6.2 Energy, Resources, and Industrials

Tell us the extent to which all of the undeveloped locations in the development schedule . . . are part of a development plan that is reviewed annually and adopted by management, including approval by the Board, if such approval is required. Refer to Rule 4-10(a)(31)(ii) of Regulation S-X and the Question 131.04 in the Compliance and Disclosure Interpretations (C&DIs).

[The rate of conversion you indicate] suggests that you may not be able to develop your proved undeveloped reserves within five years of initial disclosure.

Please provide us with your development schedule, indicating for each future annual period, the number of gross wells to be drilled, the associated net quantities of reserves, and estimated capital expenditures necessary to convert such reserves to developed reserves, to include all of the proved undeveloped reserves disclosed as of [the fiscal year-end], and describe any change made or expected to be made in the schedule that would deviate from the definition set forth in Rule 4-10(a)(31)(ii) of Regulation S-X.

You disclose that your [X thousand barrels of oil equivalent (MBOE)] in proved undeveloped reserves will be converted to developed status over the next five years. You also disclose that you converted [X MBOE] of proved undeveloped reserves to developed status during the [fiscal year]. At that rate of conversion, it appears that your proved undeveloped reserves will not be developed within five years. Expand your disclosure of investments and progress made during [the fiscal year] to include quantification of capital expenditures incurred, and any factors that impacted progress in converting proved undeveloped reserves to developed status. Refer to Item 1203(c) of Regulation S-K.

Your explanation of the changes in total proved reserves related to Extensions & Discoveries for the [past two fiscal years] indicates the change is the result of two contributing factors: successful drilling results and well performance. Refer to the description of the change categories in FASB ASC 932-235-50-5 and explain to us your rationale for including changes resulting from well performance, if true, as part of the change due to extensions and discoveries rather than a change due to revisions of the previous estimates.

We note your disclosure indicating that you participated in drilling a material number of productive exploratory wells during each of the last three fiscal years. Please modify your disclosure to clarify the extent to which these wells were extension wells or exploratory wells, based on the definitions in Item 1205(b)(2) of Regulation S-K, and Rules 4-10(a)(13) and (a)(14) of Regulation S-X.

The disclosure of revisions in the previous estimates of your proved reserves in particular should identify such individual factors as the changes caused by economic factors including costs and commodity prices, well performance, unsuccessful and/or uneconomic proved undeveloped locations or changes resulting from the removal of proved undeveloped locations due to changes in a previously adopted development plan.

Revise your disclosure to address the overall change to “Revisions to Previous Estimates” by separately identifying and quantifying the net amount attributable to each contributing factor, including offsetting factors, so the change in total proved reserves is fully explained. Refer to the disclosure requirement in FASB ASC 932-235-50-5.

Please expand the tabular presentation of proved developed and proved undeveloped reserves, by individual product type, to additionally provide the net quantities at the beginning of the initial period shown in the reserves reconciliation, e.g. [the end of the prior fiscal year]. Refer to FASB ASC 932-235-50-4.

Please disclose the annual production volumes, by final product sold, on a consolidated basis and for each field that contains 15% or more of your total proved reserves, to comply with Item 1204(a) of Regulation S-K and Rule 4-10(a)(15) of Regulation S-X.

We note you appear to identify just a single primary factor, either positive or negative, that contributed to a revision in the previous estimate of your reserves, e.g. changes in commodity prices or removing certain [proved undeveloped] locations from the five-year development plan. Please expand your discussion to separately identify and quantify each factor that contributed to the overall change in the line item to comply with FASB ASC 932-235-50-5.

Your discussion should clearly identify the source of each change and include an explanation relating to each of the items you identify. If two or more unrelated factors, including offsetting factors, are combined to arrive at the overall change, please separately identify and quantify each factor. Your discussion should provide sufficient details so that the change in net reserve quantities between periods is fully reconciled and explained.

The disclosure of revisions in previous estimates in particular should identify the changes associated with the individual factors, such as changes caused by commodity prices, costs, interest adjustments, well performance, unsuccessful and/or uneconomic proved undeveloped locations and changes in a previously adopted development plan.

To the extent that you continue to disclose dry gas locations as proved undeveloped reserves . . . , please quantify for us and expand your disclosure to provide the total number of locations and net proved reserve amounts pursuant to FASB ASC 932-235-50-10.

The projected unit development cost from the . . . subsidiaries standardized measure is $[X]/BOE (=$[X] million/[X] MMBOE). Your . . . incurred unit development cost appears to be $[X]/BOE (=$[X] million/[X] MMBOE . . . ). We see similar differences for [the prior two years]. Please explain the reason(s) for these variances between your projected and incurred unit development costs.

[Your disclosure] indicates your asset retirement obligations represent estimated future costs that must be incurred in accordance with applicable local, state and federal laws and the terms of your lease agreements. Furthermore, the definition of “Discounted Future Net Cash Flows Related to Proved Oil and Gas Reserves” referencing FASB ASC 932-235-50-30, 50-31, and 55-6 under Amendments to the XBRL Taxonomy in the Accounting Standards Update, Extractive Activities — Oil and Gas (Topic 932) notes that “future cash flows related to the settlement of an asset retirement obligation are included in the disclosure.”

The requirement pursuant to FASB ASC 932 is also consistent with guidance provided by the Division of Corporation Finance in the letter dated February 2004 to registrants primarily engaged in the production of oil and gas regarding the preparation of their filings with the Commission. The letter indicates the staff believes that “an entity should include the future cash flows related to the settlement of an asset retirement obligation in its standardized measure disclosure.” The letter also indicates that “the requirement to disclose ‘net cash flows’ relating to an entity’s interest in oil and gas reserves [pursuant to FASB Statement No. 69, paragraph 30] requires an entity to include the cash outflows associated with the settlement of an asset retirement obligation” and that “the exclusion of the cash flows associated with a retirement obligation would be a departure from the required disclosure.”

Based on the costs provided in your response, it appears that your omission of the estimated asset retirement obligations results in an understatement of your future development costs by approximately [X]%, [Y]% and [Z]%, an overstatement of your future net cash flows of approximately [A]%, [B]% and [C]%, and an overstatement of your standardized measure by approximately [P]%, [Q]% and [R]% for [fiscal years 3, 2, and 1], respectively.

Please provide us with an illustration of the disclosure revisions relating to your presentation of the standardized measure and the changes therein to assure compliance with the regulatory requirements pursuant to FASB ASC 932.

Please expand your disclosure to reconcile the overall change in the line item by separately identifying and quantifying the net amount attributable to each factor, including offsetting factors, so that the change in net reserves between periods is fully explained. In particular, disclosure relating to revisions in previous estimates should identify such underlying factors as changes caused by commodity prices, costs, ownership interests, well performance, improved recovery or changes resulting from the removal of proved undeveloped locations due to changes in a previously adopted development plan. Refer to FASB ASC 932-235-50-5.

Please expand the discussion accompanying the presentation of the standardized measure to clarify, if true, that all estimated future costs to settle your asset retirement obligations have been included in your calculation of the standardized measure for each period presented.

The reserve report does not include certain disclosures required by Item 1202(a)(8) of Regulation S-K. Please obtain a revised report to address the following information in order to satisfy your filing obligations. . . .

• The purpose for which the report was prepared (e.g. for inclusion as an exhibit in a filing made with the U.S. Securities and Exchange Commission (SEC) (Item 1202(a)(8)(i)).
• The date on which the report was completed (Item 1202(a)(8)(ii)).
• The proportion of the registrant’s total reserves covered by the report (Item 1202(a)(8)(iii)) and the percentage of the registrant’s total reserves reviewed in connection with the preparation of the report (Item 1202(a)(8)(iv)).
• A statement that the assumptions, data, methods, and procedures are appropriate for the purpose served by the report (Item 1202(a)(8)(iv)).
• The average realized prices by product for the reserves included in the report as part of the discussion of primary economic assumptions (Item 1202(a)(8)(v)).
• A statement that the third party has used all methods and procedures as it considered necessary under the circumstance[s] to prepare the report (Item 1202(a)(8)(viii)).

[Your] disclosure refers to regulations and standards under Item 102 of Regulation S-K and the Financial Accounting Standards Board (FASB) Statement No. 69 which have been updated pursuant to the Modernization of Oil and Gas Reporting; Final Rule. Please revise the disclosure to resolve these inconsistencies or tell us why a revision is not needed.

Please obtain and file a revised reserves report that includes an explanation clarifying the types of costs represented under the line item entry “Other Deductions” shown in the tabular presentation of the results of the evaluation. This information should be included in the report as part of the primary economic assumptions pursuant to Item 1202(a)(8)(v) of Regulation S-K.

We note that the amounts reported as undiscounted future development costs . . . do not agree with the corresponding figures in the reserve reports at Exhibits [X] and [Y], having the [end of fiscal year 1] and [end of fiscal year 2] reserve estimates and related information.

We also note that disclosures within the Miscellaneous sections of the third party reserve reports indicate that their measures of discounted future net cash flows reflect the net cost of plugging and salvage values only for “commercial wells.”

As the standardized measures of discounted future net cash flows should reflect all future costs to settle asset retirement obligations that either currently exist or that will arise in the course of developing and producing your proved reserves, it appears that you will need to obtain and file revised reserve reports from the engineering firm having computations of discounted future net cash flows that conform with the applicable guidance.

Please also submit any revisions to the annual report that may be necessary to resolve the inconsistencies outlined above, if the corresponding measures reported by the company are also incomplete, in this or any similar respect.