Oil and Natural Gas Properties, Buildings and Equipment

Oil and natural gas properties, buildings and equipment consist of the following:



	Year Ended December 31,
(in thousands)	2012			2011
Oil and natural gas:
Proved properties(1)	$	4,060,106		$	3,257,321
Unproved properties(2)	236,626			228,486
	4,296,732			3,485,807
Less accumulated depreciation, depletion and amortization	(1,180,298		)	(962,154		)
	3,116,434			2,523,653
Commercial and other:
Machinery, drilling rigs and equipment	18,131			22,509
Buildings and improvements	10,110			6,894
Vehicles	9,167			7,806
	37,408			37,209
Less accumulated depreciation	(25,340		)	(29,469		)
	12,068			7,740
	$	3,128,502		$	2,531,393

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(1)	Includes cogeneration facilities.

(2)

Unproved properties includes acquisition costs for properties to which proved developed producing and proved undeveloped reserves are also attributed. At December 31, 2012, unproved properties included $25.2 million of acquisition costs for unevaluated properties. The Company assesses these properties annually and recorded impairments of $0.1 million, $0.6 million and $0.0 million for the years ended December 31, 2012, 2011 and 2010, respectively.

Impairment of Oil and Natural Gas Properties

The Company reviews its oil and natural gas properties for impairment whenever events or circumstances indicate that their carrying values may not be recoverable. During the years ended December 31, 2012, 2011 and 2010, the Company recorded impairments of oil and natural gas properties of $0.1 million, $625.6 million and $0.0 million, respectively.

In the fourth quarter of 2011, the Company recorded a non-cash impairment of $625.0 million related to its E. Texas natural gas properties. The impairment was due to decreases in natural gas prices and, as a result, changes in the Company's development plans. In the fourth quarter of 2011, the NYMEX Henry Hub (HH) five-year future strip (the average of the settlement prices of the next 60 months' futures contracts) decreased approximately 15%. The carrying value of the Company's E. Texas assets prior to the impairment was $739.3 million. The factors used to determine fair value include, but are not limited to, estimates of reserves, future commodity prices, future production estimates, estimated future capital expenditures and discount rates commensurate with the risk associated with realizing the projected cash flows. Given the unobservable nature of these inputs, the nonrecurring fair value measurement of the E. Texas properties is deemed to use Level 3 inputs.

If natural gas prices continue to decrease, the estimated undiscounted future cash flows of the Company's proved natural gas properties may not exceed the carrying value and a non-cash impairment charge may be required to be recognized in future periods.

Dry Hole, Abandonment and Impairment

The Company recorded dry hole, abandonment and impairment charges of $19.0 million, $5.2 million and $1.5 million in 2012, 2011 and 2010, respectively. In 2012, the Company recorded dry hole expense of $11.9 million related to its four appraisal wells in Borden county, whose results were inconclusive for commercial quantities of oil, and $2.8 million related to mechanical failure on one well near Lake Canyon, which was abandoned in favor of drilling a nearby replacement well. The Company also recorded approximately $4.1 million in 2012 related to plugging and abandonment activities.

In 2011, the Company recorded an impairment of its drilling rigs of $4.3 million. In the fourth quarter of 2011, the Company decided to sell its three drilling rigs. As a result, the Company reduced the rigs' carrying value of $5.7 million to $1.4 million, consisting of the rigs' fair value less costs to sell. The fair value of the rigs is included in oil and natural gas properties (successful efforts basis), buildings and equipment, net on the Company's Balance Sheets at December 31, 2011. The fair value of the drilling rigs was determined using a market approach, considering comparative market data. Given the unobservable nature of these inputs, the nonrecurring fair value measurement of the drilling rigs is deemed to use Level 3 inputs. All three of the Company's drilling rigs were sold in the third quarter of 2012 for $1.8 million, which, less costs to sell of $0.2 million, resulted in a gain of $0.2 million.

In 2010, the Company recorded dry hole, abandonment and impairment expense primarily due to a mechanical failure encountered on one well in the Piceance. The well was abandoned in favor of drilling a replacement well from the same well pad.

Capitalized Interest

Acquisition costs of proved undeveloped and unproved properties qualify for interest capitalization during a period if interest cost is incurred and activities necessary to bring the properties into a productive state are in progress. As wells are drilled in a field with proved undeveloped or unproved reserves, a portion of the acquisition costs are either re-designated as proved developed or expensed, as appropriate. In fields with multiple potential drilling sites, the Company determines the amount of the acquisition cost to re-designate or expense through a systematic and rational basis that considers the total expected wells to be drilled in that field.

During 2012, the Company capitalized interest on its Permian asset, as development activities were ongoing. During 2011, the Company capitalized interest on its Piceance asset for the first half of 2011 and on its Permian asset for all of 2011, as development activities were ongoing. During 2010, the Company capitalized interest on its Piceance and Permian assets, as development activities were ongoing. In the future, interest capitalization on acquisition costs will depend on whether or not development activities are ongoing. Development activities consist primarily of drilling wells and installing the necessary equipment for production to commence. Interest capitalization ceases when the wells have been completed. Interest cost is capitalized as a component of property cost for development projects that require greater than six months to be readied for their intended use.