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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
☐ 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 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | | | | | |
15 W. Sixth Street | Suite 900 | |
Tulsa | Oklahoma | 74119 |
(Address of principal executive offices) | (Zip code) |
(918) 513-4570
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| | | | | | | | |
Title of each class | Trading symbol | Name of each exchange on which registered |
Common stock, $0.01 par value per share | 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 ☒ No ☐
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 ☒ No ☐
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.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | |
| | | |
Emerging growth company | ☐ | | |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Number of shares of registrant's common stock outstanding as of May 2, 2022: 17,303,489
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 (the "Securities Act"), 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 effects, duration, government response or other implications of the coronavirus ("COVID-19") pandemic, or the threat and occurrence of other epidemic or pandemic diseases;
•changes in domestic and global production, supply and demand for oil, NGL and natural gas, including actions by the Organization of the Petroleum Exporting Countries members and other oil exporting nations ("OPEC+");
•the volatility of oil, NGL and natural gas prices, including in our area of operation in the Permian Basin;
•the potential impact of suspending drilling programs and completions activities or shutting in a portion of our wells, as well as costs to later restart, and co‐development considerations such as horizontal spacing, vertical spacing and parent‐child interactions on production of oil, NGL and natural gas from our wells;
•United States ("U.S.") and international economic conditions and legal, tax, political and administrative developments, including the effects of energy, trade and environmental policies and existing and future laws and government regulations;
•war and political instability in Ukraine and Russian efforts to destabilize the government of Ukraine and the global hydrocarbon market;
•our ability to comply with federal, state and local regulatory requirements;
•restrictions on the use of water, including limits on the use of produced water and a moratorium on new produced water well permits recently imposed by the Railroad Commission of Texas, in an effort to control induced seismicity in the Permian Basin;
•the possibility of instability and uncertainty in the U.S. and international energy, 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;
•our ability to execute our strategies, including our ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to our financial results and to successfully integrate and realize the anticipated benefits of acquired businesses, assets and properties;
•competition in the oil and natural gas industry;
•our ability to discover, estimate, develop and replace oil, NGL and natural gas reserves and inventory;
•drilling and operating risks impacting our ability to produce existing wells and/or drill and complete new wells over an extended period of time, including risks related to hydraulic fracturing activities and inclement or extreme weather;
•the long-term performance of wells that were completed using different technologies;
•revisions to our reserve estimates as a result of changes in commodity prices, decline curves and other uncertainties;
•impacts of impairment write-downs on our financial statements;
•our ability to continue to maintain the borrowing capacity under our Senior Secured Credit Facility (as defined below) or access other means of obtaining capital and liquidity, especially during periods of sustained low commodity prices;
•our ability to comply with 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 generate sufficient cash to service our indebtedness, fund our capital requirements for our operations and projects and generate future profits;
•our ability to hedge, and regulations that affect our ability to hedge;
•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 gathering, processing, storage and export capacity in the Permian Basin and refining capacity in the U.S. Gulf Coast;
•the impact of repurchases, if any, of securities from time to time;
•the effectiveness of our internal control over financial reporting and our ability to remediate a material weakness in our internal control over financial reporting;
•our ability to maintain the health and safety of, as well as recruit and retain, qualified personnel necessary to operate our business;
•risks related to the geographic concentration of our assets; and
•our ability to secure or generate sufficient electricity to produce our wells without limitations.
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, 2021 (the "2021 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)
| | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 65,137 | | | $ | 56,798 | |
Accounts receivable, net | | 213,549 | | | 151,807 | |
Derivatives | | 5,899 | | | 4,346 | |
| | | | |
Other current assets | | 17,767 | | | 22,906 | |
Total current assets | | 302,352 | | | 235,857 | |
Property and equipment: | | | | |
Oil and natural gas properties, full cost method: | | | | |
Evaluated properties | | 9,149,982 | | | 8,968,668 | |
Unevaluated properties not being depleted | | 156,899 | | | 170,033 | |
Less: accumulated depletion and impairment | | (7,089,265) | | | (7,019,670) | |
Oil and natural gas properties, net | | 2,217,616 | | | 2,119,031 | |
Midstream service assets, net | | 94,632 | | | 96,528 | |
Other fixed assets, net | | 35,374 | | | 34,590 | |
Property and equipment, net | | 2,347,622 | | | 2,250,149 | |
| | | | |
Derivatives | | 33,862 | | | 32,963 | |
| | | | |
Other noncurrent assets, net | | 42,494 | | | 32,855 | |
Total assets | | $ | 2,726,330 | | | $ | 2,551,824 | |
Liabilities and stockholders' equity | | | | |
Current liabilities: | | | | |
Accounts payable and accrued liabilities | | $ | 73,228 | | | $ | 71,386 | |
Accrued capital expenditures | | 69,018 | | | 50,585 | |
Undistributed revenue and royalties | | 162,233 | | | 117,920 | |
| | | | |
Derivatives | | 365,256 | | | 179,809 | |
| | | | |
Other current liabilities | | 105,767 | | | 107,213 | |
Total current liabilities | | 775,502 | | | 526,913 | |
Long-term debt, net | | 1,421,821 | | | 1,425,858 | |
Derivatives | | 17,450 | | | — | |
| | | | |
Asset retirement obligations | | 69,677 | | | 69,057 | |
| | | | |
Other noncurrent liabilities | | 18,092 | | | 16,216 | |
Total liabilities | | 2,302,542 | | | 2,038,044 | |
Commitments and contingencies | | | | |
Stockholders' equity: | | | | |
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued as of March 31, 2022 and December 31, 2021 | | — | | | — | |
Common stock, $0.01 par value, 22,500,000 shares authorized and 17,302,320 and 17,074,516 issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | | 173 | | | 171 | |
Additional paid-in capital | | 2,785,415 | | | 2,788,628 | |
Accumulated deficit | | (2,361,800) | | | (2,275,019) | |
| | | | |
Total stockholders' equity | | 423,788 | | | 513,780 | |
Total liabilities and stockholders' equity | | $ | 2,726,330 | | | $ | 2,551,824 | |
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 March 31, |
| | 2022 | | 2021 |
Revenues: | | | | |
Oil sales | | $ | 347,443 | | | $ | 127,701 | |
NGL sales | | 65,155 | | | 41,678 | |
Natural gas sales | | 38,589 | | | 33,078 | |
Midstream service revenues | | 2,344 | | | 1,296 | |
Sales of purchased oil | | 78,864 | | | 46,477 | |
Total revenues | | 532,395 | | | 250,230 | |
Costs and expenses: | | | | |
Lease operating expenses | | 40,876 | | | 18,918 | |
Production and ad valorem taxes | | 27,487 | | | 13,283 | |
Transportation and marketing expenses | | 14,743 | | | 12,127 | |
Midstream service expenses | | 1,414 | | | 858 | |
Costs of purchased oil | | 82,964 | | | 49,916 | |
General and administrative | | 21,944 | | | 13,073 | |
| | | | |
Depletion, depreciation and amortization | | 73,492 | | | 38,109 | |
| | | | |
Other operating expenses | | 1,019 | | | 1,143 | |
Total costs and expenses | | 263,939 | | | 147,427 | |
| | | | |
Operating income | | 268,456 | | | 102,803 | |
Non-operating income (expense): | | | | |
Loss on derivatives, net | | (325,816) | | | (154,365) | |
Interest expense | | (32,477) | | | (25,946) | |
| | | | |
| | | | |
Loss on disposal of assets, net | | (260) | | | (72) | |
| | | | |
Other income, net | | 2,439 | | | 1,379 | |
Total non-operating expense, net | | (356,114) | | | (179,004) | |
Loss before income taxes | | (87,658) | | | (76,201) | |
Income tax (expense) benefit: | | | | |
Current | | (1,218) | | | — | |
Deferred | | 2,095 | | | 762 | |
Total income tax benefit | | 877 | | | 762 | |
Net loss | | $ | (86,781) | | | $ | (75,439) | |
Net loss per common share: | | | | |
Basic | | $ | (5.18) | | | $ | (6.33) | |
Diluted | | $ | (5.18) | | | $ | (6.33) | |
Weighted-average common shares outstanding: | | | | |
Basic | | 16,767 | | | 11,918 | |
Diluted | | 16,767 | | | 11,918 | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Laredo Petroleum, Inc.
Consolidated statements of stockholders' equity
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Additional paid-in capital | | Treasury stock (at cost) | | Accumulated deficit | | |
| | Shares | | Amount | | | Shares | | Amount | | | Total |
Balance, December 31, 2021 | | 17,075 | | | $ | 171 | | | $ | 2,788,628 | | | — | | | $ | — | | | $ | (2,275,019) | | | $ | 513,780 | |
| | | | | | | | | | | | | | |
Restricted stock awards | | 232 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
Restricted stock forfeitures | | (4) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Stock exchanged for tax withholding | | — | | | — | | | — | | | 76 | | | (5,847) | | | — | | | (5,847) | |
| | | | | | | | | | | | | | |
Retirement of treasury stock | | (76) | | | (1) | | | (5,846) | | | (76) | | | 5,847 | | | — | | | — | |
| | | | | | | | | | | | | | |
Share-settled equity-based compensation | | — | | | — | | | 2,636 | | | — | | | — | | | — | | | 2,636 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Performance share conversion | | 75 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (86,781) | | | (86,781) | |
Balance, March 31, 2022 | | 17,302 | | | $ | 173 | | | $ | 2,785,415 | | | — | | | $ | — | | | $ | (2,361,800) | | | $ | 423,788 | |
| | | | | | | | | | | | | | |
| | Common stock | | Additional paid-in capital | | Treasury stock (at cost) | | Accumulated deficit | | |
| | Shares | | Amount | | | Shares | | Amount | | | Total |
Balance, December 31, 2020 | | 12,020 | | | $ | 120 | | | $ | 2,398,464 | | | — | | | $ | — | | | $ | (2,420,027) | | | $ | (21,443) | |
Restricted stock awards | | 188 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
Restricted stock forfeitures | | (1) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Stock exchanged for tax withholding | | — | | | — | | | — | | | 37 | | | (1,290) | | | — | | | (1,290) | |
| | | | | | | | | | | | | | |
Retirement of treasury stock | | (37) | | | — | | | (1,290) | | | (37) | | | 1,290 | | | — | | | — | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Share-settled equity-based compensation | | — | | | — | | | 2,738 | | | — | | | — | | | — | | | 2,738 | |
Issuance of common stock, net of costs | | 724 | | | 7 | | | 26,859 | | | — | | | — | | | — | | | 26,866 | |
Performance share conversion | | 6 | | | — | | | — | | | — | | | — | | | — | | | — | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (75,439) | | | (75,439) | |
Balance, March 31, 2021 | | 12,900 | | | $ | 129 | | | $ | 2,426,769 | | | — | | | $ | — | | | $ | (2,495,466) | | | $ | (68,568) | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited) | | | | | | | | | | | | | | |
| | Three months ended March 31, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net loss | | $ | (86,781) | | | $ | (75,439) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | | | | |
Share-settled equity-based compensation, net | | 2,053 | | | 2,068 | |
Depletion, depreciation and amortization | | 73,492 | | | 38,109 | |
| | | | |
| | | | |
Mark-to-market on derivatives: | | | | |
Loss on derivatives, net | | 325,816 | | | 154,365 | |
Settlements paid for matured derivatives, net | | (125,370) | | | (41,174) | |
| | | | |
| | | | |
Premiums received for commodity derivatives | | — | | | 9,041 | |
Amortization of debt issuance costs | | 1,541 | | | 989 | |
| | | | |
| | | | |
| | | | |
Amortization of operating lease right-of-use assets | | 5,025 | | | 2,997 | |
| | | | |
Deferred income tax benefit | | (2,095) | | | (762) | |
Other, net | | 425 | | | 1,491 | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable, net | | (61,742) | | | (3,728) | |
Other current assets | | 5,092 | | | (10,264) | |
Other noncurrent assets, net | | (15,227) | | | (1,636) | |
Accounts payable and accrued liabilities | | 1,842 | | | 9,065 | |
Undistributed revenue and royalties | | 44,294 | | | 7,290 | |
Other current liabilities | | (1,471) | | | (19,622) | |
Other noncurrent liabilities | | 3,988 | | | (1,639) | |
Net cash provided by operating activities | | 170,882 | | | 71,151 | |
Cash flows from investing activities: | | | | |
Acquisitions of oil and natural gas properties, net | | (7,870) | | | — | |
Capital expenditures: | | | | |
| | | | |
Oil and natural gas properties | | (143,500) | | | (68,329) | |
Midstream service assets | | (293) | | | (329) | |
Other fixed assets | | (2,052) | | | (551) | |
Proceeds from dispositions of capital assets, net of selling costs | | 2,019 | | | 189 | |
Net cash used in investing activities | | (151,696) | | | (69,020) | |
Cash flows from financing activities: | | | | |
Borrowings on Senior Secured Credit Facility | | 50,000 | | | 15,000 | |
Payments on Senior Secured Credit Facility | | (55,000) | | | (50,000) | |
| | | | |
| | | | |
| | | | |
Proceeds from issuance of common stock, net of offering costs | | — | | | 26,866 | |
| | | | |
Stock exchanged for tax withholding | | (5,847) | | | (1,290) | |
| | | | |
| | | | |
Other | | — | | | 2,798 | |
Net cash used in financing activities | | (10,847) | | | (6,626) | |
Net increase (decrease) in cash and cash equivalents | | 8,339 | | | (4,495) | |
Cash and cash equivalents, beginning of period | | 56,798 | | | 48,757 | |
Cash and cash equivalents, end of period | | $ | 65,137 | | | $ | 44,262 | |
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
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, primarily in the Permian Basin of West Texas. The Company has identified one operating segment: exploration and production. 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.
Basis of presentation
The unaudited consolidated financial statements were derived from the historical accounting records of the Company and reflect the historical financial position, results of operations and cash flows for the periods described herein. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All material intercompany transactions and account balances have been eliminated in the consolidation of accounts.
The unaudited consolidated financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet as of December 31, 2021 is derived from the Company's audited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all necessary adjustments to present fairly the Company's financial position as of March 31, 2022, results of operations for the three months ended March 31, 2022 and 2021 and cash flows for the three months ended March 31, 2022 and 2021.
Certain disclosures have been condensed or omitted from the unaudited consolidated financial statements. Accordingly, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2021 Annual Report.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period financial statement presentation. There was no impact on previously reported total assets, total liabilities, net loss or stockholders' equity for the periods presented.
Significant accounting policies
There have been no material changes in the Company's significant accounting policies during the three months ended March 31, 2022. See Note 2 in the 2021 Annual Report for discussion of significant accounting policies.
Use of estimates in the preparation of interim unaudited consolidated financial statements
The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of 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.
See Note 2 in the 2021 Annual Report for further information regarding the use of estimates and assumptions.
Note 2—New accounting standards
The Company considered the applicability and impact of all accounting standard updates ("ASU") issued by the Financial Accounting Standards Board to the Accounting Standards Codification ("ASC") and has determined there are no ASUs that are not yet adopted and meaningful to disclose as of March 31, 2022. Additionally, the Company did not adopt any new ASUs during the three months ended March 31, 2022.
Condensed notes to the consolidated financial statements
(Unaudited)
Note 3—Acquisitions and divestitures
2021 Acquisitions and divestiture
Pioneer Acquisition
On September 17, 2021, the Company entered into a purchase and sale agreement (the "Pioneer PSA") with Pioneer Natural Resources USA, Inc ("PXD"), DE Midland III, LLC ("DEM"), Parsley Minerals, LLC ("PM") and Parsley Energy, L.P. ("PE" and collectively with PXD, DEM, and PM, the "Seller") pursuant to which the Company agreed to purchase (the "Pioneer Acquisition"), effective as of July 1, 2021, certain oil and natural gas properties in the Midland Basin, including approximately 20,000 net acres, and approximately 135 gross (121 net) operated locations, located in western Glasscock County, Texas, as well as related assets and contracts (the "Pioneer Assets").
On October 18, 2021 ("Pioneer Closing Date"), the Company closed the Pioneer Acquisition for an aggregate purchase price of $206.3 million, comprised of (i) $131.6 million in cash, (ii) 959,691 shares of the Company's common stock, par value $0.01 per share (the "common stock"), based upon the share price as of the Pioneer Closing Date and (iii) $3.8 million in transaction related expenses, inclusive of customary closing adjustments, subject to post-closing adjustments.
The Company determined that the Pioneer Acquisition was an asset acquisition, as substantially all of the gross assets acquired are concentrated in a group of similar identifiable assets. Accordingly, the consideration paid was allocated to the individual assets acquired and liabilities assumed based on their relative fair values and all transaction costs associated were capitalized.
The following table presents components of the purchase price, inclusive of customary closing adjustments:
| | | | | | | | |
(in thousands, except for share and share price data) | | As of October 18, 2021 |
Shares of Company common stock | | 959,691 |
Company common stock price at the Pioneer Closing Date | | $ | 73.90 | |
Value of Company common stock consideration | | $ | 70,921 | |
| | |
Cash consideration | | $ | 131,633 | |
Transaction costs | | 3,775 | |
| | |
Total purchase price | | $ | 206,329 | |
The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on the Pioneer Closing Date:
| | | | | | | | |
(in thousands) | | As of October 18, 2021 |
Evaluated properties | | $ | 139,859 | |
Unevaluated properties | | 74,192 | |
Revenue suspense liabilities assumed | | (7,722) | |
Allocated purchase price | | $ | 206,329 | |
The Company funded the cash portion of the aggregate purchase price and related transaction costs with respect to the Pioneer Acquisition with cash on hand and borrowings under its Senior Secured Credit Facility.
During the year ended December 31, 2021, in connection with the Pioneer Acquisition, the Company acquired additional interests in the Pioneer Assets through additional sellers that exercised their "tag-along" sales rights, for total cash consideration of $2.9 million, excluding customary purchase price adjustments. These acquisitions were accounted for as asset acquisitions.
Sabalo/Shad Acquisition
On May 7, 2021, the Company entered into two separate purchase and sale agreements, one (the "Sabalo PSA") with Sabalo Energy, LLC and its subsidiary, Sabalo Operating, LLC (collectively, "Sabalo"), and the other (the "Shad PSA" and together with the Sabalo PSA, the "Sabalo/Shad PSAs") with Shad Permian, LLC ("Shad"), to acquire certain Midland Basin oil and natural gas
Condensed notes to the consolidated financial statements
(Unaudited)
properties, including approximately 21,000 net acres and approximately 120 gross (109 net) operated locations and approximately 150 gross (18 net) non-operated locations, located in Howard and Borden Counties, Texas, (collectively, the "Sabalo/Shad Acquisition"). Sabalo and Shad are unaffiliated, but owned interests in the same assets.
On July 1, 2021 ("Sabalo/Shad Closing Date"), the Company closed the Sabalo/Shad Acquisition, effective April 1, 2021, for an aggregate purchase price of $863.1 million, comprised of (i) $606.1 million in cash (ii) 2,506,964 shares of the Company's common stock, based upon the share price as of the Sabalo/Shad Closing Date, and (iii) $17.0 million in transaction related expenses, inclusive of customary closing adjustments, subject to post-closing adjustments.
The Sabalo/Shad Acquisition was accounted for as a single transaction because the Sabalo PSA and Shad PSA were entered into at the same time and in contemplation of one another to form a single transaction designed to achieve an overall economic effect. The Company determined that the Sabalo/Shad Acquisition was an asset acquisition, as substantially all of the gross assets acquired are concentrated in a group of similar identifiable assets. Accordingly, the consideration paid was allocated to the individual assets acquired and liabilities assumed based on their relative fair values and all transaction costs associated were capitalized.
The following table presents components of the purchase price, inclusive of customary closing adjustments:
| | | | | | | | |
(in thousands, except for share and share price data) | | As of July 1, 2021 |
Shares of Company common stock | | 2,506,964 |
Company common stock price at the Sabalo/Shad Closing Date | | $ | 95.72 | |
Value of Company common stock consideration | | $ | 239,967 | |
| | |
Cash consideration | | $ | 606,126 | |
Transaction costs | | 17,020 | |
Total purchase price | | $ | 863,113 | |
The following table presents the allocation of the purchase price to the assets acquired and liabilities assumed, based on their relative fair values, on the Sabalo/Shad Closing Date:
| | | | | | | | |
(in thousands) | | As of July 1, 2021 |
Evaluated properties | | $ | 503,005 | |
Unevaluated properties | | 362,977 | |
Revenue suspense liabilities assumed | | (4,269) | |
Inventory | | 1,400 | |
Allocated purchase price | | $ | 863,113 | |
The Company funded the cash portion of the aggregate purchase price and related transaction costs with respect to the Sabalo/Shad Acquisition with proceeds from borrowings under its Senior Secured Credit Facility and the Working Interest Sale described below.
Working Interest Sale
On May 7, 2021, the Company entered into a purchase and sale agreement (the "Sixth Street PSA") with Piper Investments Holdings, LLC, an affiliate of Sixth Street Partners, LLC ("Sixth Street"), to sell 37.5% of the Company's working interest in certain producing wellbores and the related properties primarily located within Glasscock and Reagan Counties, Texas, subject to certain excluded assets and title diligence procedures (the "Working Interest Sale").
On July 1, 2021 (the "Sixth Street Closing Date"), the Company closed the Working Interest Sale for cash proceeds of $405.0 million. In addition to such proceeds, the Sixth Street PSA also provided the Company with the right to receive up to a maximum of $93.7 million in additional cash consideration if certain cash flow targets related to divested oil and natural gas property operations are met ("Sixth Street Contingent Consideration"). The Sixth Street Contingent Consideration is made up of quarterly payments through June 2027 totaling up to $38.7 million and a potential balloon payment of $55.0 million in June 2027. On the Sixth Street Closing Date, the fair value of the Sixth Street Contingent Consideration was determined to be $33.8 million. The Sixth Street Contingent Consideration is accounted for as a contingent consideration derivative, with all
Condensed notes to the consolidated financial statements
(Unaudited)
gains and losses as a result of changes in the fair value of the contingent consideration derivative recognized in earnings in the period in which the changes occur. See Notes 8 and 9 for further discussion of the Sixth Street Contingent Consideration.
Subsequent to the Sixth Street Closing Date, the Company continues to own and operate its remaining working interest in the properties sold to Sixth Street; however, the results of operations and cash flows related to the 37.5% working interests sold were eliminated from the Company's financial statements. This divestiture did not represent a strategic shift and will not have a major effect on the Company's future operations or financial results.
Pursuant to the rules governing full cost accounting, the Company recorded a gain on the Working Interest Sale of $93.5 million, net of transaction expenses of $11.6 million, on the Company's consolidated statements of operations, subject to post-closing adjustments, as this divestment represented more than 25% of the Company's June 30, 2021 proved reserves. For the purposes of calculating the gain, total capitalized costs were allocated between reserves sold and reserves retained as of the Sixth Street Closing Date.
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—Property and equipment
The following table presents the Company's property and equipment as of the dates presented:
| | | | | | | | | | | | | | |
(in thousands) | | March 31, 2022 | | December 31, 2021 |
Evaluated oil and natural gas properties | | $ | 9,149,982 | | | $ | 8,968,668 | |
Less accumulated depletion and impairment | | (7,089,265) | | | (7,019,670) | |
Evaluated oil and natural gas properties, net | | 2,060,717 | | | 1,948,998 | |
| | | | |
Unevaluated oil and natural gas properties not being depleted | | 156,899 | | | 170,033 | |
| | | | |
Midstream service assets | | 165,099 | | | 165,232 | |
Less accumulated depreciation and impairment | | (70,467) | | | (68,704) | |
Midstream service assets, net | | 94,632 | | | 96,528 | |
| | | | |
Depreciable other fixed assets | | 45,448 | | | 43,381 | |
Less accumulated depreciation and amortization | | (28,980) | | | (27,692) | |
Depreciable other fixed assets, net | | 16,468 | | | 15,689 | |
| | | | |
Land | | 18,906 | | | 18,901 | |
| | | | |
Total property and equipment, net | | $ | 2,347,622 | | | $ | 2,250,149 | |
See Notes 2 and 6 in the 2021 Annual Report for additional discussion of the Company's property and equipment.
The unamortized cost of evaluated oil and natural gas properties being depleted did not exceed the full cost ceiling as of March 31, 2022 and March 31, 2021. As such, no full cost ceiling impairments were recorded for the three months ended March 31, 2022 and 2021.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table presents incurred capital expenditures 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 March 31, | | |
(in thousands) | | 2022 | | 2021 | | | | |
Property acquisition costs: | | | | | | | | |
Evaluated | | $ | 4,780 | | | $ | — | | | | | |
Unevaluated | | 3,274 | | | — | | | | | |
Exploration costs | | 6,753 | | | 3,957 | | | | | |
Development costs | | 161,615 | | | 64,492 | | | | | |
Total oil and natural gas properties incurred capital expenditures | | $ | 176,422 | | | $ | 68,449 | | | | | |
Total oil and natural gas properties incurred capital expenditures includes certain employee-related costs. The following table presents capitalized employee-related incurred capital expenditures in the acquisition, exploration and development of oil and natural gas properties for the periods presented:
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(in thousands) | | 2022 | | 2021 | | | | |
Capitalized employee-related costs | | $ | 4,343 | | | $ | 4,241 | | | | | |
Note 5—Debt
Long-term debt, net
The following table presents the Company's long-term debt and debt issuance costs, net included in "Long-term debt, net" on the unaudited consolidated balance sheets as of the dates presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
(in thousands) | | Long-term debt | | Debt issuance costs, net | | Long-term debt, net | | Long-term debt | | Debt issuance costs, net | | Long-term debt, net |
January 2025 Notes | | $ | 577,913 | | | $ | (5,816) | | | $ | 572,097 | | | $ | 577,913 | | | $ | (6,345) | | | $ | 571,568 | |
January 2028 Notes | | 361,044 | | | (4,814) | | | 356,230 | | | 361,044 | | | (5,024) | | | 356,020 | |
July 2029 Notes | | 400,000 | | | (6,506) | | | 393,494 | | | 400,000 | | | (6,730) | | | 393,270 | |
Senior Secured Credit Facility(1) | | 100,000 | | | — | | | 100,000 | | | 105,000 | | | — | | | 105,000 | |
Total | | $ | 1,438,957 | | | $ | (17,136) | | | $ | 1,421,821 | | | $ | 1,443,957 | | | $ | (18,099) | | | $ | 1,425,858 | |
______________________________________________________________________________
(1)Debt issuance costs, net related to the Senior Secured Credit Facility of $7.5 million and $8.1 million as of March 31, 2022 and December 31, 2021, respectively, are included in "Other noncurrent assets, net" on the unaudited consolidated balance sheets.
July 2029 Notes
On July 16, 2021, the Company completed a private offering and sale of $400.0 million in aggregate principal amount of 7.750% senior unsecured notes due 2029 (the "July 2029 Notes"). Interest for the July 2029 Notes is payable semi-annually, in cash in arrears on January 31 and July 31 of each year, commencing January 31, 2022 with interest from closing to that date. The terms of the July 2029 Notes include covenants, which are in addition to but different than similar covenants in the Senior Secured Credit Facility, which limit the Company's ability to incur indebtedness, make restricted payments, grant liens and dispose of assets.
The July 2029 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS and GCM, and will be fully and unconditionally guaranteed by 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
Condensed notes to the consolidated financial statements
(Unaudited)
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 received net proceeds of approximately $392.0 million from the July 2029 Notes, after deducting underwriting discounts and commissions and estimated offering expenses. The proceeds from the offering were used for general corporate purposes, including repaying a portion of the borrowings outstanding under the Senior Secured Credit Facility.
Senior Secured Credit Facility
As of March 31, 2022, the Senior Secured Credit Facility, which matures on July 16, 2025 (subject to a springing maturity date of July 29, 2024 if any of the January 2025 Notes are outstanding on such date), had a maximum credit amount of $2.0 billion, a borrowing base and an aggregate elected commitment of $1.0 billion and $725.0 million, respectively, with $100.0 million outstanding, and was subject to an interest rate of 3.000%. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which the Company was in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity and $80.0 million. As of March 31, 2022 and December 31, 2021, the Company had one letter of credit outstanding of $44.1 million under the Senior Secured Credit Facility. For additional information see Note 7 in the 2021 Annual Report.
See Note 16 for discussion of (i) additional borrowings and repayments on and (ii) an increase in the borrowing base and aggregate commitment of the Senior Secured Credit Facility subsequent to March 31, 2022.
The Company's measurements of Adjusted EBITDA (non-GAAP) for financial reporting as compared to compliance under its debt agreements differ.
Debt issuance costs
No debt issuance costs were capitalized or written off during the three months ended March 31, 2022 or 2021.
The Company had total debt issuance costs of $24.7 million and $26.2 million, net of accumulated amortization of $28.7 million and $27.2 million, as of March 31, 2022 and December 31, 2021, respectively. Debt issuance costs related to the Company's January 2025 Notes, January 2028 Notes and July 2029 Notes are included in "Long-term debt, net" on the unaudited consolidated balance sheets. Debt issuance costs related to the Senior Secured Credit Facility are included in "Other noncurrent assets, net" on the unaudited consolidated balance sheets. Debt issuance costs are amortized on a straight-line basis over the respective terms of the notes and the Senior Secured Credit Facility.
Note 6—Stockholders' equity
ATM Program
On February 23, 2021, the Company entered into an equity distribution agreement (the "Equity Distribution Agreement") with Wells Fargo Securities, LLC acting as sales agent and/or principal (the "Sales Agent"), pursuant to which the Company may offer and sell, from time to time through the Sales Agent, shares of its common stock having an aggregate gross sales price of up to $75.0 million through an "at-the-market" equity program (the "ATM Program").
During the three months ended March 31, 2021, the Company sold 723,579 shares of its common stock pursuant to the ATM Program for net proceeds of approximately $26.9 million, after underwriting commissions and other related expenses. The ATM Program was completed during the year ended December 31, 2021. Proceeds from the share sales were utilized to reduce borrowings on the Senior Secured Credit Facility.
Note 7—Equity Incentive Plan
The Laredo Petroleum, Inc. Omnibus Equity Incentive Plan (the "Equity Incentive Plan") provides for the granting of incentive awards in the form of restricted stock awards, stock option awards, performance share awards, performance unit awards, phantom unit awards and other awards. On May 20, 2021, the Company's stockholders approved an amendment to the Equity Incentive Plan to, among other things, increase the maximum number of shares of the Company's common stock issuable under the Equity Incentive Plan from 1,492,500 to 2,432,500 shares.
See Note 9 in the 2021 Annual Report for additional discussion of the Company's equity-based compensation awards.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table presents activity for equity-based compensation awards for the three months ended March 31, 2022:
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| | Equity Awards | | Liability Awards |
(in thousands) | | Restricted Stock Awards | | Stock Option Awards | | Performance Share Awards(1)(2) | | Performance Unit Awards | | Phantom Unit Awards(3) |
Outstanding as of December 31, 2021 | | 350 | | | 7 | | | 72 | | | 209 | | | 33 | |
Granted | | 232 | | | — | | | 62 | | | — | | | — | |
Forfeited | | (4) | | | — | | | (2) | | | — | | | — | |
Vested | | (125) | | | — | | | (70) | | | — | | | (15) | |
| | | | | | | | | | |
Expired or canceled | | — | | | (2) | | | — | | | — | | | — | |
Outstanding as of March 31, 2022 | | 453 | | | 5 | | | 62 | | | 209 | | | 18 | |
_____________________________________________________________________________(1)The performance share awards granted on February 28, 2019 had a performance period of January 1, 2019 to December 31, 2021 and, as their market and performance criteria were satisfied, resulted in a 107% payout. As such, the granted awards vested and were converted into 75,107 shares of the Company's common stock during the three months ended March 31, 2022 based on this 107% payout.
(2)On February 22, 2022, the Company granted performance share awards with a performance period of January 1, 2022 through December 31, 2024. The market criteria consists of: (i) annual relative total shareholder return comparing the Company's shareholder return to the shareholder return of the exploration and production companies listed in the Russell 2000 Index and (ii) annual absolute total shareholder return. The performance criteria for these awards consists of: (i) earnings before interest, taxes, depreciation, amortization and exploration expense and three-year total debt reduction, (ii) growth in inventory and (iii) emissions reduction targets. Any shares earned are expected to be paid in equity during the first quarter following the completion of the requisite service period, based on the achievement of market and performance criteria, and the payout can range from 0% to 225%.
(3)On March 1, 2022 and March 5, 2022, the vested phantom unit awards were settled and paid out in cash at a fair value of $76.60 and $83.00 based on the Company's closing stock price on the respective vesting dates.
As of March 31, 2022, total unrecognized cost related to equity-based compensation awards was $39.7 million, of which $14.0 million was attributable to liability awards which will be settled in cash rather than shares. Such cost will be recognized on a straight-line basis over an expected weighted-average period of 2.28 years.
Condensed notes to the consolidated financial statements
(Unaudited)
Equity-based compensation
The following table reflects equity-based compensation expense for the periods presented:
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(in thousands) | | 2022 | | 2021 | | | | |
Equity awards: | | | | | | | | |
Restricted stock awards | | $ | 2,175 | | | $ | 1,963 | | | | | |
Performance share awards | | 461 | | | 768 | | | | | |
Stock option awards | | — | | | 7 | | | | | |
Total share-settled equity-based compensation, gross | | $ | 2,636 | | | $ | 2,738 | | | | | |
Less amounts capitalized | | (583) | | | (670) | | | | | |
Total share-settled equity-based compensation, net | | $ | 2,053 | | | $ | 2,068 | | | | | |
Liability awards: | | | | | | | | |
Performance unit awards | | $ | 5,566 | | | $ | 820 | | | | | |
Phantom unit awards | | 609 | | | 506 | | | | | |
Total cash-settled equity-based compensation, gross | | $ | 6,175 | | | $ | 1,326 | | | | | |
Less amounts capitalized | | (47) | | | (198) | | | | | |
Total cash-settled equity-based compensation, net | | $ | 6,128 | | | $ | 1,128 | | | | | |
Total equity-based compensation, net | | $ | 8,181 | | | $ | 3,196 | | | | | |
Condensed notes to the consolidated financial statements
(Unaudited)
Note 8—Derivatives
The Company has three types of derivative instruments as of March 31, 2022: (i) commodity derivatives, (ii) a debt interest rate derivative and (iii) a contingent consideration derivative. See Notes (i) 2 in the 2021 Annual Report for discussion of the Company's significant accounting policies for derivatives and presentation, (ii) 9 for discussion of fair value measurement of derivatives on a recurring basis and (iii) 16 for discussion of derivatives subsequent events. The Company's derivatives were not designated as hedges for accounting purposes, and the Company does not enter into such instruments for speculative trading purposes. Accordingly, the changes in fair value are recognized in "Loss on derivatives, net" under "Non-operating income (expense)" on the unaudited consolidated statements of operations.
The following table summarizes components of the Company's loss on derivatives, net by type of derivative instrument for the periods presented:
| | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, | | |
(in thousands) | | 2022 | | 2021 | | | | |
Commodity | | $ | (329,724) | | | $ | (154,033) | | | | | |
Interest rate | | 13 | | | 4 | | | | | |
Contingent consideration | | 3,895 | | | (336) | | | | | |
Loss on derivatives, net | | $ | (325,816) | | | $ | (154,365) | | | | | |
Commodity
Due to the inherent volatility in oil, NGL and natural gas prices and the sometimes wide pricing differentials between where the Company produces and where the Company sells such commodities, the Company engages in commodity derivative transactions, such as puts, swaps, collars and basis swaps, to hedge price risk associated with a portion of the Company's anticipated sales volumes. By removing a portion of the price volatility associated with future sales volumes, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flows from operations. See Note 10 in the 2021 Annual Report for discussion of transaction types and settlement indexes.
During the three months ended March 31, 2022, the Company’s derivatives were settled based on reported prices on commodity exchanges, with (i) oil derivatives settled based on WTI NYMEX and Brent ICE pricing, (ii) NGL derivatives settled based on Mont Belvieu OPIS pricing and (iii) natural gas derivatives settled based on Henry Hub NYMEX and Waha Inside FERC pricing.
Condensed notes to the consolidated financial statements
(Unaudited)
The following table summarizes open commodity derivative positions as of March 31, 2022, for commodity derivatives that were entered into through March 31, 2022, for the settlement periods presented:
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| | Remaining Year 2022 | | Year 2023 | | |
Oil: | | | | | | |
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WTI NYMEX - Swaps: | | | | | | |
Volume (Bbl) | | 1,068,000 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 81.57 | | | $ | — | | | |
WTI NYMEX - Collars: | | | | | | |
Volume (Bbl) | | 2,557,500 | | | 3,997,000 | | | |
Weighted-average floor price ($/Bbl) | | $ | 58.23 | | | $ | 66.37 | | | |
Weighted-average ceiling price ($/Bbl) | | $ | 69.39 | | | $ | 81.16 | | | |
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Brent ICE - Swaps: | | | | | | |
Volume (Bbl) | | 3,107,500 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 48.34 | | | $ | — | | | |
Brent ICE - Collars: | | | | | | |
Volume (Bbl) | | 1,168,750 | | | — | | | |
Weighted-average floor price ($/Bbl) | | $ | 56.65 | | | $ | — | | | |
Weighted-average ceiling price ($/Bbl) | | $ | 65.44 | | | $ | — | | | |
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Purity Ethane - Swaps: | | | | | | |
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