Annual report pursuant to Section 13 and 15(d)

CRUDE OIL AND NATURAL GAS PROPERTIES

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CRUDE OIL AND NATURAL GAS PROPERTIES
12 Months Ended
Dec. 31, 2014
CRUDE OIL AND NATURAL GAS PROPERTIES [Abstract]  
CRUDE OIL AND NATURAL GAS PROPERTIES
NOTE 3     CRUDE OIL AND NATURAL GAS PROPERTIES

The value of the Company’s crude oil and natural gas properties consists of all acquisition costs (including cash expenditures and the value of stock consideration), drilling costs and other associated capitalized costs.  Acquisitions are accounted for as purchases and, accordingly, the results of operations are included in the accompanying statements of comprehensive income from the closing date of the acquisition.  Purchase prices are allocated to acquired assets based on their estimated fair value at the time of the acquisition.  In the past, acquisitions have been funded with internal cash flow, bank borrowings and the issuance of debt and equity securities.  Development capital expenditures and purchases of properties that were in accounts payable and not yet paid in cash at December 31, 2014 and 2013 were approximately $221 million and $163 million, respectively.

2014 Acquisitions

During 2014, the Company acquired approximately 22,668 net acres, for an average cost of approximately $1,534 per net acre, in its key prospect areas in the form of effective leases.  During the same period, the Company separately acquired working interests in 125 gross (10.3 net) wells in undrilled locations in which it does not hold the underlying leasehold interests, for a total cost of approximately $10.6 million.

2013 Acquisitions

During 2013, the Company acquired approximately 20,900 net acres, for an average cost of approximately $1,279 per net acre, in its key prospect areas in the form of effective leases.  During the same period, the Company separately acquired working interests in 70 gross (7.0 net) wells in undrilled locations in which it does not hold the underlying leasehold interests, for a total cost of approximately $9.0 million.

2012 Acquisitions

During 2012, the Company acquired approximately 17,590 net acres, for an average cost of approximately $1,788 per net acre, in its key prospect areas in the form of effective leases, and earned an additional 6,450 net acres through farm-in arrangements.

Divestitures

In the fourth quarter of 2012, the Company sold its interest in certain North Dakota and Montana properties covering 835 net acres for $0.9 million in consideration.

From time-to-time the Company may also trade leasehold interests with operators to balance working interests in spacing units to facilitate and encourage a more expedited development of the Company’s acreage.
 
Unproved Properties

Unproved properties not being amortized comprise approximately 55,743 net acres and 60,600 net acres of undeveloped leasehold interests at December 31, 2014 and 2013, respectively.  The Company believes that the majority of its unproved costs will become subject to depletion within the next five years by proving up reserves relating to the acreage through exploration and development activities, by impairing the acreage that will expire before the Company can explore or develop it further or by determining that further exploration and development activity will not occur.  The timing by which all other properties will become subject to depletion will be dependent upon the timing of future drilling activities and delineation of its reserves.

Excluded costs for unproved properties are accumulated by year.  Costs are reflected in the full cost pool as the drilling costs are incurred or as costs are evaluated and deemed impaired.  The Company anticipates these excluded costs will be included in the depletion computation over the next five years.  The Company is unable to predict the future impact on depletion rates.   The following is a summary of capitalized costs excluded from depletion at December 31, 2014 by year incurred.

   
Year Ended December 31,
 
   
2014
   
2013
   
2012
   
Prior Years
 
Property Acquisition
  $ 23,919,268     $ 13,085,405     $ 3,356,715     $ 10,281,045  
Development
    -       -       -       -  
Total
  $ 23,919,268     $ 13,085,405     $ 3,356,715     $ 10,281,045  

All properties that are not classified as proved properties are considered unproved properties and, thus, the costs associated with such properties are not subject to depletion.  Once a property is classified as proved, all associated acreage and drilling costs are subject to depletion.

The Company historically has acquired its properties by purchasing individual or small groups of leases directly from mineral owners or from landmen or lease brokers, which leases historically have not been subject to specified drilling projects, and by purchasing lease packages in identified project areas controlled by specific operators.  The Company generally participates in drilling activities on a heads up basis by electing whether to participate in each well on a well-by-well basis at the time wells are proposed for drilling.

The Company assesses all items classified as unproved property on an annual basis, or if certain circumstances exist, more frequently, for possible impairment or reduction in value.  The assessment includes consideration of the following factors, among others:  intent to drill, remaining lease term, geological and geophysical evaluations, drilling results and activity, the assignment of proved reserves, and the economic viability of development if proved reserves are assigned.  During any period in which these factors indicate an impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and amortization.  For the years ended December 31, 2014, 2013 and 2012, the Company included $21.4 million, $5.1 million and $0, respectively, related to expiring leases within costs subject to the depletion calculation.