PLAINS EXPLORATION & PRODUCTION COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Summary of Significant Accounting Policies
General.
Plains Exploration & Production Company, a Delaware corporation formed in 2002
(“PXP”, the “Company”, “us”, “our”, or “we”), is an independent energy company engaged in the
upstream oil and gas business. The upstream business acquires, develops, explores for and produces
oil and gas. Our upstream activities are located in the United States.
Our consolidated financial statements include the accounts of all our consolidated subsidiaries.
We consolidate entities when we have the ability to control or direct the operating and financial
decisions of the entity or when we have a significant interest in the entity that gives us the ability to
direct the activities that are significant to that entity. The determination of our ability to control, direct or
exert significant influence over an entity involves the use of judgment. All significant intercompany
transactions have been eliminated. Certain reclassifications have been made to prior year statements
to conform to the current year presentation.
Use of Estimates.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses during the reporting
period. Significant estimates made by management include: (1) oil and natural gas reserves;
(2) depreciation, depletion and amortization; (3) timing of transfers from oil and gas properties not
subject to amortization; (4) valuation of our investment; (5) allocating purchase price in connection with
business combinations and determining fair value, including goodwill; (6) noncontrolling interest in the
form of preferred stock of subsidiary; (7) income taxes; (8) accrued assets and liabilities; (9) stock-
based compensation; (10) asset retirement obligations and (11) valuation of derivative instruments.
Although management believes these estimates are reasonable, changes in facts and circumstances
or discovery of new information may result in revised estimates, and actual results may differ from
these estimates.
Oil and Gas Properties.
We follow the full cost method of accounting whereby all costs associated
with property acquisition, exploration and development activities are capitalized. Such costs include
internal general and administrative costs such as payroll and related benefits and costs directly
attributable to employees engaged in acquisition, exploration and development activities. General and
administrative costs associated with production, operations, marketing and general corporate activities
are expensed as incurred. Capitalized costs, along with our estimated future costs to develop proved
reserves and asset retirement costs which are not already included in oil and gas properties, net of
related salvage value, are amortized to expense by the unit-of-production method using engineers’
estimates of proved oil and natural gas reserves. The costs of unproved oil and gas properties are
excluded from amortization until the properties are evaluated. Interest is capitalized on oil and natural
gas properties not subject to amortization and in the process of development. See Note 18 – Oil and
Natural Gas Activities – Capitalized Costs. Proceeds from the sale of oil and natural gas properties are
accounted for as reductions to capitalized costs unless such sales cause a significant change in the
relationship between capitalized costs and proved reserves of oil and gas attributable to a cost center,
in which case a gain or loss is recognized.
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