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Portions of 10Q related to "impairment" :
6. Impairments
Long-Lived Assets
We review our oil and gas properties for impairment periodically or when events or circumstances indicate that their carrying amounts may exceed their fair values and may not be recoverable. Under the successful efforts method of accounting, the carrying amount of an oil and gas property to be held and used is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the property. Due to the nature of the recoverability test, certain oil and gas properties may have carrying values which exceed their fair values, but an impairment charge is not recognized because their carrying values are less than their undiscounted cash flows. Determination as to whether and how much an asset is impaired involves subjectivity and management estimates on highly uncertain matters such as future commodity prices, the effects of inflation and technology improvements on operating expenses, production profiles and expected reserve lives, the outlook for market supply and demand conditions for oil and natural gas, management’s intent to hold and use the properties and other factors.
For purposes of assessing our oil and gas properties for potential impairment, management reviews the expected undiscounted future cash flows for our total proved and, in certain instances, risk-adjusted probable and possible reserves on a held and used basis based in large part on future capital and operating plans. The undiscounted cash flow review includes inputs such as applicable NYMEX forward strip prices, estimated basis price differentials, expenses and capital estimates, and escalation factors. Management also considers the impact future price changes are likely to have on our future operating plans.
If we determine that an impairment charge for a property is warranted because net book value exceeds undiscounted cash flows, an impairment charge is recorded for the amount that the property’s carrying value exceeds the amount of its estimated discounted future net cash flows. Beginning in the first quarter of 2016, the estimated discounted future cash flows were determined by using applicable basis adjusted (i) nine-year NYMEX forward strip prices for oil, and (ii) ten-year NYMEX forward strip prices for natural gas, in each case, at the end of the reporting period, and escalated along with expenses and capital starting in (i) year ten for oil and (ii) year eleven for natural gas, and thereafter at 2% per year. Production and development cost estimates (e.g. operating expenses and development capital) are conformed to reflect the
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commodity price strip used. The associated property’s expected future net cash flows were discounted using a market-based weighted average cost of capital rate, which approximated 11% and 13%, at March 31, 2016 and September 30, 2016, respectively. There were no impairments from the prescribed impairment method during the three months ended June 30, 2016. We consider the inputs for our impairment calculations to be Level 3 inputs. The impairment reviews and calculations are based on assumptions that are consistent with our business plans.
During the three months ended September 30, 2016, we began updating our annual business plan (“updated business plan”). At September 30, 2016, we incorporated the assumptions from our updated business plan into our impairment reserves analysis. For certain impaired fields, recent operating results incorporated in the updated business plan resulted in lower production estimates and higher operating cost estimates than previously forecast. Our updated business plan was prepared with the assumption that we emerge from Chapter 11 and continue to hold and use our assets for their economic lives up to and including final dispositions. There are no material asset sales planned or contemplated in this business plan. Other assumptions and or revisions in our business plan could result in material changes to the undiscounted cash flows used in our impairment analysis. We are in the process of reviewing our business plan with our creditors. Accordingly, we cannot estimate what impact, if any, other assumptions or courses of action or their probabilities of occurrence could have on our undiscounted cash flows at September 30, 2016.
Non-cash impairment charges totaled $275.0 million and $277.8 million for the three months and nine months ended September 30, 2016, respectively. For the three months ended September 30, 2016, we had non-cash impairments of $177.1 million in the Permian Basin, $88.4 million in the Rockies, $5.3 million in the Midwest and $4.2 million in Ark-La-Tex, primarily related to revisions in our updated business plan for future production and cost estimates at certain of our lower margin oil properties, as well as the impact that the drop in natural gas prices in the out years had on projected future revenues for certain of our lower margin natural gas properties. For the nine months ended September 30, 2016, we had non-cash impairments of $177.6 million in the Permian Basin, $88.6 million in the Rockies, $5.3 million in the Midwest, $4.2 million in Ark-La-Tex, and $2.1 million in the Southeast.
Non-cash impairments totaled $1.4 billion and $1.5 billion for the three months and nine months ended September 30, 2015, respectively. For the three months ended September 30, 2015, we had non-cash impairments of $605.4 million in the Midwest, $420.2 million in the Southeast, $262.1 million in Ark-La-Tex, $73.1 million in California, $49.7 million for our Permian properties, $17.4 million in the Rockies and $12.2 million for our Mid-Continent properties, primarily related to the impact of the drop in commodity strip prices on our projected future net revenues. For the nine months ended September 30, 2015, we had non-cash impairments of $605.4 million in the Midwest, $420.2 million in the Southeast, $262.1 million in Ark-La-Tex, $82.8 million in the Permian Basin, $73.1 million in California, $34.1 million in the Rockies and $21.5 million in Mid-Continent.
Management prepared its undiscounted cash flow estimates on a held and used basis which assumes oil and gas properties will be held and used for their economic lives. If a decision is reached to sell a particular asset, that asset would be classified as held for sale and could potentially be impaired if the carrying value exceeded the estimated sales value less the costs of disposal. It is also possible that further periods of prolonged lower commodity prices, future declines in commodity prices, changes to our future plans in response to a final plan of reorganization, or increases in operating costs could result in future impairments. For example, during the third quarter, had the undiscounted cash flows for one of our oil and gas properties in Ark-La-Tex been lower by 10%, the estimated non-cash impairment charges would have been approximately $220 million higher for the three months ended September 30, 2016. Given the number of assumptions involved in the estimates, estimates as to other sensitivities to earnings for these periods if other assumptions had been used in impairment reviews and calculations is not practicable. Favorable changes to some assumptions could have increased the undiscounted cash flows thus further avoiding the need to impair any assets in this period, whereas other unfavorable changes could have caused an unknown number of assets to become impaired. Additionally the oil and gas assets may be further adjusted in the future due to the outcome of Chapter 11 Cases or adjusted to fair value due to the application of fresh start accounting upon emergence from Chapter 11.
Impairments
During the three months ended September 30, 2016, we began updating our annual business plan. At September 30, 2016, we incorporated the assumptions from our updated business plan into our impairment reserve analysis. For certain impaired fields, recent operating results incorporated in the updated business plan resulted in lower production estimates and higher operating cost estimates than previously forecast. Our updated business plan was prepared with the assumption that we emerge from Chapter 11 and continue to hold and use our assets for their economic lives up to and including final dispositions. There are no material asset sales planned or contemplated in this business plan. Other assumptions and or revisions in our business plan could result in material changes to the undiscounted cash flows used in our impairment analysis. We are in the process of reviewing our business plan with our creditors. Accordingly, we cannot estimate what impact, if any, other assumptions or courses of action or their probabilities of occurrence could have on our undiscounted cash flows at September 30, 2016.
Impairments of proved properties during the three months ended September 30, 2016 totaled $275.0 million, including $177.1 million in the Permian Basin, $88.4 million in the Rockies, $5.3 million in the Midwest and $4.2 million in Ark-La-Tex, primarily related to revisions in our updated business plan for future production and cost estimates at certain of our lower margin oil properties, as well as the impact that the drop in natural gas prices in the out years had on projected future revenues for certain of our lower margin natural gas properties. Impairments of proved properties totaled $1.4 billion for the three months ended September 30, 2015, including $605.4 million in the Midwest, $420.2 million in the Southeast, $262.1 million in Ark-La-Tex, $73.1 million in California, $49.7 million in the Permian Basin, $17.4 million in the Rockies and $12.2 million in Mid-Continent.
Impairments of proved properties totaled $277.8 million for the nine months ended September 30, 2016, including $177.6 million in the Permian Basin, $88.6 million in the Rockies, $5.3 million in the Midwest, $4.2 million in Ark-La-Tex, and $2.1 million in the Southeast, primarily related to revisions in our updated business plan for future production and cost estimates at certain of our lower margin oil properties, as well as the impact that the drop in natural gas prices in the out years had on projected future revenues for certain of our lower margin natural gas properties. Impairments of proved properties totaled $1.5 billion for the nine months ended September 30, 2015, including $605.4 million in the Midwest, $420.2 million in the Southeast, $262.1 million in Ark-La-Tex, $82.8 million in the Permian Basin, $73.1 million in California, $34.1 million in the Rockies and $21.5 million in Mid-Continent.
Further periods of prolonged lower commodity prices, future declines in commodity prices, changes to our future plans in response to a final plan of reorganization, or increases in operating costs could result in future impairments. For example, during the third quarter, had the undiscounted cash flows for one of our oil and gas properties in Ark-La-Tex been lower by 10%, the estimated non-cash impairment charges would have been approximately $220 million higher for the three months ended September 30, 2016. Given the number of assumptions involved in the estimates, estimates as to other sensitivities to earnings for these periods if other assumptions had been used in impairment reviews and calculations is not practicable. Favorable changes to some assumptions could have increased the undiscounted cash flows thus avoiding the need to impair any assets in this period, whereas other unfavorable changes could have caused an unknown number of assets to become impaired. Additionally, the oil and gas assets may be further adjusted in the future due to the outcome of Chapter 11 Cases or adjusted to fair value due to the application of fresh start accounting upon emergence from Chapter 11.
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