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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Principles of consolidation |
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We consolidate all of our subsidiaries in the accompanying Consolidated Balance Sheets as of December 31, 2014 and 2013 and the Consolidated Statements of Operations, Consolidated Statements of Cash Flows and Changes in Shareholders' Equity for the years ended December 31, 2014, 2013 and 2012. Investments in unconsolidated affiliates in which we are able to exercise significant influence are accounted for using the equity method. We use the cost method of accounting for investments in unconsolidated affiliates in which we are not able to exercise significant influence. All intercompany transactions and accounts have been eliminated. |
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We report our interests in oil and natural gas properties using the proportional consolidation method of accounting. We reported our 25.5% interest in Compass Production Partners, L.P. ("Compass") using proportional consolidation for the period from its formation on February 14, 2013 to the sale of our interests on October 31, 2014. See further discussion in "Note 3. Acquisitions, divestitures and other significant events." |
Management estimates |
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In preparing the consolidated financial statements in conformity with GAAP, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the reporting periods. The more significant estimates pertain to proved oil and natural gas reserve volumes, future development costs, asset retirement obligations, share-based compensation, estimates relating to oil and natural gas revenues and expenses, accrued liabilities, the fair market value of assets and liabilities acquired in business combinations, derivatives and goodwill. Actual results may differ from management's estimates. |
Cash equivalents |
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We consider all highly liquid investments with maturities of three months or less when purchased, to be cash equivalents. |
Restricted cash |
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The restricted cash on our balance sheet is principally comprised of our share of an evergreen escrow account with BG Group that is used to fund our share of development operations in East Texas/North Louisiana. Funds held in this escrow account are restricted and can be used primarily for drilling and operations in East Texas/North Louisiana. |
Concentration of credit risk and accounts receivable |
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Financial instruments that potentially subject us to a concentration of credit risk consist principally of cash, trade receivables and our derivative financial instruments. We place our cash with financial institutions which we believe have sufficient credit quality to minimize risk of loss. We sell oil and natural gas to various customers. In addition, we participate with other parties in the drilling, completion and operation of oil and natural gas wells. The majority of our accounts receivable are due from either purchasers of oil or natural gas or participants in oil and natural gas wells for which we serve as the operator. We have the right to offset future revenues against unpaid charges related to wells which we operate. Oil and natural gas receivables are generally uncollateralized. The allowance for doubtful accounts was immaterial at both December 31, 2014 and 2013. We place our derivative financial instruments with financial institutions that we believe have high credit ratings. To mitigate our risk of loss due to default, we have entered into master netting agreements with our counterparties on our derivative financial instruments that allow us to offset our asset position with our liability position in the event of a default by the counterparty. |
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For the years ended December 31, 2014, 2013 and 2012, sales to BG Energy Merchants LLC accounted for approximately 34%, 48% and 36%, respectively, of total consolidated revenues. BG Energy Merchants LLC is a subsidiary of BG Group. For the years ended December 31, 2014 and 2013, Chesapeake Energy Marketing Inc. accounted for approximately 31% and 14%, respectively, of total consolidated revenues. Chesapeake Energy Marketing Inc. is a subsidiary of Chesapeake Energy Corporation ("Chesapeake"). |
Derivative financial instruments |
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We use derivative financial instruments to mitigate the impacts of commodity price fluctuations, protect our returns on investments and achieve a more predictable cash flow. Financial Accounting Standards Board ("FASB"), Accounting Standards Codification, ("ASC"), Topic 815, Derivatives and Hedging, ("ASC 815"), requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its estimated fair value. ASC 815 requires that changes in the derivative's estimated fair value be recognized in earnings unless specific hedge accounting criteria are met, or exemptions for normal purchases and normal sales as permitted by ASC 815 exist. We do not designate our derivative financial instruments as hedging instruments and, as a result, recognize the change in a derivative's estimated fair value in earnings as a component of other income or expense. Our derivative financial instruments are not held for trading purposes. |
Oil and natural gas properties |
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The accounting for, and disclosure of, oil and natural gas producing activities require that we choose between two GAAP alternatives: the full cost method or the successful efforts method. We use the full cost method of accounting, which involves capitalizing all acquisition, exploration, exploitation and development costs of oil and natural gas properties. Once we incur costs, they are recorded in the depletable pool of proved properties or in unproved properties, collectively, the full cost pool. Our unproved property costs, which include unproved oil and natural gas properties, properties under development, and major development projects, collectively totaled $276.0 million and $425.3 million as of December 31, 2014 and 2013, respectively, and are not subject to depletion. We review our unproved oil and natural gas property costs on a quarterly basis to assess for impairment or the need to transfer unproved costs to proved properties as a result of extension or discoveries from drilling operations or determination that no proved reserves are attributable to such costs. Our undeveloped properties are predominantly held-by-production, which reduces the risk of impairment as a result of lease expirations. We expect these costs to be evaluated in one to seven years and transferred to the depletable portion of the full cost pool during that time. As a result of this evaluation, we did not record an impairment of undeveloped properties during 2014 and recorded impairments of $1.0 million and $60.8 million of undeveloped properties during 2013 and 2012, respectively. These impairments were transferred to the depletable portion of the full cost pool during each year. The impairments were recorded to reflect the estimated market price which included certain properties that were no longer part of our drilling plans. |
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We capitalize interest on the costs related to the acquisition of undeveloped acreage in accordance with FASB ASC 835-20, Capitalization of Interest. When the unproved property costs are moved to proved developed and undeveloped oil and natural gas properties, or the properties are sold, we cease capitalizing interest related to these properties. |
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We calculate depletion using the unit-of-production method. Under this method, the sum of the full cost pool, excluding the book value of unproved properties, and all estimated future development costs less estimated salvage value are divided by the total estimated quantities of Proved Reserves. This rate is applied to our total production for the quarter, and the appropriate expense is recorded. We capitalize the portion of general and administrative costs, including share-based compensation, that is attributable to our acquisition, exploration, exploitation and development activities. |
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Sales, dispositions and other oil and natural gas property retirements are accounted for as adjustments to the full cost pool, with no recognition of gain or loss, unless the disposition would significantly alter the amortization rate and/or the relationship between capitalized costs and Proved Reserves. |
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Pursuant to Rule 4-10(c)(4) of Regulation S-X, at the end of each quarterly period, companies that use the full cost method of accounting for their oil and natural gas properties must compute a limitation on capitalized costs ("ceiling test"). The ceiling test involves comparing the net book value of the full cost pool, after taxes, to the full cost ceiling limitation defined below. In the event the full cost ceiling limitation is less than the full cost pool, we are required to record a ceiling test impairment of our oil and natural gas properties. The full cost ceiling limitation is computed as the sum of the present value of estimated future net revenues from our Proved Reserves by applying the average price as prescribed by the SEC Release No. 33-8995, less estimated future expenditures (based on current costs) to develop and produce the Proved Reserves, discounted at 10%, plus the cost of properties not being amortized and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of income tax effects. |
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The ceiling test is computed using the simple average spot price for the trailing 12 month period using the first day of each month. For the 12 months ended December 31, 2014, the trailing 12 month reference prices were $4.35 per Mmbtu for natural gas at Henry Hub ("HH"), and $94.99 per Bbl of oil for West Texas Intermediate ("WTI") at Cushing, Oklahoma. Each of the reference prices for oil and natural gas are further adjusted for quality factors and regional differentials to derive estimated future net revenues. The price used for NGLs was $33.03 per Bbl and was based on the trailing 12 month average of realized prices. Under full cost accounting rules, any ceiling test impairments of oil and natural gas properties may not be reversed in subsequent periods. Since we do not designate our derivative financial instruments as hedging instruments, we are not allowed to use the impacts of the derivative financial instruments in our ceiling test computations. The ceiling test limitation exceeded the book value of the full cost pool as of December 31, 2014. |
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The evaluation of impairment of our oil and natural gas properties includes estimates of Proved Reserves. There are numerous uncertainties inherent in estimating quantities of Proved Reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revisions of such estimate. Accordingly, reserve estimates often differ from the quantities of oil and natural gas that are ultimately recovered. |
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For the year ended December 31, 2014, we did not recognize an impairment to our proved oil and natural gas properties and for the years ended December 31, 2013 and 2012 we recognized impairments $108.5 million and $1.3 billion, respectively, to our proved oil and natural gas properties. The impairments for the year ended December 31, 2013 were primarily due to low natural gas prices for the trailing 12 months at the end of the first quarter of 2013, downward revisions to the reserves of our Haynesville shale properties based on operational matters, narrowing of basis differentials between oil price indices, and higher costs associated with the gathering and transportation of our natural gas production from the Eagle Ford shale. The impairment of our oil and natural gas properties during 2012 was due to the significant decline in natural gas prices. |
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As a result of recent decline in oil and natural gas prices, we expect to incur additional impairments to our oil and natural gas properties in 2015 if prices do not increase. Based on the commodity prices to date during 2015, we expect the reference prices to be utilized in the ceiling test calculation beginning in the first quarter of 2015 to be significantly lower than the price used at December 31, 2014. |
Inventory |
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Inventory includes tubular goods and other lease and well equipment which we plan to utilize in our ongoing exploration and development activities and is carried at the lower of cost or market value. The cost of inventory is capitalized in our full cost pool or gathering system assets once it has been placed into service. |
Office, field and other equipment |
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Office, field and other equipment are capitalized at cost and depreciated on a straight line basis over their estimated useful lives ranging from 3 to 15 years. |
Goodwill |
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In accordance with FASB ASC 350-20, Intangibles-Goodwill and Other, goodwill is not amortized, but is tested for impairment on an annual basis, or more frequently as impairment indicators arise. Impairment tests, which involve the use of estimates related to the fair market value of the business operations with which goodwill is associated, are performed as of December 31 of each year. Losses, if any, resulting from impairment tests will be reflected in operating income in the Consolidated Statements of Operations. |
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We apply a two-part, equally weighted approach in determining the fair value of our business as part of the goodwill impairment test. We perform an income approach, which uses a discounted cash flow model to value our business, and a market approach, in which our value is determined using trading metrics and transaction multiples of peer companies. We also consider our market capitalization in our evaluation of the fair value of our business. As a result of testing, the fair value of our business exceeded the carrying value of net assets by approximately 18% at December 31, 2014 and we did not record an impairment charge for the periods ending December 31, 2014, 2013 and 2012. |
Asset retirement obligations |
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We apply FASB ASC 410-20, Asset Retirement and Environmental Obligations ("ASC 410-20") to account for estimated future plugging and abandonment costs. ASC 410-20 requires legal obligations associated with the retirement of long-lived assets to be recognized at their estimated fair value at the time that the obligations are incurred. Upon initial recognition of a liability, that cost is capitalized as part of the related long-lived asset and allocated to expense over the useful life of the asset. Our asset retirement obligations primarily represent the present value of the estimated amount we will incur to plug, abandon and remediate our proved producing properties at the end of their productive lives, in accordance with applicable state laws. |
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The following is a reconciliation of our asset retirement obligations for the periods indicated: |
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(in thousands) | | 2014 | | 2013 | | 2012 |
Asset retirement obligations at beginning of period | | $ | 42,954 | | | $ | 61,864 | | | $ | 58,088 | |
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Activity during the period: | | | | | | |
Liabilities incurred during the period | | 576 | | | 514 | | | 971 | |
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Revisions in estimated assumptions | | — | | | 1,268 | | | — | |
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Liabilities settled during the period | | (33 | ) | | (187 | ) | | (338 | ) |
Adjustment to liability due to acquisitions | | 107 | | | 5,566 | | | — | |
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Adjustment to liability due to divestitures (1) | | (9,539 | ) | | (28,585 | ) | | (744 | ) |
Accretion of discount | | 2,690 | | | 2,514 | | | 3,887 | |
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Asset retirement obligations at end of period | | 36,755 | | | 42,954 | | | 61,864 | |
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Less current portion | | 1,769 | | | 191 | | | 1,200 | |
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Long-term portion | | $ | 34,986 | | | $ | 42,763 | | | $ | 60,664 | |
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-1 | For the year ended December 31, 2014, the adjustment to liability due to divestitures consisted primarily of $9.4 million from the sale of our interest in Compass. For the year ended December 31, 2013, the adjustment to liability due to divestitures consisted primarily of $28.3 million from the contribution of our certain conventional assets to Compass. | | | | | | | | | | | |
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Our asset retirement obligations are determined using discounted cash flow methodologies based on inputs and assumptions developed by management. We have no assets that are legally restricted for purposes of settling asset retirement obligations. |
Revenue recognition and gas imbalances |
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We use the sales method of accounting for oil and natural gas revenues. Under the sales method, revenues are recognized based on actual volumes of oil and natural gas sold to purchasers. Gas imbalances at December 31, 2014, 2013 and 2012 were not significant. |
Gathering and transportation |
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We generally sell oil and natural gas under two types of agreements which are common in our industry. Both types of agreements include a transportation charge. One is a net-back arrangement, under which we sell oil or natural gas at the wellhead and collect a price, net of the transportation incurred by the purchaser. In this case, we record sales at the price received from the purchaser, net of the transportation costs. Under the other arrangement, we sell oil or natural gas at a specific delivery point, pay transportation to a third party and receive proceeds from the purchaser with no transportation deduction. In this case, we record the transportation cost as gathering and transportation expense. Due to these two distinct selling arrangements, our computed realized prices, before the impact of derivative financial instruments, include revenues which are reported under two separate bases. Gathering and transportation expenses totaled $101.6 million, $100.6 million and $102.9 million for the years ended December 31, 2014, 2013 and 2012, respectively. |
Capitalization of internal costs |
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As part of our proved developed oil and natural gas properties, we capitalize a portion of salaries and related share-based compensation for employees who are directly involved in the acquisition, exploration, exploitation and development of oil and natural gas properties. During the years ended December 31, 2014, 2013 and 2012, we capitalized $15.8 million, $18.2 million and $22.5 million, respectively. The capitalized amounts include $5.5 million, $7.3 million and $7.5 million of share-based compensation for the years ended December 31, 2014, 2013 and 2012, respectively. |
Overhead reimbursement fees |
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We have classified fees from overhead charges billed to working interest owners of $13.5 million, $10.5 million and $20.5 million for the years ended December 31, 2014, 2013 and 2012, respectively, as a reduction of general and administrative expenses in the accompanying Consolidated Statements of Operations. We classified our share of these charges as oil and natural gas production costs in the amount of $6.4 million, $5.8 million and $10.3 million for the years ended December 31, 2014, 2013 and 2012, respectively. |
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In addition, we have agreements with BG Group that allow us to bill each other certain personnel costs and related fees incurred on behalf of certain properties in the East Texas/North Louisiana JV and the Appalachia JV. In connection with the formation of Compass, we entered into an agreement to perform certain operational, managerial, and administrative services. Compass reimbursed us for costs incurred in connection with the performance of these services based on an agreed upon service fee. As a result of the Compass sale, this agreement was terminated on October 31, 2014 and we entered into a customary transition services agreement pursuant to which EXCO will provide certain transition services to Compass for up to nine months following the closing date. For the years ended December 31, 2014, 2013 and 2012, general and administrative expenses were reduced by $24.7 million, $26.8 million and $25.2 million, respectively, for recoveries of fees for our personnel and services provided to our joint ventures and other partners. These recoveries are net of fees charged to us by BG Group for their personnel and services. |
Environmental costs |
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Environmental costs that relate to current operations are expensed as incurred. Remediation costs that relate to an existing condition caused by past operations are accrued when it is probable that those costs will be incurred and can be reasonably estimated based upon evaluations of currently available facts related to each site. |
Income taxes |
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Income taxes are accounted for in accordance with FASB ASC 740, Income Taxes ("ASC 740"), under which deferred income taxes are recognized for the future tax effects of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities using the enacted statutory tax rates in effect at year-end. The effect on deferred taxes for a change in tax rates is recognized in earnings in the period that includes the enactment date. A valuation allowance for deferred tax assets is recorded when it is more likely than not that the benefit from the deferred tax asset will not be realized. |
Earnings per share |
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We account for earnings per share in accordance with FASB ASC 260-10, Earnings Per Share ("ASC 260-10"). ASC 260-10 requires companies to present two calculations of earnings per share ("EPS"); basic and diluted. Basic EPS is based on the weighted average number of common shares outstanding during the period, excluding stock options, restricted share units and restricted share awards. Diluted EPS is computed in the same manner as basic EPS after assuming the issuance of common shares for all potentially dilutive common share equivalents, which include stock options, restricted share units and restricted share awards, whether exercisable or not. Our diluted EPS for the year ended December 31, 2013 also included subscription rights which were the result of the rights offering of our common shares as discussed in "Note 15. Rights Offering and other equity transactions". |
Share-based compensation |
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We account for our share-based compensation in accordance with FASB ASC Topic 718, Compensation-Stock Compensation ("ASC 718"). ASC 718 requires all share-based payments to employees, including grants of employee stock options, restricted share units and restricted share awards, to be recognized in our Consolidated Statements of Operations based on their estimated fair values. We recognize expense on a straight-line basis over the vesting period of the option, restricted share unit or restricted share award. We capitalize part of our share-based compensation that is attributable to our acquisition, exploration, exploitation and development activities. |
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Our 2005 Amended and Restated Long-Term Incentive Plan ("2005 Incentive Plan") provides for the granting of options and other equity incentive awards of our common shares in accordance with terms within the agreements. New shares will be issued for any options exercised or awards granted. Under the 2005 Incentive Plan, we have only issued stock options, restricted share units and restricted share awards, although the plan allows for other share-based awards. |
Recent accounting pronouncements |
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In April 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU 2014-08"). ASU 2014-08 revises the definition of discontinued operations by limiting discontinued operations reporting to disposals of components of an entity that represent strategic shifts that have (or will have) a major effect on an entity's operations and financial results, removing the lack of continuing involvement criteria and requiring discontinued operations reporting for the disposal of an equity method investment that meets the definition of discontinued operations. ASU 2014-08 also requires expanded disclosures for discontinued operations, including disclosure of pretax profit or loss of an individually significant component of an entity that does not qualify for discontinued operations reporting. ASU 2014-08 retained the scope exception for oil and natural gas properties accounted for under the full-cost method and therefore we do not believe the update will have a significant impact on our consolidated financial condition and results of operations. ASU 2014-08 is effective prospectively to all periods beginning after December 15, 2014. We will apply the guidance prospectively to disposal activity, when applicable, occurring after the effective date of ASU 2014-08. |
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In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The FASB and the International Accounting Standards Board ("IASB") jointly issued this comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under currently applicable guidance, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2016 and permits the use of either the retrospective or cumulative effect transition method. We are currently assessing the potential impact of ASU 2014-09 on our consolidated financial condition and results of operations. |
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In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and sets rules for how this information should be disclosed in the financial statements. ASU 2014-15 is effective for annual periods ending after December 15, 2016 and interim periods thereafter. Early adoption is permitted. As discussed in "Note 6. Debt", our ability to maintain compliance with certain debt covenants might be negatively impacted when oil and/or natural gas prices and production declines over an extended period of time. If such event occurs in future periods that could affect our ability to continue as going concern, we will provide appropriate disclosures as required by ASU 2014-15. |