Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2019

Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation

The consolidated financial statements include the accounts of Carbon Energy Corporation and its consolidated subsidiaries. In addition to Carbon Appalachia and Carbon California, we consolidate 46 partnerships in which we have a controlling interest. We reflect the non-controlling ownership interest of the portion we do not own on our consolidated balance sheets within stockholders' equity and our consolidated statements of operations.

In accordance with established practice in the oil and gas industry, our consolidated financial statements also include our pro-rata share of assets, liabilities, income, lease operating costs and general and administrative expenses of the oil and gas partnerships in which we have a non-controlling interest.

We utilize the equity method to account for investments that do not meet the criteria for pro rata consolidation when we have the ability to significantly influence the operating decisions of the investee.

All significant intercompany accounts and transactions have been eliminated.

Use of Estimates in the Preparation of Financial Statements

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and expenses and disclosure of contingent assets and liabilities. Significant items subject to such estimates and assumptions include the carrying value of oil and gas properties, the estimate of proved oil and gas reserve volumes and the related depletion and present value of estimated future net cash flows and the ceiling test applied to capitalized oil and gas properties, determining the amounts recorded for deferred income taxes, fair value of commodity derivative instruments, fair value of assets acquired and liabilities assumed qualifying as business combinations and asset retirement obligations. Actual results could differ from the estimates and assumptions used.

Reclassifications

Reclassifications

Certain prior period balances in the consolidated balance sheets and statements of operations have been reclassified to conform to the current year presentation. Specifically, a portion of credit facilities and notes payable balances as of December 31, 2018 were reclassified from non-current liabilities to current liabilities. The remaining reclassifications include certain immaterial balance sheet and expense accounts. These reclassifications had no impact on net income or stockholders' equity previously reported.

Fair Value of Financial Instruments

Fair Value of Financial Instruments

The carrying value of our cash and cash equivalents, accounts receivables, prepaid expenses, deposits and other current assets and accounts payable and accrued liabilities approximate fair value due to the short maturity of these instruments. The carrying value of our notes payable and credit facilities approximate fair value based on the variable nature of interest rates and current market rates available to us. Commodity derivatives are recorded at fair value.

Cash and Cash Equivalents

Cash and Cash Equivalents

Cash and cash equivalents have been generally invested in money market accounts, certificates of deposits and other cash equivalents with maturities of three months or less. Such investments are deemed to be cash equivalents for purposes of the financial statements. At times, the Company may have cash and cash equivalent balances more than federal insured amounts within their accounts.

Accounts Receivable

Accounts Receivable

We grant credit to all qualified customers, which potentially subjects us to credit risk resulting from, among other factors, adverse changes in the industries in which we operate and the financial condition of our customers. We continuously monitor collections and payments from our customers and, if necessary, maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified.

At December 31, 2019 and 2018, we had not identified any collection issues related to our oil and gas operations and consequently no allowance for doubtful accounts was provided for on those dates.

Revenue

Accounts receivable - Revenue is comprised of oil, natural gas and NGL revenues from producing activities.

We recognize an asset or a liability, whichever is appropriate, for revenues associated with over-deliveries or under-deliveries of natural gas to purchasers. A purchaser imbalance asset occurs when we deliver more natural gas than we nominated to deliver to the purchaser and the purchaser pays only for the nominated amount. Conversely, a purchaser imbalance liability occurs when we deliver less natural gas than we nominated to deliver to the purchaser and the purchaser pays for the amount nominated. As of December 31, 2019, and 2018, we had a purchaser imbalance receivable of $956,000 and $551,000, respectively, within accounts receivable-revenue.

Joint Interest Billings and Other

Our accounts receivable - joint interest billings and other is comprised of receivables due from other exploration and production companies and individuals who own working interests in the properties that we operate. For receivables from joint interest owners, we typically have the ability to withhold future revenues disbursements to recover any non-payment of joint-interest billings.

Insurance Receivable

Insurance receivable is comprised of insurance claims for the loss of property as a result of wildfires that impacted Carbon California in December 2017. The Company filed claims with its insurance provider. In January 2019, we reached a settlement agreement and received an $800,000 final settlement payment from our insurance provider related to the damage caused by the California wildfires. As of December 31, 2019, we were in receipt of all funds associated with the claims.

Revenue Recognition

Revenue Recognition

Oil, natural gas and natural gas liquids revenues are recognized when the performance obligation to deliver the production volumes is met and control is transferred to the customer. All product revenues are recognized on the basis of our net revenue interest.

Oil and natural gas are typically sold in an unprocessed state to third party purchasers. We recognize revenue based on the net proceeds received from the purchaser when control of oil or natural gas passes to the purchaser. For oil sales, control is typically transferred to the purchaser upon receipt at the wellhead or a contractually agreed upon delivery point. Under our natural gas contracts with purchasers, control transfers upon delivery at the wellhead or the inlet of the purchaser's system. For our other natural gas contracts, control transfers upon delivery to the inlet or to a contractually agreed upon delivery point.

Transfer of control drives the presentation of transportation and gathering costs within the accompanying consolidated statements of operations. Transportation and gathering costs incurred prior to control transfer are recorded within the transportation and gathering expense line item on the accompanying consolidated statements of operations, while transportation and gathering costs incurred subsequent to control transfer are recognized as a reduction to the related revenue.

We record revenue in the month production is delivered to the purchaser, but settlement statements may not be received until 30 to 90 days after the month of production. As such, we estimate the production delivered and the related pricing. The estimated revenue is recorded within Accounts receivable – Revenue on the consolidated balance sheets. Any differences between our initial estimates and actuals are recorded in the month payment is received from the customer. These differences have not historically been material.

Purchaser Concentration

We sell our oil, natural gas and natural gas liquids production to various purchasers in the industry. The table below presents purchasers that account for 10% or more of total oil, natural gas, and natural gas liquids sales for the years ended December 31, 2019 and 2018. There are several purchasers in the areas where we sell our production. We do not believe that changing our primary purchasers or a loss of any other single purchaser would materially impact our business.

	Year Ended December 31,
Purchaser	2019			2018
Purchaser A		18	%		*
Purchaser B		11	%		*
Purchaser C		*			17	%
Purchaser D		*			16	%
Purchaser E		*			12	%

* less than 10%

As of December 31, 2019, none of the above purchasers comprised more than 10% of total accounts receivable. One purchaser's receivable acquired with the closing of the OIE Membership Acquisition accounted for approximately 10% of accounts receivable as of December 31, 2018.

Inventory

Inventory

Inventory includes natural gas, which is recorded at the lower of weighted average cost or market value. Inventory also consists of material and supplies used in connection with the Company's maintenance, storage and handling and gas that is available for immediate use, referred to as working gas, which are stated at the lower of cost or net realizable value.

Accounting for Oil and Gas Operations

Accounting for Oil and Gas Operations

We use the full cost method of accounting for oil and gas properties. Accordingly, all costs related to the acquisition, exploration and development of oil and gas properties, including costs of undeveloped leasehold, dry holes and leasehold equipment, are capitalized. Overhead costs incurred that are directly identified with acquisition, exploration and development activities undertaken by us for our own account, and which are not related to production, general corporate overhead or similar activities, are also capitalized.

Unproved properties are excluded from amortized capitalized costs until it is determined whether or not proved reserves can be assigned to such properties. We assess our unproved properties for impairment at least annually.

Capitalized costs are depleted by an equivalent unit-of-production method, converting gas to oil at the ratio of six thousand cubic feet of natural gas to one barrel of oil. Depletion is calculated using capitalized costs, including estimated asset retirement costs, plus estimated future expenditures (based on current costs) to be incurred in developing proved reserves, net of estimated salvage values.

No gain or loss is recognized upon disposal of oil and gas properties unless such disposal significantly alters the relationship between capitalized costs and proved reserves. All costs related to production activities, including work-over costs incurred solely to maintain or increase levels of production from an existing completion interval, are charged to expense as incurred. 

We perform a ceiling test quarterly. The full cost ceiling test is a limitation on capitalized costs prescribed by SEC Regulation S-X Rule 4-10. The ceiling test is not a fair value-based measurement, rather it is a standardized mathematical calculation. The ceiling test provides that capitalized costs less related accumulated depletion and deferred income taxes may not exceed the sum of (1) the present value of future net revenue from estimated production of proved oil and gas reserves using the un-weighted arithmetic average of the first-day-of-the month price for the previous twelve month period, excluding the future cash outflows associated with settling asset retirement obligations that have been accrued on the balance sheet, at a discount factor of 10%; plus (2) the cost of properties not being amortized, if any; plus (3) the lower of cost or estimated fair value of unproved properties included in the costs being amortized, if any; less (4) income tax effects related to differences in the book and tax basis of oil and gas properties. Should the net capitalized costs exceed the sum of the components noted above, a ceiling test write-down or impairment would be recognized to the extent of the excess capitalized costs. Such impairments are permanent and cannot be recovered in future periods even if the sum of the components noted above exceeds capitalized costs in future periods.

For the years ended December 31, 2019 and 2018, we did not recognize a ceiling test impairment as our full cost pool did not exceed the ceiling limitations. Future declines in oil and natural gas prices, increases in future operating expenses and future development costs could result in impairments of our oil and gas properties in future periods. Impairment changes are a non-cash charge and accordingly would not affect cash flows but would adversely affect our net income and stockholders' equity.

We capitalize interest in accordance with Financial Accounting Standards Board ("FASB") ASC 932-835-25, Extractive Activities-Oil and Gas, Interest. Therefore, interest is capitalized for any unusually significant investments in unproved properties or major development projects not currently being depleted. We capitalize the portion of general and administrative costs that is attributable to our acquisition, exploration and development activities.

Other Property and Equipment

Other Property and Equipment

Other property and equipment are recorded at cost or, in the case of assets acquired in a business combination, at fair value. Costs of renewals and improvements that substantially extend the useful lives of assets are capitalized. Maintenance and repair costs which do not extend the useful lives of property and equipment are charged to expense as incurred. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of assets. Office furniture, automobiles, and computer hardware and software are depreciated over three to five years. Buildings are depreciated over 27.5 years, and pipeline facilities and equipment are depreciated over twenty years. Leasehold improvements are capitalized and amortized over the shorter of the lease term or the estimated useful life of the asset.

We review our property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. We look primarily to the estimated undiscounted future cash flows in our assessment of whether or not property and equipment have been impaired.

Base Gas

Gas that is used to maintain wellhead pressures within the storage fields, referred to as base gas, is recorded in other property and equipment, net on the consolidated balance sheets. Base gas is held in a storage field that is not intended for sale but is required for efficient and reliable operation of the facility.

Asset Retirement Obligations

Asset Retirement Obligations

Our asset retirement obligations (“ARO”) relate to future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage and returning such land to its original condition. The fair value of a liability for an ARO is recorded in the period in which it is incurred, and the cost of such liability is recorded as an increase in the carrying amount of the related non-current asset by the same amount. The liability is accreted each period and the capitalized cost is depleted on a units-of-production basis as part of the full cost pool. Revisions to estimated AROs result in adjustments to the related capitalized asset and corresponding liability.

The estimated ARO liability is based on estimated economic lives, estimates as to the cost to abandon the wells in the future, and federal and state regulatory requirements. The liability is discounted using a credit-adjusted risk-free rate estimated at the time the liability is incurred or increased as a result of a reassessment of expected cash flows and assumptions inherent in the estimation of the liability. Upward revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells. AROs are valued utilizing Level 3 fair value measurement inputs (see Notes 6 and 13).

Commodity Derivative Instruments

Commodity Derivative Instruments

We enter into commodity derivative contracts to manage our exposure to oil and natural gas price volatility with an objective to reduce exposure to downward price fluctuations. Commodity derivative contracts may take the form of futures contracts, swaps, collars or options. We have elected not to designate our derivatives as cash flow hedges. All derivatives are initially and subsequently measured at estimated fair value and recorded as assets or liabilities on the consolidated balance sheets. Changes in the fair value of commodity derivative contracts are recognized in revenues in the consolidated statements of operations and gains and losses are included within the cash flows from operating activities in the consolidated statements of cash flows. We do not believe we are exposed to credit risk in our derivative activities as the counterparties are established, well-capitalized financial institutions.

Stock - Based Compensation

Stock - Based Compensation

For restricted stock, compensation cost is measured at the grant date, based on the fair value of the awards and is recognized on a straight-line basis over the requisite service period (usually the vesting period). For restricted performance units, once it becomes probable that the performance measure will be achieved, expense is recognized over the remainder of the performance period.

Income Taxes

Income Taxes

We account for income taxes using the asset and liability method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of assets and liabilities and their respective tax basis, as well as the future tax consequences attributable to the future utilization of existing tax net operating losses and other types of carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences and carryforwards are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

We account for uncertainty in income taxes for tax positions taken or expected to be taken in a tax return. Only tax positions that meet the more likely than not recognition threshold are recognized.

Earnings Per Common Share

Earnings Per Common Share

Basic earnings (loss) per common share is computed by dividing the net income (loss) attributable to common stockholders for the period by the basic weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share includes potentially issuable shares consisting primarily of non-vested restricted stock and contingent restricted performance units, using the treasury stock method. In periods when we report a net loss, all common stock equivalents are excluded from the calculation of diluted weighted average shares outstanding because they would have an anti-dilutive effect, meaning the loss per share would be reduced.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncement

On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases ("Topic 842") (ASU 2016-02), as amended, which supersedes the lease accounting guidance under Topic 840, and generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We adopted the new guidance using the modified retrospective transition approach by applying the new standard to all leases existing at the date of initial application and not restating comparative periods. The most significant impact was the recognition of right-of-use assets and lease liabilities for operating leases. See Note 8 for further information on our implementation of this standard.