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Learning Objectives: SEC Disclosure Requirements; U.S. GAAP Disclosure Requirements; SMOG Example; Frequent SEC Comments Interspersed

Learning Objectives: SEC Disclosure Requirements; U.S. GAAP Disclosure Requirements; SMOG Example; Frequent SEC Comments Interspersed

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Disclosures About Oil and Gas Producing Activities Presentation Transcript

  • 1. Disclosures AboutOil and Gas Producing ActivitiesAICPA Oil and Gas Conference, Denver, CONovember 14, 2012
  • 2. Joe Blice, CPA, Audit Partner, DallasJoe has 16 years of professional experience and serves as an Audit Partner in the Dallasoffice of Hein & Associates LLP. He provides a wide range of audit and accountingservices for both public and privately held companies in the energy industry. Joe hassignificant experience with Securities and Exchange Commission disclosure andreporting requirements, and assists companies with mergers and acquisitions as well asinitial and secondary securities offerings. Joe also specializes in share-based paymentarrangements and foreign currency translation.Joe serves as the Local Energy Niche Leader for the Dallas office and he is a member ofthe Council of Petroleum Accountants Societies (COPAS) where he has served in variouscapacities since 2003. He also serves on the conference committee of the NorthAmerican Petroleum Accounting Conference (NAPAC), and is a frequent speaker atvarious energy related presentations.Prior to joining Hein & Associates LLP in 2003, Joe served as the Controller of a publicly-traded oil and gas company where he assisted with a merger and a private placement forthe organization. He began his career as a member of the audit staff of Ernst &YoungLLP after graduating from the University of Oklahoma. © 2012 Hein & Associates, LLP. All rights reserved.
  • 3. Learning Objectives• SEC Disclosure Requirements – Regulation S-K 1200• US GAAP Disclosure Requirements – FASB ASC Topic 932-235 – FASB ASC Topic 932-360• SMOG Example• Frequent SEC Comments interspersed © 2012 Hein & Associates, LLP. All rights reserved.
  • 4. SEC Disclosure Requirements
  • 5. SEC Disclosure Requirements• What goes in the front part of a document? – Registration statements – Item 11 of Form S-1 – Annual reports on Form 10-K or equivalent - Item 2 - Properties © 2012 Hein & Associates, LLP. All rights reserved.
  • 6. Applicability of S-K 1200• Material oil and gas producing activities – 10% of revenue – 10% of operating income – 10% of total assets © 2012 Hein & Associates, LLP. All rights reserved.
  • 7. General Note (S-K 1201)• 15% Threshold related to geographic area – By country – By groups of countries within an individual content – By continent – Catch-all – ―as appropriate for meaningful disclosure in the circumstances‖• Aggregation is allowed• Applies to practically all disclosures © 2012 Hein & Associates, LLP. All rights reserved.
  • 8. Disclosure of Reserves (S-K 1202)• Tabular Disclosure of Reserves – Proved developed • PDP • PDNP – Proved undeveloped – Probable (optional) – Possible (optional) © 2012 Hein & Associates, LLP. All rights reserved.
  • 9. Disclosure of Reserves (S-K 1202)• Tabular Disclosure of Reserves (continued) – Oil in barrels – Natural gas liquids (if significant) in barrels – Natural gas in cubic feet – Synthetic oil – Synthetic gas – Any product intended to be upgraded into synthetic oil or gas• See Example 1 © 2012 Hein & Associates, LLP. All rights reserved.
  • 10. Disclosure of Reserves (S-K 1202)• Aggregated Totals and Equivalent Units – Not required – State basis of conversion• Dollar values in table – Frequently disclosed – PV10 is a non-GAAP measure © 2012 Hein & Associates, LLP. All rights reserved.
  • 11. Disclosure of Reserves (S-K 1202)• Technology Used to Establish Reserves – Initial reporting – Material additions• See Example 2
  • 12. Disclosure of Reserves (S-K 1202)• Internal Controls used in the Reserves Estimation Effort – Qualifications of the company representative responsible – Qualifications of the person primarily responsible for the preparation of the report if third party is used – These are areas of frequent SEC staff comment• See Example 3 © 2012 Hein & Associates, LLP. All rights reserved.
  • 13. Disclosure of Reserves (S-K 1202)• Third Party Reserves Reports – Filed as an exhibit to the public document – Letter at the front of the report – Detail tables not required © 2012 Hein & Associates, LLP. All rights reserved.
  • 14. Disclosure of Reserves (S-K 1202)• Requirements of Third Party Reserves Reports – The purpose for which the report was prepared and for whom it was prepared; – The effective date of the report and the date on which the report was completed; – The proportion of the registrant’s total reserves covered by the report and the geographic area in which the covered reserves are located; – The assumptions, data, methods, and procedures used, including the percentage of the registrant’s total reserves reviewed in connection with the preparation of the report, and a statement that such assumptions, data, methods, and procedures are appropriate for the purpose served by the report; © 2012 Hein & Associates, LLP. All rights reserved.
  • 15. Disclosure of Reserves (S-K 1202)• Requirements of Third Party Reserves Reports (continued) – A discussion of primary economic assumptions; – A discussion of the possible effects of regulation on the ability of the registrant to recover the estimated reserves; – A discussion regarding the inherent uncertainties of reserves estimates; – A statement that the third party has used all methods and procedures as it considered necessary under the circumstances to prepare the report; – A brief summary of the third party’s conclusions with respect to the reserves estimates; and – The signature of the third party.
  • 16. Disclosure of Reserves (S-K 1202)• Primary economic assumptions – frequent SEC comment area – State the specific price used and how derived• See Example 4 © 2012 Hein & Associates, LLP. All rights reserved.
  • 17. Disclosure of Reserves (S-K 1202)• Optional Sensitivity Analysis – What-if summary of reserves – State prices used – State cost assumptions – State why these are reasonable and useful to a reader © 2012 Hein & Associates, LLP. All rights reserved.
  • 18. Proved Undeveloped Reserves (S-K 1203)• Total quantities of PUD at year end• Material changes during the year, including conversion to PDP/PDNP• Investments and progress made during the year in converting PUD to PDP/PDNP• Why material amounts remain booked for five years or more after disclosure as PUD © 2012 Hein & Associates, LLP. All rights reserved.
  • 19. Proved Undeveloped Reserves (S-K 1203)• Frequent Areas of SEC Staff Comment – Inadequate disclosure of reasons for material changes – Inadequate disclosure of technologies used to book additional PUDs – Inadequate disclosure of progress toward converting PUD to PDP/PDNP – Mathematically impossible development rates – Reserves remaining booked more than five years from initial record – Reserves scheduled to be developed more than five years hence• Be very specific in your discussion © 2012 Hein & Associates, LLP. All rights reserved.
  • 20. Production, Prices and Costs (S-K 1204)• Production by final product sold• Average sales price• Average production cost EXCLUDING severance and ad valorem taxes• See Example 5 © 2012 Hein & Associates, LLP. All rights reserved.
  • 21. Production, Prices and Costs (S-K 1204)• Production Volumes – Sales volumes only – Compression and shrinkage excluded• Net to the Entity’s interests – Exclude royalties, except in certain circumstances, and with disclosure of reasons• Stated in Normal Units – Barrels for oil, condensate and natural gas liquids – Cubic feet for natural gas – Synthetics in the final unit as sold• Equivalent Units – Express in same basis as used in depletion calculation – Disclose equivalency ratio
  • 22. Drilling and Other Exploratory and DevelopmentActivities (S-K 1205)• Drilling & exploratory activities by geographic area for each of the last three fiscal years: – Number of net productive and dry exploratory wells drilled – Number of net productive and dry developmental wells drilled• Difference between developmental versus exploratory• Wells completed during the year irrespective of spud date• See Example 6 © 2012 Hein & Associates, LLP. All rights reserved.
  • 23. Present Activities (S-K 1206)• Wells in process – Gross and net – Undrilled locations – rules say not to disclose, but many do• Improved recovery efforts• Pressure maintenance operations• Any other material activities © 2012 Hein & Associates, LLP. All rights reserved.
  • 24. Delivery Commitments (S-K 1207)• Wells in process – Gross and net – Undrilled locations – rules say not to disclose, but many do• Improved recovery efforts• Pressure maintenance operations• Any other material activities• See Example 7 for Present Activities and Delivery Commitments © 2012 Hein & Associates, LLP. All rights reserved.
  • 25. Oil and Gas Properties, Wells, Operations andAcreage (S-K 1208)• Wells by geographic area, gross and net• Example: Oil Natural Gas Total Gross Net Gross Net Gross Net France 11 10.5 43 16.8 54 27.3 Asia 6 5.9 78 70.3 84 76.2 USA — — 132 39.0 132 39.0 Total 17 16.4 253 126.1 270 142.5 © 2012 Hein & Associates, LLP. All rights reserved.
  • 26. Oil and Gas Properties, Wells, Operations andAcreage (S-K 1208)• Gross and Net Undeveloped Acreage by geographic area – Leases – Concessions• What does undeveloped mean? – Acres on which wells have not been drilled – Presence of reserves is irrelevant• Example: – Assume 1,000 acre plot with two wells, and 40 acre spacing – Assuming full development, there would be 25 locations – 920 undeveloped acres (25 total less two drilled times 40 acres) © 2012 Hein & Associates, LLP. All rights reserved.
  • 27. Oil and Gas Properties, Wells, Operations andAcreage (S-K 1208)• Discuss minimum remaining terms• Frequent area of SEC comment• See Example 8 © 2012 Hein & Associates, LLP. All rights reserved.
  • 28. US GAAP Disclosure Requirements
  • 29. US GAAP Disclosure Requirements• Different requirements for public and private companies• Some included in accounting policy footnote• Remainder in Supplementary Information, which is NOT required to be audited, and is not required for private companies• All disclosures generally required for each year in which a balance sheet and an income statement or statement of operations is required• Same requirements for geographic areas as SEC rules © 2012 Hein & Associates, LLP. All rights reserved.
  • 30. US GAAP Disclosure Requirements• Applicable to public and private entities• Disclose method of accounting – Full Cost (Regulation S-X, Rule 4-10) – Successful Efforts (ASC 932)• Usually appears on face of balance sheet, accompanied by detail discussion in the summary of significant accounting policies• Depletion policy is an area of SEC comment focus• See Example 9
  • 31. Accounting Policy Disclosure (all entities)• Areas to watch for – Depletion policy – mineral interests versus all others – Capitalized interest – Capitalizing exploratory well costs – Impairment – details on process for estimating fair value – Process for monitoring and disposing of unproved mineral interests © 2012 Hein & Associates, LLP. All rights reserved.
  • 32. Accounting Policy Disclosure (all entities)• Full Cost Method Companies – Generally same disclosures required – Add disclosure of costs excluded from depletion • Unproved properties • Major development projects not yet in service • Aging of costs for the most recent three years and in the aggregate for costs incurred more than three years ago © 2012 Hein & Associates, LLP. All rights reserved.
  • 33. Accounting Policy Disclosure (all entities)• Suspended Well Costs• Successful Efforts Only• Amount of capitalized costs pending the determination of proved reserves• Changes in those amounts• Amounts capitalized for more than one year – Aging of amounts and the number of projects – Narrative discussion of progress toward evaluating reserves• See Example 10 © 2012 Hein & Associates, LLP. All rights reserved.
  • 34. GAAP Disclosure for Public Companies• Capitalized costs• Costs incurred• Results of operations• Proved reserves, and changes thereto• Standardized measure, and changes thereto © 2012 Hein & Associates, LLP. All rights reserved.
  • 35. Capitalized Costs• Aggregate capitalized costs• Aggregate accumulated depletion, depreciation, amortization and valuation allowances – Disparity in impairment rules and oil and gas rules• See Example 11 © 2012 Hein & Associates, LLP. All rights reserved.
  • 36. Costs Incurred• Acquisition costs – all costs incurred to purchase, lease or otherwise acquire a property, whether proved or unproved.• Exploration costs – may be incurred before or after acquiring a property. Includes all geological and geophysical costs, the costs of carrying and retaining undeveloped properties such as delay rentals, taxes, legal costs for title defense and the maintenance of land records.• Development costs – costs to drill and equip wells with proved reserves.• See Example 12 © 2012 Hein & Associates, LLP. All rights reserved.
  • 37. Results of Operations• Revenues• Production costs• Exploration expenses (generally N/A for Full Cost)• DD&A (including accretion of ARO liabilities)• Income tax expenses (statutory rate, reflect specific credits)• Results of operations• Excludes corporate overhead and interest costs © 2012 Hein & Associates, LLP. All rights reserved.
  • 38. Results of Operations• May exclude separate table if: – substantially all of the entity’s operations are oil and gas production; and – Geographic segment disclosures, if required are made elsewhere. © 2012 Hein & Associates, LLP. All rights reserved.
  • 39. Proved Reserves• Net quantities at the beginning and end of each year• Royalties included, if known. If not, state that fact and the production received for the year• Volume roll forward for all periods for which an income statement is presented• Such disclosures must be made – In the aggregate and – For the enterprises’ home country (if material) and – For each foreign geographic area (countries can be grouped) © 2012 Hein & Associates, LLP. All rights reserved.
  • 40. Proved Reserves• 100% of net reserve quantities attributable to the parent and 100% of net reserve quantities of subsidiaries, whether or not wholly owned• If a significant portion of quantities are attributable to minority interests, that fact and the approximate portion• If proportionate consolidation, then only include the Company’s share• If equity method, disclose separately © 2012 Hein & Associates, LLP. All rights reserved.
  • 41. Proved Reserves• Oil and natural gas liquids to be stated in barrels• Natural gas in cubic feet• Explain important economic factors or uncertainties affecting particular components (high lifting costs, facilities in process, punitive marketing arrangements © 2012 Hein & Associates, LLP. All rights reserved.
  • 42. Proved Reserves• Changes in proved reserves for last three years – Revisions of previous estimates – either upward or downward, can result from new information or changing economic factors. – Improved recovery – if significant – Purchases of minerals in place – Extensions and discoveries – relates to extension of proved acreage from existing reservoirs through additional drilling and discovery of new fields – Production – Sales of minerals in place• Narrative explanation for significant items noted above. © 2012 Hein & Associates, LLP. All rights reserved.
  • 43. Proved Reserves• Changes in proved reserves for last three years – Obtain volume roll forward from independent or internal engineer. – The volume roll forward will be the basis for certain changes in SMOG.• Disclose total proved developed reserves at the end of each year for which an income statement is required• See Example © 2012 Hein & Associates, LLP. All rights reserved.
  • 44. Standardized Measure of Oil and Gas Quantities(SMOG)• History lesson – SMOG disclosures evolved due to disparity in oil and gas property accounting methods – ARAB Oil Embargo – Reserve Recognition Accounting – S-X Rule 4-10 – FASB 69 (now ASC 932) © 2012 Hein & Associates, LLP. All rights reserved.
  • 45. SMOG• Key Inputs – Beginning and ending reserve reports – Volume rollforward – Specific reserves runs for all volumetric changes if available – Income statement – Previously estimated development costs incurred – Income tax basis of oil and gas properties, tax rates, and NOL/other credit carryovers © 2012 Hein & Associates, LLP. All rights reserved.
  • 46. SMOG Example• Refer to handout• Example is based on an example in Chapter 29, Standardized Measure of Oil and Gas Reserves, Petroleum Accounting Principles, Procedures, & Issues, 7th Edition, available from PDI.• This is ―A‖ way, not ―THE‖ way. © 2012 Hein & Associates, LLP. All rights reserved.
  • 47. Components of SMOG+ Future cash inflows (revenues from reserve report)- Future production costs (LOE from and all operating costs from reserve report)- Future development costs (separate if material or can be combined with production costs)- Future income tax expenses (future pretax income reflecting depletion estimates and credits, times statutory rates)- Discount, at 10%= Standardized measureSee Example 14 © 2012 Hein & Associates, LLP. All rights reserved.
  • 48. Changes in SMOG• Net change in sales and transfer prices and in production (lifting) costs related to future production• Changes in estimated future development costs• Sales and transfers of oil and gas produced during the period• Net change due to extensions, discoveries, and improved recovery• Net change due to purchases and sales of minerals in place © 2012 Hein & Associates, LLP. All rights reserved.
  • 49. Changes in SMOG• Net change due to revisions in quantity estimates• Previously estimated development costs incurred during the period• Accretion of discount• Other – unspecified• Net change in income taxes © 2012 Hein & Associates, LLP. All rights reserved.
  • 50. Net Change in Prices and Costs Related toFuture Production• Computed by variance analysis: – Calculate net revenue per equivalent unit at each year end, adjusting current year end amounts for specific additions, if known, and add-back current year sales – Multiply the difference in the net cost per unit times previous year’s equivalent quantities, adjusting current year end amounts for specific additions, if known – Multiply that product by the average discount factor• Excludes future development costs
  • 51. Previously Estimated Development CostsIncurred• Use actual costs incurred related to properties included in the prior year report as proved developed nonproducing or proved undeveloped. © 2012 Hein & Associates, LLP. All rights reserved.
  • 52. Sales and Transfers of Oil and Gas ProducedDuring the Period• Directly from the income statement• Usually revenues less severance tax less LOE. © 2012 Hein & Associates, LLP. All rights reserved.
  • 53. Volume-related Changes in SMOG• Net change due to extensions, discoveries, and improved recovery• Net change due to purchases of minerals in place• Net change due to sales of minerals in place• Net change due to revisions in quantity estimates © 2012 Hein & Associates, LLP. All rights reserved.
  • 54. Volume-related Changes in SMOG• Two Methods: – Obtain specific reserves run from internal or external engineering to determine the undiscounted future net cash flow attributable to each type of change; or – Compute as a volume variance analysis. • Multiply each volume change times the current period-end net revenue per equivalent unit (careful to include or exclude future development costs as appropriate) • Multiply each of those products times the effective discount factor © 2012 Hein & Associates, LLP. All rights reserved.
  • 55. Change in Income Taxes• Two Methods: – Change in undiscounted amounts times average discount factor – Change in discounted amounts © 2012 Hein & Associates, LLP. All rights reserved.
  • 56. Other (Unspecified)• Catch-all• What it takes to balance• Should be very small – my rule of thumb is 10% of the prior year SMOG balance © 2012 Hein & Associates, LLP. All rights reserved.
  • 57. Accretion of discount• Shortcut method of last year’s SMOG times 10% is inappropriate• Two Methods: – Multiply prior year’s net cash flows by the current period’s effective discount rates – Multiply prior year PV10 times 10% © 2012 Hein & Associates, LLP. All rights reserved.
  • 58. Joe Blice972-687-7818jblice@heincpa.com