Company Quick10K Filing
Quick10K
Laredo Petroleum
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$3.60 237 $852
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
8-K 2019-07-31 Earnings, Regulation FD, Exhibits
8-K 2019-07-19 Enter Agreement
8-K 2019-07-16 Earnings, Regulation FD, Exhibits
8-K 2019-06-06 Regulation FD, Exhibits
8-K 2019-05-16 Officers, Shareholder Vote, Exhibits
8-K 2019-05-01 Earnings, Regulation FD, Exhibits
8-K 2019-04-24 Officers, Regulation FD, Exhibits
8-K 2019-04-16 Earnings, Regulation FD, Exhibits
8-K 2019-04-15 Other Events
8-K 2019-04-08 Exit Costs, Officers, Regulation FD, Exhibits
8-K 2019-04-02 Officers, Regulation FD, Exhibits
8-K 2019-03-25 Officers
8-K 2019-02-04 Off-BS Arrangement
8-K 2019-01-15 Officers
8-K 2018-12-20 Officers
8-K 2018-12-14 Officers
8-K 2018-10-24 Regulation FD, Exhibits
8-K 2018-09-27 Regulation FD, Exhibits
8-K 2018-09-10 Officers
8-K 2018-08-24 Officers
8-K 2018-08-20 Regulation FD, Exhibits
8-K 2018-07-25 Regulation FD, Exhibits
8-K 2018-06-19 Regulation FD, Exhibits
8-K 2018-05-31 Regulation FD, Exhibits
8-K 2018-04-24 Regulation FD, Exhibits
8-K 2018-04-23 Other Events, Exhibits
CSCO Cisco Systems 232,960
MAC Macerich 5,730
ITGR Integer Holdings 2,500
JOUT Johnson Outdoors 730
UNFI United Natural Foods 603
AQ Aquantia 462
LCI Lannett 265
DRRX Durect 125
SKIS Peak Resorts 67
MARPS Marine Petroleum Trust 5
LPI 2019-06-30
Part I
Item 1. Consolidated Financial Statements (Unaudited)
Note 1-Organization and Basis of Presentation
Note 2-Recently Issued or Adopted Accounting Pronouncements
Note 3-Leases
Note 4-Property and Equipment
Note 5-Debt
Note 6-Stockholders' Equity and Equity Incentive Plan
Note 7-Derivatives
Note 8-Fair Value Measurements
Note 9-Net Income per Common Share
Note 10-Commitments and Contingencies
Note 11-Supplemental Cash Flow and Non-Cash Information
Note 12-Asset Retirement Obligations
Note 13-Revenue Recognition
Note 14-Income Taxes
Note 16-Subsidiary Guarantors
Note 17-Organizational Restructuring
Note 18-Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Purchases of Equity Securities
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-10.8 a2q19ex108.htm
EX-31.1 a2q19ex311.htm
EX-31.2 a2q19ex312.htm
EX-32.1 a2q19ex321.htm

Laredo Petroleum Earnings 2019-06-30

LPI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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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 June 30, 2019
 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)
(918513-4570
(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 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No ý 
Number of shares of registrant's common stock outstanding as of July 29, 2019: 237,469,613



LAREDO PETROLEUM, INC.
TABLE OF CONTENTS
 
Page
 

ii

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, NGL and natural gas prices, including in our area of operation in the Permian Basin;
our ability to discover, estimate, develop and replace oil, NGL and natural gas reserves;
changes in domestic and global production, supply and demand for oil, NGL and natural gas;
revisions to our reserve estimates as a result of changes in commodity prices, decline curves and other uncertainties;
the long-term performance of wells that were completed using different technologies;
the ongoing instability and uncertainty in the United States and international financial and consumer markets that could adversely affect the liquidity available to us and our customers and the demand for commodities, including oil, NGL and natural gas;
the potential impact on production of oil, NGL and natural gas from our wells due to tighter spacing of our wells;
capital requirements for our operations and projects;
impacts to our financial statements as a result of impairment write-downs;
the availability and costs of drilling and production equipment, supplies, labor and oil and natural gas processing and other services;
the availability and costs of sufficient pipeline and transportation facilities and gathering and processing capacity;
our ability to maintain the borrowing capacity under our Fifth Amended and Restated     Senior Secured Credit Facility (as amended, the "Senior Secured Credit Facility") or access other means of obtaining capital and liquidity, especially during periods of sustained low commodity prices;
our ability to successfully identify and consummate strategic acquisitions at purchase prices that are accretive to our financial results and to successfully integrate acquired businesses, assets and properties;
our ability to generate sufficient cash to service our indebtedness, fund our capital requirements and generate future profits;
restrictions contained in our debt agreements, including our Senior Secured Credit Facility and the indentures governing our senior unsecured notes, as well as debt that could be incurred in the future;
our ability to recruit and retain the qualified personnel necessary to operate our business;
the potentially insufficient refining capacity in the United States Gulf Coast to refine all of the light sweet crude oil being produced in the United States, which could result in widening price discounts to world crude prices and potential shut-in of production due to lack of sufficient markets;
risks related to the geographic concentration of our assets;
our ability to hedge and regulations that affect our ability to hedge;
changes in the regulatory environment and changes in United States or international legal, tax, political, administrative or economic conditions, including regulations that prohibit or restrict our

iii

Table of Contents

ability to apply hydraulic fracturing to our oil and natural gas wells and to access and dispose of water used in these operations;
legislation or regulations that prohibit or restrict our ability to drill new allocation wells;
our ability to execute our strategies;
competition in the oil and natural gas industry;
drilling and operating risks, including risks related to hydraulic fracturing activities; and
our ability to comply with federal, state and local regulatory requirements.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report, under "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the "2018 Annual Report") and those set forth from time to time in our other filings with the Securities and Exchange Commission (the "SEC"). These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report, or if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities law.

iv

Table of Contents

Part I

Item 1.    Consolidated Financial Statements (Unaudited)


Laredo Petroleum, Inc.
Consolidated balance sheets
(in thousands, except share data)
(Unaudited)
 
 
June 30, 2019

December 31, 2018
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
55,800

 
$
45,151

Accounts receivable, net
 
76,610

 
94,321

Derivatives
 
47,167

 
39,835

Other current assets
 
12,938

 
13,445

Total current assets
 
192,515

 
192,752

Property and equipment:
 
 
 
 

Oil and natural gas properties, full cost method:
 
 
 
 

Evaluated properties
 
7,080,332

 
6,752,631

Unevaluated properties not being depleted
 
95,138

 
130,957

Less accumulated depletion and impairment
 
(4,975,302
)
 
(4,854,017
)
Oil and natural gas properties, net
 
2,200,168

 
2,029,571

Midstream service assets, net
 
131,633

 
130,245

Other fixed assets, net
 
37,933

 
39,819

Property and equipment, net
 
2,369,734

 
2,199,635

Derivatives
 
25,798

 
11,030

Operating lease right-of-use assets
 
18,903

 

Other noncurrent assets, net
 
12,972

 
16,888

Total assets
 
$
2,619,922

 
$
2,420,305

Liabilities and stockholders' equity
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable and accrued liabilities
 
$
51,289

 
$
69,504

Accrued capital expenditures
 
32,310

 
29,975

Undistributed revenue and royalties
 
44,731

 
48,841

Derivatives
 
1,473

 
7,359

Operating lease liabilities
 
9,948

 

Other current liabilities
 
30,927

 
44,786

Total current liabilities
 
170,678

 
200,465

Long-term debt, net
 
1,029,526

 
983,636

Asset retirement obligations
 
55,645

 
53,387

Operating lease liabilities
 
12,055

 

Other noncurrent liabilities
 
7,697

 
8,587

Total liabilities
 
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 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
 
2,381,450

 
2,375,286

Accumulated deficit
 
(1,039,504
)
 
(1,203,395
)
Total stockholders' equity
 
1,344,321

 
1,174,230

Total liabilities and stockholders' equity
 
$
2,619,922

 
$
2,420,305


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

1

Table of Contents

Laredo Petroleum, Inc.
Consolidated statements of operations
(in thousands, except per share data)
(Unaudited)
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2019
 
2018
 
2019
 
2018
Revenues:






 
 

 
 

Oil sales

$
160,030


$
159,051


$
289,201


$
309,965

NGL sales
 
22,197

 
36,805

 
54,432

 
65,165

Natural gas sales
 
1,636

 
12,705

 
13,606

 
30,865

Midstream service revenues

2,610


1,976


5,493


4,335

Sales of purchased oil
 
30,170

 
140,509

 
62,858

 
200,412

Total revenues

216,643


351,046


425,590


610,742

Costs and expenses:

 
 
 
 
 
 
 
Lease operating expenses

23,632


22,642


46,241


44,593

Production and ad valorem taxes
 
11,328

 
12,405

 
18,547

 
24,217

Transportation and marketing expenses
 
4,891

 
1,534

 
9,650

 
1,534

Midstream service expenses
 
607

 
403

 
2,210

 
1,096

Costs of purchased oil
 
30,172

 
140,578

 
62,863

 
201,242

General and administrative

11,056


26,834

 
32,575

 
51,559

Restructuring expenses
 
10,406

 

 
10,406

 

Depletion, depreciation and amortization

65,703


50,762


128,801


96,315

Other operating expenses
 
1,020

 
1,121

 
2,072

 
2,227

Total costs and expenses

158,815


256,279


313,365


422,783

Operating income

57,828


94,767


112,225


187,959

Non-operating income (expense):




 
 
 
 
 
Gain (loss) on derivatives, net

88,394


(45,976
)

40,029


(36,966
)
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
)
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

175,133


33,452


165,546


119,972

Income tax expense:




 






Deferred

(1,751
)



(1,655
)


Total income tax expense

(1,751
)



(1,655
)


Net income

$
173,382

 
$
33,452


$
163,891


$
119,972

Net income per common share:




 

 




Basic

$
0.75


$
0.14


$
0.71


$
0.51

Diluted

$
0.75

 
$
0.14


$
0.71


$
0.51

Weighted-average common shares outstanding:







 

 
 

Basic

231,406


230,933


230,943


234,561

Diluted

231,557


231,706


231,725


235,501

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

2

Table of Contents

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, 2018
 
233,936

 
$
2,339

 
$
2,375,286

 

 
$

 
$
(1,203,395
)
 
$
1,174,230

Restricted stock awards
 
5,986

 
60

 
(60
)
 

 

 

 

Restricted stock forfeitures
 
(48
)
 

 

 

 

 

 

Stock exchanged for tax withholding
 

 

 

 
683

 
(2,612
)
 

 
(2,612
)
Stock exchanged for cost of exercise of stock options
 

 

 

 
18

 
(76
)
 

 
(76
)
Retirement of treasury stock
 
(701
)
 
(7
)
 
(2,681
)
 
(701
)
 
2,688

 

 

Exercise of stock options
 
18

 

 
76

 

 

 

 
76

Stock-based compensation
 

 

 
9,305

 

 

 

 
9,305

Net loss
 

 

 

 

 

 
(9,491
)
 
(9,491
)
Balance, March 31, 2019
 
239,191

 
2,392

 
2,381,926

 

 

 
(1,212,886
)
 
1,171,432

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
 

 

 

 

 

 
173,382

 
173,382

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 these unaudited consolidated financial statements.

3

Table of Contents

Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited)
 
 
Six months ended June 30,
 
 
2019
 
2018
Cash flows from operating activities:

 


 

Net income

$
163,891


$
119,972

Adjustments to reconcile net income to net cash provided by operating activities:






Deferred income tax expense

1,655



Depletion, depreciation and amortization

128,801


96,315

Non-cash stock-based compensation, net
 
6,983

 
20,015

Mark-to-market on derivatives:






(Gain) loss on derivatives, net

(40,029
)

36,966

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

119


396

Premiums paid for derivatives

(6,249
)

(9,475
)
Amortization of debt issuance costs

1,693


1,638

Amortization of operating lease right-of-use assets
 
6,309

 

Other, net

4,068


6,910

Decrease (increase) in accounts receivable
 
17,537

 
(2,331
)
Increase in other current assets
 
(4,200
)
 
(10,974
)
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
 
(18,134
)
 
(20,124
)
Decrease in other noncurrent liabilities
 
(100
)
 
(544
)
Net cash provided by operating activities
 
261,269

 
262,601

Cash flows from investing activities:






Acquisitions of oil and natural gas properties
 
(2,880
)
 
(16,340
)
Capital expenditures:






Oil and natural gas properties

(284,616
)

(341,534
)
Midstream service assets

(5,449
)

(5,205
)
Other fixed assets

(965
)

(4,965
)
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

(292,974
)

(354,072
)
Cash flows from financing activities:






Borrowings on Senior Secured Credit Facility

80,000


110,000

Payments on Senior Secured Credit Facility

(35,000
)


Share repurchases
 

 
(87,218
)
Stock exchanged for tax withholding

(2,646
)

(4,397
)
Payments for debt issuance costs



(2,469
)
Net cash provided by financing activities

42,354


15,916

Net increase (decrease) in cash and cash equivalents

10,649


(75,555
)
Cash and cash equivalents, beginning of period

45,151


112,159

Cash and cash equivalents, end of period

$
55,800


$
36,604

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

4

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


Note 1Organization and basis of presentation
a.    Organization
Laredo Petroleum, Inc. ("Laredo"), together with its wholly-owned subsidiaries, Laredo Midstream Services, LLC ("LMS") and Garden City Minerals, LLC ("GCM"), is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties, and midstream and marketing services, primarily in the Permian Basin of West Texas. LMS and GCM (together, the "Guarantors") guarantee all of Laredo's debt instruments. In these notes, the "Company" refers to Laredo, LMS and GCM collectively, unless the context indicates otherwise. All amounts, dollars and percentages presented in these unaudited consolidated financial statements and the related notes are rounded and, therefore, approximate.
b.    Basis of presentation
The unaudited consolidated financial statements were derived from the historical accounting records of the Company and reflect the historical financial position, results of operations and cash flows for the periods described herein. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All material intercompany transactions and account balances have been eliminated in the consolidation of accounts.
The unaudited consolidated financial statements have not been audited by the Company's independent registered public accounting firm, except that the consolidated balance sheet as of December 31, 2018 is derived from audited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements reflect all necessary adjustments to present fairly the Company's financial position as of June 30, 2019, results of operations for the three and six months ended June 30, 2019 and 2018 and cash flows for the six months ended June 30, 2019 and 2018.
Certain disclosures have been condensed or omitted from the unaudited consolidated financial statements. Accordingly, the unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2018 Annual Report.
Significant accounting policies
See Note 2 in the 2018 Annual Report for discussion of significant accounting policies and Note 3 for those related to the adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 842, Leases ("ASC 842").
Use of estimates in the preparation of interim unaudited consolidated financial statements
The preparation of the unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ.
For further information regarding the use of estimates and assumptions, see Note 2.b in the 2018 Annual Report, Note 3 pertaining to the Company's leases and Note 6.c pertaining to the Company's 2019 performance share awards and outperformance share award.
Note 2Recently issued or adopted accounting pronouncements
The Company considers the applicability and impact of all accounting standard updates ("ASU") issued by the FASB. The discussion of the ASU listed below was determined to be meaningful to the Company's unaudited consolidated financial statements and footnotes during the six months ended June 30, 2019.
Leases
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective approach and applying the optional transition method as of the beginning of the period of adoption. Results for the period beginning after January 1, 2019 are presented under ASC 842, while prior periods are not adjusted and continue to be reported under ASC 840. The Company utilized the transition package of expedients for leases that commenced before the effective date. ASC 842 supersedes previous lease guidance in ASC 840, Leases ("ASC 840"). The core principle of the new guidance is that a lessee should recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the

5

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


underlying asset for the lease term related to its leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election, by class of underlying asset, not to recognize lease assets and lease liabilities. See Note 3 for further discussion of the ASC 842 adoption impact on the Company's unaudited consolidated financial statements.
Note 3Leases
a.    Impact of ASC 842 adoption
Prior to January 1, 2019, the Company accounted for leases under ASC 840 and did not record any right-of-use assets or corresponding lease liabilities. Upon the adoption of ASC 842 on January 1, 2019, the Company recognized $22.1 million in operating lease right-of-use assets and $25.3 million in operating lease liabilities on the unaudited consolidated balance sheets for operating leases with a term greater than 12 months. The difference between the two balances of $3.2 million is mainly due to free rent and lease build-out incentives that were recorded as deferred lease liabilities under ASC 840. These deferred lease liabilities are subtracted from the right-of-use asset opening balance under ASC 842. The transition did not result in a material impact to the unaudited consolidated statements of operations nor was there a related impact to the unaudited consolidated statements of stockholders' equity.
The Company utilized the modified retrospective approach in adopting the new standard and applied the optional transition method as of the beginning of the period of adoption, along with the transition package of practical expedients, and implemented certain accounting policy decisions which include: (i) short-term lease recognition exemption, (ii) establishing a balance sheet recognition capitalization threshold, (iii) not evaluating existing or expired land easements that were not previously accounted for as leases under ASC 840 and (iv) accounting for certain asset classes at a portfolio level by not separating the lease and non-lease components and accounting for the agreement as a single lease component.
The Company determines whether a contract is or contains a lease at inception of the contract, based on answers to a series of questions that address whether an identified asset exists and whether the Company has the right to obtain substantially all of the benefit of the asset and to control its use over the full term of the agreement. When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of the Company's leases do not provide a readily determinable implicit rate. In such cases, the Company is required to use its incremental borrowing rate ("IBR"). The Company determines its IBR using both a "credit notching" approach and a "recovery method" approach. The results of these approaches are then weighted equally and averaged in order to determine the concluded IBR. This concluded IBR is utilized to discount the lease payments based on information available at lease commencement. There are no material residual value guarantees, nor any restrictions or covenants included in the Company's lease agreements.
Mineral leases, including oil and natural gas leases granting the right to explore for those natural resources and rights to use the land in which those natural resources are contained, are not included in the scope of ASC 842.
The Company has recognized operating lease assets and operating lease liabilities on the unaudited consolidated balance sheets for leases of commercial real estate with lease terms extending into 2027 and drilling, completion, production and other equipment leases with lease terms extending through 2020. The Company has various other drilling, completion and production equipment leases on a short-term basis which are reflected in short-term lease costs.
The Company's lease costs include those that are recognized in net income (loss) during the period and capitalized as part of the cost of another asset in accordance with other GAAP.
The costs related to drilling, completion and production activities are reflected at the Company's net ownership, which is consistent with the principals of proportional consolidation, and lease commitments are reflected on a gross basis. As of June 30, 2019, the Company had an average working interest of 97% in all Laredo-operated currently producing wells in its core operating area.
The Company's short-term lease costs are not included in the calculation of lease liabilities and right-of-use assets.
Certain of the Company's leases include provisions for variable payments. These variable payments are typically determined based on a measure of throughput, actual days or another measure of usage and are not included in the calculation of lease liabilities and right-of-use assets. For our drilling rigs, the variable lease costs include the payments that depend on the performance or usage of the underlying asset, the costs to move and the costs to repair the drilling rigs. For certain of our commercial office buildings, utilities and common area maintenance charges are variable. For our equipment leases, the variable lease cost is the amount incurred under our contracts that are beyond the minimum rental fee, inclusive of maintenance.

6

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


Of the Company's commercial leases, the Company subleases certain office space to third parties where it is the primary obligor under the head lease. The lease terms on those subleases each contain renewal options that do not extend past the term of the head lease. The subleases do not contain residual value guarantees. Sublease income is recognized based on the contract terms and, upon the adoption of ASC 842, is included as a reduction of lease expense under the head lease.
The Company does not have any significant finance leases.
Certain of the Company's lease asset classes include options to renew on a month-to-month basis. The Company considers contract-based, asset-based, market-based, and entity-based factors to determine the term over which it is reasonably certain to extend the lease in determining its right-of-use assets and liabilities.
The Company's material leases do not include options to purchase the leased property.
Lease costs
The table below presents components of total lease costs and supplemental cash flow information for the Company's operating leases for the periods presented:
(in thousands)
 
Three months ended June 30, 2019
 
Six months ended June 30, 2019
Operating lease costs(1)
 
$