debt issuance costs | | (2,469 | ) | | (4,732 | ) | | — |
| | (2,469 | ) |
Net cash provided by financing activities | | $ | 66,151 |
| | $ | 72,988 |
| | $ | 42,354 |
| | $ | 15,916 |
|
Debt
As of SeptemberJune 30, 2018,2019, we were a party only to our Senior Secured Credit Facility and the indentures governing our senior unsecured notes.
Senior Secured Credit Facility. As of September 30, 2018, our 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 $170.0 million outstanding. No letters of credit were outstanding as of September 30, 2018.
The borrowing base under our Senior Secured Credit Facility is subject to a semi-annual redetermination based on the lenders' evaluation of our oil, NGL and natural gas reserves. The lenders have the right to call for an interim redetermination of the borrowing base once between any two redetermination dates and in other specified circumstances. 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, Earlythe "Early Maturity Date,Date") that is 90 days before their respective stated maturity dates, the Senior Secured Credit Facility will mature on such Early Maturity Date.
On October 23, 2018, pursuant to As of June 30, 2019, the regular semi-annual redetermination, the lenders reaffirmed the borrowing base of $1.3 billion under our Senior Secured Credit Facility. OurFacility had a maximum credit amount of $2.0 billion, a borrowing base and an aggregate elected commitment of $1.2$1.1 billion remains unchanged.
Principal amounts borrowed under our Senior Secured Credit Facility are payable on the final maturity dateeach, with such borrowings bearing$235.0 million outstanding and was subject to an interest that is payable, at our election, either on the last dayrate of each fiscal quarter at an "Adjusted Base Rate" as defined in our Senior Secured Credit Facility, or at the end of one-, two-, three-, six- or, to the extent available, 12-month interest periods (and in the case of six- and 12-month interest periods, every three months prior to the end of such interest period) at a "LIBOR Rate" as defined in our Senior Secured Credit Facility, in each case, plus an applicable margin, which ranges from 0.25% to 1.25% for "Adjusted Base Rate Loans" as defined in our Senior Secured Credit Facility, and from 1.25% to 2.25% for "Eurodollar Loans" as defined in our Senior Secured Credit Facility, based on the ratio of the outstanding revolving credit on our Senior Secured Credit Facility to the borrowing base. We are also required to pay a commitment fee, which ranges from 0.375% to 0.50%, based on the ratio of the outstanding revolving credit on our Senior Secured Credit Facility to the aggregate elected commitment.
Our Senior Secured Credit Facility is secured by a first-priority lien on certain of our assets, including oil and natural gas properties constituting at least 85% of the present value of our proved reserves owned now or in the future. Our3.69%. The Senior Secured Credit Facility contains both financial and non-financial covenants. Wecovenants, all of which we were in compliance with these covenants as of September 30, 2018 and December 31, 2017. See Notes 6.d and 16 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of items affectingall periods presented. Additionally, the Senior Secured Credit Facility subsequentprovides for the issuance of letters of credit, limited to Septemberthe lesser of total capacity or $80.0 million. As of June 30, 2018.2019 and December 31, 2018, we 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.
Senior unsecured notes. The following table presents principal amounts and applicable interest rates for our outstanding senior unsecured notes as of SeptemberJune 30, 2018:2019: |
| | | | | | | |
(in millions, except for interest rates) | | Principal | | Interest rate |
January 2022 Notes | | $ | 450.0 |
| | 5.625 | % |
March 2023 Notes | | 350.0 |
| | 6.250 | % |
Total senior unsecured notes | | $ | 800.0 |
| | |
See Notes 6.a5.a and 6.b5.b to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of the March 2023 Notes and January 2022 Notes, respectively.
Obligations and commitments
As of September 30, 2018, ourThe following table presents significant contractual obligations included our January 2022 Notes, March 2023 Notes, Senior Secured Credit Facility, drilling contracts, firm sale and transportation commitments sand purchaseas of June 30, 2019 and supply agreement, derivative deferred premiums, asset retirement obligations and office and equipment operating leases. From December 31, 2017 to September 30, 2018 the material changes in our contractual obligations included (i) an increase of $170.0 million in outstanding borrowings on our Senior Secured Credit Facility, (ii) a decrease of $47.2 million on our interest obligations for our senior unsecured notes as semi-annual interest payments were made in January, March, July and September of 2018, (iii) an increase of $19.4 million for drilling contract commitments due to the timing of when contracts were entered into and completed (on contracts other than those on a well-by-well basis), (iv) an increase of $10.7 million for firm sale and transportation commitments due to the timing of when contracts were entered into, completed and terminated, (v) a decrease of $7.1 million in derivative deferred premiums mainly due to premiums paid for derivatives, partially offset by new derivativetheir associated changes:
|
| | | | | | | | | | | | | | | |
($ in thousands, except % change) | | June 30, 2019 | | December 31, 2018 | | change | | % change |
Senior Unsecured Notes(1) | | $ | 963,438 |
| | $ | 987,031 |
| | $ | (23,593 | ) | | (2 | )% |
Firm sale and transportation commitments(2) | | 341,477 |
| | 365,940 |
| | (24,463 | ) | | (7 | )% |
Senior Secured Credit Facility(3) | | 235,000 |
| | 190,000 |
| | 45,000 |
| | 24 | % |
Asset retirement obligations(4) | | 57,948 |
| | 56,882 |
| | 1,066 |
| | 2 | % |
Lease commitments(5) | | 26,052 |
| | 34,374 |
| | (8,322 | ) | | (24 | )% |
Derivative deferred premiums(6) | | 3,290 |
| | 16,797 |
| | (13,507 | ) | | (80 | )% |
Sand purchase and supply agreement(7) | | — |
| | 3,858 |
| | (3,858 | ) | | (100 | )% |
Total | | $ | 1,627,205 |
| | $ | 1,654,882 |
| | $ | (27,677 | ) | | (2 | )% |
____________________________________________________________________________ | |
(1) | Values presented include both our principal and interest obligations. The decrease in such balance as of June 30, 2019 is due to our semi-annual interest payments made in January and March of 2019. See Notes 5.a and 5.b to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our March 2023 Notes and January 2022 Notes, respectively. |
| |
(2) | We have committed to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. If not fulfilled, we are subject to firm transportation payments on excess pipeline capacity and other contractual penalties. The decrease in such commitments as of June 30, 2019 is mainly due to our fulfillment of contractual commitments. See Note 10.c to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our firm sale and transportation commitments. |
| |
(3) | This table does not include future loan advances, repayments, commitment fees or other fees on our Senior Secured Credit Facility as we cannot determine with accuracy the timing of such items. Additionally, this table does not include interest expense as it is a floating rate instrument and we cannot determine with accuracy the future interest rates to be charged. The increase in such balance as of June 30, 2019 is due to our borrowings, which are partially offset by our payments. As of June 30, 2019, the principal on our Senior Secured Credit Facility is due on April 19, 2023. |
| |
(4) | Amounts represent our asset retirement obligation liabilities. See Note 12 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our asset retirement obligations. |
| |
(5) | Amounts represent our minimum lease payments. See Notes 2 and 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of our adoption of ASC 842 on January 1, 2019. For simplicity, we have combined our drilling contracts into the "Lease Commitments" line item for 2019 presentation purposes. The decrease in lease commitments as of June 30, 2019 is mainly due to the settlements paid for our fulfillment of lease commitments. We have committed to drilling rig contracts with third parties to facilitate our drilling plans. Included in the value in the table is the gross amount we are committed to pay for our drilling contracts, however, we will record our proportionate share based on our working interest in our consolidated financial statements as incurred. See Note 10.b to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our drilling contracts. |
| |
(6) | Amounts represent payments required for derivative deferred premiums on our commodity hedging contracts. The decrease in premiums as of June 30, 2019 is mainly due to settlements paid for early terminations of derivatives and premiums paid for derivatives. See Note 8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our deferred premiums. |
| |
(7) | At June 30, 2019, we had met our commitment to purchase sand under this purchase and supply agreement. |
deferred premiums entered into and (vi) an increase of $5.7 million due to a new in-basin sand purchase and supply agreement entered into during second-quarter 2018, partially offset by purchases made during third-quarter 2018.
See Notes 6, 8, 9, 11, 13 and 16 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our contractual obligations.
Non-GAAP financial measure
The non-GAAP financial measure of Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures used by other companies. Therefore, this non-GAAP measure should be considered in conjunction with net income or loss and other performance measures prepared in accordance with GAAP, such as operating income or loss or cash flow from operating activities. Adjusted EBITDA should not be considered in isolation or as a substitute for GAAP measures, such as net income or loss, operating income or loss or any other GAAP measure of liquidity or financial performance.
Adjusted EBITDA is a non-GAAP financial measure that we define as net income or loss plus adjustments for income tax expense or benefit,taxes, depletion, depreciation and amortization, non-cash stock-based compensation, net, accretion expense, mark-to-market on derivatives, premiums paid for derivatives, interest expense, gains or losses on disposal of assets income or loss from equity method investee, proportionate Adjusted EBITDA of equity method investee and other non-recurring income and expenses. Adjusted EBITDA provides no information regarding a company's capital structure, borrowings, interest costs, capital expenditures, working capital movement or tax position. Adjusted EBITDA does not represent funds available for discretionary use because those funds are required for debt service, capital expenditures, working capital, income taxes, franchise taxes and other commitments and obligations. However, our management believes Adjusted EBITDA is useful to an investor in evaluating our operating performance because this measure:
| |
• | is widely used by investors in the oil and natural gas industry to measure a company's operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods, the book value of assets, capital structure and the method by which assets were acquired, among other factors; |
| |
• | helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and |
| |
• | is used by our management for various purposes, including as a measure of operating performance, in presentations to our board of directors and as a basis for strategic planning and forecasting. |
is widely used by investors in the oil and natural gas industry to measure a company's operating performance without regard to items excluded from the calculation of such term, which can vary substantially from company to company depending upon accounting methods, the book value of assets, capital structure and the method by which assets were acquired, among other factors;
helps investors to more meaningfully evaluate and compare the results of our operations from period to period by removing the effect of our capital structure from our operating structure; and
is used by our management for various purposes, including as a measure of operating performance, in presentations to our board of directors and as a basis for strategic planning and forecasting.
There are significant limitations to the use of Adjusted EBITDA as a measure of performance, including the inability to analyze the effect of certain recurring and non-recurring items that materially affect our net income or loss, the lack of comparability of results of operations to different companies and the different methods of calculating Adjusted EBITDA reported by different companies. Our measurements of Adjusted EBITDA for financial reporting as compared to compliance under our debt agreements differ.
The following table presents a reconciliation of net income (GAAP) to Adjusted EBITDA (non-GAAP): |
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 |
| 2017 | | 2018 |
| 2017 |
Net income | | $ | 55,050 |
|
| $ | 11,027 |
| | $ | 175,022 |
|
| $ | 140,413 |
|
Plus: | | | | | | |
| | |
|
Income tax expense | | 1,387 |
|
| — |
| | 1,387 |
|
| — |
|
Depletion, depreciation and amortization | | 55,963 |
|
| 41,212 |
| | 152,278 |
|
| 113,327 |
|
Non-cash stock-based compensation, net | | 8,733 |
|
| 8,966 |
| | 28,748 |
|
| 26,877 |
|
Accretion expense | | 1,114 |
|
| 951 |
| | 3,341 |
|
| 2,822 |
|
Mark-to-market on derivatives: | | | | | | | | |
(Gain) loss on derivatives, net |
| 32,245 |
|
| 27,441 |
| | 69,211 |
|
| (38,127 | ) |
Settlements (paid) received for matured derivatives, net |
| (3,888 | ) |
| 13,635 |
| | (5,943 | ) |
| 34,791 |
|
Settlements received for early terminations of derivatives, net |
| — |
|
| — |
| | — |
|
| 4,234 |
|
Premiums paid for derivatives | | (5,455 | ) |
| (1,448 | ) | | (14,930 | ) |
| (13,542 | ) |
Interest expense | | 14,845 |
|
| 23,697 |
| | 42,787 |
|
| 69,590 |
|
Loss on disposal of assets, net |
| 616 |
|
| 991 |
| | 4,591 |
|
| 400 |
|
Income from equity method investee (see Note 3.c) | | — |
| | (2,371 | ) | | — |
| | (7,910 | ) |
Proportionate Adjusted EBITDA of equity method investee(1) | | — |
| | 6,789 |
| | — |
| | 19,755 |
|
Adjusted EBITDA | | $ | 160,610 |
|
| $ | 130,890 |
|
| $ | 456,492 |
|
| $ | 352,630 |
|
| |
(1) | Proportionate Adjusted EBITDA of Medallion, our equity method investee until its sale on October 30, 2017, is calculated as follows:
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2018 | | 2017 | | 2018 |
| 2017 |
Income from equity method investee | | $ | — |
| | $ | 2,371 |
| | $ | — |
| | $ | 7,910 |
|
Adjusted for proportionate share of depreciation and amortization | | — |
| | 4,418 |
| | — |
| | 11,845 |
|
Proportionate Adjusted EBITDA of equity method investee | | $ | — |
| | $ | 6,789 |
| | $ | — |
| | $ | 19,755 |
|
|
| | | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
(in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
Net income | | $ | 173,382 |
|
| $ | 33,452 |
| | $ | 163,891 |
|
| $ | 119,972 |
|
Plus: | | | | | | |
| | |
|
Deferred income tax expense | | 1,751 |
| | — |
| | 1,655 |
| | — |
|
Depletion, depreciation and amortization | | 65,703 |
|
| 50,762 |
| | 128,801 |
|
| 96,315 |
|
Non-cash stock-based compensation, net | | (423 | ) |
| 10,676 |
| | 6,983 |
|
| 20,015 |
|
Restructuring expenses | | 10,406 |
|
| — |
| | 10,406 |
|
| — |
|
Accretion expense | | 1,020 |
| | 1,121 |
| | 2,072 |
| | 2,227 |
|
Mark-to-market on derivatives: | | | | | | | | |
(Gain) loss on derivatives, net |
| (88,394 | ) |
| 45,976 |
| | (40,029 | ) |
| 36,966 |
|
Settlements received (paid) for matured derivatives, net |
| 23,480 |
|
| 181 |
| | 23,582 |
|
| (2,055 | ) |
Settlements paid for early terminations of derivatives, net |
| (5,409 | ) |
| — |
| | (5,409 | ) |
| — |
|
Premiums paid for derivatives | | (2,233 | ) |
| (5,451 | ) | | (6,249 | ) |
| (9,475 | ) |
Interest expense | | 15,765 |
|
| 14,424 |
| | 31,312 |
|
| 27,942 |
|
Litigation settlement | | (42,500 | ) | | — |
| | (42,500 | ) | | — |
|
Loss on disposal of assets, net | | 670 |
| | 1,358 |
| | 1,609 |
| | 3,975 |
|
Adjusted EBITDA | | $ | 153,218 |
|
| $ | 152,499 |
|
| $ | 276,124 |
|
| $ | 295,882 |
|
Critical accounting policies and estimates
The discussion and analysis of our financial condition and results of operations are based upon our unaudited consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Certain accounting policies involve judgments and uncertainties to such an extent that there is reasonable likelihood that materially different amounts could have been reported under different conditions or if different assumptions had been used. We evaluate our estimates and assumptions on a regular basis. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions used in preparation of our unaudited consolidated financial statements.
There have been no material changes in our critical accounting policies and procedures during the ninesix months ended SeptemberJune 30, 2018.2019. See our critical accounting policies in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the 20172018 Annual Report. Furthermore, see Notes 4 and 7.cNote 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of the impact of the adoption of ASC 606 and estimates pertaining to our 2018 performance share awards, respectively.842.
RecentRecently issued or adopted accounting pronouncements
SeeFor discussion of recently issued or adopted accounting pronouncements, see Note 2 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report. See Note 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding recent accounting pronouncements.discussion related to the adoption of ASC 842.
Off-balance sheet arrangements
Currently, we do not have any off-balance sheet arrangements other than drilling contracts,our firm sale and transportation commitments, a sand purchase and supply agreement and office and equipment operating leases which are described in "—Obligations and commitments." In addition, we have certain operating leases with a term less than or equal to 12 months that we have made an accounting policy election to not record on the unaudited consolidated balance sheets. See Note 11Notes 3 and 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional information.information on our leases and commitments and contingencies, respectively.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risk. The term "market risk," in our case, refers to the risk of loss arising from adverse changes in oil, NGL and natural gas prices and in interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive derivative instruments were entered into for hedging purposes, rather than for speculative trading.
Commodity price exposure
Due to the inherent volatility in oil, NGL and natural gas prices commodity transportation costs and differences in the prices of oil, NGL and natural gas between where we produce and where we sell such commodities, we engage in derivative transactions, such as puts, swaps, collars and basis swaps and, in the past, call spreads to hedge price risk associated with a portion of our anticipated production. By removing a portion of the price volatility associated with future production, we expect to mitigate, but not eliminate, the potential effects of variability in cash flows from operations due to fluctuations in commodity prices, commodity transportation costs and differences in commodity prices between where we produce and where we sell our products.operations.
During the second and third quartersa significant portion of 2018, the Midland market crude oil priceprices experienced an increased discount to WTI-CushingWTI Cushing and WTI Houston prices. These discounts have narrowed in 2019, however, they remain volatile. During a significant portion of 2018 and in 2019, the West Texas WAHA market natural gas prices with the August 31, 2018experienced an increased discount for prompt month delivery at $18 per Bbl of oil,to Henry Hub NYMEX prices and continues to remain volatile. The discounts are primarily due to limited pipeline capacity constraining transportation of crude oil and natural gas out of the Permian Basin to major marketingmarket hubs including, but not limited to, Cushing, Oklahoma and the United States Gulf Coast. As of October 31, 2018, this Midland discount for prompt month delivery was $6 per Bbl of oil. ThisThese pipeline constraint is expected toconstraints may continue to affect the Midland market crude oil priceprices and West Texas WAHA market natural gas prices until further transportation capacity becomes operational or until basin-wide crude oil and natural gas production decreases from its current levels. We expect the basin differential to narrow, as new pipeline capacity is expected to become operational during the second half of 2019 and the first half of 2020. We are a contracted firm shipper on the Gray Oak Pipeline, which is expected to become operational during the fourth quarter of 2019. We will continue to pursue avenues to attempt to protect our oil and natural gas value from basin differentials by securing crude oil transportation capacity, enablingwhich enables us to sell oil in multiple markets, and entering into basis-swap derivatives.derivatives, which provides pricing protection.
The fair values of our open derivative contracts are largely determined by forward price curves of the relevant indices. As of SeptemberJune 30, 2018,2019, a 10% change in the forward curves associated with our derivatives would have changed our unaudited consolidated balance sheet's net derivative position to the following amounts: | | (in thousands) | | 10% Increase | | 10% Decrease | | 10% Increase | | 10% Decrease |
Net liability derivative position | | $ | 70,691 |
| | $ | 54,814 |
| |
Net (liability) asset derivative position | | | $ | (18,140 | ) | | $ | 161,923 |
|
As of SeptemberJune 30, 20182019 and December 31, 2017,2018, the net derivative positions were liabilitiesassets of $61.9$71.5 million and $13.0$43.5 million, respectively. See Notes 87 and 9.a8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional disclosures regarding our derivatives.
Interest rate risk
Our Senior Secured Credit Facility bears interest at a floating rate and our January 2022 Notes and March 2023 Notes bear interest at fixed rates. The maturity years, outstanding balances and interest rates on our long-term debt as of SeptemberJune 30, 20182019 were as follows: | | | | Maturity year | | Maturity year |
(in millions except for interest rates) | | 2022 | | 2023(1) | | 2022 | | 2023(1) |
Senior Secured Credit Facility | | $ | — |
| | $ | 170.0 |
| | $ | — |
| | $ | 235.0 |
|
Floating interest rate | | — | % | | 3.438 | % | | — | % | | 3.688 | % |
January 2022 Notes | | $ | 450.0 |
| | $ | — |
| | $ | 450.0 |
| | $ | — |
|
Fixed interest rate | | 5.625 | % | | — | % | | 5.625 | % | | — | % |
March 2023 Notes | | $ | — |
| | $ | 350.0 |
| | $ | — |
| | $ | 350.0 |
|
Fixed interest rate | | — | % | | 6.250 | % | | — | % | | 6.250 | % |
_____________________________________________________________________________ | |
(1) | 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 applicable Early Maturity Date, the Senior Secured Credit Facility will mature on such Early Maturity Date. |
Counterparty and customer credit risk
See Item 7A. "Quantitative and Qualitative Disclosures about Market Risk"Note 13 in the 20172018 Annual Report for additional disclosures regarding credit risk. See Note 112.e in the 2018 Annual Report for additional disclosures regarding our accounts receivable. See Note 13 to our unaudited consolidated financial statements and "Part II, Item 1. Legal Proceedings" locatedincluded elsewhere in this Quarterly Report for additional information regarding revenue recognition. See Notes 7 and 8.a to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional disclosures regarding our derivatives.
for further discussion on our counterparty and customer credit risk.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, an evaluation of the effectiveness of the design and operation of Laredo's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), was performed under the supervision and with the participation of Laredo's management, including our principal executive officer and principal financial officer. Based on that evaluation, these officers concluded that Laredo's disclosure controls and procedures were effective as of SeptemberJune 30, 2018.2019. Our disclosure controls and other procedures are designed to provide reasonable assurance that the information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to Laredo's management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of changes in internal control over financial reporting
There were no changes in our internal control over financial reporting during the quarter ended SeptemberJune 30, 20182019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II
Item 1. Legal Proceedings
From time to time, we are subject to various legal proceedings arising in the ordinary course of business, including proceedings for which we may not have insurance coverage. While many of these matters involve inherent uncertainty except with regard to the specific litigation noted below, as of the date hereof, we do not currently believe that any such legal proceedings will have a material adverse effect on our business, financial position, results of operations or liquidity.
On May 3, 2017, Shell filed an Original Petition and Request for Disclosure in the District Court of Harris County, Texas, alleging that the crude oil purchase agreement entered into between Shell and Laredo effective October 1, 2016 through June 30, 2020 does not accurately reflect the compensation to be paid to Shell under certain circumstances due to a drafting mistake. Shell seeks reformation of one clause of the crude oil purchase agreement on the grounds of alleged mutual mistake or, in the alternative, unilateral mistake, an award of the amounts Shell alleges it should have been or should be paid under the crude oil purchase agreement, court costs and attorneys' fees. We do not believe there was a drafting mistake made in the crude oil purchase agreement, which covered the sale to Shell of 19,000 barrels of crude oil per day of our gross production, as well as the purchase by us of like-quantity crude oil from Shell. On December 11, 2017, Shell filed its First Amended Petition, in which it asserted nine causes of action, including multiple new claims for breach of contract and fraud.
Effective May 1, 2018, Shell terminated the crude oil purchase agreement and ceased purchasing our crude oil and selling crude oil to us under the terms of such agreement. As a result, we filed our Second Amended Answer and Original Counterclaim against Shell on June 15, 2018, in which we deny all allegations by Shell and seek damages in excess of $150.0 million resulting from Shell's breach and wrongful termination of the crude oil purchase agreement. Shell filed a Second Amended Petition on June 1, 2018, in which it asserted a new cause of action against us for alleged repudiation of Shell's proposed reformed version of the crude oil purchase agreement, a version never signed or agreed to by us.
Through April 30, 2018, the date on which Shell wrongfully terminated the crude oil purchase agreement, we had accounted for the costs and crude oil price realization as reflected in the terms of the crude oil purchase agreement. The accompanying unaudited consolidated balance sheets located elsewhere in this Quarterly Report do not include any amounts for damage claims or attorneys' fees sought by Shell. As of September 30, 2018, we had estimated an aggregate amount of $37.4 million that is the subject of Shell's claims, which is generally based on the contractual amount in dispute under the pricing election that is the subject of Shell's claims applied to the barrels of crude oil purchased and sold through the date on which Shell wrongfully terminated the crude oil purchase agreement. As a result of such termination, our estimate of this unrecorded amount is not anticipated to materially increase in the future. This estimate does not include damages sought by Shell pursuant to its latest repudiation claim asserted in its Second Amended Petition or amounts sought by Shell for recovery of attorneys' fees incurred for the prosecution of its claims.
We are unable to determine a probability of the outcome of this litigation at this time. We believe Shell's claims are meritless and the termination by Shell is improper and a breach of the crude oil purchase agreement. We therefore intend to vigorously defend ourselves against Shell's claims and pursue our rights under the terminated crude oil purchase agreement to seek all appropriate damages from Shell.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks discussed in our 20172018 Annual Report and our Second Quarter 2018 Quarterly Report. There have been no material changes in our risk factors from those described in the 20172018 Annual Report or the Second Quarter 2018 Quarterly Report. The risks described in such reports are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
Item 2. Purchases of Equity Securities
The following table summarizes purchases of common stock by Laredo:
|
| | | | | | | | | | | | | | |
Period | | Total number of shares purchased(1) | | Weighted-average price paid per share | | Total number of shares purchased as part of publicly announced plans(2) | | Maximum value that may yet be purchased under the program as of the respective period-end date (2) |
July 1, 2018 - July 31, 2018 | | 715 |
| | $ | 9.62 |
| | — |
| | $ | 112,782,213 |
|
August 1, 2018 - August 31, 2018 | | — |
| | $ | — |
| | — |
| | $ | 112,782,213 |
|
September 1, 2018 - September 30, 2018 | | 1,171,099 |
| | $ | 8.41 |
| | 1,170,190 |
| | $ | 102,945,283 |
|
Total | | 1,171,814 |
| | | | 1,170,190 |
| | |
|
| | | | | | | | | | | | | | |
Period | | Total number of shares purchased(1) | | Weighted-average price paid per share | | Total number of shares purchased as part of publicly announced plans(2) | | Maximum value that may yet be purchased under the program as of the respective period-end date (2) |
April 1, 2019 - April 30, 2019 | | 3,823 |
| | $ | 3.16 |
| | — |
| | $ | 102,945,283 |
|
May 1, 2019 - May 31, 2019 | | — |
| | $ | — |
| | — |
| | $ | 102,945,283 |
|
June 1, 2019 - June 30, 2019 | | 8,561 |
| | $ | 2.64 |
| | — |
| | $ | 102,945,283 |
|
Total | | 12,384 |
| | | | — |
| | |
______________________________________________________________________________ | |
(1) | Included in these amounts are 1,624Represents shares that were withheld by us to satisfy employee tax withholding obligations that arose upon the lapse of restrictions on restricted stock awards. |
| |
(2) | In February 2018, our board of directors authorized a $200 million share repurchase program commencing in February 2018. The repurchase program expires in February 2020. Repurchases of shares under this program totaled 1,170,190 at a cost of $9.9 million during the three months ended September 30, 2018. Share repurchases if any, under the share repurchase program may be made through a variety of methods, which may include open market purchases, privately negotiated transactions and block trades. The timing and actual number of shares repurchased, if any, will depend upon several factors, including market conditions, business conditions, the trading price of our common stock and the nature of other investment opportunities available to us. |
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
The aircraft lease agreement between Lariat Ranch, LLC and Laredo was extended and amended, effective July 1, 2018.Not applicable.
Item 6. Exhibits
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| | | |
Exhibit Number | | Description |
|
| | Membership Interest Purchase and Sale Agreement, dated as of October 1, 2017, by and among Medallion Midland Acquisition, LLC, Medallion Gathering & Processing, LLC, Laredo Midstream Services, LLC, and Medallion Midstream Holdings, LLC (incorporated by reference to Exhibit 2.1 of Laredo's Current Report on Form 8-K (File No. 001-35380) filed on October 30, 2017). |
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| | Schedule 1, amended and restated as of April 30, 2019, to the Third Amendment to Fifth Amended and Restated Credit Agreement, dated as of April 19, 2018, among Laredo Petroleum, Inc., as borrower, Wells Fargo Bank, N.A., as administrative agent, Laredo Midstream Services, LLC and Garden City Minerals, LLC, as guarantors and the banks signatory thereto (incorporated by reference to Exhibit 10.6 of Laredo's Quarterly Report on Form 10-Q (File No. 001-35380) filed on May 2, 2019). |
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101.INS* |
| | XBRL Instance Document. |
101.SCH* |
| | XBRL Schema Document. |
101.CAL* |
| | XBRL Calculation Linkbase Document. |
101.DEF* |
| | XBRL Definition Linkbase Document. |
101.LAB* |
| | XBRL LabelsLabel Linkbase Document. |
101.PRE* |
| | XBRL Presentation Linkbase Document. |
XML |
| | Extracted XBRL Instance Document. |
______________________________________________________________________________ | |
# | Management contract or compensatory plan or arrangement. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | |
| LAREDO PETROLEUM, INC. |
| | |
Date: November 6, 2018August 1, 2019 | By: | /s/ Randy A. Foutch |
| | Randy A. Foutch |
| | Chairman and Chief Executive Officer |
| | (principal executive officer) |
| | |
Date: November 6, 2018August 1, 2019 | By: | /s/ Richard C. ButerbaughMichael T. Beyer |
| | Richard C. ButerbaughMichael T. Beyer
|
| | ExecutiveSenior Vice President and Chief Financial Officer |
| | (principal financial officer) |
| | |
Date: November 6, 2018 | By: | /s/ Michael T. Beyer |
| | Michael T. Beyer |
| | Vice President - Controller and Chief Accounting Officer |
| | (officer & principal accounting officer) |