Quarterly report pursuant to Section 13 or 15(d)

CRUDE OIL AND NATURAL GAS PROPERTIES

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CRUDE OIL AND NATURAL GAS PROPERTIES
9 Months Ended
Sep. 30, 2013
CRUDE OIL AND NATURAL GAS PROPERTIES [Abstract]  
CRUDE OIL AND NATURAL GAS PROPERTIES
NOTE 3 CRUDE OIL AND NATURAL GAS PROPERTIES

The value of the Company's crude oil and natural gas properties consists of all acreage acquisition costs (including cash expenditures and the value of stock consideration), drilling costs and other associated capitalized costs. Acquisitions are accounted for as purchases and, accordingly, the results of operations are included in the accompanying statements of comprehensive income from the closing date of the acquisition. Purchase prices are allocated to acquired assets based on their estimated fair value at the time of the acquisition. In the past, acquisitions have been funded with internal cash flow, bank borrowings and the issuance of equity securities. Purchases of properties and development capital expenditures that were in accounts payable and not yet paid in cash at September 30, 2013 and December 31, 2012 were approximately $136.4 million and $91.8 million, respectively.

Acquisitions

For the nine months ended September 30, 2013, the Company acquired approximately 17,854 net mineral acres, for an average cost of approximately $1,234 per net acre, in its key prospect areas in the form of effective leases. During the same period, the Company separately acquired working interests in 56 gross (5.5 net) wells, in which it does not hold the underlying leasehold interests, for a total cost of approximately $7.3 million (which excludes the estimated drilling and completion costs for these wells).

For the nine months ended September 30, 2012, the Company acquired or earned through farm-in arrangements approximately 21,153 net mineral acres, for an average cost of approximately $1,913 per net acre, in its key prospect areas in the form of effective leases.

Unproved Properties

Unproved properties not being amortized comprise approximately 64,500 net acres of undeveloped leasehold interests at September 30, 2013 and December 31, 2012. The Company believes that the majority of its unproved costs will become subject to depletion within the next five years by proving up reserves relating to the acreage through exploration and development activities, by impairing the acreage that will expire before the Company can explore or develop it further or by determining that further exploration and development activity will not occur. The timing by which all other properties will become subject to depletion will be dependent upon the timing of future drilling activities and delineation of its reserves.

Excluded costs for unproved properties are accumulated by year. Costs are reflected in the full cost pool as the drilling costs are incurred or as costs are evaluated and deemed impaired. The Company anticipates these excluded costs will be included in the depletion computation over the next five years. The Company is unable to predict the future impact on depletion rates.

All properties that are not classified as proved properties are considered unproved properties and, thus, the costs associated with such properties are not subject to depletion. Once a property is classified as proved, all associated acreage and drilling costs are subject to depletion. At September 30, 2013 and December 31, 2012, the amounts of capitalized costs excluded from depletion were $85.1 million and $82.9 million, respectively.

The Company historically has acquired its properties by purchasing individual or small groups of leases directly from mineral owners or from landmen or lease brokers, which leases historically have not been subject to specified drilling projects, and by purchasing lease packages in identified project areas controlled by specific operators. The Company generally participates in drilling activities on a heads up basis by electing whether to participate in each well on a well-by-well basis at the time wells are proposed for drilling, with the exception of the defined drilling projects with Slawson Exploration Company, Inc. described below.

As of September 30, 2013, the Company was participating in three defined drilling projects with Slawson Exploration Company, Inc., with participation interests ranging between 4.5% and 50%, covering an aggregate of approximately 19,600 net acres of leasehold interests held by the Company. The areas cover the Windsor project area (4.5% participation interest), which includes approximately 2,100 net acres held by the Company, primarily located in Mountrail and surrounding counties of North Dakota. The South West Big Sky project (20% participation interest) includes approximately 5,500 total net acres held by the Company in Richland County, Montana. The Lambert project (50% participation interest) includes approximately 12,000 net acres held by the Company in Richland County, Montana.