Summary of Significant Accounting Policies (Policy) | 12 Months Ended |
Dec. 31, 2014 |
Summary of Significant Accounting Policies [Abstract] | |
Principles of Consolidation | Principles of Consolidation—These consolidated financial statements include PostRock’s and its subsidiaries’ accounts. Subsidiaries in which PostRock directly or indirectly owns more than 50% of the outstanding voting securities or those in which PostRock has effective control over are generally accounted for under the consolidation method of accounting. Under this method, a subsidiaries’ balance sheet and results of operations are reflected within the Company’s consolidated financial statements. All significant intercompany accounts and transactions have been eliminated. |
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Use of Estimates in the Preparation of Financial Statements | Use of Estimates in the Preparation of Financial Statements—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 disclosures 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 Company’s most significant recurring estimates are based on remaining proved oil and gas reserves. Estimates of proved reserves are key components of the Company’s depletion rate for oil and gas properties and its full cost ceiling test limitation. In addition, estimates are used in computing fair value of impaired assets, taxes, asset retirement obligations, fair value of derivative contracts and other items. Actual results could differ from these estimates. |
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Cash and Cash Equivalents | Cash and Cash Equivalents—The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash balances are maintained at a few financial institutions that are insured by the Federal Deposit Insurance Corporation although such balances at times are in excess of the insured amount; however, no losses have been recognized as a result of this circumstance. During 2011, the Company began utilizing a controlled disbursement cash account which is funded when outstanding checks and electronic payments are presented for payment and an overdraft is the normal book balance. The Company’s policy has been to fund these outstanding checks and electronic payments as they clear through the banking system with customer receipts and borrowings under its Borrowing Base Credit Facility (as defined below). The Company accounts for such book overdrafts by reporting them in accounts and revenue payable in its consolidated balance sheets and including the change in such amounts in cash flows from operating activities in its consolidated statements of cash flows. Outstanding checks and electronic payments included in accounts and revenue payable at December 31, 2013 and 2014, amounted to $4.5 million and $2.0 million, respectively. |
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Accounts Receivable | Accounts Receivable—The Company conducts the majority of its operations in Kansas and Oklahoma and operates exclusively in the oil and gas industry. Receivables are generally unsecured; however, the Company has not experienced any significant losses to date. Receivables are recorded at the estimate of amounts due based upon the terms of the related agreements. Management periodically assesses the accounts receivable and establishes an allowance for estimated uncollectible amounts. Accounts estimated to be uncollectible are charged to operations in the period the reserve is established. The allowance for doubtful accounts was approximately $194,000 at December 31, 2013 and 2014. |
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Inventory | Inventory—Inventory includes tubular goods and other lease and well equipment which the Company plans to utilize in its ongoing exploration and development activities and is carried at the lower of cost or market using the specific identification method. |
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Oil and Natural Gas Properties | Oil and Natural Gas Properties—The Company uses the full cost method of accounting for oil and gas properties. Under the full cost method, all direct costs and certain indirect costs associated with the acquisition, exploration, and development of its oil and gas properties are capitalized. |
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Oil and gas properties are depleted using the units-of-production method. The depletion expense is significantly affected by the unamortized historical and future development costs and the estimated proved oil and gas reserves. Estimation of proved oil and gas reserves relies on professional judgment and use of factors that cannot be precisely determined. Subsequent proved reserve estimates that are materially different from those reported would change the depletion expense recognized during the future reporting period. No gains or losses are recognized upon the sale or disposition of oil and gas properties such will result in an amortization rate materially different from the amortization rate calculated upon recognition of gains or losses. |
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Under the full cost accounting rules, total capitalized costs are limited to a ceiling equal to the present value of future net revenues, discounted at 10% per annum less income tax effects (the “ceiling limitation”). The Company performs a quarterly ceiling test to evaluate whether the net book value of its full cost pool exceeds the ceiling limitation. If capitalized costs (net of accumulated depreciation, depletion, and amortization) less related deferred taxes are greater than the discounted future net revenues or ceiling limitation, a write-down or impairment of the full cost pool is required. A write-down of the carrying value of the full cost pool is a non-cash charge that reduces earnings and impacts stockholders’ (deficit) equity in the period of occurrence and typically results in lower depreciation, depletion, and amortization expense in future periods. Once incurred, a write-down is not reversible at a later date. The risk that the Company will be required to write down the carrying value of its oil and gas properties increases when oil and gas prices are depressed. This is partially mitigated by the use of an unweighted arithmetic average of first day of the month price for trailing twelve-month market prices to determine the ceiling. In addition, a write-down may occur if estimates of proved reserves are substantially reduced or estimates of future development costs increase significantly. |
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Unevaluated Properties | Unevaluated Properties—The costs directly associated with unevaluated oil and gas properties and properties under development are not initially included in the amortization base and relate to unproved leasehold acreage, seismic data, wells and production facilities in progress and wells pending determination. Unevaluated leasehold costs are transferred to the amortization base once determination has been made or upon expiration of a lease. Geological and geophysical costs and cumulative drilling costs to date associated with a specific unevaluated property are transferred to the amortization base with the associated leasehold costs on a specific project basis. Costs associated with wells in progress and wells pending determination are transferred to the amortization base once a determination is made whether or not proved reserves can be assigned to the property. All items included in the Company’s unevaluated property balance are assessed on a quarterly basis for possible impairment or reduction in value. The assessment includes consideration of numerous factors, including intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, assignment of proved reserves and economic viability of development if proved reserves are assigned. Any impairments of unevaluated properties are transferred to the amortization base. |
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Capitalized General and Administrative Expenses | Capitalized General and Administrative Expenses—Under the full cost method of accounting, a portion of general and administrative expenses that are directly attributable to acquisition, exploration, and development activities are capitalized to the full cost pool. The capitalized costs include salaries, related fringe benefits, cost of consulting services and other costs directly associated with those activities. In addition to costs related to acquisition, exploration, and development activities, the Company has also capitalized certain software costs. The Company’s capitalized general and administrative costs, including software costs, were $904,000, $1.3 million and $960,000 for the years ended December 31, 2012, 2013 and 2014, respectively. |
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Capitalized Interest Costs | Capitalized Interest Costs—The Company capitalizes interest based on the cost of major development projects. Capitalized interest was $11,000 for the year ended December 31, 2012 and nil for the years ended December 31, 2013 and 2014. |
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Other Property and Equipment | Other Property and Equipment—The cost of other property and equipment is depreciated over the estimated useful lives of the related assets. The cost of leasehold improvements is depreciated over the lesser of the length of the related leases or the estimated useful lives of the assets. |
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Upon disposition or retirement of property and equipment, other than oil and gas properties, the cost and related accumulated depreciation are removed from the accounts and the gain or loss thereon, if any, is recognized in the statement of operations in the period of sale or disposition. Maintenance and repair costs are charged to operating expense as incurred. |
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Impairment | Impairment—Long-lived assets such as property and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such assets to estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of such assets exceeds their undiscounted estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of such assets exceeds the fair value of the assets. |
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Investment | Investment—The Company elected to measure its investment in Constellation Energy Partners LLC, now named Sanchez Production Partners LLC (“SPP”), at fair value with changes in fair value included in the consolidated statements of operations. If the Company had not elected the fair value method, the investment would have previously qualified for the equity method of accounting, under which the Company’s proportionate share of the investee’s income would have been reported in the consolidated statements of operations. |
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Asset Retirement Obligations | Asset Retirement Obligations—Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 410, Asset Retirement and Environmental Obligations (ASC 410) requires that the fair value of an asset retirement cost and the corresponding liability should be recorded as part of the cost of the related long-lived asset and subsequently allocated to expense using a systematic and rational method. The Company records asset retirement obligations to reflect the Company’s legal obligations related to future plugging and abandonment of its natural gas and oil wells. Asset retirement obligations associated with the retirement of a tangible long-lived asset are recognized as a liability in the period incurred or when it becomes determinable that there is a legal or contractual obligation to dismantle or dispose of the asset and reclaim or remediate any related property at the end of its useful life, with an associated increase in the carrying amount of the related long-lived asset. The cost of the tangible asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded at its estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligation discounted at the Company’s credit-adjusted risk-free interest rate. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value and is recorded within “Depreciation, depletion, and amortization” on the Statement of Operations. If the estimated future cost of the asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the long-lived asset. Revisions to estimated asset retirement obligations can result from changes in retirement cost estimates, revisions to estimated inflation rates and changes in the estimated timing of abandonment. The Company has not recorded an asset retirement obligation relating to its gathering system because it does not have any legal or constructive obligations relative to asset retirements of the gathering system. |
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Derivative Instruments | |
Derivative Instruments—The Company utilizes derivative instruments in conjunction with marketing and trading activities to manage price risk attributable to its forecasted sales of oil and gas production. |
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The Company does not designate its oil and natural gas derivative contracts as hedges under ASC 815 Derivatives and Hedging although it believes that such contracts are effective hedges of its commodity price exposure. These contracts are accounted for using the mark-to-market accounting method. Using this method, the contracts are carried at their fair value on the Company’s consolidated balance sheets under the caption “Derivative financial instruments.” Changes in the fair value of these derivative financial instruments are recorded in earnings. The Company recognizes all unrealized and realized gains and losses related to these contracts on its consolidated statements of operations under the caption “Gain (loss) from derivative instruments” which is a component of “Other income (expense)”. |
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The Company has exposure to credit risk to the extent a counterparty to a derivative instrument is unable to meet its settlement commitment. It actively monitors the creditworthiness of each counterparty and assesses the impact, if any, on its derivative positions. |
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Legal | Legal—The Company is subject to certain legal proceedings, claims and liabilities which arise in the ordinary course of its business. It accrues for losses associated with legal claims when such losses are probable and can be reasonably estimated. These estimates are adjusted as additional information becomes available or circumstances change. |
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Revenue Recognition | Revenue Recognition—Revenue from the Company’s oil and gas operations is derived from the sale of produced oil and natural gas. The Company uses the sales method of accounting for the recognition of oil and gas revenue. Because there is a ready market for oil and gas, the Company sells its oil and gas shortly after production at various pipeline receipt points at which time title and risk of loss transfers to the buyer. Revenue is recorded when title and risk of loss is transferred based on the Company’s net revenue interests. Gathering revenue is recognized at the time the gas is gathered or transported through the system and delivered to a third party as evidenced by a contract. |
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Environmental Costs | Environmental Costs—Environmental expenditures are expensed or capitalized, as appropriate, depending on future economic benefit. Expenditures that relate to an existing condition caused by past operations and that have no future economic benefit are expensed. Liabilities related to future costs are recorded on an undiscounted basis when environmental assessments and/or remediation activities are probable and costs can be reasonably estimated. The Company has no environmental costs accrued for the periods presented. |
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Stock-Based Compensation | Stock-Based Compensation—The Company grants various types of stock-based awards including stock options, restricted stock and restricted stock units to its employees and non-employee directors. The Company accounts for stock-based compensation in accordance with FASB ASC 718 Compensation – Stock Compensation where the awards are measured at fair value on the date of grant and are generally recognized as a component of general and administrative expenses in the consolidated statement of operations over the applicable requisite service periods. The fair value of stock option awards is determined using a Black-Scholes pricing model where volatility is derived from a peer group of companies. |
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Deferred Compensation Plan | Deferred compensation plan—The Company’s deferred compensation plan permits selected employees and members of its board of directors to defer part or all of their eligible compensation. The Company accounts for this deferred compensation in accordance with FASB ASC 710 Compensation – General. The Company issues common stock into a rabbi trust created to hold the assets associated with the plan. A participant’s deferred compensation is credited with earnings, gains and losses based on the Company’s common stock, the only investment option currently available under the plan. The Company may also make discretionary employer credits in an amount it determines each plan year. Distributions to participants will be made in shares of the Company’s common stock. Company shares held in the rabbi trust are recorded as treasury stock in the consolidated balance sheets. Since the deferred compensation arrangement currently does not permit diversification and only allows for settlement by delivery of Company common stock, the obligation is recorded as a component of paid-in-capital and changes in the fair value of the obligation are not recognized. |
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Income Taxes | Income Taxes—The Company records its income taxes using an asset and liability approach in accordance with the provisions of the FASB ASC 740 Income Taxes. This results in the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences (primarily property and equipment and the net operating loss carry forward) between the book carrying amounts and the tax bases of assets and liabilities using enacted tax rates at the end of the period. Under FASB ASC 740, the effect of a change in tax rates of deferred tax assets and liabilities is recognized in the year of the enacted change. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. At December 31, 2013 and 2014, a full valuation allowance was recorded against the Company’s net deferred tax assets. |
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The Company regularly analyzes tax positions taken or expected to be taken in a tax return based on the threshold condition prescribed under FASB ASC 740. Tax positions that do not meet or exceed this threshold condition are considered uncertain tax positions. The Company accrues interest and penalties related to uncertain tax positions as income tax expense. |
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Net Income (Loss) per Common Share | Net Income (Loss) per Common Share—Basic earnings (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company also includes contingently issuable shares in basic earnings (loss) per share when there is no circumstance under which those shares would not be issued. These include vested shares under the Company’s deferred compensation plan and vested deferred restricted stock units as all necessary conditions have been satisfied for the issuance of those shares other than the passage of time. Diluted earnings (loss) per share assumes the conversion of all potentially dilutive securities (warrants, stock options and restricted stock awards) and is calculated by dividing net income (loss) by the sum of the weighted average number of shares of common stock outstanding plus potentially dilutive securities under the treasury stock method. |
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Reverse Stock Split | Reverse Stock Split—All common stock, options, warrants, shares and per share amounts with respect to PostRock stock, excluding Series A Preferred Stock, have been retroactively adjusted in the accompanying consolidated financial statements and related notes to reflect the 1-for-10 reverse stock split, effective January 2, 2015. |
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Reclassifications | Reclassifications—Certain reclassifications have been made to the prior periods’ financial statements to conform to the current period’s presentation. These reclassifications had no effect on the financial position, results of operations or cash flows of the Company. |
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Concentrations of Market Risk | Concentrations of Market Risk—The Company’s future results will be affected by the market price of oil and gas. The availability of a ready market for oil and gas will depend on numerous factors beyond the Company’s control, including weather, production of oil and gas, imports, marketing, competitive fuels, proximity of oil and gas pipelines and other transportation facilities, any oversupply or undersupply of oil and gas, the regulatory environment, and other regional and political events, none of which can be predicted with certainty. |
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Concentrations of Credit Risk | Concentrations of Credit Risk—Financial instruments, which subject the Company to concentrations of credit risk, consist primarily of cash and accounts receivable. Risk with respect to receivables at December 31, 2013 and 2014, arise substantially from the sales of oil and gas. The following table discloses the percentage of consolidated revenues from our major customers: |
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| Year Ended December 31, |
| 2013 | | 2014 |
British Petroleum Energy Company | 56 | % | | 64 | % |
ONEOK Energy and Marketing and Trading Company | 11 | % | | — | % |
Sunoco | 11 | % | | 21 | % |
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Fair Value | Fair Value—The Company applies the provisions of FASB ASC 820 Fair Value Measurements and Disclosures. Fair value is the exit price that we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. |
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FASB ASC 820 also establishes a hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy are as follows: |
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•Level 1—Quoted prices available in active markets for identical assets or liabilities at the reporting date. |
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•Level 2—Pricing inputs other than quoted prices in active markets included in Level 1 which are either directly or indirectly observable at the reporting date. Level 2 consists primarily of non-exchange traded commodity derivatives. |
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•Level 3—Pricing inputs include significant inputs that are generally less observable from objective sources. |
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The Company classifies assets and liabilities within the fair value hierarchy based on the lowest level of input that is significant to the fair value measurement of each individual asset and liability taken as a whole. Transfers of assets and liabilities between Level 1 and Level 2 are recognized at the end of a reporting period. The Company prioritizes the use of the highest level inputs available in determining fair value. |
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Recent Accounting Pronouncements Not Yet Adopted | Recent Accounting Pronouncements Not Yet Adopted |
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In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update provides guidance concerning the recognition and measurement of revenue from contracts with customers. Its objective is to increase the usefulness of information in the financial statements regarding the nature, timing and uncertainty of revenues. The update is effective for PostRock beginning on January 1, 2017. The standard permits the use of either the retrospective or cumulative effect transition method. PostRock has not yet selected a transition method and is evaluating the impact this standard will have on its consolidated financial statements and related disclosures. |
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In August 2014, the Financial Accounting Standards Board issued ASU 2014-15, Presentation of Financial Statements - Going Concern (Topic 205). The update provides guidance on management’s responsibility in evaluating whether there is a substantial doubt about a company’s ability to continue as a going concern. Its objective is to define management’s responsibility to evaluate going concern and to provide related footnote disclosures. The update is effective for PostRock beginning on January 1, 2017. PostRock has not yet determined whether early application of this accounting standard will be adopted. |
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