| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Additional paid-in capital | | Treasury stock (at cost) | | Accumulated deficit | | |
| | Shares | | Amount | | | Shares | | Amount | | | Total |
Balance, June 30, 2022 | | 17,212 | | | $ | 172 | | | $ | 2,778,538 | | | — | | | $ | — | | | $ | (2,099,254) | | | $ | 679,456 | |
| | | | | | | | | | | | | | |
Restricted stock awards | | 9 | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted stock forfeitures | | (50) | | | (1) | | | 1 | | | — | | | — | | | — | | | — | |
Share repurchases | | — | | | — | | | — | | | 245 | | | (17,515) | | | — | | | (17,515) | |
Stock exchanged for tax withholding | | — | | | — | | | — | | | 11 | | | (853) | | | — | | | (853) | |
| | | | | | | | | | | | | | |
Retirement of treasury stock | | (256) | | | (2) | | | (18,366) | | | (256) | | | 18,368 | | | — | | | — | |
| | | | | | | | | | | | | | |
Share-settled equity-based compensation | | — | | | — | | | 2,059 | | | — | | | — | | | — | | | 2,059 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 337,523 | | | 337,523 | |
Balance, September 30, 2022 | | 16,915 | | | $ | 169 | | | $ | 2,762,232 | | | — | | | $ | — | | | $ | (1,761,731) | | | $ | 1,000,670 | |
| | | | | | | | | | | | | | |
| | Common stock | | Additional paid-in capital | | Treasury stock (at cost) | | Accumulated deficit | | |
| | Shares | | Amount | | | Shares | | Amount | | | Total |
Balance, June 30, 2021 | | 13,573 | | | $ | 136 | | | $ | 2,473,709 | | | — | | | $ | — | | | $ | (2,628,127) | | | $ | (154,282) | |
Restricted stock awards | | 39 | | | — | | | — | | | — | | | — | | | — | | | — | |
Restricted stock forfeitures | | (1) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Stock exchanged for tax withholding | | — | | | — | | | — | | | 9 | | | (848) | | | — | | | (848) | |
Retirement of treasury stock | | (9) | | | — | | | (848) | | | (9) | | | 848 | | | — | | | — | |
Exercise of stock options | | 2 | | | — | | | 173 | | | — | | | — | | | — | | | 173 | |
Share-settled equity-based compensation | | — | | | — | | | 2,220 | | | — | | | — | | | — | | | 2,220 | |
Equity issued for acquisitions of oil and natural gas properties | | 2,507 | | | 25 | | | 239,942 | | | — | | | — | | | — | | | 239,967 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 136,832 | | | 136,832 | |
Balance, September 30, 2021 | | 16,111 | | | $ | 161 | | | $ | 2,715,196 | | | — | | | $ | — | | | $ | (2,491,295) | | | $ | 224,062 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
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 | | 246 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
Restricted stock forfeitures | | (57) | | | (1) | | | 1 | | | — | | | — | | | — | | | — | |
Share repurchases | | — | | | — | | | — | | | 330 | | | (26,586) | | | — | | | (26,586) | |
Stock exchanged for tax withholding | | — | | | — | | | — | | | 94 | | | (7,442) | | | — | | | (7,442) | |
| | | | | | | | | | | | | | |
Retirement of treasury stock | | (424) | | | (4) | | | (34,024) | | | (424) | | | 34,028 | | | — | | | — | |
| | | | | | | | | | | | | | |
Share-settled equity-based compensation | | — | | | — | | | 7,630 | | | — | | | — | | | — | | | 7,630 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Performance share conversion | | 75 | | | 1 | | | (1) | | | — | | | — | | | — | | | — | |
Net income | | — | | | — | | | — | | | — | | | — | | | 513,288 | | | 513,288 | |
Balance, September 30, 2022 | | 16,915 | | | $ | 169 | | | $ | 2,762,232 | | | — | | | $ | — | | | $ | (1,761,731) | | | $ | 1,000,670 | |
| | | | | | | | | | | | | | |
| | 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 | | 233 | | | 2 | | | (2) | | | — | | | — | | | — | | | — | |
Restricted stock forfeitures | | (42) | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | | |
Stock exchanged for tax withholding | | — | | | — | | | — | | | 53 | | | (2,589) | | | — | | | (2,589) | |
Retirement of treasury stock | | (53) | | | — | | | (2,589) | | | (53) | | | 2,589 | | | — | | | — | |
Exercise of stock options | | 2 | | | — | | | 173 | | | — | | | — | | | — | | | 173 | |
Share-settled equity-based compensation | | — | | | — | | | 6,730 | | | — | | | — | | | — | | | 6,730 | |
Issuance of common stock, net of costs | | 1,438 | | | 14 | | | 72,478 | | | — | | | — | | | — | | | 72,492 | |
Equity issued for acquisitions of oil and natural gas properties | | 2,507 | | | 25 | | | 239,942 | | | — | | | — | | | — | | | 239,967 | |
Performance share conversion | | 6 | | | — | | | — | | | — | | | — | | | — | | | — | |
Net loss | | — | | | — | | | — | | | — | | | — | | | (71,268) | | | (71,268) | |
Balance, September 30, 2021 | | 16,111 | | | $ | 161 | | | $ | 2,715,196 | | | — | | | $ | — | | | $ | (2,491,295) | | | $ | 224,062 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
The accompanying notes are an integral part of these unaudited consolidated financial statements.
Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited) | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2022 | | 2021 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 513,288 | | | $ | (71,268) | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | |
Share-settled equity-based compensation, net | | 6,295 | | | 5,609 | |
Depletion, depreciation and amortization | | 226,555 | | | 140,763 | |
Impairment expense | | — | | | 1,613 | |
Gain on disposal of assets, net | | (4,952) | | | (93,454) | |
Mark-to-market on derivatives: | | | | |
Loss on derivatives, net | | 290,995 | | | 467,547 | |
Settlements paid for matured derivatives, net | | (423,668) | | | (191,507) | |
| | | | |
| | | | |
Premiums received for commodity derivatives | | — | | | 9,041 | |
Amortization of debt issuance costs | | 4,809 | | | 3,608 | |
| | | | |
| | | | |
| | | | |
Amortization of operating lease right-of-use assets | | 16,523 | | | 9,907 | |
Loss on extinguishment of debt, net | | 245 | | | — | |
Deferred income tax benefit | | (2,324) | | | (707) | |
Other, net | | 4,600 | | | 3,359 | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable, net | | (11,069) | | | (58,681) | |
Other current assets | | 7,574 | | | (3,026) | |
Other noncurrent assets, net | | 1,450 | | | (30,285) | |
Accounts payable and accrued liabilities | | 15,084 | | | 21,342 | |
Undistributed revenue and royalties | | 131,356 | | | 56,268 | |
Other current liabilities | | (41,362) | | | 11,203 | |
Other noncurrent liabilities | | (14,697) | | | 5,780 | |
Net cash provided by operating activities | | 720,702 | | | 287,112 | |
Cash flows from investing activities: | | | | |
Acquisitions of oil and natural gas properties, net | | (5,581) | | | (627,044) | |
Capital expenditures: | | | | |
| | | | |
Oil and natural gas properties | | (432,124) | | | (278,847) | |
Midstream service assets | | (1,163) | | | (2,375) | |
Other fixed assets | | (9,101) | | | (3,226) | |
Proceeds from dispositions of capital assets, net of selling costs | | 2,939 | | | 393,742 | |
Settlements received for contingent consideration | | 1,555 | | | — | |
Net cash used in investing activities | | (443,475) | | | (517,750) | |
Cash flows from financing activities: | | | | |
Borrowings on Senior Secured Credit Facility | | 335,000 | | | 425,000 | |
Payments on Senior Secured Credit Facility | | (400,000) | | | (650,000) | |
| | | | |
Extinguishment of debt | | (182,319) | | | — | |
Issuance of July 2029 Notes | | — | | | 400,000 | |
Proceeds from issuance of common stock, net of offering costs | | — | | | 72,492 | |
Share repurchases | | (26,586) | | | — | |
Stock exchanged for tax withholding | | (7,442) | | | (2,589) | |
Proceeds from exercise of stock options | | — | | | 173 | |
Payments for debt issuance costs | | (1,725) | | | (14,597) | |
Other, net | | (1,012) | | | 2,798 | |
Net cash (used in) provided by financing activities | | (284,084) | | | 233,277 | |
Net (decrease) increase in cash and cash equivalents | | (6,857) | | | 2,639 | |
Cash and cash equivalents, beginning of period | | 56,798 | | | 48,757 | |
Cash and cash equivalents, end of period | | $ | 49,941 | | | $ | 51,396 | |
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, is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties 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 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 September 30, 2022, results of operations for the three and nine months ended September 30, 2022 and 2021 and cash flows for the nine months ended September 30, 2022 and 2021. All adjustments are of a recurring nature unless otherwise disclosed herein.
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 previously reported 2022 and 2021 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 income (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 nine months ended September 30, 2022. See Note 2 in the 2021 Annual Report for discussion of significant accounting policies.
Use of estimates
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 September 30, 2022. Additionally, the Company did not adopt any new ASUs during the nine months ended September 30, 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 $210.1 million, comprised of (i) $135.3 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) $3.9 million in transaction related expenses, inclusive of 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 | | $ | 135,323 | |
Transaction costs | | 3,861 | |
| | |
Total purchase price | | $ | 210,105 | |
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 | | $ | 143,021 | |
Unevaluated properties | | 74,468 | |
Revenue suspense liabilities assumed | | (7,384) | |
Allocated purchase price | | $ | 210,105 | |
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 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 $94.3 million, net of transaction expenses of $11.6 million, on the Company's consolidated statements of operations, inclusive of 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.
Note 4—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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 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 | | $ | 529,464 | | | $ | (4,355) | | | $ | 525,109 | | | $ | 577,913 | | | $ | (6,345) | | | $ | 571,568 | |
January 2028 Notes | | 326,756 | | | (3,978) | | | 322,778 | | | 361,044 | | | (5,024) | | | 356,020 | |
July 2029 Notes | | 298,214 | | | (4,517) | | | 293,697 | | | 400,000 | | | (6,730) | | | 393,270 | |
Senior Secured Credit Facility(1) | | 40,000 | | | — | | | 40,000 | | | 105,000 | | | — | | | 105,000 | |
Total | | $ | 1,194,434 | | | $ | (12,850) | | | $ | 1,181,584 | | | $ | 1,443,957 | | | $ | (18,099) | | | $ | 1,425,858 | |
______________________________________________________________________________
(1)Debt issuance costs, net related to the Senior Secured Credit Facility of $7.8 million and $8.1 million as of September 30, 2022 and December 31, 2021, respectively, are included in "Other noncurrent assets, net" on the unaudited consolidated balance sheets.
Senior unsecured notes repurchases
The following table presents the Company's repurchases of its senior unsecured notes and the related gain or loss on extinguishment of debt during the periods presented:
| | | | | | | | | | | | | | | | | | |
(in thousands) | | Three months ended September 30, 2022 | | Nine months ended September 30, 2022 | | |
January 2025 Notes | | $ | 48,449 | | | $ | 48,449 | | | | | |
January 2028 Notes | | 28,038 | | | 34,288 | | | | | |
January 2029 Notes | | 76,010 | | | 101,786 | | | | | |
Total principal amount repurchased | | $ | 152,497 | | | $ | 184,523 | | | | | |
| | | | | | | | |
Write off of debt issuance costs | | $ | (1,958) | | | $ | (2,449) | | | | | |
Difference between consideration paid and net carrying amounts | | 2,511 | | | 2,204 | | | | | |
Gain (loss) on extinguishment of debt, net | | $ | 553 | | | $ | (245) | | | | | |
See Note 15 for the Company's additional repurchases of its senior unsecured notes subsequent to September 30, 2022.
Condensed notes to the consolidated financial statements
(Unaudited)
Senior Secured Credit Facility
On August 30, 2022, the Company entered into the Ninth Amendment to the Senior Secured Credit Facility (the "Ninth Amendment"). The Ninth Amendment, among other things, added additional capacity to making repurchases of the Company's common stock and clarified the conditions to making redemptions of the Company's debt.
As of September 30, 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 $1.25 billion and $1.0 billion, respectively, with a $40.0 million balance outstanding, and was subject to an interest rate of 5.379%. 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 December 31, 2021, the Company had a $44.1 million letter of credit outstanding under the Senior Secured Credit Facility. No letters of credit were outstanding under the Senior Secured Credit Facility as of September 30, 2022. For additional information see Note 7 in the 2021 Annual Report. See Note 15 for discussion of (i) additional repayments on and (ii) an increase in the borrowing base of the Senior Secured Credit Facility subsequent to September 30, 2022.
Note 5—Stockholders' equity
Authorized shares increase
On May 26, 2022, upon recommendation of the Company's board of directors, stockholders approved an amendment to the Company's Amended and Restated Certificate of Incorporation to increase the number of authorized shares of its common stock from 22,500,000 shares to 40,000,000 shares.
Share repurchase program
On May 31, 2022, the Company's board of directors authorized a $200.0 million share repurchase program. The repurchase program commenced in May 2022 and expires in May 2024. Share repurchases under the program may be made through a variety of methods, which may include open market purchases, including under plans complying with Rule 10b5-1 of the Exchange Act, and privately negotiated transactions. 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.
The following table presents the Company's open market repurchases of its common stock during the periods presented:
| | | | | | | | | | | | | | | | | | |
(in thousands, except for share and share price data) | | Three months ended September 30, 2022 | | | | Nine months ended September 30, 2022 |
Shares of Company common stock repurchased | | 244,687 | | | | 329,848 | | |
Average share price(1) | | $ | 71.58 | | | | | $ | 80.60 | | | |
Total | | $ | 17,515 | | | | | $ | 26,586 | | | |
______________________________________________________________________________(1)Average share price includes any commissions paid to repurchase stock.
All shares were retired upon repurchase. See Note 15 for the Company's additional repurchases of its common stock subsequent to September 30, 2022.
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 nine months ended September 30, 2021, the Company sold 1,438,105 shares of its common stock pursuant to the ATM Program for net proceeds of approximately $72.5 million, after underwriting commissions and other related expenses,
Condensed notes to the consolidated financial statements
(Unaudited)
thus completing the ATM Program. Proceeds from the share sales were utilized to reduce borrowings on the Senior Secured Credit Facility.
Note 6—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.
The following table presents activity for equity-based compensation awards for the nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | | 246 | | | — | | | 62 | | | — | | | — | |
Forfeited | | (57) | | | — | | | (16) | | | (59) | | | — | |
Vested | | (180) | | | — | | | (70) | | | — | | | (15) | |
| | | | | | | | | | |
Expired or canceled | | — | | | (2) | | | — | | | — | | | — | |
Outstanding as of September 30, 2022 | | 359 | | | 5 | | | 48 | | | 150 | | | 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 nine months ended September 30, 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 September 30, 2022, total unrecognized cost related to equity-based compensation awards was $23.2 million, of which $5.3 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 1.99 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 September 30, | | Nine months ended September 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Equity awards: | | | | | | | | |
Restricted stock awards | | $ | 1,818 | | | $ | 1,810 | | | $ | 6,428 | | | $ | 5,630 | |
Performance share awards | | 241 | | | 410 | | | 1,202 | | | 1,093 | |
Stock option awards | | — | | | — | | | — | | | 7 | |
Total share-settled equity-based compensation, gross | | $ | 2,059 | | | $ | 2,220 | | | $ | 7,630 | | | $ | 6,730 | |
Less amounts capitalized | | (421) | | | (409) | | | (1,335) | | | (1,121) | |
Total share-settled equity-based compensation, net | | $ | 1,638 | | | $ | 1,811 | | | $ | 6,295 | | | $ | 5,609 | |
Liability awards: | | | | | | | | |
Performance unit awards | | $ | (4,311) | | | $ | 1,380 | | | $ | 1,595 | | | $ | 8,552 | |
Phantom unit awards | | 199 | | | 269 | | | 1,078 | | | 1,202 | |
Total cash-settled equity-based compensation, gross | | $ | (4,112) | | | $ | 1,649 | | | $ | 2,673 | | | $ | 9,754 | |
Less amounts capitalized | | (45) | | | (60) | | | (247) | | | (353) | |
Total cash-settled equity-based compensation, net | | $ | (4,157) | | | $ | 1,589 | | | $ | 2,426 | | | $ | 9,401 | |
Total equity-based compensation, net | | $ | (2,519) | | | $ | 3,400 | | | $ | 8,721 | | | $ | 15,010 | |
Note 7—Net income (loss) per common share
Basic and diluted net income (loss) per common share are computed by dividing net income (loss) by the weighted-average common shares outstanding for the period. Diluted net income (loss) per common share reflects the potential dilution of non-vested restricted stock awards, outstanding stock option awards and non-vested performance share awards. See Note 9 in the 2021 Annual Report for additional discussion of these awards. For the nine months ended September 30, 2021, all of these awards were anti-dilutive due to the Company's net loss and, therefore, were excluded from the calculation of diluted net loss per common share.
The following table reflects the calculations of basic and diluted (i) weighted-average common shares outstanding and (ii) net income (loss) per common share for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands, except for per share data) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) (numerator) | | $ | 337,523 | | | $ | 136,832 | | | $ | 513,288 | | | $ | (71,268) | |
Weighted-average common shares outstanding (denominator): | | | | | | | | |
Basic | | 16,650 | | | 15,756 | | | 16,750 | | | 13,464 | |
Dilutive non-vested restricted stock awards | | 159 | | | 187 | | | 197 | | | — | |
| | | | | | | | |
Dilutive non-vested performance share awards(1) | | — | | | 50 | | | 16 | | | — | |
| | | | | | | | |
Diluted | | 16,809 | | | 15,993 | | | 16,963 | | | 13,464 | |
Net income (loss) per common share: | | | | | | | | |
Basic | | $ | 20.27 | | | $ | 8.68 | | | $ | 30.64 | | | $ | (5.29) | |
Diluted | | $ | 20.08 | | | $ | 8.56 | | | $ | 30.26 | | | $ | (5.29) | |
_____________________________________________________________________________(1)The dilutive effect of the non-vested performance shares for the three and nine months ended September 30, 2022 was calculated assuming the performance period ended on September 30, 2022.
Condensed notes to the consolidated financial statements
(Unaudited)
Note 8—Derivatives
The Company has two types of derivative instruments as of September 30, 2022: (i) commodity derivatives and (ii) a contingent consideration derivative. In previous periods, the Company also engaged in an interest rate swap derivative, which concluded during the quarterly period ended June 30, 2022. See (i) Note 2 in the 2021 Annual Report for discussion of the Company's significant accounting policies for derivatives and presentation and (ii) Note 9 for discussion of fair value measurement of derivatives on a recurring basis. 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 "Gain (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 gain (loss) on derivatives, net by type of derivative instrument for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Commodity | | $ | 110,356 | | | $ | (101,394) | | | $ | (285,715) | | | $ | (472,296) | |
Interest rate | | — | | | (17) | | | 14 | | | (43) | |
Contingent consideration | | (9,608) | | | 5,171 | | | (5,294) | | | 4,792 | |
Gain (loss) on derivatives, net | | $ | 100,748 | | | $ | (96,240) | | | $ | (290,995) | | | $ | (467,547) | |
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 nine months ended September 30, 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 September 30, 2022, for commodity derivatives that were entered into through September 30, 2022, for the settlement periods presented:
| | | | | | | | | | | | | | | | |
| | Remaining Year 2022 | | Year 2023 | | |
Oil: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
WTI NYMEX - Swaps: | | | | | | |
Volume (Bbl) | | 92,000 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 64.40 | | | $ | — | | | |
WTI NYMEX - Collars: | | | | | | |
Volume (Bbl) | | 1,407,600 | | | 4,362,000 | | | |
Weighted-average floor price ($/Bbl) | | $ | 72.65 | | | $ | 67.93 | | | |
Weighted-average ceiling price ($/Bbl) | | $ | 86.54 | | | $ | 82.89 | | | |
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Brent ICE - Swaps: | | | | | | |
Volume (Bbl) | | 1,039,600 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 48.34 | | | $ | — | | | |
Brent ICE - Collars: | | | | | | |
Volume (Bbl) | | 391,000 | | | — | | | |
Weighted-average floor price ($/Bbl) | | $ | 56.65 | | | $ | — | | | |
Weighted-average ceiling price ($/Bbl) | | $ | 65.44 | | | $ | — | | | |
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NGL: | | | | | | |
| | | | | | |
Purity Ethane - Swaps: | | | | | | |
Volume (Bbl) | | 386,400 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 11.42 | | | $ | — | | | |
Non-TET Propane - Swaps: | | | | | | |
Volume (Bbl) | | 294,400 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 35.91 | | | $ | — | | | |
Non-TET Normal Butane - Swaps: | | | | | | |
Volume (Bbl) | | 92,000 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 41.58 | | | $ | — | | | |
Non-TET Isobutane - Swaps: | | | | | | |
Volume (Bbl) | | 27,600 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 42.00 | | | $ | — | | | |
Non-TET Natural Gasoline - Swaps: | | | | | | |
Volume (Bbl) | | 92,000 | | | — | | | |
Weighted-average price ($/Bbl) | | $ | 60.65 | | | $ | — | | | |
| | | | | | |
Natural gas: | | | | | | |
| | | | | | |
| | | | | | |
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Henry Hub NYMEX - Swaps: | | | | | | |
Volume (MMBtu) | | 920,000 | | | — | | | |
Weighted-average price ($/MMBtu) | | $ | 2.73 | | | $ | — | | | |
Henry Hub NYMEX - Collars: | | | | | | |
Volume (MMBtu) | | 7,360,000 | | | 25,550,000 | | | |
Weighted-average floor price ($/MMBtu) | | $ | 3.09 | | | $ | 4.14 | | | |
Weighted-average ceiling price ($/MMBtu) | | $ | 3.84 | | | $ | 8.43 | | | |
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Waha Inside FERC to Henry Hub NYMEX - Basis Swaps: | | | | | | |
Volume (MMBtu) | | 7,314,000 | | | 25,550,000 | | | |
Weighted-average differential ($/MMBtu) | | $ | (0.36) | | | $ | (1.65) | | | |
Condensed notes to the consolidated financial statements
(Unaudited)
Contingent consideration
The Sixth Street PSA provides for potential contingent payments to be paid to the Company if certain cash flow targets are met related to divested oil and natural gas property operations. The Sixth Street Contingent Consideration provides the Company with the right to receive up to a maximum of $93.7 million in additional cash consideration, comprised of potential quarterly payments through June 2027 totaling up to $38.7 million and a potential balloon payment of $55.0 million in June 2027. As of September 30, 2022, the maximum remaining additional cash consideration of the contingent consideration was $90.1 million. The fair value of the Sixth Street Contingent Consideration was $35.9 million as of December 31, 2021 and $28.7 million as of September 30, 2022. See Note 3 for further discussion of the Working Interest Sale associated with the Sixth Street Contingent Consideration.
At each quarterly reporting period, the Company remeasures contingent consideration with the change in fair value recognized in "Gain (loss) on derivatives, net" under "Non-operating income (expense)" on the unaudited consolidated statements of operations.
Note 9—Fair value measurements
See the beginning of Note 11 in the 2021 Annual Report for information about the fair value hierarchy levels.
Fair value measurement on a recurring basis
See Note 8 for further discussion of the Company's derivatives, and see Note 2 in the 2021 Annual Report for the Company's significant accounting policies for derivatives.
Condensed notes to the consolidated financial statements
(Unaudited)
Balance sheet presentation
The following tables present the Company's derivatives by (i) balance sheet classification, (ii) derivative type and (iii) fair value hierarchy level, and provide a total, on a gross basis and a net basis reflected in "Derivatives" on the unaudited consolidated balance sheets as of the dates presented:
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| | September 30, 2022 |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the unaudited consolidated balance sheets |
Assets: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Commodity | | $ | — | | | $ | 49,566 | | | $ | — | | | $ | 49,566 | | | $ | (34,716) | | | $ | 14,850 | |
| | | | | | | | | | | | |
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Contingent consideration | | — | | | — | | | 4,140 | | | 4,140 | | | — | | | 4,140 | |
Noncurrent: | | | | | | | | | | | | |
Commodity | | — | | | 5,204 | | | — | | | 5,204 | | | (598) | | | 4,606 | |
| | | | | | | | | | | | |
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Contingent consideration | | — | | | — | | | 24,550 | | | 24,550 | | | — | | | 24,550 | |
Liabilities: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Commodity | | — | | | (93,479) | | | — | | | (93,479) | | | 34,716 | | | (58,763) | |
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Noncurrent: | | | | | | | | | | | | |
Commodity | | — | | | (1,364) | | | — | | | (1,364) | | | 598 | | | (766) | |
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Net derivative liability positions | | $ | — | | | $ | (40,073) | | | $ | 28,690 | | | $ | (11,383) | | | $ | — | | | $ | (11,383) | |
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| | December 31, 2021 |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total gross fair value | | Amounts offset | | Net fair value presented on the consolidated balance sheets |
Assets: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Commodity | | $ | — | | | $ | 21,671 | | | $ | — | | | $ | 21,671 | | | $ | (21,671) | | | $ | — | |
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Contingent consideration | | — | | | — | | | 4,346 | | | 4,346 | | | — | | | 4,346 | |
Noncurrent: | | | | | | | | | | | | |
Commodity | | — | | | 1,448 | | | — | | | 1,448 | | | — | | | 1,448 | |
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Contingent consideration | | — | | | — | | | 31,515 | | | 31,515 | | | — | | | 31,515 | |
Liabilities: | | | | | | | | | | | | |
Current: | | | | | | | | | | | | |
Commodity | | — | | | (201,428) | | | — | | | (201,428) | | | 21,671 | | | (179,757) | |
| | | | | | | | | | | | |
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Interest rate | | — | | | (52) | | | — | | | (52) | | | — | | | (52) | |
| | | | | | | | | | | | |
Noncurrent: | | | | | | | | | | | | |
Commodity | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | |
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Net derivative liability positions | | $ | — | | | $ | (178,361) | | | $ | 35,861 | | | $ | (142,500) | | | $ | — | | | $ | (142,500) | |
See Note 11 in the 2021 Annual Report for discussion of the significant Level 2 inputs used in the fair value mark-to-market analysis of commodity, interest rate and contingent consideration derivatives. The Company reviewed the third-party specialist's valuations of commodity, interest rate and contingent consideration derivatives, including the related inputs, and analyzed changes in fair values between reporting dates.
The Sixth Street Contingent Consideration associated with the Working Interest Sale was categorized as Level 3 of the fair value hierarchy, as the Company utilized its own cash flow projections along with a risk-adjusted discount rate generated by a third-party valuation specialist to determine the valuation. The Company reviewed the third-party specialist's valuation,
Condensed notes to the consolidated financial statements
(Unaudited)
including the related inputs, and analyzed changes in fair values between the Sixth Street Closing Date and the reporting dates. The fair value of the Sixth Street Contingent Consideration was recorded as part of the basis in the oil and natural gas properties divested and as a contingent consideration asset. At each quarterly reporting period prior to the end of the contingency period, the Company will remeasure the Sixth Street Contingent Consideration with the changes in fair value recognized in the earnings for such quarter. See Note 3 for further discussion of the Working Interest Sale associated with the Sixth Street Contingent Consideration.
The following table summarizes the changes in contingent consideration derivatives classified as Level 3 measurements for the periods presented: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Balance of Level 3 at beginning of period | | $ | 38,620 | | | $ | — | | | $ | 35,861 | | | $ | — | |
Sixth Street Contingent Consideration valuation as of Sixth Street Closing Date | | — | | | 33,832 | | | — | | | 33,832 | |
Change in Sixth Street Contingent Consideration fair value | | (9,608) | | | 5,182 | | | (5,294) | | | 5,182 | |
Settlements realized(1) | | (322) | | | — | | | (1,877) | | | — | |
Balance of Level 3 at end of period | | $ | 28,690 | | | $ | 39,014 | | | $ | 28,690 | | | $ | 39,014 | |
_____________________________________________________________________________ (1)For the nine months ended September 30, 2022, $1.6 million of realized settlements has been received and is included in "Settlements received for contingent consideration" in cash flows from investing activities on the unaudited consolidated statements of cash flows, and $0.3 million is a receivable at period end.
Items not accounted for at fair value
The carrying amounts reported on 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, 2022 | | December 31, 2021 |
(in thousands) | | Carrying amount | | Fair value(1) | | Carrying amount | | Fair value(1) |
January 2025 Notes | | $ | 529,464 | | | $ | 525,059 | | | $ | 577,913 | | | $ | 589,471 | |
January 2028 Notes | | 326,756 | | | 313,686 | | | 361,044 | | | 378,578 | |
July 2029 Notes | | 298,214 | | | 274,771 | | | 400,000 | | | 390,000 | |
Senior Secured Credit Facility | | 40,000 | | | 39,959 | | | 105,000 | | | 105,040 | |
Total | | $ | 1,194,434 | | | $ | 1,153,475 | | | $ | 1,443,957 | | | $ | 1,463,089 | |
______________________________________________________________________________
(1)The fair values of the outstanding notes were determined using the Level 2 fair value hierarchy quoted market prices for each respective instrument as of September 30, 2022 and December 31, 2021. The fair values of the outstanding debt under the Senior Secured Credit Facility was estimated utilizing the Level 2 fair value hierarchy pricing model for similar instruments as of September 30, 2022 and December 31, 2021.
Note 10—Commitments and contingencies
From time to time, the Company is subject to various legal proceedings arising in the ordinary course of business, including those that arise from interpretation of federal, state and local laws and regulations affecting the oil and natural gas industry, personal injury claims, title disputes, royalty disputes, contract claims, contamination claims relating to oil and natural gas exploration and development and environmental claims, including claims involving assets previously sold to third parties and no longer part of the Company's current operations. The Company may not have insurance coverage for some of these proceedings and failure to comply with applicable laws and regulations can result in substantial penalties. While many of
Condensed notes to the consolidated financial statements
(Unaudited)
these matters involve inherent uncertainty, as of the date hereof, the Company believes that any such legal proceedings, if ultimately decided adversely, will not have a material adverse effect on the Company's business, financial position, results of operations or liquidity. See Note 15 in the 2021 Annual Report for further discussion of litigation and environmental and federal, state and local regulations.
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. A portion of the Company's commitments are related to transportation commitments with a certain pipeline pertaining to the gathering of the Company's production from established acreage that extends into 2024. The Company was unable to satisfy a portion of this particular commitment with produced or purchased oil, therefore, the Company expensed firm transportation payments on excess capacity of $7.7 million and $2.8 million during the nine months ended September 30, 2022 and 2021, respectively, which are recorded in "Transportation and marketing expenses" on the unaudited consolidated statements of operations. The Company's estimated aggregate liability of firm transportation payments on excess capacity is $8.6 million as of September 30, 2022, and is included in "Accounts payable and accrued liabilities" on the unaudited consolidated balance sheet. As of September 30, 2022, future firm sale and transportation commitments of $171.5 million are expected to be satisfied and, as such, are not recorded as a liability on the unaudited consolidated balance sheet.
Note 11—Supplemental cash flow and non-cash information
The following table presents supplemental cash flow and non-cash information for the periods presented:
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| | Nine months ended September 30, |
(in thousands) | | 2022 | | 2021 |
Supplemental cash flow information: | | | | |
Cash paid for interest, net of $3,265 and $3,081 of capitalized interest, respectively | | $ | 130,082 | | | $ | 95,684 | |
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Supplemental non-cash operating information: | | | | |
Right-of-use assets obtained in exchange for operating lease liabilities(1) | | $ | 34,532 | | | $ | 7,532 | |
Supplemental non-cash investing information: | | | | |
Fair value of contingent consideration asset on transaction date(2) | | $ | — | | | $ | 33,832 | |
Change in accrued capital expenditures | | $ | 5,144 | | | $ | 25,380 | |
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_____________________________________________________________________________(1)See Note 5 in the 2021 Annual Report for additional discussion of the Company's leases.
(2)See Note 3 for discussion of the Company's 2021 Working Interest Sale which included contingent consideration. See Note 9 for discussion of the quarterly remeasurement of this contingent consideration.
Note 12—Income taxes
The Company is subject to federal and state income taxes and the Texas franchise tax. As of September 30, 2022, the Company had federal net operating loss ("NOL") carryforwards totaling $1.6 billion, $1.2 billion of which will begin to expire in 2031 and $366.8 million of which will not expire but may be limited in future periods, and state of Oklahoma net operating loss carryforwards totaling $34.4 million that will begin to expire in 2032. If the Company were to experience an "ownership change" as determined under Section 382 of the Internal Revenue Code, the Company's ability to offset taxable income arising after the ownership change with net operating losses arising prior to the ownership change would be limited. As of September 30, 2022, no such ownership change has occurred.
As of September 30, 2022, the Company believes it is more likely than not that a portion of the net operating loss carryforwards 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 September 30, 2022 and the Company's ability to capitalize intangible drilling costs, rather than expensing these costs and future projections of taxable income. A significant item of objective negative evidence
Condensed notes to the consolidated financial statements
(Unaudited)
considered was the cumulative historical three-year pre-tax loss and net deferred tax asset position. Such objective evidence limits the ability to consider other subjective evidence such as the Company’s potential for future growth.
As of September 30, 2022, a total valuation allowance of $325.7 million has been recorded to offset the Company's federal and Oklahoma net deferred tax assets, resulting in a $1.5 million Texas net deferred asset, which is included in "Other noncurrent assets, net" on the unaudited consolidated balance sheets.
Since September 30, 2015, the Company has recorded a full valuation allowance against its federal and Oklahoma net deferred tax position. As such, the Company's effective tax rate is 1%, due to the Texas franchise tax. The Company's effective tax rate is affected by changes in valuation allowances, recurring permanent differences and discrete items that may occur in any given year, but are not consistent from year to year. For the three and nine months ended September 30, 2022 and 2021, the Company’s items of discrete income tax expense or benefit were not material.
On August 16, 2022, the U.S. Inflation Reduction Act of 2022 (the "IRA") was signed into U.S. law. The IRA includes various tax provisions, including a 1% excise tax on stock repurchases made by publicly traded U.S. corporations, expanded tax credits for clean energy incentives and a 15% corporate alternative minimum tax that applies to certain corporations with adjusted financial statement income in excess of $1.0 billion. The Company is evaluating the IRA and its requirements, as well as the potential impact of the IRA to its business.
Note 13—Related parties
Halliburton
The Chairman of the Company's board of directors is on the board of directors of Halliburton Company ("Halliburton"). Halliburton provides drilling and completions services to the Company.
The following table presents the capital expenditures for oil and natural gas properties paid to Halliburton included in the unaudited consolidated statements of cash flows for the periods presented: | | | | | | | | | | | | | | |
| | Nine months ended September 30, |
(in thousands) | | 2022 | | 2021 |
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Capital expenditures for oil and natural gas properties | | $ | 78,749 | | | $ | 42,074 | |
Note 14—Organizational restructurings
On August 24, 2022, the Company announced the departure of the Company's Senior Vice President and Chief Operating Officer. In connection with the departure, the Company incurred one-time charges for certain payments and benefits of $10.4 million during the three months ended September 30, 2022. These charges were recorded as "Organizational restructuring expenses" on the unaudited consolidated statements of operations. All equity-based compensation awards held by the Company's Senior Vice President and Chief Operating Officer were forfeited and the corresponding equity-based compensation totaling $4.9 million previously recorded was reversed in "General and administrative" on the unaudited consolidated statements of operations during the three months ended September 30, 2022.
On June 29, 2021 (the "Effective Date"), the Company committed to a company-wide reorganization effort (the "Reorganization Plan") that included a workforce reduction of 14 individuals, or approximately 5% of the workforce. The reduction in workforce was communicated to employees on the Effective Date and implemented immediately, subject to certain administrative procedures. The Company put the Reorganization Plan in place in order to better position the Company for the future. In connection with the Reorganization Plan, the Company incurred an aggregate of $9.8 million of one-time charges during the nine months ended September 30, 2021 comprising of compensation, tax, professional, outplacement and insurance related expenses. All equity-based compensation awards held by the affected employees were forfeited and the corresponding equity-based compensation totaling $1.1 million previously recorded was reversed in "General and administrative" on the unaudited consolidated statements of operations during the nine months ended September 30, 2021.
Condensed notes to the consolidated financial statements
(Unaudited)
Note 15—Subsequent events
NOG Working Interest Sale
On August 16, 2022, the Company entered into a purchase and sale agreement with Northern Oil and Gas, Inc. ("NOG"), pursuant to which the Company agreed to sell to NOG the Company’s working interests in certain specified non-operated oil and gas properties for an aggregate purchase price of $110.0 million, subject to certain customary adjustments (the "NOG Working Interest Sale"). The NOG Working Interest Sale closed on October 3, 2022, with an effective date of August 1, 2022.
Senior Secured Credit Facility
On October 7, 2022, the Company repaid $40.0 million on the Senior Secured Credit Facility. As a result, there was no outstanding balance under the Senior Secured Credit Facility as of November 2, 2022. See Note 4 for additional discussion of the Senior Secured Credit Facility.
On November 1, 2022, the Company entered into the Tenth Amendment (the "Tenth Amendment") to the Senior Secured Credit Facility. The Tenth Amendment, among other things, (i) increases the borrowing base from $1.25 billion to $1.3 billion, (ii) permits additional senior note buybacks and other restricted payments, subject to certain conditions; and (iii) makes technical changes to permit the Company to potentially incur term loans, subject to terms to be agreed with lenders making such term loans, in addition to revolving loans, in each case, subject to the terms of the Tenth Amendment and the Senior Secured Credit Facility.
Senior unsecured notes repurchases
Subsequent to September 30, 2022, the Company repurchased $50.9 million and $9.9 million in aggregate principal amount of the January 2025 Notes and January 2028 Notes, respectively, through November 2, 2022. See Note 4 for additional discussion of the Company's senior unsecured notes repurchases.
Share repurchase program
Subsequent to September 30, 2022, the Company repurchased 112,049 shares of its common stock on the open market at a weighted-average price of $66.68 per common share for a total of $7.5 million under the share repurchase program through November 2, 2022. See Note 5 for additional discussion of the Company's share repurchases under this program.
Commodity derivatives
The following table summarizes the Company's open oil derivative positions as of September 30, 2022, updated for derivative transactions entered into from September 30, 2022 through November 2, 2022, for the settlement periods presented:
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| | Remaining Year 2022 | | Year 2023 |
Oil: | | | | |
WTI NYMEX - Swaps: | | | | |
Volume (Bbl) | | 92,000 | | | — | |
Weighted-average price ($/Bbl) | | $ | 64.40 | | | $ | — | |
WTI NYMEX - Collars: | | | | |
Volume (Bbl) | | 1,407,600 | | | 4,727,000 | |
Weighted-average floor price ($/Bbl) | | $ | 72.65 | | | $ | 68.09 | |
Weighted-average ceiling price ($/Bbl) | | $ | 86.54 | | | $ | 83.81 | |
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See Note 8 for additional discussion regarding the Company's derivatives. There has been no other derivative activity subsequent to September 30, 2022.
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 is for the three and nine months ended September 30, 2022 and 2021, and 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 2021 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" and "Part II, Item 1A. Risk Factors." 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. Unless otherwise specified, references to "average sales price" refer to average sales price excluding the effects of our derivative transactions. 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 in the Permian Basin of West Texas. The oil and liquids-rich Permian Basin is characterized by multiple target horizons, extensive production histories, long-lived reserves, high drilling success rates and high initial production rates. We have grown primarily through our drilling program, coupled with select strategic acquisitions. As of September 30, 2022, we had assembled 165,359 net acres in the Permian Basin.
We are currently operating two drilling rigs and one completions crew which we expect to maintain for the remainder of 2022. Our planned capital expenditures for fourth-quarter 2022 are expected to be approximately $135.0 million to $145.0 million. However, we will continue to monitor commodity prices and service costs and adjust activity levels in order to proactively manage our cash flows and preserve liquidity. Below is a summary and comparative analysis of our financial and operating performance for the periods presented:
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| | Three months ended September 30, | | | | 2022 compared to 2021 | | |
(in thousands) | | 2022 | | 2021 | | | | | | Change (#) | | Change (%) | | | | |
Oil sales volumes (MBbl) | | 3,219 | | | 3,250 | | | | | | | (31) | | | (1) | % | | | | |
Oil equivalents sales volumes (MBOE) | | 7,324 | | | 7,057 | | | | | | | 267 | | | 4 | % | | | | |
Oil, NGL and natural gas sales(1) | | $ | 444,948 | | | $ | 311,276 | | | | | | | $ | 133,672 | | | 43 | % | | | | |
Net income | | $ | 337,523 | | | $ | 136,832 | | | | | | | $ | 200,691 | | | 147 | % | | | | |
Net cash provided by operating activities | | $ | 182,615 | | | $ | 97,674 | | | | | | | $ | 84,941 | | | 87 | % | | | | |
Free Cash Flow (a non-GAAP financial measure)(2) | | $ | 51,361 | | | $ | (19,895) | | | | | | | $ | 71,256 | | | 358 | % | | | | |
Adjusted EBITDA (a non-GAAP financial measure)(2) | | $ | 222,790 | | | $ | 133,441 | | | | | | | $ | 89,349 | | | 67 | % | | | | |
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_____________________________________________________________________________(1)Our oil, NGL and natural gas sales increased as a result of a 38% increase in average sales price per BOE.
(2)See pages 37-39 for discussion and calculations of these non-GAAP financial measures.
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| | Nine months ended September 30, | | | | 2022 compared to 2021 | | |
(in thousands) | | 2022 | | 2021 | | | | | | Change (#) | | Change (%) | | | | |
Oil sales volumes (MBbl) | | 10,536 | | | 7,840 | | | | | | | 2,696 | | | 34 | % | | | | |
Oil equivalents sales volumes (MBOE) | | 22,905 | | | 21,985 | | | | | | | 920 | | | 4 | % | | | | |
Oil, NGL and natural gas sales(1) | | $ | 1,445,605 | | | $ | 746,059 | | | | | | | $ | 699,546 | | | 94 | % | | | | |
Net income (loss) | | $ | 513,288 | | | $ | (71,268) | | | | | | | $ | 584,556 | | | 820 | % | | | | |
Net cash provided by operating activities | | $ | 720,702 | | | $ | 287,112 | | | | | | | $ | 433,590 | | | 151 | % | | | | |
Free Cash Flow (a non-GAAP financial measure)(2) | | $ | 183,404 | | | $ | (27,585) | | | | | | | $ | 210,989 | | | 765 | % | | | | |
Adjusted EBITDA (a non-GAAP financial measure)(2) | | $ | 722,377 | | | $ | 323,755 | | | | | | | $ | 398,622 | | | 123 | % | | | | |
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_____________________________________________________________________________(1)Our oil, NGL and natural gas sales increased as a result of a 86% increase in average sales price per BOE and a 34% increase in oil sales volumes.
(2)See pages 37-39 for discussion and calculations of these non-GAAP financial measures.
Recent developments
Volatility in commodity prices
Commodity prices remained strong during the third quarter of 2022, sustaining levels reached at the end of the first quarter as increased commodity demand has continued to outpace relative supply. While recessionary concerns have placed some downward pressure on commodity prices, causing oil and gas prices to retreat from their earlier highs in 2022, worldwide commodity demand continues to exceed pre-COVID-19 pandemic levels. Although supply has increased, it has been constrained and pricing has been affected, in part, by the impact of the Russian-Ukrainian military conflict on global commodity and financial markets, and the resulting effect of sanctions by the European Union, United Kingdom and U.S. on imports of oil and gas from Russia, as well as a recent announcement by OPEC+ of oil production cuts of two million barrels per day beginning in November of 2022. However, because any of the above factors could suddenly change or reverse, global commodity and financial markets remain subject to heightened levels of uncertainty and volatility, and future disruptions and industry-specific impacts could result.
Rising inflation and interest rates
Reversing a trend experienced in 2020 in connection with the impact of COVID-19 and historically low crude oil prices, drilling and completions costs and costs of oilfield services, equipment, and materials began to rise in 2021 and have continued to persist at elevated levels in 2022 in conjunction with the significant increase in commodity prices, labor tightening, supply chain disruptions caused by the COVID-19 pandemic and the resulting limited availability of certain materials and products manufactured using such materials and heightened levels of inflation. In addition to the effect of such inflationary pressures on our operating costs, rising interest rates as a result of the Federal Reserve’s tightening monetary policy have the potential to increase our borrowing costs on debt under our Senior Secured Credit Facility. We remain committed to our ongoing efforts to increase the efficiency of our operations and improve costs, which may, in part, offset cost increases from inflation and reduce our borrowing needs.
See Note 15 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for discussion of recent developments that have occurred subsequent to September 30, 2022.
Pricing and reserves
Our results of operations are heavily influenced by oil, NGL and natural gas prices. Historically, commodity prices have experienced significant fluctuations; however, the volatility in prices has substantially increased in recent years. We maintain an active, multi-year commodity derivatives strategy to minimize commodity price volatility and support cash flows needed for operations. We have entered into a number of commodity 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." See Notes 8 and 9 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our commodity derivatives. Notwithstanding our derivatives strategy, another collapse in commodity prices may affect the economic viability of, and our ability to fund, our drilling projects, as well as the economic recovery of oil, NGL and natural gas reserves. See "Critical accounting estimates" in "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" of the 2021 Annual Report for further discussion of our oil, NGL and natural gas reserve quantities and standardized measure of discounted future net cash flows.
Our reserves are reported in three streams: oil, NGL and natural gas. The Realized Prices, which are utilized to value our proved reserves and calculated using the average first-day-of-the-month prices for each month within the 12-month period prior to the end of the reporting period, adjusted for factors affecting price received at the delivery point, as of September 30, 2022 were $92.54 for oil, $32.38 for NGL and $4.34 for natural gas. The unamortized cost of evaluated oil and natural gas properties being depleted did not exceed the full cost ceiling as of September 30, 2022 and September 30, 2021. As such, no full cost ceiling impairments were recorded during the nine months ending September 30, 2022 and September 30, 2021. Additionally, if prices remain at current levels we do not anticipate recording any full cost ceiling impairments for the foreseeable future. See Notes 2 and 6 in our 2021 Annual Report for discussion of the full cost method of accounting and our Realized Prices.
Results of operations
Revenues
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 U.S. and do not include the effects of derivatives. See Note 2 in our 2021 Annual Report for additional information regarding our revenue recognition policies.
The following tables present our sources of revenue as a percentage of total revenues for the periods presented and the corresponding changes for such periods:
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| | Three months ended September 30, | | 2022 compared to 2021 | | |
| | 2022 | | 2021 | | Change (#) | | Change (%) | | | | |
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Oil sales | | 67 | % | | 60 | % | | 7 | | | 12 | % | | | | |
NGL sales | | 13 | % | | 13 | % | | — | | | — | % | | | | |
Natural gas sales | | 16 | % | | 10 | % | | 6 | | | 60 | % | | | | |
Midstream service revenues | | — | % | | — | % | | — | | | — | % | | | | |
Sales of purchased oil | | 4 | % | | 17 | % | | (13) | | | (76) | % | | | | |
Total | | 100 | % | | 100 | % | | | | | | | | |
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| | 2022 | | 2021 | | Change (#) | | Change (%) | | | | |
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Oil sales | | 69 | % | | 56 | % | | 13 | | | 23 | % | | | | |
NGL sales | | 13 | % | | 14 | % | | (1) | | | (7) | % | | | | |
Natural gas sales | | 11 | % | | 11 | % | | — | | | — | % | | | | |
Midstream service revenues | | — | % | | — | % | | — | | | — | % | | | | |
Sales of purchased oil | | 7 | % | | 19 | % | | (12) | | | (63) | % | | | | |
Total | | 100 | % | | 100 | % | | | | | | | | |
Oil, NGL and natural gas sales volumes, revenues and prices
The following tables present information regarding our oil, NGL and natural gas sales volumes, sales revenues and average sales prices for the periods presented and the corresponding changes for such periods:
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| | | | Three months ended September 30, | | 2022 compared to 2021 |
| | | | | | 2022 | | 2021 | | Change (#) | | Change (%) |
Sales volumes: | | | | | | | | | | | | |
Oil (MBbl) | | | | | | 3,219 | | | 3,250 | | | (31) | | | (1) | % |
NGL (MBbl) | | | | | | 2,034 | | | 1,830 | | | 204 | | | 11 | % |
Natural gas (MMcf) | | | | | | 12,430 | | | 11,860 | | | 570 | | | 5 | % |
Oil equivalents (MBOE)(1)(2) | | | | | | 7,324 | | | 7,057 | | | 267 | | | 4 | % |
Average daily oil equivalent sales volumes (BOE/D)(2) | | | | | | 79,613 | | | 76,703 | | | 2,910 | | | 4 | % |
Average daily oil sales volumes (Bbl/D)(2) | | | | | | 34,994 | | | 35,329 | | | (335) | | | (1) | % |
Sales revenues (in thousands): | | | | | | | | | | | | |
Oil | | | | | | $ | 311,740 | | | $ | 229,329 | | | $ | 82,411 | | | 36 | % |
NGL | | | | | | 59,377 | | | 47,949 | | | 11,428 | | | 24 | % |
Natural gas | | | | | | 73,831 | | | 33,998 | | | 39,833 | | | 117 | % |
Total oil, NGL and natural gas sales revenues | | | | | | $ | 444,948 | | | $ | 311,276 | | | $ | 133,672 | | | 43 | % |
Average sales prices(2): | | | | | | | | | | | | |
Oil ($/Bbl)(3) | | | | | | $ | 96.83 | | | $ | 70.56 | | | $ | 26.27 | | | 37 | % |
NGL ($/Bbl)(3) | | | | | | $ | 29.20 | | | $ | 26.20 | | | $ | 3.00 | | | 11 | % |
Natural gas ($/Mcf)(3) | | | | | | $ | 5.94 | | | $ | 2.87 | | | $ | 3.07 | | | 107 | % |
Average sales price ($/BOE)(3) | | | | | | $ | 60.75 | | | $ | 44.11 | | | $ | 16.64 | | | 38 | % |
Oil, with commodity derivatives ($/Bbl)(4) | | | | | | $ | 71.09 | | | $ | 53.94 | | | $ | 17.15 | | | 32 | % |
NGL, with commodity derivatives ($/Bbl)(4) | | | | | | $ | 24.47 | | | $ | 9.31 | | | $ | 15.16 | | | 163 | % |
Natural gas, with commodity derivatives ($/Mcf)(4) | | | | | | $ | 3.35 | | | $ | 1.45 | | | $ | 1.90 | | | 131 | % |
Average sales price, with commodity derivatives ($/BOE)(4) | | | | | | $ | 43.74 | | | $ | 29.70 | | | $ | 14.04 | | | 47 | % |
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(1)BOE is calculated using a conversion rate of six Mcf per one Bbl.
(2)The numbers presented in the three months ended September 30, 2022 and 2021 columns are based on actual amounts and are not calculated using the rounded numbers presented in the table above or the table below.
(3)Price reflects the average of actual sales prices received when control passes to the purchaser/customer adjusted for quality, certain transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the delivery point.
(4)Price reflects the after-effects of our commodity derivative transactions on our average sales prices. Our calculation of such after-effects includes settlements of matured commodity derivatives during the respective periods and an adjustment to reflect premiums incurred previously or upon settlement that are attributable to commodity derivatives that settled during the respective periods.
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| | | | Nine months ended September 30, | | 2022 compared to 2021 |
| | | | | | 2022 | | 2021 | | Change (#) | | Change (%) |
Sales volumes: | | | | | | | | | | | | |
Oil (MBbl) | | | | | | 10,536 | | | 7,840 | | | 2,696 | | | 34 | % |
NGL (MBbl) | | | | | | 6,128 | | | 6,702 | | | (574) | | | (9) | % |
Natural gas (MMcf) | | | | | | 37,447 | | | 44,659 | | | (7,212) | | | (16) | % |
Oil equivalents (MBOE)(1)(2) | | | | | | 22,905 | | | 21,985 | | | 920 | | | 4 | % |
Average daily oil equivalent sales volumes (BOE/D)(2) | | | | | | 83,901 | | | 80,530 | | | 3,371 | | | 4 | % |
Average daily oil sales volumes (Bbl/D)(2) | | | | | | 38,594 | | | 28,717 | | | 9,877 | | | 34 | % |
Sales revenues (in thousands): | | | | | | | | | | | | |
Oil | | | | | | $ | 1,069,542 | | | $ | 514,752 | | | $ | 554,790 | | | 108 | % |
NGL | | | | | | 197,037 | | | 133,121 | | | 63,916 | | | 48 | % |
Natural gas | | | | | | 179,026 | | | 98,186 | | | 80,840 | | | 82 | % |
Total oil, NGL and natural gas sales revenues | | | | | | $ | 1,445,605 | | | $ | 746,059 | | | $ | 699,546 | | | 94 | % |
Average sales prices(2): | | | | | | | | | | | | |
Oil ($/Bbl)(3) | | | | | | $ | 101.51 | | | $ | 65.66 | | | $ | 35.85 | | | 55 | % |
NGL ($/Bbl)(3) | | | | | | $ | 32.16 | | | $ | 19.86 | | | $ | 12.30 | | | 62 | % |
Natural gas ($/Mcf)(3) | | | | | | $ | 4.78 | | | $ | 2.20 | | | $ | 2.58 | | | 117 | % |
Average sales price ($/BOE)(3) | | | | | | $ | 63.11 | | | $ | 33.94 | | | $ | 29.17 | | | 86 | % |
Oil, with commodity derivatives ($/Bbl)(4) | | | | | | $ | 71.03 | | | $ | 49.33 | | | $ | 21.70 | | | 44 | % |
NGL, with commodity derivatives ($/Bbl)(4) | | | | | | $ | 25.93 | | | $ | 10.40 | | | $ | 15.53 | | | 149 | % |
Natural gas, with commodity derivatives ($/Mcf)(4) | | | | | | $ | 3.05 | | | $ | 1.53 | | | $ | 1.52 | | | 99 | % |
Average sales price, with commodity derivatives ($/BOE)(4) | | | | | | $ | 44.60 | | | $ | 23.86 | | | $ | 20.74 | | | 87 | % |
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(1)BOE is calculated using a conversion rate of six Mcf per one Bbl.
(2)The numbers presented in the nine months ended September 30, 2022 and 2021 columns are based on actual amounts and are not calculated using the rounded numbers presented in the table above or the table below.
(3)Price reflects the average of actual sales prices received when control passes to the purchaser/customer adjusted for quality, certain transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the delivery point.
(4)Price reflects the after-effects of our commodity derivative transactions on our average sales prices. Our calculation of such after-effects includes settlements of matured commodity derivatives during the respective periods and an adjustment to reflect premiums incurred previously or upon settlement that are attributable to commodity derivatives that settled during the respective periods.
The following tables present net settlements paid for matured commodity derivatives and net premiums paid previously or upon settlement attributable to commodity derivatives that matured during the periods utilized in our calculation of the average sales prices, with commodity derivatives, for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | 2022 compared to 2021 | |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) | |
Net settlements paid for matured commodity derivatives: | | | | | | | | | |
Oil | | $ | (82,862) | | | $ | (43,838) | | | $ | (39,024) | | | (89) | % | |
NGL | | (9,618) | | | (30,905) | | | 21,287 | | | 69 | % | |
Natural gas | | (32,131) | | | (16,747) | | | (15,384) | | | (92) | % | |
Total | | $ | (124,611) | | | $ | (91,490) | | | $ | (33,121) | | | (36) | % | |
Net premiums paid previously or upon settlement attributable to commodity derivatives that matured during the respective period: | | | | | | | | | |
Oil | | $ | — | | | $ | (10,182) | | | $ | 10,182 | | | 100 | % | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | 2022 compared to 2021 | |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) | |
Net settlements paid for matured commodity derivatives: | | | | | | | | | |
Oil | | $ | (321,106) | | | $ | (96,675) | | | $ | (224,431) | | | (232) | % | |
NGL | | (38,152) | | | (63,434) | | | 25,282 | | | 40 | % | |
Natural gas | | (64,694) | | | (30,046) | | | (34,648) | | | (115) | % | |
Total | | $ | (423,952) | | | $ | (190,155) | | | $ | (233,797) | | | (123) | % | |
Net premiums paid previously or upon settlement attributable to commodity derivatives that matured during the respective period: | | | | | | | | | |
Oil | | $ | — | | | $ | (31,370) | | | $ | 31,370 | | | 100 | % | |
| | | | | | | | | |
| | | | | | | | | |
Changes in average sales prices and sales volumes caused the following changes to our oil, NGL and natural gas revenues between the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Oil | | NGL | | Natural gas | | Total |
Third-quarter 2021 Revenues | | $ | 229,329 | | | $ | 47,949 | | | $ | 33,998 | |
| $ | 311,276 | |
Effect of changes in average sales prices | | 84,586 | | | 6,095 | | | 38,199 | | | 128,880 | |
Effect of changes in sales volumes | | (2,175) | | | 5,333 | | | 1,634 | | | 4,792 | |
| | | | | | | | |
Third-quarter 2022 Revenues | | $ | 311,740 | | | $ | 59,377 | | | $ | 73,831 | | | $ | 444,948 | |
Change ($) | | $ | 82,411 | | | $ | 11,428 | | | $ | 39,833 | | | $ | 133,672 | |
Change (%) | | 36 | % | | 24 | % | | 117 | % | | 43 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Oil | | NGL | | Natural gas | | Total |
Third-quarter year-to-date 2021 Revenues | | $ | 514,752 | | | $ | 133,121 | | | $ | 98,186 | |
| $ | 746,059 | |
Effect of changes in average sales prices | | 377,743 | | | 75,324 | | | 96,696 | | | 549,763 | |
Effect of changes in sales volumes | | 177,047 | | | (11,408) | | | (15,856) | | | 149,783 | |
| | | | | | | | |
Third-quarter year-to-date 2022 Revenues | | $ | 1,069,542 | | | $ | 197,037 | | | $ | 179,026 | | | $ | 1,445,605 | |
Change ($) | | $ | 554,790 | | | $ | 63,916 | | | $ | 80,840 | | | $ | 699,546 | |
Change (%) | | 108 | % | | 48 | % | | 82 | % | | 94 | % |
The increase in our third-quarter 2022 oil revenues as compared to the same period in 2021 is primarily due to an increase in oil price. The increase in our third-quarter year-to-date 2022 oil revenues as compared to the same period in 2021 is primarily due to (i) an increase in oil price and (ii) the Sabalo/Shad Acquisition and Pioneer Acquisition, both of which occurred during the second half of 2021, and the related increase in our oil sales volumes.
The increase in our third-quarter 2022 NGL and natural gas revenues as compared to the same period in 2021 is primarily due to increases in NGL and natural gas prices. The increase in our third-quarter year-to-date 2022 NGL and natural gas revenues as compared to the same period in 2021 is primarily due to increases in NGL and natural gas prices, partially offset by the Working Interest Sale, which occurred during the second half of 2021, and the related decrease in our NGL and natural gas sales volumes.
Sales of purchased oil. Sales of purchased oil are a function of the volumes and prices of purchased oil sold to customers and are offset by the volumes and costs of purchased oil. During the three and nine months ended September 30, 2022, we were a firm shipper on the Gray Oak pipeline and we utilized purchased oil to fulfill portions of our commitments. In previous periods, we also utilized purchased oil to fulfill portions of our Bridgetex pipeline commitment, which ended during the first quarter of 2022. The continuance of this practice in the future is based upon, among other factors, our pipeline capacity as a firm shipper and the quantity of our lease production which may contribute to our pipeline commitments. Sales of purchased oil decreased during the three and nine months ended September 30, 2022 compared to the same periods in 2021 primarily due to a decrease in the volumes of purchased oil as our Bridgetex pipeline commitment ended during the first quarter of 2022, partially offset by an increase in sales prices.
The following tables present sales of purchased oil for the periods presented and the corresponding changes for such periods:
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| | Three months ended September 30, | | | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | | | | | Change ($) | | Change (%) |
| | | | | | | | | | | | |
Sales of purchased oil | | $ | 18,371 | | | $ | 66,235 | | | | | | | $ | (47,864) | | | (72) | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | | | | | Change ($) | | Change (%) |
| | | | | | | | | | | | |
Sales of purchased oil | | $ | 106,030 | | | $ | 173,500 | | | | | | | $ | (67,470) | | | (39) | % |
Costs and expenses
The following tables present information regarding costs and expenses and selected average costs and expenses per BOE sold for the periods presented and the corresponding changes for such periods:
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| | Three months ended September 30, | | 2022 compared to 2021 |
(in thousands except for per BOE sold data) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Costs and expenses: | | | | | | | | |
Lease operating expenses | | $ | 44,246 | | | $ | 29,837 | | | $ | 14,409 | | | 48 | % |
Production and ad valorem taxes | | 29,024 | | | 17,937 | | | 11,087 | | | 62 | % |
Transportation and marketing expenses | | 13,285 | | | 11,660 | | | 1,625 | | | 14 | % |
Midstream service expenses | | 769 | | | 1,014 | | | (245) | | | (24) | % |
Costs of purchased oil | | 18,772 | | | 68,805 | | | (50,033) | | | (73) | % |
| | | | | | | | |
General and administrative (excluding LTIP) | | 14,831 | | | 11,332 | | | 3,499 | | | 31 | % |
General and administrative (LTIP): | | | | | | | | |
LTIP cash | | (3,782) | | | 2,065 | | | (5,847) | | | (283) | % |
LTIP non-cash | | 808 | | | 1,611 | | | (803) | | | (50) | % |
Organizational restructuring expenses | | 10,420 | | | — | | | 10,420 | | | 100 | % |
| | | | | | | | |
| | | | | | | | |
Depletion, depreciation and amortization | | 74,928 | | | 62,678 | | | 12,250 | | | 20 | % |
| | | | | | | | |
Other operating expense, net | | 1,772 | | | 1,798 | | | (26) | | | (1) | % |
Total costs and expenses | | $ | 205,073 | | | $ | 208,737 | | | $ | (3,664) | | | (2) | % |
Gain on disposal of assets, net | | 4,282 | | | 95,201 | | | (90,919) | | | (96) | % |
Selected average costs and expenses per BOE sold(1): | | | | | | | | |
Lease operating expenses | | $ | 6.04 | | | $ | 4.23 | | | $ | 1.81 | | | 43 | % |
Production and ad valorem taxes | | 3.96 | | | 2.54 | | | 1.42 | | | 56 | % |
Transportation and marketing expenses | | 1.81 | | | 1.65 | | | 0.16 | | | 10 | % |
General and administrative (excluding LTIP) | | 2.02 | | | 1.61 | | | 0.41 | | | 25 | % |
Total selected operating expenses | | $ | 13.83 | | | $ | 10.03 | | | $ | 3.80 | | | 38 | % |
General and administrative (LTIP): | | | | | | | | |
LTIP cash | | $ | (0.52) | | | $ | 0.29 | | | $ | (0.81) | | | (279) | % |
LTIP non-cash | | $ | 0.11 | | | $ | 0.23 | | | $ | (0.12) | | | (52) | % |
Depletion, depreciation and amortization | | $ | 10.23 | | | $ | 8.88 | | | $ | 1.35 | | | 15 | % |
_____________________________________________________________________________
(1)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.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | 2022 compared to 2021 |
(in thousands except for per BOE sold data) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Costs and expenses: | | | | | | | | |
Lease operating expenses | | $ | 127,136 | | | $ | 68,526 | | | $ | 58,610 | | | 86 | % |
Production and ad valorem taxes | | 89,512 | | | 45,957 | | | 43,555 | | | 95 | % |
Transportation and marketing expenses | | 39,022 | | | 34,477 | | | 4,545 | | | 13 | % |
Midstream service expenses | | 3,916 | | | 2,572 | | | 1,344 | | | 52 | % |
Costs of purchased oil | | 108,516 | | | 183,458 | | | (74,942) | | | (41) | % |
| | | | | | | | |
General and administrative (excluding LTIP) | | 41,729 | | | 33,479 | | | 8,250 | | | 25 | % |
General and administrative (LTIP): | | | | | | | | |
LTIP cash | | 3,606 | | | 10,905 | | | (7,299) | | | (67) | % |
LTIP non-cash | | 5,465 | | | 4,798 | | | 667 | | | 14 | % |
Organizational restructuring expenses | | 10,420 | | | 9,800 | | | 620 | | | 6 | % |
| | | | | | | | |
| | | | | | | | |
Depletion, depreciation and amortization | | 226,555 | | | 140,763 | | | 85,792 | | | 61 | % |
Impairment expense | | — | | | 1,613 | | | (1,613) | | | (100) | % |
Other operating expense, net | | 2,947 | | | 4,099 | | | (1,152) | | | (28) | % |
Total costs and expenses | | $ | 658,824 | | | $ | 540,447 | | | $ | 118,377 | | | 22 | % |
Gain on disposal of assets, net | | 4,952 | | | 93,454 | | | (88,502) | | | (95) | % |
Selected average costs and expenses per BOE sold(1): | | | | | | | | |
Lease operating expenses | | $ | 5.55 | | | $ | 3.12 | | | $ | 2.43 | | | 78 | % |
Production and ad valorem taxes | | 3.91 | | | 2.09 | | | 1.82 | | | 87 | % |
Transportation and marketing expenses | | 1.70 | | | 1.57 | | | 0.13 | | | 8 | % |
General and administrative (excluding LTIP) | | 1.82 | | | 1.52 | | | 0.30 | | | 20 | % |
Total selected operating expenses | | $ | 12.98 | | | $ | 8.30 | | | $ | 4.68 | | | 56 | % |
General and administrative (LTIP): | | | | | | | | |
LTIP cash | | $ | 0.16 | | | $ | 0.50 | | | $ | (0.34) | | | (68) | % |
LTIP non-cash | | $ | 0.24 | | | $ | 0.22 | | | $ | 0.02 | | | 9 | % |
Depletion, depreciation and amortization | | $ | 9.89 | | | $ | 6.40 | | | $ | 3.49 | | | 55 | % |
_____________________________________________________________________________ (1)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 ("LOE"). LOE, which includes workover expenses, increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021. LOE are daily expenses incurred to bring oil, NGL and natural gas out of the ground and to market, together with the daily expenses incurred to maintain our producing properties. Such costs also include maintenance, repairs and non-routine workover expenses related to our oil and natural gas properties. LOE increased during 2022 due to inflationary pressures and costs associated with integrating our assets from the Sabalo/Shad Acquisition and Pioneer Acquisition, primarily driven by costs related to artificial lift and flowback management. We continue to focus on economic efficiencies associated with the usage and procurement of products and services related to LOE.Total LOE is expected to remain relatively flat for the remainder of the year, with unit LOE increasing as total volumes are expected to decline.
Production and ad valorem taxes. Production and ad valorem taxes increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021, due to increased oil, NGL and natural gas sales revenues. Production taxes are based on and fluctuate in proportion to our oil, NGL and natural gas sales revenues, and are established by federal, state or local taxing authorities. We take advantage of all credits and exemptions in our various taxing jurisdictions. 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 increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021. These are expenses incurred for the delivery of produced oil to customers in the U.S. Gulf Coast market via the Gray Oak pipeline and, in previous periods, the Bridgetex pipeline. We ship the majority of our produced oil to the U.S. Gulf Coast, which we believe provides a long-term pricing advantage versus the Midland market. Additionally, firm transportation payments on excess pipeline capacity associated with transportation agreements are included in transportation and marketing expenses. See Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our transportation commitments.
Costs of purchased oil. During the three and nine months ended September 30, 2022, we were a firm shipper on the Gray Oak pipeline and we utilized purchased oil to fulfill portions of our commitments. In previous periods, we also utilized purchased oil to fulfill portions of our Bridgetex pipeline commitment, which ended during the first quarter of 2022. In the event our long-haul transportation capacity on the Gray Oak pipeline is expected to exceed our net production, consistent with our historic practice, we expect to continue to purchase third-party oil at the trading hubs to satisfy the deficit in our associated long-haul transportation commitments. Costs of purchased oil decreased for the three and nine months ended September 30, 2022, compared to the same periods in 2021 primarily due to a decrease in the volumes of purchased oil on pipelines as our Bridgetex pipeline commitment ended during the first quarter of 2022, partially offset by an increase in sales prices.
General and administrative ("G&A"). G&A, excluding employee compensation expenses from our long-term incentive plan ("LTIP"), increased for the three and nine months ended September 30, 2022, compared to the same period in 2021, mainly due to (i) increases in workforce and professional expenses and (ii) inflationary pressures.
LTIP cash expense decreased for the three and nine months ended September 30, 2022, compared to the same periods in 2021. These decreases are primarily due to (i) forfeitures of cash-settled performance unit awards in connection with the departure of our former Senior Vice President and Chief Operating Officer during the third quarter of 2022 and (ii) a decrease in the fair values of our cash-settled LTIP awards during the third quarter of 2022, mainly due to the performance of our stock during the period.
LTIP non-cash expense decreased for the three months ended September 30, 2022, compared to the same period in 2021, mainly due to forfeitures of share-settled LTIP awards in connection with the departure of our former Senior Vice President and Chief Operating Officer during the third quarter of 2022. LTIP non-cash expense increased for the nine months ended September 30, 2022, compared to the same period in 2021, mainly due to new share-settled LTIP awards granted to our employees during the second half of 2021 and the first half of 2022, and partially offset by forfeitures of share-settled LTIP awards in connection with the departure of our former Senior Vice President and Chief Operating Officer during the third quarter of 2022. See Note 6 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our equity-based compensation.
Organizational restructuring expenses. Organizational restructuring expenses increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021. Such expenses were incurred for (i) the departure our former Senior Vice President and Chief Operating Officer during the third quarter of 2022 and (ii) a workforce reduction during the second quarter of 2021. See Note 14 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for information regarding our organizational restructurings.
Gain on disposal of assets, net. Gain on disposal of assets, net, decreased for the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to the gain recorded in third-quarter 2021 in connection with the Working Interest Sale. See Note 3 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion regarding the gain on the Working Interest Sale. From time to time, we dispose of inventory, midstream service assets and other fixed assets. The associated gain or loss recorded during the period fluctuates depending on the volume of the assets disposed, their associated net book value and, in the case of a disposal by sale, the sale price.
Depletion, depreciation and amortization ("DD&A"). The following tables present depletion expense per BOE sold for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Depletion expense per BOE sold | | $ | 9.79 | | | $ | 8.40 | | | $ | 1.39 | | | 17 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Depletion expense per BOE sold | | $ | 9.46 | | | $ | 5.94 | | | $ | 3.52 | | | 59 | % |
Depletion expense per BOE increased for the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to (i) an increase in the book value of our oil and natural gas properties as a result of the Sabalo/Shad Acquisition and Pioneer Acquisition and the associated development costs and (ii) inflationary pressures. See Note 6 to our consolidated financial statements included in our 2021 Annual Report and "—Pricing and reserves" for additional information regarding the full cost method of accounting.
Other operating expense, net. These costs include accretion expense due to the passage of time on our asset retirement obligations. See Note 2 in our 2021 Annual Report for additional information regarding our asset retirement obligations.
Non-operating income (expense)
The following tables present the components of non-operating income (expense), net for the periods presented and the corresponding changes for such periods:
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| | Three months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Gain (loss) on derivatives, net | | $ | 100,748 | | | $ | (96,240) | | | $ | 196,988 | | | 205 | % |
Interest expense | | (30,967) | | | (30,406) | | | (561) | | | (2) | % |
| | | | | | | | |
Gain extinguishment of debt, net | | 553 | | | — | | | 553 | | | 100 | % |
| | | | | | | | |
Other income, net | | 98 | | | 441 | | | (343) | | | (78) | % |
Total non-operating expense, net | | $ | 70,432 | | | $ | (126,205) | | | $ | 196,637 | | | 156 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Loss on derivatives, net | | $ | (290,995) | | | $ | (467,547) | | | $ | 176,552 | | | 38 | % |
Interest expense | | (96,251) | | | (82,222) | | | (14,029) | | | (17) | % |
| | | | | | | | |
Loss extinguishment of debt, net | | (245) | | | — | | | (245) | | | (100) | % |
| | | | | | | | |
Other income, net | | 433 | | | 2,236 | | | (1,803) | | | (81) | % |
Total non-operating expense, net | | $ | (387,058) | | | $ | (547,533) | | | $ | 160,475 | | | 29 | % |
Gain (loss) on derivatives, net. The following tables present the changes in the components of gain (loss) on derivatives, net for the periods presented and the corresponding changes for such periods:
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| | Three months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Non-cash gain (loss) on derivatives, net | | $ | 225,037 | | | $ | (3,514) | | | $ | 228,551 | | | 6,504 | % |
Settlements paid for matured derivatives, net | | (124,289) | | | (92,726) | | | (31,563) | | | (34) | % |
| | | | | | | | |
| | | | | | | | |
Gain (loss) on derivatives, net | | $ | 100,748 | | | $ | (96,240) | | | $ | 196,988 | | | 205 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Non-cash gain (loss) on derivatives, net | | $ | 131,118 | | | $ | (285,081) | | | $ | 416,199 | | | 146 | % |
Settlements paid for matured derivatives, net | | (423,668) | | | (191,507) | | | (232,161) | | | (121) | % |
Settlements received for contingent consideration | | 1,555 | | | — | | | 1,555 | | | 100 | % |
| | | | | | | | |
Premiums received for commodity derivatives | | — | | | 9,041 | | | (9,041) | | | (100) | % |
Loss on derivatives, net | | $ | (290,995) | | | $ | (467,547) | | | $ | 176,552 | | | 38 | % |
Non-cash gain (loss) on derivatives, net is the result of (i) new and matured contracts, including contingent consideration derivatives for the period subsequent to the initial valuation date and through the end of the contingency period, 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 and (ii) matured interest rate swaps and the changing relationship between the contract interest rate and the LIBOR interest rate forward curve. In general, if outstanding commodity contracts are held constant, we experience gains during periods of decreasing market prices and losses during periods of increasing market prices. Settlements paid or received for matured derivatives are for our (i) commodity derivative contracts, which are based on the settlement prices compared to the prices specified in the derivative contracts, (ii) interest rate derivative and (iii) contingent consideration derivatives.
See Notes 8 and 9 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.
Interest expense. During the third quarter of 2021, we completed the offering of the July 2029 Notes, with interest payable semi-annually commencing January 31, 2022 with interest from closing to that date. The increase during the nine months ended September 30, 2022 reflects a full year-to-date of interest expense incurred for the July 2029 Notes. See Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional information regarding our long-term debt.
Income tax benefit (expense)
The following tables present income tax benefit (expense) for the periods presented and the corresponding changes for such periods: | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Current | | $ | 960 | | | $ | (1,300) | | | $ | 2,260 | | | 174 | % |
Deferred | | $ | 2,808 | | | $ | (1,377) | | | $ | 4,185 | | | 304 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Current | | $ | (4,771) | | | $ | (1,300) | | | $ | (3,471) | | | (267) | % |
Deferred | | $ | 2,324 | | | $ | 707 | | | $ | 1,617 | | | 229 | % |
| | | | | | | | |
We are subject to federal and state income taxes and the Texas franchise tax. The income tax benefit (expense) for the three and nine months ended September 30, 2022 is attributed to Texas franchise tax, due to a full valuation allowance recorded against the federal and Oklahoma deferred tax assets.
If we were to experience an "ownership change" as determined under Section 382 of the Internal Revenue Code, our ability to offset taxable income arising after the ownership change with net operating losses arising prior to the ownership change would be limited. As of September 30, 2022, no such ownership change has occurred.
With the rise in oil prices and the addition of oily, high-margin inventory, we have seen positive indications that we will use our NOLs. We utilized $244.8 million of our NOLs on our 2021 tax return and expect to utilize a comparable amount on our 2022 tax return. However, as of September 30, 2022, we believe it is more likely than not that a portion of the NOL loss carryforwards are not fully realizable. We continue 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 our oil, NGL and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax
liabilities recorded as of September 30, 2022, and our ability to capitalize intangible drilling costs, rather than expensing these costs and future projections of Oklahoma sourced income. A significant item of objective negative evidence considered was the cumulative historical three-year pre-tax loss and a net deferred tax asset position at September 30, 2022.
We currently believe it is reasonably possible we could achieve a three-year cumulative level of profitability within the next 12 months, which would enhance our ability to conclude that it is more likely than not that the deferred tax assets would be realized and support a release of the valuation allowance. However, the exact timing and amount of the release is unknown at this time. As long as we continue to conclude that the valuation allowance recorded against our net deferred tax assets is necessary, we will not have significant deferred income tax expense or benefit. The valuation allowance does not preclude us from utilizing the tax attributes if we recognize taxable income.
On August 16, 2022, the Inflation Reduction Act of 2022 was signed into U.S. law. The IRA includes various tax provisions, including a 1% excise tax on stock repurchases made by publicly traded U.S. corporations, expanded tax credits for clean energy incentives and a 15% corporate alternative minimum tax that applies to certain corporations with adjusted financial statement income in excess of $1.0 billion. The Company is evaluating the IRA and its requirements, as well as the potential impact of the IRA to its business. For additional discussion of our income taxes, see Note 12 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 asset dispositions. Our primary operational uses of capital have been for the acquisition, exploration and development of oil and natural gas properties and infrastructure development. During the third quarter of 2022, we have utilized our cash flows to fund the repurchase of portions of our senior unsecured notes and our share repurchase program. For additional discussion of the repurchase of our senior unsecured notes and our share repurchase program, see Notes 4 and 5, respectively, to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
We continually seek to maintain a financial profile that provides operational flexibility and monitor the markets to consider which financing alternatives, including debt and equity capital resources, joint ventures and asset sales, are available to meet our future planned capital expenditures, a significant portion of which we are able to adjust and manage. We also continually evaluate opportunities with respect to our capital structure, including issuances of new securities, as well as transactions involving our outstanding senior notes, which could take the form of open market or private repurchases, exchange or tender offers, or other similar transactions, and our common stock, which could take the form of open market or private repurchases. 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, or combination of alternatives, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. We continuously look for other opportunities to maximize shareholder value. For further discussion of our financing activities related to debt instruments, see Notes 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Due to the inherent volatility in the prices of oil, NGL and natural gas and the sometimes wide pricing differentials between where we produce and sell such commodities, we engage in commodity derivative transactions to hedge price risk associated with a portion of our anticipated sales volumes. Due to the inherent volatility in interest rates, we will, from time to time, enter into interest rate derivative swaps to hedge interest rate risk associated with our debt under the Senior Secured Credit Facility. By removing a portion of the price volatility associated with future sales volumes, we expect to mitigate, but not eliminate, the potential effects of variability in cash flows from operations. See "Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk" below. See Note 9 to our consolidated financial statements included elsewhere in this Quarterly Report for discussion of our open commodity positions.
As of September 30, 2022, we had cash and cash equivalents of $49.9 million and available capacity under the Senior Secured Credit Facility of $960.0 million, resulting in total liquidity of $1.0 billion. As of November 2, 2022, we had cash and cash equivalents of $53.9 million and full available capacity under the Senior Secured Credit Facility of $1.0 billion, resulting in total liquidity of $1.1 billion. We believe that our operating cash flows and the aforementioned liquidity sources provide us with sufficient liquidity and financial resources to manage our cash needs and contractual obligations, to implement our currently planned capital expenditure budget and, at our discretion, to fund any share repurchases, pay down, repurchase or refinance
debt or adjust our planned capital expenditure budget.
Cash requirements for known contractual and other obligations
The following table presents significant cash requirements for known contractual and other obligations as of September 30, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | |
(in thousands) | | Short-term(1) | | Long-term | | Total |
Senior unsecured notes(2) | | $ | 106,495 | | | $ | 1,517,430 | | | $ | 1,623,925 | |
Senior Secured Credit Facility(3) | | — | | | 40,000 | | | 40,000 | |
Asset retirement obligations(4) | | 3,183 | | | 70,063 | | | 73,246 | |
Firm transportation commitments(5) | | 17,217 | | | 60,282 | | | 77,499 | |
Performance unit award cash payouts(6) | | 6,644 | | | 7,926 | | | 14,570 | |
Lease commitments(7) | | 18,906 | | | 14,762 | | | 33,668 | |
Total | | $ | 152,445 | | | $ | 1,710,463 | | | $ | 1,862,908 | |
_____________________________________________________________________________ (1)We expect to satisfy our short-term contractual and other obligations with cash flows from operations.
(2)Amounts presented include both our principal and interest obligations. The July 2029 Notes consist of $298.2 million in principal and interest payments totaling $23.1 million each year with interest payments due semi-annually on January 31 and July 31 of each year until July 31, 2029. The January 2025 Notes and January 2028 Notes consist of $529.5 million and $326.8 million in principal, respectively, and interest payments totaling $50.3 million and $33.1 million each year, respectively, with interest payments due semi-annually on January 15 and July 15 of each year until January 15, 2025 and January 15, 2028, respectively.
(3)The $40.0 million principal on our Senior Secured Credit facility is due on July 16, 2025. Amounts presented do 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, amounts presented do not include interest expense as it is a floating rate instrument and we cannot determine with accuracy the future interest rates to be charged. See Notes 4 and 15 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our Senior Secured Credit Facility.
(4)Asset retirement obligations represent future costs associated with the retirement of tangible long-lived assets. See Note 2 in our 2021 Annual Report for additional information regarding our asset retirement obligations.
(5)Amounts represent commitments to deliver, for sale or transportation, fixed volumes of product under certain contractual arrangements that specify the delivery of a fixed and determinable quantity. See Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our firm transportation commitments.
(6)Amounts represent the estimated cash payouts as of September 30, 2022 for our performance unit awards granted on March 5, 2020 and March 9, 2021, utilizing our September 30, 2022 closing stock price. See Note 9 to our consolidated financial statements included in our 2021 Annual Report for additional discussion of our performance unit awards.
(7)Lease commitment amounts represent our minimum lease payments for our operating lease liabilities. We have committed to drilling rig contracts with third parties to facilitate our drilling plans. Amounts presented include the gross amount we are committed to pay for the drilling rig contract. However, we will record our proportionate share based on our working interest in our consolidated financial statements as incurred. Management does not currently anticipate the early termination of these contracts in 2022. See Note 5 to our consolidated financial statements included in our 2021 Annual Report for additional discussion of our leases and Note 10 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for additional discussion of our drilling rig contracts.
Cash flows
The following table presents our cash flows for the periods presented and the corresponding changes for such periods:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, | | 2022 compared to 2021 |
(in thousands) | | 2022 | | 2021 | | Change ($) | | Change (%) |
Net cash provided by operating activities | | $ | 720,702 | | | $ | 287,112 | | | $ | 433,590 | | | 151 | % |
Net cash used in investing activities | | (443,475) | | | (517,750) | | | 74,275 | | | 14 | % |
Net cash (used in) provided by financing activities | | (284,084) | | | 233,277 | | | (517,361) | | | (222) | % |
Net (decrease) increase in cash and cash equivalents | | $ | (6,857) | | | $ | 2,639 | | | $ | (9,496) | | | (360) | % |
Cash flows from operating activities
Net cash provided by operating activities increased during the nine months ended September 30, 2022, compared to the same period in 2021. Notable cash changes include (i) an increase in total oil, NGL and natural gas sales revenues of $699.5 million, (ii) a decrease of $241.2 million due to changes in net settlements for matured derivatives, net of premiums, mainly due to increases in commodity prices and (iii) an increase of $85.7 million due to net changes in operating assets and liabilities. Other significant changes include an increase in lease operating expense and production and ad valorem taxes. The increase in total oil, NGL and natural gas sales revenues was due to a 86% increase in average sales price per BOE as well as a 34% increase in oil volumes sold. For additional information, see "—Results of operations."
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 commodity derivatives' exposure, and sales volume levels. Regional and worldwide economic activity, weather, infrastructure, transportation capacity to reach markets, costs of operations, legislation and regulations, including potential government production curtailments, and other variable factors significantly impact the prices of these commodities. For additional information on risks related to our business, see "Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk" and "Part II. Item 1A. Risk Factors" included elsewhere in this Quarterly Report and "Part I. Item 1A. Risk Factors" in our 2021 Annual Report.
Cash flows from investing activities
Net cash used in investing activities decreased for the nine months ended September 30, 2022, compared to the same period in 2021, mainly due to (i) a decrease in acquisitions of oil and natural gas properties, offset by a decrease in proceeds from the sale of capital assets and (ii) inflationary pressures and an increase in non-operated capital expenditures related to oil and natural gas properties.
The following table presents incurred capital expenditures, on an accrual basis, 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 September 30, | | Nine months ended September 30, | | |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 | | | | |
Property acquisition costs: | | | | | | | | | | | | |
Evaluated | | $ | 3,515 | | | $ | 745,240 | | | $ | 8,295 | | | $ | 745,240 | | | | | |
Unevaluated | | 179 | | | 127,505 | | | 3,470 | | | 127,505 | | | | | |
Exploration costs | | 4,343 | | | 8,143 | | | 18,700 | | | 27,413 | | | | | |
Development costs | | 130,961 | | | 127,031 | | | 420,468 | | | 279,032 | | | | | |
Total oil and natural gas properties incurred capital expenditures(1) | | $ | 138,998 | | | $ | 1,007,919 | | | $ | 450,933 | | | $ | 1,179,190 | | | | | |
______________________________________________________________________________
(1)Total oil and natural gas properties incurred capital expenditures includes certain employee-related costs.
The amount, timing and allocation of capital expenditures are largely discretionary and within management's control. If oil, NGL and natural gas prices are below our acceptable levels, or costs are above our acceptable levels, we may choose to defer a portion of our 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 continually monitor and may adjust our projected capital expenditures in response to world developments, as well as 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
For the nine months ended September 30, 2022, $284.1 million of net cash was used in financing activities compared to $233.3 million of net cash that was provided by financing activities for the same period in 2021. In 2022, we began executing our strategy to return cash to shareholders through redemption of our senior secured notes and repurchasing our equity, which consisted of extinguishment of debt on our senior unsecured notes of $182.3 million and share repurchases of $26.6 million during the nine months ended September 30, 2022. Other notable 2022 activity included (i) borrowings on our Senior Secured Credit Facility of $335.0 million, (ii) payments on our Senior Secured Credit Facility of $400.0 million and (iii) stock exchanged for tax withholding of $7.4 million. For further discussion of our financing activities related to debt instruments and share repurchases, see Notes 4 and 5, respectively, to our unaudited consolidated financial statements included elsewhere in this Quarterly Report.
Sources of Liquidity
Senior Secured Credit Facility
As of September 30, 2022, the Senior Secured Credit Facility, which matures on July 16, 2025, had a maximum credit amount of $2.0 billion, a borrowing base and an aggregate elected commitment of $1.25 billion and $1.0 billion, respectively, with a $40.0 million balance outstanding, and was subject to an interest rate of 5.379%. The Senior Secured Credit Facility contains both financial and non-financial covenants, all of which we were in compliance with for all periods presented. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or $80.0 million. As of December 31, 2021, we had a $44.1 million letter of credit outstanding under the Senior Secured Credit Facility. There were no outstanding letters of credit as of September 30, 2022. The Senior Secured Credit Facility is fully and unconditionally guaranteed by LMS and GCM.
On August 30, 2022, we entered into the Ninth Amendment to the Senior Secured Credit Facility. The Ninth Amendment, among other things, added additional capacity to making repurchases of the Company's common stock and clarified the conditions to making redemptions of the Company's debt.
On November 1, 2022, we entered into the Tenth Amendment to our Senior Secured Credit Facility. The Tenth Amendment, among other things, (i) increases the borrowing base from $1.25 billion to $1.3 billion, (ii) permits additional senior note buybacks and other restricted payments, subject to certain conditions; and (iii) makes technical changes to permit us to potentially incur term loans, subject to terms to be agreed with lenders making such term loans, in addition to revolving loans, in each case, subject to the terms of the Tenth Amendment and the Senior Secured Credit Facility.
See Notes 4 and 15 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of our Senior Secured Credit Facility.
January 2025 Notes, January 2028 Notes and July 2029 Notes
The following table presents principal amounts and applicable interest rates for our outstanding January 2025 Notes, January 2028 Notes and July 2029 Notes as of September 30, 2022:
| | | | | | | | | | | | | | |
(in millions, except for interest rates) | | Principal | | Interest rate |
January 2025 Notes | | $ | 529.5 | | | 9.500 | % |
January 2028 Notes | | 326.8 | | | 10.125 | % |
July 2029 Notes | | 298.2 | | | 7.750 | % |
Total senior unsecured notes | | $ | 1,154.5 | | | |
During the nine months ended September 30, 2022, we repurchased a total of $184.5 million in aggregate principal amount of our senior unsecured notes. See Note 4 to our unaudited consolidated financial statements included elsewhere in this Quarterly Report for further discussion of these repurchases.
Supplemental Guarantor information
As of September 30, 2022, $1.2 billion of our senior unsecured notes remained outstanding. Our wholly owned subsidiaries, LMS and GCM (each, a "Guarantor," and together, the "Guarantors"), jointly and severally, and fully and unconditionally, guarantees the January 2025 Notes, January 2028 Notes and July 2029 Notes.
The guarantees are senior unsecured obligations of each Guarantor and rank equally in right of payment with other existing and future senior indebtedness of such Guarantor, and senior in right of payment to all existing and future subordinated indebtedness of such Guarantor. The guarantees of the senior unsecured notes by the Guarantors are subject to certain Releases. The obligations of each Guarantor under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. Further, the rights of holders of the senior unsecured notes against the Guarantors may be limited under the U.S. Bankruptcy Code or state fraudulent transfer or conveyance law. Laredo is not restricted from making investments in the Guarantors and the Guarantors are not restricted from making intercompany distributions to Laredo or each other.
The assets, liabilities and results of operations of the combined issuer and Guarantors are not materially different than the corresponding amounts presented in our unaudited consolidated financial statements included elsewhere in this Quarterly Report. Accordingly, we have omitted the summarized financial information of the issuer and the Guarantors that would otherwise be required.
Non-GAAP financial measures
The non-GAAP financial measures of Free Cash Flow and Adjusted EBITDA, as defined by us, may not be comparable to similarly titled measures used by other companies. Furthermore, these non-GAAP financial measures should not be considered in isolation or as a substitute for GAAP measures of liquidity or financial performance, but rather should be considered in conjunction with GAAP measures, such as net income or loss, operating income or loss or cash flows from operating activities.
Free Cash Flow
Free Cash Flow is a non-GAAP financial measure that we define as net cash provided by operating activities (GAAP) before changes in operating assets and liabilities, net, less incurred capital expenditures, excluding non-budgeted acquisition costs. Management believes Free Cash Flow is useful to management and investors in evaluating operating trends in our business that are affected by production, commodity prices, operating costs and other related factors. There are significant limitations to the use of Free Cash Flow as a measure of performance, including the lack of comparability due to the different methods of calculating Free Cash Flow reported by different companies.
The following table presents a reconciliation of net cash provided by operating activities (GAAP) to Free Cash Flow (non-GAAP) for the periods presented: