5. Property and Equipment

	March 31, 2013			December 31, 2012
	(in thousands)
Oil and gas properties, on the basis of full-cost accounting:
Proved properties	$	1,667,293		$	1,522,723
Unevaluated properties	301,609			313,941
Other property and equipment	5,601			5,038
Less accumulated depreciation, depletion, and amortization	(316,270		)	(274,294		)
Net property and equipment	$	1,658,233		$	1,567,408

Oil and Gas Properties

The Company uses the full-cost method of accounting for its exploration and development activities. Under this method of accounting, the cost of both successful and unsuccessful exploration and development activities are capitalized as property and equipment. 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. For the three months ended March 31, 2013, the Company capitalized $1.5 million of internal costs to oil and gas properties. Proceeds from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless a significant portion of the Company’s reserve quantities are sold that results in a significant alteration of the relationship between capitalized costs and remaining proved reserves, in which case a gain or loss is generally recognized in income.

Depreciation, depletion and amortization is calculated using the Units of Production Method (“UOP”). The UOP calculation, multiplies the percentage of estimated proved reserves produced by the cost of those reserves. The result is to recognize expense at the same pace that the reservoirs are estimated to be depleting. The amortization base in the UOP calculation includes the sum of proved property costs net of accumulated depreciation, depletion and amortization (“DD&A”), estimated future development costs (future costs to access and develop proved reserves) and asset retirement costs that are not already included in oil and gas property, less related salvage value. For the three months ended March 31, 2013 and 2012, depletion expense related to oil and gas properties was $41.6 million and $27.9 million, respectively, and $28.51 and $37.10 per Boe, respectively.

Unevaluated Property

Oil and gas unevaluated properties and properties under development include costs that are not being depleted or amortized. These costs represent investments in unproved properties. The Company excludes these costs until proved reserves are found, until it is determined that the costs are impaired or until major development projects are placed in service, at which time the costs are moved into oil and natural gas properties subject to amortization. All unproved property costs are reviewed at least quarterly to determine if impairment has occurred. Unevaluated property was $301.6 million at March 31, 2013 compared to $313.9 million at December 31, 2012, decreasing primarily due to continued development of the Company’s evaluated acreage.

Other Property and Equipment

Other property and equipment consists of vehicles, furniture and fixtures, and computer hardware and software and are carried at cost. Depreciation is provided principally using the straight-line method over the estimated useful lives of the assets, which range from five to seven years. Maintenance and repairs are charged to expense as incurred, while renewals and betterments are capitalized.

Ceiling Test

The Company performs a ceiling test on a quarterly basis. The test establishes a limit (ceiling) on the book value of oil and gas properties. The capitalized costs of oil and gas properties, net of accumulated DD&A and the related deferred income taxes, may not exceed this “ceiling.” The ceiling limitation is equal to the sum of: (i) the present value of estimated future net revenues from the projected production of proved oil and gas reserves, excluding future cash outflows associated with settling asset retirement obligations (“ARO”) accrued on the balance sheet, calculated using the average oil and natural gas sales price received by the Company as of the first trading day of each month over the preceding twelve months (such prices are held constant throughout the life of the properties) and a discount factor of 10%; (ii) the cost of unproved and unevaluated properties excluded from the costs being amortized; (iii) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; and (iv) related income tax effects. If capitalized costs exceed this ceiling, the excess is charged to expense in the accompanying consolidated statements of operations.

At March 31, 2013 and 2012, capitalized costs did not exceed the ceiling, and no impairment to oil and gas properties was required.

Eagle Property Acquisition—October 2012

On October 1, 2012, the Company closed on the Eagle Property Acquisition. The assets acquired include certain interests in producing oil and natural gas assets and unevaluated leasehold acreage in Oklahoma and Kansas and related hedging instruments. The Company’s results from operations include the results from the properties acquired in the Eagle Property Acquisition beginning October 1, 2012.

The following table presents unaudited pro forma information for the Company as if the Eagle Property Acquisition occurred on January 1, 2012:

	For the Three Months Ended March 31, 2012

Revenues and other	$	52,889
Net income (loss)	(14,134		)
Preferred stock dividends	6,500
Income (loss) attributable to common shareholders	$	(20,634	)
Net loss per common share - basic	N/A
Net loss per common share - diluted	N/A

The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Eagle Property Acquisition and are factually supportable. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition been completed on January 1, 2012. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations for the combined company. The unaudited pro forma consolidated results reflect the following pro forma adjustments:

· Adjustment to recognize incremental DD&A expense, using the UOP method, resulting from the purchase of the properties;

· Adjustment to recognize additional general and administrative expense as a result of the purchase of the properties;

· Adjustment to recognize the issuance of $600 million in aggregate principal amount of 10.75% senior unsecured notes due 2020, associated deferred financing cost amortization, and interest expense, net of amounts capitalized;

· Adjustment to recognize asset retirement obligation accretion on properties acquired;

· Adjustment to recognize a pro forma income tax provision;

· Adjustment to recognize dividends associated with the issuance of 325,000 shares of Series A Preferred Stock; and

· Elimination of transaction costs incurred in 2012 that are directly related to the transaction and do not have a continuing impact on the combined company’s operating results.