DNE » Topics » Oil and gas properties

These excerpts taken from the DNE 10-K filed Mar 5, 2009.

Oil and gas properties

With the acquisition of Goldking, Dune elected to switch from full cost to successful efforts method of accounting for its investments in oil and gas properties, effective January 1, 2007. The successful efforts method is the preferable method of accounting for oil and gas properties. Under the successful efforts method, exploration costs and dry hole costs (the primary uncertainty affecting this method) are recognized as expenses when incurred and the costs of successful exploration wells are capitalized as oil and gas properties. The Company believes that, in light of the Goldking acquisition and its increased level of development and exploration activities, the successful efforts method of accounting provides a better matching of expenses to the period in which oil and gas production is realized. As a result, the Company believes that the change in accounting method was appropriate.

The calculation of depreciation, depletion and amortization of capitalized costs under the successful efforts method of accounting differs from the full cost method in that the successful efforts method requires Dune to calculate depreciation, depletion and amortization expense on individual properties rather than one pool of costs. In addition, under the successful efforts method, Dune assesses its properties individually for impairment compared to one pool of costs under the full cost method.

The change in accounting method constituted a “Change in Accounting Principle,” requiring that all prior period financial statements be adjusted to reflect the results and balances that would have been reported had Dune been following the successful efforts method of accounting from its inception. The cumulative effect of the change in accounting method as of December 31, 2006 was to increase the balance of our net investment in oil and gas properties and retained earnings at that date by $4,805,966. The change in accounting method resulted in an increase (decrease) in the net loss of ($8,080,323) for the year ended December 31, 2006. The impact on earnings per share was ($.14) for the year ended December 31, 2006. The change in method of accounting had no impact on cash or working capital.

The unit-of-production method of depreciation, depletion and amortization of oil and gas properties under the successful efforts method of accounting is applied pursuant to the simple multiplication of units produced by

 

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Table of Contents

DUNE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

the costs per unit on a field by field basis. Leasehold cost per unit is calculated by dividing the total cost by the estimated total proved oil and gas reserves associated with that field. Well cost per unit is calculated by dividing the total cost by the estimated total proved developed oil and gas reserves associated with that field. The volumes or units produced and asset costs are known and while the proved reserves have a high probability of recoverability, they are based on estimates that are subject to some variability. Amortization expense from continuing operations amounted to $55,652,979, $29,330,321, and $3,297,424 for the years ended December 31, 2008, 2007 and 2006, respectively.

We test for impairment of our properties based on estimates of proved reserves. Proved oil and gas properties are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. We estimate the future undiscounted cash flows of the affected properties to judge the recoverability of the carrying amounts. Initially this analysis is based on proved reserves. However, when we believe that a property contains oil and gas reserves that do not meet the defined parameters of proved reserves, an appropriately risk adjusted amount of these reserves may be included in the impairment evaluation. These reserves are subject to much greater risk of ultimate recovery. An asset would be impaired if the undiscounted cash flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair value.

Impairment analysis is performed on an ongoing basis. In addition to using estimates of oil and gas reserve volumes in conducting impairment analysis, it is also necessary to estimate future oil and gas prices and costs, considering all available evidence at the date of review. The impairment evaluation triggers include a significant long-term decrease in current and projected prices or reserve volumes, an accumulation of project costs significantly in excess of the amount originally expected and historical and current negative operating losses. Although we evaluate future oil and gas prices as part of the impairment analysis, we do not view short-term decreases in prices, even if significant, as impairment triggering events.

During the years ended December 31, 2008 and 2006, the Company impaired its oil and gas properties from continuing operations by $125,694,000 and $6,911,697, respectively, which are reflected in the accompanying Consolidated Statements of Operations. No impairment of oil and gas properties was recorded in 2007.

Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Dune assesses the realizability of unproved properties on at least an annual basis or when there has been an indication that an impairment in value may have occurred. Impairment of unproved properties is assessed based on management’s intention with regard to future exploration and development of individually significant properties and the ability of Dune to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is charged to expense. There was no impairment of unproved properties during the years ended December 31, 2008 and 2007. There were no material costs not subject to amortization as of December 31, 2008 and 2007.

Oil and gas properties

STYLE="margin-top:6px;margin-bottom:0px; text-indent:4%">With the acquisition of Goldking, Dune elected to switch from full cost to successful efforts method of accounting for its investments in oil and gas
properties, effective January 1, 2007. The successful efforts method is the preferable method of accounting for oil and gas properties. Under the successful efforts method, exploration costs and dry hole costs (the primary uncertainty affecting
this method) are recognized as expenses when incurred and the costs of successful exploration wells are capitalized as oil and gas properties. The Company believes that, in light of the Goldking acquisition and its increased level of development and
exploration activities, the successful efforts method of accounting provides a better matching of expenses to the period in which oil and gas production is realized. As a result, the Company believes that the change in accounting method was
appropriate.

The calculation of depreciation, depletion and amortization of capitalized costs under the successful efforts method of
accounting differs from the full cost method in that the successful efforts method requires Dune to calculate depreciation, depletion and amortization expense on individual properties rather than one pool of costs. In addition, under the successful
efforts method, Dune assesses its properties individually for impairment compared to one pool of costs under the full cost method.

The
change in accounting method constituted a “Change in Accounting Principle,” requiring that all prior period financial statements be adjusted to reflect the results and balances that would have been reported had Dune been following the
successful efforts method of accounting from its inception. The cumulative effect of the change in accounting method as of December 31, 2006 was to increase the balance of our net investment in oil and gas properties and retained earnings at
that date by $4,805,966. The change in accounting method resulted in an increase (decrease) in the net loss of ($8,080,323) for the year ended December 31, 2006. The impact on earnings per share was ($.14) for the year ended December 31,
2006. The change in method of accounting had no impact on cash or working capital.

The unit-of-production method of depreciation,
depletion and amortization of oil and gas properties under the successful efforts method of accounting is applied pursuant to the simple multiplication of units produced by

 


F-7







Table of Contents



DUNE ENERGY, INC.

ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



the costs per unit on a field by field basis. Leasehold cost per unit is calculated by dividing the total cost by the estimated total proved oil and gas
reserves associated with that field. Well cost per unit is calculated by dividing the total cost by the estimated total proved developed oil and gas reserves associated with that field. The volumes or units produced and asset costs are known and
while the proved reserves have a high probability of recoverability, they are based on estimates that are subject to some variability. Amortization expense from continuing operations amounted to $55,652,979, $29,330,321, and $3,297,424 for the years
ended December 31, 2008, 2007 and 2006, respectively.

We test for impairment of our properties based on estimates of proved reserves.
Proved oil and gas properties are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. We estimate the future undiscounted cash flows of the affected properties to judge the
recoverability of the carrying amounts. Initially this analysis is based on proved reserves. However, when we believe that a property contains oil and gas reserves that do not meet the defined parameters of proved reserves, an appropriately risk
adjusted amount of these reserves may be included in the impairment evaluation. These reserves are subject to much greater risk of ultimate recovery. An asset would be impaired if the undiscounted cash flows were less than its carrying value.
Impairments are measured by the amount by which the carrying value exceeds its fair value.

Impairment analysis is performed on an ongoing
basis. In addition to using estimates of oil and gas reserve volumes in conducting impairment analysis, it is also necessary to estimate future oil and gas prices and costs, considering all available evidence at the date of review. The impairment
evaluation triggers include a significant long-term decrease in current and projected prices or reserve volumes, an accumulation of project costs significantly in excess of the amount originally expected and historical and current negative operating
losses. Although we evaluate future oil and gas prices as part of the impairment analysis, we do not view short-term decreases in prices, even if significant, as impairment triggering events.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">During the years ended December 31, 2008 and 2006, the Company impaired its oil and gas properties from continuing operations by $125,694,000 and
$6,911,697, respectively, which are reflected in the accompanying Consolidated Statements of Operations. No impairment of oil and gas properties was recorded in 2007.

FACE="Times New Roman" SIZE="2">Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become
proved or their values become impaired. Dune assesses the realizability of unproved properties on at least an annual basis or when there has been an indication that an impairment in value may have occurred. Impairment of unproved properties is
assessed based on management’s intention with regard to future exploration and development of individually significant properties and the ability of Dune to obtain funds to finance such exploration and development. If the results of an
assessment indicate that the properties are impaired, the amount of the impairment is charged to expense. There was no impairment of unproved properties during the years ended December 31, 2008 and 2007. There were no material costs not subject
to amortization as of December 31, 2008 and 2007.

These excerpts taken from the DNE 10-K filed Mar 10, 2008.

Oil and gas properties

Oil and gas exploration and production companies choose one of two acceptable accounting methods, successful efforts or full cost. The most significant difference between the two methods relates to the accounting treatment of drilling costs for unsuccessful exploration wells (“dry holes”) and exploration costs. With the acquisition of Goldking, we elected to switch from full cost to successful efforts method of accounting for our investment in oil and gas properties, effective January 1, 2007.

Under the successful efforts method, exploration costs and dry hole costs (the primary uncertainty affecting this method) are recognized as expenses when incurred and the costs of successful exploration wells are capitalized as oil and gas properties. Entities that follow the full cost method capitalize all drilling and exploration costs including dry hole costs into one pool of total oil and gas property costs. We believe that, in light of the Goldking acquisition and our increased level of development and limited exploration activities, the successful efforts method of accounting provides a better matching of expenses to the period in which oil and gas production is realized. As a result, we believe that the change in accounting method was appropriate.

 

F-8


DUNE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The calculation of depreciation, depletion and amortization of capitalized costs under the successful efforts method of accounting differs from the full cost method in that the successful efforts method required us to calculate depreciation, depletion and amortization expense on individual properties rather than one pool of costs. In addition, under successful efforts method, we assess our properties individually for impairment compared to one pool of costs under the full cost method.

The change in accounting method constituted a “Change in Accounting Principle,” requiring that all prior period financial statements be adjusted to reflect the results and balances that would have been reported had we been following the successful efforts method of accounting from our inception. The cumulative effect of the change in accounting method as of December 31, 2006 was to increase the balance of our net investment in oil and gas properties and retained earnings at that date by $4,805,966. The change in accounting method resulted in an increase (decrease) in the net loss of ($8,080,323) and $1,444,665 for the years ended December 31, 2006 and 2005, respectively. The impact on earnings per share was ($.14) and $.03 for the years ended December 31, 2006 and 2005, respectively. The change in method of accounting had no impact on cash or working capital.

The unit-of-production method of depreciation, depletion and amortization of oil and gas properties under the successful efforts method of accounting is applied pursuant to the simple multiplication of units produced by the costs per unit on a field by field basis. Leasehold cost per unit is calculated by dividing the total cost by the estimated total proved oil and gas reserves associated with that field. Well cost per unit is calculated by dividing the total cost by the estimated total proved producing oil and gas reserves associated with that field. The volumes or units produced and asset costs are known and while the proved reserves have a high probability of recoverability, they are based on estimates that are subject to some variability. Amortization expense amounted to $35,722,445, $5,665,883 and $1,543,788 for the years ended December 31, 2007, 2006 and 2005, respectively.

We test for impairment of our properties based on estimates of proved reserves. Proved oil and gas properties are reviewed for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable. We estimate the future undiscounted cash flows of the affected properties to judge the recoverability of the carrying amounts. Initially this analysis is based on proved reserves. However, when we believe that a property contains oil and gas reserves that do not meet the defined parameters of proved reserves, an appropriately risk adjusted amount of these reserves may be included in the impairment evaluation. These reserves are subject to much greater risk of ultimate recovery. An asset would be impaired if the undiscounted cash flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair value.

Impairment analysis is performed on an ongoing basis. In addition to using estimates of oil and gas reserve volumes in conducting impairment analysis, it is also necessary to estimate future oil and gas prices. The impairment evaluation triggers include a significant long-term decrease in current and projected prices or reserve volumes, an accumulation of project costs significantly in excess of the amount originally expected, and historical and current negative operating losses. Although we evaluate future oil and gas prices as part of the impairment analysis, we do not view short-term decreases in prices, even if significant, as impairment triggering events.

During the year ended December 31, 2006, the Company impaired its oil and gas properties by $31,411,329 which is reflected in the accompanying Consolidated Statements of Operations. No impairment of oil and gas properties was recorded in 2007 or 2005.

Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of these unproved property costs begins when the properties become proved or their values become impaired. Dune assesses the realizability of unproved properties on at least an

 

F-9


DUNE ENERGY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

annual basis or when there has been an indication that an impairment in value may have occurred. Impairment of unproved properties is assessed based on management’s intention with regard to future exploration and development of individually significant properties and the ability of Dune to obtain funds to finance such exploration and development. If the results of an assessment indicate that the properties are impaired, the amount of the impairment is charged to expense. There was no impairment of unproved properties during the years ended December 31, 2007 and 2006. There were no material costs not subject to amortization as of December 31, 2007 and 2006.

Oil and gas
properties

Oil and gas exploration and production companies choose one of two acceptable accounting methods, successful efforts or full
cost. The most significant difference between the two methods relates to the accounting treatment of drilling costs for unsuccessful exploration wells (“dry holes”) and exploration costs. With the acquisition of Goldking, we elected to
switch from full cost to successful efforts method of accounting for our investment in oil and gas properties, effective January 1, 2007.

SIZE="2">Under the successful efforts method, exploration costs and dry hole costs (the primary uncertainty affecting this method) are recognized as expenses when incurred and the costs of successful exploration wells are capitalized as oil and gas
properties. Entities that follow the full cost method capitalize all drilling and exploration costs including dry hole costs into one pool of total oil and gas property costs. We believe that, in light of the Goldking acquisition and our increased
level of development and limited exploration activities, the successful efforts method of accounting provides a better matching of expenses to the period in which oil and gas production is realized. As a result, we believe that the change in
accounting method was appropriate.

 


F-8









DUNE ENERGY, INC.

ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 


The calculation of depreciation, depletion and amortization of capitalized costs under the successful
efforts method of accounting differs from the full cost method in that the successful efforts method required us to calculate depreciation, depletion and amortization expense on individual properties rather than one pool of costs. In addition, under
successful efforts method, we assess our properties individually for impairment compared to one pool of costs under the full cost method.

SIZE="2">The change in accounting method constituted a “Change in Accounting Principle,” requiring that all prior period financial statements be adjusted to reflect the results and balances that would have been reported had we been
following the successful efforts method of accounting from our inception. The cumulative effect of the change in accounting method as of December 31, 2006 was to increase the balance of our net investment in oil and gas properties and retained
earnings at that date by $4,805,966. The change in accounting method resulted in an increase (decrease) in the net loss of ($8,080,323) and $1,444,665 for the years ended December 31, 2006 and 2005, respectively. The impact on earnings per
share was ($.14) and $.03 for the years ended December 31, 2006 and 2005, respectively. The change in method of accounting had no impact on cash or working capital.

FACE="Times New Roman" SIZE="2">The unit-of-production method of depreciation, depletion and amortization of oil and gas properties under the successful efforts method of accounting is applied pursuant to the simple multiplication of units produced
by the costs per unit on a field by field basis. Leasehold cost per unit is calculated by dividing the total cost by the estimated total proved oil and gas reserves associated with that field. Well cost per unit is calculated by dividing the total
cost by the estimated total proved producing oil and gas reserves associated with that field. The volumes or units produced and asset costs are known and while the proved reserves have a high probability of recoverability, they are based on
estimates that are subject to some variability. Amortization expense amounted to $35,722,445, $5,665,883 and $1,543,788 for the years ended December 31, 2007, 2006 and 2005, respectively.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">We test for impairment of our properties based on estimates of proved reserves. Proved oil and gas properties are reviewed for impairment whenever events
or circumstances indicate that the carrying amount may not be recoverable. We estimate the future undiscounted cash flows of the affected properties to judge the recoverability of the carrying amounts. Initially this analysis is based on proved
reserves. However, when we believe that a property contains oil and gas reserves that do not meet the defined parameters of proved reserves, an appropriately risk adjusted amount of these reserves may be included in the impairment evaluation. These
reserves are subject to much greater risk of ultimate recovery. An asset would be impaired if the undiscounted cash flows were less than its carrying value. Impairments are measured by the amount by which the carrying value exceeds its fair value.

Impairment analysis is performed on an ongoing basis. In addition to using estimates of oil and gas reserve volumes in conducting
impairment analysis, it is also necessary to estimate future oil and gas prices. The impairment evaluation triggers include a significant long-term decrease in current and projected prices or reserve volumes, an accumulation of project costs
significantly in excess of the amount originally expected, and historical and current negative operating losses. Although we evaluate future oil and gas prices as part of the impairment analysis, we do not view short-term decreases in prices, even
if significant, as impairment triggering events.

During the year ended December 31, 2006, the Company impaired its oil and gas
properties by $31,411,329 which is reflected in the accompanying Consolidated Statements of Operations. No impairment of oil and gas properties was recorded in 2007 or 2005.

STYLE="margin-top:12px;margin-bottom:0px; text-indent:4%">Properties not subject to amortization consist of exploration and development costs which are evaluated on a property-by-property basis. Amortization of
these unproved property costs begins when the properties become proved or their values become impaired. Dune assesses the realizability of unproved properties on at least an

 


F-9









DUNE ENERGY, INC.

ALIGN="center">NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 



annual basis or when there has been an indication that an impairment in value may have occurred. Impairment of unproved properties is assessed based on
management’s intention with regard to future exploration and development of individually significant properties and the ability of Dune to obtain funds to finance such exploration and development. If the results of an assessment indicate that
the properties are impaired, the amount of the impairment is charged to expense. There was no impairment of unproved properties during the years ended December 31, 2007 and 2006. There were no material costs not subject to amortization as of
December 31, 2007 and 2006.

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