Discontinued operations

In the second quarter of 2015, the Company began the marketing and sale process of Fidelity with an anticipated sale to occur within one year. The sale of Fidelity is part of the Company's strategic plan to grow its capital investments in the remaining business segments and to focus on creating a greater long-term value. The assets and liabilities for these operations have been classified as held for sale and the results of operations are shown in income (loss) from discontinued operations, other than certain general and administrative costs and interest expense which do not meet the criteria for income (loss) from discontinued operations. The Company's consolidated financial statements and accompanying notes for current and prior periods have been restated. At the time the assets were classified as held for sale, depreciation, depletion and amortization expense was no longer recorded.

The carrying amounts of the major classes of assets and liabilities that are classified as held for sale on the Company's Consolidated Balance Sheets were as follows:



	June 30, 2015		June 30, 2014		December 31, 2014
	(In thousands)
ASSETS
Current assets:
Receivables, net	$	33,551	$	146,589	$	94,132
Inventories	6,748		12,849		11,401
Deferred income taxes	—		6,623		—
Commodity derivative instruments	2,537		129		18,335
Prepayments and other current assets	34,456		6,328		7,309
Total current assets held for sale	77,292		172,518		131,177
Noncurrent assets:
Investments	37		37		37
Net property, plant and equipment	1,097,576		1,753,509		1,618,099
Deferred income taxes	52,017		—		—
Other	161		4,091		2,334
Less allowance for impairment of assets held for sale	399,987		—		—
Total noncurrent assets held for sale	749,804		1,757,637		1,620,470
Total assets held for sale	$	827,096	$	1,930,155	$	1,751,647
LIABILITIES
Current liabilities:
Long-term debt due within one year	$	—	$	569	$	897
Accounts payable	49,400		165,189		103,556
Taxes payable	4,064		15,051		19,900
Deferred income taxes	1,401		—		8,206
Accrued compensation	4,460		5,721		5,373
Commodity derivative instruments	3,511		17,449		—
Other accrued liabilities	12,107		27,640		16,796
Total current liabilities held for sale	74,943		231,619		154,728
Noncurrent liabilities:
Long-term debt	—		608		—
Deferred income taxes	—		257,316		238,391
Other liabilities	35,790		60,761		57,050
Total noncurrent liabilities held for sale	35,790		318,685		295,441
Total liabilities held for sale	$	110,733	$	550,304	$	450,169

At the time the Company committed to the plan to sell Fidelity, the Company performed a fair value assessment of the assets and liabilities classified as held for sale. The estimated fair value was determined using the income and the market approaches. The income approach was determined by using the present value of future estimated cash flows. The income approach considered management’s views on current operating measures as well as assumptions pertaining to market forces in the oil and gas industry including estimated reserves, estimated prices, market differentials, estimates of well operating and future development costs and timing of operations. The estimated cash flows were discounted using a rate believed to be consistent with those used by principal market participants. The market approach was provided by a third party and based on market transactions involving similar interests in oil and natural gas properties. The fair value assessment indicated an impairment based on the current carrying value exceeding the estimated fair value, which resulted in the Company writing down Fidelity’s assets at June 30, 2015. An impairment of $400.0 million ($252.0 million after tax) was recorded and included in operating expenses from discontinued operations during the second quarter of 2015. The estimated fair value of Fidelity's assets have been categorized as Level 3 in the fair value hierarchy.

Unforeseen events and changes in circumstances and market conditions and material differences in the value of the assets held for sale due to changes in estimates of future cash flows could negatively affect the estimated fair value of Fidelity and result in additional impairment charges. Various factors, including oil and natural gas prices, market differentials, changes in estimates of reserve quantities, unsuccessful results of exploration and development efforts or changes in operating and development costs could result in future impairments of the Company's assets held for sale. In addition, the ultimate sales price of Fidelity may differ from the estimated fair value.

Historically, the Company used the full-cost method of accounting for its oil and natural gas production activities. Under this method, all costs incurred in the acquisition, exploration and development of oil and natural gas properties are capitalized and amortized on the units-of-production method based on total proved reserves.

Prior to the oil and natural gas properties being classified as held for sale, capitalized costs were subject to a "ceiling test" that limits such costs to the aggregate of the present value of future net cash flows from proved reserves discounted at 10 percent, as mandated under the rules of the SEC, plus the cost of unproved properties not subject to amortization, plus the effects of cash flow hedges, less applicable income taxes. Proved reserves and associated future cash flows are determined based on SEC Defined Prices and exclude cash outflows associated with asset retirement obligations that have been accrued on the balance sheet. If capitalized costs, less accumulated amortization and related deferred income taxes, exceed the full-cost ceiling at the end of any quarter, a permanent noncash write-down is required to be charged to earnings in that quarter regardless of subsequent price changes.

The Company's capitalized cost under the full-cost method of accounting exceeded the full-cost ceiling at March 31, 2015. SEC Defined Prices, adjusted for market differentials, were used to calculate the ceiling test. Accordingly, the Company was required to write down its oil and natural gas producing properties. The Company recorded a $500.4 million ($315.3 million after tax) noncash write-down in operating expenses from discontinued operations in the first quarter of 2015.

In 2007, Centennial Resources sold CEM to Bicent. In connection with the sale, Centennial Resources agreed to indemnify Bicent and its affiliates from certain third party claims arising out of or in connection with Centennial Resources' ownership or operation of CEM prior to the sale. In addition, Centennial had previously guaranteed CEM's obligations under a construction contract. The Company incurred legal expenses and had a benefit related to the resolution of this matter in the second quarter of 2014, which are reflected in discontinued operations in the consolidated financial statements and accompanying notes.

The reconciliation of the major classes of income and expense constituting pretax income (loss) from discontinued operations to the after-tax net income (loss) from discontinued operations on the Company's Consolidated Statements of Income were as follows:



	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2015			2014		2015			2014
	(In thousands)
Operating revenues	$	43,087		$	139,580	$	98,023		$	277,115
Operating expenses	442,725			103,057		1,015,677			201,307
Operating income (loss)	(399,638		)	36,523		(917,654		)	75,808
Other income	188			1,010		2,069			1,025
Interest expense	33			31		55			57
Income (loss) from discontinued operations before income taxes	(399,483		)	37,502		(915,640		)	76,776
Income taxes	(148,068		)	13,621		(339,620		)	27,783
Income (loss) from discontinued operations	$	(251,415	)	$	23,881	$	(576,020	)	$	48,993