Summary of Significant Accounting Policies | 12 Months Ended |
Dec. 31, 2014 |
Accounting Policies [Abstract] | |
Summary of Significant Accounting Policies | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
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Use of Estimates |
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The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Although management believes these estimates are reasonable, actual results could differ from these estimates. Changes in estimates are recorded prospectively. Significant assumptions are required in the valuation of proved oil and natural gas reserves that may affect the amount at which oil and natural gas properties are recorded. Estimation of asset retirement obligations (“AROs”) and valuations of derivative instruments and the fair value of incentive unit compensation also require significant assumptions. It is possible that these estimates could be revised at future dates and these revisions could be material. Depletion of oil and natural gas properties are determined using estimates of proved oil and natural gas reserves. There are numerous uncertainties inherent in the estimation of quantities of proved reserves and in the projection of future rates of production and the timing of development expenditures. Similarly, evaluations for impairment of proved and unproved oil and natural gas properties are subject to numerous uncertainties including, among others, estimates of future recoverable reserves and commodity price estimates. |
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Reclassifications |
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Certain reclassifications have been made to prior periods to conform to current period presentation. |
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Cash and Cash Equivalents |
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The Company considers all highly liquid instruments with an original maturity of three months or less at the time of issuance to be cash equivalents. |
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Derivative and Other Financial Instruments |
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The Company uses derivative financial instruments to reduce exposure to fluctuations in the prices of oil. These derivative transactions are generally in the form of collars, swaps and puts. In addition, the Company has previously entered into interest rate derivative contracts to minimize the effects of fluctuations in interest rates. |
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The Company reports the fair value of derivatives on the consolidated balance sheets in derivative instrument assets and derivative instrument liabilities as either current or noncurrent and determines the current and noncurrent classification based on the timing of expected future cash flows of individual contracts. The Company reports these amounts on a gross basis by contract. |
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The Company’s derivative instruments were not designated as hedges for accounting purposes for any of the periods presented. Accordingly, the changes in fair value are recognized in the consolidated statements of operations in the period of change. Gains and losses on derivatives are included in cash flows from operating activities. |
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Accounts Receivable |
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| | As of December 31, | | | | | |
| | 2014 | | 2013 | | | | | |
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Sale of oil and natural gas and related products | | $ | 24,059 | | | $ | 15,618 | | | | | | |
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Joint interest owners | | 10,400 | | | 10,728 | | | | | | |
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Derivatives - settled, but uncollected | | 5,977 | | | — | | | | | | |
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Total accounts receivable | | $ | 40,436 | | | $ | 26,346 | | | | | | |
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Accounts receivable, which are primarily from the sale of oil, natural gas and natural gas liquids (“NGLs”), are accrued based on estimates of the volumetric sales and prices the Company believes it will receive. In addition, settled but uncollected derivative contracts and receivables related to joint interest billings are included in accounts receivable. The Company routinely reviews outstanding balances, assesses the financial strength of its customers and records a reserve for amounts not expected to be fully recovered. The Company has not provided an allowance for doubtful accounts based on management’s expectations that all material receivables at year-end will be collected. The need for an allowance is determined based upon reviews of individual accounts, historical losses, existing economic conditions and other pertinent factors. No bad debt expense was recorded for the years ended December 31, 2014, 2013 or 2012. |
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Transactions with Related Parties |
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The Company's accounts receivable from related parties as of December 31, 2013 was $3.7 million and was owed by Wallace LP. Prior to the IPO, Collins, Wallace LP and Collins & Wallace Holdings, LLC had non-operated working interests in substantially all of the oil and natural gas assets that the Company operates. As of December 31, 2014, all related party receivable balances have been collected and no amounts remain outstanding. |
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In August 2014, the Company acquired from Pecos working interests in certain acreage and wells in Glasscock County, Texas for $4.5 million associated with the series of acquisitions in the amount of $257 million as further described in the recent acquisitions section of Note 3 - Acquisitions and Sales of Oil and Natural Gas Property Interests. |
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Oil and Natural Gas Properties |
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The Company uses the successful efforts method of accounting for its oil and natural gas exploration and production activities. Costs incurred by the Company related to the acquisition of oil and natural gas properties and the cost of drilling development wells and successful exploratory wells are capitalized, while the costs of unsuccessful exploratory wells are expensed when determined to be unsuccessful. |
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The Company capitalizes interest on expenditures while activities are in progress to bring the assets to their intended use for significant exploration and development projects that last more than six months. The Company did not capitalize any interest in the years ended December 31, 2014, 2013 or 2012, as no projects lasted more than six months. Costs incurred to maintain wells and related equipment, lease and well operating costs and other exploration costs are expensed as incurred. Gains and losses arising from the sale of properties are generally included in operating income. Unproved properties are assessed at least annually for possible impairment. |
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Capitalized acquisition costs attributable to proved oil and natural gas properties and leasehold costs are depleted on a field basis based on proved reserves using the unit-of-production method. Capitalized exploration well costs and development costs, including AROs, are depleted on a field basis, based on proved developed reserves. Depletion expense for oil and natural gas producing property was $87.2 million, $46.9 million, and $48.0 million, for the years ended December 31, 2014, 2013 and 2012, respectively. Depletion expense is included in depreciation, depletion and amortization in the accompanying consolidated statements of operations. |
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The Company’s oil and natural gas properties as of December 31, 2014 and December 31, 2013 consisted of the following: |
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| | As of December 31, | | | | | |
| | 2014 | | 2013 | | | | | |
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Proved oil and natural gas properties | | $ | 1,585,125 | | | $ | 562,019 | | | | | | |
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Unproved oil and natural gas properties | | 655,678 | | | 33,467 | | | | | | |
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Total oil and natural gas properties | | 2,240,803 | | | 595,486 | | | | | | |
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Less: accumulated depletion and impairment | | (171,046 | ) | | (88,514 | ) | | | | | |
Total oil and natural gas properties, net | | $ | 2,069,757 | | | $ | 506,972 | | | | | | |
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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. As of December 31, 2014 and 2013, there were no costs capitalized in connection with exploratory wells in progress. |
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Capitalized costs are evaluated for impairment whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. To determine if a field is impaired, the Company compares the carrying value of the field to the undiscounted future net cash flows by applying estimates of future oil and natural gas prices to the estimated future production of oil and natural gas reserves over the economic life of the property and deducting future costs. Future net cash flows are based upon reservoir engineers’ estimates of proved reserves. |
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For a property determined to be impaired, an impairment loss equal to the difference between the property’s carrying value and its estimated fair value is recognized. Fair value, on a field basis, is estimated to be the present value of the aforementioned expected future net cash flows. Unproved properties are assessed at least annually to determine whether they have been impaired. An impairment allowance is provided on an unproved property when the Company determines that the property will not be developed. Each part of this calculation is subject to a large degree of judgment, including the determination of the depletable units’ estimated reserves, future net cash flows and fair value. For the year ended December 31, 2014, impairment expense for unproved property was $4.3 million, which primarily related to an expectation that certain leasehold interests would expire and not be renewed. No impairment of unproved property was recorded for the years ended December 31, 2013 or 2012. |
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Natural gas volumes are converted to Boe at the rate of six Mcf of natural gas to one Bbl of oil. This convention is not an equivalent price basis and there may be a large difference in value between an equivalent volume of oil versus an equivalent volume of natural gas. NGL volumes are stated in barrels. |
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Other Property and Equipment |
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Other property and equipment includes service wells, computer equipment and software, telecommunications equipment, and furniture and fixtures. These items are recorded at cost, or fair value if acquired through a business acquisition, and are depreciated using straight-line methods based on expected lives of the individual assets or group of assets ranging from 5 to 39 years. Depreciation expense related to such assets for the years ended December 31, 2014, 2013 and 2012 was $0.9 million, $0.3 million and $0.3 million, respectively, and is included in depreciation, depletion and amortization in the accompanying consolidated statements of operations. |
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Investment in Unconsolidated Subsidiary |
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In October 2014, the Company invested $0.6 million which is included in "Other long-term assets" on the accompanying consolidated balance sheet and has committed to invest $5 million in the aggregate. This entity will develop, own and operate an integrated water management system to gather, store, process, treat, distribute and dispose of water on behalf of exploration and production companies operating in Midland, Martin, Andrews, and other counties in Texas approved by the board of this entity. Under the terms of the agreement, the Company owns a minority interest and will account for this investment using the equity method of accounting. |
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Restricted Cash |
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Restricted cash as of December 31, 2014 and 2013 consisted of certificates of deposit that mature in periods through 2017. |
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Deferred Loan Costs |
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Deferred loan costs are stated at cost, net of amortization, which is computed using the effective interest method over the life of the loan. Deferred loan costs of $15.1 million and $2.2 million as of December 31, 2014 and 2013, respectively, net of accumulated amortization, are included in other long-term assets in the accompanying consolidated balance sheets. Amortization of deferred loan costs of $1.2 million, $1.7 million and $0.5 million was recorded for the years ended December 31, 2014, 2013 and 2012, respectively. |
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Asset Retirement Obligations |
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The Company records AROs related to the retirement of long-lived assets at the time a legal obligation is incurred and the liability can be reasonably estimated. AROs are recorded as long-term liabilities with a corresponding increase in the carrying amount of the related long-lived asset. Subsequently, the asset retirement cost included in the carrying amount of the related asset is allocated to expense through depletion of the asset. Changes in the liability due to passage of time are generally recognized as an increase in the carrying amount of the liability and as corresponding accretion expense. |
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The Company estimates a fair value of the obligation on each well in which it owns an interest by identifying costs associated with the future down-hole plugging, dismantlement and removal of production equipment and facilities, and the restoration and reclamation of the surface acreage to a condition similar to that existing before oil and natural gas extraction began. |
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In general, the amount of ARO and the costs capitalized will be equal to the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor up to the estimated settlement date which is then discounted back to the date that the abandonment obligation was incurred using an estimated credit adjusted rate. If the estimated ARO changes, an adjustment is recorded to both the ARO and the long-lived asset. Revisions to estimated AROs can result from changes in retirement cost estimates, revisions to estimated inflation rates and changes in the estimated timing of abandonment. |
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After recording these amounts, the ARO is accreted to its future estimated value using the same assumed credit adjusted rate and the associated capitalized costs are depreciated on a unit-of-production basis. |
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The ARO consisted of the following for the period indicated: |
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| Year Ended December 31, | | | | | | |
| 2014 | | 2013 | | | | | | |
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Asset retirement obligation at beginning of period | $ | 2,584 | | | $ | 2,716 | | | | | | | |
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Liabilities incurred or assumed | 2,147 | | | 644 | | | | | | | |
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Liabilities settled | — | | | (897 | ) | | | | | | |
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Accretion expense | 142 | | | 121 | | | | | | | |
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Asset retirement obligation at end of period | $ | 4,873 | | | $ | 2,584 | | | | | | | |
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Income Taxes |
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RSP LLC was organized as a limited liability company and treated as a flow-through entity for federal income tax purposes. As such, taxable income and any related tax credits were passed through to its members and are included in their tax returns even though such net taxable income or tax credits may not have actually been distributed. Accordingly, provision for federal and state corporate income taxes has been made only for the operations of RSP Inc. from January 23, 2014 through December 31, 2014 in the accompanying consolidated financial statements. Deferred income taxes are provided to reflect the future tax consequences or benefits of differences between the tax basis of assets and liabilities and their reported amounts in the financial statements using enacted tax rates. Upon the corporate reorganization in connection with the IPO transaction, the Company established a $132 million provision for deferred income taxes, which was recognized as tax expense from continuing operations in the first quarter of 2014. This $132 million provision, related to our change in tax status, was subsequently adjusted to $95 million during the fourth quarter of 2014. The primary upward adjustments in the effective tax rate above the U.S. statutory rate are the adjustment related to the corporate reorganization noted above along with non-deductible incentive unit compensation. |
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The following is an analysis of the Company’s consolidated income tax expense: |
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| | | Year Ended December 31, |
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Current | | | $ | 4,338 | | | $ | 68 | | | $ | (339 | ) |
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Deferred | | | 153,468 | | | 2,194 | | | — | |
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Income Tax Expense (Benefit) | | | $ | 157,806 | | | $ | 2,262 | | | $ | (339 | ) |
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Deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities, given the provisions of enacted tax laws. Tax positions are evaluated for recognition using a more-likely-than-not threshold, and those tax positions requiring recognition are measured as the largest amount of tax benefit that is greater than fifty percent likely of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. The Company’s policy is to record interest and penalties relating to uncertain tax positions in income tax expense. At December 31, 2014, the Company did not have any accrued liability for uncertain tax positions and does not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. |
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The Company’s U.S. federal income tax returns and Texas franchise tax returns for 2010 and beyond remain subject to examination by the taxing authorities. No other jurisdiction’s returns are significant to the Company’s financial position. |
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Segment Reporting |
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The Company operates in only one industry segment: the oil and natural gas exploration and production industry in the United States. All of its operations are conducted in one geographic area of the United States. All revenues are derived from customers located in the United States. |
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New Accounting Pronouncements |
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In January 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-01, "Income Statement - Extraordinary and Unusual Items (Subtopic 225-20)," which eliminates the concept of extraordinary items in US GAAP. An entity is required to apply ASU 2015-01 for annual and interim reporting periods beginning after December 15, 2015. An entity may apply ASU 2015-01 prospectively or retrospectively for all periods presented in the financial statements. The Company does not expect the impact of its pending adoption of this guidance will have a material effect on its consolidated financial statements. |
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In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers (Topic 606),” which provides a comprehensive revenue recognition standard for contracts with customers that supersedes current revenue recognition guidance including industry specific guidance. An entity is required to apply ASU 2014-09 for annual and interim reporting periods beginning after December 15, 2016. An entity can apply ASU 2014-09 using either a full retrospective method, meaning the standard is applied to all of the periods presented, or a modified retrospective method, meaning the cumulative effect of initially applying the standard is recognized in the most current period presented in the financial statements. The Company is evaluating the impact that this new guidance will have on its consolidated financial statements. |