Gulfport Energy Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Property And Equipment

Property And Equipment

12 Months Ended

Dec. 31, 2014

Property, Plant and Equipment [Abstract]

PROPERTY AND EQUIPMENT

The major categories of property and equipment and related accumulated depletion, depreciation, amortization and impairment as of December 31, 2014 and 2013 are as follows:



	December 31,
	2014			2013
	(In thousands)
Oil and natural gas properties	$	3,923,154		$	2,477,178
Office furniture and fixtures	10,752			6,093
Building	5,398			4,626
Land	2,194			412
Total property and equipment	3,941,498			2,488,309
Accumulated depletion, depreciation, amortization and impairment	(1,050,879		)	(784,717		)
Property and equipment, net	$	2,890,619		$	1,703,592

No impairment of oil and natural gas properties was required under the ceiling test for the years ended December 31, 2014, 2013 or 2012.

Included in oil and natural gas properties at December 31, 2014 and 2013 is the cumulative capitalization of $72.7 million and $47.5 million in general and administrative costs incurred and capitalized to the full cost pool. General and administrative costs capitalized to the full cost pool represent management’s estimate of costs incurred directly related to exploration and development activities such as geological and other administrative costs associated with overseeing the exploration and development activities. All general and administrative costs not directly associated with exploration and development activities were charged to expense as they were incurred. Capitalized general and administrative costs were approximately $25.2 million, $14.9 million and $9.1 million for the years ended December 31, 2014, 2013 and 2012, respectively.

The following is a summary of Gulfport’s oil and gas properties not subject to amortization as of December 31, 2014:



	Costs Incurred in
	2014		2013		2012		Prior to 2012		Total
	(in thousands)
Acquisition costs	$	405,226	$	323,515	$	459,151	$	93,864	$	1,281,756
Exploration costs	—		—		—		—		—
Development costs	173,693		1,801		506		—		176,000
Capitalized interest	5,204		2,578		—		—		7,782
Total oil and gas properties not subject to amortization	$	584,123	$	327,894	$	459,657	$	93,864	$	1,465,538

The following table summarizes the Company’s non-producing properties excluded from amortization by area at December 31, 2014:



	December 31, 2014
	(In thousands)
Colorado	$	5,127
Bakken	96
Southern Louisiana	145
Ohio	1,460,125
Other	45
	$	1,465,538

At December 31, 2013, approximately $1.0 billion of non-producing leasehold costs was not subject to amortization.

During the year ended December 31, 2012, the Company determined that further development of its non-producing leasehold assets located in Belize was not in alignment with its strategic operating plan and, therefore, recognized a loss on disposal of assets, net of tax, of approximately $3.5 million which is included in discontinued operations on the accompanying consolidated statements of operations for the year ended December 31, 2012.

The Company evaluates the costs excluded from its amortization calculation at least annually. Subject to industry conditions and the level of the Company’s activities, the inclusion of most of the above referenced costs into the Company’s amortization calculation is expected to occur within three to five years.

A reconciliation of the Company's asset retirement obligation for the years ended December 31, 2014 and 2013 is as follows:



	December 31,
	2014			2013
	(In thousands)
Asset retirement obligation, beginning of period	$	15,083		$	13,275
Liabilities incurred	9,295			3,556
Liabilities settled	(7,201		)	(2,465		)
Accretion expense	761			717
Asset retirement obligation as of end of period	17,938			15,083
Less current portion	75			795
Asset retirement obligation, long-term	$	17,863		$	14,288

On May 7, 2012, the Company entered into a contribution agreement with Diamondback. Under the terms of the contribution agreement, the Company agreed to contribute to Diamondback, prior to the closing of the Diamondback initial public offering (“Diamondback IPO”), all its oil and natural gas interests in the Permian Basin (the "Contribution"). The Contribution was completed on October 11, 2012. At the closing of the Contribution, Diamondback issued to the Company (i) 7,914,036 shares of Diamondback common stock and (ii) a promissory note for $63.6 million, which was repaid to the Company at the closing of the Diamondback IPO on October 17, 2012. This aggregate consideration was subject to a post-closing cash adjustment based on changes in the working capital, long-term debt and certain other items of Diamondback O&G LLC, formerly Windsor Permian LLC ("Diamondback O&G"), as of the date of the Contribution. In January 2013, the Company received an additional payment from Diamondback of approximately $18.6 million as a result of this post-closing adjustment. Diamondback O&G is a wholly-owned subsidiary of Diamondback. Under the contribution agreement, the Company is generally responsible for all liabilities and obligations with respect to the contributed properties arising prior to the Contribution and Diamondback is responsible for such liabilities and obligations with respect to the contributed properties arising after the Contribution.

In accordance with the Company's policy under the full cost method of accounting to only recognize a gain or loss upon the disposal of oil and natural gas properties if such dispositions significantly alter the relationship between capitalized costs and proven oil and natural gas reserves, the Company recognized a gain on the sale of its Permian Basin assets of approximately $7.3 million, which is included in the accompanying consolidated statements of operations for the year ended December 31, 2012. In addition, the Company recorded a reduction to its full cost pool of approximately $213.0 million as a result of the Contribution.

In connection with the Contribution, the Company and Diamondback entered into an investor rights agreement under which the Company had the right, for so long as it beneficially owned more than 10% of Diamondback’s outstanding common stock, to designate one individual as a nominee to serve on Diamondback’s board of directors. Such nominee, if elected to Diamondback’s board, would also serve on each committee of the board so long as he or she satisfied the independence and other requirements for service on the applicable committee of the board. So long as the Company had the right to designate a nominee to Diamondback’s board and there was no Gulfport nominee actually serving as a Diamondback director, the Company had the right to appoint one individual as an advisor to the board who would be entitled to attend board and committee meetings. The Company was also entitled to certain information rights and Diamondback granted the Company certain demand and “piggyback” registration rights obligating Diamondback to register with the SEC any shares of Diamondback common stock that the Company owns. Immediately upon completion of the Contribution, the Company owned a 35% equity interest in Diamondback, rather than leasehold interests in the Company’s Permian Basin acreage. Upon completion of the Diamondback IPO in October 2012, Gulfport owned approximately 21.4% of Diamondback's outstanding common stock. Following the Contribution, the Company has accounted for its interest in Diamondback as an equity investment. In November 2014, the Company sold all of the remaining shares of Diamondback common stock that it received in the Contribution and, as of December 31, 2014, Gulfport did not own any shares of Diamondback's common stock. See Note 5, "Equity Investments - Diamondback Energy, Inc."