Basis of Presentation

The accompanying unaudited financial statements have been prepared by Cimarex Energy Co. (“Cimarex”, “we”, or “us”) pursuant to rules and regulations of the Securities and Exchange Commission (SEC). Accordingly, certain disclosures required by accounting principles generally accepted in the United States and normally included in Annual Reports on Form 10-K have been omitted. Although management believes that our disclosures in these interim financial statements are adequate, they should be read in conjunction with the financial statements, summary of significant accounting policies, and footnotes included in our 2013 Annual Report on Form 10-K.

In the opinion of management, the accompanying financial statements reflect all adjustments necessary to present fairly our financial position, results of operations, and cash flows for the periods and as of the dates shown. We have evaluated subsequent events through the date of this filing.

Oil and Gas Properties

We use the full cost method of accounting for our oil and gas operations. Accounting rules require us to perform a quarterly ceiling test calculation to test our oil and gas properties for possible impairment. The primary components impacting this calculation are commodity prices, reserve quantities added and produced, overall exploration and development costs, depletion expense, and tax effects. If the net capitalized cost of our oil and gas properties subject to amortization (the carrying value) exceeds the ceiling limitation, the excess would be charged to expense. The ceiling limitation is equal to the sum of the present value discounted at 10% of estimated future net cash flows from proved reserves, the cost of properties not being amortized, the lower of cost or estimated fair value of unproven properties included in the costs being amortized, and all related tax effects.

At June 30, 2014, the calculated value of the ceiling limitation exceeded the carrying value of our oil and gas properties subject to the test, and no impairment was necessary. However, a decline of 9% in the value of the ceiling limitation would have resulted in an impairment. If pricing conditions decline, or if there is a negative impact on one or more of the other components of the calculation, we may incur a full cost ceiling impairment related to our oil and gas properties in future quarters.

Oil, Gas and NGL sales

Oil, gas and NGL sales are based on the sales method by which revenue is recognized on actual volumes sold to purchasers. There is a ready market for our products and sales occur soon after production. The determination to record and separately disclose NGL volumes is based on the location at which both title contractually transfers from Cimarex to a buyer and the associated volumes can be physically quantified. For those NGL volumes that we have recorded and disclosed separately, contractual title of the volumes has passed from Cimarex to a buyer at a point where the NGL volumes have been physically separated from the production stream. Should title contractually transfer before NGL volumes can be physically separated and quantified (typically at the wellhead), we do not report separate NGL volumes and the value of the NGLs are included in the reported value of the disclosed gas volumes.

Under certain contracts, when NGLs are extracted from the gas stream, processors receive as compensation a portion of the sales value from both the residue gas and the NGLs as a processing fee and remit the contractual proceeds to us. Prior to 2014, revenue was recognized net of these processing fees for residue gas and NGLs sold under these contracts as allowed under EITF 00-10 Accounting for Shipping and Handling Fees and Costs. Beginning in 2014, we believe that with the increase in NGL production and the impact of recent changes to these contracts, these processing costs will become more significant in the future. Accordingly, we have changed our policy to record these processing costs with operating costs as allowed under EITF 00-10. As a result, beginning in 2014, our realized prices for sales under these contracts reflect the value of 100% of the residue gas and NGLs yielded by processing, rather than the value associated with the contractual proceeds we received. The related processing fees now are included in “transportation, processing and other” operating costs. The effect of this change in the current quarter and six months ended was that total revenue was $12.2 million and $24.1 million, respectively, higher with an offsetting increase in total transportation, processing and other costs. There was no impact on operating income. Financial statements for periods prior to 2014 have not been reclassified to reflect this change in accounting treatment as it was impracticable to do so.

Use of Estimates

The more significant areas requiring the use of management’s estimates and judgments relate to the estimation of proved oil and gas reserves, the use of these oil and gas reserves in calculating depletion, depreciation, and amortization (DD&A), the use of the estimates of future net revenues in computing ceiling test limitations and estimates of future abandonment obligations used in recording asset retirement obligations, and the assessment of goodwill. Estimates and judgments are also required in determining allowance for bad debt, impairments of undeveloped properties and other assets, purchase price allocation, valuation of deferred tax assets, fair value measurements, and commitments and contingencies.

Accounts Receivable, Accounts Payable, and Accrued Liabilities

The components of our receivable accounts, accounts payable, and accrued liabilities are shown below:



	June 30,		December 31,
(in thousands)	2014		2013
Receivables, net of allowance
Trade	$	95,201	$	83,070
Oil and gas sales		333,614		265,050
Gas gathering, processing, and marketing		20,452		19,102
Other		189		532
Receivables, net	$	449,456	$	367,754

Accounts payable
Trade	$	84,567	$	80,918
Gas gathering, processing, and marketing		41,692		35,192
Accounts payable	$	126,259	$	116,110

Accrued liabilities
Exploration and development	$	251,663	$	173,298
Taxes other than income		27,134		27,509
Other		190,155		211,688
Accrued liabilities	$	468,952	$	412,495

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). The new revenue standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the Codification. We must comply with this ASU beginning in fiscal year 2017 and early adoption is not permitted. Entities can choose to apply the standard using either the full retrospective approach or a modified retrospective approach. We are currently evaluating the impact of the provisions of Topic 606 and the effects of adoption cannot be determined at this time.