7. OIL AND NATURAL GAS PROPERTIES

Oil and Natural Gas Properties We follow the successful efforts method of accounting for our oil and natural gas exploration, development and production activities. Leasehold acquisition costs, property acquisition and the costs of development of proved areas are capitalized. If proved reserves are found on an undeveloped property, leasehold cost is transferred to proved properties. Under this method of accounting, costs relating to the development of proved areas are capitalized when incurred.

Accounting rules require that we price our oil and natural gas proved reserves at the preceding twelve-month average of the first-day-of-the-month reference prices as adjusted for location and quality differentials. Such SEC-required prices are utilized except where different prices are fixed and determinable from applicable contracts for the remaining term of those contracts. Our proved reserve estimates exclude the effect of any derivatives we have in place.

Our estimate of proved reserves is based on the quantities of oil, natural gas and natural gas liquids that engineering and geological analyses demonstrate, with reasonable certainty, to be recoverable from established reservoirs in the future under current operating and economic parameters. Proved reserves are calculated based on various factors, including consideration of an independent reserve engineers’ report on proved reserves and an economic evaluation of all of our properties on a well-by-well basis. The process used to complete the estimates of proved reserves at December 31, 2015 and 2014 is described in detail in Note 16.

Reserves and their relation to estimated future net cash flows impact depletion and impairment calculations. As a result, adjustments to depletion and impairments are made concurrently with changes to reserve estimates. The accuracy of reserve estimates is a function of many factors including the following: the quality and quantity of available data, the interpretation of that data, the accuracy of various mandated economic assumptions and the judgments of the individuals preparing the estimates.

Proved reserve estimates are a function of many assumptions, all of which could deviate significantly from actual results. As such, reserve estimates may materially vary from the ultimate quantities of oil and natural gas eventually recovered.

Oil and natural gas properties consist of the following (in thousands):



	December 31,
	2015		2014
Oil and natural gas properties and related equipment (successful efforts method)
Property costs
Proved property	$	731,548	$	649,432
Unproved property		39		1,560
Land		501		501
Total property costs		732,088		651,493
Materials and supplies		1,056		1,056
Total		733,144		652,549
Less: Accumulated depreciation, depletion, amortization and impairments		(652,167)		(517,239)
Oil and natural gas properties and equipment, net	$	80,977	$	135,310

Gathering and transportation assets consist of the following (in thousands):


	December 31,
	2015		2014
Gathering and transportation assets
Catarina midstream assets	$	147,479	$	—
Less: Accumulated depreciation, depletion, amortization		(1,402)		—
Total gathering and transportation assets	$	146,077	$	—

Depreciation, Depletion and Amortization. Depreciation and depletion of producing oil and natural gas properties is recorded at the field level, based on the units-of-production method. Unit rates are computed for unamortized drilling and development costs using proved developed reserves and for unamortized leasehold costs using all proved reserves. Acquisition costs of proved properties are amortized on the basis of all proved reserves, developed and undeveloped, and capitalized development costs (including wells and related equipment and facilities) are amortized on the basis of proved developed reserves. It has been our historical practice to use our year-end reserve report to adjust our depreciation, depletion, and amortization expense for the fourth quarter. Depreciation, depletion, and amortization expense is calculated using year-end reserve reports based on the SEC-required price. As more fully described in Note 16, proved reserves estimates are subject to future revisions when additional information becomes available.

All other properties, including the gathering and transportation assets, are stated at historical acquisition cost, net of any impairments, and are depreciated using the straight-line method over the useful lives of the assets, which range from 3 to 15 years for furniture and equipment, and up to 36 years for gathering facilities.

Depreciation, depletion, amortization and impairments consisted of the following (in thousands):


	Year Ended December 31,
	2015		2014

DD&A of oil and natural gas-related assets	$	10,330	$	17,533
DD&A of gathering and transportation related assets		4,206		—
Total DD&A		14,536		17,533
Asset impairments		123,860		5,424
Total	$	138,396	$	22,957

Impairment of Oil and Natural Gas Properties and Other Non-Current Assets

Oil and natural gas properties are reviewed for impairment on a field by field basis when facts and circumstances indicate that their carrying value may not be recoverable. We assess impairment of capitalized costs of proved oil and natural gas properties by comparing net capitalized costs to estimated undiscounted future net cash flows using expected prices. If net capitalized costs exceed estimated undiscounted future net cash flows, the measurement of impairment is based on estimated fair value, which would consider estimated future discounted cash flows. The cash flow estimates are based upon third party reserve reports using future expected oil and natural gas prices adjusted for basis differentials. Other significant inputs, besides reserves, used to determine the fair values of proved properties include estimates of: (ii) future operating and development costs; (iii) future commodity prices; and (iv) a market-based weighted average cost of capital rate. These inputs require significant judgments and estimates by the Partnership’s management at the time of the valuation and are the most sensitive and subject to change. Cash flow estimates for the impairment testing exclude derivative instruments.

Significant unproved properties are assessed for impairment individually, and valuation allowances against the capitalized costs are recorded based on the estimated economic chance of success and the length of time that we expect to hold the properties. Properties that are not individually significant are aggregated by groups and amortized based on development risk and average holding period. The valuation allowances are reviewed at least annually.

For the year ended December 31, 2015, we recorded non-cash charges of $123.9 million, to impair the value of our Cherokee Basin properties, Woodford Shale properties and our Texas and Louisiana properties acquired prior to the Eagle Ford acquisition. For the year ended December 31, 2014, we recorded non-cash impairment charge of $5.4 million to impair the value of our oil and natural gas fields in Texas and Louisiana. The carrying values of the impaired proved properties were reduced to fair value of $81 million, estimated using inputs characteristic of a Level 3 fair value measurement.

Asset Retirement Obligation

As described in Note 9, estimated asset retirement costs are recognized when the asset is acquired or placed in service, and are amortized over proved developed reserves using the units-of-production method. Asset retirement costs are estimated by our engineers using existing regulatory requirements and anticipated future inflation rates.

Exploration and Dry Hole Costs

Exploration and dry hole costs represent abandonments of drilling locations, dry hole costs, delay rentals, geological and geophysical costs and the impairment, amortization and abandonment associated with leases on our unproved properties. All such costs on oil and natural gas properties relating to unsuccessful exploratory wells are charged to expense as incurred. We recorded no exploration or dry hole costs for the years ended December 31, 2015 and 2014, however, we did record $1.9 million for impairments of unproved properties, which is classified as exploration costs on the statement of operations for the year ended December 31, 2015.

Materials and Supplies

Materials and supplies consist of well equipment, parts and supplies. They are valued at the lower of cost or market, using either the specific identification or first-in first-out method, depending on the inventory type. Materials and supplies are capitalized as used in the development or support of our oil and natural gas properties.