7. OIL AND NATURAL GAS PROPERTIES

Oil and natural gas properties as of December 31, 2020 and 2019 (Successor) consisted of the following (in thousands):


	Successor
	December 31, 2020		December 31, 2019

Subject to depletion	$	509,274	$	420,609
Not subject to depletion:
Exploration and extension wells in progress		—		—
Other capital costs:
Incurred in 2020		983		—
Incurred in 2019(1)		74,511		105,009
Incurred in 2018		—		—
Incurred in 2017 and prior		—		—
Total not subject to depletion		75,494		105,009
Gross oil and natural gas properties		584,768		525,618
Less accumulated depletion		(295,163)		(19,474)
Net oil and natural gas properties	$	289,605	$	506,144

(1)

In 2019, with the adoption of fresh-start accounting, the Company’s unevaluated properties were recorded at fair value.

The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, treating equipment and gathering support facilities costs, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense. Depletion for oil and natural gas properties is calculated using the unit of production method, which depletes the capitalized costs of evaluated properties plus future development costs based on the ratio of production for the current period to total reserve volumes of evaluated properties as of the beginning of the period. Depletion expense was $60.5 million, $19.5 million and $84.6 million for the year ended December 31, 2020 (Successor), the period of October 2, 2019 through December 31, 2019 (Successor) and the period of January 1, 2019 through October 1, 2019 (Predecessor), respectively. Depletion expense is recorded in “Depletion, depreciation and accretion” in the Company’s consolidated statements of operations.

With the adoption of fresh-start accounting, the Company recorded its oil and natural gas properties at fair value as of the Emergence Date. The Company’s evaluated and unevaluated properties were assigned fair values of $380.4 million and $109.0 million, respectively. Refer to Note 3, “Fresh-start Accounting,” for a discussion of the valuation approaches used.

The Successor Company’s policy of accounting for its treating equipment and gathering support facilities identifies these assets as part of the Company’s full cost pool due to their supporting nature to the Company’s oil and natural gas operations. The Company’s treating equipment and gathering support facilities were included in “Oil and natural gas properties, evaluated” on the consolidated balance sheet as of the Emergence Date. Refer to Note 3, “Fresh-start Accounting,” for a discussion of the valuation approaches used.

Additionally, the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. 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 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 the full cost ceiling test limitation. For the three months ended September 30, 2020 (Successor), the Company transferred approximately $23.6 million of unevaluated property costs to the full cost pool. For the three months ended June 30, 2019 (Predecessor), the Company transferred approximately $481.7 million of unevaluated property costs to the full cost pool, the majority of which were associated with the Company’s Hackberry Draw area. For the three months ended March 31, 2019 (Predecessor), the Company identified certain leases in the Hackberry Draw area with near-term expirations and transferred approximately $51.0 million of associated unevaluated property costs to the full cost pool. These transfers of unevaluated property to the full cost pool in 2020 and 2019 were the result of the Company’s intent to focus available capital on Monument Draw.

The ceiling test value of the Company’s reserves was calculated based on the following prices:


	West Texas Intermediate (per barrel) (1)		Henry Hub (per MMBtu) (1)
December 31, 2020	$	39.54	$	1.99
December 31, 2019		55.85		2.58
December 31, 2018		65.56		3.10

⁽¹⁾

Unweighted average of the first day of the 12‑months ended spot price, adjusted by lease or field for quality, transportation fees and market differentials.

The Company’s net book value of oil and natural gas properties at June 30, September 30, and December 31, 2020 (Successor) exceeded the ceiling amount and the Company recorded full cost ceiling test impairments before income taxes of $60.1 million, $128.3 million, and $26.7 million, respectively, for those periods, or $215.1 million for the year ended December 31, 2020 (Successor). The ceiling test impairments during 2020 (Successor) were primarily driven by decreases in the first-day-of-the-month 12-month average prices for crude oil used in the ceiling test calculation. Additionally, during the three months ended September 30, 2020 (Successor), the transfer of unevaluated property costs to the full cost pool, as discussed above, also contributed to the impairment recorded for the period. During the three months ended December 31, 2020 (Successor), proved undeveloped reserves additions as a result of changes to the Company’s five year development plan partially offset the impact on the impairment of the average price decline for the period. The Company’s net book value of oil and natural gas properties at March 31, June 30, and September 30, 2019 (Predecessor) exceeded the ceiling amount and the Company recorded full cost ceiling test impairments before income taxes of $275.2 million, $664.4 million and $45.6 million, respectively, for the periods. The ceiling test impairments during 2019 (Predecessor) were driven by the transfers of unevaluated property to the full cost pool that occurred during the year, as discussed above, and decreases in the first-day-of-the-month 12-month average prices for crude oil used in the ceiling test calculations. The Company’s net book value of oil and natural gas properties in 2018 (Predecessor) did not exceed the ceiling amount.

Full cost ceiling test impairments are recorded in “Full cost ceiling impairment” in the Company’s consolidated statements of operations and in “Accumulated depletion” in the Company’s consolidated balance sheets.

Changes in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties to the full cost pool, capital spending, and other factors will determine the Company’s ceiling test calculation and impairment analyses in future periods.