Summary of Significant Accounting Policies | 6 Months Ended |
Jun. 30, 2014 |
Accounting Policies [Abstract] | ' |
Summary of Significant Accounting Policies | ' |
(2) Summary of Significant Accounting Policies (As Restated) |
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Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of Swift Energy and its wholly owned subsidiaries, which are engaged in the exploration, development, acquisition, and operation of oil and gas properties, with a focus on inland waters and onshore oil and natural gas reserves in Louisiana and Texas. Our undivided interests in oil and gas properties are accounted for using the proportionate consolidation method, whereby our proportionate share of each entity’s assets, liabilities, revenues, and expenses are included in the appropriate classifications in the accompanying condensed consolidated financial statements. Intercompany balances and transactions have been eliminated in preparing the accompanying condensed consolidated financial statements. |
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Subsequent Events. On July 15, 2014, we closed our transaction with PT Saka Energi Indonesia ("Saka Energi") to fully develop 8,300 acres of Fasken area Eagle Ford shale properties owned by Swift Energy in Webb County, Texas. Swift Energy sold a 36% full participating interest in the Fasken properties to Saka Energi for $175 million in total cash consideration, with $125 million paid at closing and $50 million in cash to be paid by Saka Energi over time to carry a portion of Swift Energy's field development costs incurred after the effective date, January 1, 2014. |
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Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities and the reported amounts of certain revenues and expenses during each reporting period. We believe our estimates and assumptions are reasonable; however, such estimates and assumptions are subject to a number of risks and uncertainties that may cause actual results to differ materially from such estimates. Significant estimates and assumptions underlying these financial statements include: |
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• | the estimated quantities of proved oil and natural gas reserves used to compute depletion of oil and natural gas properties and the related present value of estimated future net cash flows there-from, | | | | | | | | | | | | |
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• | estimates related to the collectability of accounts receivable and the credit worthiness of our customers, | | | | | | | | | | | | |
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• | estimates of the counterparty bank risk related to letters of credit that our customers may have issued on our behalf, | | | | | | | | | | | | |
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• | estimates of future costs to develop and produce reserves, | | | | | | | | | | | | |
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• | accruals related to oil and gas sales, capital expenditures and lease operating expenses, | | | | | | | | | | | | |
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• | estimates of insurance recoveries related to property damage, and the solvency of insurance providers, | | | | | | | | | | | | |
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• | estimates in the calculation of share-based compensation expense, | | | | | | | | | | | | |
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• | estimates of our ownership in properties prior to final division of interest determination, | | | | | | | | | | | | |
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• | the estimated future cost and timing of asset retirement obligations, | | | | | | | | | | | | |
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• | estimates made in our income tax calculations, | | | | | | | | | | | | |
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• | estimates in the calculation of the fair value of hedging assets and liabilities, and | | | | | | | | | | | | |
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• | estimates in the assessment of current litigation claims against the company. | | | | | | | | | | | | |
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While we are not aware of any material revisions to any of our estimates, there will likely be future revisions to our estimates resulting from matters such as new accounting pronouncements, changes in ownership interests, payouts, joint venture audits, re-allocations by purchasers or pipelines, or other corrections and adjustments common in the oil and gas industry, many of which require retroactive application. These types of adjustments cannot be currently estimated and will be recorded in the period during which the adjustments occur. |
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We are subject to legal proceedings, claims, liabilities and environmental matters that arise in the ordinary course of business. We accrue for losses when such losses are considered probable and the amounts can be reasonably estimated. |
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Property and Equipment. We follow the “full-cost” method of accounting for oil and natural gas property and equipment costs. Under this method of accounting, all productive and nonproductive costs incurred in the exploration, development, and acquisition of oil and natural gas reserves are capitalized. Such costs may be incurred both prior to and after the acquisition of a property and include lease acquisitions, geological and geophysical services, drilling, completion, and equipment. Internal costs incurred that are directly identified with exploration, development, and acquisition activities undertaken by us for our own account, and which are not related to production, general corporate overhead, or similar activities, are also capitalized. For the three months ended June 30, 2014 and 2013, such internal costs capitalized totaled $6.9 million and $7.5 million, respectively. For the six months ended June 30, 2014 and 2013, such internal costs capitalized totaled $14.1 million and $16.0 million, respectively. Interest costs are also capitalized to unproved oil and natural gas properties. For the three months ended June 30, 2014 and 2013, capitalized interest on unproved properties totaled $1.2 million and $1.9 million, respectively. For the six months ended June 30, 2014 and 2013, capitalized interest on unproved properties totaled $2.5 million and $3.8 million, respectively. Interest not capitalized and general and administrative costs related to production and general corporate overhead are expensed as incurred. |
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The “Property and Equipment” balances on the accompanying condensed consolidated balance sheets are summarized for presentation purposes. The following is a detailed breakout of our “Property and Equipment” balances (in thousands): |
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| June 30, 2014 (As Restated) | | December 31, 2013 (As Restated) | | | | | | |
Property and Equipment | | | | | | | | | |
Proved oil and gas properties | $ | 5,817,395 | | | $ | 5,600,279 | | | | | | | |
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Unproved oil and gas properties | 63,662 | | | 71,452 | | | | | | | |
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Furniture, fixtures, and other equipment | 42,400 | | | 42,368 | | | | | | | |
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Less – Accumulated depreciation, depletion, and amortization | (3,261,672 | ) | | (3,125,282 | ) | | | | | | |
Property and Equipment, Net | $ | 2,661,785 | | | $ | 2,588,817 | | | | | | | |
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No gains or losses are recognized upon the sale or disposition of oil and natural gas properties, except in transactions involving a significant amount of reserves or where the proceeds from the sale of oil and natural gas properties would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a cost center. Internal costs associated with selling properties are expensed as incurred. |
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Future development costs are estimated property-by-property based on current economic conditions and are amortized to expense as our capitalized oil and gas property costs are amortized. |
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We compute the provision for depreciation, depletion, and amortization (“DD&A”) of oil and natural gas properties using the unit-of-production method. Under this method, we compute the provision by multiplying the total unamortized costs of oil and gas properties, including future development costs, gas processing facilities, and both capitalized asset retirement obligations and undiscounted abandonment costs of wells to be drilled, net of salvage values, but excluding costs of unproved properties, by an overall rate determined by dividing the physical units of oil and natural gas produced during the period by the total estimated units of proved oil and natural gas reserves at the beginning of the period. This calculation is done on a country-by-country basis, and the period over which we will amortize these properties is dependent on our production from these properties in future years. Furniture, fixtures, and other equipment are recorded at cost and are depreciated by the straight-line method at rates based on the estimated useful lives of the property, which range between two and 20 years. Repairs and maintenance are charged to expense as incurred. |
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Geological and geophysical (“G&G”) costs incurred on developed properties are recorded in “Proved properties” and therefore subject to amortization. G&G costs incurred that are directly associated with specific unproved properties are capitalized in “Unproved properties” and evaluated as part of the total capitalized costs associated with a prospect. The cost of unproved properties not being amortized is assessed quarterly, on a property-by-property basis, to determine whether such properties have been impaired. In determining whether such costs should be impaired, we evaluate current drilling results, lease expiration dates, current oil and gas industry conditions, international economic conditions, capital availability, and available geological and geophysical information. Any impairment assessed is added to the cost of proved properties being amortized. |
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Full-Cost Ceiling Test. At the end of each quarterly reporting period, the unamortized cost of oil and natural gas properties (including natural gas processing facilities, capitalized asset retirement obligations, net of related salvage values and deferred income taxes, and excluding the recognized asset retirement obligation liability) is limited to the sum of the estimated future net revenues from proved properties (excluding cash outflows from recognized asset retirement obligations, including future development and abandonment costs of wells to be drilled, using the preceding 12-months’ average price based on closing prices on the first day of each month, adjusted for price differentials, discounted at 10%, and the lower of cost or fair value of unproved properties) adjusted for related income tax effects (“Ceiling Test”). This calculation is done on a country-by-country basis. |
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The calculations of the Ceiling Test and provision for DD&A are based on estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting the future rates of production, timing, and plan of development. The accuracy of any reserves 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 revision of such estimates. Accordingly, reserves estimates are often different from the quantities of oil and natural gas that are ultimately recovered. |
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It is reasonably possible that our estimate of discounted future net cash flows from proved oil and natural gas reserves could change in the future and that non-cash write-downs of oil and natural gas properties could occur in the future. For example, if future capital expenditures out pace future discounted net cash flows in our reserve calculations, if we have significant declines in our oil and natural gas reserves volumes (which also reduces our estimate of discounted future net cash flows from proved oil and natural gas reserves) or if oil or natural gas prices decline, non-cash write-downs of our oil and natural gas properties could occur in the future. We cannot estimate the amount or timing of any potential future non-cash write-down of our oil and natural gas properties. |
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Revenue Recognition. Oil and gas revenues are recognized when production is sold to a purchaser at a fixed or determinable price, when delivery has occurred and title has transferred, and if collectability of the revenue is probable. Swift Energy uses the entitlement method of accounting in which we recognize our ownership interest in production as revenue. If our sales exceed our ownership share of production, the natural gas balancing payables are reported in “Accounts payable and accrued liabilities” on the accompanying condensed consolidated balance sheets. Natural gas balancing receivables are reported in “Other current assets” on the accompanying condensed consolidated balance sheets when our ownership share of production exceeds sales. As of June 30, 2014 and December 31, 2013, we did not have any material natural gas imbalances. |
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Reclassification of Prior Period Balances. Certain reclassifications have been made to prior period amounts to conform to the current-year presentation. |
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Accounts Receivable. We assess the collectability of accounts receivable, and based on our judgment, we accrue a reserve when we believe a receivable may not be collected. At June 30, 2014 and December 31, 2013, we had an allowance for doubtful accounts of approximately $0.1 million. The allowance for doubtful accounts has been deducted from the total “Accounts receivable” balance on the accompanying condensed consolidated balance sheets. |
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At June 30, 2014, our “Accounts receivable” balance included $59.7 million (restated) for oil and gas sales, $1.1 million for joint interest owners, $7.7 million for severance tax credit receivables and $0.8 million for other receivables. At December 31, 2013, our “Accounts receivable” balance included $56.9 million for oil and gas sales, $1.6 million for joint interest owners, $11.6 million for severance tax credit receivables and $0.8 million for other receivables. |
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Debt Issuance Costs. Legal fees, accounting fees, underwriting fees, printing costs, and other direct expenses associated with extensions of our bank credit facility and public debt offerings were capitalized and are amortized on an effective interest basis over the life of each of the respective senior note offerings and credit facility. |
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The 7.125% senior notes due in 2017 mature on June 1, 2017, and the balance of their issuance costs at June 30, 2014, was $1.5 million. The 8.875% senior notes due in 2020 mature on January 15, 2020, and the balance of their issuance costs at June 30, 2014, was $3.3 million. The 7.875% senior notes due in 2022 mature on March 1, 2022, and the balance of their issuance costs at June 30, 2014, was $6.2 million. The balance of revolving credit facility issuance costs at June 30, 2014, was $2.9 million. |
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Price-Risk Management Activities. The Company follows FASB ASC 815-10, which requires that changes in the derivative’s fair value are recognized in earnings. The changes in the fair value of our derivatives are recognized in "Price-risk management and other, net” on the accompanying condensed consolidated statements of operations. We have a price-risk management policy to use derivative instruments to protect against declines in oil and natural gas prices, mainly through the purchase of price swaps, floors, calls, collars and participating collars. |
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During the three months ended June 30, 2014 and 2013, we recorded net losses of $2.7 million and net gains of $1.5 million, respectively, relating to our derivative activities. The 2014 amount includes a revenue reduction of $1.2 million during the second quarter of 2014 for the non-cash fair value adjustments on commodity derivatives. The effects of our derivatives are included in the "Other" section of our operating activities on the accompanying condensed consolidated statements of cash flows. |
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The fair values of our derivatives are computed using commonly accepted industry-standard models and are periodically verified against quotes from brokers. The fair value of our unsettled derivative assets at June 30, 2014 was $0.2 million which was recognized on the accompanying condensed consolidated balance sheet in “Other current assets.” The fair value of our unsettled derivative liabilities at June 30, 2014 was $3.1 million which was recognized on the accompanying condensed consolidated balance sheet in “Accounts payable and accrued liabilities.” |
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At June 30, 2014, we had less than $0.1 million in receivables for settled derivatives which were recognized on the accompanying condensed consolidated balance sheet in “Accounts receivable” and were subsequently collected in July 2014. At June 30, 2014, we also had $1.3 million in payables for settled derivatives which were recognized on the accompanying condensed consolidated balance sheet in "Accounts payable and accrued liabilities" and were subsequently paid in July 2014. |
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The Company uses an International Swap and Derivatives Association "ISDA" master agreement for our derivative contracts. This is an industry standardized contract containing the general conditions of our derivative transactions including provisions relating to netting derivative settlement payments under certain circumstances (such as default). For reporting purposes, the Company has elected to not offset the asset and liability fair value amounts of its derivatives on the accompanying balance sheets. If all counterparties were in a default situation, the Company, under the right of set-off, would show a net derivative fair value liability of $2.9 million at June 30, 2014. For further discussion related to the fair value of the Company's derivatives, refer to Note 7 of these condensed consolidated financial statements. |
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The following tables summarize the weighted average prices and future production volumes for our unsettled derivative contracts in place as of June 30, 2014: |
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Oil Derivatives | Total Volumes (Bbls) | | Swap Fixed Price | | | | | | | | |
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2014 Contracts | | | | | | | | | | | |
Swaps | 197,500 | | $ | 101.76 | | | | | | | | | |
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Natural Gas Derivatives | Total Volumes (MMBtu) | | Swap Fixed Price | | Floor | | Ceiling Price |
(NYMEX Henry Hub Settlements) | Price |
2014 Contracts | | | | | | | |
Swaps | 7,020,000 | | $ | 4.29 | | | | | |
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Collars | 2,100,000 | | | | $ | 4.13 | | | $ | 4.46 | |
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2015 Contracts | | | | | | | |
Swaps | 900,000 | | $ | 4.42 | | | | | |
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Natural Gas Basis Derivatives | Total Volumes (MMBtu) | | Swap Fixed Price | | | | | | | | |
(East Texas Houston Ship Channel Settlements) | | | | | | | | |
2014 Contracts | | | | | | | | | | | |
Swaps | 8,850,000 | | $ | (0.09 | ) | | | | | | | | |
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2015 Contracts | | | | | | | | | | | |
Swaps | 8,200,000 | | $ | (0.02 | ) | | | | | | | | |
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Supervision Fees. Consistent with industry practice, we charge a supervision fee to the wells we operate including our wells in which we own up to a 100% working interest. Supervision fees are recorded as a reduction to “General and administrative, net”, on the accompanying condensed consolidated statements of operations. Our supervision fees are based on COPAS industry guidelines. The amount of supervision fees charged for the three and six months ended June 30, 2014 and 2013 did not exceed our actual costs incurred. The total amount of supervision fees charged to the wells we operated were $3.0 million and $3.3 million for the three months ended June 30, 2014 and 2013, respectively and $5.7 million and $6.1 million for the six months ended June 30, 2014 and 2013, respectively. |
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Inventories. Inventories consist primarily of tubulars and other equipment and supplies that we expect to place in service in production operations. Inventories carried at cost (weighted average method) are included in “Other current assets” on the accompanying condensed consolidated balance sheets totaling $3.0 million and $3.5 million at June 30, 2014 and December 31, 2013, respectively. |
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Income Taxes. Under guidance contained in FASB ASC 740-10, 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 the enacted tax laws. |
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We follow the recognition and disclosure provisions under guidance contained in FASB ASC 740-10-25. Under this guidance, 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. Our policy is to record interest and penalties relating to uncertain tax positions in income tax expense. At June 30, 2014, we did not have any accrued liability for uncertain tax positions and do not anticipate recognition of any significant liabilities for uncertain tax positions during the next 12 months. |
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Our U.S. Federal income tax returns for 2007 forward, our Louisiana income tax returns from 1999 forward and our Texas franchise tax returns after 2008 remain subject to examination by the taxing authorities. There are no material unresolved items related to periods previously audited by these taxing authorities. No other jurisdiction returns are significant to our financial position. |
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For the six months ended June 30, 2014, we recognized an income tax expense increase of $1.9 million related to a shortfall between the tax deduction received with respect to prior restricted stock grants that vested during the year versus the actual book expense recorded over the life of those grants. |
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Accounts Payable and Accrued Liabilities. The “Accounts payable and accrued liabilities” balances on the accompanying condensed consolidated balance sheets are summarized below (in thousands): |
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| June 30, | | December 31, 2013 (As Restated) | | | | | | |
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Trade accounts payable (1) | $ | 39,240 | | | $ | 30,769 | | | | | | | |
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Accrued operating expenses | 15,988 | | | 16,016 | | | | | | | |
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Accrued payroll costs | 8,655 | | | 10,938 | | | | | | | |
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Asset retirement obligation – current portion | 13,717 | | | 15,859 | | | | | | | |
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Accrued taxes | 7,533 | | | 5,845 | | | | | | | |
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Escrow deposit liability (2) | 12,500 | | | — | | | | | | | |
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Other payables | 6,890 | | | 2,891 | | | | | | | |
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Total accounts payable and accrued liabilities | $ | 104,523 | | | $ | 82,318 | | | | | | | |
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(1) Included in “trade accounts payable” are liabilities of approximately $7.5 million and $26.1 million at June 30, 2014 and December 31, 2013, respectively, for outstanding checks. |
(2) This amount includes the liability related to the Fasken joint venture for the restricted cash, held in escrow, at June 30, 2014. |
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Cash and Cash Equivalents. We consider all highly liquid instruments with an initial maturity of three months or less to be cash equivalents. |
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Restricted Cash. During the second quarter we received a cash deposit, held in an escrow account, of $12.5 million related to the Fasken joint venture. These amounts were contractually restricted until the transaction closed on July 15, 2014. As of June 30, 2014, this balance is reported in “Other current assets” on the accompanying condensed consolidated balance sheets. |
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Restricted Cash also includes amounts held in escrow accounts to satisfy plugging and abandonment obligations. As of June 30, 2014 and December 31, 2013, these assets were approximately $1.0 million. These amounts are restricted as to their current use and will be released when we have satisfied all plugging and abandonment obligations in certain fields. These restricted cash balances are reported in “Other Long-Term Assets” on the accompanying condensed consolidated balance sheets. |
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Asset Retirement Obligation. We record these obligations in accordance with the guidance contained in FASB ASC 410-20. This guidance requires entities to record the fair value of a liability for legal obligations associated with the retirement obligations of tangible long-lived assets in the period in which it is incurred. When the liability is initially recorded, the carrying amount of the related long-lived asset is increased. The liability is discounted from the expected date of abandonment. Over time, accretion of the liability is recognized each period, and the capitalized cost is depreciated on a unit-of-production basis as part of depreciation, depletion, and amortization expense for our oil and gas properties. Upon settlement of the liability, the Company either settles the obligation for its recorded amount or incurs a gain or loss upon settlement which is included in the “Property and Equipment” balance on our accompanying condensed consolidated balance sheets. This guidance requires us to record a liability for the fair value of our dismantlement and abandonment costs, excluding salvage values. |
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The following provides a roll-forward of our asset retirement obligation (in thousands): |
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| 2014 | | | | | | | | | | |
Asset Retirement Obligation recorded as of January 1 | $ | 79,084 | | | | | | | | | | | |
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Accretion expense | 2,801 | | | | | | | | | | | |
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Liabilities incurred for new wells and facilities construction | 180 | | | | | | | | | | | |
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Reductions due to sold and abandoned wells and facilities | (2,643 | ) | | | | | | | | | | |
Revisions in estimates | 258 | | | | | | | | | | | |
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Asset Retirement Obligation as of June 30 | $ | 79,680 | | | | | | | | | | | |
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At June 30, 2014 and December 31, 2013, approximately $13.7 million and $15.9 million of our asset retirement obligation was classified as a current liability in “Accounts payable and accrued liabilities” on the accompanying condensed consolidated balance sheets. |
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New Accounting Pronouncements. In May 2014, the FASB issued ASU 2014-09, providing a comprehensive revenue recognition standard for contracts with customers that supersedes current revenue recognition guidance. The guidance is effective for annual and interim reporting periods beginning after December 15, 2016 and upon adoption, entities are required to recognize revenue using the following five-step model: identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue as the entity satisfies each performance obligation. Adoption of this standard could result in retrospective application, either in the form of recasting all prior periods presented or a cumulative adjustment to equity in the period of adoption. We plan to review and assess the effect and implement any necessary requirements as needed. |