General
We follow the full cost method of accounting whereby all costs associated with property
acquisition, exploration and development activities are capitalized. Our revenues are derived from the
sale of oil, gas and natural gas liquids. We recognize revenues when our production is sold and title is
transferred. Our revenues are highly dependent upon the prices of, and demand for, oil and gas. The
markets for oil and gas have historically been volatile and are likely to continue to be volatile in the
future. The prices we receive for our oil and gas and our levels of production are subject to wide
fluctuations and depend on numerous factors beyond our control, including supply and demand,
economic conditions, foreign imports, the actions of OPEC, political conditions in other oil-producing
countries, and governmental regulation, legislation and policies. Under the SEC’s full cost accounting
rules, we review the carrying value of our proved oil and gas properties each quarter. These rules
generally require that we price our future oil and gas production at the twelve-month average
first-day-of-the-month reference prices as adjusted for location and quality differentials to determine a
ceiling value of our properties. These prices are utilized except where different prices are fixed and
determinable from applicable contracts for the remaining term of those contracts, including derivative
contracts that qualify and are designated for hedge accounting treatment. The derivative instruments
we have in place are not classified as hedges for accounting purposes. The rules require an
impairment if our capitalized costs exceed the allowed “ceiling”. For further discussion, see Critical
Accounting Policies and Estimates. 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. If oil and gas prices decline in
the future, impairments of our oil and gas properties could occur. Impairment charges required by
these rules do not directly impact our cash flows from operating activities.
Our oil and gas production expenses include salaries and benefits of personnel involved in
production activities (including stock-based compensation), steam gas costs, electricity costs,
maintenance costs, production, ad valorem and severance taxes, gathering and transportation costs
and other costs necessary to operate our producing properties. Depreciation, depletion and
amortization, or DD&A, for producing oil and gas properties is calculated using the units of production
method based upon estimated proved reserves. For the purposes of computing DD&A, estimated
proved reserves are redetermined as of the end of each year and on an interim basis when deemed
necessary.
General and administrative expense, or G&A, consists primarily of salaries and related benefits of
administrative personnel (including stock-based compensation), office rent, systems costs and other
administrative costs.
Results Overview
For the year ended December 31, 2011, we reported net income attributable to common
stockholders of $205.3 million, on total revenues of $2.0 billion. This compares to net income of $103.3
million, on total revenues of $1.5 billion for the year ended December 31, 2010, and net income of
$136.3 million, on total revenues of $1.2 billion for the year ended December 31, 2009.
Significant transactions that affect comparisons between the periods include the divestment of our
Panhandle and South Texas properties in the fourth quarter of 2011, the divestment of our U.S. Gulf of
Mexico shallow water shelf properties to McMoRan and the acquisition of our Eagle Ford Shale
properties during the fourth quarter of 2010.
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