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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
 ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2015
 or
 o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from                             to                            
Commission File Number: 001-35380
 Laredo Petroleum, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 (State or Other Jurisdiction of
Incorporation or Organization)
 
45-3007926
 (I.R.S. Employer
Identification No.)
15 W. Sixth Street, Suite 900
 
 
Tulsa, Oklahoma
 
74119
(Address of Principal Executive Offices)
 
(Zip code)
(918) 513-4570
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý  No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý  No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 
Large accelerated filer ý
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No ý 
Number of shares of registrant's common stock outstanding as of May 4, 2015: 213,878,297




TABLE OF CONTENTS 
 
 
Page
 
Part I
 
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
Part II
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

ii


CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Various statements contained in or incorporated by reference into this Quarterly Report on Form 10-Q (this "Quarterly Report") are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include statements, projections and estimates concerning our operations, performance, business strategy, oil and natural gas reserves, drilling program capital expenditures, liquidity and capital resources, the timing and success of specific projects, outcomes and effects of litigation, claims and disputes, derivative activities and potential financing. Forward-looking statements are generally accompanied by words such as "estimate," "project," "predict," "believe," "expect," "anticipate," "potential," "could," "may," "will," "foresee," "plan," "goal," "should," "intend," "pursue," "target," "continue," "suggest" or the negative thereof or other variations thereof or other words that convey the uncertainty of future events or outcomes. Forward-looking statements are not guarantees of performance. These statements are based on certain assumptions and analyses made by us in light of our experience and our perception of historical trends, current conditions and expected future developments as well as other factors we believe are appropriate under the circumstances. Among the factors that significantly impact our business and could impact our business in the future are:
the volatility of oil and natural gas prices;
changes in domestic and global production, supply and demand for oil and natural gas;
the continuation of restrictions on the export of domestic crude oil and its potential to cause weakness in domestic pricing;
the potentially insufficient refining capacity in the U.S. Gulf Coast to refine all of the light sweet crude oil being produced in the United States, which, coupled with the export limitations noted above and a continuing increase in light sweet crude oil production, could result in widening price discounts to world crude prices and potential shut-in of production due to lack of sufficient markets;
the ongoing instability and uncertainty in the U.S. and international financial and consumer markets that could adversely affect the liquidity available to us and our customers and the demand for commodities, including oil and natural gas;
regulations that prohibit or restrict our ability to apply hydraulic fracturing to our oil and natural gas wells and to access and dispose of water used in these operations;
legislation or regulations that prohibit or restrict our ability to drill new allocation wells;
our ability to execute our strategies, including but not limited to our hedging strategies;
our ability to discover, estimate, develop and replace oil and natural gas reserves, including our expectations that estimates of our proved reserves will increase;
uncertainties about the estimates of our oil and natural gas reserves;
competition in the oil and natural gas industry;
changes in the regulatory environment and changes in international, legal, political, administrative or economic conditions;
drilling and operating risks, including risks related to hydraulic fracturing activities;
risks related to the geographic concentration of our assets;
capital requirements for our operations and projects;
our ability to maintain or increase the borrowing capacity under our Senior Secured Credit Facility (as defined below) or access other means of providing capital and liquidity;
our ability to generate sufficient cash to service our indebtedness, fund our capital requirements and to generate future profits;
the availability and costs of drilling and production equipment, labor and oil and natural gas processing and other services;
the availability of sufficient pipeline and transportation facilities and gathering and processing capacity;
our ability to comply with federal, state and local regulatory requirements;
restrictions contained in our debt agreements, including our Senior Secured Credit Facility and the indentures governing our senior unsecured notes, as well as debt that could be incurred in the future, and;

iii


our ability to recruit and retain the qualified personnel necessary to operate our business.
These forward-looking statements involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Forward-looking statements should, therefore, be considered in light of various factors, including those set forth under "Part I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations," "Part II, Item 1A. Risk Factors" and elsewhere in this Quarterly Report, under "Part I, Item 1A. Risk Factors" and "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the "2014 Annual Report"), and those set forth from time to time in our other filings with the Securities and Exchange Commission (the "SEC"). These documents are available through our website or through the SEC's Electronic Data Gathering and Analysis Retrieval system at http://www.sec.gov. In light of such risks and uncertainties, we caution you not to place undue reliance on these forward-looking statements. These forward-looking statements speak only as of the date of this Quarterly Report, or if earlier, as of the date they were made. We do not intend to, and disclaim any obligation to, update or revise any forward-looking statements unless required by securities law.

iv



PART I

Item 1.    Consolidated Financial Statements (Unaudited)

Laredo Petroleum, Inc.
Consolidated balance sheets
(in thousands, except share data)
(Unaudited)
 
 
March 31, 2015

December 31, 2014
Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
569,093

 
$
29,321

Accounts receivable, net
 
110,003

 
126,929

Derivatives
 
195,078

 
194,601

Other current assets
 
27,430

 
14,402

Total current assets
 
901,604

 
365,253

Property and equipment:
 
 
 
 

Oil and natural gas properties, full cost method:
 
 
 
 

Evaluated properties
 
4,692,853

 
4,446,781

Unevaluated properties not being amortized
 
307,845

 
342,731

Midstream service assets
 
139,224

 
117,052

Other fixed assets
 
60,901

 
56,165

Total property and equipment
 
5,200,823

 
4,962,729

Less accumulated depletion, depreciation, amortization and impairment
 
(1,680,364
)
 
(1,608,647
)
Net property and equipment
 
3,520,459

 
3,354,082

Derivatives
 
118,587

 
117,788

Debt issuance costs, net
 
33,513

 
28,463

Investment in equity method investee
 
72,350

 
58,288

Other assets, net
 
8,510

 
8,675

Total assets
 
$
4,655,023

 
$
3,932,549

Liabilities and stockholders' equity
 
 
 
 

Current liabilities:
 
 
 
 

Accounts payable
 
$
30,410

 
$
39,008

Short-term debt
 
551,230

 

Undistributed revenue and royalties
 
46,216

 
65,438

Accrued capital expenditures
 
118,175

 
148,241

Deferred income taxes
 
73,753

 
71,191

Derivatives
 

 
115

Other current liabilities
 
73,048

 
101,032

Total current liabilities
 
892,832

 
425,025

Long-term debt
 
1,300,000

 
1,801,295

Deferred income taxes
 
106,835

 
105,754

Asset retirement obligations
 
32,136

 
31,042

Other noncurrent liabilities
 
4,108

 
6,232

Total liabilities
 
2,335,911

 
2,369,348

Commitments and contingencies
 


 


Stockholders' equity:
 
 
 
 
Preferred stock, $0.01 par value, 50,000,000 shares authorized and zero issued at March 31, 2015 and December 31, 2014
 

 

Common stock, $0.01 par value, 450,000,000 shares authorized, and 213,883,270 and 143,686,491 issued, at March 31, 2015 and December 31, 2014, respectively
 
2,139

 
1,437

Additional paid-in capital
 
2,064,852

 
1,309,171

Retained earnings
 
252,121

 
252,593

Total stockholders' equity
 
2,319,112

 
1,563,201

Total liabilities and stockholders' equity
 
$
4,655,023

 
$
3,932,549


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

1



Laredo Petroleum, Inc.
Consolidated statements of operations
(in thousands, except per share data)
(Unaudited)
 
 
Three months ended March 31,
 
 
2015
 
2014
Revenues:






Oil, NGL and natural gas sales

$
118,118


$
173,214

Midstream service revenues

1,309


96

Sales of purchased oil
 
31,267

 

Total revenues

150,694


173,310

Costs and expenses:

 
 
 
Lease operating expenses

32,380


21,785

Midstream service expenses
 
1,574

 
845

Production and ad valorem taxes

9,086


12,450

Minimum volume commitments

1,656


516

Costs of purchased oil
 
31,200

 

General and administrative

21,855


27,654

Restructuring expenses
 
6,042

 

Accretion of asset retirement obligations

579


415

Depletion, depreciation and amortization

71,942


49,607

Impairment expense

878



Total costs and expenses

177,192


113,272

Operating income (loss)

(26,498
)

60,038

Non-operating income (expense):




 
Gain (loss) on derivatives, net

63,155


(31,112
)
Income (loss) from equity method investee

(433
)

16

Interest expense

(32,414
)

(28,986
)
Interest and other income

123


83

Write-off of debt issuance costs



(124
)
Loss on disposal of assets, net

(762
)

(21
)
Non-operating income (expense), net

29,669


(60,144
)
Income (loss) before income taxes

3,171


(106
)
Income tax expense:






Deferred

(3,643
)

(107
)
Total income tax expense

(3,643
)

(107
)
Net loss

$
(472
)
 
$
(213
)
Net loss per common share:






Basic

$


$

Diluted

$


$

Weighted-average common shares outstanding:






Basic

162,426


141,067

Diluted

162,426


141,067

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

2



Laredo Petroleum, Inc.
Consolidated statement of stockholders' equity
(in thousands)
(Unaudited) 
 
 
Common Stock
 
Additional
paid-in capital
 
Treasury Stock
(at cost)
 
Retained earnings
 
 
 
 
Shares
 
Amount
 
 
Shares
 
Amount
 
 
Total
Balance, December 31, 2014
 
143,686

 
$
1,437

 
$
1,309,171

 

 
$

 
$
252,593

 
$
1,563,201

Restricted stock awards
 
1,749

 
18

 
(18
)
 

 

 

 

Restricted stock forfeitures
 
(368
)
 
(4
)
 
4

 

 

 

 

Vested restricted stock exchanged for tax withholding
 

 

 

 
184

 
(2,283
)
 

 
(2,283
)
Retirement of treasury stock
 
(184
)
 
(2
)
 
(2,281
)
 
(184
)
 
2,283

 

 

Equity issuance, net of offering costs
 
69,000

 
690

 
753,473

 

 

 

 
754,163

Stock-based compensation
 

 

 
4,503

 

 

 

 
4,503

Net loss
 

 

 

 

 

 
(472
)
 
(472
)
Balance, March 31, 2015
 
213,883

 
$
2,139

 
$
2,064,852

 

 
$

 
$
252,121

 
$
2,319,112

 
The accompanying notes are an integral part of this unaudited consolidated financial statement.

3



Laredo Petroleum, Inc.
Consolidated statements of cash flows
(in thousands)
(Unaudited)
 
 
Three months ended March 31,
 
 
2015
 
2014
Cash flows from operating activities:

 


 

Net loss

$
(472
)

$
(213
)
Adjustments to reconcile net loss to net cash provided by operating activities:






Deferred income tax expense

3,643


107

Depletion, depreciation and amortization

71,942


49,607

Impairment expense

878



Non-cash stock-based compensation, net of amounts capitalized

4,788


4,329

Accretion of asset retirement obligations

579


415

Mark-to-market on derivatives:






(Gain) loss on derivatives, net

(63,155
)

31,112

Cash settlements received (paid) for matured derivatives, net

63,141


(1,431
)
Cash settlements received for early terminations of derivatives, net



76,660

Change in net present value of deferred premiums paid for derivatives

43


65

Cash premiums paid for derivatives

(1,421
)

(1,959
)
Amortization of debt issuance costs

1,377


1,207

Write-off of debt issuance costs



124

Cash settlement of performance unit awards
 
(2,738
)
 

Other

1,163


(47
)
Decrease (increase) in accounts receivable
 
16,926

 
(3,619
)
Increase in other assets
 
(14,478
)
 
(4,616
)
Decrease in accounts payable
 
(8,598
)
 
(8,001
)
Decrease in undistributed revenues and royalties
 
(19,222
)
 
(1,052
)
Decrease in other accrued liabilities
 
(28,714
)
 
(14,893
)
Increase in other noncurrent liabilities
 
187

 
224

Increase in fair value of performance unit awards
 
996

 
98

Net cash provided by operating activities
 
26,865

 
128,117

Cash flows from investing activities:






Capital expenditures:






Acquisition of mineral interests



(7,305
)
Oil and natural gas properties

(243,733
)

(187,040
)
Midstream service assets

(20,434
)

(10,520
)
Other fixed assets

(3,919
)

(3,369
)
Investment in equity method investee
 
(14,495
)
 
(11,300
)
Proceeds from dispositions of capital assets, net of costs

35


268

Net cash used in investing activities

(282,546
)

(219,266
)
Cash flows from financing activities:






Borrowings on Senior Secured Credit Facility

175,000



Payments on Senior Secured Credit Facility

(475,000
)


Issuance of March 2023 Notes
 
350,000



Issuance of January 2022 Notes



450,000

Proceeds from issuance of common stock, net of offering costs
 
754,163

 

Purchase of treasury stock

(2,283
)

(3,274
)
Proceeds from exercise of employee stock options



1,585

Payments for debt issuance costs

(6,427
)

(7,796
)
Net cash provided by financing activities

795,453


440,515

Net increase in cash and cash equivalents

539,772


349,366

Cash and cash equivalents, beginning of period

29,321


198,153

Cash and cash equivalents, end of period

$
569,093


$
547,519

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

4

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

Note 1—Organization
Laredo Petroleum, Inc. ("Laredo"), together with its subsidiaries, Laredo Midstream Services, LLC ("LMS") and Garden City Minerals, LLC ("GCM"), is an independent energy company focused on the acquisition, exploration and development of oil and natural gas properties primarily in the Permian Basin in West Texas. LMS and GCM (together, the "Guarantors") guarantee all of Laredo's debt instruments.
In these notes, the "Company," (i) when used in the present tense, prospectively or from October 24, 2014 to March 31, 2015, refers to Laredo, LMS and GCM collectively, unless the context indicates otherwise or (ii) when used for historical periods from December 31, 2013 to October 23, 2014, refers to Laredo and LMS 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.
The Company operates in two business segments, which are (i) exploration and production and (ii) midstream and marketing. The exploration and production segment is engaged in the acquisition, exploration and development of oil and natural gas properties primarily in the Permian Basin in West Texas. The midstream and marketing segment provides the exploration and production segment and certain third parties with (i) any products and services that need to be delivered by infrastructure, including oil and natural gas gathering services as well as rig fuel, natural gas lift and water in the primary drilling corridors and (ii) takeaway optionality in the field and firm service commitments to maximize oil, natural gas liquids ("NGL") and natural gas revenues.
Note 2—Basis of presentation and significant accounting policies
a.    Basis of presentation
The accompanying unaudited consolidated financial statements were derived from the historical accounting records of the Company and reflect the historical financial position, results of operations and cash flows for the periods described herein. The Company uses the equity method of accounting to record its net interests when the Company holds 20% to 50% of the voting rights and/or has the ability to exercise significant influence but does not control the entity. Under the equity method, the Company's proportionate share of the investee's net income (loss) is included in the unaudited consolidated statements of operations. See Note 14 for additional discussion of the Company's equity method investment. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All material intercompany transactions and account balances have been eliminated in the consolidation of accounts.
The accompanying 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, 2014 is derived from audited consolidated financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all necessary adjustments to present fairly the Company's financial position as of March 31, 2015 and the results of operations and cash flows for the three months ended March 31, 2015 and 2014.
Certain disclosures have been condensed or omitted from these unaudited consolidated financial statements. Accordingly, these unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the 2014 Annual Report.
b.    Use of estimates in the preparation of interim unaudited consolidated financial statements
The preparation of the accompanying unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Although management believes these estimates are reasonable, actual results could differ. The interim results reflected in the unaudited consolidated financial statements are not necessarily indicative of the results that may be expected for other interim periods or for the full year.
Significant estimates include, but are not limited to, (i) estimates of the Company's reserves of oil, NGL and natural gas, (ii) future cash flows from oil and natural gas properties, (iii) depletion, depreciation and amortization, (iv) asset retirement obligations, (v) stock-based compensation, (vi) deferred income taxes, (vii) fair value of assets acquired and liabilities assumed in an acquisition and (viii) fair values of commodity derivatives, interest rate derivatives, commodity deferred premiums and performance unit awards. As fair value is a market-based measurement, it is determined based on the assumptions that market participants would use. These estimates and assumptions are based on management's best judgment. Management evaluates its

5

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

estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment. Such estimates and assumptions are adjusted when facts and circumstances dictate. Illiquid credit markets and volatile equity and energy markets have combined to increase the uncertainty inherent in such estimates and assumptions. Management believes its estimates and assumptions to be reasonable under the circumstances. As future events and their effects cannot be determined with precision, actual values and results could differ from these estimates. Any changes in estimates resulting from future changes in the economic environment will be reflected in the financial statements in future periods.
c.    Reclassifications
Certain amounts in the accompanying unaudited consolidated financial statements have been reclassified to conform to the 2015 presentation. These reclassifications had no impact to previously reported total assets, total liabilities, net income or loss, stockholders' equity or cash flows.
d.    Treasury stock
Laredo's employees may elect to have the Company withhold shares of stock to satisfy their tax withholding obligations that arise upon the lapse of restrictions on their stock awards. Such treasury stock is recorded at cost and retired upon acquisition.
e.    Accounts receivable
The Company sells oil, NGL and natural gas to various customers and participates with other parties in the drilling, completion and operation of oil and natural gas wells. The Company's accounts receivable are generally unsecured. Accounts receivable for joint interest billings are recorded as amounts billed to customers less an allowance for doubtful accounts.
Amounts are considered past due after 30 days. The Company determines joint interest operations accounts receivable allowances based on management's assessment of the creditworthiness of the joint interest owners. Additionally, as the operator of the majority of its wells, the Company has the ability to realize the receivables through netting of anticipated future production revenues. The Company maintains an allowance for doubtful accounts for estimated losses inherent in its accounts receivable portfolio. In establishing the required allowance, management considers historical losses, current receivables aging and existing industry and economic data. The Company reviews its allowance for doubtful accounts quarterly. Past due amounts greater than 90 days and over a specified amount are reviewed individually for collectability. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is remote.
Accounts receivable consist of the following components for the periods presented:
(in thousands)
 
March 31, 2015
 
December 31, 2014
Oil, NGL and natural gas sales
 
$
44,859

 
$
57,070

Joint operations, net(1)
 
25,752

 
33,808

Matured derivatives
 
20,829

 
16,098

Purchased oil and other product sales
 
17,963

 
18,917

Other
 
600

 
1,036

Total
 
$
110,003

 
$
126,929

______________________________________________________________________________
(1)
Accounts receivable for joint operations are presented net of an allowance for doubtful accounts of $0.1 million and $0.8 million as of March 31, 2015 and December 31, 2014, respectively.
f.    Derivatives
The Company uses derivatives to reduce exposure to fluctuations in the prices of oil and natural gas. By removing a significant portion of the price volatility associated with future production, the Company expects to mitigate, but not eliminate, the potential effects of variability in cash flows from operations due to fluctuations in commodity prices. These transactions are primarily in the form of collars, swaps, puts and basis swaps.
Derivatives are recorded at fair value and are included net on the unaudited consolidated balance sheets as assets or liabilities. The Company nets the fair value of derivatives by counterparty where the right of offset exists. The Company determines the fair value of its derivatives by utilizing pricing models for substantially similar instruments. Inputs to the pricing models include publicly available prices and forward price curves generated from a compilation of data gathered from third parties (see Notes 8 and 9). 

6

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

The Company's derivatives were not designated as hedges for accounting purposes for any of the periods presented. Accordingly, the changes in fair value are recognized in the unaudited consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities (see Note 8).
g.    Property and equipment
The following table sets forth the Company's property and equipment for the periods presented:
(in thousands)
 
March 31, 2015
 
December 31, 2014
Evaluated oil and natural gas properties
 
$
4,692,853

 
$
4,446,781

Less accumulated depletion and impairment
 
(1,654,807
)
 
(1,586,237
)
Evaluated oil and natural gas properties, net
 
3,038,046

 
2,860,544

 
 
 
 
 
Unevaluated properties not being amortized
 
307,845

 
342,731

 
 
 
 
 
Midstream service assets
 
139,224

 
117,052

Less accumulated depreciation
 
(10,214
)
 
(8,590
)
Midstream service assets, net
 
129,010

 
108,462

 
 
 
 
 
Depreciable other fixed assets
 
47,289

 
42,933

Less accumulated depreciation and amortization
 
(15,343
)
 
(13,820
)
Depreciable other fixed assets, net
 
31,946

 
29,113

 
 
 
 
 
Land
 
13,612

 
13,232

 
 
 
 
 
Total property and equipment, net
 
$
3,520,459

 
$
3,354,082

For the three months ended March 31, 2015 and 2014, depletion expense was $16.08 per barrel of oil equivalent ("BOE") sold and $19.61 per BOE sold, respectively.
The Company uses the full cost method of accounting for its oil and natural gas properties. Under this method, all acquisition, exploration and development costs, including certain related employee costs, incurred for the purpose of finding oil and natural gas are capitalized and amortized on a composite unit of production method based on proved oil, NGL and natural gas reserves. Such amounts include the cost of drilling and equipping productive wells, dry hole costs, lease acquisition costs, delay rentals and other costs related to such activities. Costs, including related employee costs, associated with production and general corporate activities are expensed in the period incurred. Sales of oil and natural gas properties, whether or not being amortized currently, are accounted for as adjustments of capitalized costs, with no gain or loss recognized, unless such adjustments would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas.
The Company excludes the costs directly associated with acquisition and evaluation of unevaluated properties from the depletion calculation until it is determined whether or not proved reserves can be assigned to the properties. The Company capitalizes a portion of its interest costs on its unevaluated properties. Capitalized interest becomes a part of the cost of the unevaluated properties and is subject to depletion when proved reserves can be assigned to the associated properties. All items classified as unevaluated property are assessed on a quarterly basis for possible impairment or reduction in value. The assessment includes consideration of the following factors, among others: intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of evaluated reserves, and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion.
The full cost ceiling is based principally on the estimated future net cash flows from proved oil and natural gas properties discounted at 10%. Full cost companies are required to use the unweighted arithmetic average first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period, unless prices were defined by contractual arrangements, to calculate the discounted future revenues. In the event the unamortized cost of evaluated oil and natural gas properties being amortized exceeds the full cost ceiling, as defined by the SEC, the excess is charged to expense in the period such excess occurs. Once incurred, a write-down of oil and natural gas properties is not reversible.

7

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

h.    Debt issuance costs
Debt issuance fees, which are stated at cost, net of amortization, are amortized over the life of the respective debt agreements utilizing the effective interest and straight-line methods. The Company capitalized $6.4 million of debt issuance costs during the three months ended March 31, 2015 as a result of the issuance of the March 2023 Notes (as defined below). The Company capitalized $7.8 million of debt issuance costs during the three months ended March 31, 2014 as a result of the issuance of the January 2022 Notes (as defined below). The Company had total debt issuance costs of $33.5 million and $28.5 million, net of accumulated amortization of $20.7 million and $19.4 million, as of March 31, 2015 and December 31, 2014, respectively.
As a result of changes in the borrowing base of the Senior Secured Credit Facility (as defined below) due to the issuance of the January 2022 Notes, the Company wrote-off approximately $0.1 million of debt issuance costs during the three months ended March 31, 2014. No debt issuance costs were written-off during the three months ended March 31, 2015. See Notes 5.a, 5.b and 5.e for definition of and information regarding the March 2023 Notes, January 2022 Notes and the Senior Secured Credit Facility, respectively.
Future amortization expense of debt issuance costs as of March 31, 2015 is as follows:
(in thousands)
 
 
Remaining 2015

$
4,587

2016

6,165

2017

6,236

2018

6,026

2019

2,913

Thereafter

7,586

Total

$
33,513

i.    Other current assets and liabilities
Other current assets consist of the following components for the periods presented:
(in thousands)
 
March 31, 2015
 
December 31, 2014
Prepaid expenses
 
$
18,043

 
$
6,451

Materials and supplies inventory and other
 
9,387

 
7,951

Total other current assets
 
$
27,430

 
$
14,402

Other current liabilities consist of the following components for the periods presented:
(in thousands)
 
March 31, 2015
 
December 31, 2014
Accrued interest payable
 
$
27,969

 
$
37,689

Lease operating expense payable
 
17,121

 
11,963

Other accrued liabilities
 
27,958

 
51,380

Total other current liabilities
 
$
73,048

 
$
101,032

j.    Asset retirement obligations
Asset retirement obligations associated with the retirement of tangible long-lived assets are recognized as a liability in the period in which they are incurred and become determinable. The associated asset retirement costs are part of the carrying amount of the long-lived asset. Subsequently, the asset retirement cost included in the carrying amount of the related long-lived asset is charged to expense through depletion, or for midstream asset retirement cost through depreciation, of the associated asset. Changes in the liability due to the passage of time are recognized as an increase in the carrying amount of the liability and as corresponding accretion expense.
The fair value of additions to the asset retirement obligation liability is measured using valuation techniques consistent with the income approach, which converts future cash flows into a single discounted amount. Significant inputs to the valuation include: (i) estimated plug and abandonment cost per well based on Company experience, (ii) estimated remaining life per well based on the reserve life per well, (iii) estimated removal and/or remediation costs for midstream assets, (iv) estimated remaining life of midstream assets, (v) future inflation factors and (vi) the Company's average credit adjusted risk-free rate.

8

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

Inherent in the fair value calculation of asset retirement obligations are numerous assumptions and judgments including, in addition to those noted above, the ultimate settlement of these amounts, the ultimate timing of such settlement and changes in legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions impact the fair value of the existing asset retirement obligation liability, a corresponding adjustment will be made to the asset balance.
The Company is obligated by contractual and regulatory requirements to remove certain pipeline and gas gathering assets and perform other remediation of the sites where such pipeline and gas gathering assets are located upon the retirement of those assets. However, the fair value of the asset retirement obligation cannot currently be reasonably estimated because the settlement dates are indeterminate. The Company will record an asset retirement obligation for pipeline and gas gathering assets in the periods in which settlement dates become reasonably determinable.
The following reconciles the Company's asset retirement obligation liability for the periods presented:
(in thousands)
 
Three months ended March 31, 2015
 
Year ended December 31, 2014
Liability at beginning of period
 
$
32,198

 
$
21,743

Liabilities added due to acquisitions, drilling, midstream service asset construction and other
 
515

 
6,370

Accretion expense
 
579

 
1,787

Liabilities settled upon plugging and abandonment
 
(188
)
 
(450
)
Revision of estimates
 

 
2,748

Liability at end of period
 
$
33,104

 
$
32,198

k.    Fair value measurements
The carrying amounts reported in the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable, undistributed revenue and royalties and other accrued assets and liabilities approximate their fair values. See Note 5 for fair value disclosures related to the Company's debt obligations. The Company carries its derivatives at fair value. See Notes 8 and 9 for details regarding the fair value of the Company's derivatives.
l.    Compensation awards
Stock-based compensation expense is included in "General and administrative" in the Company's unaudited consolidated statements of operations over the awards' vesting periods and is based on their grant date fair value. The Company utilizes the closing stock price on the grant date, less an expected forfeiture rate, to determine the fair value of service vesting restricted stock awards and a Black-Scholes pricing model to determine the fair values of service vesting restricted stock option awards. The Company utilizes a Monte Carlo simulation prepared by an independent third party to determine the fair values of the performance share awards and performance unit awards. The Company capitalizes a portion of stock-based compensation for employees who are directly involved in the acquisition, exploration and development of its oil and gas properties into the full cost pool. Capitalized stock-based compensation is included as an addition to "Oil and natural gas properties" in the unaudited consolidated balance sheets. See Note 6 for further discussion regarding the restricted stock awards, restricted stock option awards, performance share awards and performance unit awards.
m.    Environmental
The Company is subject to extensive federal, state and local environmental laws and regulations. These laws, among other things, regulate the discharge of materials into the environment and may require the Company to remove or mitigate the environmental effects of the disposal or release of petroleum or chemical substances at various sites. Environmental expenditures are expensed in the period incurred. Liabilities for expenditures of a non-capital nature are recorded when environmental assessment or remediation is probable and the costs can be reasonably estimated. Such liabilities are generally undiscounted unless the timing of cash payments is fixed and readily determinable. Management believes no materially significant liabilities of this nature existed as of March 31, 2015 or December 31, 2014.

9

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

n. Long-lived assets, materials and supplies and line-fill
Impairment losses are recorded on property and equipment used in operations and other long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Impairment is measured based on the excess of the carrying amount over the fair value of the asset.
Materials and supplies are comprised of equipment used in developing oil and natural gas properties and are included in "Other current assets" and "Other assets, net" on the unaudited consolidated balance sheets. They are carried at the lower of cost or market ("LCM"). The market price for materials and supplies is determined utilizing the Company's recent prices paid to acquire materials. During the three months ended March 31, 2015, the Company reduced materials and supplies by $0.8 million in order to reflect the balance at LCM. The adjustment is included in "Impairment expense" in the unaudited consolidated statements of operations and in "Other operating costs and expenses" for the Company's exploration and production segment presented in Note 16. The Company determined an LCM adjustment was not necessary for materials and supplies during the three months ended March 31, 2014.
Minimum volumes of product in a pipeline system which enables the system to operate is known as line-fill, and is generally not available to be withdrawn from the pipeline system until the expiration of the transportation contract. Beginning in the fourth quarter of 2014, the Company owns oil line-fill in third-party pipelines, which is accounted for at LCM with cost determined using the weighted-average cost method, and is included in "Other assets, net" on the unaudited consolidated balance sheets. The LCM adjustment is determined utilizing a quoted market price adjusted for regional price differentials (Level 2). For the three months ended March 31, 2015, the Company recorded an LCM adjustment of $0.1 million related to its line-fill, which is included in "Impairment expense" in the unaudited consolidated statements of operations and as "Other operating costs and expenses" for the Company's midstream and marketing segment presented in Note 16.
o.    Non-cash investing and supplemental cash flow information
The following presents the non-cash investing and supplemental cash flow information for the periods presented:
 
 
Three months ended March 31,
(in thousands)
 
2015

2014
Non-cash investing information:
 
 
 
 
Change in accrued capital expenditures
 
$
(30,066
)
 
$
10,622

Change in accrued capital contribution to equity method investee
 
$

 
$
5,574

Capitalized asset retirement cost
 
$
515

 
$
576

Supplemental cash flow information:
 
 
 
 
Capitalized interest
 
$
98

 
$

Note 3—Equity offering
On March 5, 2015, the Company completed the sale of 69,000,000 shares of Laredo's common stock at a price to the public of $11.05 per share (the "March 2015 Equity Offering"). The Company received net proceeds of $754.2 million, after underwriting discounts, commissions and offering expenses. Entities affiliated with Warburg Pincus LLC ("Warburg Pincus") purchased 29,800,000 shares in the March 2015 Equity Offering, following which Warburg Pincus owned 41.0% of Laredo's common stock. There were no comparative offerings of the Company's stock during the three months ended March 31, 2014.

Note 4—Acquisitions
a.    2014 acquisition of leasehold interests
On August 28, 2014, the Company completed a material acquisition of leasehold interests totaling 8,156 net acres in the Midland Basin, primarily within the Company's core development area, for $192.5 million. The acquisition was accounted for as an acquisition of assets.
b.    2014 acquisition of mineral interests
On February 25, 2014, the Company completed the acquisition of the mineral interests underlying 278 net acres in Glasscock County, Texas in the Permian Basin for $7.3 million. These mineral interests entitle the Company to receive royalty

10

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

interests on all production from this acreage with no additional future capital or operating expenses required. As such, the purchase was accounted for as an acquisition of assets.
c.    2014 acquisitions of evaluated and unevaluated oil and natural gas properties
The Company accounts for acquisitions of evaluated and unevaluated oil and natural gas properties under the acquisition method of accounting. Accordingly, the Company conducts assessments of net assets acquired and recognizes amounts for identifiable assets acquired and liabilities assumed at the estimated acquisition date fair values, while transaction and integration costs associated with the acquisitions are expensed as incurred.
The Company makes various assumptions in estimating the fair values of assets acquired and liabilities assumed. The most significant assumptions relate to the estimated fair values of evaluated and unevaluated oil and natural gas properties. The fair values of these properties are measured using valuation techniques that convert future cash flows to a single discounted amount. Significant inputs to the valuation include estimates of: (i) reserves, (ii) future operating and development costs, (iii) future commodity prices and (iv) a market-based weighted-average cost of capital rate. The market-based weighted-average cost of capital rate is subject to additional project-specific risk factors. To compensate for the inherent risk of estimating the value of the unevaluated properties, the discounted future net revenues of probable and possible reserves are reduced by additional risk-weighting factors.
On June 11, 2014, the Company completed the acquisition of evaluated and unevaluated oil and natural gas properties, totaling 460 net acres, located in Reagan County, Texas for $4.7 million, net of closing adjustments. On June 23, 2014, the Company completed the acquisition of evaluated and unevaluated oil and natural gas properties, totaling 24 net acres, located in Glasscock County, Texas for $1.8 million. The results of operations prior to June 2014 do not include results from these acquisitions.
Note 5—Debt
a.   March 2023 Notes
On March 18, 2015, the Company completed an offering of $350.0 million in aggregate principal amount of 6 1/4% senior unsecured notes due 2023 (the "March 2023 Notes"), and entered into an Indenture (the "Base Indenture"), as supplemented by the Supplemental Indenture (the "Supplemental Indenture" and, together with the Base Indenture, the "Indenture"), among Laredo, LMS and GCM, as guarantors, and Wells Fargo Bank, National Association, as trustee. The March 2023 Notes will mature on March 15, 2023 with interest accruing at a rate of 6 1/4% per annum and payable semi-annually in cash in arrears on March 15 and September 15 of each year, commencing September 15, 2015. The March 2023 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain automatic customary releases, including the sale, disposition, or transfer of all of the capital stock or of all or substantially all of the assets of a subsidiary guarantor to one or more persons that are not the Company or a restricted subsidiary, exercise of legal defeasance or covenant defeasance options or satisfaction and discharge of the Indenture, designation of a subsidiary guarantor as a non-guarantor restricted subsidiary or as an unrestricted subsidiary in accordance with the Indenture, release from guarantee under the Senior Secured Credit Facility, or liquidation or dissolution (collectively, the "Releases").
The March 2023 Notes were offered and sold pursuant to a prospectus supplement dated March 4, 2015 and the base prospectus dated March 22, 2013, relating to the Company's effective shelf registration statement on Form S-3 (File No. 333-187479). The Company received net proceeds of $343.6 million from the offering, after deducting the initial purchasers' discount and the estimated outstanding offering expenses. In April 2015, the Company used the proceeds of the offering to fund a portion of the Company's redemption of the January 2019 Notes (defined below). See Note 19.a for additional discussion of this early redemption.
The Company may redeem, at its option, all or part of the March 2023 Notes at any time on or after March 15, 2018, at the applicable redemption price plus accrued and unpaid interest to, but not including, the date of redemption. Further, before March 15, 2018, the Company may on one or more occasions redeem up to 35% of the aggregate principal amount of the March 2023 Notes in an amount not exceeding the net proceeds from one or more private or public equity offerings at a redemption price of 106.25% of the principal amount of the March 2023 Notes, plus accrued and unpaid interest to the date of redemption, if at least 65% of the aggregate principal amount of the March 2023 Notes remains outstanding immediately after such redemption and the redemption occurs within 180 days of the closing date of each such equity offering. If a change of control occurs prior to March 15, 2016, the Company may redeem all, but not less than all, of the March 2023 Notes at a redemption price equal to 110% of the principal amount of the March 2023 Notes plus any accrued and unpaid interest to, but not including, the date of redemption.

11

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

b.    January 2022 Notes
On January 23, 2014, the Company completed an offering of $450.0 million in aggregate principal amount of 5 5/8% senior unsecured notes due 2022 (the "January 2022 Notes"). The January 2022 Notes will mature on January 15, 2022 and bear an interest rate of 5 5/8% per annum, payable semi-annually, in cash in arrears on January 15 and July 15 of each year, commencing July 15, 2014. The January 2022 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain Releases.
c.    May 2022 Notes
On April 27, 2012, the Company completed an offering of $500.0 million in aggregate principal amount of 7 3/8% senior unsecured notes due 2022 (the "May 2022 Notes"). The May 2022 Notes will mature on May 1, 2022 and bear an interest rate of 7 3/8% per annum, payable semi-annually, in cash in arrears on May 1 and November 1 of each year, commencing November 1, 2012. The May 2022 Notes are fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain Releases.
d.    January 2019 Notes
On January 20, 2011, the Company completed an offering of $350.0 million 9 1/2% senior unsecured notes due 2019 (the "January Notes") and on October 19, 2011, the Company completed an offering of an additional $200.0 million 9 1/2% senior unsecured notes due 2019 (the "October Notes" and together with the January Notes, the "January 2019 Notes"). The January 2019 Notes were due to mature on February 15, 2019 and bore an interest rate of 9 1/2% per annum, payable semi-annually, in cash in arrears on February 15 and August 15 of each year. The January 2019 Notes were fully and unconditionally guaranteed on a senior unsecured basis by LMS, GCM and certain of the Company's future restricted subsidiaries, subject to certain Releases.
Utilizing proceeds from the March 2023 Notes and the March 2015 Equity Offering, the Company redeemed the January 2019 Notes in full on April 6, 2015. As such, the Company classified the January 2019 Notes as "Short-term debt" in the March 31, 2015 unaudited consolidated balance sheet. See Note 19.a for discussion of the early redemption of the January 2019 Notes.
e.    Senior Secured Credit Facility
As of March 31, 2015, the Fourth Amended and Restated Credit Agreement (as amended, the "Senior Secured Credit Facility"), which matures on November 4, 2018, had a maximum credit amount of $2.0 billion, a borrowing base of $1.15 billion and an aggregate elected commitment of $900.0 million with no amounts outstanding. It contains both financial and non-financial covenants, all of which the Company was in compliance with as of March 31, 2015. Laredo is required to pay an annual commitment fee on the unused portion of the financial institutions' commitment of 0.375% to 0.5%, based on the ratio of outstanding revolving credit to the total commitment under the Senior Secured Credit Facility. Additionally, the Senior Secured Credit Facility provides for the issuance of letters of credit, limited to the lesser of total capacity or $20.0 million. No letters of credit were outstanding as of March 31, 2015 or 2014.
Subsequent to March 31, 2015, the Company made borrowings on the Senior Secured Credit Facility and the borrowing base and the aggregate elected commitment amounts were increased. See Note 19.b for additional information.
f.    Fair value of debt
The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amount and fair values of the Company's debt for the periods presented:
 
 
March 31, 2015
 
December 31, 2014
(in thousands)
 
Carrying
value
 
Fair
value
 
Carrying
value
 
Fair
value
January 2019 Notes(1)
 
$
551,230

 
$
576,653

 
$
551,295

 
$
550,000

January 2022 Notes
 
450,000

 
436,500

 
450,000

 
396,014

May 2022 Notes
 
500,000

 
519,375

 
500,000

 
467,529

March 2023 Notes
 
350,000

 
350,875

 

 

Senior Secured Credit Facility
 

 

 
300,000

 
300,279

Total value of debt
 
$
1,851,230

 
$
1,883,403

 
$
1,801,295

 
$
1,713,822

______________________________________________________________________________
(1)
The carrying value of the January 2019 Notes includes the October Notes unamortized bond premium of $1.2 million and $1.3 million as of March 31, 2015 and December 31, 2014, respectively.

12

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

The fair values of the debt outstanding on the January 2019 Notes, the January 2022 Notes, May 2022 Notes and the March 2023 Notes were determined using the March 31, 2015 and December 31, 2014 quoted market price (Level 1) for each respective instrument. The fair value of the outstanding debt on the Senior Secured Credit Facility as of December 31, 2014 was estimated utilizing pricing models for similar instruments (Level 2). See Note 9 for information about fair value hierarchy levels.
Note 6—Employee compensation
The Company has a Long-Term Incentive Plan (the "LTIP"), which provides for the granting of incentive awards in the form of restricted stock awards, restricted stock option awards, performance share awards, performance unit awards and other awards. The LTIP provides for the issuance of 10.0 million shares.
The Company recognizes the fair value of stock-based compensation awards expected to vest over the requisite service period as a charge against earnings, net of amounts capitalized. The Company's stock-based compensation awards are accounted for as equity instruments and its performance unit awards are accounted for as liability awards. Stock-based compensation is included in "General and administrative" in the unaudited consolidated statements of operations. The Company capitalizes a portion of stock-based compensation for employees who are directly involved in the acquisition, exploration and development of oil and natural gas properties into the full-cost pool. Capitalized stock-based compensation is included as an addition to "Oil and natural gas properties" in the unaudited consolidated balance sheets.
a.    Restricted stock awards
All restricted stock awards are treated as issued and outstanding in the accompanying unaudited consolidated financial statements. Per the award agreement terms, if an employee terminates employment prior to the restriction lapse date, the awarded shares are forfeited and canceled and are no longer considered issued and outstanding. If the employee's termination of employment is by reason of death or disability, all of the holder's restricted stock will automatically vest. Restricted stock awards granted to officers and employees vest in a variety of vesting schedules including (i) 20% at the grant date and then 20% annually thereafter, (ii) 33%, 33% and 34% per year beginning on the first anniversary date of the grant, (iii) 50% in year two and 50% in year three, (iv) fully on the first anniversary of the grant date and (v) fully on the third anniversary of the grant date. Restricted stock awards granted to non-employee directors vest fully on the first anniversary of the grant date.
The following table reflects the outstanding restricted stock awards for the three months ended March 31, 2015:
(in thousands, except for weighted-average grant date fair values)
 
Restricted
stock
awards
 
Weighted-average
grant date
fair value (per award)
Outstanding at December 31, 2014
 
2,205

 
$
22.63

Granted
 
1,749

 
$
11.90

Forfeited
 
(368
)
 
$
22.86

Vested(1)
 
(718
)
 
$
22.27

Outstanding at March 31, 2015
 
2,868

 
$
16.14

______________________________________________________________________________
(1)
The vesting of certain restricted stock awards could result in federal and state income tax expense or benefit related to the difference between the market price of the common stock at the date of vesting and the date of grant. See Note 7 for additional discussion regarding the tax impact of vested restricted stock awards.
The Company utilizes the closing stock price on the grant date to determine the fair value of service vesting restricted stock awards. As of March 31, 2015, unrecognized stock-based compensation related to the restricted stock awards was $36.9 million. Such cost is expected to be recognized over a weighted-average period of 2.29 years.

13

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

b.    Restricted stock option awards
Restricted stock option awards granted under the LTIP vest and are exercisable in four equal installments on each of the four anniversaries of the grant date. The following table reflects the stock option award activity for the three months ended March 31, 2015:
(in thousands, except for weighted-average exercise price and contractual term)
 
Restricted
stock option
awards
 
Weighted-average
exercise price
(per option)
 
Weighted-average
remaining contractual term
(years)
Outstanding at December 31, 2014
 
1,367

 
$
20.76

 
8.17

Granted
 
632

 
$
11.93

 
9.91

Exercised(1)
 

 
$

 

Expired or canceled
 
(7
)
 
$
21.46

 

Forfeited
 
(114
)
 
$
18.03

 

Outstanding at March 31, 2015
 
1,878

 
$
17.95

 
8.60

Vested and exercisable at end of period(2)
 
617

 
$
20.67

 
7.68

Vested, exercisable, and expected to vest at end of period(3)
 
1,837

 
$
17.98

 
8.59

_____________________________________________________________________________
(1)
The exercise of stock option awards could result in federal and state income tax expense or benefit related to the difference between the fair value of the stock option award at the date of grant and the intrinsic value of the stock option award when exercised. See Note 7 for additional discussion regarding the tax impact of exercised stock option awards.
(2)
The vested and exercisable options at March 31, 2015 had no aggregate intrinsic value.
(3)
The aggregate intrinsic value of vested, exercisable and expected to vest options at March 31, 2015 was $0.7 million.
The Company utilizes the Black-Scholes option pricing model to determine the fair value of restricted stock option awards and is recognizing the associated expense on a straight-line basis over the four-year requisite service period of the awards. Determining the fair value of equity-based awards requires judgment, including estimating the expected term that stock option awards will be outstanding prior to exercise and the associated volatility. As of March 31, 2015, unrecognized stock-based compensation related to the restricted stock option awards was $10.3 million. Such cost is expected to be recognized over a weighted-average period of 3.05 years.
The assumptions used to estimate the fair value of restricted stock options granted on February 27, 2015 are as follows:
Risk-free interest rate(1)
1.70
%
Expected option life(2)
6.25 years

Expected volatility(3)
52.59
%
Fair value per stock option
$
6.15

______________________________________________________________________________
(1)
U.S. Treasury yields as of the grant date were utilized for the risk-free interest rate assumption, matching the treasury yield terms to the expected life of the option.
(2)
As the Company had limited exercise history at the time of valuation relating to terminations and modifications, expected option life assumptions were developed using the simplified method in accordance with GAAP.
(3)
The Company utilized its own volatility in order to develop the expected volatility.
    

14

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

In accordance with the LTIP and stock option agreement, the options granted will become exercisable in accordance with the following schedule based upon the number of full years of the optionee's continuous employment or service with the Company, following the date of grant:
Full years of continuous employment
 
Incremental percentage of
option exercisable
 
Cumulative percentage of
option exercisable
Less than one
 
%
 
%
One
 
25
%
 
25
%
Two
 
25
%
 
50
%
Three
 
25
%
 
75
%
Four
 
25
%
 
100
%
No shares of common stock may be purchased unless the optionee has remained in continuous employment with the Company for one year from the grant date. Unless terminated sooner, the option will expire if and to the extent it is not exercised within 10 years from the grant date. The unvested portion of a stock option award shall expire upon termination of employment, and the vested portion of a stock option award shall remain exercisable for (i) one year following termination of employment by reason of the holder's death or disability, but not later than the expiration of the option period, or (ii) 90 days following termination of employment for any reason other than the holder's death or disability, and other than the holder's termination of employment for cause. Both the unvested and the vested but unexercised portion of a stock option award shall expire upon the termination of the option holder's employment or service by the Company for cause.
c.    Performance share awards
The performance share awards granted to management on February 27, 2015 (the "2015 Performance Share Awards") and on February 27, 2014 (the "2014 Performance Share Awards") are subject to a combination of market and service vesting criteria. A Monte Carlo simulation prepared by an independent third party was utilized in order to determine the grant date fair value of these awards. The Company has determined the 2014 Performance Share Awards and the 2015 Performance Share Awards are equity awards and recognizes the associated expense on a straight-line basis over the three-year requisite service period of the awards. These awards will be settled, if at all, in stock at the end of the requisite service period based on the achievement of certain performance criteria.
The 2015 Performance Share Awards have a performance period of January 1, 2015 to December 31, 2017 and any shares earned under such awards are expected to be issued in the first quarter of 2018 if the performance criteria are met. During the three months ended March 31, 2015, 602,501 2015 Performance Share Awards were granted and all remain outstanding at March 31, 2015. The 271,667 outstanding 2014 Performance Share Awards have a performance period of January 1, 2014 to December 31, 2016 and any shares earned under such awards are expected to be issued in the first quarter of 2017 if the performance criteria are met.
As of March 31, 2015, unrecognized stock-based compensation related to the 2015 Performance Share Awards and the 2014 Performance Share Awards was $14.0 million. Such cost is expected to be recognized over a weighted-average period of 2.60 years.
The assumptions used to estimate the fair value of the 2015 Performance Share Awards granted on February 27, 2015 are as follows:
Risk-free rate(1)
 
0.95
%
Dividend yield
 
%
Expected volatility(2)
 
53.78
%
Laredo stock closing price as of February 27, 2015
 
$
11.93

Fair value per performance share
 
$
16.23

______________________________________________________________________________
(1)
The risk-free rate was derived using a zero-coupon yield derived from the Treasury Constant Maturities yield curve on the grant date.
(2)
The Company utilized a peer historical look-back, weighted with the Company's own volatility, to develop the expected volatility.

15

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

d.    Stock-based compensation award expense
The following has been recorded to stock-based compensation expense for the periods presented:
 
 
Three months ended March 31,
(in thousands)
 
2015

2014
Restricted stock award compensation, net of amounts capitalized
 
$
3,280

 
$
3,486

Restricted stock option award compensation, net of amounts capitalized
 
673

 
628

Restricted performance share award compensation, net of amounts capitalized
 
835

 
215

Total stock-based compensation, net of amounts capitalized
 
$
4,788

 
$
4,329

e.    Performance unit awards
The performance unit awards issued to management on February 15, 2013 (the "2013 Performance Unit Awards") and on February 3, 2012 (the "2012 Performance Unit Awards") are subject to a combination of market and service vesting criteria. A Monte Carlo simulation prepared by an independent third party is utilized to determine the fair values of these awards at the grant date and to re-measure the fair values at the end of each reporting period until settlement in accordance with GAAP. The volatility criteria utilized in the Monte Carlo simulation is based on the volatility of the Company's stock price and the stock price volatilities of a group of peer companies defined in each award agreement. These awards are accounted for as liability awards as they will be settled in cash at the end of the requisite service period based on the achievement of certain performance criteria. The liability and related compensation expense of these awards for each period is recognized by dividing the fair value of the total liability by the requisite service period and recording the pro rata share for the period for which service has already been provided. As there are inherent uncertainties related to these factors and the Company's judgment in applying them to the fair value determinations, there is risk that the recorded performance unit compensation may not accurately reflect the amount ultimately earned by the members of management.
The 44,481 outstanding 2013 Performance Unit Awards have a performance period of January 1, 2013 to December 31, 2015 and are expected to be paid in the first quarter of 2016 if the performance criteria are met. The 27,381 outstanding 2012 Performance Unit Awards had a performance period of January 1, 2012 to December 31, 2014 and, as their performance criteria were satisfied, they were paid at $100 per unit during the three months ended March 31, 2015.
Compensation expense for the 2012 Performance Unit Awards and the 2013 Performance Unit Awards is included in "General and administrative" in the Company's unaudited consolidated statements of operations, and the corresponding liabilities are included in "Other current liabilities" and "Other noncurrent liabilities" in the unaudited consolidated balance sheets. Due to the quarterly re-measurement of the fair value of the 2013 Performance Unit Awards as of March 31, 2015, compensation expense for the three months ended March 31, 2015 was $1.0 million. Compensation expense related to the 2012 Performance Unit Awards and the 2013 Performance Unit Awards amounted to $0.1 million for the three months ended March 31, 2014.
Note 7—Income taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating losses and tax credit carry-forwards. Under this method, deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income (loss) in the period that includes the enactment date. A valuation allowance is established to reduce deferred tax assets if it is determined it is more likely than not that the related tax benefit will not be realized. On a quarterly basis, management evaluates the need for and adequacy of valuation allowances based on the expected realizability of the deferred tax assets and adjusts the amount of such allowances, if necessary.
The Company evaluates uncertain tax positions for recognition and measurement in the unaudited consolidated financial statements. To recognize a tax position, the Company determines whether it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation, based on the technical merits of the position. A tax position that meets the more-likely-than-not threshold is measured to determine the amount of benefit to be recognized in the unaudited consolidated financial statements. The amount of tax benefit recognized with respect to any tax position is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon

16

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

settlement. The Company had no unrecognized tax benefits related to uncertain tax positions in the unaudited consolidated financial statements at March 31, 2015 or December 31, 2014.
The Company is subject to corporate income taxes and the Texas franchise tax. Income tax expense for the periods presented consisted of the following:
 
 
Three months ended March 31,
(in thousands)

2015
 
2014
Current taxes

$

 
$

Deferred taxes

(3,643
)
 
(107
)
Income tax expense

$
(3,643
)
 
$
(107
)
Income tax expense differed from amounts computed by applying the applicable federal income tax rate of 35% to pre-tax earnings as a result of the following:
 

Three months ended March 31,
(in thousands)

2015
 
2014
Income tax expense computed by applying the statutory rate

$
(1,110
)
 
$
37

State income tax, net of federal tax benefit and increase in valuation allowance

91

 
1,287

Non-deductible stock-based compensation

(91
)
 
(116
)
Stock-based compensation tax deficiency

(2,457
)
 
(141
)
Change in deferred tax valuation allowance

(5
)
 
(1,078
)
Other items

(71
)
 
(96
)
Income tax expense

$
(3,643
)
 
$
(107
)
 
For the three months ended March 31, 2015 and 2014, the effective tax rate on income (loss) before income taxes was not meaningful due to the significant effect of discrete items on a relatively small amount of income (loss). The Company's effective tax rate is affected by recurring permanent differences and by discrete items that may occur in any given year, but are not consistent from year to year.
The impact of significant discrete items is separately recognized in the quarter in which they occur. The vesting of certain restricted stock awards could result in federal and state income tax expense or benefits related to the difference between the market price of the common stock at the date of vesting and the date of grant. The exercise of stock option awards could result in federal and state income tax expense or benefits related to the difference between the fair value of the stock option on the grant date and the intrinsic value of the stock option when exercised. The tax impact resulting from vestings of restricted stock awards and exercise of option awards are discrete items. During the three months ended March 31, 2015 and 2014, certain shares related to restricted stock awards vested at times when the Company's stock price was lower than the fair value of those shares on the grant date. As a result, the income tax deduction related to such shares is less than the expense previously recognized for book purposes. During the three months ended March 31, 2014, certain restricted stock options were exercised, for which the related income tax deduction was less than the expense previously recognized for book purposes. There were no stock options exercised during the three months ended March 31, 2015. In accordance with GAAP, such shortfalls reduce additional paid-in capital to the extent windfall tax benefits have been previously recognized. However, the Company has not previously recognized any windfall tax benefits; therefore, such shortfalls are included in income tax expense.
The following table presents the tax impact of these shortfalls for the periods presented:
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Vesting of restricted stock
 
$
(2,501
)
 
$
(1
)
Exercise of restricted stock options
 

 
(142
)
Tax expense due to shortfalls
 
$
(2,501
)
 
$
(143
)

17

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

Significant components of the Company's net deferred tax liability for the periods presented are as follows:
(in thousands)
 
March 31, 2015
 
December 31, 2014
Oil and natural gas properties, midstream service assets and other fixed assets
 
$
(456,797
)
 
$
(424,712
)
Net operating loss carry-forward
 
388,163

 
353,724

Derivatives
 
(117,565
)
 
(121,365
)
Stock-based compensation
 
6,892

 
10,718

Accrued bonus
 
656

 
3,256

Capitalized interest
 
3,126

 
3,049

Other
 
(3,759
)
 
(316
)
Gross deferred tax liability
 
(179,284
)
 
(175,646
)
Valuation allowance
 
(1,304
)
 
(1,299
)
Net deferred tax liability
 
$
(180,588
)
 
$
(176,945
)
Deferred tax assets and liabilities were classified in the unaudited consolidated balance sheets as follows for the periods presented:
(in thousands)
 
March 31, 2015
 
December 31, 2014
Deferred tax asset
 
$

 
$

Deferred tax liability
 
(180,588
)
 
(176,945
)
Deferred tax liability
 
$
(180,588
)
 
$
(176,945
)
The Company had federal net operating loss carry-forwards totaling $1.1 billion and state of Oklahoma net operating loss carry-forwards totaling $81.8 million as of March 31, 2015. These carry-forwards begin expiring in 2026. As of March 31, 2015, the Company believes the federal and the state of Oklahoma net operating loss carry-forwards are fully realizable. The Company considered all available evidence, both positive and negative, in determining whether, based on the weight of that evidence, a valuation allowance was needed on either the federal or the Oklahoma net operating loss carry-forwards. Such consideration included estimated future projected earnings based on existing reserves and projected future cash flows from its oil and natural gas reserves (including the timing of those cash flows), the reversal of deferred tax liabilities recorded as of March 31, 2015, the Company's ability to capitalize intangible drilling costs, rather than expensing these costs in order to prevent an operating loss carry-forward from expiring unused, and future projections of Oklahoma sourced income.

The Company's federal and state operating loss carry-forwards include windfall tax deductions from vestings of certain restricted stock awards and stock option exercises that were not recorded in the Company's income tax provision. The amount of windfall tax benefit recognized in additional paid-in capital is limited to the amount of benefit realized currently in income taxes payable. As of March 31, 2015, the Company had suspended additional paid-in capital credits of $4.5 million related to windfall tax deductions. Upon realization of the net operating loss carry-forwards from such windfall tax deductions, the Company would record a benefit of up to $4.5 million in additional paid-in capital.
The Company maintains a valuation allowance to reduce certain deferred tax assets to amounts that are more likely than not to be realized. As of March 31, 2015, a full valuation allowance of $1.3 million was recorded against the deferred tax asset related to the Company's charitable contribution carry-forward of $3.6 million.
The Company's income tax returns for the years 2012 through 2014 remain open and subject to examination by federal tax authorities and/or the tax authorities in Oklahoma and Texas which are the jurisdictions where the Company has or had operations. Additionally, the statute of limitations for examination of federal net operating loss carry-forwards typically does not begin to run until the year the attribute is utilized in a tax return.
Note 8—Derivatives
a. Commodity derivatives
The Company engages in derivative transactions such as collars, swaps, puts and basis swaps to hedge price risks due to unfavorable changes in oil and natural gas prices related to its production. As of March 31, 2015, the Company had 34 open derivative contracts with financial institutions that extend from April 2015 to December 2017. None of these contracts were designated as hedges for accounting purposes. The contracts are recorded at fair value on the balance sheet and gains and losses

18

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

are recognized in current period earnings. Gains and losses on derivatives are reported on the unaudited consolidated statements of operations in the "Gain (loss) on derivatives, net" line item.
Each collar transaction has an established price floor and ceiling. When the settlement price is below the price floor established by these collars, the Company receives an amount from its counterparty equal to the difference between the settlement price and the price floor multiplied by the hedged contract volume. When the settlement price is above the price ceiling established by these collars, the Company pays its counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the hedged contract volume.
Each swap transaction has an established fixed price. When the settlement price is below the fixed price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is above the fixed price, the Company pays its counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume.
Each put transaction has an established floor price. The Company pays its counterparty a premium, which can be deferred until settlement, to enter into the put transaction. When the settlement price is below the floor price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is above the floor price, the put option expires.
The oil basis swap transactions have an established fixed basis differential. The Company's oil basis swaps' differential is between the West Texas Intermediate-Argus Americas Crude (Midland) ("WTI Midland") index crude oil price and the WTI NYMEX (defined below) index crude oil price. When the WTI NYMEX price less the fixed basis differential is greater than the actual WTI Midland price, the difference multiplied by the hedged contract volume is paid to the Company by the counterparty. When the WTI NYMEX price less the fixed basis differential is less than the actual WTI Midland price, the difference multiplied by the hedged contract volume is paid by the Company to the counterparty.
During the first quarter of 2014, the Company unwound a physical commodity contract and the associated oil basis swap financial derivative contract which hedged the differential between the Light Louisiana Sweet Argus and the Brent International Petroleum Exchange index oil prices. Prior to its unwind, the physical commodity contract qualified to be scoped out of mark-to-market accounting in accordance with the normal purchase and normal sale scope exemption. Once modified to settle financially in the unwind agreement, the contract ceased to qualify for the normal purchase and normal sale scope exemption, therefore requiring it to be marked-to-market. The Company received net proceeds of $76.7 million from the early termination of these contracts. The Company agreed to settle the contracts early due to the counterparty's decision to exit the physical commodity trading business.
The following represents cash settlements received for derivatives for the periods presented:
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Cash settlements received (paid) for matured commodity derivatives
 
$
63,141

 
$
(1,431
)
Early terminations of commodity derivatives received
 

 
76,660

Cash settlements received for derivatives, net
 
$
63,141

 
$
75,229

    

19

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

The following table summarizes open positions as of March 31, 2015, and represents, as of such date, derivatives in place through December 2017 on annual production volumes:
 
 
Remaining Year
2015
 
Year
2016
 
Year
2017
Oil positions:(1)
 
 

 
 
 
 

Puts:
 
 

 
 

 
 

Hedged volume (Bbl)
 
342,000

 

 

Weighted-average price ($/Bbl)
 
$
75.00

 
$

 
$

Swaps:
 
 

 
 

 
 

Hedged volume (Bbl)
 
504,000

 
1,573,800

 

Weighted-average price ($/Bbl)
 
$
96.56

 
$
84.82

 
$

Collars:
 
 

 
 

 
 

Hedged volume (Bbl)
 
4,922,140

 
2,556,000

 
2,628,000

Weighted-average floor price ($/Bbl)
 
$
79.81

 
$
80.00

 
$
77.22

Weighted-average ceiling price ($/Bbl)
 
$
95.40

 
$
93.77

 
$
97.22

Totals:
 
 
 
 
 
 
Total volume hedged with ceiling price (Bbl)
 
5,426,140

 
4,129,800

 
2,628,000

Weighted-average ceiling price ($/Bbl)
 
$
95.51

 
$
90.36

 
$
97.22

Total volume hedge with floor price (Bbl)
 
5,768,140

 
4,129,800

 
2,628,000

Weighted-average floor price ($/Bbl)
 
$
80.99

 
$
81.84

 
$
77.22

Basis swaps:(2)
 
 
 
 
 
 
Hedged volume (Bbl)
 
2,750,000

 

 

Weighted-average price ($/Bbl)
 
$
(1.95
)
 
$

 
$

Natural gas positions:(3)
 
 

 
 

 
 

Collars:
 
 

 
 

 
 

Hedged volume (MMBtu)
 
21,520,000

 
18,666,000

 

Weighted-average floor price ($/MMBtu)
 
$
3.00

 
$
3.00

 
$

Weighted-average ceiling price ($/MMBtu)
 
$
5.96

 
$
5.60

 
$

_______________________________________________________________________________
(1)
Oil derivatives are settled based on the average of the daily settlement prices for the First Nearby Month of the West Texas Intermediate NYMEX Light Sweet Crude Oil Futures Contract for each NYMEX Trading Day during each month ("WTI NYMEX").
(2)
The associated oil basis swaps are settled on the differential between the WTI Midland and the WTI NYMEX index oil prices.
(3)
Natural gas derivatives are settled based on the Inside FERC index price for West Texas Waha for the calculation period.
b. Balance sheet presentation
In accordance with the Company's standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives. The Company's oil and natural gas commodity derivatives are presented on a net basis as "Derivatives" on the unaudited consolidated balance sheets. See Note 9.a for a summary of the fair value of derivatives on a gross basis.
By using derivatives to hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. For the Company, market risk is the exposure to changes in the market price of oil and natural gas, which are subject to fluctuations from a variety of factors, including changes in supply and demand. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, thereby creating credit risk. The Company's counterparties are participants in the Senior Secured Credit Facility which is secured by the Company's oil and natural gas reserves; therefore, the Company is not required to post any collateral. The Company does not require collateral from its derivative counterparties. The Company minimizes the credit risk in derivatives by: (i) limiting its exposure to any single counterparty, (ii) entering into derivatives only with

20

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

counterparties that meet the Company's minimum credit quality standard or have a guarantee from an affiliate that meets the Company's minimum credit quality standard and (iii) monitoring the creditworthiness of the Company's counterparties on an ongoing basis.
Note 9—Fair value measurements
The Company accounts for its oil and natural gas commodity derivatives at fair value. The fair value of derivatives is determined utilizing pricing models for similar instruments. The models use a variety of techniques to arrive at fair value, including quotes and pricing analysis. Inputs to the pricing models include publicly available prices and forward curves generated from a compilation of data gathered from third parties.
The Company has categorized its assets and liabilities measured at fair value, based on the priority of inputs to the valuation technique, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
Assets and liabilities recorded at fair value on the unaudited consolidated balance sheets are categorized based on inputs to the valuation techniques as follows: 
Level 1—
Assets and liabilities recorded at fair value for which values are based on unadjusted quoted prices for identical assets or liabilities in an active market that management has the ability to access. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
 
 
Level 2—
Assets and liabilities recorded at fair value for which values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the assets or liabilities. Substantially all of these inputs are observable in the marketplace throughout the full term of the price risk management instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.
 
 
Level 3—
Assets and liabilities recorded at fair value for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs are not corroborated by market data. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability.
When the inputs used to measure fair value fall within different levels of the hierarchy in a liquid environment, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company conducts a review of fair value hierarchy classifications on an annual basis. Changes in the observability of valuation inputs may result in a reclassification for certain financial assets or liabilities. Transfers between fair value hierarchy levels are recognized and reported in the period in which the transfer occurred. No transfers between fair value hierarchy levels occurred during the three months ended March 31, 2015 or 2014.

21

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

a. Fair value measurement on a recurring basis
The following tables summarize the Company's fair value hierarchy by commodity on a gross basis and the net presentation on the unaudited consolidated balance sheets for derivative assets and liabilities measured at fair value on a recurring basis for the periods presented:
(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total gross fair value
 
Amounts offset
 
Net fair value presented on the consolidated balance sheets
As of March 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
190,569

 
$

 
$
190,569

 
$
(3,238
)
 
$
187,331

Natural gas derivatives
 

 
11,815

 

 
11,815

 

 
11,815

Oil deferred premiums
 

 

 

 

 
(3,545
)
 
(3,545
)
Natural gas deferred premiums
 

 

 

 

 
(523
)
 
(523
)
Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
118,663

 
$

 
$
118,663

 
$

 
$
118,663

Natural gas derivatives
 

 
4,738

 

 
4,738

 

 
4,738

Oil deferred premiums
 

 

 

 

 
(4,814
)
 
(4,814
)
Natural gas deferred premiums
 

 

 

 

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
(3,238
)
 
$

 
$
(3,238
)
 
$
3,238

 
$

Natural gas derivatives
 

 

 

 

 

 

Oil deferred premiums
 

 

 
(3,545
)
 
(3,545
)
 
3,545

 

Natural gas deferred premiums
 

 

 
(523
)
 
(523
)
 
523

 

Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$

 
$

 
$

 
$

 
$

Natural gas derivatives
 

 

 

 

 

 

Oil deferred premiums
 

 

 
(4,814
)
 
(4,814
)
 
4,814

 

Natural gas deferred premiums
 

 

 

 

 

 

Net derivative position
 
$

 
$
322,547

 
$
(8,882
)
 
$
313,665

 
$

 
$
313,665


22

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

(in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total gross fair value
 
Amounts offset
 
Net fair value presented on the consolidated balance sheets
As of December 31, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
190,303

 
$

 
$
190,303

 
$

 
$
190,303

Natural gas derivatives
 

 
9,647

 

 
9,647

 

 
9,647

Oil deferred premiums
 

 

 

 

 
(4,653
)
 
(4,653
)
Natural gas deferred premiums
 

 

 

 

 
(696
)
 
(696
)
Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$
117,963

 
$

 
$
117,963

 
$

 
$
117,963

Natural gas derivatives
 

 
3,646

 

 
3,646

 

 
3,646

Oil deferred premiums
 

 

 

 

 
(3,821
)
 
(3,821
)
Natural gas deferred premiums
 

 

 

 

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Current:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$

 
$

 
$

 
$

 
$

Natural gas derivatives
 

 

 

 

 

 

Oil deferred premiums
 

 

 
(4,768
)
 
(4,768
)
 
4,653

 
(115
)
Natural gas deferred premiums
 

 

 
(696
)
 
(696
)
 
696

 

Noncurrent:
 
 
 
 
 
 
 
 
 
 
 
 
Oil derivatives
 
$

 
$

 
$

 
$

 
$

 
$

Natural gas derivatives
 

 

 

 

 

 

Oil deferred premiums
 

 

 
(3,821
)
 
(3,821
)
 
3,821

 

Natural gas deferred premiums
 

 

 

 

 

 

Net derivative position
 
$

 
$
321,559

 
$
(9,285
)
 
$
312,274

 
$

 
$
312,274

These items are included in "Derivatives" on the unaudited consolidated balance sheets. Significant Level 2 assumptions associated with the calculation of discounted cash flows used in the mark-to-market analysis of commodity derivatives include each derivative contract's corresponding commodity index price, appropriate risk-adjusted discount rates and other relevant data.
The Company's deferred premiums associated with its commodity derivative contracts are categorized as Level 3, as the Company utilizes a net present value calculation to determine the valuation. They are considered to be measured on a recurring basis as the derivative contracts they derive from are measured on a recurring basis. As commodity derivative contracts containing deferred premiums are entered into, the Company discounts the associated deferred premium to its net present value at the contract trade date, using the Senior Secured Credit Facility rate at the trade date (historical input rates range from 1.69% to 3.56%), and then records the change in net present value to interest expense over the period from trade until the final settlement date at the end of the contract. After this initial valuation, the net present value of each deferred premium is not adjusted; therefore, significant increases (decreases) in the Senior Secured Credit Facility rate would result in a significantly lower (higher) fair value measurement for each new contract entered into that contained a deferred premium; however, the valuation for the deferred premiums already recorded would remain unaffected. While the Company believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates; therefore, on a quarterly basis, the valuation is compared to counterparty valuations and a third-party valuation of the deferred premiums for reasonableness.

23

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

The following table presents actual cash payments required for deferred premiums as of March 31, 2015, and for the calendar years following:
(in thousands)
 
 
Remaining 2015
 
$
3,746

2016
 
358

2017
 
4,585

2018
 
426

  Total
 
$
9,115

A summary of the changes in assets classified as Level 3 measurements for the periods presented are as follows:
 
 
Three months ended March 31,
(in thousands)
 
2015
 
2014
Balance of Level 3 at beginning of period
 
$
(9,285
)

$
(12,684
)
Change in net present value of deferred premiums for derivatives
 
(43
)

(65
)
Total purchases and settlements:
 
 



Purchases
 
(975
)


Settlements
 
1,421


1,959

Balance of Level 3 at end of period
 
$
(8,882
)

$
(10,790
)
b. Fair value measurement on a nonrecurring basis
The Company accounts for the impairment of long-lived assets, if any, at fair value on a nonrecurring basis. For purposes of fair value measurement, it was determined that the impairment of long-lived assets is classified as Level 3, based on the use of internally developed cash-flow models. See Note 2.n for discussion of the Company's impairment of materials and supplies and line-fill for the three months ended March 31, 2015.
The accounting policies for impairment of oil and natural gas properties are discussed in Note 2.g. Significant inputs included in the calculation of discounted cash flows used in the impairment analysis include the Company's estimate of operating and development costs, anticipated production of evaluated reserves and other relevant data.
Note 10—Credit risk
The Company's oil, NGL and natural gas sales are made to a variety of purchasers, including intrastate and interstate pipelines or their marketing affiliates and independent marketing companies. The Company's joint operations accounts receivable are from a number of oil and natural gas companies, partnerships, individuals and others who own interests in the oil and natural gas properties operated by the Company. Management believes that any credit risk imposed by a concentration in the oil and natural gas industry is offset by the creditworthiness of the Company's customer base and industry partners. The Company routinely assesses the recoverability of all material trade and other receivables to determine collectability.
The Company uses derivatives to hedge its exposure to oil and natural gas price volatility. These transactions expose the Company to potential credit risk from its counterparties. In accordance with the Company's standard practice, its derivatives are subject to counterparty netting under agreements governing such derivatives; therefore, the credit risk associated with its derivative counterparties is somewhat mitigated. See Notes 8 and 9 for additional information regarding the Company's derivatives.
Note 11—Commitments and contingencies
a.    Litigation

From time to time the Company is involved in legal proceedings and/or may be subject to industry rulings that could bring rise to claims in the ordinary course of business. The Company has concluded that the likelihood is remote that the ultimate resolution of any pending litigation or pending claims will be material or have a material adverse effect on the Company's business, financial position, results of operations or liquidity.


24

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

b.    Drilling contracts

The Company has committed to drilling contracts with various third parties to complete its various drilling projects. The contracts contain early termination clauses that require the Company to potentially pay penalties to the third parties should the Company cease drilling efforts. These penalties would negatively impact the Company's financial statements upon early contract termination, especially if a significant number of such contracts were terminated early in their respective terms. In the fourth quarter of 2014, the Company announced a reduced 2015 capital expenditure budget compared to 2014. As a result, the Company began releasing rigs as drilling contracts came close to expiration and incurred charges of $0.5 million in the fourth quarter of 2014. No comparable amounts were recorded in the three months ended March 31, 2015 or 2014. Future commitments of $33.7 million as of March 31, 2015 are not recorded in the accompanying unaudited consolidated balance sheets. Management does not currently anticipate the early termination of any existing contracts in 2015 that would result in a substantial penalty.
 
c.    Federal and state regulations

Oil and natural gas exploration, production and related operations are subject to extensive federal and state laws, rules and regulations. Failure to comply with these laws, rules and regulations can result in substantial penalties. The regulatory burden on the oil and natural gas industry increases the cost of doing business and affects profitability. The Company believes that it is in compliance with currently applicable federal and state regulations related to oil and natural gas exploration and production, and that compliance with the current regulations will not have a material adverse impact on the financial position or results of operations of the Company. These rules and regulations are frequently amended or reinterpreted; therefore, the Company is unable to predict the future cost or impact of complying with these regulations.
 
d.    Other commitments

See Note 14 for discussion regarding the commitments to the Company's non-consolidated variable interest entity ("VIE").
Note 12—Restructuring
Following the recent drop in oil prices, in an effort to reduce costs and to better position the Company for ongoing efficient growth, on January 20, 2015, the Company executed a company-wide restructuring and reduction in force (the "RIF") that included (i) the relocation of certain employees in the Company's Dallas, Texas area office to the Company's other existing offices in Tulsa, Oklahoma and Midland, Texas; (ii) closing the Company's Dallas, Texas area office; (iii) a workforce reduction of approximately 75 employees and (iv) the release of 24 contract personnel. The reduction in workforce was communicated to employees on January 20, 2015 and was generally effective immediately. The relocation of Company employees is expected to be completed by June 1, 2015. The Company's compensation committee approved the RIF and the severance package offered in connection with the RIF. The Company incurred expenses of $6.0 million during the three months ended March 31, 2015 related to the RIF. As of March 31, 2015, no additional RIF expenses are expected to be incurred.
Note 13—Net loss per share
Basic net loss per share is computed by dividing net loss by the weighted-average number of common shares outstanding for the period. Diluted net loss per share reflects the potential dilution of non-vested restricted stock awards, performance share awards and outstanding restricted stock options. For the three months ended March 31, 2015 and 2014, all of these potentially dilutive items were anti-dilutive due to the Company's net loss and, therefore, were excluded from the calculation of diluted net loss per share.

25

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

The following is the calculation of basic and diluted weighted-average common shares outstanding and net loss per share for the periods presented:
 
 
Three months ended March 31,
(in thousands, except for per share data)
 
2015
 
2014