| Basis of presentation and significant accounting policies | 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 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 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 is included in the unaudited consolidated statements of operations. See Note 2.h for additional discussion of the Company's equity method investment. 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, 2016 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 September 30, 2017 , results of operations for the three and nine months ended September 30, 2017 and 2016 and cash flows for the nine months ended September 30, 2017 and 2016 . 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 2016 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) impairments, (v) asset retirement obligations, (vi) stock-based compensation, (vii) deferred income taxes, (viii) fair value of assets acquired and liabilities assumed in an acquisition, (ix) fair value of derivatives and deferred premiums and (x) contingent liabilities. As fair value is a market-based measurement, it is determined based on the assumptions that would be used by market participants. These estimates and assumptions are based on management's best judgment. Management evaluates its 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 2017 presentation. These reclassifications had no impact on previously reported balance sheets or stockholders' equity. d. Accounts receivable The Company sells produced oil, NGL and natural gas and purchased oil to various customers and participates with other parties in the development and operation of oil and natural gas properties. The majority of the Company's accounts receivable are unsecured. Accounts receivable for joint interest billings are recorded as amounts billed to customers less an allowance for doubtful accounts. 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 greater than 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 consisted of the following components as of the dates presented: (in thousands) September 30, 2017 December 31, 2016 Oil, NGL and natural gas sales $ 62,055 $ 46,999 Sales of purchased oil and other products 15,624 16,213 Joint operations, net (1) 8,736 12,175 Matured derivatives 3,345 11,059 Other 80 421 Total $ 89,840 $ 86,867 ______________________________________________________________________________ (1) Accounts receivable for joint operations are presented net of an allowance for doubtful accounts of $0.1 million and $0.2 million as of September 30, 2017 and December 31, 2016 , respectively. As the operator of the majority of its wells, the Company has the ability to realize some or all of these receivables through the netting of production revenues. e. Derivatives The Company uses derivatives to reduce exposure to fluctuations in the prices of oil, NGL 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 in the form of puts, swaps, collars, basis swaps and call spreads . Derivatives are recorded at fair value and are presented on a net basis on the unaudited consolidated balance sheets as assets and/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 Note 8.a for discussion regarding the fair value of the Company's derivatives. 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 Notes 7 and 8.a for discussion regarding the Company's derivatives. f. Other current assets and liabilities Other current assets consisted of the following components as of the dates presented: (in thousands) September 30, 2017 December 31, 2016 Inventory (1) $ 8,623 $ 8,063 Prepaid expenses and other 7,573 6,228 Total other current assets $ 16,196 $ 14,291 ______________________________________________________________________________ (1) See Note 2.i for discussion of inventory held by the Company. Other current liabilities consisted of the following components as of the dates presented: (in thousands) September 30, 2017 December 31, 2016 Accrued interest payable $ 21,832 $ 24,152 Accrued compensation and benefits 16,498 25,947 Purchased oil payable 16,070 17,213 Lease operating expense payable 11,442 10,572 Other accrued liabilities 27,230 16,331 Total other current liabilities $ 93,072 $ 94,215 g. Property and equipment The following table sets forth the Company's property and equipment as of the dates presented: (in thousands) September 30, 2017 December 31, 2016 Evaluated oil and natural gas properties $ 5,863,536 $ 5,488,756 Less accumulated depletion and impairment (4,616,246 ) (4,514,183 ) Evaluated oil and natural gas properties, net 1,247,290 974,573 Unevaluated properties not being depleted 211,720 221,281 Midstream service assets 161,144 150,629 Less accumulated depreciation and impairment (30,737 ) (24,389 ) Midstream service assets, net 130,407 126,240 Depreciable other fixed assets 50,767 52,491 Less accumulated depreciation and amortization (23,779 ) (22,632 ) Depreciable other fixed assets, net 26,988 29,859 Land 14,914 14,914 Total property and equipment, net $ 1,631,319 $ 1,366,867 For the three months ended September 30, 2017 and 2016 , depletion expense was $6.80 per barrel of oil equivalent ("BOE") sold and $6.71 per BOE sold, respectively. For the nine months ended September 30, 2017 and 2016 , depletion expense was $6.57 per BOE sold and $7.55 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 exploring for or developing oil and natural gas properties, are capitalized and depleted 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 depleted 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, NGL and natural gas. The following table presents capitalized employee-related costs for the periods presented: Three months ended September 30, Nine months ended September 30, (in thousands) 2017 2016 2017 2016 Capitalized employee-related costs $ 6,938 $ 6,149 $ 17,911 $ 12,598 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 to 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 properties are assessed on a quarterly basis for possible impairment. 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 revenues from proved oil and natural gas properties discounted at 10% . The SEC guidelines require companies 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 before differentials ("Benchmark Prices"). The Benchmark Prices are then adjusted for quality, transportation fees, geographical differentials, marketing bonuses or deductions and other factors affecting the price received at the wellhead ("Realized Prices"). The Realized Prices are utilized to calculate the discounted future net revenues in the full cost ceiling calculation. In the event the unamortized cost of evaluated oil and natural gas properties being depleted 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. Full cost ceiling impairment expense for the nine months ended September 30, 2016 was $161.1 million and is included in the "Impairment expense" line item in the unaudited consolidated statements of operations and in the financial information provided for the Company's exploration and production segment presented in Note 13 . There was no full cost ceiling impairment expense recorded during the nine months ended September 30, 2017. h. Variable interest entity Medallion was established for the purpose of developing midstream solutions and providing midstream infrastructure to bring oil to market in the Midland Basin. As of September 30, 2017, LMS held 49% of Medallion's ownership units. LMS and the third-party 51% interest-holder agreed that the voting rights of Medallion, the profit and loss sharing and the additional capital contribution requirements would be equal to the ownership unit percentage held. Additionally, Medallion required a super-majority vote of 75% for many key operating and business decisions. The Company has determined that Medallion is a variable interest entity ("VIE"). However, LMS was not considered to be the primary beneficiary of the VIE because LMS did not have the power to direct the activities that most significantly affected Medallion's economic performance. As such, prior to its sale, Medallion was accounted for under the equity method of accounting. The Company's proportionate share of Medallion's net income is reflected in the unaudited consolidated statements of operations as "Income from equity method investee" and the carrying amount is reflected in the unaudited consolidated balance sheets as "Investment in equity method investee." The Company has elected to classify distributions received from Medallion using the cumulative earnings approach. No such distributions have been received through September 30, 2017. LMS contributed $24.6 million to Medallion during the three and nine months ended September 30, 2017. LMS contributed $16.0 million and $58.7 million to Medallion during the three and nine months ended September 30, 2016, respectively. Medallion continued expansion activities on existing portions of its pipeline infrastructure in order to gather and transport additional third-party oil production during each of the nine months ended September 30, 2017 and 2016. See Note 12.a for discussion of items included in the Company's unaudited consolidated financial statements related to Medallion. See Note 16.a for discussion regarding an additional contribution made to Medallion subsequent to September 30, 2017 . On October 30, 2017 , LMS, together with the third-party 51% interest holder, completed the previously announced sale of 100% of the ownership interests in Medallion (the "Medallion Sale"). LMS has a Transportation Services Agreement (the "TA") with a wholly-owned subsidiary of Medallion, under which LMS receives firm transportation of the Company's crude oil production from Reagan and Glasscock County, Texas to Colorado City, Texas that continues to be in effect after the Medallion Sale. Historically, the Company's crude oil purchasers have fulfilled the commitment by transporting crude oil, purchased from the Company, under the TA, as agent. As of September 30, 2017, the Company's maximum exposure to loss associated with future commitments under the TA is $146.2 million that is not recorded in the Company's unaudited consolidated balance sheets. As a result of the Company's continuing involvement with Medallion due to the TA surviving the closing of the Medallion Sale, the Company will record a deferred gain in the amount of its maximum exposure to loss as of October 30, 2017 during the fourth quarter of 2017. This deferred gain will be amortized over the TA's firm commitment transportation term through 2024. See Note 16.a for additional discussion of the Medallion Sale subsequent to September 30, 2017. i. Long-lived assets and inventory 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 inventory, which is used in the Company's production activities of oil and natural gas properties and midstream service assets, is carried at the lower of cost or net realizable value ("NRV"), with cost determined using the weighted-average cost method, and is included in "Other current assets" and "Other assets, net" on the unaudited consolidated balance sheets. The NRV for materials and supplies inventory is determined utilizing a replacement cost approach (Level 2). The Company has frac pit water inventory, which is used in developing oil and natural gas properties and is carried at lower of cost or NRV, with cost determined using the weighted-average cost method, and is included in "Other current assets" on the unaudited consolidated balance sheets. The NRV for frac pit water inventory is determined utilizing a replacement cost approach (Level 2). The minimum volume of product in a pipeline system that 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. The Company owns oil line-fill in third-party pipelines, which is accounted for at lower of cost or NRV, with cost determined using the weighted-average cost method, and is included in "Other assets, net" on the unaudited consolidated balance sheets. The NRV is determined utilizing a quoted market price adjusted for regional price differentials (Level 2). There were no long-lived asset impairments recorded during the nine months ended September 30, 2017 or 2016. Inventory impairments of $1.0 million were recorded for the nine months ended September 30, 2016. There were no inventory impairments recorded during the nine months ended September 30, 2017. Debt issuance costs Debt issuance fees, which are recorded 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 $4.7 million of debt issuance costs during the nine months ended September 30, 2017 as a result of entering into the Fifth Amended and Restated Credit Agreement (as amended, the "Senior Secured Credit Facility"). No debt issuance costs were capitalized during the nine months ended September 30, 2016 . The Company had total debt issuance costs of $20.4 million and $18.8 million , net of accumulated amortization of $24.4 million and $21.3 million , as of September 30, 2017 and December 31, 2016 , respectively. No debt issuance costs were written off during the nine months ended September 30, 2017 . The Company wrote-off $0.8 million of debt issuance costs during the nine months ended September 30, 2016 as a result of changes in the borrowing base and aggregate elected commitment of the Senior Secured Credit Facility, which is included in the unaudited consolidated statements of operations in the "Write-off of debt issuance costs" line item. Debt issuance costs related to the Company's senior unsecured notes are presented in "Long-term debt, net" on the Company's unaudited consolidated balance sheets. Debt issuance costs related to the Senior Secured Credit Facility are presented in "Other assets, net" on the Company's unaudited consolidated balance sheets. See Note 4.f for additional discussion of debt issuance costs. Future amortization expense of debt issuance costs as of September 30, 2017 for the periods presented is as follows: (in thousands) September 30, 2017 Remaining 2017 $ 1,044 2018 4,223 2019 4,308 2020 4,396 2021 4,493 Thereafter 1,947 Total $ 20,411 k. 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 service assets 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, (iii) estimated removal and/or remediation costs for midstream service assets, (iv) estimated remaining life of midstream service assets, (v) future inflation factors and (vi) the Company's average credit adjusted risk-free rate. 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 gathering assets and perform other remediation of the sites where such pipeline and 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 gathering assets in the periods in which settlement dates are reasonably determinable. The following reconciles the Company's asset retirement obligation liability for the periods presented: (in thousands) Nine months ended September 30, 2017 Year ended December 31, 2016 Liability at beginning of period $ 52,207 $ 46,306 Liabilities added due to acquisitions, drilling, midstream service asset construction and other 492 1,528 Accretion expense 2,822 3,483 Liabilities settled upon plugging and abandonment (357 ) (1,242 ) Liabilities removed due to sale of property (871 ) — Revision of estimates 178 2,132 Liability at end of period $ 54,471 $ 52,207 l. Fair value measurements The carrying amounts reported in the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, undistributed revenue and royalties, accrued capital expenditures and other accrued assets and liabilities approximate their fair values. See Note 4.e for fair value disclosures related to the Company's debt obligations. The Company carries its derivatives at fair value. See Note 8.a for details regarding the fair value of the Company's derivatives. m. 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. n. Compensation awards Stock-based compensation expense, net of amounts capitalized, is included in "General and administrative" in the unaudited consolidated statements of operations over the awards' vesting periods and is based on the awards' grant date fair value. The Company utilizes the closing stock price on the grant date, less an expected forfeiture rate, to determine the fair values 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, in prior periods, the 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 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. See Note 5 for further discussion regarding the restricted stock awards, stock option awards, performance share awards and performance unit awards. o. July 2016 and May 2016 Equity Offerings On July 19, 2016, the Company completed the sale of 13,000,000 shares of Laredo's common stock (the "July 2016 Equity Offering") for net proceeds of $136.3 million , after underwriting discounts, commissions and offering expenses. On August 9, 2016, the underwriters exercised their option to purchase an additional 1,950,000 shares of Laredo's common stock, which resulted in net proceeds to the Company of $20.5 million , after underwriting discounts, commissions and offering expenses. On May 16, 2016, the Company completed the sale of 10,925,000 shares of Laredo's common stock (the "May 2016 Equity Offering") for net proceeds of $119.3 million , after underwriting discounts, commissions and offering expenses. There were no comparative offerings of Laredo's stock during the nine months ended September 30, 2017 . p. 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 September 30, 2017 or December 31, 2016 . q. Non-cash investing and supplemental cash flow information The following presents the non-cash investing and supplemental cash flow information for the periods presented: Nine months ended September 30, (in thousands) 2017 2016 Non-cash investing information: Change in accrued capital expenditures $ 39,156 $ (24,963 ) Change in accrued capital contribution to equity method investee (1) $ — $ (27,583 ) Capitalized asset retirement cost $ 670 $ 1,669 Supplemental cash flow information: Capitalized interest $ 756 $ 199 ______________________________________________________________________________ (1) See Notes 2.h , 12.a and 16.a for additional discussion of the Company's equity method investee. |
