Vital Energy(VTLE) - 2022 Q3 - Quarterly Report

Form 10-Q Filing Information This section provides essential filing details for Laredo Petroleum, Inc.'s Form 10-Q, including its quarterly report status, incorporation, and stock exchange listing Filing Details This section provides the basic filing information for Laredo Petroleum, Inc.'s Form 10-Q, indicating it is a quarterly report for the period ended September 30, 2022. The company is registered in Delaware and its common stock is listed on the New York Stock Exchange - The document is a Quarterly Report (Form 10-Q) for the period ended September 30, 2022[2] - Laredo Petroleum, Inc. is incorporated in Delaware and its common stock (LPI) is registered on the New York Stock Exchange[3] Registrant Status as of November 1, 2022 | Indicator | Status | | :-------------------------- | :----- | | Large accelerated filer | ☒ | | Common stock outstanding | 16,813,540 | | Shell company | No | Glossary of Oil and Natural Gas Terms This section provides a comprehensive glossary of essential oil and natural gas industry terms to ensure consistent understanding throughout the report Key Industry Definitions This section provides definitions for key terms used throughout the Quarterly Report, specifically related to the oil and natural gas industry, ensuring clarity and consistent understanding of technical and financial terminology - The glossary defines terms such as 'Bbl' (barrel), 'BOE' (barrel of oil equivalent), 'Benchmark Prices', 'Completion', 'Developed acreage', 'Dry hole', 'Fracturing', 'GAAP', 'Horizontal drilling', 'Initial Production', 'Liquids', 'Mcf' (thousand cubic feet), 'Natural gas liquids' (NGL), 'Net acres', 'Proved reserves', 'Realized Prices', 'Reservoir', 'Royalty interest', 'Standardized measure', 'Undeveloped acreage', 'Working interest', 'WTI', and 'Brent'[9][10][11][12][13][14][15][16][17][18][19][20][21][22][23][24][25] Cautionary Statement Regarding Forward-Looking Statements This section details the company's forward-looking statements and associated risks, highlighting potential material differences in actual results due to market, economic, and operational uncertainties Forward-Looking Statements and Risk Factors This section outlines the company's forward-looking statements, projections, and estimates, emphasizing that actual results may differ materially due to various risks and uncertainties. Key risk factors include market volatility, economic conditions, regulatory changes, and operational challenges in the oil and natural gas industry - Forward-looking statements cover operations, performance, business strategy, reserves, drilling programs, capital expenditures, liquidity, litigation outcomes, and derivative activities[26] - Significant risk factors include instability in energy, financial, and consumer markets, changes in supply and demand for oil, NGL, and natural gas, price volatility (especially in the Permian Basin), and the impact of suspending drilling or completion activities[27] - Additional risks include U.S. and international economic conditions, legal/tax/political developments, the war in Ukraine, rising interest rates, inflation, supply chain disruptions, regulatory compliance, water use restrictions, acquisition integration, competition, and the ability to maintain borrowing capacity and generate sufficient cash flow[27][30] Part I - Financial Information This part presents the unaudited consolidated financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the reporting period Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Laredo Petroleum, Inc., including balance sheets, statements of operations, stockholders' equity, and cash flows, along with condensed notes providing details on organization, accounting policies, acquisitions, debt, equity, derivatives, and other financial matters Consolidated Balance Sheets This section presents the company's financial position, highlighting significant increases in total assets and stockholders' equity from December 2021 to September 2022 Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Total current assets | $248,061 | $235,857 | | Property and equipment, net | $2,475,912 | $2,250,149 | | Total assets | $2,805,925 | $2,551,824 | | Total current liabilities | $527,273 | $526,913 | | Long-term debt, net | $1,181,584 | $1,425,858 | | Total liabilities | $1,805,255 | $2,038,044 | | Total stockholders' equity | $1,000,670 | $513,780 | - Total assets increased by $254.1 million (9.96%) from December 31, 2021, to September 30, 2022, primarily driven by an increase in net property and equipment[33] - Total stockholders' equity significantly increased by $486.89 million (94.77%) from December 31, 2021, to September 30, 2022, indicating improved financial health[33] Consolidated Statements of Operations This section details the company's financial performance, showing significant increases in net income and total revenues for both the three and nine months ended September 30, 2022 Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total revenues | $464,114 | $379,250 | $1,556,665 | $923,851 | | Total costs and expenses | $205,073 | $208,737 | $658,824 | $540,447 | | Operating income | $263,323 | $265,714 | $902,793 | $476,858 | | Net income (loss) | $337,523 | $136,832 | $513,288 | $(71,268) | | Basic EPS | $20.27 | $8.68 | $30.64 | $(5.29) | | Diluted EPS | $20.08 | $8.56 | $30.26 | $(5.29) | - Net income for the three months ended September 30, 2022, increased by 146.68% YoY to $337.5 million, and for the nine months, it swung from a loss of $71.3 million to a profit of $513.3 million[35] - Total revenues for the nine months ended September 30, 2022, increased by 68.5% YoY to $1.56 billion, primarily driven by higher oil, NGL, and natural gas sales[35] Consolidated Statements of Stockholders' Equity This section outlines changes in stockholders' equity, demonstrating a substantial increase driven by net income, partially offset by share repurchases and treasury stock retirement Stockholders' Equity Changes (in thousands) | Metric | Balance, Dec 31, 2021 | Net Income (9M 2022) | Share Repurchases (9M 2022) | Retirement of Treasury Stock (9M 2022) | Balance, Sep 30, 2022 | | :-------------------------------- | :-------------------- | :------------------- | :-------------------------- | :------------------------------------- | :-------------------- | | Common stock (Amount) | $171 | $1 | $(4) | $(4) | $169 | | Additional paid-in capital | $2,788,628 | $7,630 | $(26,586) | $(34,024) | $2,762,232 | | Accumulated deficit | $(2,275,019) | $513,288 | — | — | $(1,761,731) | | Total stockholders' equity | $513,780 | $513,288 | $(26,586) | — | $1,000,670 | - Total stockholders' equity increased significantly from $513.8 million at December 31, 2021, to $1.001 billion at September 30, 2022, primarily due to net income of $513.3 million[41] - The company repurchased $26.6 million of shares and retired treasury stock, impacting additional paid-in capital and common stock[41] Consolidated Statements of Cash Flows This section details the company's cash flow activities, showing a substantial increase in operating cash flow and a shift to cash usage in financing activities for the nine months ended September 30, 2022 Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $720,702 | $287,112 | | Net cash used in investing activities | $(443,475) | $(517,750) | | 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, end of period | $49,941 | $51,396 | - Net cash provided by operating activities increased by 151% to $720.7 million for the nine months ended September 30, 2022, compared to $287.1 million in the prior year[44] - Net cash used in financing activities was $284.1 million for the nine months ended September 30, 2022, a significant shift from $233.3 million provided in the prior year, reflecting debt extinguishment and share repurchases[44] Note 1—Organization and Basis of Presentation This note describes Laredo Petroleum, Inc.'s business as an independent energy company in the Permian Basin and confirms the GAAP-compliant preparation of its unaudited financial statements - Laredo Petroleum, Inc. is an independent energy company focused on oil and natural gas properties in the Permian Basin of West Texas, operating as a single exploration and production segment[46] - The unaudited consolidated financial statements are prepared in accordance with GAAP and reflect all necessary adjustments for fair presentation[47][48] Note 2—New Accounting Standards This note confirms that no new accounting standard updates requiring material disclosure have been identified or adopted as of September 30, 2022 - The Company determined there are no new accounting standard updates (ASUs) that are not yet adopted and meaningful to disclose as of September 30, 2022[54] Note 3—Acquisitions and Divestiture This note details significant acquisitions of oil and natural gas properties in 2021 and a working interest divestiture, including a contingent consideration derivative, generating substantial cash and gains - In 2021, Laredo completed the Pioneer Acquisition for $210.1 million (cash and common stock) and the Sabalo/Shad Acquisition for $863.1 million (cash and common stock), both involving oil and natural gas properties in the Midland Basin[57][58][64][66] - The company also completed a Working Interest Sale to Sixth Street for $405.0 million in cash, divesting 37.5% of its working interest in certain producing wellbores, resulting in a $94.3 million gain[67][68][73] - The Working Interest Sale included a contingent consideration derivative, allowing Laredo to receive up to $93.7 million in additional cash if certain cash flow targets are met[68][71] Note 4—Debt This note provides details on the company's long-term debt, including senior unsecured notes and the Senior Secured Credit Facility, highlighting debt repurchases and facility terms Long-Term Debt, Net (in thousands) | Debt Type | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------- | :----------- | :----------- | | January 2025 Notes | $525,109 | $571,568 | | January 2028 Notes | $322,778 | $356,020 | | July 2029 Notes | $293,697 | $393,270 | | Senior Secured Credit Facility | $40,000 | $105,000 | | Total | $1,181,584 | $1,425,858 | - The company repurchased $152.5 million in principal amount of senior unsecured notes during Q3 2022, resulting in a $0.55 million gain on extinguishment of debt[75] - The Senior Secured Credit Facility had a $40.0 million balance outstanding as of September 30, 2022, with a borrowing base of $1.25 billion and an aggregate elected commitment of $1.0 billion[78] Note 5—Stockholders' Equity This note details changes in stockholders' equity, including an increase in authorized common stock, the initiation of a share repurchase program, and the completion of an ATM program - Stockholders approved an increase in authorized common stock from 22.5 million to 40 million shares on May 26, 2022[79] - A $200.0 million share repurchase program was authorized on May 31, 2022, under which 244,687 shares were repurchased for $17.5 million during Q3 2022[80][81] - The ATM Program, which sold 1,438,105 shares for $72.5 million in net proceeds during the nine months ended September 30, 2021, was completed[84][86] Note 6—Equity Incentive Plan This note outlines the company's Equity Incentive Plan, including an increase in authorized shares, and details the equity-based compensation expense and unrecognized costs - The Equity Incentive Plan's maximum number of issuable shares was increased from 1,492,500 to 2,432,500 shares on May 20, 2021[87] Equity-Based Compensation Expense (in thousands) | Type | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total share-settled, net | $1,638 | $1,811 | $6,295 | $5,609 | | Total cash-settled, net | $(4,157) | $1,589 | $2,426 | $9,401 | | Total equity-based compensation, net | $(2,519) | $3,400 | $8,721 | $15,010 | - Total unrecognized cost related to equity-based compensation awards was $23.2 million as of September 30, 2022, with $5.3 million attributable to cash-settled liability awards[89] Note 7—Net Income (Loss) Per Common Share This note presents the basic and diluted net income (loss) per common share, highlighting a significant improvement and return to profitability for the nine months ended September 30, 2022 Net Income (Loss) Per Common Share | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $20.27 | $8.68 | $30.64 | $(5.29) | | Diluted EPS | $20.08 | $8.56 | $30.26 | $(5.29) | | Basic weighted-average shares | 16,650 | 15,756 | 16,750 | 13,464 | | Diluted weighted-average shares | 16,809 | 15,993 | 16,963 | 13,464 | - Diluted EPS for the nine months ended September 30, 2022, was $30.26, a significant improvement from a loss of $5.29 in the prior year, reflecting the company's return to profitability[93] Note 8—Derivatives This note details the company's use of commodity and contingent consideration derivatives to manage price risk, reporting a significant net gain on derivatives for the three months ended September 30, 2022 - The company uses commodity derivatives (puts, swaps, collars, basis swaps) to hedge price risk for oil, NGL, and natural gas, and a contingent consideration derivative related to the Sixth Street PSA[95][97] Gain (Loss) on Derivatives, Net (in thousands) | Derivative Type | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 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 | | Total | $100,748 | $(96,240) | $(290,995) | $(467,547) | - For the three months ended September 30, 2022, the company reported a net gain on derivatives of $100.7 million, a significant improvement from a $96.2 million loss in the prior year[96] Note 9—Fair Value Measurements This note provides fair value measurements for financial instruments, including the contingent consideration derivative and debt, detailing changes in derivative liability positions - The fair value of the Sixth Street Contingent Consideration, classified as Level 3, was $28.7 million as of September 30, 2022, down from $35.9 million at December 31, 2021[102][111] Net Derivative Liability Positions (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :-------------------------------- | :----------- | :----------- | | Net derivative liability positions | $(11,383) | $(142,500) | Fair Values of Debt (in thousands) | Debt Type | Carrying Amount (Sep 30, 2022) | Fair Value (Sep 30, 2022) | | :-------------------------- | :----------------------------- | :------------------------ | | January 2025 Notes | $529,464 | $525,059 | | January 2028 Notes | $326,756 | $313,686 | | July 2029 Notes | $298,214 | $274,771 | | Senior Secured Credit Facility | $40,000 | $39,959 | | Total | $1,194,434 | $1,153,475 | Note 10—Commitments and Contingencies This note outlines the company's legal proceedings, firm transportation commitments, and associated liabilities, affirming no material adverse effects are anticipated from current legal matters - The company is subject to various legal proceedings in the ordinary course of business, but does not believe they will have a material adverse effect on its financial position[114][117] - Firm transportation payments on excess pipeline capacity were $7.7 million for the nine months ended September 30, 2022, up from $2.8 million in 2021, due to unfulfilled commitments[118] - Estimated aggregate liability for firm transportation payments on excess capacity was $8.6 million as of September 30, 2022[118] Note 11—Supplemental Cash Flow and Non-Cash Information This note provides supplemental cash flow details, including cash paid for interest and right-of-use assets obtained, for the nine months ended September 30, 2022 Supplemental Cash Flow Information (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash paid for interest, net | $130,082 | $95,684 | | Right-of-use assets obtained | $34,532 | $7,532 | | Fair value of contingent consideration asset | — | $33,832 | Note 12—Income Taxes This note details the company's income tax position, including significant NOL carryforwards, a valuation allowance against deferred tax assets, and the potential impact of the U.S. Inflation Reduction Act - As of September 30, 2022, the company had federal net operating loss (NOL) carryforwards totaling $1.6 billion and Oklahoma NOL carryforwards of $34.4 million[121] - A total valuation allowance of $325.7 million has been recorded against federal and Oklahoma net deferred tax assets, resulting in a 1% effective tax rate due to Texas franchise tax[126][127] - The company is evaluating the potential impact of the U.S. Inflation Reduction Act of 2022, which includes a 1% excise tax on stock repurchases and a 15% corporate alternative minimum tax[128][191] Note 13—Related Parties This note discloses related party transactions, specifically capital expenditures paid to Halliburton, where a board member holds a dual directorship - The Chairman of Laredo's board of directors also serves on the board of Halliburton Company, which provides drilling and completions services to Laredo[129] Capital Expenditures Paid to Halliburton (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Capital expenditures for oil and natural gas properties | $78,749 | $42,074 | Note 14—Organizational Restructurings This note details organizational restructuring events, including one-time charges incurred from executive departures in Q3 2022 and a company-wide workforce reduction in Q2 2021 - In Q3 2022, the company incurred $10.4 million in one-time charges due to the departure of its Senior Vice President and Chief Operating Officer, with $4.9 million in equity-based compensation reversed[130] - In Q2 2021, a company-wide reorganization resulted in a workforce reduction of 14 individuals and $9.8 million in one-time charges, with $1.1 million in equity-based compensation reversed[131] Note 15—Subsequent Events This note reports significant events occurring after the reporting period, including a working interest sale, debt repayments, an increased credit facility borrowing base, and further share and note repurchases - The NOG Working Interest Sale closed on October 3, 2022, for $110.0 million, divesting working interests in non-operated oil and gas properties[133] - The company repaid $40.0 million on the Senior Secured Credit Facility on October 7, 2022, bringing the outstanding balance to zero as of November 2, 2022[134] - The Tenth Amendment to the Senior Secured Credit Facility, effective November 1, 2022, increased the borrowing base from $1.25 billion to $1.3 billion and permits additional senior note buybacks[135] - Subsequent to September 30, 2022, the company repurchased an additional $50.9 million of January 2025 Notes and $9.9 million of January 2028 Notes, and 112,049 common shares for $7.5 million[136][137] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance, condition, and operational results for the three and nine months ended September 30, 2022, compared to the same periods in 2021. It covers revenues, costs, non-operating items, liquidity, capital resources, and non-GAAP financial measures Executive Overview This overview highlights Laredo Petroleum's operational focus in the Permian Basin, its drilling activities, and key financial and operating performance metrics for the three and nine months ended September 30, 2022 - Laredo Petroleum, Inc. is an independent energy company focused on oil and natural gas properties in the Permian Basin of West Texas, holding 165,359 net acres as of September 30, 2022[140] - The company is operating two drilling rigs and one completions crew, with planned Q4 2022 capital expenditures of $135.0 million to $145.0 million[141] Key Financial and Operating Performance (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Oil sales volumes (MBbl) | 3,219 | 3,250 | (1)% | | Oil equivalents sales volumes (MBOE) | 7,324 | 7,057 | 4% | | Oil, NGL and natural gas sales | $444,948 | $311,276 | 43% | | Net income | $337,523 | $136,832 | 147% | | Net cash provided by operating activities | $182,615 | $97,674 | 87% | | Free Cash Flow (non-GAAP) | $51,361 | $(19,895) | 358% | | Adjusted EBITDA (non-GAAP) | $222,790 | $133,441 | 67% | Key Financial and Operating Performance (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Oil sales volumes (MBbl) | 10,536 | 7,840 | 34% | | Oil equivalents sales volumes (MBOE) | 22,905 | 21,985 | 4% | | Oil, NGL and natural gas sales | $1,445,605 | $746,059 | 94% | | Net income (loss) | $513,288 | $(71,268) | 820% | | Net cash provided by operating activities | $720,702 | $287,112 | 151% | | Free Cash Flow (non-GAAP) | $183,404 | $(27,585) | 765% | | Adjusted EBITDA (non-GAAP) | $722,377 | $323,755 | 123% | Recent Developments This section discusses recent market and economic developments, including strong commodity prices, rising operational costs due to inflation, and potential increases in borrowing costs from rising interest rates - Commodity prices remained strong in Q3 2022, with demand outpacing supply, despite recessionary concerns and the Russian-Ukrainian conflict causing volatility[145] - Drilling and completions costs, oilfield services, equipment, and materials costs have risen due to inflationary pressures, labor tightening, and supply chain disruptions[146] - Rising interest rates from the Federal Reserve's monetary policy tightening have the potential to increase borrowing costs on the Senior Secured Credit Facility[146] Pricing and Reserves This section covers the company's commodity derivatives strategy to manage price risk, presents realized prices for proved reserves, and confirms no full cost ceiling impairments were recorded - The company maintains an active, multi-year commodity derivatives strategy to minimize price volatility and support cash flows[148] Realized Prices for Proved Reserves as of September 30, 2022 | Commodity | Price | | :---------- | :---- | | Oil | $92.54 | | NGL | $32.38 | | Natural gas | $4.34 | - No full cost ceiling impairments were recorded during the nine months ended September 30, 2022, or 2021, and none are anticipated in the foreseeable future if prices remain at current levels[151] Results of Operations This section analyzes the company's financial performance by examining revenues, costs, non-operating income and expenses, and income tax impacts for the reporting periods Revenues This section analyzes the company's revenue performance, highlighting significant increases in oil, NGL, and natural gas sales driven by higher average prices, while sales of purchased oil decreased - Total oil, NGL, and natural gas sales revenues increased by 43% to $444.9 million for Q3 2022 and by 94% to $1.45 billion for the nine months ended September 30, 2022, primarily due to higher average sales prices[155][159][163] Average Sales Prices (Unaffected by Derivatives) | Commodity | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (%) | | :---------- | :-------------------------- | :-------------------------- | :--------- | | Oil ($/Bbl) | $96.83 | $70.56 | 37% | | NGL ($/Bbl) | $29.20 | $26.20 | 11% | | Natural gas ($/Mcf) | $5.94 | $2.87 | 107% | | Average sales price ($/BOE) | $60.75 | $44.11 | 38% | Average Sales Prices (Unaffected by Derivatives) | Commodity | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (%) | | :---------- | :-------------------------- | :-------------------------- | :--------- | | Oil ($/Bbl) | $101.51 | $65.66 | 55% | | NGL ($/Bbl) | $32.16 | $19.86 | 62% | | Natural gas ($/Mcf) | $4.78 | $2.20 | 117% | | Average sales price ($/BOE) | $63.11 | $33.94 | 86% | - Sales of purchased oil decreased by 72% for Q3 2022 and 39% for the nine months ended September 30, 2022, primarily due to the end of the Bridgetex pipeline commitment[165][166] Costs and Expenses This section analyzes the company's operating and non-operating costs, detailing increases in lease operating expenses and taxes, and a decrease in costs of purchased oil Total Costs and Expenses (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Lease operating expenses | $44,246 | $29,837 | 48% | | Production and ad valorem taxes | $29,024 | $17,937 | 62% | | Transportation and marketing expenses | $13,285 | $11,660 | 14% | | Costs of purchased oil | $18,772 | $68,805 | (73)% | | General and administrative (excluding LTIP) | $14,831 | $11,332 | 31% | | Organizational restructuring expenses | $10,420 | — | 100% | | Depletion, depreciation and amortization | $74,928 | $62,678 | 20% | | Total costs and expenses | $205,073 | $208,737 | (2)% | Total Costs and Expenses (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Lease operating expenses | $127,136 | $68,526 | 86% | | Production and ad valorem taxes | $89,512 | $45,957 | 95% | | Transportation and marketing expenses | $39,022 | $34,477 | 13% | | Costs of purchased oil | $108,516 | $183,458 | (41)% | | General and administrative (excluding LTIP) | $41,729 | $33,479 | 25% | | Organizational restructuring expenses | $10,420 | $9,800 | 6% | | Depletion, depreciation and amortization | $226,555 | $140,763 | 61% | | Total costs and expenses | $658,824 | $540,447 | 22% | - Lease operating expenses (LOE) increased due to inflationary pressures and costs associated with integrating assets from the Sabalo/Shad and Pioneer Acquisitions[171] - Gain on disposal of assets, net, decreased significantly due to a large gain recorded in Q3 2021 from the Working Interest Sale[179] Non-Operating Income (Expense) This section analyzes non-operating income and expenses, highlighting a significant shift from a net loss to a net gain on derivatives for the three months ended September 30, 2022 Non-Operating Income (Expense) (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Gain (loss) on derivatives, net | $100,748 | $(96,240) | 205% | | Interest expense | $(30,967) | $(30,406) | (2)% | | Gain extinguishment of debt, net | $553 | — | 100% | | Total non-operating expense, net | $70,432 | $(126,205) | 156% | Non-Operating Income (Expense) (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Loss on derivatives, net | $(290,995) | $(467,547) | 38% | | Interest expense | $(96,251) | $(82,222) | (17)% | | Loss extinguishment of debt, net | $(245) | — | (100)% | | Total non-operating expense, net | $(387,058) | $(547,533) | 29% | - Non-cash gain (loss) on derivatives, net, was $225.0 million for Q3 2022, a significant increase from a $3.5 million loss in Q3 2021, driven by changes in market prices relative to outstanding contract prices[183] Income Tax Benefit (Expense) This section details the company's income tax benefit or expense, primarily driven by Texas franchise tax and a valuation allowance, with potential for future release based on profitability Income Tax Benefit (Expense) (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Current | $960 | $(1,300) | 174% | | Deferred | $2,808 | $(1,377) | 304% | Income Tax Benefit (Expense) (in thousands) | Metric | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Current | $(4,771) | $(1,300) | (267)% | | Deferred | $2,324 | $707 | 229% | - The income tax benefit/expense is primarily attributed to Texas franchise tax due to a full valuation allowance against federal and Oklahoma deferred tax assets[186] - The company believes it is reasonably possible to achieve a three-year cumulative level of profitability within the next 12 months, which could support a release of the valuation allowance on deferred tax assets[190] Liquidity and Capital Resources This section assesses the company's liquidity and capital resources, including cash requirements, cash flow analysis, and available funding sources Cash Requirements for Known Contractual and Other Obligations This section details the company's significant short-term and long-term cash requirements for contractual and other obligations, including debt, asset retirement, and lease commitments Significant Cash Requirements as of September 30, 2022 (in thousands) | Obligation | Short-term | Long-term | Total | | :-------------------------- | :--------- | :-------- | :------ | | Senior unsecured notes | $106,495 | $1,517,430 | $1,623,925 | | Senior Secured Credit Facility | — | $40,000 | $40,000 | | Asset retirement obligations | $3,183 | $70,063 | $73,246 | | Firm transportation commitments | $17,217 | $60,282 | $77,499 | | Performance unit award cash payouts | $6,644 | $7,926 | $14,570 | | Lease commitments | $18,906 | $14,762 | $33,668 | | Total | $152,445 | $1,710,463 | $1,862,908 | - Short-term contractual obligations are expected to be satisfied with cash flows from operations[198] Cash Flows This section summarizes the company's cash flow activities, highlighting a substantial increase in operating cash, reduced cash used in investing, and a shift to cash usage in financing Cash Flow Summary (in thousands) | Activity | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | | Net cash provided by operating activities | $720,702 | $287,112 | 151% | | Net cash used in investing activities | $(443,475) | $(517,750) | 14% | | Net cash (used in) provided by financing activities | $(284,084) | $233,277 | (222)% | | Net (decrease) increase in cash and cash equivalents | $(6,857) | $2,639 | (360)% | - Operating cash flows increased significantly due to higher oil, NGL, and natural gas sales revenues, partially offset by changes in derivative settlements and increased operating expenses[201] - Investing activities saw a decrease in cash used, mainly due to fewer acquisitions of oil and natural gas properties, despite increased capital expenditures for oil and natural gas properties[202][203] - Financing activities shifted from providing cash to using cash, reflecting debt extinguishment and share repurchases as part of the strategy to return cash to shareholders[207] Sources of Liquidity This section identifies the company's liquidity sources, including cash and available credit facility capacity, and details outstanding senior unsecured notes - As of September 30, 2022, total liquidity was $1.0 billion, comprising $49.9 million in cash and $960.0 million in available capacity under the Senior Secured Credit Facility[195] - The Senior Secured Credit Facility had a $40.0 million balance outstanding as of September 30, 2022, with a borrowing base of $1.25 billion and an aggregate elected commitment of $1.0 billion[208] Outstanding Senior Unsecured Notes as of September 30, 2022 (in millions) | Note Type | 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 | $1,154.5 | | Supplemental Guarantor Information This section provides supplemental information regarding Laredo's subsidiaries as guarantors for certain notes, confirming their financial statements are not materially different from the consolidated report - Laredo's wholly-owned subsidiaries, LMS and GCM, jointly and severally guarantee the January 2025, January 2028, and July 2029 Notes[214] - The assets, liabilities, and results of operations of the combined issuer and Guarantors are not materially different from the consolidated financial statements[216] Non-GAAP Financial Measures This section presents and reconciles non-GAAP financial measures, specifically Free Cash Flow and Adjusted EBITDA, used by management and investors to evaluate performance Free Cash Flow This section defines and reconciles Free Cash Flow, a non-GAAP measure, demonstrating a significant improvement for the nine months ended September 30, 2022, reflecting strong operating performance - Free Cash Flow (non-GAAP) is defined as net cash provided by operating activities before changes in operating assets and liabilities, net, less incurred capital expenditures, excluding non-budgeted acquisition costs[218] Free Cash Flow Reconciliation (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $182,615 | $97,674 | $720,702 | $287,112 | | Cash flows from operating activities before changes in operating assets and liabilities, net | $191,461 | $117,531 | $632,366 | $284,511 | | Total incurred capital expenditures, excluding non budgeted acquisition costs | $140,100 | $137,426 | $448,962 | $312,096 | | Free Cash Flow (non-GAAP) | $51,361 | $(19,895) | $183,404 | $(27,585) | - Free Cash Flow significantly improved to $183.4 million for the nine months ended September 30, 2022, compared to a negative $27.6 million in the prior year, reflecting strong operating performance[220] Adjusted EBITDA This section defines and reconciles Adjusted EBITDA, a non-GAAP measure, demonstrating a significant increase for the nine months ended September 30, 2022, reflecting strong operational profitability - Adjusted EBITDA (non-GAAP) is used by management and investors to evaluate operating performance by removing the effect of capital structure and certain non-recurring items[221][223] Adjusted EBITDA Reconciliation (in thousands) | Metric | 3 Months Ended Sep 30, 2022 | 3 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $337,523 | $136,832 | $513,288 | $(71,268) | | Share-settled equity-based compensation, net | $1,638 | $1,811 | $6,295 | $5,609 | | Depletion, depreciation and amortization | $74,928 | $62,678 | $226,555 | $140,763 | | Organizational restructuring expenses | $10,420 | — | $10,420 | $9,800 | | (Gain) loss on derivatives, net | $(100,748) | $96,240 | $290,995 | $467,547 | | Interest expense | $30,967 | $30,406 | $96,251 | $82,222 | | Income tax (benefit) expense | $(3,768) | $2,677 | $2,447 | $593 | | Adjusted EBITDA (non-GAAP) | $222,790 | $133,441 | $722,377 | $323,755 | - Adjusted EBITDA increased by 123% to $722.4 million for the nine months ended September 30, 2022, compared to $323.8 million in the prior year, indicating strong operational profitability[224] Critical Accounting Estimates This section acknowledges the use of estimates in financial reporting and confirms no material changes to critical accounting estimates during the nine months ended September 30, 2022 - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts of assets, liabilities, revenues, and expenses[225] - There have been no material changes in critical accounting estimates during the nine months ended September 30, 2022[226] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section provides information on the company's exposure to market risks, specifically related to commodity prices and interest rates, and how these risks are managed through derivative instruments Commodity Price Exposure This section details the company's commodity price exposure and its use of derivative instruments to hedge price risk for oil, NGL, and natural gas sales - The company uses commodity derivative transactions (puts, swaps, collars, basis swaps) to hedge price risk for anticipated sales volumes of oil, NGL, and natural gas[228] Sensitivity Analysis of Commodity Derivative Liability (in thousands) | Metric | As of September 30, 2022 | | :-------------------------------- | :----------------------- | | Commodity derivative liability position | $(40,073) | | Impact of a 10% increase in forward commodity prices | $(44,477) | | Impact of a 10% decrease in forward commodity prices | $60,771 | Interest Rate Risk This section describes the company's interest rate risk, distinguishing between the floating rate Senior Secured Credit Facility and fixed-rate senior unsecured notes - The Senior Secured Credit Facility bears interest at a floating rate (5.379% as of September 30, 2022), while senior unsecured notes bear fixed rates[230] - Interest rates on the Senior Secured Credit Facility are based on an alternate base rate or Term SOFR, with applicable margins varying based on utilization[230] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and internal control over financial reporting, concluding that disclosure controls were effective as of September 30, 2022, with no material changes to internal controls - Laredo's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2022[231] - There were no material changes in internal controls over financial reporting during the quarter ended September 30, 2022[232] Part II - Other Information This part includes disclosures on legal proceedings, risk factors, equity security purchases, defaults, mine safety, and a list of exhibits filed with the report Item 1. Legal Proceedings This section states that the company is involved in various legal proceedings in the ordinary course of business but does not anticipate any material adverse effects on its financial position or operations - The company is subject to various legal proceedings arising in the ordinary course of business[235] - Management does not currently believe that any such legal proceedings will have a material adverse effect on the company's business, financial position, results of operations, or liquidity[235] Item 1A. Risk Factors This section highlights that, apart from a new risk factor concerning inflationary pressures and monetary policy, there have been no material changes to the risk factors previously disclosed in earlier reports - No material changes in risk factors from previous reports, except for a new risk related to continuing or worsening inflationary pressures and associated changes in monetary policy[236][237] - Inflationary pressures have led to and may continue to cause increases in drilling and completions costs, oilfield services, equipment, and materials, impacting capital expenditures and operating costs[237] - Rising interest rates due to monetary policy tightening could increase the cost of capital and depress economic growth, negatively affecting financial and operating results[237] Item 2. Purchases of Equity Securities This section details the company's common stock repurchase activities during the third quarter of 2022 under its authorized share repurchase program Common Stock Purchases (July 1, 2022 - September 30, 2022) | Period | Total Shares Purchased | Weighted Average Price Paid Per Share | Shares Purchased Under Publicly Announced Plans | Maximum Value Remaining Under Program | | :-------------------------- | :--------------------- | :------------------------------------ | :---------------------------------------------- | :------------------------------------ | | July 1, 2022 - July 31, 2022 | 102,244 | $70.53 | 94,031 | $184,283,901 | | August 1, 2022 - August 31, 2022 | 105,772 | $72.18 | 105,772 | $176,648,973 | | September 1, 2022 - September 30, 2022 | 48,867 | $72.07 | 44,884 | $173,413,515 | | Total | 256,883 | | 244,687 | | - During the three months ended September 30, 2022, the company repurchased 244,687 shares under its $200 million share repurchase program for a total cost of $17.5 million[240] Item 3. Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities were reported[241] Item 4. Mine Safety Disclosures This section addresses the company's compliance with mine safety regulations for its Howard County, Texas sand mine, noting that while mining operations are contracted, the company may still be considered an 'operator' under the Mine Act - The company's Howard County, Texas sand mine is subject to regulation by the Federal Mine Safety and Health Administration (MSHA) under the Mine Act[242] - Despite contracting mining operations, Laredo may be considered an 'operator' and could be issued citations for violations[244] Item 5. Other Information This section states that there is no other information to report under this item - No other information is applicable for this item[246] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, certifications, and mine safety disclosures - The exhibits include amendments to the Certificate of Incorporation and Bylaws, the Omnibus Equity Incentive Plan, and the Ninth and Tenth Amendments to the Senior Secured Credit Facility[248] - Certifications from the Chief Executive Officer and Chief Financial Officer, along with Mine Safety Disclosures and Inline XBRL financial information, are also included[248] Signatures This section contains the official signatures of the company's principal executive, financial, and accounting officers, certifying the report's submission Company Signatures This section contains the official signatures of Laredo Petroleum, Inc.'s principal executive officer, principal financial officer, and principal accounting officer, certifying the report's submission - The report is signed by Jason Pigott (President and CEO), Bryan J. Lemmerman (SVP and CFO), and Jessica R. Wren (Senior Director of Financial Accounting and SEC Reporting) on November 3, 2022[253]