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Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

These consolidated financial statements include the accounts of (i) the Company, (ii) Parsley LLC, a direct majority owned subsidiary of the Company, (iii) the direct and indirect wholly owned subsidiaries of Parsley LLC, and (iv) Pacesetter Drilling, LLC (“Pacesetter”), an indirect, majority owned subsidiary of Parsley LLC, of which Parsley LLC owns, indirectly, a 63.0% interest. Parsley LLC also owns, indirectly, a 42.5% noncontrolling interest in Spraberry Production Services, LLC (“SPS”). The Company accounts for its investment in SPS using the equity method of accounting. All significant intercompany and intra-company balances and transactions have been eliminated.

Use of Estimates

These consolidated financial statements and related notes are presented in accordance with GAAP. Preparation in accordance with GAAP requires the Company to (i) adopt accounting policies within accounting rules set by the Financial Accounting Standards Board (“FASB”) and by the SEC and (ii) make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. The Company’s management believes the major estimates and assumptions impacting the Company’s consolidated financial statements are the following:


•	estimates of proved reserves of oil and natural gas, which affect the calculations of depletion, depreciation and amortization (“DD&A”) and impairment of proved oil and natural gas properties;


•	impairment of undeveloped properties and other assets;


•	depreciation of property and equipment; and


•	valuation of commodity derivative instruments.

Although management believes these estimates are reasonable, actual results may differ from estimates and assumptions of future events and these revisions could be material. Future production may vary materially from estimated oil and natural gas proved reserves. Actual future prices may vary significantly from price assumptions used for determining proved reserves and for financial reporting.

Cash and Cash Equivalents

The Company considers all cash on hand, depository accounts held by banks, money market accounts and investments with an original maturity of three months or less to be cash equivalents. The Company’s cash and cash equivalents are held in financial institutions in amounts that exceed the insurance limits of the Federal Deposit Insurance Corporation. However, management believes that the Company’s counterparty risks are minimal based on the reputation and history of the institutions selected.

Short-term Investments

Periodically, the Company invests in commercial paper with investment grade rated entities. The Company also periodically enters into time deposits with financial institutions. Commercial paper and time deposits are included in cash and cash equivalents if they have maturity dates that are less than three months at the date of purchase; otherwise, investments are reflected as short-term investments in the accompanying consolidated balance sheets based on their maturity dates. As of December 31, 2019, the Company had no short-term investments.

Accounts Receivable

Accounts receivable consist of receivables from joint interest owners on properties the Company operates and crude oil, natural gas and natural gas liquids (“NGLs”) production delivered to purchasers. The purchasers remit payment for production directly to the Company. Most payments are received within three months after the production date. For receivables from joint interest owners, the Company typically has the ability to withhold future revenue disbursements to recover any non-payment of joint interest billings. Accounts receivable outstanding longer than the contractual payment terms are considered past due.

The Company recognizes an allowance for doubtful accounts in an amount equal to anticipated future uncollectible receivables. The Company determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, the Company’s previous loss history, the debtor’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole. The Company writes off specific accounts receivable when they become uncollectible and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. The Company had an allowance for doubtful accounts of $2.8 million at December 31, 2018.

Significant Customers

For the years ended December 31, 2019, 2018 and 2017, the following customers accounted for more than 10% of the Company’s revenue:



	Year Ended December 31,
	2019	2018	2017
Shell Trading (US) Company	55%	53%	62%
Lion Oil, Inc.	30%	22%	3%
Targa Pipeline Mid-Continent, LLC	8%	11%	13%

Oil and Natural Gas Properties

Unproved properties consist of costs incurred to acquire unproved leases, or lease acquisition costs. Unproved costs are capitalized until reclassified from unproved properties to proved properties when proved reserves are discovered or are expensed as the leases expire or the Company specifically identifies leases that are probable of reverting to the lessor.

Unproved properties are assessed periodically for impairment on a property by property basis by considering future drilling plans, the results of exploration activities, commodity price outlooks, planned future sales, remaining lease terms and the expiration of all or a portion of such projects. The Company’s periodic assessment also considers its ability to enter into leasehold exchange transactions and leasehold extensions that allow for higher concentrations of ownership and development. The Company recognizes impairment expense for unproved properties at the earlier of the time when the lease term or continuous development clause has expired or management estimates the lease will expire before it is drilled, sold or traded. The impairment of unproved oil and natural gas properties is recorded in Exploration and abandonment costs in the Company’s consolidated statements of operations. Based on this assessment, the Company expensed $62.8 million and $127.0 million of undeveloped leasehold during the years ended December 31, 2019 and 2018, respectively, related to the expected future abandonment of expiring acreage. There were no such costs incurred during the year ended December 31, 2017. At December 31, 2019, the Company had $2.5 billion of undeveloped leasehold. Of the remaining undeveloped leasehold costs at December 31, 2019, $183.4 million is scheduled to expire in 2020. The leasehold expiring in 2020 relates to areas in which the Company is actively drilling. If the Company’s drilling is not successful, this leasehold could become partially or entirely impaired.

Exploration and Abandonment Costs

Oil and Gas Reserves

Impairment of Oil and Natural Gas Properties

Allocation of Purchase Price in Business Combinations

Asset Retirement Obligations

For the Company, asset retirement obligations represent the future abandonment costs of tangible assets, namely the plugging and abandonment of wells and land remediation. The fair value of a liability for an asset’s retirement obligation is recorded in the period in which it is incurred if a reasonable estimate of fair value can be made and the corresponding cost is capitalized as part of the carrying amount of the related long-lived asset. The liability is accreted to its then present value each period. If the liability is settled for an amount other than the recorded amount, the difference is recorded in Other income (expense) in the Company’s consolidated statements of operations.

Inherent to the present value calculation are numerous estimates, assumptions and judgments, including, but not limited to: the ultimate settlement amounts; inflation factors; credit-adjusted risk-free rates; timing of settlement; and changes in the legal, regulatory, environmental and political environments. To the extent future revisions to these assumptions affect the present value of the abandonment liability, the Company makes corresponding adjustments to both the asset retirement

obligations and the related oil and natural gas property asset balance. These revisions result in prospective changes to DD&A expense and accretion of the discounted abandonment liability.

Other Property and Equipment, net

Other property and equipment is recorded at cost. The Company expenses maintenance and repairs in the period incurred. Upon retirements or dispositions of assets, the cost and related accumulated depreciation are removed from the consolidated balance sheet with the resulting gains or losses, if any, reflected in operations. Depreciation of other property and equipment is computed using the straight line method over their estimated useful lives, which range from two years to 35 years. Depreciation expense on other property and equipment was $18.9 million, $15.5 million and $11.5 million for the years ended December 31, 2019, 2018 and 2017, respectively. See Note 16—Disclosures About Fair Value of Financial Instruments for additional information regarding the Company’s impairment of other property and equipment, net.

Materials and supplies are stated at the lower of cost or market and consist of oil and gas drilling or repair items such a tubing, casing and pumping units. These items are primarily acquired for use in future drilling or repair operations and are carried at lower of cost or market. “Market,” in the context of valuation, represents net realizable value, which is the amount that the Company is allowed to bill to the joint account under joint operating agreements to which the Company is a party. The Company evaluated materials and supplies based on current operations and determined that these materials and supplies would not be utilized in the current year and included them in noncurrent assets as non-depreciable other property, plant and equipment. See Note 16—Disclosures About Fair Value of Financial Instruments for additional information regarding the Company’s impairment of materials and supplies.

Capitalized Interest

The Company capitalizes interest on expenditures made in connection with long-term projects that are not subject to current depletion. Interest is capitalized only for the period that activities are in progress to bring these projects to their intended use and only to the extent the Company has incurred interest expense.

Equity Investments

Equity investments in which the Company exercises significant influence but does not control are accounted for using the equity method. Under the equity method, the Company’s share of investees’ earnings or loss, after elimination of intra-company profit or loss, is generally recognized in the Company’s consolidated statements of operations. The Company reviews its investments to determine if a non-temporary loss in value has occurred. If such loss has occurred, the Company would recognize an impairment provision. The Company did not recognize impairment for its equity investments during the years ended December 31, 2019, 2018 and 2017.

Derivatives Instruments

Derivative Instruments

The Company utilizes derivative financial instruments, including three-way collars, two-way collars and swap contracts to (i) reduce the effect of price volatility on the Company’s oil and natural gas revenues and (ii) support its annual capital budgeting and expenditure plans.

The Company reports the fair value of derivatives on the consolidated balance sheets in derivative instrument assets and derivative instrument liabilities as either current or noncurrent. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual transactions and reports these on a gross basis by contract.

The Company’s derivative instruments were not designated as hedges for accounting purposes for any of the periods presented. Accordingly, the changes in fair value are recognized in the Company’s consolidated statements of operations in the period of change. Gains and losses resulting from the changes in fair value of derivatives are included in cash flows from operating activities.

Fair Value of Financial Instruments

Fair value represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. The Company’s assets and liabilities that are measured at fair value at each reporting date are classified according to a hierarchy that prioritizes inputs and assumptions underlying the valuation techniques. This fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs and consists of three broad levels:



Level 1:		Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.
Level 2:		Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1 that are either directly or indirectly observable as of the reporting date.
Level 3:		Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management's best estimate of fair value.

Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy. Reclassifications of fair value between Level 1, Level 2 and Level 3 of the fair value hierarchy, if applicable, are made at the end of each quarter.

Deferred Loan Costs

Deferred loan costs are stated at cost, net of amortization, and are amortized to interest expense using the effective interest method over the life of the loan.

Revenue Recognition

Substantially all of the Company’s revenue is from the sale of crude oil, natural gas and NGLs. See Note 3—Revenue from Contracts with Customers for additional information regarding the Company’s revenue recognition.

Defined Contribution Plan

The Company sponsors a 401(k) defined contribution plan for the benefit of all employees beginning on their date of hire. The plan allows eligible employees to contribute a portion of their annual compensation, not to exceed annual limits established by the federal government. The Company makes matching contributions of up to a certain percentage of an employee’s contributions. For the years ended December 31, 2019, 2018 and 2017, the Company made contributions to the plan of $3.9 million, $3.8 million and $2.8 million, respectively.

Income Taxes

The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are calculated by applying existing tax laws and the rates expected to apply to taxable income in the years in

which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The tax returns and the amount of taxable income or loss are subject to examination by federal and state taxing authorities.

The Company periodically assesses whether it is more likely than not that it will generate sufficient taxable income to realize its deferred income tax assets, including net operating losses. In making this determination, the Company considers all available positive and negative evidence and makes certain assumptions. The Company considers, among other things, its deferred tax liabilities, the overall business environment, its historical earnings and losses, current industry trends and its outlook for future years.

Earnings Per Share

Earnings per Share

The Company uses the “if-converted” method to determine the potential dilutive effect of its Class B common stock and the treasury stock method to determine the potential dilutive effect of outstanding restricted stock and restricted stock units.

Comprehensive Income

The Company has no elements of comprehensive income other than net income.

Segment Reporting

Operating segments are defined as components of an enterprise (i) that engage in activities from which it may earn revenues and incur expenses and (ii) for which separate operational financial information is available and is regularly evaluated by the chief operating decision maker for the purpose of allocating resources and assessing performance.

Based on the organization and management of the Company, the Company has only one

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current presentation.

Recent Accounting Pronouncements

Recently Issued but Not Yet Adopted Accounting Pronouncements

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses. In May 2019, ASU 2016-13 was subsequently amended by ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments—Credit Losses and ASU 2019-05, Financial Instruments—Credit Losses (Topic 326): Targeted Transition Relief. ASU 2016-13, as amended, affects trade receivables, financial assets and certain other instruments that are not measured at fair value through net income. This ASU will replace the currently required incurred loss approach with an expected loss model for instruments measured at amortized cost and is effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. ASU 2016-13 will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. In November 2019, the FASB issued ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments—Credit Losses. ASU 2019-11 requires entities that did not adopt the amendments in ASU 2016-13 as of November 2019 to adopt 2019-11. This ASU contains the same effective dates and transition requirements as ASU 2016-13. This ASU did not have a material impact on the Company’s consolidated financial statements as the Company does not have a history of material credit losses.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This ASU summarizes the FASB’s recently issued ASU No. 2019-12, simplifying the Accounting for Income Taxes. The ASU enhances and simplifies various aspects of the income tax accounting guidance in Accounting Standards Codification (“ASC”) Topic 740, Income Taxes. The amendments in this update are effective for fiscal years, and interim periods within

those fiscal years, beginning after December 15, 2020. The Company is in the process of evaluating the impact this guidance will have on the Company’s consolidated financial statements and the timing of adoption.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC Topic 605, Revenue Recognition, and most industry-specific guidance. The Company adopted this standard effective January 1, 2018 using the modified retrospective approach. As a result, the Company changed its accounting policy for revenue recognition, as discussed in Note 3—Revenue from Contracts with Customers. The Company also implemented processes and controls to ensure new contracts are reviewed for the appropriate accounting treatment and to generate the required disclosures under the standards.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize leases on balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU No. 2018-20 Leases (Topic 842); and ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326) and Leases (Topic 842). The standard establishes a right-of-use (“ROU”) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. A modified retrospective transition approach is required, applying the standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the standard for the comparative periods. The Company adopted the standard on January 1, 2019 using the modified retrospective transition approach, which allows the Company to apply the previous lease guidance and disclosure requirements under ASC Topic 840, Leases (“ASC 840”), in the comparative periods presented for the year of adoption. The adoption did not require an adjustment to beginning retained earnings for a cumulative effect adjustment.

The standard provides a number of optional practical expedients in transition. The Company has elected to apply the practical expedient to use hindsight with respect to determining lease term and in assessing any impairment of ROU assets for existing leases. The Company did not elect to apply the “package practical expedients.” The standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, the Company did not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company has elected the practical expedient to not separate lease and non-lease components for all of its leases other than leases of vehicles.

Adoption of the standard resulted in the Company recording additional operating net ROU assets and lease liabilities of $143.9 million. The current portion of the operating lease liability is included in Current operating lease liabilities and the noncurrent portion of the operating lease liability is included in Operating lease liabilities, in each case, on the Company’s consolidated balance sheets. Balances associated with finance leases have been reclassified to include the current portion in Other current liabilities and the noncurrent portion in Financing lease liabilities on the Company’s consolidated balance sheets. The adoption of this standard did not materially impact the Company’s consolidated statements of operations or cash flows. Please refer to Note 9—Leases for additional discussion.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal—Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This update requires the capitalization of implementation costs incurred in a hosting arrangement that is a service contract for internal-use software. Training and certain data conversion costs cannot be capitalized. The Company is required to expense the capitalized implementation costs over the term of the hosting agreement. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted ASU 2018-15 prospectively as of October 1, 2019. The adoption of this guidance did not have a material effect on the Company’s financial position, results of operation or cash flows.