10-K 1 egn-12312014x10k.htm 10-K EGN-12.31.2014-10K


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K


x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 2014

o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ___ TO ___

Commission file number 1-7810
Energen Corporation
(Exact name of registrant as specified in its charter)
Alabama
 
63-0757759
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
605 Richard Arrington Jr. Boulevard North, Birmingham, Alabama 35203-2707
 
35203-2707
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code
(205) 326-2700

Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class

Name of Each Exchange on Which Registered
Common Stock, $0.01 par value

New York Stock Exchange

Securities Registered Pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES x NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO x

Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o

Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x Accelerated filer o Non-accelerated filer o Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO x

Aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2014: $6,440,598,008

Number of shares outstanding of the registrant’s common stock as of February 16, 2015: 72,991,974 shares

DOCUMENTS INCORPORATED BY REFERENCE
Energen Corporation Proxy Statement to be filed on or about March 18, 2015 (Part III, Item 10-14)



 
ENERGEN CORPORATION
2014 FORM 10-K ANNUAL REPORT
 
TABLE OF CONTENTS
 
 
 
 

Page
 
 
 
Industry Glossary
Cautionary Statement Regarding Forward-Looking Statements
 
 
 
 
PART I
 
Item 1.
Business
Item 1A.
Risk Factors
Item 1B.
Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Mine Safety Disclosures
 
 
 
 
PART II
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
 
 
Purchases of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operations
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and
 
 
Financial Disclosure
Item 9A.
Controls and Procedures
 
 
 
 
PART III
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and
 
 
Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
 
 
 
 
PART IV
 
 
 
 
Item 15.
Exhibits and Financial Statement Schedules
Signatures
 



2



INDUSTRY GLOSSARY
 
For a more complete definition of certain terms defined below, as well as other terms and concepts applicable to successful efforts accounting, please refer to Rule 4-10(a) of Regulation S-X, promulgated pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, each as amended.
 
 
Basis
The difference between the futures price for a commodity and the corresponding cash spot price. This commonly is related to factors such as product quality, location and contract pricing.
 
 
Basin Specific
A type of derivative contract whereby the contract’s settlement price is based on specific geographic basin indices.
 
 
Bbl
A standard barrel containing 42 United States gallons.
 
 
Bcf
One billion cubic feet of natural gas.
 
 
BOE
One barrel of oil equivalent, a standard conversion used to express oil and natural gas volumes on a comparable oil equivalent basis. Natural gas equivalents are determined under the relative energy content method by using the ratio of six Mcf of natural gas to one barrel of oil.
 
 
Cash Flow Hedge
The designation of a derivative instrument to reduce exposure to variability in cash flows from the forecasted sale of oil, natural gas liquids or natural gas production whereby the gains (losses) on the derivative transaction are anticipated to offset the losses (gains) on the forecasted sale.
 
 
Collar
A contractual arrangement that effectively establishes a price range between a floor and a ceiling for the underlying commodity. The purchaser bears the risk of fluctuation between the minimum (or floor) price and the maximum (or ceiling) price.
 
 
Development Costs
Costs necessary to gain access to, prepare and equip development wells in areas of proved reserves.
 
 
Development Well
A well drilled within the proved area of an oil or natural gas reservoir to the depth of a stratigraphic horizon known to be productive.
 
 
Downspacing
An increase in the number of available drilling locations as a result of a regulatory commission order.
 
 
Dry Well
An exploratory or a development well found to be incapable of producing either oil or natural gas in sufficient quantities to justify completion as an oil or natural gas well.
 
 
Exploration Expenses
Costs primarily associated with drilling unsuccessful exploratory wells in undeveloped properties or exploratory geological and geophysical activities.
 
 
Exploratory Well
A well drilled to find and produce oil or natural gas in an unproved area, to find a new reservoir in a field previously found to be productive of oil or natural gas in another reservoir, or to extend a known reservoir.
 
 
Futures Contract
An exchange-traded contractual arrangement to buy or sell a standard quantity and quality of a commodity at a specified future date and price. Such contracts offer liquidity and minimal credit risk exposure but lack the flexibility of swap contracts.
 
 
Hedging
The use of derivative commodity instruments such as futures, swaps, options and collars to help reduce financial exposure to commodity price volatility.
 
 
Gross Well or Acre
A well or acre in which a working interest is owned.
 
 
LIBOR
London Interbank Offered Rate.
 
 
MBbl
One thousand barrels of oil.
 
 
MBOE
One thousand BOE.
 
 
MBOE/d
One thousand BOE per day.
 
 
Mcf
One thousand cubic feet of natural gas.
 
 
MMBOE
One million BOE.
 
 
MMcf
One million cubic feet of natural gas.
 
 
MMcfe
One million cubic feet of natural gas equivalent.
 
 
MMgal
One million gallons of natural gas liquids.
 
 
Natural Gas Liquids (NGL)
Liquid hydrocarbons that are extracted and separated from the natural gas stream. NGL products include ethane, propane, butane, natural gasoline and other hydrocarbons.
 
 

3



Net Well or Acre
A net well or acre is deemed to exist when the sum of fractional ownership working interests in gross wells or acres equals one.
 
 
NYMEX
New York Mercantile Exchange.
 
 
Operational Enhancement
Any action undertaken to improve production efficiency of oil and natural gas wells and/or reduce well costs.
 
 
Operator
The company responsible for exploration, development and production activities for a specific project.
 
 
Pay-Add
An operation within a currently producing wellbore that attempts to access and complete an additional pay zone(s) while maintaining production from the existing completed zone(s).
 
 
Pay Zone
The stratigraphic horizon from which oil and natural gas is produced.
 
 
Production (Lifting) Costs
Costs incurred to operate and maintain wells.

 
 
Productive Well
An exploratory or a development well that is not a dry well.
 
 
Proved Developed Reserves
The portion of proved reserves which can be expected to be recovered through existing wells with existing equipment and operating methods.
 
 
Proved Reserves
Estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions.
 
 
Proved Undeveloped Reserves (PUD)
The portion of proved reserves which can be expected to be recovered from new wells on undrilled proved acreage or from existing wells where a relatively major expenditure is required for completion.
 
 
Recompletion
An operation within an existing wellbore whereby a completion in one pay zone is abandoned in order to attempt a completion in a different pay zone.
 
 
Proved Reserves-to-Production Ratio
Ratio expressing years of supply determined by dividing the remaining recoverable proved reserves at year end by actual annual production volumes. The reserve-to-production ratio is a statistical indicator with certain limitations, including predictive value. The ratio varies over time as changes occur in production levels and remaining recoverable proved reserves.
 
 
SEC
The United States Securities and Exchange Commission.
 
 
Service Well
A well employed for the introduction into an underground stratum of water, gas or other fluid under pressure or disposal of salt water produced with oil or other waste.
 
 
Sidetrack Well
A new section of wellbore drilled from an existing well.
 
 
Swap
A contractual arrangement in which two parties, called counterparties, effectively agree to exchange or “swap” variable and fixed rate payment streams based on a specified commodity volume. The contracts allow for flexible terms such as specific quantities, settlement dates and location but also expose the parties to counterparty credit risk.
 
 
Working Interest
Ownership interest in the oil and natural gas properties that is burdened with the cost of development and operation of the property.
 
 
Workover
A major remedial operation on a completed well to restore, maintain, or improve the well’s production such as deepening the well or plugging back to produce from a shallow formation.











4




CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
 
 
 
 

All statements, other than statements of historical fact, appearing in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are noted in Energen’s disclosure and analysis as permitted by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements about our expectations, beliefs, intentions or business strategies for the future, statements concerning our outlook with regard to timing and amount of future production of oil, natural gas liquids and natural gas, price realizations, nature and timing of capital expenditures for exploration and development, plans for funding operations and drilling program capital expenditures, timing and success of specific projects, operating costs and other expenses, proved oil and natural gas reserves, liquidity and capital resources, outcomes and effects of litigation, claims and disputes and derivative activities. In particular, forward-looking statements may include words such as “anticipate”, “believe”, “could”, “estimate”, “expect”, “forecast”, “foresee”, “intend”, “may”, “plan”, “potential”, “predict”, “project”, “seek”, “will” or other words or expressions concerning matters that are not historical facts. These statements involve certain risks and uncertainties that may cause actual results to differ materially from expectations as of the date of this filing.

Factors that could cause actual results to differ materially from those expressed or implied by forward-looking statements include, but are not limited to, the following:

volatility of oil, natural gas liquids and natural gas prices;
uncertainties about the estimates of our proved oil, natural gas liquids and natural gas reserves;
drilling risks;
risks associated with our concentration of operations in the Permian Basin of west Texas and New Mexico and the San Juan Basin in New Mexico and Colorado;
competition in the oil and natural gas industry;
the adequacy of our capital resources, access to financing and liquidity;
operational risks including risks of personal injury, property damage and environmental damage;
changes in the regulatory environment at the federal, state, or local level and our ability to comply with regulations promulgated by the various regulatory bodies;
changes in and the effects of environmental and other governmental regulation that applies to our operations, including new legislation or regulation of hydraulic fracturing, water use and disposal, permitting and other legal requirements;
instability in the domestic and global capital and credit markets;
financial strength of the purchasers of our oil and the counterparties to our derivative contracts;
changes in domestic and global economic and business conditions that impact the demand for oil, natural gas liquids and natural gas;
the availability, capacity and cost of oilfield equipment, pipeline and transportation facilities, gathering and processing facilities, supplies and services;
uncertainties about our ability to successfully execute our business and financial plans and strategies, including but not limited to our ability to economically develop our proved oil, natural gas liquids and natural gas reserves and to replace those reserves as scheduled as well our ability to project future rates of production and the timing of development expenditures;
the effectiveness of and our ability to use derivative instruments as part of our risk management activities;
the costs and effects of litigation; and
acts of nature, sabotage, terrorism or other malicious intentional acts (including cyber-attacks), war and other similar acts that disrupt operations or cause damage greater than covered by insurance.

See Item 1A, Risk Factors, for a discussion of risk factors that may affect Energen and cause material variances from forward-looking statement expectations. The Item 1A, Risk Factors, discussion is incorporated by reference into this forward-looking statement disclosure.

5





Except as otherwise disclosed, the forward-looking statements do not reflect the impact of possible or pending acquisitions, investments, divestitures or restructurings. The absence of errors in input data, calculations and formulas used in estimates, assumptions and forecasts cannot be guaranteed. We base our forward-looking statements on information currently available to us, and we undertake no obligation to update or revise any of these statements, whether as a result of changes in underlying factors, new information, future events or other developments.







6




PART I

ITEM 1.    BUSINESS

General

Energen Corporation (Energen or the Company) is an oil and natural gas exploration and production company engaged in the exploration, development and production of oil and natural gas liquids-rich properties and natural gas in the Permian Basin in west Texas and the San Juan Basin in New Mexico and Colorado. Headquartered in Birmingham, Alabama, our operations are conducted through our subsidiary, Energen Resources Corporation (Energen Resources).

Prior to September 2, 2014, Energen owned Alabama Gas Corporation (Alagasco), which was engaged in the purchase, distribution and sale of natural gas principally in central and north Alabama. On September 2, 2014, Energen completed the transaction to sell Alagasco to The Laclede Group, Inc. (Laclede) for $1.6 billion, less the assumption of $267 million in debt. The net pre-tax proceeds to Energen totaled approximately $1.32 billion resulting in a pre-tax gain of $726.5 million. This sale had an effective date of August 31, 2014. Energen used cash proceeds from the sale to reduce long-term and short-term indebtedness. During the second quarter of 2014, Energen classified Alagasco as held for sale and reflected the associated operating results in discontinued operations. See Note 15, Discontinued Operations and Held for Sale Properties, for further information regarding the sale of Alagasco.

Energen was incorporated in 1978 in connection with a corporate reorganization completed in 1979 which resulted in Energen becoming the parent company to Energen Resources, which was formed in 1971, and Alagasco. Alagasco was formed by merger in 1948. As noted above, Alagasco was sold in 2014 to The Laclede Group.

Energen maintains a web site with the address www.energen.com. Information contained on this web site is not incorporated by reference into this report. Energen makes available free of charge through its web site the annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports. Also, these reports are available in print upon shareholder request. These reports are available as soon as reasonably practicable after being electronically filed with or furnished to the Securities and Exchange Commission. Energen’s web site also includes its Business Conduct Guidelines, Corporate Governance Guidelines, Audit Committee Charter, Compensation Committee Charter and Governance and Nominations Committee Charter, each of which is available in print upon shareholder request.

Narrative Description of Business

Oil and Natural Gas Operations
General: Energen’s operations focus on increasing production and adding proved reserves through the development of oil, natural gas liquids and natural gas properties. In addition, Energen explores for and develops new reservoirs, primarily in areas in which it has an operating presence. All oil, natural gas liquids and natural gas production is sold to third parties. Energen operates its properties for its own interest and that of its joint interest owners. This role includes overall project management and day-to-day decision-making relative to project operations.

At the end of 2014, Energen’s proved reserves totaled 372.7 MMBOE. Substantially all of these proved reserves are located in the Permian Basin in west Texas and the San Juan Basin in New Mexico and Colorado. Approximately 71 percent of Energen’s year-end proved reserves are proved developed reserves. Energen’s proved reserves are long-lived, with a year-end proved reserves-to-production ratio of 14 years. Oil, natural gas liquids and natural gas represent approximately 49 percent, 20 percent and 31 percent, respectively, of Energen’s proved reserves.

Property Acquisitions and Dispositions: In October 2013, Energen completed the sale of its Black Warrior Basin coalbed methane properties in Alabama for $160 million (subject to closing adjustments). Energen recorded a pre-tax gain on the sale of approximately $35 million in the fourth quarter of 2013 that was reflected in gain on disposal of discontinued operations in the year ended December 31, 2013. At December 31, 2012, proved reserves associated with Energen’s Black Warrior Basin properties totaled 97 Bcf of natural gas.

In March 2014, Energen completed the sale of its North Louisiana/East Texas natural gas and oil properties for $30.3 million. The sale had an effective date of December 1, 2013, and the proceeds from the sale were used to repay short-term obligations. During the third quarter of 2013, Energen classified these primarily natural gas properties as held for sale and reflected the associated operating results in discontinued operations. Energen recognized non-cash impairment writedowns on these properties in 2014 of $1.9 million pre-tax to adjust the carrying amount of these properties to their fair value based on an estimate of the selling price of the properties. Energen also recognized non-cash impairment writedowns on these properties

7




in the third and fourth quarters of 2013 of $24.6 million pre-tax and $5.2 million pre-tax, respectively. These non-cash impairment writedowns are reflected in gain on disposal of discontinued operations, net on the consolidated income statements. At December 31, 2013, proved reserves associated with Energen’s North Louisiana/East Texas properties totaled 23 Bcf of natural gas and 91 MBbl of oil.

In February 2015, Energen entered into a purchase and sale agreement to sell the majority of its natural gas assets in the San Juan Basin in New Mexico and Colorado for approximately $395 million. This sale is expected to close March 31, 2015, and have an effective date of January 1, 2015. During the third and fourth quarters of 2014, non-cash impairment writedowns of $147.9 million pre-tax and $88.1 million pre-tax, respectively, were recognized by Energen on certain natural gas properties in the San Juan Basin to adjust the carrying amount of these properties to their fair value based on expected future discounted cash flows in the third quarter and based on direct market data in the fourth quarter as these properties were designated as held for sale as of December 31, 2014. These non-cash impairment writedowns are reflected in asset impairment on the consolidated income statement. At December 31, 2014, proved reserves associated with these San Juan Basin properties totaled 69,043 MBOE.

Growth Strategy: Energen is focused on increasing its oil, natural gas liquids and natural gas production and proved reserves largely through the drill bit. The Company engages in active development and/or exploratory programs in the Permian and San Juan basins and seeks to expand its footprint in its areas of existing operation primarily through tuck acquisitions of proved properties and unproved leasehold. Energen operated approximately 95 percent of its proved reserves at December 31, 2014.

Since the end of fiscal year 1995, Energen has invested approximately $1.9 billion to acquire proved and unproved reserves, $4.7 billion in related development and $2.8 billion in exploration. Energen’s capital spending plans for 2015 target a total investment of approximately $1.0 billion, the bulk of which will focus on drilling and development activities on its existing properties, with approximately 92 percent targeting the liquids-rich Permian Basin and the remainder primarily targeting the Mancos shale oil formation in the San Juan Basin. Energen may choose to allocate additional capital during the year for property acquisitions and/or increased drilling and development activities.

Energen’s development activities can result in the addition of new proved reserves and can serve to reclassify proved undeveloped reserves to proved developed reserves. Proved reserve disclosures are provided annually, although changes to reserve classifications occur throughout the year. Accordingly, additions of new proved reserves from development activities can occur throughout the year and may result from numerous factors including, but not limited to, regulatory approvals for drilling unit downspacing that increase the number of available drilling locations; changes in the economic or operating environments that allow previously uneconomic locations to be added; technological advances that make reserve locations available for development; successful development of existing proved undeveloped reserve locations that reclassify adjacent probable locations to proved undeveloped reserve locations; increased knowledge of field geology and engineering parameters relative to oil and natural gas reservoirs; and changes in management’s intent to develop certain opportunities.

During the three years ended December 31, 2014, Energen’s development and exploratory efforts have added 224 MMBOE of proved reserves from the drilling of 1,127 gross development, exploratory and service wells (including 3 sidetrack wells) and 251 well recompletions and pay-adds. In 2014, Energen’s successful development and exploratory wells and other activities added approximately 130 MMBOE of proved reserves; Energen drilled 346 gross development, exploratory and service wells (no sidetrack wells were drilled), performed some 48 well recompletions and pay-adds, and conducted other operational enhancements. Energen’s production from continuing operations totaled 25.7 MMBOE in 2014 and in 2015 is estimated to range from 21.4 MMBOE to 22.4 MMBOE, with a midpoint of 21.9 MMBOE, including approximately 18.4 MMBOE of estimated production from proved reserves owned at December 31, 2014. Energen’s 2015 production estimate excludes volumes from the San Juan Basin assets held for sale at December 31, 2014. Such assets produced an estimated 6.6 MMBOE in 2014.














8




Drilling Activity: The following table sets forth the total number of net productive and dry exploratory and development wells drilled:

Years ended December 31,
2014
2013
2012
Development:
 
 
 
Productive
80.2

169.5

239.9

Dry



Total
80.2

169.5

239.9

Exploratory:
 
 
 
Productive
109.4

89.1

74.1

Dry
1.0

0.9

1.1

Total
110.4

90.0

75.2


As of December 31, 2014, Energen was participating in the drilling of 3 gross (2.9 net) development and 20 gross (14.1 net) exploratory wells. In addition to the development wells drilled, Energen drilled 22.5, 9.8 and 47.8 net service wells during 2014, 2013 and 2012, respectively. As of December 31, 2014, Energen was participating in the drilling of 1 gross (1 net) service well.

Productive Wells and Acreage: The following table sets forth the total gross and net productive gas and oil wells as of December 31, 2014, and developed and undeveloped acreage as of the latest practicable date prior to year end:

 
Gross

Net

Oil wells
5,252

3,440

Gas wells
2,663

1,420

Developed acreage
677,503

500,744

Undeveloped acreage
217,579

157,224


There were 6 wells with multiple completions in 2014. All wells and acreage are located onshore in the United States, with the majority of the net undeveloped acreage located in Texas, New Mexico and Colorado.

Concentration of Credit Risk: Revenues and related accounts receivable from oil and natural gas operations primarily are generated from the sale of produced oil and natural gas to energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to the energy marketing industry has the potential to affect Energen’s overall exposure to credit risk, either positively or negatively, in that our oil and natural gas purchasers may be affected similarly by changes in economic, industry or other conditions. Energen considers the credit quality of its purchasers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee. The two largest purchasers of Energen’s oil and natural gas, Plains Marketing, LP (Plains) and HollyFrontier Corporation (HollyFrontier), accounted for approximately 39 percent and 15 percent, respectively, of Energen’s accounts receivable for commodity sales as of December 31, 2014. Energen’s other purchasers each accounted for less than 9 percent of these accounts receivable as of December 31, 2014. During the year ended December 31, 2014, Plains and HollyFrontier accounted for approximately 37 percent and 13 percent, respectively, of total revenues. All other oil and natural gas purchasers each accounted for less than 10 percent of total revenues for the year ended December 31, 2014.

Risk Management: Energen attempts to lower the commodity price risk associated with its oil and natural gas business through the use of swaps and basis swaps. Energen has policies in place to limit hedging to not more than 80 percent of its estimated annual production; however, Energen’s credit facility contains a covenant that operates to limit hedging at a lower threshold in certain circumstances. Energen recognizes all derivatives on the balance sheet and measures all derivatives at fair value. Prior to June 30, 2013, the Company utilized cash flow hedge accounting, where applicable, for its derivative transactions. Effective June 30, 2013, Energen discontinued the use of cash flow hedge accounting and dedesignated all remaining derivative commodity instruments that were previously designated as cash flow hedges.


9




See the Cautionary Statement Regarding Forward-Looking Statements preceding Item 1, Business, and Item 1A, Risk Factors, for further discussion with respect to price and other risks.

Environmental Matters and Climate Change
Various federal, state and local environmental laws and regulations apply to the operations of Energen. Historically, the cost of environmental compliance has not materially affected our financial position, results of operations or cash flows. New regulations, enforcement policies, claims for damages or other events could result in significant unanticipated costs.

Federal, state and local legislative bodies and agencies frequently exercise their respective authority to adopt new laws and regulations and to amend and interpret existing laws and regulations. Such law and regulation changes may occur with little prior notification, subject Energen to cost increases, and impose restrictions and limitations on our operations. Examples of law and regulatory changes with the potential to materially impact Energen include, but are not limited to, measures dealing with hydraulic fracturing, emission limits and reporting and the repeal of certain oil and natural gas tax incentives and deductions.

Energen regularly utilizes hydraulic fracturing in its drilling and completion activities. Energen’s first widespread use of hydraulic fracturing occurred during the 1980s when we successfully pioneered the exploration and development of coalbed methane in Alabama’s Black Warrior Basin.

Hydraulic fracturing is a well-established reservoir stimulation technique used throughout the oil and natural gas industry for more than 60 years. After a well has been drilled, hydraulic fracturing is used during the completion process to form small fractures in the target formation through which the natural gas or oil can flow. The fractures are created when a water-based fluid is pumped at a calculated rate and pressure into the natural gas- or crude oil-bearing rock. The fracture fluid is a mixture composed primarily of water and sand or inert ceramic, sand-like grains; it also contains a small percentage of special purpose chemical additives (which are highly diluted-typically less than one percent by volume) that can vary by project. The millimeter-thick cracks or fractures in the target formation are propped open by the sand, thereby allowing the crude oil or natural gas to flow from tight (low permeability) reservoirs into the well bore.

Various states in which we operate have adopted a variety of well construction, set back, and disclosure regulations limiting how drilling can be performed and requiring various degrees of chemical and water usage disclosure for operators that employ hydraulic fracturing. We are complying with these additional regulations as part of our routine operations and within the normal execution of our business plan. The adoption of additional federal or state regulations, however, could impose significant new costs and challenges. For example, adoption of new hydraulic fracturing permitting requirements could significantly delay or prevent new drilling. Adoption of new regulatory restrictions on the use of hydraulic fracturing could reduce the amount of oil and gas able to be recovered from our proved reserves. The degree to which additional oil and natural gas industry regulation may impact our future operations and results will depend on the extent to which we utilize the regulated activity and whether the geographic locations in which we operate are subject to the new regulation.

Existing federal, state and local environmental laws and regulations also have the potential to increase costs, reduce liquidity, delay operations and otherwise alter business operations. These existing laws and regulations include, but are not limited to, the Clean Air Act; the Clean Water Act; Oil Pollution Prevention: Spill Prevention, Control, and Countermeasure regulations; Toxic Substances Control Act; Resource Conservation and Recovery Act; and the Federal Endangered Species Act. Compliance with these and other environmental laws and regulations is undertaken as part of Energen’s routine operations. Energen does not separately track costs associated with these routine compliance activities.

Climate change, whether arising through natural occurrences or human activities, may have a significant impact upon the operations of Energen. Volatile weather patterns and the resulting environmental impact may adversely affect our results of operations, financial position and cash flows. We are unable to predict the timing or manifestation of climate change or reliably estimate the impact to Energen. However, climate change could affect our operations as follows:

sustained increases or decreases to the supply and demand of oil, natural gas liquids and natural gas;
potential disruption to third-party facilities to which Energen delivers. Such facilities include third-party oil and gas gathering, transportation, processing and storage facilities and are typically limited in number and geographically concentrated.

Under oversight of the Site Remediation Section of the Railroad Commission of Texas, the Company is currently in the process of cleanup and remediation of oil and gas wastes in nine reserve pits in Mitchell County, Texas. We estimate that the cleanup, remediation and related costs will approximate $2.5 million of which $1.9 million has been incurred.


10




During January 2014, Energen Resources responded to a General Notice and Information Request from the Environmental Protection Agency regarding the Reef Environmental Site in Sylacauga, Talladega County, Alabama. The letter identifies Energen Resources as a potentially responsible party under The Comprehensive Environmental Response, Compensation, and Liability Act for the cleanup of the Site. In 2008, Energen hired a third party to transport approximately 3,000 gallons of non-hazardous wastewater to Reef Environmental for wastewater treatment. Reef Environmental ceased operating its wastewater treatment system in 2010. Due to its one time use of Reef Environmental for a small volume of non-hazardous wastewater, Energen Resources has not accrued a liability for cleanup of the Site.

Employees
The Company has approximately 550 employees. Energen believes that its relations with employees are good.

11



ITEM 1A. RISK FACTORS

The future success and continued viability of our business, like any venture, is subject to many recognized and unrecognized risks and uncertainties. Such risks and uncertainties could cause actual results to differ materially from those contained in forward-looking statements made in this report and presented elsewhere by management. The following list identifies and briefly summarizes certain risk factors. The list should not be viewed as complete or comprehensive, as the risks below are not the only risks facing Energen. Energen could also be affected by additional risks and uncertainties we currently deem to be immaterial or risks that are currently not known or have yet to be identified by us. If any of the following risks were to occur, our business, financial condition or results of operations could be materially adversely affected; and such events could impair our ability to implement business plans or complete development activities as scheduled. In such a case, the trading price of our shares could decline; and shareholders could lose part or all of their investment.

We undertake no obligation to correct or update such risk factors whether as a result of new information, future events or otherwise. These risk factors should be read in conjunction with our disclosure specific to forward-looking statements made elsewhere in this report under the heading Cautionary Statement Regarding Forward-Looking Statements.

Risks Related to Our Business

Commodity prices for crude oil and natural gas are volatile, and a substantial reduction in commodity prices could adversely affect our financial results and operations.

Our business is significantly impacted by commodity prices, and historical markets for oil, natural gas liquids and natural gas have been volatile. Energen’s revenues, operating results, profitability and cash flows depend primarily upon the prices realized for our oil, natural gas liquids and natural gas production.

We have more oil proved reserves than natural gas proved reserves, so oil prices are more likely to have an impact on our business than natural gas prices. Approximately 49 percent of our December 31, 2014 proved reserves are oil. Commodity prices for oil, natural gas liquids and natural gas are reflections of supply and demand and are subject to many factors that are beyond our control, including:
the domestic and foreign supply of oil, natural gas liquids and natural gas, including the ability of the members of the Organization of the Petroleum Exporting Countries and other exporting countries to agree on and maintain oil price and production controls;
the level of consumer demand for oil, natural gas liquids and natural gas;
global oil and natural gas inventory levels;
the availability, proximity and capacity of transportation facilities and processing facilities;
worldwide economic conditions;
commodity price disparities between delivery points and applicable index prices;
the supply, demand and pricing of alternative sources of energy or fuels and the effects of energy conservation efforts or technological advances in energy consumption;
weather conditions;
changes in political conditions in major oil and natural gas producing regions and
domestic, local and foreign governmental regulations and taxes.

Substantial reductions in oil, natural gas liquids and natural gas prices would reduce our revenue and cash flows and potentially reduce the amount of oil and natural gas that we can economically produce resulting in a reduction in the proved oil and natural gas reserves we could recognize. Thus, significant and sustained commodity price reductions could materially and adversely affect our financial condition and results of operations which could impact our ability to maintain or increase our current levels of borrowing, our ability to repay current or future indebtedness, our ability to refinance our current indebtedness or obtain additional capital on attractive terms.

Our oil and natural gas proved reserves are estimates, and actual future production may vary significantly and may also be negatively impacted by our inability to invest in production on planned timelines.

There are numerous uncertainties inherent in estimating quantities of proved oil and natural gas reserves and in projecting future rates of production and timing of development expenditures. Reserve estimation is a subjective process involving the estimation of volumes to be recovered from underground accumulations of oil and natural gas that are unable to be measured in an exact manner. The reserve estimation process is dependent upon and subject to multiple variables and assumptions, including:

12



oil, natural gas liquids and natural gas prices;
timing of development expenditures;
the quality, quantity and interpretation of available geological, geophysical and engineering data;
the geologic characteristics of the reservoirs;
future operating costs, property, severance, excise and other taxes and costs and
the effects of compliance with regulatory and contractual requirements.
Additionally, in the event we are unable to fully invest or must alter the timing of our planned investment expenditures, our future revenues, production and proved reserves could be negatively affected.
Drilling for and producing oil and natural gas are high-risk activities with many uncertainties that could impact our expenses or our production volumes.

Drilling involves many risks, including the risk that no commercially productive oil or natural gas reservoirs will be located or economically developed. Our future drilling activities may not be successful and, if unsuccessful, such failure could have a material adverse effect on our future results of operations and financial condition. Anticipated drilling plans and capital expenditures may also be delayed, curtailed or canceled which could result in actual drilling and capital expenditures being substantially different than currently planned, due to:
delays resulting from compliance with regulatory or contractual requirements, which may include limitations on hydraulic
fracturing or the emission of greenhouse gases;
unexpected or unusual pressure or irregularities in geological formations;
unexpected drilling conditions;
declines in oil, natural gas liquids or natural gas prices;
adverse weather conditions, such as tornadoes, snow and ice storms;
delays in, limited availability of, or cost to obtain personnel and equipment necessary to complete our drilling,
completion and operating activities;
equipment or facility failures and accidents or malfunctions resulting in blowouts, fires, explosions, uncontrollable flows of oil, natural gas or well fluids, surface cratering and other events;     
title related issues;
fracture stimulation failures;
restricted access to land for drilling;
reductions in availability of financing at acceptable rates;
strategic changes implemented by management and
limitations in the market for oil, natural gas and natural gas liquids.

While all drilling, whether developmental, extension or exploratory, involves these risks, exploratory and extension drilling involve greater risks of dry holes or failure to find and exploit commercially productive quantities of oil and natural gas. We expect to continue to experience exploration and abandonment expense in 2015 and future years.

Our concentration of producing properties in the Permian Basin of west Texas and the San Juan Basin of New Mexico and Colorado makes us vulnerable to risks associated with operating in limited geographic areas.

At December 31, 2014, approximately 75 percent and 24 percent of our total estimated proved reserves were attributable to properties located in the Permian Basin of west Texas and San Juan Basin of New Mexico, respectively. As a result of this geographic concentration, we may be disproportionately exposed to the impact of regional supply and demand factors, delays or interruptions of production from wells in these areas caused by:
governmental regulation;
state politics;
processing or transportation capacity constraints;
market limitations;
water shortages, including restrictions on water usage or other drought related conditions or
interruption of the processing or transportation of oil, natural gas liquids or natural gas.





13



Our industry is highly competitive which makes it challenging for us to acquire properties to replace our proved oil and natural gas reserves, market oil and natural gas and locate and secure qualified personnel.

We operate in a highly competitive environment for acquiring properties to replace our proved oil and natural gas reserves, marketing oil and natural gas and locating and securing qualified personnel. Many of our current and potential competitors possess greater financial, technical and personnel resources than we do. Those competitors may be willing to pay more for exploratory prospects and productive oil and natural gas properties, as well as for trained personnel. Our ability to acquire properties and to find and develop proved reserves in the future will depend on our ability to evaluate and select suitable properties and to execute transactions in an intensely competitive environment. Our failure to acquire properties, market oil and natural gas and secure trained personnel could have a material adverse effect on our production, revenues and results of operations.

Our business is capital intensive, and we may not be able to obtain the needed capital, financing, or to refinance our current indebtedness on satisfactory terms or at all.

Our exploration, development and acquisition activities are capital intensive and constitute the primary use of our capital resources. We make and expect to continue to make significant capital expenditures for the exploration, development and acquisition of oil, natural gas liquids and natural gas reserves. We have historically funded our capital expenditures through cash flows from operations, our credit facility and other borrowings.

If our borrowing capacity decreases, for any reason, we may have limited ability to obtain the capital necessary to support our future operations. If we are unable to obtain necessary financing with appropriate terms, we could experience a decline in our operations. Specifically, a failure to secure additional financing, or necessary refinancing, could result in a reduction of our operations relating to the development of future prospects, which in turn could lead to a decline in our proved oil and natural gas reserves and could adversely affect our future production, revenues and results of operations. The borrowing base of our credit facility is subject to periodic redetermination and is based in part on oil and natural gas prices. A lowering of our borrowing base because of lower oil and natural gas prices or for other reasons could require us to repay indebtedness in excess of the borrowing base, or we might need to further secure the lenders with additional collateral.

The nature of our operations involves many operational risks including the risk of personal injury, property damage and environmental damage, and our insurance policies do not cover all such risks.

Inherent in our oil and natural gas production activities are a variety of hazards and operational risks, including, but not limited to:
pipeline and storage leaks, ruptures and spills;
equipment malfunctions and mechanical failures;
fires and explosions;
well blowouts, explosions and cratering;
uncontrollable flows of oil, natural gas or well fluids;
vandalism;
pollution;
releases of toxic gases;
adverse weather conditions or natural disasters and
soil, surface and water or groundwater contamination from petroleum constituents, hydraulic fracturing fluid, or produced water.

Such events could result in loss of human life, significant damage to or destruction of property, environmental pollution or other damage, impairment or suspension of our operations, repair and remediation costs, regulatory investigations and penalties or lawsuits and other substantial financial losses. Furthermore, our oil and natural gas exploration and production activities are subject to all of the operating risks associated with drilling for and producing oil and natural gas, including those noted above. Additionally, the location of certain of our pipeline and storage facilities near populated areas, including residential areas, commercial business centers and industrial sites, could increase the level of damages resulting from these risks.

In accordance with customary industry practices, we maintain insurance against some, but not all, of these risks and losses; and the insurance coverages are subject to retention levels and coverage limits. We may elect not to obtain insurance if we believe the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. Furthermore, we could be subject to the credit risk of our insurers if we make a claim under our insurance policies. There is no guarantee that we will be able to obtain or maintain our insurance in the future at rates we deem economical

14



and that the insurance we may desire will be offered by insurers. Losses and liabilities arising from uninsured or under-insured events or insurer insolvency, in the event of a claim, could materially and adversely affect our business, financial condition or results of operations.

We are subject to extensive regulation, including numerous federal, state and local laws and regulations as well as legislation and regulations restricting the emissions of “greenhouse gases” that may require significant expenditures or impose significant restrictions on our operations.

We are subject to extensive federal, state and local regulation which significantly influences our operations. Federal, state and local legislative bodies and agencies frequently exercise their respective authority to adopt new laws and regulations and to amend, modify and interpret existing laws and regulations. Such changes can subject us to significant tax or increased expenditures and can impose significant restrictions and limitations on our operations. Noncompliance with these laws and regulations may subject us to administrative, civil or criminal penalties, remedial cleanups, and natural resource damages or other liabilities. Furthermore, we may incur significant costs to remain in compliance with or to return to compliance with applicable regulations if they are revised or reinterpreted or if governmental policies or laws change related to our operations.
The subject of climate change is receiving increasing attention from many parties including legislators and governmental agencies. Debate over whether the climate is changing, possible causes and other possible impacts has been ongoing for several years.

If additional legislation or regulatory programs to reduce emissions of greenhouse gases are adopted, it could require us to incur increased operating costs, such as those for purchasing and operating emissions control systems, acquiring emissions allowances or complying with new regulatory or reporting requirements. Any such legislation or regulatory programs could also increase the cost of consuming and using oil and natural gas, and thereby negatively impact the demand for the oil, natural gas liquids and natural gas we produce. Consequently, legislation and regulatory programs related to greenhouse gases could adversely affect our production, revenues and results of operations.

Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing, as well as governmental reviews of such activities, could result in increased costs and additional operating restrictions or delays and adversely affect our production.

Energen regularly utilizes hydraulic fracturing in its drilling and completion activities, and hydraulic fracturing is a common practice that is used in the oil and gas industry to stimulate production of hydrocarbons from tight (low permeability) formations. After a well has been drilled, hydraulic fracturing is used during the completion process to form small fractures in the target formation through which the oil, natural gas liquids or natural gas can flow. The fractures are created when a water-based fluid is pumped at a calculated rate and pressure into the crude oil- or natural gas-bearing rock. The fracture fluid is a mixture composed primarily of water and sand or inert ceramic, sand-like grains; it also contains a small percentage of special purpose chemical additives (which are highly diluted-typically less than one percent by volume) that can vary by project. The millimeter-thick cracks or fractures in the target formation are propped open by the sand, thereby allowing the crude oil or natural gas to flow from tight reservoirs into the well bore.

The hydraulic fracturing process is typically regulated by state oil and gas commissions. However, under the Safe Drinking Water Act’s Underground Injection Control Program, the EPA has assumed regulatory authority of hydraulic fracturing involving diesel additives and issued revised permitting guidance in February 2014 requiring facilities to obtain permits to use diesel additives in hydraulic fracturing activities. Legislation intended to provide for federal regulation of hydraulic fracturing and require disclosure of the chemicals used has been introduced and considered by the U.S. Congress. In addition, Texas and New Mexico, two states in which we operate, have adopted, and other states are considering adopting, regulations that could impose new or stricter permitting, disclosure and well construction requirements on companies that perform hydraulic fracturing. Consideration and efforts to regulate hydraulic fracturing by local, state and federal authorities are increasing; and local land use restrictions, such as county and city ordinances, may restrict or prohibit any type of drilling or hydraulic fracturing. If additional federal, state or local restrictions are adopted in the areas we operate or plan to operate, we may incur significant costs to comply with the requirements, experience delays or have to curtail our exploration, development, or production activities. Additionally, such restrictions could reduce the amount of oil and gas that we are able to recover from our proved reserves.

Our operations are dependent on the availability, use and disposal of water; and restrictions on our ability to acquire or dispose of water could cause us to incur substantial costs in the acquisition, usage and disposal of water.

Water is a key component of both the drilling and hydraulic fracturing processes. Historically, we have been able to obtain water from various local sources for use in our operations. Texas is experiencing severe drought conditions that have persisted for the last several years. Several local water districts may begin restricting the use of water subject to their jurisdiction for drilling and

15



hydraulic fracturing in order to protect the local water supply during the drought conditions. If we are unable to obtain water to use in our operations from local sources, we may have to incur substantial costs to produce oil and natural gas and it may make it uneconomical to produce in that area. Our drilling procedures produce water of which we must dispose. We could be unable to dispose of our wastewater or face increased costs and procedures for disposal as a result of changes in federal or local legislation governing the disposal of drilling wastewater.

We periodically evaluate our proved and unproved oil and natural gas properties for impairment and could be required to recognize non-cash charges in our statements of income in future periods. If commodity prices for oil, natural gas liquids or natural gas decline or our drilling efforts are unsuccessful, we may be required to writedown the carrying values of certain oil and natural gas properties.

We periodically review the carrying value of our proved and unproved oil and natural gas properties for possible impairment on a field-by-field basis. We monitor our oil and natural gas properties as well as the market and business environments in which we operate and make assessments about events that could result in potential impairment issues, which include, but are not limited to, downward commodity price trends, unanticipated increased operating costs and lower than expected production performance. If a material event occurs, we perform an evaluation to determine whether the asset is impaired. If the quantity of potential reserves determined by such evaluations is insufficient to fully recover the cost invested in the respective project, we will record an impairment loss in our statements of income.

We are exposed to counterparty credit risk as a result of our concentrated customer base.

Revenues and related accounts receivable from oil and natural gas operations primarily are generated from the sale of produced oil, natural gas liquids and natural gas to a small number of energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to a limited number of customers in the energy marketing industry has the potential to affect our overall exposure to credit risk, either positively or negatively, based on changes in economic, industry or other conditions specific to a single customer or to the energy marketing industry generally. We consider the credit quality of our customers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent company guarantee.

We are subject to financing and interest rate exposure risks. Volatility in global financial markets, negative operating results, certain strategic business decisions, or other matters resulting in a downgrade in, or a negative outlook with respect to, our credit ratings could negatively impact our cost of and our ability to access capital for future development and working capital needs.

We rely on access to credit markets, and turmoil or volatility in the global financial markets could lead to a contraction in credit availability and negatively impact our ability to finance our operations. Global financial market turmoil, as has been experienced in last decade, could materially affect our operations, liquidity and financial condition through the adverse impacts such turmoil can have on the debt and equity capital markets. Market volatility and credit market disruption may severely limit credit availability, and issuer credit ratings can change rapidly. A significant reduction in cash flows from operations or the availability of credit could limit our ability to pursue acquisition opportunities or reduce cash flow used for drilling which could materially and adversely affect our ability to achieve our planned growth and operating results.

The availability and cost of credit market access is significantly influenced by market events and rating agency evaluations for lenders and Energen. In addition to operating results, business decisions relating to recapitalization, refinancing, restructuring, acquisition and disposition transactions involving Energen may negatively impact market and rating agency considerations regarding the credit of Energen, and management periodically considers these types of transactions.

Our derivative risk management activities may limit our potential gains and involve other risks that could result in financial losses.

Although we make use of futures, swaps, options, collars and fixed-price contracts to mitigate price risk, fluctuations in future oil, natural gas liquids and natural gas prices could materially affect our financial position, results of operations and cash flows. Furthermore, such risk mitigation activities may cause our financial position and results of operations to be materially different from results that would have been obtained had such risk mitigation activities not been implemented. The changes in the fair market value of our derivative contracts as reported in our consolidated statements of income may result in significant non-cash gains or losses.


16



The effectiveness of such risk mitigation assumes that counterparties maintain satisfactory credit quality and that actual sales volumes will generally meet or exceed the volumes subject to the futures, swaps, options, collars and fixed-price contracts. A substantial failure to meet sales volume targets, whether caused by miscalculations, weather events, natural disaster, accident, mechanical failure, criminal act or otherwise, could leave us financially exposed to our counterparties and result in material adverse financial consequences to Energen. The adverse effect could be increased if the adverse event was widespread enough to move market prices against our position.

Derivatives reform legislation which has been adopted by the U.S. Congress, or additions to or changes in the legislation, could negatively impact our ability to use derivative instruments as part of our risk management activities.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. Title VII of the Dodd-Frank Act establishes federal oversight and regulation of the over-the-counter derivatives markets and participants in such markets and requires the Commodities Futures Trading Commission (CFTC) and the SEC to promulgate implementing rules and regulations. These rules and regulations will cover, among other transactions, transactions linked to crude oil and natural gas prices.  We believe Energen’s derivative transactions qualify for the end-user exception which exempts them from certain Dodd-Frank Act margin and exchange clearing requirements pursuant to final regulations adopted by the CFTC and SEC and published in the Federal Register on July 19, 2012. 

The CFTC has designated certain interest rate swaps and credit default swaps for mandatory clearing and the associated rules also will require Energen, in connection with covered derivative activities, to comply with clearing and trade-execution requirements or take steps to qualify for an exemption to such requirements. Although we believe we qualify for the end-user exception from the mandatory clearing requirements for swaps entered to mitigate our commercial risks, the application of the mandatory clearing and trade execution requirements to other market participants, such as dealers, may change the cost and availability of our future derivative arrangements. The changes in the regulation of swaps may result in certain market participants deciding to curtail or stop engaging in derivative activities. If we reduce our use of derivatives as a result of the Dodd Frank Act and regulations, our results of operations may become more volatile and our cash flows may be less predictable, which could adversely affect our ability to plan for and fund capital expenditures and our results of operations.

Our operations depend on the use of third-party facilities, and an interruption of our ability to utilize these facilities may adversely affect our financial condition and results of operations.

Energen delivers to third-party facilities. These facilities include third-party oil and natural gas gathering, transportation, processing and storage facilities. Energen relies on such facilities for access to market for our oil, natural gas liquids and natural gas production. Such facilities are typically limited in number and geographically concentrated. A lack of available capacity on these facilities could result in the shut-in of producing wells or the delay or discontinuance of development plans for properties for Energen. An extended interruption of access to or service from these facilities, whether caused by weather events, natural disaster, accident, mechanical failure, criminal act, maintenance or otherwise could have an adverse effect on our revenues and results of operations.

The success of our future operations is dependent on our future drilling activities and our ability to economically develop our oil, natural gas liquids and natural gas reserves; and our expectations regarding future drilling and development activities are subject to uncertainties that could significantly alter the occurrence or timing of such activities, as they are expected to be realized over multiple years.

We have identified drilling locations and prospects for future drilling, including development and exploratory drilling activities. Our ability to successfully and economically drill and develop these locations depends on a number of factors, including:
prices of oil, natural gas liquids and natural gas;
current laws or regulations or changes in the laws or regulations in the identified and prospective locations;
the availability and cost of capital;
seasonal and other weather conditions;
regulatory approvals;
negotiation of agreements with third parties;
access to and availability of required equipment, supplies and personnel and
drilling results.

Because of the factors noted above, we cannot provide any guarantee regarding the timing or success of future drilling activities; and our actual drilling activities may materially differ from our current expectations.


17



Energen has limited control over activities on properties which we do not operate, which could materially reduce our production and revenues.

Energen operates in certain instances through joint ventures under joint operating agreements. Typically, the operator under a joint operating agreement enters into contracts, such as drilling contracts, for the benefit of all joint venture partners. Through the joint operating agreement, the non-operators reimburse, and in some cases advance, the funds necessary to meet the contractual obligations entered into by the operator. For properties we do not operate, we have limited ability to control the operation or future development of the properties or the amount of capital expenditures that we are required to fund with respect to them. An operator’s failure to adequately perform operations, an operator’s breach of the applicable agreements or an operator’s failure to act in our best interest could reduce our production and revenues. The success and timing of our drilling and development activities on properties operated by others is dependent on a number of factors, including the operator's timing and amount of capital expenditures, expertise and financial resources, inclusion of other participants in drilling wells and use of technology. Our dependence on the operator and other working interest owners for these projects and our limited ability to control the operation and future development of these properties could negatively affect the realization of our expected returns on capital in drilling or acquisition activities and could lead to unexpected costs in the future.

Our business could be negatively impacted by security threats, including cybersecurity threats and related disruptions.

We face a variety of security threats, including cybersecurity threats to access sensitive information or render data or systems unusable, threats to the security of our facilities and infrastructure or those of third parties, including processing plants and pipelines, and threats from terrorist acts. Current procedures and controls may not be sufficient to prevent security breaches from occurring, and we could have to implement additional procedures and controls to mitigate the effects of potential breaches and monitor for potential security threats resulting in increased capital and operating costs. In the event of a security breach, losses of sensitive information, critical infrastructure or capabilities essential to our operations could occur and could have a material adverse effect on our reputation, operations, financial position and results of operations. Cybersecurity attacks are becoming more sophisticated and prevalent and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and systems, other electronic security breaches that could cause disruptions in critical systems, unauthorized release of confidential information and data corruption. Furthermore, some experts claim that cybersecurity attacks have become a weapon of war and espionage. As we rely on our information technology infrastructure to process, transmit and store electronic information critical for the efficient operation of our business and day-to-day operations, such attacks could lead to a material disruption in our business, including the theft, destruction, loss, misappropriation or release of confidential data or other business information, financial losses, loss of business, potential liability and damage our reputation.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

None

18



ITEM 2.    PROPERTIES

The corporate headquarters of Energen and Energen Resources are located in leased office space in Birmingham, Alabama. See the discussion under Item 1, Business, for further information related to Energen’s business operations. Information concerning Energen’s production and proved reserves is summarized in the table below and included in Note 20, Oil and Natural Gas Operations (Unaudited), in the Notes to Financial Statements. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations for a discussion of the future outlook and expectations for Energen and additional information regarding production, revenue and production costs.

Energen focuses on increasing its production and proved reserves through the development and exploration of onshore North American oil and natural gas properties. Energen maintains district offices in Midland, Texas and Farmington, New Mexico.




The major areas of operations include (1) the Permian Basin and (2) the San Juan Basin as highlighted on the above map. In February 2015, Energen entered into a purchase and sale agreement to sell the majority of its natural gas assets in the San Juan Basin in New Mexico and Colorado.

The following table sets forth the production volumes, proved reserves and proved reserves-to-production ratio by area:

 
Year ended
 
 
 
December 31, 2014
December 31, 2014
December 31, 2014
 
Production Volumes
(MBOE)
Proved Reserves (MBOE)
Proved Reserves-to-Production Ratio
Permian Basin
17,298

280,788

16.23 years
San Juan Basin*
8,327

90,871

10.91 years
Other
224

1,019

4.55 years
Total
25,849

372,678

14.42 years
* Certain San Juan Basin assets were classified as held-for-sale as of December 31, 2014.

19



The following table sets forth proved reserves by area as of December 31, 2014:

 
Oil MBbl
NGL MBbl
Natural Gas MMcf
Total MBOE
Permian Basin
179,466

55,075

277,484

280,788

San Juan Basin*
1,475

18,384

426,071

90,871

Other
286

4

4,371

1,019

Total
181,227

73,463

707,926

372,678

* Certain San Juan Basin assets were classified as held-for-sale as of December 31, 2014.

See Note 20, Oil and Natural Gas Operations (Unaudited), in the Notes to Financial Statements for the changes to proved reserves during the years ended December 31, 2014, 2013 and 2012 of oil, natural gas liquids and natural gas.

The following table sets forth proved developed reserves by area as of December 31, 2014:

 
Oil MBbl
NGL MBbl
Natural Gas MMcf
Total MBOE
Permian Basin
117,014

29,234

158,640

172,688

San Juan Basin*
1,475

18,384

426,071

90,871

Other
208

3

4,363

939

Total
118,697

47,621

589,074

264,498

* Certain San Juan Basin assets were classified as held-for-sale as of December 31, 2014.

The following table sets forth proved undeveloped reserves by area as of December 31, 2014:

 
Oil MBbl
NGL MBbl
Natural Gas MMcf
Total MBOE
Permian Basin
62,452

25,841

118,844

108,100

Other
78

1

8

80

Total
62,530

25,842

118,852

108,180


The following table sets forth the reconciliation of proved undeveloped reserves:

Year ended December 31, 2014
Total MMBOE
Balance at beginning of period
88.0
Undeveloped reserves transferred to developed reserves
(11.9)
Revisions
(59.3)
Extensions and discoveries
91.3
Acquisitions
0.1
Balance at end of period
108.2

Proved undeveloped reserves transferred to proved developed reserves reflect capital expenditures of approximately $246 million during the year ended December 31, 2014 in development of previously proved undeveloped reserves. Proved undeveloped reserves additions included proved undeveloped reserve locations one offset away from producing wells and proved undeveloped reserve locations that are more than one offset away from producing wells using reliable technology and where our geologic interpretation and experience indicate the reservoirs are continuous across those locations. The technologies associated with these additions to proved reserve estimates included analysis of well production data, geophysical data, wireline data, core data and interpretation of zonal analysis. Revisions largely relate to a reduction in proved undeveloped reserves of 53.4 MMBOE associated with changes in our development plans and revisions from decreased well performance in the Permian Basin of approximately 13.3 MMBOE.

Estimated proved reserves as of December 31, 2014 are based upon studies for each of our properties prepared by Company engineers and audited by Ryder Scott Company, L.P. (Ryder Scott) and T. Scott Hickman and Associates, Inc. (T. Scott Hickman),

20



independent oil and gas reservoir engineers. Calculations were prepared using geological and engineering methods widely used and referred to by professionals in the industry and in accordance with SEC guidelines.

A Senior Vice President at Ryder Scott is the technical person primarily responsible for overseeing the audit of the reserves. The Senior Vice President has a Bachelor of Science degree in Mechanical Engineering and is a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers. He has been an employee of Ryder Scott since 1982 and also serves as chief technical advisor of unconventional reserves evaluation. A Petroleum Consultant at T. Scott Hickman is the technical person primarily responsible for overseeing the audit of the reserves. He has a Bachelor of Science degree in Petroleum Engineering and is a member of the Society of Petroleum Engineers and the Society of Petroleum Evaluation Engineers. He has been employed by T. Scott Hickman since 1983. The Vice President of Acquisitions and Reservoir Engineering is the technical person primarily responsible for overseeing reserves on behalf of Energen. His background includes a Bachelor of Science degree in Mechanical Engineering and membership in the Society of Petroleum Engineers. He is a registered Professional Engineer in the State of Alabama with more than 30-years experience evaluating oil and natural gas properties and estimating reserves.

Energen relies upon certain internal controls when preparing its reserve estimations. These internal controls include review by the reservoir engineering managers to ensure the correct reserve methodology has been applied for each specific property and that the reserves are properly categorized in accordance with SEC guidelines. The reservoir engineering managers also affirm the accuracy of the data used in the reserve and associated rate forecast, provide a review of the procedures used to input pricing data and provide a review of the working and net interest factors to ensure that factors are adequately reflected in the engineering analysis.

Net production forecasts are compared to historical sales volumes to check for reasonableness, and operating costs and severance taxes calculated in the reserve report are compared to historical accounting data to help ensure proper cost estimates are used. A reserve table is generated comparing the previous year’s reserves to current year reserve estimates to determine variances. This table is reviewed by the Vice President of Acquisitions and Reservoir Engineering and the Chief Operating Officer of Energen Resources. Revisions and additions are investigated and explained.

Reserve estimates of proved reserves are sent to independent reservoir engineers for audit and verification. For 2014, approximately 99 percent of all proved reserves were audited by the independent reservoir engineers which audit engineering procedures, check the reserve estimates for reasonableness and check that the reserves are properly classified.

The following table sets forth the standard pressure base in pounds-force per square inch absolute (psia) for each state in which Energen has wells:

Texas
14.65 psia
Colorado
14.73 psia
New Mexico
15.025 psia

The following table sets forth the total net productive oil and natural gas wells by area as of December 31, 2014, and developed and undeveloped acreage as of the latest practicable date prior to year-end:

 
Gross Wells

Net Wells
Net Developed Acreage
Net Undeveloped Acreage
Permian Basin
5,234

3,418

213,458

88,756

San Juan Basin*
2,590

1,434

276,411

38,812

Other
91

8

10,875

29,656

Total
7,915

4,860

500,744

157,224

* Certain San Juan Basin assets were classified as held-for-sale as of December 31, 2014.







21



The following table sets forth expiration dates for gross and net undeveloped acreage at year end as of December 31, 2014:

 
Years ending December 31,
 
2015
2016
2017
Thereafter
 
Gross
Net
Gross
Net
Gross
Net
Gross
Net
Permian
50,461

37,945

22,862

20,864

24,468

22,963

14,017

6,983

San Juan/other*
18,749

13,738

13,699

4,969

12,518

6,322

60,805

43,440

Total
69,210

51,683

36,561

25,833

36,986

29,285

74,822

50,423

*Other includes acreage principally located in Alabama, Wyoming, Oklahoma, Arkansas, Kentucky, Louisiana, Montana and North Dakota, where Energen does not currently have plans for development.

In the ordinary course of business based on our evaluation of certain geologic trends and prospective economics, we have allowed certain lease acreage to expire and may allow additional acreage to expire in the future.

Energen has 46.4 MMBOE of proved undeveloped reserves on leased acreage which is not held by production and is expected to be developed after the primary term of the leases. Drilling associated with these reserves is expected to occur under the continuous development provisions of the leases. The amount represents approximately 43 percent of the 108.2 MMBOE total proved undeveloped reserves and approximately 12 percent of the 372.7 MMBOE total proved reserves at December 31, 2014.

Energen sells oil, natural gas liquids, and natural gas under a variety of contractual arrangements, some of which specify the delivery of a fixed and determinable quantity (firm volumes). Energen is contractually committed to deliver approximately 10.8 Bcf (net) of natural gas through March 2016. We expect to fulfill delivery commitments through production of existing proved reserves.

 
  Natural Gas MMcf
San Juan Basin
10,835

ITEM 3.    LEGAL PROCEEDINGS

Energen and its affiliates are, from time to time, parties to various pending or threatened legal proceedings. Certain of these lawsuits include claims for punitive damages in addition to other specified relief. Various pending or threatened legal proceedings are in progress currently. See Note 11, Commitments and Contingencies, in the Notes to Financial Statements for further discussion with respect to legal proceedings.

ITEM 4.    MINE SAFETY DISCLOSURES

None

EXECUTIVE OFFICERS OF THE REGISTRANT

Name
Age
Position (1)
James T. McManus, II
56
Chairman, Chief Executive Officer and President of Energen (2)
Charles W. Porter, Jr.
50
Vice President, Chief Financial Officer and Treasurer of Energen (3)
John S. Richardson
57
President and Chief Operating Officer of Energen Resources (4)
J. David Woodruff, Jr.
58
Vice President, General Counsel and Secretary of Energen (5)
David A. Godsey
60
Senior Vice President – Exploration and Geology of Energen Resources (6)
David J. Minor
63
Senior Vice President – Operations of Energen Resources (7)
D. Paul Sparks, Jr.
52
Senior Vice President – Resource Development and Technology of Energen Resources(8)
Russell E. Lynch, Jr.
41
Vice President and Controller of Energen (9)

Notes:    
(1) All executive officers of Energen have been employed by Energen or a subsidiary for the past five years except for Mr. Godsey and Mr. Minor. Officers serve at the pleasure of the Board of Directors.

(2) Mr. McManus has been employed by the Company in various capacities since 1986. He was elected Executive Vice President and Chief Operating Officer of Energen Resources in October 1995 and President of Energen Resources in April 1997. He was elected President and Chief Operating Officer of Energen effective January 1, 2006 and Chief Executive Officer of Energen and each of its subsidiaries effective July 1, 2007. He was elected Chairman of the Board of Energen and each of its subsidiaries effective January 1, 2008. Mr. McManus serves as a Director of Energen and each of its subsidiaries.

(3) Mr. Porter has been employed by the Company in various financial capacities since 1989. He was elected Controller of Energen Resources in 1998. In 2001, he was elected Vice President – Finance of Energen Resources. He was elected Vice President, Chief Financial Officer and Treasurer of Energen and each of its subsidiaries effective January 1, 2007.

(4) Mr. Richardson has been employed by the Company in various capacities since 1985. He was elected Vice President – Acquisitions and Engineering of Energen Resources in 1997. He was elected Executive Vice President and Chief Operating Officer of Energen Resources effective January 1, 2006. He was elected President and Chief Operating Officer of Energen Resources effective January 23, 2008.

(5) Mr. Woodruff has been employed by the Company in various capacities since 1986. He was elected Vice President-Legal and Assistant Secretary of Energen and each of its subsidiaries in April 1991. He was elected General Counsel and Secretary of Energen and each of its subsidiaries effective January 1, 2003. He also served as Vice President –Corporate Development of Energen from 1995 to 2010.

(6) Mr. Godsey was employed by the Company in December 2012 as Senior Vice President – Exploration and Geology of Energen Resources. He served as Geoscience Manager Permian Basin for Cheasapeake Energy from April 2003 to December 2012. He also served from December 1999 to April 2003 as Project Geologist for EOG Resources, Inc.

(7) Mr. Minor was employed by the Company in December 2012 as Senior Vice President – Operations of Energen Resources. He owned and operated Firebird Energy LLC, an energy consulting firm, from 2009 to 2012. As owner of the consulting firm he served in various positions including Executive Director of Operations for Far East Energy Corporation and President and General Manager of Walter Black Warrior Basin LLC. He served from December 2006 to December 2008 as Senior Vice President of Technology for CDX Gas LLC.

(8) Mr. Sparks has been employed by the Company in various capacities since 1989. He was elected Senior Vice President – Operations of Energen Resources in January 2006. He was elected Senior Vice President – Resource Development and Technology of Energen Resources effective November 1, 2012.

(9) Mr. Lynch has been employed by the Company in various capacities since 2001. He was elected Vice President and Controller of Energen effective January 1, 2009.

22




PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Quarterly Market Prices and Dividends Paid Per Share
 
 
 
 
 
Quarter ended
High
Low
Close
Dividends Paid
March 31, 2013
$52.13
$44.46
$52.01
$0.145
June 30, 2013
$56.65
$45.11
$52.26
$0.145
September 30, 2013
$77.50
$52.42
$76.39
$0.145
December 31, 2013
$89.92
$65.74
$70.75
$0.145
March 31, 2014
$83.65
$65.35
$80.81
$0.15
June 30, 2014
$90.66
$76.42
$88.88
$0.15
September 30, 2014
$90.50
$71.24
$72.24
$0.15
December 31, 2014
$73.21
$53.78
$63.76
$0.02

Energen’s common stock is listed on the New York Stock Exchange under the symbol EGN. On February 13, 2015, there were 4,043 holders of record of Energen common stock. We expect to pay annual cash dividends of $0.08 per share on Energen common stock in 2015. The amount and timing of all dividend payments is subject to the discretion of the Board of Directors and is based upon business conditions, results of operations, financial conditions and other factors. Energen may not pay dividends during an event of default, if the payment would result in an event of default or if availability is less than 10 percent of the loan limit under the credit facility.

The following table summarizes information concerning purchases of equity securities by the issuer:




Period
Total Number of Shares Purchased
 
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Maximum Number of Shares that May Yet Be Purchased Under the Plans***
October 1, 2014 - October 31, 2014
545

*
$
55.83


3,600,000
November 1, 2014 - November 30, 2014
6,279

*
67.60


3,600,000
 
226,839

**
65.77

226,839

3,373,161
December 1, 2014 - December 31, 2014
981

*
56.35


3,373,161
Total
234,644

 
$
65.76

226,839

3,373,161
*Acquired in connection with tax withholdings and payment of exercise price on stock compensation plans.
**Energen had 226,839 shares repurchased and retired pursuant to its repurchase authorization.
***By resolution adopted October 22, 2014, the Board of Directors authorized Energen to repurchase up to 3,600,000 shares of Energen common stock, replacing and superseding its prior stock repurchase authorizations. The resolution does not have an expiration date and does not limit Energen’s authorization to acquire shares in connection with tax withholdings and payment of exercise price on stock compensation plans.


23




PERFORMANCE GRAPH
Energen Corporation — Comparison of Five-Year Cumulative Shareholder Returns

This graph compares the total shareholder returns of Energen, the Standard & Poor’s Composite Stock Index (S&P 500) and the Standard & Poor’s Supercomposite Oil & Gas Exploration & Production Index (S15OILP). The graph assumes $100 invested at the per-share closing price of the common stock on the New York Exchange Composite Tape on December 31, 2009, in the Company and each of the indices. Total shareholder return includes reinvested dividends.




As of December 31,
2009
2010
2011
2012
2013
2014
S&P 500
$
100

$
115

$
117

$
136

$
180

$
205

Energen
$
100

$
104

$
109

$
100

$
158

$
143

S15OILP
$
100

$
114

$
105

$
107

$
138

$
120



24




ITEM 6.    SELECTED FINANCIAL DATA

The selected financial data as set forth below should be read in conjunction with the consolidated financial statements and the Notes to Financial Statements included in this Form 10-K.

SELECTED FINANCIAL AND COMMON STOCK DATA

Years ended December 31,
(dollars in thousands, except per share amounts)
2014
 
2013
 
2012
 

2011
 

2010
INCOME STATEMENT
 
 
 
 
 
 
 
 
 
Total revenues
$
1,679,213

 
$
1,206,293

 
$
1,090,948

 
$
834,700

 
$
804,693

Income from continuing operations
$
99,643

 
$
141,881

 
$
204,621

 
$
174,686

 
$
184,049

Net income
$
568,032

 
$
204,554

 
$
253,562

 
$
259,624

 
$
290,807

Diluted earnings per average common share from continuing operations
$
1.36

 
$
1.96

 
$
2.83

 
$
2.42

 
$
2.55

Diluted earnings per average common share
$
7.75

 
$
2.82

 
$
3.51

 
$
3.59

 
$
4.04

BALANCE SHEET
 
 
 
 
 
 
 
 
 
Total property, plant and equipment, net
$
5,199,137

 
$
5,118,088

 
$
4,698,951

 
$
3,807,305

 
$
2,936,562

Total assets
$
6,138,258

 
$
6,622,212

 
$
6,175,890

 
$
5,237,416

 
$
4,363,560

Long-term debt
$
1,038,563

 
$
1,093,541

 
$
903,500

 
$
904,454

 
$
204,461

Total shareholders’ equity
$
3,414,604

 
$
2,858,019

 
$
2,676,690

 
$
2,432,163

 
$
2,154,043

COMMON STOCK DATA
 
 
 
 
 
 
 
 
 
Cash dividends paid per common share
$
0.47

 
$
0.58

 
$
0.56

 
$
0.54

 
$
0.52

Diluted average common shares outstanding (000)
73,275

 
72,471

 
72,316

 
72,332

 
72,051

Price range:
 
 
 
 
 
 
 
 
 
High
$
90.66

 
$
89.92

 
$
58.24

 
$
65.44

 
$
49.94

Low
$
53.78

 
$
44.46

 
$
40.13

 
$
37.22

 
$
40.25

Close
$
63.76

 
$
70.75

 
$
45.09

 
$
50.00

 
$
48.26


*We expect to pay annual cash dividends of $0.08 per share on Energen common stock in 2015.
























25




SELECTED BUSINESS DATA

Years ended December 31,
(dollars in thousands, except per unit data)
2014
 
2013
 
2012
 

2011
 

2010
Oil, natural gas liquids and natural gas sales from continuing operations
 
 
 
 
 
 
Oil
$
988,868

 
$
961,055

 
$
766,105

 
$
570,413

 
$
383,541

Natural gas liquids
110,918

 
91,407

 
81,313

 
101,818

 
68,216

Natural gas
244,408

 
203,855

 
159,377

 
210,813

 
214,426

Total
$
1,344,194

 
$
1,256,317

 
$
1,006,795

 
$
883,044

 
$
666,183

Open non-cash mark-to-market gains (losses) on derivative instruments
 
Oil
$
271,200

 
$
(43,261
)
 
$
58,786

 
$
(37,473
)
 
$
(3
)
Natural gas liquids
287

 
(652
)
 
479

 
(114
)
 

Natural gas
43,958

 
(3,919
)
 
(515
)
 

 

Total
$
315,445

 
$
(47,832
)
 
$
58,750

 
$
(37,587
)
 
$
(3
)
Closed gains (losses) on derivative instruments
 
Oil
$
4,377

 
$
(52,694
)
 
$
(35,954
)
 
$
(67,205
)
 
$
19,501

Natural gas liquids
6,218

 
10,795

 
4,146

 
(14,240
)
 
(3,055
)
Natural gas
8,979

 
39,707

 
57,211

 
70,688

 
122,067

Total
$
19,574

 
$
(2,192
)
 
$
25,403

 
$
(10,757
)
 
$
138,513

Total revenues
$
1,679,213

 
$
1,206,293

 
$
1,090,948

 
$
834,700

 
$
804,693

Production volumes from continuing operations
 
 
 
 
 
 
 
 
 
Oil (MBbl)
11,814

 
10,364

 
8,749

 
6,300

 
5,109

Natural gas liquids (MMgal)
172.3

 
135.8

 
108.1

 
91.4

 
79.0

Natural gas (MMcf)
58,602

 
58,104

 
59,166

 
54,132

 
51,778

Production volumes from continuing operations (MBOE)
25,684

 
23,281

 
21,183

 
17,499

 
15,619

Total production volumes (MBOE)
25,849

 
25,362

 
24,066

 
20,448

 
18,832

Proved reserves
 
 
 
 
 
 
 
 
 
Oil (MBbl)
181,227

 
164,870

 
155,348

 
129,578

 
103,262

Natural gas liquids (MBbl)
73,463

 
63,011

 
56,155

 
53,957

 
40,601

Natural gas (MMcf))
707,926

 
719,725

 
809,128

 
957,368

 
954,387

Total (MBOE)
372,678

 
347,835

 
346,359

 
343,099

 
302,928

Costs per BOE from continuing operations
 
 
 
 
 
 
 
 
 
Oil, natural gas liquids and natural gas production expenses
$
10.68

 
$
11.06

 
$
9.55

 
$
9.11

 
$
9.09

Production and ad valorem taxes
$
3.97

 
$
4.04

 
$
3.58

 
$
3.82

 
$
3.33

Depreciation, depletion and amortization
$
21.36

 
$
19.45

 
$
16.17

 
$
12.19

 
$
10.72

Exploration expense
$
1.09

 
$
0.60

 
$
0.62

 
$
0.74

 
$
4.13

General and administrative expense
$
4.75

 
$
4.89

 
$
3.71

 
$
4.41

 
$
4.12

Net capital expenditures
$
1,372,510

 
$
1,104,745

 
$
1,291,211

 
$
1,115,452

 
$
717,782

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

26



ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


OVERVIEW OF BUSINESS

Energen Corporation (Energen or the Company) is an oil and natural gas exploration and production company engaged in the exploration, development and production of oil and natural gas liquids-rich properties and natural gas in the Permian Basin in west Texas and the San Juan Basin in New Mexico and Colorado. Our operations are conducted through our subsidiary, Energen Resources Corporation (Energen Resources).

Energen is focused on increasing its oil and natural gas liquids production and proved reserves largely through development well drilling, exploration, and acquisitions of proved and unproved properties in and around our existing assets. All oil, natural gas liquids and natural gas production is sold to third parties. Energen operates its properties for its own interest and that of its joint interest owners. This role includes overall project management and day-to-day decision-making relative to project operations.
    
FINANCIAL AND OPERATING PERFORMANCE

Overview of Year-to-Date 2014 Results and Activities
During the year ended December 31, 2014 as compared to the same period in the prior year, we:
increased production volumes from continuing operations by 10.3 percent;
increased proved reserves at December 31, 2014 to a record 372.7 MMBOE;
expanded our activities in the Permian Basin, increasing production by 22 percent or 3,111 MBOE;
recognized non-cash impairments on certain held for sale gas properties in the San Juan Basin in the third and fourth quarters of $147.9 million pre-tax and $88.1 million pre-tax, respectively (see Note 14, Acquisition and Disposition of Properties, in the Notes to Financial Statements);
recognized non-cash impairments on certain Permian Basin oil properties in the third and fourth quarters of 2014 of $31.2 million pre-tax and $94.5 million pre-tax, respectively;
recognized unproved leasehold writedowns primarily on Permian Basin oil properties of $55.1 million pre-tax and
completed the transaction to sell Alabama Gas Corporation (Alagasco) to The Laclede Group, Inc. (Laclede) on September 2, 2014.

Year ended December 31, 2014 vs year ended December 31, 2013
Energen’s net income for the year ended December 31, 2014 totaled $568.0 million ($7.75 per diluted share) compared to the year ended December 31, 2013 net income of $204.6 million ($2.82 per diluted share). Energen’s income from continuing operations totaled $99.6 million ($1.36 per diluted) in 2014 as compared with $141.9 million ($1.96 per diluted) in 2013. Income from discontinued operations for the current year was $468.4 million ($6.39 per diluted share) as compared with income of $62.7 million ($0.86 per diluted share) from the prior year largely due to the sale of Alagasco. This decrease in income from continuing operations was primarily the result of:

non-cash impairments on certain gas properties in the San Juan Basin (approximately $142.1 million after-tax);
non-cash impairments on certain oil properties in the Permian Basin (approximately $80.1 million after-tax);
unproved leasehold writedowns primarily on Permian Basin oil properties (approximately $35.1 million after-tax);
lower realized oil and natural gas liquids commodity prices (approximately $72 million after-tax);
higher depreciation, depletion and amortization (DD&A) expense (approximately $62 million after-tax);
higher oil, natural gas liquids and natural gas production expense (approximately $11 million after-tax);
higher exploration expense (approximately $9 million after-tax);
increased general and administrative expense (approximately $5 million after-tax) and
higher production and ad valorem taxes (approximately $5 million after-tax)

partially offset by:

year-over-year after-tax $232.4 million gain on open derivatives (resulting from an after-tax $201.8 million non-cash gain on open derivatives for 2014 and an after-tax $30.6 million non-cash loss on open derivatives for 2013);
higher oil, natural gas liquids and natural gas production volumes (approximately $104 million after-tax);
higher realized natural gas commodity prices (approximately $25 million after-tax) and
gain on closed derivatives (approximately $14 million after-tax).

27




Year ended December 31, 2013 vs year ended December 31, 2012
For the year ended December 31, 2013, Energen’s net income totaled $204.6 million ($2.82 per diluted share) as compared to net income of $253.6 million ($3.51 per diluted share) in 2012. Energen’s income from continuing operations totaled $141.9 million ($1.96 per diluted) in 2013 as compared with $204.6 million ($2.83 per diluted) in 2012. Income from discontinued operations for 2013 was $62.7 million ($0.86 per diluted share) as compared with income of $48.9 million ($0.68 per diluted share) from 2012. Income from discontinued operations in 2013 included earnings from Alagasco and an after-tax gain of $22.5 million on the sale of the Black Warrior Basin coalbed methane properties partially offset by the non-cash impairment writedown on North Louisiana/East Texas primarily natural gas properties of $18.9 million after-tax. Income from discontinued operations in 2012 included earnings from Alagasco partially offset by a non-cash impairment on certain properties in East Texas of approximately $13.4 million after-tax. This decrease in income from continuing operations was primarily the result of:

higher depreciation, depletion and amortization (DD&A) expense (approximately $73 million after-tax);
year-over-year after-tax $67.8 million loss on open derivatives (resulting from an after-tax $30.6 million non-cash loss on open derivatives for 2013 and an after-tax $37.2 million non-cash gain on open derivatives for 2012);
higher oil, natural gas liquids and natural gas production expense (approximately $36 million after-tax);
increased general and administrative expense (approximately $23 million after-tax);
loss on closed derivatives (approximately $18 million after-tax);
higher production and ad valorem taxes (approximately $12 million after-tax);
lower realized natural gas liquids commodity prices (approximately $7 million after-tax);
decreased natural gas production volumes (approximately $2 million after-tax) and
higher exploration expense (approximately $1 million after-tax)

partially offset by:

higher oil and natural gas liquids production volumes (approximately $107 million after-tax);
higher realized oil and natural gas commodity prices (approximately $67 million after-tax) and
decreased interest expense (approximately $5 million after-tax).

Operating Income
Consolidated operating income in 2014, 2013 and 2012 totaled $177.0 million, $252.1 million and $364.1 million, respectively. In 2014, lower operating income was largely due to non-cash impairments on certain properties in the San Juan and Permian basins, leasehold writedowns in the Permian Basin, lower oil and natural gas liquids commodity prices and higher DD&A expense. Partially offsetting these decreases in operating income was the non-cash mark-to-market income in open and closed derivatives, higher production and increased natural gas commodity prices. Reduced operating income for 2013 is primarily due to higher DD&A expense, higher oil, natural gas liquids and natural gas production expense and the non-cash mark-to-market decrease in open and closed derivatives partially offset by increased oil and natural gas liquids production and higher natural gas and oil commodity prices.

Results of Operations
The following table summarizes information regarding our production and operating data from continuing operations.

Years ended December 31, (in thousands, except sales price and per unit data)

2014
2013
2012
Operating and production data from continuing operations
 
 
 
Oil, natural gas liquids and natural gas sales
 
 
 
Oil
$
988,868

$
961,055

$
766,105

Natural gas liquids
110,918

91,407

81,313

Natural gas
244,408

203,855

159,377

Total
$
1,344,194

$
1,256,317

$
1,006,795

Open non-cash mark-to-market gains (losses) on derivative instruments
 
 
Oil
$
271,200

$
(43,261
)
$
58,786

Natural gas liquids
287

(652
)
479

Natural gas
43,958

(3,919
)
(515
)
Total
$
315,445

$
(47,832
)
$
58,750


28




Closed gains (losses) on derivative instruments
 
 
Oil
$
4,377

$
(52,694
)
$
(35,954
)
Natural gas liquids
6,218

10,795

4,146

Natural gas
8,979

39,707

57,211

Total
$
19,574

$
(2,192
)
$
25,403

Total revenues
$
1,679,213

$
1,206,293

$
1,090,948

Production volumes
 
 
 
Oil (MBbl)
11,814

10,364

8,749

Natural gas liquids (MMgal)
172.3

135.8

108.1

Natural gas (MMcf)
58,602

58,104

59,166

Total production volumes (MBOE)
25,684

23,281

21,183

Average daily production volumes
 
 
 
Oil (MBbl)
32.4

28.4

24.0

Natural gas liquids (MMgal)
0.5

0.4

0.3

Natural gas (MMcf)
160.6

159.2

162.1

Total average daily production volumes (MBOE/d)
70.4

63.8

58.0

Permian Basin - Spraberry (Trend Area) Field production volumes (included in production volumes above)**
Oil (MBbl)
2,463

2,822

2,134

Natural gas liquids (MMgal)
44.5

38.5

25.8

Natural gas (MMcf)
5,729

4,836

3,592

Total production volumes (MBOE)
4,477

4,544

3,347

Average realized prices excluding effects of open non-cash mark-to-market derivative instruments
Oil (per barrel)
$
84.07

$
87.65

$
83.46

Natural gas liquids (per gallon)
$
0.68

$
0.75

$
0.79

Natural gas (per Mcf)
$
4.32

$
4.19

$
3.66

Average realized prices excluding effects of all derivative instruments
Oil (per barrel)
$
83.70

$
92.73

$
87.56

Natural gas liquids (per gallon)
$
0.64

$
0.67

$
0.75

Natural gas (per Mcf)
$
4.17

$
3.51

$
2.69

Costs per BOE
 
 
 
Oil, natural gas liquids and natural gas production expenses
$
10.68

$
11.06

$
9.55

Production and ad valorem taxes
$
3.97

$
4.04

$
3.58

Depreciation, depletion and amortization
$
21.36

$
19.45

$
16.17

Exploration expense
$
1.09

$
0.60

$
0.62

General and administrative
$
4.75

$
4.89

$
3.71

** The Spraberry (Trend Area) Field in the Permian Basin contained 15 percent or more of Energen’s total proved reserves as of December 31, 2014.









29




Revenues: Our revenues fluctuate primarily as a result of realized commodity prices, production volumes, the value of our derivative contracts and any recognized gains or losses on the sales of assets.

Our revenues are predominantly derived from the sale of oil, natural gas liquids and natural gas. In 2014, commodity sales increased $87.9 million or 7 percent from the same period of 2013. In the current year, commodity sales revenues from continuing operations increased largely as a result of higher production volumes and higher natural gas commodity prices partially offset by lower oil and natural gas liquids commodity prices. Particular factors impacting commodity sales for 2014 include the following:

Oil volumes in 2014 increased 14 percent to 11,814 MBbl as new drilling in the horizontal Wolfcamp in the Midland and Delaware basins, along with continued Wolfberry and Bone Spring drilling, more than offset declines in the mature Central Basin Platform.
Average realized oil prices fell 9.7 percent to $83.70 per barrel during 2014 and included the impact of wider oil basis differentials.
Natural gas liquids production for 2014 rose 26.9 percent to 172.3 MMgal largely due to higher natural gas volumes related to the current drilling program and higher natural gas liquids recovery.
Average realized natural gas liquids prices decreased 4.5 percent to an average price of $0.64 per gallon during 2014.
Natural gas production increased 0.9 percent to 58.6 Bcf in 2014 as increased production in the Permian Basin was partially offset by declining San Juan Basin production.
Average realized natural gas prices rose 18.8 percent to $4.17 per Mcf during 2014.
Production from continuing operations rose 10.3 percent to 25.7 MMBOE during 2014.

For the year ended December 31, 2013, oil, natural gas liquids and natural gas sales increased $249.5 million or 24.8 percent from the same period of 2012. Commodity sales revenues from continuing operations increased in 2013 largely as a result of significantly higher oil and natural gas liquids production volumes and higher realized oil and natural gas commodity prices partially offset by lower natural gas liquids commodity prices and decreased natural gas production volumes. Particular factors impacting commodity sales for 2013 include the following:

Oil volumes rose 18.5 percent to 10,364 MBbl during 2013.
Average realized oil prices in 2013 rose 6 percent to $92.73 per barrel.
Production of natural gas liquids increased 25.6 percent to 135.8 MMgal in 2013.
Average realized natural gas liquids prices fell 10.7 percent to an average price of $0.67 per gallon during 2013.
Natural gas production decreased 1.8 percent to 58.1 Bcf in 2013.
Average realized natural gas prices in 2013 rose 30.5 percent to $3.51 per Mcf.
Production from continuing operations rose 9.9 percent to 23.3 MMBOE during 2013.

Realized prices exclude the effects of derivative instruments.

Oil, natural gas liquids and natural gas production expense: The following table provides the components of our oil, natural gas liquids and natural gas production expenses:

Years ended December 31, (in thousands, except per unit data)
2014
2013
2012
Lease operating expenses
$
140,413

$
129,326

$
106,029

Workover and repair costs
91,629

84,102

56,520

Marketing and transportation
42,390

44,010

39,737

Total oil, natural gas liquids and natural gas production expense
$
274,432

$
257,438

$
202,286

Oil, natural gas liquids and natural gas production expense per BOE
$
10.68

$
11.06

$
9.55


Energen had oil, natural gas liquids and natural gas production expense of $274.4 million, $257.4 million and $202.3 million during the years ended December 31, 2014, 2013 and 2012, respectively. Lease operating expense generally reflects year-over-year increases in the number of active wells resulting from Energen’s ongoing development and exploratory activities. In 2014, lease operating expense increased $11.1 million primarily due to increased chemical and treatment costs (approximately $2.7 million), higher producing overhead costs (approximately $2.2 million), increased gathering costs (approximately $2.2 million), additional other operations and maintenance expense (approximately $1.9 million), increased labor costs (approximately $1.7 million), higher electrical costs (approximately $1.7 million) and increased non-operated costs (approximately $1.6 million) partially offset by decreased environmental compliance costs (approximately $2.9 million) and lower water disposal costs (approximately $1 million). During 2013, lease operating expense increased $23.3 million largely due to increased equipment

30




rental expense (approximately $4.5 million), higher gathering costs (approximately $4.2 million), higher labor costs (approximately $3.6 million), increased environmental compliance costs (approximately $3.1 million), additional electrical costs (approximately $2.8 million), increased chemical usage (approximately $2.4 million) and increased nonoperated costs (approximately $1 million). On a per unit basis, the average lease operating expense for 2014, 2013 and 2012 was $5.46 per barrel of oil equivalent (BOE), $5.56 per BOE and $5.01 per BOE, respectively.

Workover and repair costs increased approximately $7.5 million and $27.6 million in 2014 and 2013, respectively. In 2014, these expenses were primarily related to workovers in the west Texas Permian Basin associated with pump and tubing replacements. Additional expenses were incurred associated with the protective preparation of producing wells for offset operations. Also, the increased number of producing wells resulting from our ongoing drilling program creates a higher level of base load workover and repair expense. The increase in workover and repair costs from 2012 to 2013 primarily resulted from increased base load due to our ongoing drilling program, well cleanouts resulting from offset well drilling and fracturing interference, and remedial work related to production interruption from two severe winter weather events.

In the years ended December 31, 2014 and 2013, marketing and transportation costs decreased $1.6 million and rose $4.3 million, respectively.

Production and ad valorem taxes: Production and ad valorem taxes were $102.1 million ($3.97 per BOE), $94.1 million ($4.04 per BOE) and $75.9 million ($3.58 per BOE), respectively, during the years ended December 31, 2014, 2013 and 2012. In 2014, production-related taxes were $7.8 million higher as increased commodity production volumes contributed approximately $7 million to the increase in production taxes combined with increased natural gas commodity market prices, largely offset by lower gas and natural gas liquids commodity market prices, which contributed approximately $0.8 million to the increase. In 2013, production-related taxes were $13.8 million higher as a result of higher oil and natural gas commodity market prices and the impact of increased oil and natural gas liquids production volumes which contributed approximately $8.5 million and $5.3 million to the increase in production taxes, respectively. Commodity market prices exclude the effects of derivative instruments for purposes of determining production taxes. Increased ad valorem taxes in 2014 and 2013 were primarily driven by the increase in the number of active wells.

Depreciation, depletion and amortization: DD&A expense increased $95.7 million in 2014 and $110.3 million in 2013. The average DD&A rates were $21.36 per BOE in 2014, $19.45 per BOE in 2013 and $16.17 per BOE in 2012. The increase in the 2014 and 2013 per unit DD&A rates, which contributed approximately $47.5 million and $76.6 million, respectively, to the increase in DD&A expense, was primarily due to higher rates resulting from an increase in development costs. Increased production volumes also contributed approximately $46.4 million and $33.6 million to the increase in DD&A expense in 2014 and 2013, respectively.

Asset impairment: In February 2015, Energen entered into a purchase and sale agreement to sell the majority of its natural gas assets in the San Juan Basin in New Mexico and Colorado for approximately $395 million. This sale is expected to close March 31, 2015, and have an effective date of January 1, 2015. During the third and fourth quarters of 2014, non-cash impairment writedowns of $147.9 million pre-tax and $88.1 million pre-tax, respectively, were recognized by Energen on certain gas properties in the San Juan Basin to adjust the carrying amount of these properties to their fair value based on expected future discounted cash flows in the third quarter and based on direct market data in the fourth quarter as these properties were designated as held for sale as of December 31, 2014. These non-cash impairment writedowns are reflected in asset impairment on the consolidated income statement. At December 31, 2014, proved reserves associated with Energen’s San Juan Basin held for sale properties totaled 69,043 MBOE.

During the third and fourth quarters of 2014, Energen recognized non-cash impairment writedowns on certain properties in the Permian Basin of $31.2 million pre-tax and $94.5 million pre-tax, respectively, to adjust the carrying amount of these properties to their fair value based on expected future discounted cash flows. These non-cash impairment writedowns are reflected in asset impairment on the consolidated income statement.

Energen recognized unproved leasehold writedowns primarily on Permian Basin oil properties of $55.1 million pre-tax during the fourth quarter of 2014. These non-cash writedowns are reflected in asset impairment on the consolidated income statement.









31




Exploration: The following table provides details of our exploration expense:

Years ended December 31, (in thousands, except per unit data)
2014
2013
2012
Geological and geophysical
$
8,800

$
3,141

$
2,461

Dry hole costs
9,325

2,101

10,453

Delay rentals and other
9,965

8,794

138

Total exploration expense
$
28,090

$
14,036

$
13,052

Total exploration expense per BOE
$
1.09

$
0.60

$
0.62


Exploration expense rose $14.1 million during 2014 primarily due to higher dry hole costs, increased seismic costs and additional delay rentals. Exploration expense increased $1 million in 2013 primarily due to increased delay rentals largely offset by lower dry hole costs.
 
General and administrative: The following table provides details of our general and administrative (G&A) expense:

Years ended December 31, (in thousands, except per unit data)
2014
2013
2012
General and administrative
$
27,781

$
25,310

$
20,617

Benefit and performance-based compensation costs
43,740

45,954

23,031

Labor costs
50,531

42,557

34,979

Total general and administrative expense
$
122,052

$
113,821

$
78,627

Total general and administrative expense per BOE
$
4.75

$
4.89

$
3.71


Total G&A expense rose $8.2 million in 2014 largely due to increased labor costs (approximately $8 million), higher professional services (approximately $2.4 million) and increased recruiting expenses (approximately $1.5 million) partially offset by decreased costs from Energen’s benefit and performance-based compensation plans (approximately $2.2 million) and decreased legal expenses (approximately $1.7 million). In 2013, total G&A expense rose $35.2 million primarily due to increased costs related to Energen’s benefit and performance-based compensation plans (approximately $22.9 million), higher labor costs (approximately $7.6 million), increased legal expenses (approximately $3 million) and higher professional services (approximately $1.1 million).

Interest expense: Interest expense decreased $2 million during 2014 largely due to the December 2013 repayment of the Senior Term Loans of $300 million issued in November 2011 and the October 2013 repayment of $50 million of 5 percent Notes, partially offset by the write-off of debt issuance costs of $2.7 million associated with the $600 million Senior Term Loans issued in December 2013, interest expense incurred from our credit facility entered into on September 2, 2014 and $0.4 million associated with the October 2012 syndicated credit facilities. In 2013, interest expense declined $7.8 million largely due to expense incurred under our credit facility borrowings prior to October 2012, the October 2013 repayment of $50 million of 5 percent Notes and the December 2013 repayment of the Senior Term Loans of $300 million. The interest expense associated with the $600 million Senior Term Loans and the October 2012 syndicated credit facilities are reflected in discontinued operations for all years presented. In conjunction with the sale of Alagasco, the $600 million Senior Term Loans and the syndicated credit facilities were repaid in September 2014. The average daily outstanding balance under credit facilities was $482.2 million in 2014. The average daily outstanding balance under credit facilities was $772.0 million in 2013 as compared to $309.9 million in 2012.

Income tax expense: Income tax expense decreased in 2014 and 2013 largely due to lower pre-tax income. In addition, Energen recognized an $8.4 million income tax benefit as a result of re-measuring its state deferred tax liabilities during the fourth quarter of 2014. This re-measurement reflected the state apportionment changes related to certain San Juan Basin properties designated as held for sale as of December 31, 2014.

Discontinued operations, net of tax: On September 2, 2014, Energen completed the transaction to sell Alagasco to Laclede for $1.6 billion, less the assumption of $267 million in debt. The net pre-tax proceeds to Energen totaled approximately $1.32 billion. This sale has an effective date of August 31, 2014. Energen used cash proceeds from the sale to reduce long-term and short-term indebtedness. During the second quarter of 2014, Energen classified Alagasco as held for sale and reflected the associated operating results in discontinued operations. Energen’s results of operations and cash flows for the years ended December 31, 2014, 2013 and 2012 and our financial position as of December 31, 2014 and 2013 presented in our consolidated financial statements and these notes reflect Alagasco as discontinued operations.

32




In March 2014, Energen completed the sale of its North Louisiana/East Texas primarily natural gas properties for $30.3 million. The sale had an effective date of December 1, 2013, and the proceeds from the sale were used to repay short-term obligations. During the third quarter of 2013, Energen classified these primarily natural gas properties as held for sale and reflected the associated operating results in discontinued operations. Energen recognized non-cash impairment writedowns on these properties in 2014 of $1.9 million pre-tax to adjust the carrying amount of these properties to their fair value based on an estimate of the selling price of the properties. Energen also recognized non-cash impairment writedowns on these properties in the third and fourth quarters of 2013 of $24.6 million pre-tax and $5.2 million pre-tax, respectively. These non-cash impairment writedowns are reflected in gain on disposal of discontinued operations, net on the consolidated income statements. At December 31, 2013, proved reserves associated with Energen’s North Louisiana/East Texas properties totaled 23 Bcf of natural gas and 91 MBbl of oil.

In October 2013, Energen completed the sale of its Black Warrior Basin coalbed methane properties in Alabama for $160 million (subject to closing adjustments). Energen recorded a pre-tax gain on the sale of approximately $35 million in the fourth quarter of 2013 that was reflected in gain on disposal of discontinued operations in the year ended December 31, 2013. The sale had an effective date of July 1, 2013, and the proceeds from the sale were used to repay short-term obligations. The property was classified as held for sale and reflected in discontinued operations during the third quarter of 2013. At December 31, 2012, proved reserves associated with Energen’s Black Warrior Basin properties totaled 97 Bcf of natural gas.

During the first quarter of 2012, Energen recorded a non-cash impairment writedown on certain properties in East Texas of $21.5 million pre-tax to adjust the carrying amount of these properties to their fair value based on expected future discounted cash flows. This non-cash impairment writedown is reflected in loss from discontinued operations for the year ended December 31, 2012. The impairment was caused by the impact of lower future natural gas prices. This impairment writedown is classified as Level 3 fair value.

See Note 15, Discontinued Operations and Held for Sale Properties, in the Notes to Financial Statements for additional information regarding discontinued operations.

FINANCIAL POSITION AND LIQUIDITY

Cash Flow
The key drivers impacting our cash flow from operations are our oil, natural gas liquids and natural gas production volumes and overall commodity market prices, net of the effects of settlements on our derivative commodity instruments. We rely on our cash flows from operations supplemented by borrowings under our syndicated credit facility to fund our capital spending plans and working capital requirements.

Net cash provided by operating activities: Energen’s net cash from operating activities totaled $705.5 million, $927.4 million and $735.7 million in 2014, 2013 and 2012, respectively and included discontinued operations associated with cash flows from Alagasco of $91.5 million, $109.3 million and $85.1 million, respectively. During 2014, operating cash flows decreased due to lower oil and natural gas liquids commodity prices partially offset by increased production and higher natural gas commodity prices. Net income in 2014 was also significantly impacted by non-cash charges, including higher DD&A, asset impairment charges and the change in derivative fair value. During 2013, operating cash flows increased due to an increase in oil and natural gas liquids production and higher natural gas and oil commodity prices. In 2013, net income was also impacted by non-cash charges, including higher DD&A and the change in derivative fair value. Net income decreased during 2012 largely due to lower realized natural gas and natural gas liquids commodity prices partially offset by increased production volumes and higher oil commodity prices. The Company’s working capital needs were also influenced by accrued taxes and the timing of payments and recoveries for all years.

Net cash used in investing activities: Energen made net investments of $38.9 million during 2014. Energen invested $70.7 million in property acquisitions including approximately $68.5 million of unproved leaseholds; $399.1 million for development costs (excludes the accrual of approximately $4.6 million of accrued development cost) including approximately $270 million to drill 102 net development and service wells; and $844.1 million for exploration (excludes the accrual of approximately $109.3 million of accrued exploration cost) including approximately $703 million to drill 110 net exploratory wells. Included in the proceeds from the sale of Alagasco and other assets in 2014 are cash proceeds of $1,317.1 million from the sale of Alagasco and $30 million from the sale of North Louisiana/East Texas properties. During 2013, the Company made net investments of $1,053.6 million. Energen invested $31.3 million in property acquisitions including approximately $26.8 million of unproved leaseholds; $675.4 million for development costs (includes the reversal of approximately $23.9 million of accrued development cost) including approximately $457 million to drill 179 net development and service wells; and $423.7 million for exploration including approximately $295 million to drill 90 net exploratory wells. Energen had cash proceeds in 2013 of $161.0 million primarily from the sale of certain Black Warrior Basin properties. During 2012, the Company made net investments of $1,322.2 million. Energen invested $139.6 million in property acquisitions including approximately $58.6 million of unproved leaseholds; $692.4 million for development costs (includes the reversal of approximately $46.8 million of accrued development cost) including approximately $560 million to drill 288 net development and service wells; and $416.7 million for exploration including approximately $376.6 million to drill 75 net exploratory wells. In February 2012, Energen completed the purchase of certain properties in the Permian Basin for a cash purchase price of $68 million adding approximately 8.2 MMBOE of proved reserves. Energen had cash proceeds in 2012 of $2.6 million primarily from the sale of certain Black Warrior Basin properties.

During 2014, Energen added 130 MMBOE of proved reserves from discoveries and other additions, primarily the result of exploratory and development drilling that increased the number of proved undeveloped locations in the Permian Basin. Energen added approximately 37 MMBOE and 69 MMBOE of proved reserves in 2013 and 2012, respectively.

Net cash provided by (used in) financing activities: The Company used $670.3 million for net financing activities in 2014 largely due to the repayment of $600 million Senior Term Loans, discontinued operations primarily related to the sale of Alagasco and the purchase and retirement of shares. In 2013, the Company provided $122.1 million from net financing activities primarily from the December 2013 issuance of $600 million of Senior Term Loans partially offset by the repayment of long-term debt of $350 million combined with a decrease in short-term borrowings. In 2012, the Company provided $586.6 million from net financing activities largely from an increase in short-term borrowings used to fund development activity at Energen and discontinued operations. For each of the years, net cash used in financing activities also reflected dividends paid to common shareholders which were partially offset by the issuance of common stock through the Company’s stock-based compensation plan.

Capital Expenditures
Capital spending at Energen is detailed below.

Years ended December 31, (in thousands)
2014
2013
2012
Property acquisitions
$
71,096

$
31,481

$
138,496

Development
406,597

654,222

748,251

Exploration
953,409

423,698

416,678

Other
20,849

11,352

4,543

Total
1,451,951

1,120,753

1,307,968

Less exploration expenditures charged to income
79,441

16,008

16,757

Net capital expenditures
$
1,372,510

$
1,104,745

$
1,291,211


FUTURE CAPITAL RESOURCES AND LIQUIDITY

Outlook
Realized commodity prices and production levels by commodity type are the two primary drivers of our liquidity. Recent price declines in the outlook for oil, natural gas liquids and natural gas indicate a significant risk for lower revenues and related operating cash flows. Historically, prices received for oil, natural gas liquids and natural gas production have been volatile because of supply and demand factors, general economic conditions and seasonal weather patterns. Crude oil prices also are affected by quality differentials, worldwide political developments and actions of the Organization of the Petroleum Exporting Countries. Basis differentials, like the underlying commodity prices, can be volatile because of regional supply and demand factors, including seasonal variations and the availability and price of transportation to consuming areas.

Commodity hedges in place for 2015 will help mitigate some of the commodity price volatility and recent declines. We currently have approximately 8,280 MBbl of oil and 31 Bcf of natural gas hedged for 2015. We are fully exposed to commodity price volatility beginning in 2016. See Item 7A, Quantitative and Qualitative Disclosures about Market Risk, for a full detail of our hedged volumes.

Energen plans to continue to implement its growth strategy with capital spending in 2015. Production in 2015 is estimated to range from 21.4 MMBOE to 22.4 MMBOE, with a midpoint of 21.9 MMBOE, including approximately 18.4 MMBOE of estimated production from proved reserves owned at December 31, 2014. Energen’s 2015 production estimate excludes volumes from the San Juan Basin assets held for sale at December 31, 2014. Such assets produced an estimated 6.6 MMBOE in 2014. Production estimates do not include amounts for potential future acquisitions. In the event Energen is unable to fully invest in its capital investment opportunities, future operating revenues, production and proved reserves could be negatively affected.


Production volumes by area are expected to be as follows:

Year ended December 31, (MMBOE)
2015
Permian Basin
19.9
San Juan Basin/other
2.0
Total (midpoint of range)
21.9

Production volumes by commodity are expected to be as follows:

Year ended December 31, (MMBOE)
2015
Oil
14.0
Natural gas liquids
3.7
Natural gas
4.2
Total (midpoint of range)
21.9

During 2015, Energen expects an annualized decline rate of approximately16.4 percent for its proved developed producing properties owned at December 31, 2014, excluding production from San Juan Basin properties held for sale at December 31, 2014. During the same period, total production from proved properties is expected to decrease approximately 3.8 percent and total production is expected to increase approximately 14.5 percent. The above proved developed producing properties decline rate is not necessarily indicative of Energen’s expectations for its terminal decline rate on a long-term basis.

Various factors influence decline rates. For example, certain properties may have production curves that decline at faster rates in the early years of production and at slower rates in later years. Accordingly, the decline rate for a single year is influenced by numerous factors, including but not limited to, the mix of types of wells, the mix of newer versus older wells, and the effect of enhanced recovery activities, but it is not necessarily indicative of future decline rates. Energen expects a compound annual decline rate for proved producing properties owned at December 31, 2014, excluding production from San Juan Basin properties held for sale at December 31, 2014, for the 5 year period 2014 to 2019, for the 10 year period 2014 to 2024 and for the 20 year period 2014 to 2034 of approximately 15.8 percent, 13.3 percent and 10.3 percent, respectively.

Revenues and related accounts receivable from oil and natural gas operations primarily are generated from the sale of produced oil, natural gas liquids and natural gas to energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to the energy marketing industry has the potential to affect Energen’s overall exposure to credit risk, either positively or negatively, in that our oil and natural gas purchasers may be affected similarly by changes in economic, industry or other conditions. Energen considers the credit quality of its customers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee.

Energen plans to continue investing significant capital in oil and natural gas production operations. For 2015, we expect our oil and natural gas capital spending to total approximately $1 billion, including $347 million for existing properties and $613 million for exploration. Included in this $347 million is approximately $288 million for the development of previously identified proved undeveloped reserves.














Capital expenditures by area and targeted formation during 2015 are planned as follows:

Year ended December 31, (in thousands)
2015
Permian
 
Midland Basin
 
Wolfcamp
$
515,000

Spraberry
68,000

Wolfberry
27,000

SWD/Facilities
45,000

Non-operated/Other
10,000

Delaware Basin
 
Bone Spring
10,000

Wolfcamp
85,000

Wolfbone
13,000

Lease extensions
37,000

SWD/Facilities
39,000

Non-operated/Other
3,000

Other Permian
12,000

San Juan Basin/Non-Operated/Other
73,000

Net Carry-in/Carry Out
63,000

Total
$
1,000,000


Energen anticipates having the following drilling rigs and net wells by area during 2015. The drilling rigs presented below are operated while the net wells include operated and non-operated wells.

 
Drilling Rigs
Net Wells
Permian Basin
8-11
116

Energen also may allocate additional capital for other oil and natural gas activities such as property acquisitions and additional development of existing properties. Energen may evaluate acquisition opportunities which arise in the marketplace. Energen’s ability to invest in property acquisitions is subject to market conditions and industry trends. Property acquisitions, except as discussed above, are not included in the aforementioned estimate of oil and natural gas investments and could result in capital expenditures different from those outlined above.

To finance capital spending, Energen expects to use internally generated cash flow supplemented by our existing $2.0 billion five-year syndicated credit facility. We also will use the $395 million of proceeds expected from the sale of certain San Juan Basin properties. Energen also may issue long-term debt and equity periodically to replace short-term obligations, enhance liquidity and provide for permanent financing. Access to capital is an integral part of Energen’s business plan. While we expect to have ongoing access to our credit facility and long-term capital markets, continued access could be adversely affected by current and future economic and business conditions and possible credit rating downgrades.

Credit Facility and Working Capital
On September 2, 2014, Energen entered into a $1.5 billion five-year syndicated secured credit facility with domestic and foreign lenders. The credit facility was amended to $2.0 billion on November 17, 2014. The credit facility has an initial borrowing base of $2.1 billion. This credit facility refinances and replaces the $1.25 billion five-year syndicated unsecured credit facility entered into on October 30, 2012. Energen’s obligations under the $2.0 billion syndicated credit facility are unconditionally guaranteed by Energen Resources. The financial covenants of the credit facility require Energen to maintain a ratio of total debt to consolidated income before interest expense, income taxes, depreciation, depletion, amortization, exploration expense and other non-cash income and expenses (EBITDAX) less than or equal to 4.0 to 1.0; to maintain a ratio of consolidated current assets (adjusted to include amounts available for borrowings and exclude non-cash derivative instruments) to consolidated current liabilities (adjusted to exclude maturities under the credit facility and non-cash derivative instruments) greater than or equal to 1.0 to 1.0; and, during certain periods, to maintain a ratio of the net present value of proved reserves of our oil and natural gas properties to consolidated total debt greater than or equal to 1.50 to 1.0. Our credit facility also limits our ability to enter into commodity hedges based on projected production volumes. The Company was in compliance with the terms of the syndicated credit facility at December 31, 2014.

At close of the sale of certain San Juan properties, our borrowing base and corresponding bank commitments will be reduced by $220 million reflecting the sold proved reserves. In addition, our borrowing base is subject to redetermination semi-annually and for event-driven unscheduled redeterminations. Each redetermination includes updating the borrowing base for new drilling and production and for any changes to the specific lending criteria of our bank group, including commodity price outlook. Given the recent decrease in commodity prices and based on the recent strip prices, we anticipate a further reduction of $150 million to $250 million to our borrowing base. However, we believe that after reflecting these reductions to our borrowing base and related bank commitments we will have adequate liquidity to execute our planned capital spending.

At December 31, 2014, Energen reported unadjusted working capital of $359.0 million arising from current assets of $919.4 million exceeding current liabilities of $560.3 million. Working capital at Energen is influenced by the fair value of derivative financial instruments associated with future production. Energen has $322.3 million in current assets and $1.0 million in current liabilities, respectively, associated with its derivative financial instruments at December 31, 2014. Energen relies upon cash flows from operations supplemented by our credit facility to fund working capital needs.

Credit Ratings
On September 3, 2014, following the sale of Alagasco, Standard & Poor’s (S&P) lowered its credit ratings for Energen from BBB- to BB with a stable outlook. On April 8, 2014, Moody’s Investors Service lowered Energen’s senior unsecured credit rating from Baa3 to Ba1 with a negative outlook.

Dividends
Dividends for the first, second and third quarter of 2014 were $0.15 per share on Energen common stock and $0.02 per share for the fourth quarter of 2014. Subsequent to the sale of Alagasco, Energen substantially reduced the amount of its dividend payments with a focus on further development and exploration of its oil and natural gas properties. The amount and timing of all dividend payments is subject to the discretion of the Board of Directors and is based upon business conditions, results of operations, financial conditions and other factors. Energen’s credit facility prohibits payment of dividends during an event of default, if the payment would result in an event of default or if availability is less than 10 percent of the loan limit under the credit facility.

Employee Benefit Plans
In October 2014, Energen’s Board of Directors elected to freeze and terminate its qualified defined benefit pension plan. A plan amendment adopted in October 2014 closes the plan to new entrants, effective November 1, 2014, and freezes benefit accruals effective December 31, 2014. Energen terminated the plan on January 31, 2015. We anticipate distributing benefits under the plan in late 2015 or early 2016 pending receipt of a determination letter from the Internal Revenue Service and completion of certain administrative actions.

Energen’s non-qualified supplemental retirement plans were terminated effective December 31, 2014. Distributions under the plans are subject to certain payment restrictions under the Internal Revenue Code and Treasury regulations and payments to plan participants will be made in each of the first quarters of 2015 and 2016. In connection with the termination of these plans, Energen has also reclassified approximately $11.0 million as of December 31, 2014 of its investment in a Rabbi Trust from other long term assets to prepayments and other assets in the accompanying balance sheets to reflect its intent to utilize these assets to fund the estimated payments in the first quarter of 2015.

In October 2014, Energen’s Board of Directors amended and restated the Employee Saving Plan to make certain benefit design changes effective January 1, 2015. The benefit design changes include an increase in the percentage of Company match and other contributions.

Stock Repurchase Authorization
From time to time, the Company may repurchase shares of its common stock through open market or negotiated purchases. Such repurchases would be pursuant to a 3,600,000 share repurchase authorization approved by the Board of Directors on October 22, 2014. For the year ended December 31, 2014, Energen repurchased and retired 226,839 shares for $14.9 million pursuant to our repurchase authorization. There were no shares repurchased pursuant to its repurchase authorization for the years ended December 31, 2013 and 2012. As of December 31, 2014, a total of 3,373,161 shares remain authorized for future repurchase. The timing and amounts of any repurchases are subject to changes in market conditions and other business considerations. Energen also from time to time acquires shares in connection with participant elections under Energen’s stock compensation plans. For the years ended December 31, 2014, 2013 and 2012, Energen acquired 32,768 shares, 14,766 shares and 12,867 shares, respectively, in connection with its stock compensation plans.

Contractual Cash Obligations and Other Commitments
In the course of ordinary business activities, Energen enters into a variety of contractual cash obligations and other commitments. The following table summarizes Energen’s significant contractual cash obligations, other than hedging contracts, as of December 31, 2014:

 
Payments Due Before December 31,

(in thousands)

Total

2015

2016-2017

2018-2019
2020 and Thereafter
Long-term debt (1)
$
1,039,000

$

$
19,000

$
485,000

$
535,000

Interest payments on debt
283,382

37,689

74,791

69,888

101,014

Operating leases
12,597

2,698

5,144

4,755


Asset retirement obligations (2)
742,007

3,282

4,825

4,816

729,084

Nonqualified supplemental retirement plans
26,461

10,959

14,714

217

571

Total contractual cash obligations
$
2,103,447

$
54,628

$
118,474

$
564,676

$
1,365,669


(1) Long-term debt obligations include approximately $0.4 million of unamortized debt discounts as of December 31, 2014.

(2) Represents the estimated future asset retirement obligation on an undiscounted basis.

Energen operates in certain instances through joint ventures under joint operating agreements. Typically, the operator under a joint operating agreement enters into contracts, such as drilling contracts, for the benefit of all joint venture partners. Through the joint operating agreement, the non-operators reimburse, and in some cases advance, the funds necessary to meet the contractual obligations entered into by the operator. These obligations are typically shared on a working interest basis as defined in the joint operating contractual agreement.

Under various agreements for third-party gathering, treatment, transportation or other services, Energen is committed to deliver minimum production volumes or to pay certain costs in the event the minimum quantities are not delivered. These delivery commitments are approximately 5.4 MMBOE through August 2017.

During 2015, Energen anticipates an additional contribution of $13.7 million in order to complete the distribution of plan assets related to the plan termination. The contractual obligations reported above exclude any payments Energen expects to make to postretirement benefit program assets.

The contractual obligations reported above exclude Energen’s liability of $17.5 million related to Energen’s provision for uncertain tax positions. Energen cannot make a reasonably reliable estimate of the amount and period of related future payments for such liability.

In 2011, Energen Resources received an Order to Perform Restructured Accounting and Pay Additional Royalties (the Order), following an audit performed by the Taxation and Revenue Department (the Department) of the State of New Mexico on behalf of the Office of Natural Resources Revenue (ONRR), of federal oil and gas leases in New Mexico. The audit covered periods from January 2004 through December 2008 and included a review of the computation and payment of royalties due on minerals removed from specified U.S. federal leases. The Order addressed ONRR’s efforts to change accounting and reporting practices, and to unbundle fees charged by third parties that gather, compress and transport natural gas production. ONRR now maintains that all or some of such fees are not deductible.

Energen Resources appealed the Order in 2011 and in July 2012, on a motion from ONRR, the Order was remanded. In August 2014, ONRR issued its Revised Order that is now under appeal. In the Revised Order, ONRR has ordered that Energen pay additional royalties on production from certain federal leases in the amount of $129,700. Energen estimates that application of the Revised Order to all of the Company’s federal leases would result in ONRR claims up to approximately $24 million, plus interest and penalties from 2004 forward. ONRR began implementing its unbundling initiative in 2010, but seeks to implement its revisions retroactively, despite the fact that they conflict with previous audits, allowances and industry practice. Energen continues to vigorously contest the Revised Order and the findings. Management is unable, at this time, to determine a range of reasonably possible losses, and no amount has been accrued as of December 31, 2014.

Derivative Commodity Instruments
We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. Such instruments may include over-the-counter (OTC) swaps and basis swaps typically executed with investment and commercial banks and energy-trading firms.

Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net gain position with thirteen of our active counterparties and in a net loss position with the remaining one at December 31, 2014. Energen has policies in place to limit hedging to not more than 80 percent of our estimated annual production; however, Energen’s credit facility contains a covenant which operates to limit hedging at a lower threshold in certain circumstances.

Energen has prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the market value of crude oil, natural gas liquids and natural gas may have on the fair value of its derivative instruments. This analysis measured the impact on the commodity derivative instruments and, thereby, did not consider the underlying exposure related to the commodity. At December 31, 2014, Energen was in a net gain position of $321.3 million for derivative contracts and estimates that a 10 percent increase or decrease in the commodities prices would have resulted in an approximate $54 million change in the fair value of open derivative contracts; however, gains and losses on derivative contracts are expected to be similarly offset by sales at the spot market price. The hypothetical change in fair value was calculated by multiplying the difference between the hypothetical price and the contractual price by the contractual volumes and did not include the impact of related taxes on actual cash prices.

All derivatives are recognized at fair value under the fair value hierarchy as discussed in Note 2, Summary of Significant Accounting Policies, in the Notes to Financial Statements. Level 3 assets as of December 31, 2014 represent an immaterial amount of both total assets and liabilities. Changes in fair value primarily result from price changes in the underlying commodity. Energen has prepared a sensitivity analysis to evaluate the hypothetical effect that changes in the prices used to estimate fair value would have on the fair value of its Level 3 instruments. We estimate that a 10 percent increase or decrease in commodity prices would result in an approximate $6.7 million change in the fair value of open Level 3 derivative contracts and to the results of operations.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was signed into law. Title VII of the Dodd-Frank Act establishes federal oversight and regulation of the over-the-counter derivatives markets and participants in such markets and requires the Commodities Futures Trading Commission (CFTC) and the SEC to promulgate implementing rules and regulations. These rules and regulations will cover, among other transactions, transactions linked to crude oil and natural gas prices.  We believe Energen’s derivative transactions qualify for the end-user exception which exempts them from certain Dodd-Frank Act margin and exchange clearing requirements pursuant to final regulations adopted by the CFTC and SEC and published in the Federal Register on July 19, 2012. However, the Dodd-Frank Act also authorized the CFTC to set position limits for certain futures and options contracts in the major energy markets and for swaps that are their economic equivalents. The CFTC’s initial regulations on position limits were vacated by the U.S. District Court for the District of Columbia in 2012, and the CFTC subsequently proposed new position limits in November 2013 which have not yet been finally adopted. The full impact of the Dodd-Frank Act and related regulatory requirements on Energen will not be known until the regulations have been fully implemented and the derivative markets have adjusted to such regulations. Energen could experience increased costs and reduced liquidity in the markets as a result of the new rules and regulations, which could reduce hedging opportunities and negatively affect our revenues and cash flows.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Energen’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. Management has identified the following critical accounting policies in the application of existing accounting standards or in the implementation of new standards that involve significant judgments and estimates by Energen. The application of these accounting policies necessarily requires management’s most subjective or complex judgments regarding estimates and projected outcomes of future events that could have a material impact on the financial statements.

Accounting for Oil and Natural Gas Producing Activities and Related Proved Reserves: Energen utilizes the successful efforts method of accounting for its oil and natural gas producing activities. Acquisition and development costs of proved properties are capitalized and amortized on a units-of-production basis over the remaining life of total proved and proved developed reserves. Proved oil and natural gas reserves are the estimated quantities of crude oil, natural gas liquids and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing

33




economic and operating conditions. The technologies associated with these proved reserve estimates are analysis of well production data, geophysical data, wireline and core data. Accordingly, these estimates do not include probable or possible reserves. Estimated oil and gas proved reserves are based on currently available reservoir data and are subject to future revision. Estimates of physical quantities of oil and natural gas proved reserves have been determined by Company engineers. Independent oil and natural gas reservoir engineers have audited the estimates of proved reserves of crude oil, natural gas liquids and natural gas attributed to Energen’s net interests in oil and natural gas properties as of December 31, 2014. The independent reservoir engineers have issued reports covering approximately 99 percent of the Company’s ending proved reserves and in their judgment these estimates were reasonable in the aggregate. Energen’s production of proved undeveloped reserves requires the drilling of development wells and the installation or completion of related infrastructure facilities.

Changes in oil and natural gas prices, operating costs and expected performance from the properties can result in a revision to the amount of estimated proved reserves held by Energen. If proved reserves are revised upward, earnings could be affected due to lower depreciation and depletion expense per unit of production. Likewise, if proved reserves are revised downward, earnings could be affected due to higher depreciation and depletion expense or due to an immediate writedown of the property’s book value if an impairment is warranted.

The table below reflects an estimated increase in 2015 depreciation, depletion and amortization expense associated with an assumed downward revision in the reported oil and natural gas reserve amounts at December 31, 2014:

 
Percentage Change in Proved Oil & Natural Gas Reserves From Reported Reserves
 
as of December 31, 2014
(dollars in thousands)
-5%
-10%
Estimated increase in DD&A expense for the
year ended December 31, 2015, net of tax
$
15,927

$
33,339


Exploratory drilling costs are capitalized pending determination of proved reserves. If proved reserves are not discovered, the exploratory drilling costs are expensed. Other exploration costs, including geological and geophysical costs, are expensed as incurred.

Asset Impairments: Oil and natural gas proved properties periodically are assessed for possible impairment on a field-by-field basis using the estimated undiscounted future cash flows. Impairment losses are recognized when the estimated undiscounted future cash flows are less than the current net book values of the properties in a field. Energen monitors its oil and natural gas properties as well as the market and business environments in which it operates and makes assessments about events that could result in potential impairment issues. Such potential events may include, but are not limited to, substantial commodity price declines, unanticipated increased operating costs, and lower than expected production performance. If a material event occurs, we make an estimate of undiscounted future cash flows to determine whether the asset is impaired. If the asset is impaired, Energen will record an impairment loss for the difference between the net book value of the properties and the fair value of the properties. The fair value of the properties typically is estimated using discounted cash flows.

Cash flow and fair value estimates require Energen to make projections and assumptions for pricing, demand, competition, operating costs, legal and regulatory issues, discount rates and other factors for many years into the future. These variables can, and often do, differ from the estimates and can have a positive or negative impact on our need for impairment or on the amount of impairment. In addition, further changes in the economic and business environment can impact Energen’s original and ongoing assessments of potential impairment.

Energen also may recognize impairments of capitalized costs for unproved properties. The greatest portion of these costs generally relate to the acquisition of leasehold. The costs are capitalized and periodically evaluated as to recoverability, based on changes brought about by exploration activities, changes in economic factors and potential shifts in business strategy employed by management. We consider a combination of geologic and economic factors to evaluate the need for impairment of these costs.

Derivatives: Energen periodically enters into derivative commodity instruments to manage its exposure to oil, natural gas liquids and natural gas price volatility. We enter into derivative transactions that are accounted for as mark-to-market transactions with gains and losses reported in current period gain (loss) on derivative instruments, net. Energen does not enter into derivatives or other financial instruments for trading purposes. The use of derivative contracts to mitigate price risk may cause the Company’s financial position, results of operations and cash flow to be materially different from results that would have been obtained had such risk mitigation activities not occurred.

34




Employee Benefit Plans: An employer is required to recognize the net funded status of defined benefit pensions and other postretirement benefit plans as an asset or liability in its statement of financial position and to recognize changes in the funded status through comprehensive income in the year in which the changes occur. For other postretirement plans, the benefit obligation is the accumulated postretirement benefit obligation, a measurement of earned postretirement benefit obligations expected to be paid to employees upon retirement. As Energen has frozen and plans to terminate the defined benefit pension plan, the projected pension benefit obligation as of December 31, 2014 represents the present value of the estimated cost of settling the benefit obligation of the plan.

Actuarial assumptions attempt to anticipate future events and are used in calculating the expenses and liabilities related to these plans. The calculation of the liability related to Energen’s benefit plans includes assumptions regarding the market interest rates at which pension benefits will be settled, appropriate weighted average discount rates, the expected long-term rate of return on the plans’ assets and the anticipated life span of employees. The key assumptions used in determining these calculations are disclosed in Note 5, Employee Benefit Plans, in the Notes to Financial Statements.

In selecting each discount rate, consideration was given to Moody’s Aa corporate bond rates, along with a yield curve applied to payments Energen expects to make out of its retirement plans. The yield curve is comprised of a broad base of Aa bonds with maturities between zero and thirty years. The discount rate for each plan was developed as the level equivalent rate that would produce the same present value as that using spot rates aligned with the projected benefit payments; the weighted average discount rate used to determine net periodic benefit costs was 3.66 percent for the pension plans and 4.88 percent for the other postretirement plans for the year ended December 31, 2014. The assumed rate of return on assets is the weighted average of expected long-term asset assumptions; the return on assets used to determine net periodic benefit cost was 7 percent for each of the applicable plans for the year ended December 31, 2014. The estimated weighted average rate of increase in the compensation level for pay related plans was 3.63 percent for the year ended December 31, 2014.

The selection and use of actuarial assumptions affects the amount of benefit expense recorded in Energen’s financial statements. The table below reflects a hypothetical 25 basis point change in assumed actuarial assumptions to pre-tax benefit expense for the year ended December 31, 2014:

(in thousands)
 
Postretirement
Expense
Discount rate change
 
$
10

Return on assets
 
$
25


The weighted average discount rate and return on plan assets used in the 2015 actuarial assumptions for other postretirement plans are 4.25 percent and 7.00 percent, respectively.

The pension plan obligations anticipated the plan will be settled during late 2015. Should the settlement not occur until 2016, the obligations may vary based on market rates and the time of settlement. A 25 basis point increase in market rates would reduce the cost of settling the pension obligations by approximately $2.7 million.

Asset Retirement Obligation: Energen records the fair value of a liability for an asset retirement obligation in the period in which it is incurred. Subsequent to initial measurement, liabilities are required to be accreted to their present value each period and capitalized costs are depreciated over the estimated useful life of the related assets. Upon settlement of the liability, Energen will settle the obligation for its recorded amount and recognize the resulting gain or loss. Energen has an obligation to remove tangible equipment and restore land at the end of oil and natural gas production operations. The estimate of future restoration and removal costs includes numerous assumptions and uncertainties, including but not limited to, inflation factors, discount rates, timing of settlement, and changes in contractual, regulatory, political, environmental, safety and public relations considerations.

RECENT PRONOUNCEMENTS OF THE FINANCIAL ACCOUNTING STANDARDS BOARD

See Note 18, Recently Issued Accounting Standards, in the Notes to Financial Statements for information regarding recently issued accounting standards.

35




ITEM 7A.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information contained herein should be read in conjunction with the related disclosures as set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under the heading “Outlook” and in Note 7, Derivative Commodity Instruments, and in Note 8, Fair Value Measurements, in the Notes to Financial Statements.

We are exposed to various market risks including commodity price risk, counterparty credit risk and interest rate risk. We seek to manage these risks through our risk management program which often includes the use of derivative instruments. We do not enter into derivative or other financial instruments for speculative or trading purposes.

Commodity price risk: Energen’s major market risk exposure is in the pricing applicable to its oil and natural gas production. Historically, prices received for oil, natural gas liquids and natural gas production have been volatile due to seasonal weather patterns, world and national supply-and-demand factors and general economic conditions. Crude oil prices also are affected by quality differentials, by worldwide political developments and by actions of the Organization of the Petroleum Exporting Countries. Basis differentials, like the underlying commodity prices, can be volatile because of regional supply-and-demand factors, including seasonal factors and the availability and price of transportation to consuming areas.

We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. Such instruments may include over-the-counter swaps and basis swaps typically executed with investment and commercial banks and energy-trading firms.

As of December 31, 2014, Energen entered into the following transactions for 2015 and subsequent years:

Production Period
Total Hedged Volumes
Average Contract
Price

Description
Fair Value (in thousands)
Oil
 
2015
8,280
 MBbl
$89.30 Bbl
NYMEX Swaps
$
268,550

Oil Basis Differential
 
2015
2,160
 MBbl
$(4.30) Bbl
WTS/WTI Basis Swaps*
(3,836
)
2015
6,840
 MBbl
$(4.82) Bbl
WTI/WTI Basis Swaps**
(14,419
)
Natural Gas
 
2015
23.0
 Bcf
$4.13 Mcf
Basin Specific Swaps - San Juan
28,597

2015
8.0
 Bcf
$4.25 Mcf
Basin Specific Swaps - Permian
10,927

December 2014 contracts (closed but not cash settled)
 
31,530

Total
 
 
 
$
321,349

*WTS - West Texas Sour/Midland, WTI - West Texas Intermediate/Cushing
 
**WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing
 

Realized prices are anticipated to be lower than New York Mercantile Exchange prices primarily due to basis differences and other factors.

Additionally, we have entered into certain sales volume and supply target arrangements with certain customers. A failure to meet sales volume targets at Energen due to miscalculations, weather events, natural disasters, accidents, mechanical failures, criminal acts or otherwise could leave us exposed to our counterparties in commodity hedging contracts and result in material adverse financial losses.

Counterparty credit risk: Our principal exposure to credit risk is through the sale of our oil, natural gas liquids and natural gas production, which we market to energy marketing companies. Such sales are typically made on an unsecured credit basis with payment due the month following delivery. This concentration of sales to the energy marketing industry has the potential to affect our overall exposure to credit risk. We consider the credit quality of our purchasers and, in certain instances, may require credit assurances such as a deposit, letter of credit or parent guarantee.

We are also at risk for economic loss based upon the credit worthiness of our derivative instrument counterparties. The counterparties to the commodity instruments are investment banks and energy-trading firms and are believed to be creditworthy by Energen. All

36




hedge transactions are subject to Energen’s risk management policy, approved by the Board of Directors, which does not permit speculative positions. Energen formally documents all relationships between hedging instruments and hedged items at the inception of the hedge, as well as its risk management objective and strategy for undertaking the hedge.

Interest rate risk: Our interest rate exposure as of December 31, 2014 primarily relates to our syndicated credit facility with variable interest rates. At December 31, 2014, we had interest rate swap agreements with a notional of $133 million. The interest rate swaps exchange a variable interest rate for a fixed interest rate of 1.0425 percent. The fair value of our interest rate swaps was a $0.8 million liability at December 31, 2014. The weighted average interest rate for amounts outstanding at December 31, 2014 was 1.67 percent. All long-term debt obligations, other than our credit facility, were at fixed rates at December 31, 2014.


37




ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ENERGEN CORPORATION
INDEX TO FINANCIAL STATEMENTS

 
 
Page
1.
Financial Statements
 
 
 
 
 
Report of Independent Registered Public Accounting Firm
 
 
 
 
Consolidated Statements of Income for the years ended December 31, 2014, 2013
and 2012
 
 
 
 
Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013
and 2012
 
 
 
 
Consolidated Balance Sheets as of December 31, 2014 and 2013
 
 
 
 
Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2014, 2013
and 2012
 
 
 
 
Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012
 
 
 
 
Notes to Financial Statements
 
 
 

Schedules other than those listed above are omitted because they are not required, not applicable, or the required information is shown in the financial statements or notes thereto.


38



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Energen Corporation:

In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Energen Corporation and its subsidiaries at December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP
Birmingham, Alabama
March 2, 2015


39




ENERGEN CORPORATION
CONSOLIDATED BALANCE SHEETS

(in thousands)
December 31, 2014
 
December 31, 2013
 
 
 
 
ASSETS
 
 
 
Current Assets
 
 
 
Cash and cash equivalents
$
1,852

 
$
2,523

Accounts receivable, net of allowance for doubtful accounts of $688 and $696 at December 31, 2014 and 2013, respectively
157,678

 
136,334

Inventories
14,251

 
11,130

Assets held for sale
395,797

 
1,242,872

Deferred income taxes

 
21,250

Derivative instruments
322,337

 
17,463

Prepayments and other
27,445

 
9,989

Total current assets
919,360

 
1,441,561

Property, Plant and Equipment
 
 
 
Oil and gas properties, successful efforts method
 
 


Proved properties
6,903,514

 
6,695,400

Unproved properties
142,340

 
168,975

Less accumulated depreciation, depletion and amortization
1,893,106

 
1,776,802

Oil and gas properties, net
5,152,748

 
5,087,573

Other property and equipment, net
46,389

 
30,515

Total property, plant and equipment, net
5,199,137

 
5,118,088

Other postretirement assets

 
8,894

Noncurrent derivative instruments

 
5,439

Other assets
19,761

 
48,230

TOTAL ASSETS
$
6,138,258

 
$
6,622,212


The accompanying Notes to Financial Statements are an integral part of these statements.


40




ENERGEN CORPORATION
CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)
December 31, 2014
 
December 31, 2013
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Current Liabilities
 
 
 
Long-term debt due within one year
$

 
$
60,000

Notes payable to banks

 
489,000

Accounts payable
101,453

 
78,178

Accrued taxes
5,530

 
8,201

Accrued wages and benefits
46,162

 
27,036

Accrued capital costs
207,461

 
93,623

Revenue and royalty payable
72,047

 
51,519

Liabilities related to assets held for sale
24,230

 
831,570

Deferred income taxes
79,164



Derivative instruments
988

 
30,302

Other
23,288

 
21,796

Total current liabilities
560,323

 
1,691,225

Long-term debt
1,038,563

 
1,093,541

Asset retirement obligations
94,060

 
108,533

Pension and other postretirement liabilities
15,935

 
47,484

Deferred income taxes
1,000,486

 
807,614

Noncurrent derivative instruments

 
398

Other
14,287

 
15,398

Total liabilities
2,723,654

 
3,764,193

Commitments and Contingencies


 


Shareholders’ Equity
Preferred stock, cumulative, $0.01 par value, 5,000,000
shares authorized

 

Common shareholders’ equity
 
 
 
Common stock, $0.01 par value; 150,000,000 shares authorized; 75,875,711 shares issued at December 31, 2014 and 75,574,156 shares issued at December 31, 2013
759

 
756

   Premium on capital stock
564,438

 
523,711

   Retained earnings
2,997,821

 
2,476,616

   Accumulated other comprehensive income (loss), net of tax
 
 
 
Unrealized gain on hedges, net

 
13,362

Pension and postretirement plans
(22,870
)
 
(32,245
)
Interest rate swap

 
(1,184
)
Deferred compensation plan
2,862

 
3,259

Treasury stock, at cost; 2,980,598 shares and 2,967,999 shares at December 31, 2014 and 2013, respectively
(128,406
)
 
(126,256
)
Total shareholders’ equity
3,414,604

 
2,858,019

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$