7. OIL AND NATURAL GAS PROPERTIES

Oil and natural gas properties as of December 31, 2019 (Successor) and 2018 (Predecessor) consisted of the following (in thousands):


	Successor		Predecessor
	December 31, 2019		December 31, 2018

Subject to depletion	$	420,609	$	1,470,509
Not subject to depletion:
Exploration and extension wells in progress		—		23,536
Other capital costs:
Incurred in 2019(1)		105,009		—
Incurred in 2018		—		310,113
Incurred in 2017		—		638,269
Incurred in 2016 and prior		—		—
Total not subject to depletion		105,009		971,918
Gross oil and natural gas properties		525,618		2,442,427
Less accumulated depletion		(19,474)		(639,951)
Net oil and natural gas properties	$	506,144	$	1,802,476

(1)

In 2019, with the adoption of fresh-start accounting, the Company’s unevaluated properties were recorded at fair value.

The Company uses the full cost method of accounting for its investment in oil and natural gas properties. Under this method of accounting, all costs of acquisition, exploration and development of oil and natural gas reserves (including such costs as leasehold acquisition costs, geological expenditures, treating equipment and gathering support facilities costs, dry hole costs, tangible and intangible development costs and direct internal costs) are capitalized as the cost of oil and natural gas properties when incurred. To the extent capitalized costs of evaluated oil and natural gas properties, net of accumulated depletion, exceed the discounted future net revenues of proved oil and natural gas reserves, net of deferred taxes, such excess capitalized costs are charged to expense.

With the adoption of fresh-start accounting, the Company recorded its oil and natural gas properties at fair value as of the Emergence Date. The Company’s evaluated and unevaluated properties were assigned fair values of $380.4 million and $109.0 million, respectively. Refer to Note 3, “Fresh-start Accounting,” for a discussion of the valuation approaches used.

The Successor Company’s policy of accounting for its treating equipment and gathering support facilities identifies these assets as part of the Company’s full cost pool due to their supporting nature to the Company’s oil and natural gas operations. The Company’s treating equipment and gathering support facilities were included in “Oil and natural gas properties, evaluated” on the consolidated balance sheet as of the Emergence Date. Refer to Note 3, “Fresh-start Accounting,” for a discussion of the valuation approaches used.

Additionally, the Company assesses all properties classified as unevaluated property on a quarterly basis for possible impairment or reduction in value. The Company assesses properties on an individual basis or as a group, if properties are individually insignificant. The assessment includes consideration of the following factors, among others: intent to drill; remaining lease term; geological and geophysical evaluations; drilling results and activity; the assignment of proved reserves; and the economic viability of development if proved reserves are assigned. During any period in which these factors indicate impairment, the cumulative drilling costs incurred to date for such property and all or a portion of the associated leasehold costs are transferred to the full cost pool and are then subject to depletion and the full cost ceiling test limitation. For the three months ended June 30, 2019 (Predecessor), the Company transferred approximately $481.7 million of unevaluated property costs to the full cost pool, the majority of which were associated with the Company’s Hackberry Draw area. For the three months ended March 31, 2019 (Predecessor), the Company identified certain leases in the Hackberry Draw area with near-term expirations and transferred approximately $51.0 million of associated unevaluated property costs to the full cost pool. These transfers of unevaluated property to the full cost pool in 2019 were the result of the Company’s focus on its most economic area, Monument Draw.

The ceiling test value of the Company’s reserves was calculated based on the following prices:


	West Texas Intermediate (per barrel) (1)		Henry Hub (per MMBtu) (1)
December 31, 2019	$	55.85	$	2.578
December 31, 2018		65.56		3.100
December 31, 2017		51.34		2.976

⁽¹⁾

Unweighted average of the first day of the 12‑months ended spot price, adjusted by lease or field for quality, transportation fees and market differentials.

The Company’s net book value of oil and natural gas properties at March 31, June 30, and September 30, 2019 (Predecessor) exceeded the ceiling amount and the Company recorded full cost ceiling test impairments before income taxes of $275.2 million, $664.4 million and $45.6 million, respectively, for the periods. The ceiling test impairments during 2019 (Predecessor) were driven by the transfers of unevaluated property to the full cost pool that occurred during the year, as discussed above, and decreases in the first-day-of-the-month 12-month average prices for crude oil used in the ceiling test calculations. The Company’s net book value of oil and natural gas properties in 2018 and 2017 (Predecessor) did not exceed the ceiling amount.

Full cost ceiling test impairments are recorded in “Full cost ceiling impairment” in the Company’s consolidated statements of operations and in “Accumulated depletion” in the Company’s consolidated balance sheets.

Changes in commodity prices, production rates, levels of reserves, future development costs, transfers of unevaluated properties to the full cost pool, capital spending, and other factors will determine the Company’s ceiling test calculation and impairment analyses in future periods.

Under the full cost method of accounting, sales of oil and gas properties are accounted for as adjustments to capitalized costs with no gain or loss recognized, unless the adjustment significantly alters the relationship between capitalized costs and proved reserves. If the El Halcón and Williston Divestitures were accounted for as adjustments of capitalized costs with no gain or loss recognized, the adjustments would have significantly altered the relationship between capitalized costs and proved reserves. Accordingly, the Company recognized a gain on the sale of the oil and natural gas properties associated with the El Halcón Divestiture of $235.7 million for the year ended December 31, 2017 (Predecessor). The Company recognized an initial gain on the sale of the Williston Assets of $485.9 million during the year ended December 31, 2017 (Predecessor). This gain was reduced by $7.2 million during the year ended December 31, 2018 (Predecessor) as the result of customary post-closing adjustments. The carrying value of the properties sold was determined by allocating total capitalized costs within the full cost pool between properties sold and properties retained based on their relative fair values. The gain (loss) was recorded in “Gain (loss) on sale of oil and natural gas properties,” on the Company’s consolidated statements of operations.