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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2013

Summary of Significant Accounting Policies [Abstract]

The accompanying consolidated financial statements include the accounts of Adams Resources & Energy, Inc., a Delaware corporation (‟ARE”) together with its wholly owned subsidiaries (the ‟Company”) after elimination of all intercompany accounts and transactions. The impact on the accompanying financial statements of events occurring after December 31, 2013 were evaluated through the date of issuance of these financial statements.

Nature of Operations

The Company is engaged in the business of crude oil marketing, tank truck transportation of liquid chemicals, and oil and gas exploration and production. Its primary area of operation is within a 1,000 mile radius of Houston, Texas.

Cash and Cash Equivalents

Cash and cash equivalents include any Treasury bill, commercial paper, money market fund or federal funds with maturity of 90 days or less. Depending on cash availability and market conditions, investments in corporate and municipal bonds, which are classified as investments in marketable securities, may also be made from time to time. Cash and cash equivalents are maintained with major financial institutions and such deposits may exceed the amount of federally backed insurance provided. While the Company regularly monitors the financial stability of such institutions, cash and cash equivalents ultimately remain at risk subject to the financial viability of such institutions.

Marketable Securities

From time to time, the Company may invest in marketable securities consisting of investment grade corporate bonds traded in liquid markets. Such bonds are held for the purpose of investing in liquid funds and are not generally intended to be retained on a long term basis. Marketable securities are initially recognized at acquisition costs inclusive of transaction costs and are classified as trading securities. In subsequent periods, marketable securities are valued at fair value. Changes in these fair values are recognized as gains or losses in the accompanying statement of operations under the caption ‟Costs and Expenses – Marketing”. Interest on marketable securities is recognized directly in the statement of operations during the period earned.

Allowance for Doubtful Accounts

Accounts receivable result from sales of crude oil, natural gas and trucking services. Marketing business wholesale level sales of crude oil comprise in excess of 90 percent of accounts receivable and under industry practices, such items are ‟settled” and paid in cash within 20 days of the month following the transaction date. For such receivables, an allowance for doubtful accounts is determined based on specific account identification. The balance of accounts receivable results primarily from sales of trucking services. For this component of receivables, the allowance for doubtful accounts is determined based on a review of specific accounts combined with a review of the general status of the aging of all accounts.

Inventories

Inventory consists of crude oil held in storage tanks and at third-party pipelines as part of the Company’s crude oil marketing operations. Crude oil inventory is carried at the lower of average cost or market.

Prepayments

The components of prepayments and other are as follows (in thousands):

	December 31,
	2013		2012
Cash collateral deposits for commodity purchases	$	13,705	$	5,000
Insurance premiums		2,490		1,872
Rents, license and other		584		840
	$	16,779	$	7,712

Property and Equipment

Expenditures for major renewals and betterments are capitalized, and expenditures for maintenance and repairs are expensed as incurred. Interest costs incurred in connection with major capital expenditures are capitalized and amortized over the lives of the related assets. When properties are retired or sold, the related cost and accumulated depreciation, depletion and amortization is removed from the accounts and any gain or loss is reflected in earnings.

Oil and gas exploration and development expenditures are accounted for in accordance with the successful efforts method of accounting. Direct costs of acquiring developed or undeveloped leasehold acreage, including lease bonus, brokerage and other fees, are capitalized. Exploratory drilling costs are initially capitalized until the properties are evaluated and determined to be either productive or nonproductive. Such evaluations are made on a quarterly basis. If an exploratory well is determined to be nonproductive, the costs of drilling the well are charged to expense. Costs incurred to drill and complete development wells, including dry holes, are capitalized. As of December 31, 2013, the Company had no unevaluated or suspended exploratory drilling costs.

Depreciation, depletion and amortization of the cost of proved oil and gas properties is calculated using the unit-of-production method. The reserve base used to calculate depreciation, depletion and amortization for leasehold acquisition costs and the cost to acquire proved properties is the sum of proved developed reserves and proved undeveloped reserves. For lease and well equipment, development costs and successful exploration drilling costs, the reserve base includes only proved developed reserves. All other property and equipment is depreciated using the straight-line method over the estimated average useful lives of three to twenty years.

The Company reviews its long-lived assets for impairment whenever there is evidence that the carrying value of such assets may not be recoverable. Any impairment recognized is permanent and may not be restored. Producing oil and gas properties are reviewed on a field-by-field basis. For properties requiring impairment, the fair value is estimated based on an internal discounted cash flow model. Cash flows are developed based on estimated future production and prices and then discounted using a market based rate of return consistent with that used by the Company in evaluating cash flows for other assets of a similar nature. For the years ended December 31, 2013, 2012 and 2011, there were $1,373,000, $4,699,000 and $7,105,000 respectively, of impairment provisions on producing oil and gas properties.

Fair value measurements for producing oil and gas properties that were subject to fair value impairment for the years ended December 31, 2013 and 2012 summarized as follows (in thousands):



	Producing Properties Subject to Fair Value Impairment
	2013			2012
Net book value at January 1	$	13,180		$	11,073
Property additions		5,661			13,083
Depletion taken		(3,727	)		(6,371	)
Impairment valuation loss		(1,373	)		(4,699	)
Net book at December 31	$	13,741		$	13,086

Fair value measurements for producing oil and gas properties are based on Level 3 – Significant Unobservable Inputs – (see “Fair Value Measurements” below).

On a quarterly basis, management evaluates the carrying value of non-producing oil and gas leasehold properties and may deem them impaired based on remaining lease term, area drilling activity and the Company’s plans for the property. This fair value measure depends highly on management’s assessment of the likelihood of continued exploration efforts in a given area and, as such, data inputs are categorized as ‟unobservable or Level 3” inputs. Importantly, this fair value measure only applies to the write-down of capitalized costs and will never result in an increase to reported earnings. Accordingly, impairment provisions on non-producing properties totaling $1,257,000, $856,000 and $7,644,000 were recorded for the years ending December 31, 2013, 2012 and 2011, respectively. Capitalized costs for non-producing oil and gas leasehold interests currently represent approximately five percent of total oil and gas property costs and are categorized as follows (in thousands):

	December 31,		December 31,
	2013		2012

South Texas Project acreage	$	4,217	$	3,263
West Texas Project		116		180
Napoleonville Louisiana acreage		162		323
Other acreage areas		411		329

Total Non-producing Leasehold Costs	$	4,906	$	4,095

The South Texas, West Texas and Napoleonville acreage areas have active or scheduled drilling operations underway and holding the underlying acreage is essential to the ongoing exploration effort. The ‟Other Acreage Areas” category consists of smaller onshore interests dispersed over a wide geographical area. Since the Company is generally not the operator of its oil and gas property interests, it does not maintain underlying detail acreage data and is dependent on the operator when determining which specific acreage will ultimately be drilled. However, the capitalized cost detail on a property-by-property basis is reviewed by management and deemed impaired if development is not anticipated prior to lease expiration. Onshore leasehold periods are normally three years and may contain renewal options. Capitalized cost activity on the ‟Other Acreage Areas” was as follows (in thousands):

	Leasehold Costs
	2013			2012
Net book value January 1	$	329		$	475
Property additions		304			810
Property sale		-			(100	)
Impairments		(222	)		(856	)

Net book value December 31	$	411		$	329

During 2012, the Company sold half of its interest in certain non-producing Kansas oil and gas properties. Proceeds from the sale totaled $578,000 and the Company recorded a $475,000 pre-tax gain from this sale. Also during 2012, the Company sold its interest in two oil and gas producing property units for total proceeds of $3,049,000. The Company realized a $1,728,000 pre-tax gain from these two sales. In January 2011, the Company completed the sale of its interest in certain producing oil and gas properties located in the on-shore Gulf Coast region of Texas. Proceeds from the 2011 sale totaled $6.2 million and the pre-tax gain totaled $2,708,000. Also during 2011, the Company sold a portion of its interest in certain non-producing oil and gas properties located in West Texas for $329,000 with a $125,000 pre-tax gain from this transaction.

During 2013, 2012 and 2011, the Company sold certain used trucks and equipment from its marketing and transportation segments and recorded pre-tax gains totaling $372,000, $2,482,000 and $1,246,000, respectively.

Cash Deposits and Other Assets

The Company has established certain deposits to support participation in its liability insurance program and remittance of state crude oil severance taxes and other state collateral deposits. Insurance collateral deposits are invested at the discretion of the Company’s insurance carrier and such investments primarily consist of intermediate term federal government bonds and bonds backed by federal agencies. Components of cash deposits and other assets are as follows (in thousands):

	December 31,
	2013		2012
Insurance collateral deposits	$	3,718	$	3,413
State collateral deposits		160		170
Materials and supplies		609		616
	$	4,487	$	4,199

Revenue Recognition

Commodity purchase and sale contracts utilized by the Company’s marketing business generally qualify as derivative instruments with certain specifically identified crude oil contracts designated as trading activities. From the time of contract origination, such trading activity contracts are marked-to-market and recorded on a net revenue basis in the accompanying consolidated financial statements.

Most all crude oil purchase and sale contracts qualify and are designated as non-trading activities and the Company considers such contracts as normal purchases and sales activity. For normal purchases and sales the Company’s customers are invoiced monthly based upon contractually agreed upon terms with revenue recognized in the month in which the physical product is delivered to the customer. Such sales are recorded gross in the financial statements because the Company takes title, has risk of loss for the products, is the primary obligor for the purchase, establishes the sale price independently with a third party, and maintains credit risk associated with the sale of the product.

Certain crude oil contracts may be with a single counterparty to provide for similar quantities of crude oil to be bought and sold at different locations. These contracts are entered into for a variety of reasons, including effecting the transportation of the commodity, to minimize credit exposure, and/or to meet the competitive demands of the customer. Such buy/sell arrangements are reflected on a net revenue basis in the accompanying consolidated financial statements. Reporting such crude oil contracts on a gross revenue basis would increase the Company’s reported revenues by $1,602,626,000, $1,381,352,000 and $1,812,561,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

Transportation segment customers are invoiced, and the related revenue is recognized, as the service is provided. Oil and gas revenue from the Company’s interests in producing wells is recognized as title and physical possession of the oil and gas passes to the purchaser.

Letter of Credit Facility

The Company maintains a Credit and Security Agreement with Wells Fargo Bank to provide a $60 million stand-by letter of credit facility that is used to support the Company’s crude oil purchases within the marketing segment. This facility is collateralized by the eligible accounts receivable within the segment and certain marketing and transportation equipment. Stand-by letters of credit issued totaled $14.6 million and $21.9 million as of December 31, 2013 and 2012, respectively. The issued stand-by letters of credit are cancelled as the underlying purchase obligations are satisfied by cash payment when due. The letter of credit facility places certain restrictions on the Company’s Gulfmark Energy, Inc. subsidiary. Such restrictions included the maintenance of a combined 1.1 to 1.0 current ratio and the maintenance of positive net earnings excluding inventory valuation changes, as defined, among other restrictions. The Company is currently in compliance with all such financial covenants.

Statement of Cash Flows

Interest paid totaled $24,000, $10,000 and $8,000 during the years ended December 31, 2013, 2012 and 2011, respectively. Income taxes paid during these same periods totaled $9,949,000, $12,650,000, and $5,597,000, respectively. In addition, State and Federal income tax refunds totaled $4,000, $10,000 and $2,743,000 in 2013, 2012 and 2011, respectively. Non-cash investing activities for property and equipment items included in accounts payable as of period end were $1,507,000, $2,419,000 and $4,070,000 as of December 31, 2013, 2012 and 2011, respectively. There were no significant non-cash financing activities in any of the periods reported.

Earnings Per Share

Earnings per Share

Earnings per share are based on the weighted average number of shares of common stock and potentially dilutive common stock shares outstanding during the period. The weighted average number of shares outstanding was 4,217,596 for 2013, 2012 and 2011. There were no potentially dilutive securities during those periods.

Share-Based Payments

During the periods presented herein, the Company had no stock-based employee compensation plans, nor any other share-based payment arrangements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of 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. Examples of significant estimates used in the accompanying consolidated financial statements include the oil and gas reserve volumes that form the foundation for calculating depreciation, depletion and amortization and estimating cash flows to assess impairment triggers and estimated values associated with oil and gas properties. Other examples include revenue accruals, the provision for bad debts, insurance related accruals, income tax permanent and timing differences, contingencies, and valuation of fair value contracts.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis (see Note 2).

Use of Derivative Instruments

The Company’s marketing segment is involved in the purchase and sale of crude oil. The Company seeks to make a profit by procuring this commodity as it is produced and then delivering the material to end users or the intermediate use marketplace. As is typical for the industry, such transactions are made pursuant to the terms of forward month commodity purchase and/or sale contracts. Certain of these contracts meet the definition of a derivative instrument and therefore, the Company accounts for such contracts at fair value, unless the normal purchase and sale exception is applicable. Such underlying contracts are standard for the industry and are the governing document for the Company’s crude oil wholesale distribution businesses. The accounting methodology utilized by the Company for its commodity contracts is further discussed below under the caption ‟Fair Value Measurements”.

None of the Company’s derivative instruments have been designated as hedging instruments and the estimated fair value of forward month commodity contracts (derivatives) is reflected in the accompanying Consolidated Balance Sheet as of December 31, 2013 as follows (in thousands):

	Balance Sheet Location and Amount
	Current			Other		Current			Other
	Assets			Assets		Liabilities			Liabilities
Asset Derivatives
- Fair Value Commodity
Contracts at Gross Valuation	$	449		$	-	$	-		$	-
Liability Derivatives
- Fair Value Commodity
Contracts at Gross Valuation		-			-		54			-
Less Counterparty Offsets		(54	)		-		(54	)		-
As Reported Fair Value Contracts	$	395		$	-	$	-		$	-

As of December 31, 2013, one 100,000 barrel crude oil commodity put option and one commodity purchase and sale contract comprised the Company’s derivative valuations. The purchase and sale contract encompasses approximately 175 barrels of crude oil per day in each of January and February 2014.

Forward month commodity contracts (derivatives) are reflected in the accompanying Consolidated Balance Sheet as of December 31, 2012 as follows (in thousands):

	Balance Sheet Location and Amount
	Current			Other		Current			Other
	Assets			Assets		Liabilities			Liabilities
Asset Derivatives
- Fair Value Commodity
Contracts at Gross Valuation	$	354		$	-	$	-		$	-
Liability Derivatives
- Fair Value Commodity
Contracts at Gross Valuation		-			-		381			-
Less Counterparty Offsets		(270	)		-		(270	)		-
As Reported Fair Value Contracts	$	84		$	-	$	111		$	-

As of December 31, 2012, three commodity purchase and sales contracts comprised substantially all of the Company’s derivative valuations. Such contracts encompassed the purchase and sale of approximately 900 barrels of crude oil per day in January 2013 and continuing at 200 barrels per day through June 2013.

The Company only enters into commodity contracts with creditworthy counterparties or obtains collateral support for such activities. As of December 31, 2013 and 2012, the Company was not holding nor had it posted any collateral to support its forward month fair value derivative activity. The Company is not subject to any credit-risk related trigger events. The Company has no other financial investment arrangements that would serve to offset its derivative contracts.

Forward month commodity contracts (derivatives) are reflected in the accompanying Consolidated Statement of Operations for the years ended December 31, 2013, 2012 and 2011 as follows (in thousands):

	Gain (Loss)
Location	2013			2012			2011
Revenues – marketing	$	(193	)	$	(1,365	)	$	119

Fair Value Measurements

The carrying amount reported in the consolidated balance sheet for cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of the immediate or short-term maturity of these financial instruments. Marketable securities are recorded at fair value based on market quotations from actively traded liquid markets.

Fair value contracts consist of derivative financial instruments and are recorded as either an asset or liability measured at fair value. Changes in fair value are recognized immediately in earnings unless the derivatives qualify for, and the Company elects, cash flow hedge accounting. The Company had no contracts designated for hedge accounting during any reporting periods.

Fair value estimates are based on assumptions that market participants would use when pricing an asset or liability and the Company uses a fair value hierarchy of three levels that prioritizes the information used to develop those assumptions. Currently, for all items presented herein, the Company utilizes a market approach to valuing its contracts. On a contract by contract, forward month by forward month basis, the Company obtains observable market data for valuing its contracts. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data. The fair value hierarchy is summarized as follows:

Level 1 – quoted prices in active markets for identical assets or liabilities that may be accessed at the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. For Level 1 valuation of marketable securities, the Company utilizes market quotations provided by its primary financial institution and for the valuations of derivative financial instruments, the Company utilizes the New York Mercantile Exchange ‟NYMEX” for such valuations.

Level 2 – (a) quoted prices for similar assets or liabilities in active markets, (b) quoted prices for identical assets or liabilities but in markets that are not actively traded or in which little information is released to the public, (c) observable inputs other than quoted prices, and (d) inputs derived from observable market data. Source data for Level 2 inputs include information provided by the NYMEX, published price data and indices, third party price survey data and broker provided forward price statistics.

Level 3 – Unobservable market data inputs for assets or liabilities.

As of December 31, 2013, the Company’s fair value assets and liabilities are summarized and categorized as follows (in thousands):

	Market Data Inputs
	Gross Level 1		Gross Level 2			Gross Level 3		Counterparty
	Quoted Prices		Observable			Unobservable		Offsets			Total
Derivatives
- Current assets	$	-	$	449		$	-	$	(54	)	$	395
- Current liabilities		-		(54	)		-		54			-
Net Value	$	-	$	395		$	-	$	-		$	395

As of December 31, 2012, the Company’s fair value assets and liabilities are summarized and categorized as follows (in thousands):

	Market Data Inputs
	Gross Level 1		Gross Level 2			Gross Level 3		Counterparty
	Quoted Prices		Observable			Unobservable		Offsets			Total
Derivatives
- Current assets	$	-	$	354		$	-	$	(270	)	$	84
- Current liabilities		-		(381	)		-		270			(111	)
Net Value	$	-	$	(27	)	$	-	$	-		$	(27	)

When determining fair value measurements, the Company makes credit valuation adjustments to reflect both its own nonperformance risk and its counterparty’s nonperformance risk. When adjusting the fair value of derivative contracts for the effect of nonperformance risk, the impact of netting and applicable credit enhancements, such as collateral postings, thresholds, and guarantees are considered. Credit valuation adjustments utilize Level 3 inputs, such as credit scores to evaluate the likelihood of default by the Company or its counterparties. As of December 31, 2013 and 2012, credit valuation adjustments were not significant to the overall valuation of the Company’s fair value contracts. As a result, fair value assets and liabilities are included in their entirety in the fair value hierarchy.

The following table illustrates the factors impacting the change in the net value of the Company’s fair value contracts for the year ended December 31, 2013 (in thousands):

	Level 1		Level 2
	Quoted Prices		Observable			Total
Net Fair Value January 1,	$	-	$	(27	)	$	(27	)
- Net realized (gains) losses		-		27			27
- Option deposit		-		615			615
- Net unrealized gains (losses)		-		(220	)		(220	)
Net Fair Value December 31,	$	-	$	395		$	395

The following table illustrates the factors impacting the change in the net value of the Company’s fair value contracts for the year ended December 31, 2012 (in thousands):

	Level 1		Level 2
	Quoted Prices		Observable			Total
Net Fair Value January 1,	$	-	$	1,338		$	1,338
- Net realized (gains) losses		-		(1,338	)		(1,338	)
- Net unrealized gains (losses)		-		(27	)		(27	)
Net Fair Value December 31,	$	-	$	(27	)	$	(27	)

Asset Retirement Obligations

The Company records a liability for the estimated retirement costs associated with certain tangible long-lived assets. The estimated fair value of asset retirement obligations are recorded in the period in which they are incurred and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period, and the capitalized cost is depreciated over the useful life of the asset or the units of production associated with the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. A summary of the Company’s asset retirement obligations is presented as follows (in thousands):

	2013			2012
Balance on January 1,	$	1,886		$	1,568
-Liabilities incurred		431			358
-Accretion of discount		85			63
-Liabilities settled		(138	)		(103	)
-Revisions to estimates		300			-
Balance on December 31,	$	2,564		$	1,886

In addition to an accrual for asset retirement obligations, the Company maintains $75,000 in escrow cash, which is legally restricted for the potential purpose of settling asset retirement costs in accordance with certain state regulations. Such cash deposits are included in other assets in the accompanying consolidated balance sheet.

Recent Accounts Pronouncement

In December 2011, the Financial Accounting Standards Board (‟FASB”) issued ASU 2011-11. This update requires additional disclosures about an entity’s right of setoff and related arrangements associated with its financial and derivative instruments. The ASU requires a tabular presentation that reflects the gross, net and setoff amounts associated with such assets and liabilities among other requirements. The Company adopted ASU 2011-11 effective January 1, 2013 and the adoption of ASU 2011-11 did not have a material impact on the Company’s consolidated financial statements, but additional disclosures regarding fair value measurements resulted.

Management believes the impact of other recently issued standards and updates, which are not yet effective, will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows upon adoption.