NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1:
Accounting Principles and Basis of Presentation
The accompanying unaudited condensed financial statements of Panhandle Oil and Gas Inc. have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC.
Management of the Company believes that all adjustments necessary for a fair presentation of the financial position and results of operations and cash flows for the periods have been included.
All such adjustments are of a normal recurring nature.
The results are not necessarily indicative of those to be expected for the full year.
The Company’s fiscal year runs from October 1 through September 30.
Certain amounts and disclosures have been condensed or omitted from these financial statements pursuant to the rules and regulations of the SEC.
Therefore, these condensed financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s
20
1
3
Annual Report on Form 10-K.
NOTE 2:
Income Taxes
The Company’s provision for income taxes differs from the statutory rate primarily due to estimated
federal
and
state
benefit
s
generated from estimated excess
federal and Oklahoma percentage depletion
, which are
permanent tax benefits.
Both e
xces
s
federal percentage depletion
, which is
limited to certain production volumes and by certain income levels
,
and excess Oklahoma percentage depletion
, which has
no
limitation on production volume
,
reduce estimated taxable income or add to estimated taxable loss projected for
any
year.
The federal and Oklahoma excess percentage depletion estimates will be updated throughout the year until finalized with detail
ed
well-by-well calculations at fiscal year-end.
F
ederal and Oklahoma excess percentage depletion
benefits,
when a
provision
for in
come taxes is recorded, de
crease the effective tax rate
,
while the effect is to increase the effective tax rate when a benefit for income taxes is
recorded.
The benefit
s
of federal and Oklahoma excess percentage depletion are not directly related to the amount of
pre-tax
income recorded in a period.
Accordingly, in periods where a recorded
pre-tax income
or
loss
is relatively small, the proportional effect of these items on the effective tax rate may be significant.
The effective tax rate for the quarter ended
December 31, 2013
, was
31%
as compared to
24%
for the quarter ended
December 31, 2012
.
NOTE
3
:
Basic
and Diluted
Earnings
per Share
Basic
and diluted
e
arnings
per share is calculated using net income
divided by the weighted average
number
of
voting
common shares outstanding
,
including unissued
,
vested
directors’
deferred compensation
shares
during the
period
.
NOTE
4
:
Long-term Debt
The Company has a credit facility with Bank of Oklahoma (BOK) which consists of a revolving loan in the amount of
$80,000,000
which is subject to a semi-annual borrowing base determination, wherein BOK applies their own current pricing forecast and an
8%
discount rate to the Company’s proved reserves as calculated by the Company’s Independent Consulting Petroleum Engineering Firm. When applying the discount rate, BOK also applies an advance rate percentage to all proved non-producing and proved undeveloped reserves. The facility
currently
has a borrowing base of
$35,000,000
and is secured by certain of the Company’s properties with a carrying value of
$38,864,588
at
December 31, 2013
. The facility matures on
November 30, 2017
. The interest rate is based on
BOK
prime plus from
0.375%
to
1.125%
, or 30 day LIBOR plus from
1.875%
to
2.625%
. The election of
BOK
prime or LIBOR is at the Company’s discretion. The interest rate spread from LIBOR or the prime rate increases as a larger percent of the loan value of the Company’s oil and natural gas properties is advanced. The interest rate spread from
BOK
prime or LIBOR will be charged based on the percent of the value advanced of the calculated loan value of the Company’s oil and natural gas properties. At
December 31, 2013
, the effective interest rate was
2.04%
.
The Company’s debt is recorded at the carrying amount on its balance sheet. The carrying amount of the Company’s revolving credit facility approximates fair value because the interest rates are reflective of market rates.
Since the bank charges a customary non-use fee of
0.25%
annually of the unused portion of the borrowing base, the Company has not requested the bank to increase its borrowing base beyond
$35,000,000
. Determinations of the borrowing base are made semi-annually or whenever the bank, in its sole discretion, believes that there has been a material change in the value of the oil and natural gas properties. While the Company believes the availability could be increased (if needed) by placing more of the Company’s properties as security under the revolving credit facility, increases are at the discretion of the bank. The loan agreement contains customary covenants which, among other things, require periodic financial and reserve reporting and limit the Company’s incurrence of indebtedness, liens, dividends and acquisitions of treasury stock, and require
the Company to maintain certain financial ratios. At
December 31, 2013
, the Company was in compliance with the covenants of the BOK agreement.
NOTE
5
:
Deferred Compensation Plan for Directors
The Company has a deferred compensation plan for non-employee directors (the Plan).
The Plan provides that each eligible director can individually elect to
be credited with future unissued
shares of Company stock rather than cash for
Board
and committee chair retainers,
Board
meeting fees and
Board
committee meeting fees.
These
unissued
shares are credited to each director’s deferred fee account at the closing market price of the stock on the date earned.
Upon retirement, termination or death of the director
,
or upon a change in control of the Company, the
unissued
shares
credited
under the Plan will be issued to the director.
NOTE
6
:
R
estricted
S
tock
P
lan
On March 11, 2010, shareholders approved the Panhandle Oil and Gas Inc. 2010 Restricted Stock Plan (2010 Stock Plan), which made available
100,000
shares of common stock to provide a long-term component to the Company’s total compensation package for its officers and to further align the interest of its officers with those of its shareholders. The 2010 Stock Plan is designed to provide as much flexibility as possible for future grants of restricted stock so that the Company can respond as necessary to provide competitive compensation in order to retain, attract and motivate officers of the Company and to align their interests with those of the Company’s shareholders.
Effective March 2010, the board of directors approved the purchase of the Company’s common stock, from time to time, equal to the aggregate number of shares of common stock awarded pursuant to the Company’s 2010 Restricted Stock Plan, contributed by the Company to its ESOP and credited to the accounts of directors pursuant to the Deferred Compensation Plan for Non-Employee Directors.
On December
2
1, 20
13
, the Company awarded
6,
093
non-performance based shares and
18
,
279
performance based shares of the Company’s common stock as restricted stock to certain officers. The restricted stock vests at the end of
three
years and contains nonforfeitable rights to receive dividends and voting rights during the vesting period.
The non-performance and performance based shares had a fair value on their award date of
$
199
,
788
and
$
294
,
889
, respectively, and will be recognized as compensation expense ratably over the vesting period. The fair value of the performance based shares on their award date is calculated by simulating the Company’s stock price and stock price return utilizing a Monte Carlo model covering the period from the grant date through the end of the performance period (December
2
1, 201
3
, through December
2
1, 201
6
).
The following table summarizes the Company’s pre-tax compensation expense for the three months ended
December 31, 2013
and
2012
, related to the Company’s performance based and non-performance based restricted stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31,
|
|
2013
|
|
2012
|
Performance based, restricted stock
|
$
|
72,695
|
|
$
|
99,939
|
Non-performance based, restricted stock
|
|
55,281
|
|
|
157,938
|
Total compensation expense
|
$
|
127,976
|
|
$
|
257,877
|
A summary of the Company’s unrecognized compensation cost for its unvested performance based and non-performance based restricted stock and the weighted-average periods over which the compensation cost is expected to be recognized are shown in the following table.
|
|
|
|
|
|
|
|
|
As of December 31, 2013
|
|
Unrecognized Compensation Cost
|
|
Weighted Average Period (in years)
|
Performance based, restricted stock
|
$
|
504,920
|
|
1.98
|
Non-performance based, restricted stock
|
|
372,135
|
|
1.95
|
Total
|
$
|
877,055
|
|
|
Upon vesting, shares are expected to be issued out of shares held in treasury.
NOTE
7
:
Oil
, NGL
and Natural Gas Reserves
Management considers the estimation of the Company’s crude oil, NGL and natural gas reserves to be the most significant of its judgments and estimates. Changes in crude oil, NGL and natural gas reserve estimates affect the Company’s calculation of DD&A, provision for abandonment and assessment of the need for asset impairments. On an annual basis, with a semi-annual update, the Company’s Independent Consulting Petroleum Engineer, with assistance from Company staff, prepares estimates of crude oil, NGL and natural gas reserves based on available geological and seismic data, reservoir pressure data, core analysis reports, well logs, analogous reservoir performance history, production data and other available sources of engineering, geological and geophysical information. Between periods in which reserves would normally be calculated, the Company updates the reserve calculations utilizing appropriate prices for the current period. The estimated oil, NGL and natural gas reserves were computed using the 12-month average price calculated as the unweighted arithmetic average of the first-day-of-the-month oil, NGL and natural gas price for each month within the 12-month period prior to the balance sheet date, held flat over the life of the properties. However, projected future crude oil, NGL and natural gas pricing assumptions are used by management to prepare estimates of crude oil, NGL and natural gas reserves and future net cash flows used in asset impairment assessments and in formulating management’s overall operating decisions. Crude oil, NGL and natural gas prices are volatile and affected by worldwide production and consumption and are outside the control of management
.
NOTE
8
:
Impairment
All long-lived assets, principally oil and natural gas properties, are monitored for potential impairment when circumstances indicate that the carrying value of the asset may be greater than its estimated future net cash flows. The evaluations involve significant judgment since the results are based on estimated future events, such as inflation rates, future sales prices for oil, NGL and natural gas, future production costs, estimates of future oil, NGL and natural gas reserves to be recovered and the timing thereof, the economic and regulatory climates and other factors. The need to test a property for impairment may result from significant declines in sales prices or unfavorable adjustments to oil, NGL and natural gas reserves. Between periods in which reserves would normally be calculated, the Company updates the reserve calculations utilizing updated projected future price decks current with the period. For the three months ended
December 31, 2013
and
2012
, the assessment resulted in
impairment
provisions of
$202,991
and
$154,965
, respectively.
A reduction in oil, NGL or natural gas prices, or a decline in reserve volumes, could lead to additional impairment that may be material to the Company.
NOTE
9
:
Capitalized Costs
As of
December 31, 2013
and
2012
, non
-producing o
il and
natural
gas properties include costs of
$83,174
and
$0
, respectively,
on exploratory wells which were drilling and/or testing.
NOTE
10
:
Exploration Costs
In the quarter ended
December 31, 2013
,
lease expirations and leasehold impairments
of
$24,148
were
charged to exploration costs
.
Leasehold impairments are recorded
for individually insignificant non-producing leases which the Company believes will not be transferred to proved properties over the remaining lives of the leases.
In the quarter ended
December 31, 2013
, t
he Company also had
an
additional
$14,607
related to
geological and geophysical costs
.
In the quarter ended
December 31, 2012
,
lease expirations and impairments
of
$13,222
w
ere
charged to exploration costs as well as additional costs of
$6,545
related to
exploratory
dry hole
s
.
NOTE
1
1
:
Derivatives
T
he Company has entered into
fixed
swap
contracts
and costless collar contracts
.
T
hese instruments
a
re intended to reduce the Company’s exposure to short-term fluctuations in the price of
oil and
natural gas.
Fixed swap contracts set a fixed price and provide payments to the Company if the index price is below the fixed price, or require payments by the Company if the index price is above the fixed price.
Collar contracts set a fixed floor price and a fixed ceiling price and provide payments to the Company if the index price falls below the floor or require payments by the Company if the index price rises above the ceiling
.
These contracts cover only a portion of the Company’s natural gas
and oil
production and provide only
partial price protection against declines in natural gas
and oil
prices.
These derivative instruments may expose the Company to risk of financial loss and limit the benefit of future increases in prices.
All of the Company’s derivative contracts are with Bank of Oklahoma and are secured.
The derivative instruments have settled or will settle based on the prices below.
Derivative contracts in place as of
December 31, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production volume
|
|
|
|
|
Contract period
|
|
covered per month
|
|
Index
|
|
Contract price
|
Natural gas costless collars
|
|
|
|
|
|
|
November 2013 - April 2014
|
|
160,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.00 floor/$4.55 ceiling
|
January - June 2014
|
|
40,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.25 floor/$3.90 ceiling
|
January - June 2014
|
|
50,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.50 floor/$4.30 ceiling
|
January - June 2014
|
|
80,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.75 floor/$4.35 ceiling
|
July - December 2014
|
|
140,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.75 floor/$4.50 ceiling
|
|
|
|
|
|
|
|
Natural gas fixed price swaps
|
|
|
|
|
|
|
January - June 2014
|
|
80,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.085
|
July - December 2014
|
|
140,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.110
|
April - September 2014
|
|
50,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.200
|
April - September 2014
|
|
50,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.180
|
April - September 2014
|
|
50,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.210
|
|
|
|
|
|
|
|
Oil costless collars
|
|
|
|
|
|
|
January - June 2014
|
|
4,000 Bbls
|
|
NYMEX WTI
|
|
$90.00 floor/$101.50 ceiling
|
January - December 2014
|
|
4,000 Bbls
|
|
NYMEX WTI
|
|
$85.00 floor/$100.00 ceiling
|
January - June 2014
|
|
3,667 Bbls
|
|
NYMEX WTI
|
|
$85.00 floor/$99.00 ceiling
|
|
|
|
|
|
|
|
Oil fixed price swaps
|
|
|
|
|
|
|
January - December 2014
|
|
3,000 Bbls
|
|
NYMEX WTI
|
|
$94.50
|
Derivative contracts in place as of
September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Production volume
|
|
|
|
|
Contract period
|
|
covered per month
|
|
Index
|
|
Contract price
|
Natural gas costless collars
|
|
|
|
|
|
|
February - December 2013
|
|
80,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.75 floor/$4.25 ceiling
|
February - December 2013
|
|
50,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.75 floor/$4.30 ceiling
|
February - December 2013
|
|
100,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.75 floor/$4.05 ceiling
|
November 2013 - April 2014
|
|
160,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.00 floor/$4.55 ceiling
|
|
|
|
|
|
|
|
Natural gas fixed price swaps
|
|
|
|
|
|
|
March - October 2013
|
|
100,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.505
|
March - October 2013
|
|
70,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.400
|
April - December 2013
|
|
40,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$3.655
|
May - November 2013
|
|
100,000 Mmbtu
|
|
NYMEX Henry Hub
|
|
$4.320
|
|
|
|
|
|
|
|
Oil costless collars
|
|
|
|
|
|
|
March - December 2013
|
|
3,000 Bbls
|
|
NYMEX WTI
|
|
$90.00 floor/$102.00 ceiling
|
March - December 2013
|
|
4,000 Bbls
|
|
NYMEX WTI
|
|
$90.00 floor/$101.50 ceiling
|
May - December 2013
|
|
2,000 Bbls
|
|
NYMEX WTI
|
|
$90.00 floor/$97.50 ceiling
|
January - June 2014
|
|
4,000 Bbls
|
|
NYMEX WTI
|
|
$90.00 floor/$101.50 ceiling
|
|
|
|
|
|
|
|
Oil fixed price swaps
|
|
|
|
|
|
|
September - December 2013
|
|
4,000 Bbls
|
|
NYMEX WTI
|
|
$105.25
|
T
he Company has elected not to complete all of the documentation requirements necessary to permit these derivative contr
acts to be accounted for as cash flow hedges.
The Company’s fair value of derivative contracts was
a net liability
of
$466,772
as of
December 31, 2013
,
and
a net asset
of
$425,198
as of
Sept
ember
30, 2013
.
The fair value amounts recognized for the Company’s derivative contracts executed with the same counterparty under a master netting arrangement may be offset. The Company has the choice to offset or not, but that choice must be applied consistently. A master netting arrangement exists if the reporting entity has multiple contracts with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. Offsetting the fair values recognized for the derivative contracts outstanding with a single counterparty results in the net fair value of the transactions being reported as an asset or a liability in the Condensed Balance Sheets. The Company has chosen to present the fair values of its derivative contracts under master netting agreements using a net fair value presentation.
The following table summarizes and reconciles the Company's derivative contracts’ fair values at a gross level back to net fair value presentation on the Company's Condensed Balance Sheets at
December 31, 2013
, and
September 30, 2013
. The Company adopted the accounting guidance requiring additional disclosures for balance sheet offsetting of assets and liabilities effective January 1, 2013.
The Company has offset all amounts subject to master netting agreements in the Company's Condensed Balance Sheets at
December 31, 2013
, and
September 30, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2013
|
|
9/30/2013
|
|
|
Fair Value (a)
|
|
Fair Value (a)
|
|
|
Commodity Contracts
|
|
Commodity Contracts
|
|
|
Current Assets
|
|
Current Liabilities
|
|
Current Assets
|
|
Current Liabilities
|
Gross amounts recognized
|
|
$
|
116,629
|
|
$
|
(583,401)
|
|
$
|
665,099
|
|
$
|
239,901
|
Offsetting adjustments
|
|
|
(116,629)
|
|
|
116,629
|
|
|
(239,901)
|
|
|
(239,901)
|
Net presentation on Condensed Balance Sheets
|
|
$
|
-
|
|
$
|
(466,772)
|
|
$
|
425,198
|
|
$
|
-
|
(a) See Fair Value Measurements section for further disclosures regarding fair value of financial instruments.
The fair value of derivative assets and derivative liabilities is adjusted for credit risk.
The impact of credit risk was immaterial for all periods presented.
NOTE
1
2
:
Fair Value Measurements
F
air value
is defined
as the amount that would be received from the sale of an asset or paid for the transfer of a liability in an orderly transaction between market participants, i.e., an exit price. To estimate an exit price, a three-level hierarchy is used. The fair value hierarchy prioritizes the inputs, which refer broadly to assumptions market participants would use in pricing an asset or a liability, into three levels. Level 1 inputs are unadjusted quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability.
Level 2 inputs include the following: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active; (iii) inputs other than quoted prices that are observable for the asset or liability; or (iv) inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 inputs are unobservable inputs for the financial asset or liability.
The following table provides fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis as of
December 31, 2013
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement at December 31, 2013
|
|
|
Quoted Prices in Active Markets
|
|
Significant Other Observable Inputs
|
|
Significant Unobservable Inputs
|
|
Total Fair
|
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Value
|
Financial Assets (Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Contracts - Swaps
|
|
$
|
-
|
|
$
|
(88,536)
|
|
$
|
-
|
|
$
|
(88,536)
|
Derivative Contracts - Collars
|
|
$
|
-
|
|
$
|
-
|
|
$
|
(378,236)
|
|
$
|
(378,236)
|
Level 2 – Market Approach - T
he fair values of the Company’s natural gas swaps are based on a third-party pricing model which utilizes inputs that are either readily available in the public market
, such as natural gas curves,
or can be corroborated from active markets. These values are based upon future prices, time to
maturity and other factors.
These values are then compared to the values given by our counterparties for reasonableness.
Level 3 –
The fair values of the Company’s costless collar contracts are based on a pricing model which utilizes inputs that are unobservable or not readily available in the public market. These values are based upon future prices, volatility, time to maturity and other factors.
These values are then compared to the values given by our counterparties for reasonableness.
The significant unobservable inputs for Level 3 derivative contracts include unpublished forward prices of oil and natural gas, market volatility and credit risk of counterparties. Changes in these inputs will impact the fair value measurement of our derivative contracts. An increase (decrease) in the forward prices and volatility of oil and natural gas prices will decrease (increase) the fair value of oil and natural gas derivatives, and adverse changes to our counterparties’ creditworthiness will decrease the fair value of our derivatives.
The following table represents quantitative disclosures about unobservable inputs for Level 3 Fair Value Measurements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instrument Type
|
|
Unobservable Input
|
|
Range
|
|
Weighted Average
|
|
Fair Value December 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Oil Collars
|
|
Oil price volatility curve
|
|
0% - 17.35%
|
|
9.26%
|
|
$
|
(177,849)
|
Natural Gas Collars
|
|
Natural gas price volatility curve
|
|
0% - 24.20%
|
|
14.41%
|
|
$
|
(200,387)
|
A reconciliation of the Company’s derivative contracts classified as Level 3 measurements is presented below. All gains and losses are presented on the Gains (losses) on derivative contracts line item on our Statement of Operations.
|
|
|
|
|
|
|
Derivatives
|
Balance of Level 3 as of October 1, 2013
|
$
|
242,902
|
Total gains or (losses)
|
|
|
Included in earnings
|
|
(621,138)
|
Included in other comprehensive income (loss)
|
|
-
|
Purchases, issuances and settlements
|
|
-
|
Transfers in and out of Level 3
|
|
-
|
Balance of Level 3 as of December 31, 2013
|
$
|
(378,236)
|
The following table presents impairments associated with certain assets that have been measured at fair value on a nonrecurring basis within Level 3 of the fair value hierarchy.
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Quarter Ended December 31,
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2013
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2012
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Fair Value
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Impairment
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Fair Value
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Impairment
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Producing Properties
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$
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236,199
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$
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202,991
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$
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332,220
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$
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154,965
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(a)
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(a)
At the end of each quarter,
the Company assesses
the carrying value of its producing properties for impai
rment.
This assessment utilizes
estimates of future cash flows.
Significant judgments and assumptions in these assessments include estimates of future oil and natural gas prices using a forward NYMEX curve adjusted for locational basis differentials, drilling plans, expected capital costs and an applicable discount rate commensurate with risk of the underlying cash flow estimates.
These assessments identified certain properties with carrying value in excess of their calculated fair values.
At
December 31, 2013
, and
September 30, 2013
, the fair value of financial instruments approximated their carrying amounts.
Financial instruments include long-term debt, which the valuation is classified as Level 3 and is based on a valuation technique that requires inputs that are both unobservable and significant to the overall fair value measurement.
The fair value measurement of our long-term debt is valued using a discounted cash flow model that calculates the present value of future cash flows pursuant to the terms of the debt agreements and applies estimated current market interest rates.
The estimated current market interest rates are based primarily on interest rates currently being offered on borrowings of similar amounts and terms.
In addition, no valuation input adjustments were considered necessary relating to nonperformance risk for the debt
agreements.
NOTE
1
3
:
Recently Adopted
Accounting Pronouncements
Other accounting standards that have been issued or proposed by the FASB, or other standards-setting bodies, that do not require adoption until a future date are not expected to have a material impact on the financial statements upon adoption.