Nature of operations and summary of significant accounting policies | 12 Months Ended |
Dec. 31, 2013 |
Accounting Policies [Abstract] | ' |
Nature of operations and summary of significant accounting policies | ' |
Nature of operations and summary of significant accounting policies |
Chaparral Energy, Inc. and its subsidiaries, (collectively, “we”, “our”, “us”, or the “Company”) are involved in the acquisition, exploration, development, production and operation of oil and natural gas properties. Properties are located primarily in Oklahoma, Texas, New Mexico, Louisiana, Arkansas, and Kansas. |
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows. |
Principles of consolidation |
The consolidated financial statements include the accounts of Chaparral Energy, Inc. and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated. |
Use of estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that 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. |
The more significant areas requiring use of assumptions, judgments and estimates on our consolidated financial statements include: quantities of proved oil and natural gas reserves; cash flow estimates used in impairment tests of other long-lived assets; depreciation, depletion and amortization; asset retirement obligations; assigning fair value and allocating purchase price in connection with business combinations; valuation allowances associated with deferred income taxes; valuation of derivative instruments; and accrued revenue and related receivables. Although management believes these estimates are reasonable, actual results could significantly differ from these estimates. |
Reclassifications |
Certain reclassifications have been made to prior period financial statements to conform to current period presentation. The reclassifications had no effect on our previously reported results of operations. |
Cash and cash equivalents |
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. We maintain cash and cash equivalents in bank deposit accounts and money market funds which may not be federally insured. As of December 31, 2013, cash with a recorded balance totaling $46,692 was held at JP Morgan Chase Bank, N.A. We have not experienced any losses in such accounts and believe we are not exposed to any significant credit risk on such accounts. |
Accounts receivable |
We have receivables from joint interest owners and oil and natural gas purchasers which are generally uncollateralized. We generally review our oil and natural gas purchasers for credit worthiness and general financial condition. We may have the ability to withhold future revenue disbursements to recover non-payment of joint interest billings on properties of which we are the operator. Accounts receivable from joint interest owners are stated at amounts due, net of an allowance for doubtful accounts. Accounts receivable are generally due within 30 days and accounts outstanding longer than 60 days are considered past due. We establish our allowance for doubtful accounts by considering the length of time past due, previous loss history, future net revenues of the debtor’s ownership interest in oil and natural gas properties we operate, and the owner’s ability to pay its obligation, among other things. |
We write off accounts receivable when they are determined to be uncollectible. Bad debt expense for the years ended December 31, 2013, 2012, and 2011 was $498, $731, and $179, respectively. Accounts receivable consisted of the following at December 31: |
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| | 2013 | | 2012 |
Joint interests | | $ | 31,335 | | | $ | 19,282 | |
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Accrued commodity sales | | 60,768 | | | 50,814 | |
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Derivative settlements | | 4,616 | | | 8,013 | |
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Other | | 1,392 | | | 472 | |
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Allowance for doubtful accounts | | (1,596 | ) | | (1,274 | ) |
| | $ | 96,515 | | | $ | 77,307 | |
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Inventories |
Inventories are comprised of equipment used in developing oil and natural gas properties, oil and natural gas product inventories, and equipment for resale. Equipment inventory and inventory for resale are carried at the lower of cost or market using the average cost method. Oil and natural gas product inventories are stated at the lower of production cost or market. Inventories are shown net of a provision for obsolescence, commensurate with known or estimated exposure, which is reflected in the valuation allowance disclosed below. We recorded expense of $0, $0, and $602 for the years ended December 31, 2013, 2012, and 2011, respectively, to reflect changes in the valuation allowance. Inventories consisted of the following at December 31: |
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| | 2013 | | 2012 |
Equipment inventory | | $ | 13,657 | | | $ | 8,047 | |
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Commodities | | 3,186 | | | 3,175 | |
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Inventory valuation allowance | | (706 | ) | | (712 | ) |
| | $ | 16,137 | | | $ | 10,510 | |
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Property and equipment |
Property and equipment is capitalized and stated at cost, while maintenance and repairs are expensed currently. |
Depreciation and amortization are provided in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Estimated useful lives of our assets are as follows: |
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Furniture and fixtures | | | | 10 years | | | | |
Automobiles and trucks | | | | 5 years | | | | |
Machinery and equipment | | 10 | — | 20 years | | | | |
Office and computer equipment | | 5 | — | 10 years | | | | |
Building and improvements | | 10 | — | 40 years | | | | |
Oil and natural gas properties |
Capitalized Costs. We use the full cost method of accounting for oil and natural gas properties and activities. Accordingly, we capitalize all costs incurred in connection with the exploration for and development of oil and natural gas reserves. Proceeds from the disposition of oil and natural gas properties are accounted for as a reduction in capitalized costs, with no gain or loss generally recognized unless such dispositions involve a significant alteration in the depletion rate. We capitalize internal costs that can be directly identified with exploration and development activities, but do not include any costs related to production, general corporate overhead or similar activities. Capitalized costs include geological and geophysical work, 3D seismic, delay rentals, drilling and completing and equipping oil and natural gas wells, including salaries, benefits, capitalized interest on qualified projects and other internal costs directly attributable to these activities. |
The costs of unevaluated oil and natural gas properties are excluded from amortization until the properties are evaluated. Costs are transferred into the amortization base on an ongoing basis as the properties are evaluated and proved reserves are established or impairment is determined. Work in progress costs are included in unevaluated oil and natural gas properties and as of December 31, 2013, include $196,227 of capital costs incurred for undeveloped acreage, $115,828 for the construction of CO2 delivery pipelines and facilities for which there are no reserves, and $9,422 for wells and facilities in progress pending determination. As of December 31, 2012, work in progress costs included $64,840 of capital costs incurred for undeveloped acreage, $84,183 for the construction of CO2 delivery pipelines and facilities for which there are no reserves, and $13,898 for wells and facilities in progress pending determination. |
Depreciation, depletion and amortization. Depreciation, depletion and amortization (“DD&A”) of oil and natural gas properties are provided using the units-of-production method based on estimates of proved oil and natural gas reserves and production, which are converted to a common unit of measure based upon their relative energy content. Our cost basis for depletion includes estimated future development costs to be incurred on proved undeveloped properties. The computation of DD&A takes into consideration restoration, dismantlement, and abandonment costs, and the anticipated proceeds from salvaging equipment. |
Ceiling Test. In accordance with the full cost method of accounting, the net capitalized costs of oil and natural gas properties are not to exceed their related estimated future net revenues discounted at 10% (“PV-10 value”), net of tax considerations, plus the cost of unproved properties not being amortized. |
Our estimates of oil and natural gas reserves as of December 31, 2013, 2012, and 2011 were prepared using an average price for oil and natural gas based upon the first day of each month for the prior twelve months as required by the Securities Exchange Commission (“SEC”). As of December 31, 2013, the cost center ceiling exceeded the net capitalized cost of our oil and natural gas properties, and no ceiling test impairment was recorded. The PV-10 value of our reserves was estimated based on average prices of $96.78 per Bbl of oil, $3.67 per Mcf of natural gas and $32.53 per Bbl of natural gas liquids for the year ended December 31, 2013. |
A decline in oil and natural gas prices subsequent to December 31, 2013 could result in ceiling test write-downs in future periods. The amount of any future impairment is difficult to predict, and will depend on the average oil and natural gas prices during each period, the incremental proved reserves added during each period, and additional capital spent. |
Assets held for sale |
Assets are classified as held for sale when the carrying amount will be recovered through a sale transaction rather than through continuing use. The classification is only made when we commit to a plan to sell the assets and there is reasonable certainty the sale will take place within one year. Upon classification as held for sale, long-lived assets are no longer depreciated, and measurement for impairment is performed to identify and expense any excess of carrying value over fair value less costs to sell. Oil and natural gas properties that we intend to sell are not presented as held for sale pursuant to the rules governing full cost accounting for oil and natural gas properties. |
In the fourth quarter of 2012, we finalized a plan to dispose of certain of our drilling rigs by sale. As a result of determining fair value less costs to sell on these assets, an impairment loss was recorded in the amount of $1,500 preceding classification as held for sale. In the third quarter of 2013, we reassessed the fair value of the drilling rigs classified as held for sale and recorded an additional impairment loss of $1,090. |
In late 2013, market conditions changed and hence the timing of the ultimate disposal of the drilling rigs became uncertain. Accordingly, we reclassified the drilling rigs to property and equipment in the consolidated balance sheets. The assets were measured at the lower of the carrying value of the assets before being classified as held for sale, adjusted for any depreciation that would have been recognized had the assets been continuously held and used, or the fair value of the assets at the date they no longer met the criteria as held for sale. As a result of this measurement, we recognized an additional loss of $2,400 in the fourth quarter of 2013. All impairment losses related to assets held for sale are included in loss on impairment of other assets in the consolidated statement of operations. We have reclassified our consolidated balance sheets as of December 31, 2012, to reflect the drilling rigs as assets held and used in order to conform to the current year presentation. |
Impairment of long-lived assets |
Impairment losses are recorded on property and equipment used in operations and other long-lived assets held and used 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. |
In addition to the impairments discussed above, during 2012, we recognized $500 of impairment losses primarily related to drill pipe held and used which was recorded in loss on impairment of other assets in the consolidated statements of operations. |
Deferred income taxes |
Deferred income taxes are provided for significant carryforwards and temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years. Deferred income tax assets or liabilities are determined by applying the presently enacted tax rates and laws. We record a valuation allowance for the amount of net deferred tax assets when, in management’s opinion, it is more likely than not that such assets will not be realized. |
Realization of our deferred tax assets is dependent upon generating sufficient future taxable income. Although realization is not assured, we believe it is more likely than not that the deferred tax asset will be realized. The amount of the deferred tax asset considered realizable, however, could be reduced in the near-term if estimates of future taxable income are reduced. |
If applicable, we would report a liability for tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return, and would recognize interest and penalties related to uncertain tax positions in interest expense. As of December 31, 2013 and 2012, we have not recorded a liability or accrued interest or penalties related to uncertain tax positions. |
Tax years beginning with 1998 remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which we are subject. |
Derivative transactions |
We use derivative instruments to reduce the effect of fluctuations in crude oil and natural gas prices, and we recognize all derivatives as either assets or liabilities measured at fair value. Changes in the fair value of derivatives that are not accounted for as hedges are reported immediately in non-hedge derivative gains (losses) in the consolidated statements of operations. Cash flows associated with non-hedge derivatives are reported as investing activities in the consolidated statements of cash flows unless the derivatives contain a significant financing element, in which case they are reported as financing activities. |
Effective April 1, 2010, we elected to discontinue hedge accounting prospectively. The effective portion of changes in the fair value of derivatives qualifying and designated as cash flow hedges was recognized in accumulated other comprehensive income (loss) (“AOCI”) prior to April 1, 2010, and is reclassified into income as the hedged transactions occur. As of December 31, 2013, all amounts related to de-designated cash flow hedges have been reclassified into earnings. |
We offset assets and liabilities for derivative contracts executed with the same counterparty under a master netting arrangement. See “Note 6—Derivative instruments” for additional information regarding our derivative transactions. |
Fair value measurements |
Fair value is defined by the FASB as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. |
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized according to the fair value hierarchy defined by the FASB. The hierarchical levels are based upon the level of judgment associated with the inputs used to measure the fair value of the assets and liabilities. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the asset or liability is categorized based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. |
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities at the measurement date. Level 2 inputs include adjusted quoted prices for similar instruments in active markets, and inputs other than quoted prices that are observable for the asset or liability. Fair value assets and liabilities included in this category are derivatives with fair values based on published forward commodity price curves and other observable inputs. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Assets carried at fair value and included in this category are certain financial derivatives, additions to our asset retirement obligations, and valuation of assets and liabilities acquired in our Cabot Acquisition. See “Note 7—Fair value measurements” for additional information regarding our fair value measurements. |
Valuation of business combinations |
In connection with a purchase business combination, the acquiring company must record assets acquired and liabilities assumed based on fair values as of the acquisition date. In estimating the fair values of assets acquired and liabilities assumed, we make various assumptions. The most significant assumptions related to the estimated fair values assigned to proved and unproved oil and natural gas properties. To estimate the fair values of these properties, we utilize estimates of oil and natural gas reserves. We make future price assumptions to apply to the estimated reserves quantities acquired and estimate future operating and development costs to arrive at estimates of future net cash flows. For estimated proved reserves, the future net cash flows were discounted using a market-based weighted average cost of capital rates determined appropriate at the time of the acquisition. The market-based weighted average cost of capital rates are subject to additional project-specific risking factors. To compensate for the inherent risk of estimating and valuing unproved reserves, the discounted future net cash flows of the unproved reserves were reduced by additional risk-weighting. |
Asset retirement obligations |
We own oil and natural gas properties that require expenditures to plug, abandon or remediate wells at the end of their productive lives and to remove tangible equipment and facilities at the end of oil and natural gas production operations in accordance with applicable federal and state laws. We record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the carrying amount of oil and natural gas properties. The accretion of the asset retirement obligations is included in depreciation, depletion and amortization on the consolidated statements of operations. In certain instances, we are required to make deposits to escrow accounts for plugging and abandonment obligations. See “Note 8—Asset retirement obligations” for additional information regarding our asset retirement obligations. |
Environmental liabilities |
We are subject to extensive federal, state and local environmental laws and regulations covering discharge of materials into the environment. Because these laws and regulations change regularly, we are unable to predict the conditions and other factors over which we do not exercise control that may give rise to environmental liabilities affecting us. Environmental expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation are expensed. Liabilities are accrued when environmental assessments and/or clean-ups are probable, and the costs can be reasonably estimated. As of December 31, 2013 and 2012, we have not accrued for or been fined or cited for any environmental violations which would have a material adverse effect upon our financial position, operating results, or cash flows. |
Revenue recognition |
Sales of oil, natural gas and NGLs are recorded when title of oil, natural gas and NGL production passes to the customer. Well supervision fees and overhead reimbursements from producing properties are recognized as expense reimbursements from outside interest owners when the services are performed. Sales of products or services are recognized at the time of delivery of materials or performance of service. |
Gas balancing |
In certain instances, the owners of the natural gas produced from a well will select different purchasers for their respective ownership interest in the wells. If one purchaser takes more than its rateable portion of the natural gas, the owners selling to that purchaser will be required to satisfy the imbalance in the future by cash payments or by allowing the other owners to sell more than their share of production. We recognize gas imbalances on the sales method and, accordingly, have recognized revenue on all production delivered to our purchasers. To the extent future reserves exist to enable the other owners to sell more than their rateable share of gas, no liability is recorded for our obligation for natural gas taken by our purchasers which exceeds our ownership interest of the well’s total production. As of December 31, 2013 and 2012, our aggregate imbalance due to under production was approximately 2,449 MMcf and 2,690 MMcf, respectively. As of December 31, 2013 and 2012, our aggregate imbalance due to over production was approximately 1,553 MMcf and 1,658 MMcf, respectively, and a liability for gas imbalances of $1,588 and $1,984, respectively, was included in accounts payable and accrued liabilities. |
Stock-based compensation |
Our stock-based compensation programs consist of phantom stock, restricted stock units (“RSU”), and restricted stock awards issued to employees. Generally, we use new shares to grant restricted stock awards, and we cancel restricted shares forfeited or repurchased for tax withholding. Canceled shares are available to be issued as new grants under our 2010 Equity Incentive Plan. |
The estimated fair value of the phantom stock and RSU awards are remeasured at the end of each reporting period until settlement. The estimated fair market value of these awards is calculated based on our total asset value less total liabilities, with both assets and liabilities being adjusted to fair value in accordance with the terms of the Phantom Stock Plan and the Non-Officer Restricted Stock Unit Plan. The primary adjustment required is the adjustment of oil and natural gas properties from net book value to the discounted and risk-adjusted reserve value based on internal reserve reports priced on NYMEX forward strips. Compensation cost associated with the phantom stock awards and RSU awards is recognized over the vesting period using the straight-line method and the accelerated method, respectively. |
The fair value of our restricted stock awards that include a service condition is based upon the estimated fair market value of our common equity per share on a minority, non-marketable basis on the date of grant, and is remeasured at the end of each reporting period until settlement. We recognize compensation cost over the requisite service period using the accelerated method for awards with graded vesting. |
We use a Monte Carlo model to estimate the grant date fair value of restricted stock awards that include a market condition. This model includes various significant assumptions, including the expected volatility of the share awards and the probabilities of certain vesting conditions. Compensation cost associated with restricted stock awards that include a market condition is recognized over the requisite service period using the straight-line method. |
The assumptions used to value our stock-based compensation awards reflect our best estimates, but they involve inherent uncertainties based on market conditions generally outside of our control. As a result, if other assumptions had been used, stock-based compensation expense could have been significantly impacted. |
The costs associated with our stock-based compensation programs is calculated net of forfeitures, which are estimated based on our historical and expected turnover rates. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation cost could be different from what we have recorded in the current period. |
See “Note 10—Stock-based compensation” for additional information relating to stock-based compensation. |
Recently adopted accounting pronouncements |
Balance Sheet Offsetting. In December 2011, the FASB issued authoritative guidance that requires enhanced disclosures that will enable financial statement users to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. In January 2013, additional guidance was issued which narrows the scope of the disclosure requirements to derivatives, securities borrowings, and securities lending transactions that are either offset or subject to a master netting arrangement. This guidance, which was effective and adopted by us in the first quarter of 2013, resulted in additional disclosures but had no financial impact. |
Presentation of Comprehensive Income. In February 2013, the FASB issued authoritative guidance that requires disclosures of the amounts reclassified out of AOCI by component, including the respective line items of net income if the amount is required to be reclassified to net income in its entirety in the same reporting period. This additional guidance was effective and adopted by us in the first quarter of 2013. As our entire balance in AOCI consists of deferred hedge gains, implementation of the guidance had no significant impact on our financial statement presentation and disclosures. |
Recently issued accounting pronouncements |
Other Expenses. In July 2011, the FASB issued authoritative guidance regarding how health insurers should recognize and classify in their income statements the fees mandated by the Health Care and Education Reconciliation Act (“HCERA”). The HCERA imposes an annual fee upon health insurers for each calendar year beginning on or after January 1, 2014. The annual fee will be allocated to individual entities providing health insurance to employees based on a ratio, as provided for in the HCERA, and is not tax deductible. This guidance specifies that once the entity has provided qualifying health insurance in the calendar year in which the fee is payable, the liability for the entity’s fee should be estimated and recorded in full with a corresponding deferred cost that is amortized to expense on a straight line basis, unless another method better allocates the fee over the calendar year that it is payable. This guidance is effective for calendar years beginning after December 15, 2013, once the fee is instituted. We have assessed the impact that this fee and the adoption of the related authoritative guidance will have on our consolidated financial statements and determined the impact to be immaterial. |