Oil and Gas Properties. The Company’s oil, gas and NGL exploration and production activities are accounted for using the successful efforts method. Under this method, all property acquisition costs and costs of exploratory and development wells are capitalized when incurred, pending determination of whether the well has found proved reserves. If an exploratory well does not find proved reserves, the costs of drilling the well are charged to expense and included within cash flows from investing activities in the Consolidated Statements of Cash Flows. If an exploratory well does find proved reserves, the costs remain capitalized and are included within additions to oil and gas properties within cash flows from investing activities in the Consolidated Statements of Cash Flows when incurred. The costs of development wells are capitalized whether proved reserves are added or not. Oil and gas lease acquisition costs are also capitalized.
Other exploration costs, including certain geological and geophysical expenses and delay rentals for oil and gas leases, are charged to expense as incurred. The sale of a partial interest in a proved property is accounted for as a cost recovery and no gain or loss is recognized as long as this treatment does not significantly affect the unit-of-production amortization rate. A gain or loss is recognized for all other sales of proved properties and is classified in other operating revenues. Maintenance and repairs are charged to expense, and renewals and betterments are capitalized to the appropriate property and equipment accounts.
Unproved oil and gas property costs are transferred to proved oil and gas properties if the properties are subsequently determined to be productive or are assigned proved reserves. Proceeds from sales of partial interests in unproved leases are accounted for as a recovery of cost without recognizing any gain until all costs are recovered. Unproved oil and gas properties are assessed periodically for impairment based on remaining lease terms, drilling results, reservoir performance, commodity price outlooks, future plans to develop acreage and other relevant matters.
Materials and supplies consist primarily of tubular goods and well equipment to be used in future drilling operations or repair operations and are carried at the lower of cost or market value, on a first-in, first-out basis.
The following table sets forth the net capitalized costs and associated accumulated DD&A and non-cash impairments relating to the Company’s oil, natural gas and NGL producing activities:
|
| | | | | | | |
| As of December 31, |
| 2013 | | 2012 |
| (in thousands) |
Proved properties | $ | 485,427 |
| | $ | 387,242 |
|
Wells and related equipment and facilities | 2,192,754 |
| | 2,625,891 |
|
Support equipment and facilities | 177,224 |
| | 304,914 |
|
Materials and supplies | 8,518 |
| | 13,220 |
|
Total proved oil and gas properties | $ | 2,863,923 |
| | $ | 3,331,267 |
|
Unproved properties | 239,925 |
| | 384,486 |
|
Wells and facilities in progress | 56,674 |
| | 72,721 |
|
Total unproved oil and gas properties, excluded from amortization | $ | 296,599 |
| | $ | 457,207 |
|
Accumulated depreciation, depletion, amortization and impairment | (976,339 | ) | | (1,203,495 | ) |
Total oil and gas properties, net | $ | 2,184,183 |
| | $ | 2,584,979 |
|
Net changes in capitalized exploratory well costs for the years ended December 31, 2013, 2012 and 2011, respectively, are reflected in the following table:
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
| (in thousands) |
Beginning of period | $ | — |
| | $ | — |
| | $ | 9,041 |
|
Additions to capitalized exploratory well costs pending the determination of proved reserves | — |
| | — |
| | 110 |
|
Reclassifications to wells, facilities and equipment based on the determination of proved reserves | — |
| | — |
| | (6,179 | ) |
Exploratory well costs charged to dry hole costs and abandonment expense | — |
| | — |
| | (2,972 | ) |
End of period | $ | — |
| | $ | — |
| | $ | — |
|
All exploratory wells are evaluated for economic viability within one year of well completion. Exploratory wells that discover potentially economic reserves in areas where a major capital expenditure would be required before production could begin, and where the economic viability of that major capital expenditure depends upon the successful completion of further exploratory work in the area, remain capitalized if the well finds a sufficient quantity of reserves to justify its completion as a producing well and the Company is making sufficient progress assessing the reserves and the economic and operating viability of the project.
The Company reviews proved oil and gas properties on a field-by-field basis for impairment on an annual basis or whenever events and circumstances indicate that a decline in the recoverability of their carrying value may have occurred. The Company estimates the expected undiscounted future cash flows of its oil and gas properties and compares such undiscounted future cash flows to the carrying amount of the oil and gas properties to determine if the carrying amount is recoverable. If the carrying value of a property exceeds the undiscounted future cash flows, the Company will impair the carrying value to fair value based on an analysis of quantitative and qualitative factors. The factors used to determine fair value include, but are not limited to, recent sales prices of comparable properties, the present value of future cash flows, net of estimated operating and development costs using estimates of reserves, future commodity pricing, future production estimates, anticipated capital expenditures and various discount rates commensurate with the risk and current market conditions associated with realizing the expected cash flows projected.
The Company recognized non-cash impairment charges, which were included within impairment, dry hole costs and abandonment expense in the Consolidated Statements of Operations, as follows:
|
| | | | | | | | | | | | |
| Year Ended December 31, | |
| 2013 | | 2012 | | 2011 | |
| (in thousands) | |
Non-cash impairment of proved oil and gas properties | $ | 206,953 |
| (1) | $ | — |
| | $ | 82,814 |
| (2) |
Non-cash impairment of unproved oil and gas properties | 19,598 |
| (3) | 37,348 |
| (4) | 17,464 |
| (5) |
Dry hole costs | 1,124 |
| | 21,012 |
| | 13,391 |
| |
Abandonment expense | 10,723 |
| | 9,509 |
| | 3,930 |
| |
Total non-cash impairment, dry hole costs and abandonment expense | $ | 238,398 |
| | $ | 67,869 |
| | $ | 117,599 |
| |
| |
(1) | Non-cash impairment of proved oil and gas properties for the year ended December 31, 2013 related to our West Tavaputs properties based upon an analysis of the carrying value of the related properties relative to their estimated fair values. These assets were sold in December 2013. |
| |
(2) | Non-cash impairment of proved oil and gas properties for the year ended December 31, 2011 related to properties within the Powder River and Wind River Basins. The impairment was the result of an analysis of the carrying value of the related properties relative to their estimated fair values. |
| |
(3) | Non-cash impairment of unproved oil and gas properties for the year ended December 31, 2013 was comprised of $17.1 million related to certain unproved oil and gas properties within exploration projects primarily as a result of no future plans to evaluate the remaining acreage and an estimated market value below our carrying value and $2.5 million related to our West Tavaputs properties based upon an analysis of the carrying value of the related properties relative to their estimated fair values. These assets were sold in December 2013. |
| |
(4) | Non-cash impairment of unproved oil and gas properties for the year ended December 31, 2012 related to certain unproved oil and gas properties within exploration projects primarily as a result of unfavorable natural gas exploratory results, unfavorable market conditions or no future plans to evaluate the remaining acreage. |
| |
(5) | Non-cash impairment of unproved oil and gas properties for the year ended December 31, 2011 related to certain unproved oil and gas properties within exploration projects primarily as a result of no future plans to evaluate the remaining acreage and an estimated market value below our carrying value. |
The provision for DD&A of oil and gas properties is calculated on a field-by-field basis using the unit-of-production method. Natural gas is converted to barrel of oil equivalents, Boe, at the standard rate of six Mcf to one barrel. Estimated future dismantlement, restoration and abandonment costs, which are net of estimated salvage values, are taken into consideration by this calculation.
