Deferred Revenue from Volumetric Production Payment

9 Months Ended

Sep. 30, 2014

Deferred Revenue Disclosure [Abstract]

Deferred Revenue from Volumetric Production Payment

In March 2012, Southwest Royalties, Inc. (“SWR”), a wholly owned subsidiary of CWEI, completed the mergers of each of the 24 limited partnerships of which SWR was the general partner, into SWR, with SWR continuing as the surviving entity in the mergers. To obtain the funds to finance the aggregate merger consideration, SWR entered into a volumetric production payment (“VPP”) with a third party for upfront cash proceeds of $44.4 million and deferred future advances aggregating $4.7 million. Under the terms of the VPP, SWR conveyed to the third party a term overriding royalty interest covering approximately 725,000 barrel of oil equivalent (“BOE”) of estimated future oil and gas production from certain properties derived from the mergers. The scheduled volumes under the VPP relate to production months from March 2012 through December 2019 and are to be delivered to, or sold on behalf of, the third party free of all costs associated with the production and development of the underlying properties. Once the scheduled volumes have been delivered to the third party, the term overriding royalty interest will terminate. SWR retained the obligation to prudently operate and produce the properties during the term of the VPP, and the third party assumed all risks related to the adequacy of the associated reserves to fully recoup the scheduled volumes and also assumed all risks associated with product prices. As a result, the VPP has been accounted for as a sale of reserves, with the sales proceeds being deferred and amortized into oil and gas sales as the scheduled volumes are produced. The net proceeds from the VPP are recorded as a non-current liability in the consolidated balance sheets. Deferred revenue from the VPP is amortized over the life of the VPP and recognized in oil and gas sales in the consolidated statements of operations and comprehensive income (loss). As of September 30, 2014, we have a remaining obligation to deliver approximately 402,000 BOE.

The following table reflects the changes in the deferred revenue during the nine months ended September 30, 2014 and the year ended December 31, 2013:



	September 30, 2014			December 31, 2013
	(In thousands)
Beginning of period	$	29,770		$	37,184
Deferred revenue from VPP	810			1,332
Amortization of deferred revenue from VPP	(5,855		)	(8,746		)
End of period	$	24,725		$	29,770