Inventory
. Oil inventories are carried at the lower of the cost to produce or market value, and
materials and supplies inventories are stated at the lower of cost or market with cost determined on an
average cost method. At December 31, 2011 and 2010, inventory consisted of the following (in
thousands):
December 31,
2011
2010
Oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
7,075
$
6,744
Materials and supplies . . . . . . . . . . . . . . . . .
13,098
17,662
$
20,173
$
24,406
Federal and State Income Taxes.
We recognize deferred tax liabilities and assets for expected
future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred tax liabilities and assets are determined based on the difference between
the financial statement and tax bases of assets and liabilities using tax rates in effect for the year in
which the differences are expected to reverse. A valuation allowance is established to reduce deferred
tax assets if it is more likely than not that some portion or all of the related tax benefits will not be
realized.
We have also established a recognition threshold and measurement attribute for a tax position
taken or expected to be taken in a tax return. The tax benefit from an uncertain tax position is
recognized when it is more likely than not, based on the technical merits of the position, that the
position will be sustained on examination by the taxing authorities. Additionally, the amount of the tax
benefit recognized is the largest amount of benefit that has a greater than 50% likelihood of being
realized upon ultimate settlement. Furthermore, we recognize potential penalties and interest related to
unrecognized tax benefits as a component of income tax expense. See Note 11 – Income Taxes.
Revenue Recognition.
Oil and gas revenue from our interests in producing wells is recognized
upon delivery and passage of title using the sales method for gas imbalances, net of any royalty
interests or other profit interests in the produced product. If our sales of production volumes for a well
exceed our portion of the estimated remaining recoverable reserves of the well, a liability is recorded.
No receivables are recorded for those wells on which we have taken less than our ownership share of
production unless the amount taken by other parties exceeds the estimate of their remaining reserves.
We had no material gas imbalances at December 31, 2011 or 2010.
Derivative Financial Instruments.
We use various derivative instruments to manage our exposure
to commodity price risk on sales of oil and gas production. We do not enter into derivative instruments
for speculative trading purposes. We present the fair value of our derivative contracts on a net basis
where the right of offset is provided for in our counterparty agreements. See Note 6 – Commodity
Derivative Contracts.
Investment.
We have elected to measure our investment at fair value with changes in fair value
included in our income statement. If we had not elected the fair value method, the investment would
have qualified for the equity method of accounting, under which our proportionate share of the
investee’s income would have been reported in our income statement. See Note 7 – Investment and
Note 8 – Fair Value Measurements of Assets and Liabilities.
F-10