5. Property and Equipment

	September 30, 2013			December 31, 2012
	(in thousands)
Oil and gas properties, on the basis of full-cost accounting:
Proved properties	$	2,488,680		$	1,522,723
Unevaluated properties	425,742			313,941
Other property and equipment	10,029			5,038
Less accumulated depreciation, depletion, and amortization	(443,852		)	(274,294		)
Net property and equipment	$	2,480,599		$	1,567,408

Oil and Gas Properties

For the three and nine months ended September 30, 2013, the Company capitalized $2.9 million and $6.2 million, respectively, of internal costs directly related to exploration and development activities to oil and gas properties. Note that these amounts are inclusive of $0.5 million and $1.1 million of qualifying share based compensation expense (as discussed in Note 10) for the three and nine months ended September 30, 2013, respectively.

For the three and nine months ended September 30, 2012, the Company capitalized $0.5 million and $0.9 million, respectively, of internal costs to oil and gas properties. Note that these amounts are inclusive of $0.1 million and $0.1 million of qualifying share based compensation expense (as discussed in Note 10) for the three and nine months ended September 30, 2012, respectively.

The Company accounts for its oil and gas properties under the full cost method. Under the full cost method, proceeds from the sale or disposition of oil and gas properties are accounted for as a reduction to capitalized costs unless a significant portion of the Company’s reserve quantities are sold that results in a significant alteration of the relationship between capitalized costs and remaining proved reserves, in which case a gain or loss is generally recognized in income.

The Company performs a ceiling test on a quarterly basis. The test establishes a limit (ceiling) on the book value of oil and gas properties. The capitalized costs of oil and gas properties, net of accumulated DD&A and the related deferred income taxes, may not exceed this “ceiling.” The ceiling limitation is equal to the sum of: (i) the present value of estimated future net revenues from the projected production of proved oil and gas reserves, excluding future cash outflows associated with settling asset retirement obligations (“ARO”) accrued on the balance sheet, calculated using the average oil and natural gas sales price received by the Company as of the first trading day of each month over the preceding twelve months (such prices are held constant throughout the life of the properties) and a discount factor of 10%; (ii) the cost of unproved and unevaluated properties excluded from the costs being amortized; (iii) the lower of cost or estimated fair value of unproved properties included in the costs being amortized; and (iv) related income tax effects. If capitalized costs exceed this ceiling, the excess is charged to expense in the accompanying consolidated statements of operations.

At September 30, 2013 and 2012, capitalized costs did not exceed the ceiling, and no impairment to oil and gas properties was required; however, the Company’s ceiling test calculation at September 30, 2013 indicated the Company’s capitalized costs were within 5% of the ceiling.

Depreciation, depletion and amortization is calculated using the Units of Production Method (“UOP”). The UOP calculation multiplies the percentage of estimated proved reserves produced by the cost of those reserves. The result is to recognize expense at the same pace that the reservoirs are estimated to be depleting. The amortization base in the UOP calculation includes the sum of proved property costs net of accumulated depreciation, depletion and amortization (“DD&A”), estimated future development costs (future costs to access and develop proved reserves) and asset retirement costs that are not already included in oil and gas property, less related salvage value. The following table presents depletion expense related to oil and gas properties for the three and nine months ended September 30, 2013 and 2012:

	For the Three Months Ended September 30,				For the Nine Months Ended September 30,
	2013		2012		2013		2012

Depletion expense (in thousands)	$	74,345	$	30,571	$	168,190	$	86,303
Depletion expense (per Boe)	$	28.39	$	40.60	$	28.68	$	38.79

Oil and gas unevaluated properties and properties under development include costs that are not being depleted or amortized. These costs represent investments in unproved properties. The Company excludes these costs until proved reserves are found, until it is determined that the costs are impaired or until major development projects are placed in service, at which time the costs are moved into oil and natural gas properties subject to amortization. All unproved property costs are reviewed at least quarterly to determine if impairment has occurred. Unevaluated property was $425.7 million at September 30, 2013 compared to $313.9 million at December 31, 2012, increasing primarily due to the Anadarko Basin Acquisition which is discussed further below.

Other Property and Equipment

Other property and equipment consists of vehicles, furniture and fixtures, and computer hardware and software and are carried at cost. Depreciation is calculated principally using the straight-line method over the estimated useful lives of the assets, which range from five to seven years. Maintenance and repairs are charged to expense as incurred, while renewals and betterments are capitalized.

Eagle Property Acquisition—October 2012

On October 1, 2012, the Company closed on the Eagle Property Acquisition. The assets acquired include certain interests in producing oil and natural gas assets and unevaluated leasehold acreage in Oklahoma and Kansas and related hedging instruments. The Company’s results from operations include the results from the properties acquired in the Eagle Property Acquisition beginning October 1, 2012. The fair value of, and the allocation to, the assets acquired and liabilities assumed in the Eagle Property Acquisition, has been finalized and is shown in the following table (in thousands):

	Eagle Property Acquisition
Oil and gas properties:
Proved	$	419,549
Unevaluated	244,236
Commodity derivative contracts	8,453
Total assets acquired	$	672,238

Asset retirement obligations	2,662
Deferred income tax liabilities	25,985
Commodity derivative contracts	—
Total liabilities assumed	$	28,647

Net assets acquired	$	643,591

The finalized balances in the table above include immaterial changes to the amounts originally allocated to oil and gas properties and deferred income tax liabilities. These changes were required to reflect the final consideration paid after adjustment for certain post-closing purchase price amounts.

Anadarko Basin Acquisition—May 2013

On May 31, 2013, the Company closed on the acquisition of producing properties and undeveloped acreage in the Anadarko Basin in Texas and Oklahoma from Panther Energy Company, LLC and its partners for approximately $618 million in cash (before customary post-closing adjustments). The Company funded the purchase price of the Anadarko Basin Acquisition with a portion of the net proceeds from the private placement of $700 million in aggregate principal amount of 9.25% senior unsecured notes due 2021, which also closed on May 31, 2013.

The transaction was accounted for using the acquisition method of accounting which requires, among other things, that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The final determination of fair value for certain assets and liabilities remains preliminary and will be completed after post-closing purchase price adjustments are finalized no later than one year from the acquisition date.

Since June 30, 2013 the Company has recorded adjustments to the purchase price to reduce the amounts allocated to proved and unproved properties by $1.0 million and $0.4 million, respectively. The following table reflects the adjusted allocation as of September 30, 2013 (in thousands):

	Anadarko Basin Acquisition
Oil and gas properties
Proved	$	416,239
Unevaluated	206,989
Total assets acquired	$	623,228

Asset retirement obligations	6,296
Total liabilities assumed	$	6,296

Net assets acquired	$	616,932

Actual and Pro Forma Information

Revenues attributable to the Eagle Property Acquisition and Anadarko Basin Acquisition included in the Company’s consolidated statements of operations for the three months ended September 30, 2013 were $69.3 million and $45.6 million, respectively. Revenues attributable to the Eagle Property Acquisition and Anadarko Basin Acquisition included in the Company’s unaudited condensed consolidated statements of operations for the nine months ended September 30, 2013 were $152.5 million and $59.8 million, respectively.

The following table presents unaudited pro forma information for the Company as if the Eagle Property Acquisition and the Anadarko Basin Acquisition occurred on January 1, 2012 (the three and nine month periods ended September 30, 2013 are adjusted for the Anadarko Basin Acquisition only, as the effect of the Eagle Property Acquisition is included in the Company’s historical results for these periods, and the effect of the Anadarko Basin Acquisition was not included in the Company’s results until May 31, 2013):

	For the Three Months Ended September 30, 2012			For the Nine Months Ended September 30, 2013			For the Nine Months Ended September 30, 2012

Revenues and other	$	85,606		$	378,591		$	360,913
Net income (loss)	(15,790		)	(21,401		)	(136,656		)
Preferred stock dividends	(6,500		)	(9,254		)	(19,500		)
Income (loss) available to common shareholders	$	(22,290	)	$	(30,655	)	$	(156,156	)
Net loss per common share - basic	$	(0.34	)	$	(0.47	)	$	(2.69	)
Net loss per common share - diluted	$	(0.34	)	$	(0.47	)	$	(2.69	)

The historical financial information was adjusted to give effect to the pro forma events that were directly attributable to the Eagle Property Acquisition and the Anadarko Basin Acquisition and are factually supportable. The unaudited pro forma consolidated results are not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisitions been completed on January 1, 2012. In addition, the unaudited pro forma consolidated results do not purport to project the future results of operations for the combined Company.