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production basis. Successful drilling costs, costs of development and developmental dry holes are capitalized and amortized over the
proved developed reserves on a units-of-production basis. When circumstances indicate that proved oil and gas properties may be
impaired, we compare expected undiscounted future cash flows at a depreciation, depletion and amortization group level to the
unamortized capitalized cost of the asset. If the expected undiscounted future cash flows, based on our estimate of future crude oil and
natural gas prices, operating costs, anticipated production from proved reserves and other relevant data, are lower than the
unamortized capitalized cost, the capitalized cost is reduced to fair value. Fair value is generally calculated using the Income
Approach described in the Fair Value Measurement Topic of the ASC. Significant unproved leasehold costs are capitalized and are not
amortized, pending an evaluation of their exploration potential. Unproved leasehold costs are assessed on an individual basis
periodically to determine if an impairment of the cost of individual properties has occurred. Factors taken into account for impairment
analysis include results of the technical studies conducted, lease terms and management’s future exploration plans. The cost of
impairment is charged to expense in the period in which it occurs. Costs incurred for exploration dry holes, geological, and
geophysical work (including the cost of seismic data), and delay rentals are charged to expense as incurred. Costs of other property
and equipment are depreciated on a straight-line basis based on their respective useful lives.
Inventory.
Inventories consist of various tubular products that will be used in our drilling programs. The inventory is stated at
the average cost. Cost is determined using a weighted average method comprised of the purchase price and other directly attributable
costs.
Income Taxes.
We apply the liability method of accounting for income taxes
.
Under this method, deferred tax assets and
liabilities are determined by applying tax rates in effect at the end of a reporting period to the cumulative temporary differences
between the tax bases of assets and liabilities and their reported amounts in the financial statements. Since we are in development
stage and there can be no assurance that we will generate any earnings or any specific level of earnings in future years, we establish a
valuation allowance for deferred tax assets (net of liabilities).
Use of Estimates.
The preparation of our consolidated financial statements in conformity with United States Generally
Accepted Accounting Principles requires us to make estimates and assumptions that impact our reported assets and liabilities,
disclosure of contingent assets and liabilities at the date of our consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant estimates include: (i) accruals related to expenses, (ii) assumptions used in
estimating fair value of equity-based awards and the fair value of the liability component of the convertible senior notes and
(iii) assumptions used in impairment testing. Although we believe these estimates are reasonable, actual results could differ from these
estimates.
Estimates of Proved Oil & Natural Gas Reserves.
Reserve quantities and the related estimates of future net cash flows affect
our periodic calculations of depletion and impairment of our oil and natural gas properties. Proved oil and natural gas reserves are the
estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future periods from known reservoirs under existing economic and operating conditions. As
of December 31, 2015, we have proved undeveloped reserves in the U.S. Gulf of Mexico. Estimated reserve quantities and future cash
flows were estimated by independent petroleum consultants and prepared in accordance with guidelines established by the SEC and
the Financial Accounting Standards Board. The accuracy of these reserve estimates is a function of:
•
the quality and quantity of available data and the engineering and geological interpretation of that data;
•
estimates regarding the amount and timing of future operating cost, severance taxes, development cost and workover
cost, all of which may in fact vary considerably from actual results;
•
the accuracy of various mandated economic assumptions (such as the future prices of oil and natural gas); and
•
the judgments of the persons preparing the estimates.
Asset Retirement Obligations.
The Company expects to have significant obligations under its lease agreements and federal
regulation to remove its equipment and restore land or seabed at the end of oil and natural gas production operations. These asset
retirement obligations (“ARO”) are primarily associated with plugging and abandoning wells and removing and disposing of offshore
oil and natural gas platforms. Estimating the future restoration and removal cost is difficult and requires us to make estimates and
judgments because most of the removal obligations are many years in the future and contracts and regulation often have vague
descriptions of what constitutes removal. Asset removal technologies and cost are constantly changing, as are regulatory, political,
environmental, safety and public relations considerations. We record a separate liability for the discounted present value of our asset
retirement obligations, with an offsetting increase to the related oil and natural gas properties. The cost of the related oil and natural
gas asset, including the asset retirement cost, is depreciated over the useful life of the asset. The asset retirement obligation is recorded
at its estimated fair value, measured by reference to the expected future cash outflows required to satisfy the retirement obligation
