Significant Accounting Policies (Policies) | 3 Months Ended |
Mar. 31, 2014 |
Significant Accounting Policies | ' |
Basis of Presentation | ' |
Basis of Presentation |
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The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany transactions and balances have been eliminated in consolidation. The financial statements reported for March 31, 2014, and the three month period then ended include the Company and all of its subsidiaries. |
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These interim financial statements have not been audited. However, in the opinion of management, all adjustments consisting of only normal and recurring adjustments necessary for a fair statement of the financial statements have been included. As these are interim financial statements, they do not include all disclosures required for financial statements prepared in conformity with GAAP. Interim period results are not necessarily indicative of results of operations or cash flows for a full year. |
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These consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, they do not include all disclosures required by GAAP and should be read in conjunction with our most recent audited consolidated financial statements included in Jones Energy, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013. |
Use of Estimates | ' |
Use of Estimates |
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In preparing the accompanying financial statements, management has made certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent liabilities, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. Changes in estimates are recorded prospectively. |
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Significant assumptions are required in the valuation of proved oil and natural gas reserves, which affect the Company’s estimates of depletion expense, impairment, and the allocation of value in our business combinations. Significant assumptions are also required in the Company’s estimates of the net gain or loss on commodity derivative assets, fair value associated with business combinations, and asset retirement obligations (“ARO”). |
Oil and Gas Properties | ' |
Oil and Gas Properties |
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The Company accounts for its oil and natural gas exploration and production activities under the successful efforts method of accounting. Oil and gas properties consisted of the following at March 31, 2014 and December 31, 2013: |
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| | March 31, | | December 31, | |
(in thousands of dollars) | | 2014 | | 2013 | |
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Mineral interests in properties | | | | | |
Unproved | | $ | 93,386 | | $ | 99,134 | |
Proved | | 970,222 | | 958,816 | |
Wells and equipment and related facilities | | 709,358 | | 609,748 | |
| | 1,772,966 | | 1,667,698 | |
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Less: Accumulated depletion and impairment | | (409,573 | ) | (370,470 | ) |
Net oil and gas properties | | $ | 1,363,393 | | $ | 1,297,228 | |
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Costs to acquire mineral interests in oil and natural gas properties are capitalized. Costs to drill and equip development wells and the related asset retirement costs are capitalized. The costs to drill and equip exploratory wells are capitalized pending determination of whether the Company has discovered proved commercial reserves. If proved commercial reserves are not discovered, such drilling costs are charged to expense. In some circumstances, it may be uncertain whether proved commercial reserves have been found when drilling has been completed. Such exploratory well drilling costs may continue to be capitalized if the anticipated reserve quantity is sufficient to justify its completion as a producing well and sufficient progress in assessing the reserves and the economic and operating viability of the project is being made. In the first quarter of 2014 we had no material capitalized costs associated with exploratory wells. |
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The Company capitalizes 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. The Company did not capitalize any interest during the three months ended March 31, 2014 as no projects lasted more than six months. Depletion of oil and gas properties amounted to $39.1 million and $24.9 million for the periods ended March 31, 2014 and March 31, 2013, respectively. |
Other Property, Plant and Equipment | ' |
Other Property, Plant and Equipment |
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Other property, plant and equipment consisted of the following at March 31, 2014 and December 31, 2013: |
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| | March 31, | | December 31, | |
(in thousands of dollars) | | 2014 | | 2013 | |
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Leasehold improvements | | $ | 1,116 | | $ | 1,060 | |
Furniture, fixtures, computers and software | | 2,705 | | 2,491 | |
Vehicles | | 833 | | 835 | |
Aircraft | | 910 | | 910 | |
Other | | 133 | | 134 | |
| | 5,697 | | 5,430 | |
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Less: Accumulated depreciation and amortization | | (2,225 | ) | (1,986 | ) |
Net other property, plant and equipment | | $ | 3,472 | | $ | 3,444 | |
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Other property, plant and equipment is depreciated on a straight-line basis over the estimated useful lives of the property, plant and equipment, which range from three years to ten years. Depreciation and amortization of other property, plant and equipment amounted to $0.2 million and $0.2 million during the three months ended March 31, 2014 and 2013, respectively. |
Commodity Derivatives | ' |
Commodity Derivatives |
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The Company records its commodity derivative instruments on the Consolidated Balance Sheet as either an asset or liability measured at its fair value. Changes in the derivative’s fair value are recognized currently in earnings, unless specific hedge accounting criteria are met. During the three month periods ended March 31, 2014 and 2013, the Company elected not to designate any of its commodity price risk management activities as cash-flow or fair value hedges. The changes in the fair values of outstanding financial instruments are recognized as gains or losses in the period of change. |
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Although the Company does not designate its commodity derivative instruments as cash-flow hedges, management uses those instruments to reduce the Company’s exposure to fluctuations in commodity prices related to its natural gas and oil production. Net gains and losses, at fair value, are included on the Consolidated Balance Sheet as current or noncurrent assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of commodity derivative contracts are recorded in earnings as they occur and are included in other income (expense) on the Consolidated Statement of Operations. See Note 4, “Fair Value Measurement,” for disclosure about the fair values of commodity derivative instruments. |
Asset Retirement Obligations | ' |
Asset Retirement Obligations |
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The Company’s asset retirement obligations consist of future plugging and abandonment expenses on oil and natural gas properties. |
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A summary of the Company’s ARO for three months ended March 31, 2014 is as follows: |
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(in thousands of dollars) | | | | | | |
Balance at December 31, 2013 | | $ | 10,963 | | | | |
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Liabilities incurred | | 330 | | | | |
Accretion of discount | | 170 | | | | |
Liabilities settled due to sale of related properties | | — | | | | |
Liabilities settled due to plugging and abandonment | | (49 | ) | | | |
Change in estimate | | 13 | | | | |
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Balance at March 31, 2014 | | 11,427 | | | | |
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Less: Current portion of ARO | | (2,794 | ) | | | |
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Total long-term ARO at March 31, 2014 | | $ | 8,633 | | | | |
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Income Taxes | ' |
Income Taxes |
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Following its IPO on July 29, 2013, the Company began recording a federal and state income tax liability associated with its status as a corporation. No provision for federal income taxes was recorded prior to the IPO because the taxable income or loss was includable in the income tax returns of the individual partners and members. The Company is also subject to state income taxes. The State of Texas includes in its tax system a franchise tax applicable to the Company and an accrual for franchise taxes is included in the financial statements when appropriate. |
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Income taxes are accounted for under the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to be recovered or settled pursuant to the provisions of ASC 740—Income Taxes. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. |
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The Company records a valuation allowance if it is deemed more likely than not that all or a portion of its deferred income tax assets will not be realized. In addition, income tax rules and regulations are subject to interpretation and the application of those rules and regulations require judgment by the Company and may be challenged by the taxation authorities. The Company follows ASC 740-10-25, which requires the use of a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return and disclosures regarding uncertainties in income tax positions. Only tax positions that meet the more likely than not recognition threshold are recognized. The Company’s policy is to include any interest and penalties recorded on uncertain tax positions as a component of income tax expense. The Company’s unrecognized tax benefits or related interest and penalties are immaterial. |
Tax Receivable Agreement | ' |
Tax Receivable Agreement |
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In conjunction with the IPO, the Company entered into a Tax Receivable Agreement (“TRA”) with JEH and the pre-IPO owners. Upon any exchange of JEH—Units and Class B common stock of the Company held by JEH’s pre-IPO owners for Class A common stock of the Company, the TRA provides for the payment by the Company, directly to such exchanging owners, of 85% of the amount of cash savings in income or franchise taxes that the Company realizes as a result of (i) the tax basis increases resulting from the exchange of JEH Units for shares of Class A common stock (or resulting from a sale of JEH Units for cash) and (ii) imputed interest deemed to be paid by the Company as a result of, and additional tax basis arising from, any payments the Company makes under the TRA. The Company will retain the benefit of the remaining 15% of the cash savings. Liabilities under the TRA will be recognized upon the exchange of shares. As of March 31, 2014, there had been no exchanges and no liability is recorded on the Consolidated Balance Sheet. |
Stock Compensation | ' |
Stock Compensation |
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JEH has a management incentive plan that provides membership-interest awards in JEH to members of senior management (“management units”). The management unit grants awarded prior to the initial filing of the registration statement in March 2013 had a dual vesting schedule. Sixty percent of the units awarded vested in five equal annual installments, with the remaining 40% vesting upon a company restructuring event, including the IPO. All grants awarded after the initial registration statement but prior to the IPO have a single vesting structure of five equal annual installments and were valued at the IPO price, adjusted for equivalent shares. Both the vested and unvested management units were converted into JEH Units and shares of Class B common stock at the IPO date. |
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Under the Jones Energy, Inc. 2013 Omnibus Incentive Plan, established in conjunction with the Company’s IPO, the Company reserved 3,850,000 shares of Class A common stock for director and employee stock-based compensation awards. As of March 31, 2014 no such awards had been issued or granted to any of the Company’s employees. |
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In September 2013, the Company granted each of the four outside members of the Board of Directors 6,645 shares of restricted Class A common stock under the Jones Energy, Inc. 2013 Omnibus Incentive Plan. The fair value of the restricted stock grants was based on the value of the Company’s Class A common stock on the date of grant and is expensed on a straight-line basis over the one-year vesting period. |
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Refer to Note 7, “Stock-based Compensation,” for additional information regarding the management units and restricted stock awards. |
Recent Accounting Developments | ' |
Recent Accounting Developments |
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There are no recent accounting developments applicable to the Company as of March 31, 2014. |