Annual report pursuant to Section 13 and 15(d)

Oil and Natural Gas Properties

v2.4.0.6
Oil and Natural Gas Properties
 12 Months Ended
Dec. 31, 2012
Oil and Gas Property [Abstract]  
Oil and Natural Gas Properties
Crude Oil and Natural Gas Properties

The following table discloses certain financial data relating to the Company's crude oil and natural gas activities, all of which are located in the United States.
 
For the year ended December 31,
 
2012
 
2011
 
2010
Capitalized costs incurred:
 
 
 
 
 
    Evaluated Properties-
 
 
 
 
 
        Beginning of period balance
$
1,421,640

 
$
1,316,677

 
$
1,593,884

        Deconsolidation of Subsidiary January 1, 2010
—

 
—

 
(364,589
)
        Capitalized G&A
12,148

 
11,205

 
10,676

        Property acquisition costs
2,075

 
—

 
—

        Exploration costs
22,703

 
5,473

 
14,739

        Development costs
38,444

 
88,285

 
61,967

        End of period balance
$
1,497,010

 
$
1,421,640

 
$
1,316,677

 
 
 
 
 
 
    Unevaluated Properties (excluded from amortization):
 

 
 

 
 

        Beginning of period balance
$
2,603

 
$
8,106

 
$
25,442

        Acquisitions
29,590

 
2,422

 
1,374

        Exploration
34,674

 
1,372

 
2,187

        Capitalized interest
2,109

 
573

 
2,000

        Transfers to evaluated
(200
)
 
(9,870
)
 
(22,897
)
        End of period balance
$
68,776

 
$
2,603

 
$
8,106

 
 
 
 
 
 
    Accumulated depreciation, depletion and amortization:
 

 
 

 
 

        Beginning of period balance
$
1,208,331

 
$
1,155,915

 
$
1,488,718

        Provision charged to expense
48,524

 
52,416

 
31,786

        Deconsolidation of Subsidiary January 1, 2010
—

 
—

 
(364,589
)
        Sale of mineral interests
39,410

 
—

 
—

        End of period balance
$
1,296,265

 
$
1,208,331

 
$
1,155,915


Unevaluated property costs primarily include lease acquisition costs incurred at federal and state lease sales, unevaluated drilling costs, seismic, capitalized interest and certain overhead costs related to exploration and development. Collectively, these costs are excluded from the amortizable evaluated property base, and consisted of $66,173 incurred in 2012, $841 in 2011, and $1,762 in 2010 .  These costs are directly related to the acquisition and evaluation of unproved properties and major development projects.  The excluded costs and related reserves are included in the amortization base as the properties are evaluated and proved reserves are established or impairment is determined.  The Company expects that the majority of these costs will be evaluated over the next three but within five years.  The Company’s unevaluated property balance increased by $66,173 to $68,776 at December 31, 2012 compared to December 31, 2011. A significant portion of this increase relates to the purchase of leases, primarily in the Midland basin and exploration costs associated with evaluating our new acreage.

Subsequent to December 31, 2012 and through March 8, 2013, the Company completed two horizontal exploration wells and two vertical exploration wells and  is evaluating the results.  The Company also drilled three horizontal wells and had one in progress. 

Depletion per unit-of-production (Boe) amounted to $31.56, $26.42 and $19.00 for the years ended December 31, 2012, 2011, and 2010, respectively.  Lease operating expense, or production costs, per unit-of-production (Boe) amounted to $16.86, $11.04, and $10.58 for the years ended December 31, 2012, 2011, and 2010, respectively.

Under the full-cost accounting rules of the SEC, the Company reviews the carrying value of its proved crude oil and natural gas properties each quarter.  Under these rules, capitalized costs of crude oil and natural gas properties, net of accumulated depreciation, depletion and amortization and deferred income taxes, may not exceed the present value of estimated future net cash flows from proved crude oil and natural gas reserves, discounted at 10%, plus the lower of cost or fair value of unevaluated properties, net of related tax effects (the full-cost ceiling amount).  These rules generally require pricing based on the preceding 12-months’ average crude oil and natural gas prices based on closing prices on the first day of each month and require a write-down if the “ceiling” is exceeded.  Given the volatility of crude oil and natural gas prices, it is reasonably possible that the Company’s estimate of discounted future net cash flows from proved crude oil and natural gas reserves could change in the near term.  If crude oil and natural gas prices decline significantly, even if only for a short period of time, it is possible that write-downs of crude oil and natural gas properties could occur in the future.  For the years ended December 31, 2012, 2011, and 2010, the Company recorded no impairment charges related to its crude oil and natural gas properties as a result of this calculation.  
 
Property Acquisitions and Dispositions

Acquisitions:

During the first quarter of 2012, the Company acquired approximately 16,233 gross (14,653 net) acres in Borden county, which is located in the northern Midland basin. The northern Midland basin has had limited drilling activity compared with the southern Midland basin (where our current production is located), increasing the economic risk related to these drilling activities. The purchase price of $14,538 was funded from existing cash balances. During the third quarter of 2012, we acquired an additional 8,095 gross acres (6,964 net) in this area for a total consideration of $4,835.

During the second quarter of 2012, the Company signed a purchase and sale agreement to acquire 2,319 gross (1,762 net) acres in southern Reagan county, Texas for a total purchase price of $12,012, which was financed with a draw on the Credit Facility. The transaction had an effective date of May 1, 2012 and closed on July 5, 2012.

Dispositions:

Effective December 28, 2012, the Company closed on the sale of its 11.25% working interest in the Habanero field (Garden Banks Block 341). The Company sold its interest in Habanero to Shell Offshore Inc., a subsidiary of Royal Dutch Shell Plc, for an estimated net cash consideration of USD $39,410 after customary purchase price adjustments. As discussed in Note 2, the proceeds from the sale were accounted for as a reduction to capitalized costs as the sale did not significantly alter the relationship between capitalized costs and proved reserves.