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Oil and Natural Gas Producing Activities

12 Months Ended

Dec. 31, 2018

Oil and Natural Gas Producing Activities

5. OIL AND NATURAL GAS PRODUCING ACTIVITIES

Divestitures

On October 3, 2017, the Company and Statoil entered into a purchase and sale agreement Purchase Agreement, pursuant to which the Company assigned, sold, and conveyed certain non-operated assets in the Williston Basin, North Dakota to Statoil in consideration for the elimination of $4.0 million in outstanding liabilities to Statoil and payment by Statoil to the Company of $2.0 million in cash. The Company has historically accounted for the eliminated liabilities on the Company’s balance sheet under “Payable to major operator” and “Contingent ownership interests.” The Purchase Agreement was unanimously approved by the board of directors of the Company and closed on October 5, 2017, with an effective date of August 1, 2017. The Company recorded a gain of $4.3 million related to the divestiture.

Ceiling Test and Impairment

The reserves used in the Ceiling Test incorporate assumptions regarding pricing and discount rates over which management has no influence in the determination of present value. In the calculation of the Ceiling Test for the year ended December 31, 2018, the Company used $61.64 per barrel for oil and $4.27 per MMbtu for natural gas (as further adjusted for property, specific gravity, quality, local markets and distance from markets) to compute the future cash flows of the Company’s producing properties. The discount factor used was 10%.

There was no impairment for the years ended December 31, 2018 and 2017 of the Company’s oil and natural gas properties. Impairment charges in previous years are generally the result of declines in the price of oil and natural gas, additional capitalized well costs and changes in production.

Capitalized Costs

The following table presents the Company’s capitalized costs associated with oil and natural gas producing activities as of December 31, 2018 and 2017:

	2018			2017
	(in thousands)
Oil and Natural Gas Properties:
Unevaluated properties:
Unproved leasehold costs	$	3,728		$	4,664
Evaluated properties in full cost pool		88,764			86,313
Less accumulated depreciation, depletion and amortization		(83,729	)		(83,362	)

Net capitalized costs	$	8,763		$	7,615

The Company’s depreciation, depletion and amortization was $0.4 million ($3.20 per BOE) and $0.8 million ($3.86 per BOE) for the years ended December 31, 2018 and 2017, respectively.

Unevaluated Oil and Natural Gas Properties

Unevaluated oil and natural gas properties consist of leasehold costs that are excluded from the DD&A calculation and the ceiling test until a determination about the existence of proved reserves can be completed. Unevaluated oil and natural gas properties consisted of unproved lease acquisition costs and costs paid to evaluate potential acquisition prospects of $3.7 million and $4.7 million at December 31, 2018 and 2017, respectively.

On a quarterly basis, management reviews market conditions and other changes in circumstances related to the Company’s unevaluated properties and transfers the costs to evaluated properties within the full cost pool as warranted. For the year ended December 31, 2018, the Company reclassified $0.7 million of unevaluated oil and natural gas properties to the full cost pool related to the drilling and completion of the J. Beeler No. 1 well in South Texas, which was completed in December 2018. As a result of a transfer of acreage for working interest in wells being drilled in South Texas, which was completed in May 2019, the Company revalued the remaining acreage held in the area and transferred unproved leasehold acreage of $0.4 million to the full cost pool.

Results of Operations

Presented below are the results of operations from oil and natural gas producing activities for the years ended December 31, 2018 and 2017:

	2018			2017
	(in thousands)
Oil and natural gas sales	$	5,539		$	6,545
Lease operating expense		(1,898	)		(2,903	)
Production taxes		(392	)		(499	)
Depreciation, depletion accretion and amortization		(393	)		(753	)
Impairment of oil and natural gas properties		-			-

Results of operations from oil and natural gas producing activities	$	2,856		$	2,390