SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 12 Months Ended |
Dec. 31, 2013 |
Accounting Policies [Abstract] | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | ' |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Basis of Presentation |
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. These estimates are based on information that is currently available to us and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates under different assumptions and conditions. Significant estimates are required for proved oil and gas reserves which, as described below under Estimates of Proved Oil and Gas Reserves, may have a material impact on the carrying value of oil and gas property. |
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Divestitures and Discontinued Operations |
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Certain balances in the financial statements and disclosures in the footnotes have been revised as a result of the sale of all of the oil and gas assets of PRC Williston, LLC on December 30, 2013. The operating results of PRC Williston, have been reclassified as discontinued operations in the consolidated statements of operations for the years ended December 31, 2013, 2012, and 2011. See "Note 3 - Divestitures and Discontinued Operations". |
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| Year Ended December 31, |
| 2013 | | 2012 | | 2011 |
| (in thousands) |
Revenues | $ | 7,194 | | | $ | 7,614 | | | $ | 8,687 | |
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Expenses | 8,868 | | | 19,216 | | | 6,989 | |
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Loss from discontinued operations before tax | (1,674 | ) | | (11,602 | ) | | 1,698 | |
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Income tax benefit (expense) | — | | | — | | | — | |
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Loss from discontinued operations | (1,674 | ) | | (11,602 | ) | | 1,698 | |
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Gain on disposal of discontinued operations | 7,145 | | | — | | | — | |
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Income (loss) from discontinued operations | $ | 5,471 | | | $ | (11,602 | ) | | $ | 1,698 | |
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Financial Instruments |
The carrying amounts of financial instruments including accounts receivable, accounts payable and accrued liabilities, and accounts payable to Parent approximate fair value as of December 31, 2013 and 2012. |
Oil and Gas Properties |
Capitalized Costs |
Our oil and gas properties consisted of the following: |
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| | December 31, | | | |
| | 2013 (1) | | 2012 | | | |
| | (in thousands) | | | |
Unproved properties | | $ | — | | | $ | — | | | | |
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Proved properties | | — | | | 33,800 | | | | |
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Total costs | | — | | | 33,800 | | | | |
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Less accumulated depreciation and depletion | | — | | | (15,543 | ) | | | |
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Net capitalized costs | | $ | — | | | $ | 18,257 | | | | |
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(1) No capitalized costs exist at December 31, 2013 due to the sale of the oil and gas properties of PRC Williston, LLC. |
We follow the successful efforts method of accounting for our oil and gas producing activities. Costs to acquire mineral interests in oil and gas properties and to drill and equip development wells and related asset retirement costs are capitalized. Costs to drill exploratory wells are capitalized pending determination of whether the wells have proved reserves. If we determine that the wells do not have proved reserves, the costs are charged to expense. There were no costs capitalized for exploratory wells pending the determination of proved reserves at either December 31, 2013 or 2012. Geological and geophysical costs, including seismic studies and costs of carrying and retaining unproved properties are charged to expense as incurred. We capitalize interest on expenditures for significant exploration and development projects that last more than six months while activities are in progress to bring the assets to their intended use. No interest was capitalized during the periods presented. |
On the sale or retirement of a complete unit of a proved property, the cost and related accumulated depreciation, depletion, and amortization are eliminated from the property accounts, and the resultant gain or loss is recognized. On the retirement or sale of a partial unit of proved property, the cost is charged to accumulated depreciation, depletion, and amortization with a resulting gain or loss recognized in income. |
Capitalized amounts attributable to proved oil and gas properties are depleted by the unit-of-production method over proved reserves using the unit conversion ratio of six Mcf of gas to one Bbl of oil and the ratio of forty-two Gal of natural gas liquids to one Bbl of oil. Well costs and related equipment are depleted over proved developed reserves, and leasehold costs are depleted over total proved reserves. Depreciation and depletion expense from continuing operations for oil and gas producing property and related equipment was $0 million for the years ended December 31, 2013, 2012, and 2011. |
Capitalized costs related to proved oil and gas properties, including wells and related equipment and facilities, are evaluated for impairment based on an analysis of undiscounted future net cash flows. If undiscounted cash flows are insufficient to recover the net capitalized costs related to proved properties, then we recognize an impairment charge in income from operations equal to the difference between the net capitalized costs related to proved properties and their estimated fair values based on the present value of the related future net cash flows. We recorded $1.2 million of impairment charge to our proved properties during the year ended December 31, 2013, we recorded $2.3 million of impairments for the year ended December 31, 2012 in discontinued operations, and we incurred no impairment charge to our proved properties for the year ended December 31, 2011 based on our analysis. |
Unproved oil and gas properties that are individually significant are periodically assessed for impairment of value, and a loss is recognized at the time of impairment by providing an impairment allowance in the Company’s statement of operations. We recorded no impairment to unproved properties during the year ended December 31, 2013, and $10.5 million during the year ended December 31, 2012 in discontinued operations. We did not record impairment during the year ended 2011. |
On the sale of an entire interest in an unproved property for cash or cash equivalent, gain or loss on the sale is recognized, taking into consideration the amount of any recorded impairment if the property had been assessed individually. If a partial interest in an unproved property is sold, the amount received is treated as a reduction of the cost of the interest retained. |
Estimates of Proved Oil and Gas Reserves |
Estimates of our proved reserves included in this report are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and SEC guidelines. The accuracy of a reserve estimate is a function of: |
· the quality and quantity of available data; |
· the interpretation of that data; |
· the accuracy of various mandated economic assumptions; |
· and the judgment of the persons preparing the estimate. |
Our proved reserve information included in this report was predominately based on evaluations prepared by independent petroleum engineers. Estimates prepared by other third parties may be higher or lower than those included herein. Because these estimates depend on many assumptions, all of which may substantially differ from future actual results, reserve estimates will be different from the quantities of oil and gas that are ultimately recovered. In addition, results of drilling, testing and production after the date of an estimate may justify material revisions to the estimate. |
In accordance with SEC requirements, we based the estimated discounted future net cash flows from proved reserves on the unweighted arithmetic average of the prior 12-month commodity prices as of the first day of each of the months constituting the period and costs on the date of the estimate. Future prices and costs may be materially higher or lower than these prices and costs which would impact the estimated value of our reserves. |
The estimates of proved reserves may materially impact depreciation, depletion, and amortization (“DD&A”) expense. If the estimates of proved reserves decline, the rate at which we record depreciation and depletion expense will increase, reducing net income. Such a decline may result from lower estimated market prices. |
Revenue Recognition |
Revenues associated with sales of crude oil, natural gas, natural gas liquids and petroleum products, and other items are recognized when title passes to the customer, which is when the risk of ownership passes to the purchaser and physical delivery of goods occurs, either immediately or within a fixed delivery schedule that is reasonable and customary in the industry. |
Revenues from the production of natural gas and crude oil properties in which we have an interest with other producers are recognized based on the actual volumes we sold during the period. Any differences between volumes sold and entitlement volumes, based on our net working interest, which are deemed to be non-recoverable through remaining production, are recognized as accounts receivable or accounts payable, as appropriate. Cumulative differences between volumes sold and entitlement volumes are generally not significant. |
Restricted Cash |
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On December 23, 2013, the Chancery Court entered a temporary restraining order prohibiting the Company from transferring, assigning, removing, distributing or otherwise displacing to its Parent, or its parent’s creditors, or any other person or entity $5,000,000 of the proceeds received in connection with the sale of the Company’s assets. See “Note 8 - Contingencies.” |
Accounts Receivable |
Accounts receivable consists of oil and gas sales, due under normal trade terms, generally requiring payment within 30 to 60 days of production. Payments made on all accounts receivable are applied to the earliest unpaid items. We review our accounts receivable periodically and reduce the carrying amount by a valuation allowance that reflects our best estimate of the amount that may not be collectible. Based on our review, no allowance was warranted at either December 31, 2013 or 2012. |
Production Costs |
Production costs, including compressor rental and repair, pumpers’ salaries, saltwater disposal, ad valorem taxes, insurance, repairs and maintenance, expensed workovers and other operating expenses are expensed as incurred and included in lease operating expense on our consolidated statements of operations. |
Severance Tax and Marketing |
Severance taxes comprise production taxes charged by the state of North Dakota on oil and natural gas produced. These taxes are computed on the basis of volumes and/or value of production or sales. These taxes are usually levied at the time and place the minerals are severed from the producing reservoir. Marketing costs are those directly associated with marketing our production and are based on volumes produced. |
Exploration and Abandonments |
Exploration expenses include dry hole costs, delay rentals, and geological and geophysical costs. Abandonment costs are charges to leasehold costs associated with properties that we chose not to develop and impair such costs. |
Dependence on Major Customers |
For the years ended December 31, 2013, 2012, and 2011, we sold 48%; 99%; and 98%, respectively, of our oil and gas produced to Plains Marketing, L.P. (“Plains”), a subsidiary of Plains All American Pipeline, L.P. Additionally, substantially all of our accounts receivable related to oil and gas sales were due from Plains at December 31, 2013 and 2012. For the year ended December 31, 2013, we sold 52% of our oil and gas produced to Trafigura Limited. We believe that there are potential alternative purchasers and that it may be necessary to establish relationships with new purchasers if our production grows. However, there can be no assurance that we can establish such relationships and that those relationships will result in increased purchasers. Although we are exposed to a concentration of credit risk, we believe that Plains and Trafigura are credit worthy. |
Dependence on Suppliers |
Our industry is cyclical, and from time to time there is a shortage of drilling rigs, fracture stimulation services, equipment, supplies and qualified personnel. During these periods, the costs and delivery times of rigs, equipment and supplies are substantially greater. If the unavailability or high cost of drilling rigs, equipment, supplies or qualified personnel were particularly severe in the areas where we operate, we could be materially and adversely affected. We believe that there are potential alternative providers of drilling services and that it may be necessary to establish relationships with new contractors as our activity level and capital program grows. However, there can be no assurance that we can establish such relationships and that those relationships will result in increased availability of drilling rigs. |
Accounts Payable to Parent |
In accordance with revolving credit agreement between the Company and its Parent, the Parent has loaned funds to the Company to i) pay off third party debt, ii) fund operations, principally joint interest billings offset by revenue receipts, and iii) fund the development of oil and gas properties. As of December 31, 2013 and 2012, the Company has an outstanding liability owed to its Parent in the amount of $45.7 million and $59.0 million, respectively. See “Note 5- Related Party Transactions.” |
Asset Retirement Obligation |
Our asset retirement obligation represents the present value of the estimated amount we will incur to plug, abandon and remediate our producing properties at the end of their productive lives, in accordance with applicable federal, state and local laws. We determine our asset retirement obligation by calculating the present value of estimated cash flows related to the liability. The retirement obligation is recorded as a liability at its estimated present value as of the asset’s inception, with an offsetting increase to proved properties. Periodic accretion of discount of the estimated liability is recorded as accretion expense in the consolidated statements of operations. |
Our liability is determined using significant assumptions, including current estimates of plugging and abandonment costs, annual inflation of these costs, the productive lives of wells and our risk-adjusted interest rate. Changes in any of these assumptions can result in significant revisions to the estimated asset retirement obligation. See “Note 4 — Asset Retirement Obligations” to our financial statements for more information. |
Income Taxes |
The Company is not subject to federal income taxes and does not have a tax sharing agreement or allocate taxes with its member. Therefore, no provision has been made for federal or state income taxes on the Company’s books. It is the responsibility of the member to report its share of taxable income or loss on its separate income tax return. Accordingly, no recognition has been given to federal or state income taxes in the accompanying financial statements. |
Based on management’s analysis, the Company did not have any uncertain tax positions as of December 31, 2013 or 2012. The Company’s income tax returns for the periods subsequent to December 31, 2009 remain open for examination by taxing authorities. Interest and penalties, and the associated tax expense related to uncertain tax positions, when applicable, will be recorded in income tax expense as the positions are recognized. At December 31, 2013, and 2012, there were no material income tax interest or penalty items recorded in the statement of operations or as a liability on the balance sheet. |