Quarterly report pursuant to Section 13 or 15(d)

Impact of ASC 606 Adoption

v3.10.0.1
Impact of ASC 606 Adoption
9 Months Ended
Sep. 30, 2018
Impact of ASC 606 Adoption  
Impact of ASC 606 Adoption

3. Impact of ASC 606 Adoption

On January 1, 2018, the Company adopted Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”) using the modified retrospective method of transition. ASC 606 supersedes previous revenue recognition requirements in Accounting Standards Codification 605, Revenue Recognition (“ASC 605”) and includes a five-step revenue recognition model to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services.

The impact of adoption on the Company’s results is as follows for the periods presented (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2018

 

    

Under ASC 606

    

Under ASC 605

    

Decrease

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

33,218

 

$

33,237

 

$

(19)

Natural gas liquid sales

 

 

12,720

 

 

12,733

 

 

(13)

Natural gas sales

 

 

7,026

 

 

10,191

 

 

(3,165)

Gathering and transportation

 

 

54

 

 

3,203

 

 

(3,149)

Lease operating and workover expense

 

 

11,861

 

 

11,909

 

 

(48)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

11,516

 

$

11,516

 

$

 —

 

 

 

 

 

 

 

 

 

 

Retained deficit

 

$

(61,170)

 

$

(61,170)

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

 

    

Under ASC 606

    

Under ASC 605

    

Decrease

 

 

 

 

 

 

 

 

 

 

Oil sales

 

$

99,834

 

$

99,879

 

$

(45)

Natural gas liquid sales

 

 

35,651

 

 

35,709

 

 

(58)

Natural gas sales

 

 

22,145

 

 

31,778

 

 

(9,633)

Gathering and transportation

 

 

178

 

 

9,702

 

 

(9,524)

Lease operating and workover expense

 

 

43,621

 

 

43,833

 

 

(212)

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,977

 

$

13,977

 

$

 —

 

 

 

 

 

 

 

 

 

 

Retained deficit

 

$

(61,170)

 

$

(61,170)

 

$

 —

 

The primary impact to the Company’s revenues as a result of the adoption of ASC 606 is the netting of certain deductions and costs against revenue instead of its historical practice of presenting such expenses gross in gathering and transportation. These changes are due to analysis of the control model in ASC 606. Further discussion of the Company’s revenue recognition under ASC 606 is included below.

Revenue Recognition

Oil, NGLs and natural gas revenues are recognized at the point in time that control of the product is transferred to the customer and collectability is reasonably assured. Other revenue consists of iodine royalty income, which are point in time sales, and salt water disposal income, which is recognized over time. A more detailed summary of the underlying contracts that give rise to revenue and the method of recognition is included below.

Natural Gas and NGLs Sales

Under the Company’s gas processing contracts, it delivers natural gas to a midstream processing entity at the wellhead or the inlet of the midstream processing entity’s system. The midstream processing entity processes the natural gas, sells the resulting NGLs and residue gas to third-parties and pays the Company for the NGLs and residue gas. In these scenarios, the Company evaluates whether it is the principal or the agent in the transaction. For those contracts that the Company concluded that it was the principal, the ultimate third-party is the customer, and it recognizes revenue on a gross basis, with gathering, compression, processing, and transportation fees presented as an expense. Alternatively, for those contracts that the Company has concluded that it is the agent, the purchaser is its customer, and it recognizes revenue based on the net amount of the proceeds received from the purchaser.

Oil Sales

Under the Company’s oil sales contracts, it delivers all or a specified percentage of the crude oil production from specified leases to the purchaser at the wellhead. The Company sells oil production at the wellhead and collects an agreed-upon index price, net of applicable transport costs. The Company recognizes revenue when control transfers to the purchaser at the wellhead at the net price received.

Other Revenue

Other revenue consists of fees charged to outside working interest owners for salt water disposal as well as royalties received from a third-party for iodine extracted from the Company’s salt water. Salt water disposal revenue is recognized over time because the customer simultaneously receives and consumes the benefit of the salt water disposal service as the service is provided. For salt water disposal income the Company utilized the practical expedient in ASC 606-10-55-18 which states that if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, the entity may recognize revenue in the amount to which the entity has a right to invoice. Iodine royalty revenue is recognized point-in-time when control transfers to the customer.

Imbalances

The Company recognizes revenue for all oil, NGLs and natural gas sold to purchasers regardless of whether the sales are proportionate to the Company’s ownership interest in the property. Production imbalances are recognized as a liability to the extent an imbalance on a specific property exceeds the Company’s share of remaining proved oil and gas reserves. The Company had no significant imbalances at September 30, 2018 or December 31, 2017.

Significant Judgments

Principal versus agent

The Company engages in various types of transactions in which midstream entities process its wet gas and, in some scenarios, subsequently market resulting NGLs and residue gas to third-party customers on its behalf, such as its percentage-of-proceeds and gas purchase contracts. These types of transactions require judgment to determine whether the Company is the principal or the agent in the contract and, as a result, whether revenues are recorded gross or net. The Company analyzed control under ASC 606 and determined for those contracts where control passes at the wellhead, the Company acts as agent and revenue should be recognized net of amounts paid after such control passed for costs such as gathering, compression, processing and transportation, among others. The determination of control and the presentation of revenues was completed for ASC 606 purposes only. Amounts paid by the Company for royalties are calculated under a different methodology and may differ from the amount of revenues recognized under ASC 606.

Transaction price allocated to remaining performance obligations

A significant number of the Company’s product sales are short-term in nature with a contract term of one year or less. For those contracts, the Company has utilized the practical expedient in ASC 606-10-50-14 that exempts it from disclosure of the transaction price allocated to remaining performance obligations if the performance obligation is part of a contract that has an original expected duration of one year or less.

For the Company’s product sales that have a contract term greater than one year,  it has utilized the practical expedient in ASC 606-10-50-14A that states it is not required to disclose the transaction price allocated to remaining performance obligations if the variable consideration is allocated entirely to a wholly unsatisfied performance obligation. Under these sales contracts, each unit of product generally represents a separate performance obligation; therefore future volumes are wholly unsatisfied and disclosure of the transaction price allocated to remaining performance obligations is not required.

For salt water disposal income, the Company has utilized the practical expedient in ASC 606-10-50-14 that states that if it recognizes revenue from the satisfaction of the performance obligation in accordance with the right to invoice practical expedient then it is exempted from disclosure of the transaction price allocated to remaining performance obligations.

Prior-period performance obligations

The Company records revenue in the month production is delivered and control passes to the customer. However, settlement statements and payment may not be received for 30 to 90 days after the date production occurs, and as a result, the Company is required to estimate the amount of production that was delivered and the price that will be received for the sale of the product. The Company utilizes its knowledge of the properties, its historical performance, the anticipated effect of weather conditions during the month of production, NYMEX and local spot market prices and other pertinent factors as the basis for these estimates. The Company records the variances between its estimates and the actual amounts received in the month payment is received and such variances have historically not been significant. For the three and nine months ended September 30, 2018, revenue recognized in the reporting period related to performance obligations satisfied in prior reporting periods was not material.