Any prolonged, substantial reduction in the demand for oil and gas, or distribution problems in
meeting this demand, could adversely affect our business.
Our success is materially dependent upon the demand for oil and gas. The availability of a ready
market for our oil and gas production depends on a number of factors beyond our control, including the
demand for and supply of oil and gas, the availability of alternative energy sources, the proximity of
reserves to, and the capacity of, oil and gas gathering systems, pipelines or trucking and terminal
facilities. We may also have to shut-in some of our wells temporarily due to a lack of market demand. If
the demand for oil and gas diminishes, our financial results would be negatively impacted.
In addition, there are limitations related to the methods of transportation and processing for our
production. Substantially all of our oil and gas production is transported by pipelines and trucks and/or
processed in facilities owned by third parties. The inability or unwillingness of these parties to provide
transportation and processing services to us for a reasonable fee could result in us having to find
transportation and processing alternatives, increased transportation and processing costs or
involuntary curtailment of a significant portion of our oil and gas production, any of which could have a
negative impact on our results of operations and cash flows.
Our asset carrying values may be impaired in future periods if oil and gas prices decline.
Under the SEC’s full cost accounting rules, we review the carrying value of our oil and gas
properties each quarter. Under these rules, for each cost center, capitalized costs of oil and gas
properties (net of accumulated depreciation, depletion and amortization and related deferred income
taxes) may not exceed a “ceiling” equal to:
• the present value, discounted at 10%, of estimated future net cash flows from proved oil and
gas reserves, net of estimated future income taxes; plus
• the cost of unproved properties not being amortized; plus
• the lower of cost or estimated fair value of unproved properties included in the costs being
amortized (net of related tax effects).
These rules generally require that we price our future oil and gas production at the twelve-month
average of the first-day-of-the-month reference prices as adjusted for location and quality differentials
and require an impairment if our capitalized costs exceed this “ceiling”. For 2011, the twelve-month
average of the first-day-of-the-month reference prices (prior to adjustment for location and quality
differentials) were $95.99 per Bbl for oil and $4.12 per MMBtu for natural gas. At December 31, 2011,
the ceiling with respect to our domestic oil and gas properties exceeded the net capitalized costs of
those properties by approximately 30%.
Given the volatility of oil and gas prices, it is likely that our estimate of discounted future net
revenues from proved oil and gas reserves will change in the near term. We may be required to
recognize non-cash pre-tax impairment charges in future reporting periods if market prices for oil or
natural gas decline.
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