Significant Accounting Policies

12 Months Ended

Dec. 31, 2015

Significant Accounting Policies Disclosures [Abstract]

1. SIGNIFICANT ACCOUNTING POLICIES:

Liquidity and Ability to Continue as a Going Concern

Our accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business for the twelve-month period following the date of these consolidated financial statements. Continued low oil and natural gas prices during 2015 have had a significant adverse impact on our business, and as a result of our financial condition, substantial doubt exists that we will be able to continue as a going concern.

As of February 29, 2016, the total outstanding principal amount of our debt obligations was $3.76 billion, consisting of the following:

$450.0 million of unsecured senior notes due 2018 issued by us ( the “2018 Notes”);
$850.0 million of unsecured senior notes due 2024 issued by us (the “2024 Notes”);
$999.0 million under the credit agreement between our wholly-owned subsidiary, Ultra Resources, Inc. ("Ultra Resources"), as the borrower, and JPMorgan Chase Bank, as the administrative agent (the "Credit Agreement") - Ultra Resources' obligations under the Credit Agreement are guaranteed by the Company and UP Energy Corporation; and
$1.46 billion in unsecured senior notes (the "Senior Notes") issued by Ultra Resources - Ultra Resources' obligations under the Senior Notes are guaranteed by the Company and UP Energy Corporation.

We recently borrowed $266.0 million under the Credit Agreement, which represented substantially all of the remaining undrawn amount under the Credit Agreement. As a result, no material further extensions of credit are available under the Credit Agreement. As of February 29, 2016, the Company's cash on hand exceeds the amount recently borrowed under the Credit Agreement. These funds are intended to be used for general corporate purposes.

Our ability to continue as a “going concern” is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements, our ability to cure any defaults that occur under our debt agreements or to obtain waivers or forbearances with respect to any such defaults, and our ability to pay, retire, amend, replace or refinance our indebtedness as defaults occur or as interest and principal payments come due.

Covenant Compliance. Our Credit Agreement contains covenants, including: a consolidated leverage covenant pursuant to which Ultra Resources must maintain a maximum ratio of its total funded consolidated debt to its trailing four fiscal quarters’ EBITDAX of 3.5 to 1.0; a PV-9 covenant pursuant to which Ultra Resources is required to maintain a minimum ratio of the discounted net present value of its oil and gas properties to its total funded consolidated debt of 1.5 to 1.0; and a covenant requiring us to deliver annual, audited, consolidated financial statements of the Company without a “going concern” or like qualification or exception. The Master Note Purchase Agreement governing our Senior Notes contains a consolidated leverage ratio covenant similar to the consolidated leverage ratio covenant in the Credit Agreement. The indentures governing our 2018 Notes and our 2024 Notes contain an interest charge coverage ratio pursuant to which we are required to maintain a minimum ratio of our trailing four fiscal quarters’ consolidated EBITDA to total interest expense of no less than 2.25 to 1.00 as a precondition to our incurring additional indebtedness.

Based on our EBITDAX for the trailing four fiscal quarters ended December 31, 2015, we were in compliance with the consolidated leverage ratio covenant in the Credit Agreement and the Master Note Purchase Agreement at December 31, 2015. However, based on our estimates of forward commodity prices and our most recent production forecasts, we expect to breach the consolidated leverage covenant for the trailing four fiscal quarters ended March 31, 2016. A violation of this covenant can become an event of default under our debt agreements and result in the acceleration of all of our indebtedness.

Based on the net present value of Ultra Resources’ oil and gas properties and Ultra Resources’ total funded consolidated debt at December 31, 2015, we expect to breach the PV-9 ratio in the Credit Agreement when we report whether or not we are in compliance with the covenant on April 1, 2016. A violation of this covenant can become an event of default under our debt agreements and result in the acceleration of all of our indebtedness.

The audit report prepared by our auditors with respect to the financial statements in this Form 10-K includes an explanatory paragraph expressing uncertainty as to our ability to continue as a “going concern.” As a result, we expect to be in default under the Credit Agreement on March 15, 2016 when we deliver our financial statements to the Credit Agreement lenders. A violation of this covenant can become an event of default under our debt agreements and result in the acceleration of all of our indebtedness.

Based on our EBITDA for the trailing four fiscal quarters ended December 31, 2015, we were in compliance with the interest charge coverage ratio in the indentures governing our 2018 Notes and our 2024 Notes at December 31, 2015. However, if commodity prices stay at or decline from recent levels or if we fail to develop new properties and operate our existing properties profitably or if our interest expense increases due to changes in the agreements governing our indebtedness or due to breaches of the covenants in the agreements governing our indebtedness, we may not be able to continue to comply with this covenant during the next twelve months. If we breach this covenant, our ability to incur additional indebtedness will be limited, or we may not be able to incur additional indebtedness at all.

We cannot provide any assurances that we will be able to comply with the covenants or to make satisfactory alternative arrangements in the event we cannot do so. If we are unable to cure any such default, or obtain a forbearance, a waiver or replacement financing, and those lenders, or other parties entitled to do so, accelerate the payment of such indebtedness or obligations, we may consider or pursue various forms of negotiated restructurings of our debt obligations and/or asset sales under court supervision pursuant to a voluntary bankruptcy filing under Chapter 11 of the U.S. Bankruptcy Code or the Canadian Bankruptcy and Insolvency Act, which would have a material adverse effect on our business, financial condition, results of operations and cash flows. Under certain circumstances, it is also possible that our creditors may file an involuntary petition for bankruptcy against us.

Maturities. At December 31, 2015, we have the following obligations outstanding under the Credit Agreement, the 2018 Notes, the 2024 Notes, and the Senior Notes (maturity dates exclude the effect of the default provisions described above):

$630.0 million due October 2016 under the Credit Agreement;
$450.0 million due December 2018 with respect to the 2018 Notes;
$850.0 million due September 2024 with respect to the 2024 Notes; and
$1.46 billion due between March 2016 and October 2025 with respect to the Senior Notes (see Note 8 for maturity details).

In addition, we anticipate the following significant near-term interest and maturity payments: (i) an approximately $40 million interest payment on March 1, 2016 under the Senior Notes; (ii) a $62 million maturity payment on March 1, 2016 under one series of the Senior Notes; and (iii) an approximately $26 million interest payment on April 1, 2016 under the 2024 Notes.

We are currently attempting to (i) amend, replace, refinance or restructure our Credit Agreement and Master Note Purchase Agreement and the indentures related to our 2018 Notes and our 2024 Notes; and/or (ii) secure additional capital through possible asset sales, public or private issuances of debt, equity or equity-linked securities, debt for equity swaps or any combination of these. We may also seek additional sources of liquidity in an effort to secure sufficient cash to meet our operating and financing needs. However, we cannot provide any assurances that we will be successful in accomplishing any of these plans.

Our ability to continue as a going concern is dependent on many factors, including, among other things, our ability to comply with the covenants in our existing debt agreements and amend or replace our debt agreements as they mature. We cannot provide any assurances that we will be able to comply with the covenants or to make satisfactory alternative arrangements in the event we cannot do so.

(a) Basis of presentation and principles of consolidation: The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company presents its financial statements in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). All inter-company transactions and balances have been eliminated upon consolidation.

(b) Cash and cash equivalents: The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.

(c) Restricted cash: Restricted cash represents cash received by the Company from production sold where the final division of ownership of the production is unknown or in dispute.

(d) Accounts receivable: Accounts receivable are stated at the historical carrying amount net of write-offs and an allowance for uncollectible accounts. The carrying amount of the Company’s accounts receivable approximates fair value because of the short-term nature of the instruments. The Company routinely assesses the collectability of all material trade and other receivables.

(e) Property, plant and equipment: Capital assets are recorded at cost and depreciated using the declining-balance method based on their respective useful life. Previously, gathering system expenditures were recorded at cost and depreciated separately from proven oil and gas properties using the straight-line method due to the expectation that they would be used to transport production from probable and possible reserves, as well as from third parties. However, subsequent to the SWEPI Transaction, the Company’s remaining gathering systems are expected to only be used to transport the Company’s proved volumes and as a result, $91.8 million was transferred to proven oil and gas properties at September 30, 2014.

(f) Oil and natural gas properties: The Company uses the full cost method of accounting for exploration and development activities as defined by the Securities and Exchange Commission (“SEC”) Release No. 33-8995, Modernization of Oil and Gas Reporting Requirements (“SEC Release No. 33-8995”) and Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 932, Extractive Activities – Oil and Gas (“FASB ASC 932”). Under this method of accounting, the costs of unsuccessful, as well as successful, exploration and development activities are capitalized as oil and gas properties. This includes any internal costs that are directly related to exploration and development activities but does not include any costs related to production, general corporate overhead or similar activities. The carrying amount of oil and natural gas properties also includes estimated asset retirement costs recorded based on the fair value of the asset retirement obligation when incurred. Gain or loss on the sale or other disposition of oil and natural gas properties is not recognized, unless the gain or loss would significantly alter the relationship between capitalized costs and proved reserves of oil and natural gas attributable to a country.

The sum of net capitalized costs and estimated future development costs of oil and natural gas properties are amortized using the units-of-production method based on the Company’s proved reserves. Oil and natural gas reserves and production are converted into equivalent units based on relative energy content. Asset retirement costs are included in the base costs for calculating depletion.

Under the full cost method, costs of unevaluated properties and major development projects expected to require significant future costs may be excluded from capitalized costs being amortized. The Company excludes significant costs until proved reserves are found or until it is determined that the costs are impaired. The Company reviews its unproved leasehold costs quarterly or when management determines that events or circumstances indicate that the recorded carrying value of the unevaluated properties may not be recoverable. The fair values of unproved properties are evaluated utilizing a discounted net cash flows model based on management’s assumptions of future oil and gas production, commodity prices, operating and development costs; as well as appropriate discount rates. The estimated prices used in the cash flow analysis are determined by management based on forward price curves for the related commodities, adjusted for average historical location and quality differentials. Estimates of cash flows related to probable and possible reserves are reduced by additional risk weighting factors. The amount of any impairment is transferred to the capitalized costs being amortized.

Companies that use the full cost method of accounting for oil and natural gas exploration and development activities are required to perform a ceiling test calculation each quarter. The full cost ceiling test is an impairment test prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is performed quarterly, on a country-by-country basis, utilizing the average of prices in effect on the first day of the month for the preceding twelve month period in accordance with SEC Release No. 33-8995. The ceiling limits such pooled costs to the aggregate of the present value of future net revenues attributable to proved crude oil and natural gas reserves discounted at 10%, plus the lower of cost or market value of unproved properties, less any associated tax effects. If such capitalized costs exceed the ceiling, the Company will record a write-down to the extent of such excess as a non-cash charge to earnings. Any such write-down will reduce earnings in the period of occurrence and results in a lower depletion, depreciation and amortization (“DD&A”) rate in future periods. A write-down may not be reversed in future periods even though higher oil and natural gas prices may subsequently increase the ceiling.

During 2015, the Company recorded a $3.1 billion non-cash write-down of the carrying value of the Company’s proved oil and gas properties as a result of ceiling test limitations, which is reflected within ceiling test and other impairments in the accompanying Consolidated Statements of Operations. The ceiling test was calculated based upon the average of quoted market prices in effect on the first day of the month for the preceding twelve month period at December 31, 2015 for Henry Hub natural gas and West Texas Intermediate oil, adjusted for market differentials. The Company did not have any write-downs related to the full cost ceiling limitation in 2014 or 2013.

(g) Inventories: At December 31, 2015 and 2014, inventory of $4.3 million and $10.2 million, respectively, primarily includes the cost of pipe and production equipment that will be utilized during the 2016 drilling program and crude oil inventory. Materials and supplies inventories are carried at lower of cost or market and include expenditures and other charges directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. The Company uses the weighted average method of recording its materials and supplies inventory. Crude oil inventory is valued at lower of cost or market.

(h) Derivative instruments and hedging activities: The Company follows FASB ASC Topic 815, Derivatives and Hedging (“FASB ASC 815”). The Company records the fair value of its commodity derivatives as an asset or liability on the Consolidated Balance Sheets, and records the changes in the fair value of its commodity derivatives in the Consolidated Statements of Operations as an unrealized gain or loss on commodity derivatives. The Company does not offset the value of its derivative arrangements with the same counterparty. (See Note 7).

(i) Deferred financing costs: Included in current assets at December 31, 2015 are costs associated with the issuance of our senior notes, revolving credit facility, 2018 Notes and 2024 Notes. The remaining unamortized issuance costs are being amortized over the life of the applicable debt or facility using the straight line method.

(j) Income taxes: Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria described in FASB ASC Topic 740, Income Taxes. In addition, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit.

The Company has recorded a valuation allowance against certain deferred tax assets of $1.3 billion as of December 31, 2015. Some or all of this valuation allowance may be reversed in future periods against future income.

(k) Earnings (loss) per share: Basic earnings (loss) per share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during each period. Diluted income (loss) per share is computed by adjusting the average number of common shares outstanding for the dilutive effect, if any, of common stock equivalents. The Company uses the treasury stock method to determine the dilutive effect.

The following table provides a reconciliation of components of basic and diluted net (loss) income per common share:

		December 31,
		2015		2014		2013

Net (loss) income	$	(3,207,220)	$	542,851	$	237,838

Weighted average common shares outstanding
during the period		153,192		153,136		152,963

Effect of dilutive instruments		-	⁽¹⁾	1,558		1,463

Weighted average common shares outstanding during
the period including the effects of dilutive instruments		153,192		154,694		154,426

Net (loss) income per common share - basic	$	(20.94)	$	3.54	$	1.55

Net (loss) income per common share - fully diluted	$	(20.94)	$	3.51	$	1.54

Number of shares not included in dilutive earnings per share that would have been anti-dilutive because the exercise price was greater than the average market price of
the common shares		-	⁽¹⁾	1,377		1,406

⁽¹⁾ Due to the net loss for the year ended December 31, 2015, 1.7 million shares for options and restricted stock units were anti-dilutive and excluded from the computation of loss per share.

(l) Use of estimates: Preparation of consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Actual results could differ from those estimates.

(m) Accounting for share-based compensation: The Company measures and recognizes compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values in accordance with FASB ASC Topic 718, Compensation – Stock Compensation.

(n) Fair value accounting: The Company follows FASB ASC Topic 820, Fair Value Measurements and Disclosures (“FASB ASC 820”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. This statement applies under other accounting topics that require or permit fair value measurements. See Note 8 for additional information.

(o) Asset retirement obligation: The initial estimated retirement obligation of properties is recognized as a liability with an associated increase in oil and gas properties for the asset retirement cost. Accretion expense is recognized over the estimated productive life of the related assets. If the fair value of the estimated asset retirement obligation changes, an adjustment is recorded to both the asset retirement obligation and the asset retirement cost. Revisions in estimated liabilities can result from revisions of estimated inflation rates, changes in service and equipment costs and changes in the estimated timing of settling asset retirement obligations. As a full cost company, settlements for asset retirement obligations for abandonment are adjusted to the full cost pool. The asset retirement obligation is included within other long-term obligations in the accompanying Consolidated Balance Sheets.

(p) Revenue recognition: The Company generally sells oil and natural gas under both long-term and short-term agreements at prevailing market prices and under multi-year contracts that provide for a fixed price of oil and natural gas. The Company recognizes revenues when the oil and natural gas is delivered, which occurs when the customer has taken title and has assumed the risks and rewards of ownership, prices are fixed or determinable and collectability is reasonably assured. The Company accounts for oil and natural gas sales using the “entitlements method.” Under the entitlements method, revenue is recorded based upon the Company’s ownership share of volumes sold, regardless of whether it has taken its ownership share of such volumes. Any amount received in excess of the Company’s share of the volumes is treated as a liability. If the Company receives less than its entitled share, the underproduction is recorded as a receivable. At December 31, 2015 and 2014, the Company had a net natural gas imbalance liability of $1.3 million and $3.0 million, respectively.

Make-up provisions and ultimate settlements of volume imbalances are generally governed by agreements between the Company and its partners with respect to specific properties or, in the absence of such agreements, through negotiation. The value of volumes over- or under-produced can change based on changes in commodity prices. The Company prefers the entitlements method of accounting for oil and natural gas sales because it allows for recognition of revenue based on its actual share of jointly owned production, results in better matching of revenue with related operating expenses, and provides balance sheet recognition of the estimated value of product imbalances.

(q) Capitalized interest: Interest is capitalized on the cost of unevaluated gas and oil properties that are excluded from amortization and actively being evaluated, if any, as well as on work in process relating to gathering systems that are not currently in service.

(r) Capital cost accrual: The Company accrues for exploration and development costs in the period incurred, while payment may occur in a subsequent period.

(s) Reclassifications: Certain amounts in the financial statements of prior periods have been reclassified to conform to the current period financial statement presentation.

(t) Recent accounting pronouncements: In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (“ASU No. 2016-02”). The guidance requires that lessees will be required to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. The ASU also will require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative information. For public companies, the standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after Dec. 15, 2018 with earlier application permitted. The Company is still evaluating the impact of ASU No. 2016-02 on its financial position and results of operations.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU No. 2015-17”). The guidance eliminates the requirement to present deferred tax assets and liabilities as current and noncurrent amounts in a classified balance sheet. The new standard requires deferred tax assets and liabilities to be classified as noncurrent. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period and may be applied either prospectively or retrospectively to all periods presented. The Company has elected early adoption of ASU No. 2015-17 and has applied these changes prospectively. The adoption of this guidance has no impact on our results of operations or cash flows. The reclassification of amounts from current to noncurrent affects presentation of our financial position. See Note 9 for additional information.

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory (“ASU No. 2015-11”). Public companies will have to apply the amendments for reporting periods that start after December 15, 2016, including interim periods within those fiscal years. This ASU requires an entity to measure inventory at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company does not expect the adoption of ASU No. 2015-11 to have a material impact on its consolidated financial statements.

In April 2015, the FASB issued an amendment to U.S. GAAP to simplify the balance sheet presentation of the costs for issuing debt. The changes were adopted in ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU No. 2015-3”). Public companies will have to apply the amendments for reporting periods that start after December 15, 2015. The amendment requires adoption by revising the balance sheets for periods prior to the effective date, which makes it easier for investors to evaluate a company’s financial performance. The amendment to FASB ASC 835-30-45, Interest—Imputation of Interest, formerly Accounting Principles Board Opinion No. 21, means that the costs for issuing debt will appear on the balance sheet as a direct deduction of debt. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.

In June 2015, the FASB issued a delay by one year of the revenue recognition standard adopted in June 2014. In June 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU No. 2014-09”), which amends the FASB ASC by adding new FASB ASC Topic 606, Revenue from Contracts with Customers, and superseding the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. ASU No. 2014-09 provides new guidance concerning recognition and measurement of revenue and requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from contracts with customers. The new proposal related to ASU No. 2014-09 delays the application of the standard to reporting periods beginning after December 15, 2017 instead of December 15, 2016. The Company is still evaluating the impact of ASU No. 2014-09 on its financial position and results of operations.

In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”) that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. ASU No. 2014-15 becomes effective for annual periods beginning in 2016 and for interim reporting periods starting in the first quarter of 2017. The Company does not expect the adoption of this ASU to have a material impact on its consolidated financial statements.