Summary of Significant Accounting Policies (Policies)

12 Months Ended

Dec. 31, 2016

The preparation of these consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. Actual results could differ materially from those estimates. The accounting policies most affected by management’s estimates and assumptions are as follows:


•	Provisions for depreciation, depletion and amortization and estimates of non-equity plans are based on estimates of proved reserves;


•	Impairments of long-lived assets are based on estimates of future net cash flows and, when applicable, the estimated fair values of impaired assets;


•	Exploration expenses related to impairments of unproved acreage are based on estimates of fair values of the underlying leases;


•	Asset retirement obligations (“ARO”) are based on estimates regarding the timing and cost of future asset retirements;


•	Valuation of derivative financial instruments are based on the fair value of commodity derivatives;


•	Valuation of stock-based compensation is based on the grant date fair value;


•	Valuation of common stock warrants are based on their fair value using the Black-Scholes method;


•	Impairments of inventory are based on estimates of fair values of tubular goods and other well equipment held in inventory; and


•	Exploration expenses related to well abandonment costs are based on the judgments regarding the productive status of in-progress exploratory wells.

Principles of Consolidation

The consolidated financial statements include the accounts of CWEI and its wholly owned subsidiaries. We account for our undivided interests in oil and gas limited partnerships using the proportionate consolidation method. Under this method, we consolidate our proportionate share of assets, liabilities, revenues and expenses of such limited partnerships. Less than 5% of our consolidated total assets and total revenues are derived from oil and gas limited partnerships. Substantially all intercompany transactions and balances associated with the consolidated operations have been eliminated.

Oil and Gas Properties

We follow the successful efforts method of accounting for oil and gas properties, whereby costs of productive wells, developmental dry holes and productive leases are capitalized into appropriate groups of properties based on geographical and geological similarities. These capitalized costs are amortized using the unit-of-production method based on estimated proved reserves. Proceeds from sales of properties are credited to property costs, and a gain or loss is recognized when a significant portion of an amortization base is sold or abandoned.

Exploration costs, including geological and geophysical expenses and delay rentals, are charged to expense as incurred. Exploratory drilling costs, including the cost of stratigraphic test wells, are initially capitalized but charged to exploration expense if and when the well is determined to be nonproductive. The determination of an exploratory well’s ability to produce must be made within one year from the completion of drilling activities. The acquisition costs of unproved acreage are initially capitalized and are carried at cost, net of accumulated impairment provisions, until such leases are transferred to proved properties or charged to exploration expense as impairments of unproved properties.

Pipelines and Other Midstream Facilities and Other Property and Equipment

Pipelines and other midstream facilities consist of pipelines to transport oil, natural gas and water, natural gas processing facilities and compressors. Other property and equipment consists primarily of field equipment and facilities, office equipment, leasehold improvements and vehicles. Major renewals and betterments are capitalized while repairs and maintenance are charged to expense as incurred. The cost of assets retired or otherwise disposed of and the applicable accumulated depreciation are removed from the accounts, and any gain or loss is included in operating income (loss) in the accompanying consolidated statements of operations and comprehensive income (loss).

Depreciation of pipelines and other midstream facilities and other property and equipment is computed on the straight-line method over the estimated useful lives of the assets, which generally range from 3 to 30 years.

Contract Drilling

We conduct contract drilling operations through Desta Drilling, L.P. (“Desta Drilling”), a wholly owned subsidiary of CWEI. Desta Drilling recognizes revenues and expenses from daywork drilling contracts as the work is performed, but defers revenues and expenses from footage or turnkey contracts until the well is substantially completed or until a loss, if any, on a contract is determinable.

Property and equipment, including buildings, major replacements, improvements and capitalized interest on construction-in-progress, are capitalized and are depreciated using the straight-line method over estimated useful lives of 3 to 40 years. Upon disposition, the costs and related accumulated depreciation of assets are eliminated from the accounts and the resulting gain or loss is recognized.

Valuation of Property and Equipment

Our long-lived assets, including proved oil and gas properties and contract drilling equipment, are assessed for potential impairment in their carrying values, based on depletable groupings, whenever events or changes in circumstances indicate such impairment may have occurred. An impairment is recognized when the estimated undiscounted future net cash flows of the asset are less than its carrying value. Any such impairment is recognized based on the difference in the carrying value and estimated fair value of the impaired asset.

Unproved oil and gas properties are periodically assessed, and any impairment in value is charged to exploration costs. The amount of impairment recognized on unproved properties which are not individually significant is determined by impairing the costs of such properties within appropriate groups based on our historical experience, acquisition dates and average lease terms. The valuation of unproved properties is subjective and requires management to make estimates and assumptions which, with the passage of time, may prove to be materially different from actual realizable values.

Asset Retirement Obligations

We recognize a liability for the present value of all legal obligations associated with the retirement of tangible, long-lived assets and capitalize an equal amount as a cost of the asset. The cost associated with the asset retirement obligation, along with any estimated salvage value, is included in the computation of depreciation, depletion and amortization.

Income Taxes

We utilize the asset and liability method to account for income taxes. Under this method of accounting for income taxes, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. 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 are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in enacted tax rates is recognized in the consolidated statements of operations and comprehensive income (loss) in the period that includes the enactment date. We also record any financial statement recognition and disclosure requirements for uncertain tax positions taken or expected to be taken in a tax return. Financial statement recognition of the tax position is dependent on an assessment of a 50% or greater likelihood that the tax position will be sustained upon examination, based on the technical merits of the position. Any interest and penalties related to uncertain tax positions are recorded as interest expense.

Hedging Transactions

From time to time, we utilize commodity derivative instruments, consisting of swaps, floors and collars, to attempt to optimize the price received for our oil and gas production. All of our commodity derivative instruments are recognized as assets or liabilities in the balance sheet, measured at fair value. The accounting for changes in the fair value of a commodity derivative depends on both the intended purpose and the formal designation of the commodity derivative. Designation is established at the inception of a commodity derivative, but subsequent changes to the designation are permitted. For commodity derivatives designated as cash flow hedges and meeting the effectiveness guidelines under applicable accounting standards, changes in fair value are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. Hedge effectiveness is measured quarterly based on relative changes in fair value between the commodity derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. Changes in fair value of commodity derivative instruments which are not designated as cash flow hedges or do not meet the effectiveness guidelines are recorded in earnings as the changes occur. If designated as cash flow hedges, actual gains or losses on settled commodity derivatives are recorded as oil and gas revenues in the period the hedged production is sold, while actual gains or losses on interest rate derivatives are recorded in interest expense for the applicable period. Actual gains or losses from commodity derivatives not designated as cash flow hedges are recorded in other income (expense) as gain (loss) on commodity derivatives.

Stock-Based Compensation

Restricted stock and stock options issued to employees and directors are recorded at grant-date fair value. Stock-based compensation expense is recognized in our consolidated statement of operations and comprehensive income (loss) on an accelerated basis over the awards’ vesting periods based on their fair values on the dates of grant, net of an estimate for forfeitures. Stock-based compensation awards generally vest over a period ranging from one to three years. We utilize the Black-Scholes option pricing model to measure the fair value of stock options.

Common Stock Warrants

Common stock warrant liabilities are measured at fair value on a recurring basis until the underlying common stock warrants are exercised (see Note 3). We measure the fair value of the common stock warrant liabilities using the Black-Scholes method (Level 2 inputs). Inputs used to determine fair value under this method include our price volatility and expected remaining life.

Inventory

Inventory consists primarily of tubular goods and other well equipment which we plan to utilize in our exploration and development activities and is stated at the lower of average cost or estimated market value.

Capitalization of Interest

Interest costs associated with our inventory of unproved oil and gas property lease acquisition costs are capitalized during the periods for which exploration activities are in progress.

Cash and Cash Equivalents

We consider all cash and highly liquid investments with original maturities of three months or less to be cash equivalents.

Net Income (Loss) Per Common Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted net income (loss) per share reflects the potential dilution that could occur if dilutive stock options were exercised, calculated using the treasury stock method. The diluted net income (loss) per share calculations for December 31, 2016, 2015 and 2014 include changes in potential shares attributable to dilutive stock options and restricted stock.

Fair Value Measurements

We follow a framework for measuring fair value, which outlines a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties at the measurement date. Where available, fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, use of unobservable prices or inputs are used to estimate the current fair value, often using an internal valuation model. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the item being valued. We categorize our assets and liabilities recorded at fair value in the accompanying consolidated balance sheets based upon the level of judgment associated with the inputs used to measure their fair value. Hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities are as follows:



Level 1 -	Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level 2 -	Inputs (other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level 3 -	Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Revenue Recognition and Gas Balancing

We utilize the sales method of accounting for oil, natural gas and natural gas liquids (“NGL”) revenues whereby revenues, net of royalties, are recognized as the production is sold to purchasers. The amount of gas sold may differ from the amount to which we are entitled based on our revenue interests in the properties. We did not have any significant gas imbalance positions at December 31, 2016, 2015 or 2014. Revenues from midstream services and drilling rig services are recognized as services are provided.

Comprehensive Income (Loss)

There were no differences between net income (loss) and comprehensive income (loss) in December 31, 2016, 2015 and 2014.

Concentration Risks

We sell our oil and natural gas production to various customers, serve as operator in the drilling, completion and operation of oil and gas wells, and enter into derivatives with various counterparties. When management deems appropriate, we obtain letters of credit to secure amounts due from our principal oil and gas purchasers and follow other procedures to monitor credit risk from joint owners and derivatives counterparties. Allowances for doubtful accounts at December 31, 2016 and 2015 relate to amounts due from joint interest owners.

Recent Accounting Pronouncements

In August 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The objective of the standard is to reduce the existing diversity in practice of several cash flow issues, including debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payment made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The guidance in ASU 2016-15 is effective for public entities for annual reporting periods beginning after December 15, 2017, including interim periods therein. Early adoption is permitted and is to be applied on retrospective basis. We are currently evaluating the method of adoption and impact this standard may have on our financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation.” ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as certain classification changes in the statement of cash flows. This update is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Upon adoption, we expect to record a cumulative-effect adjustment to reclassify approximately $7.5 million of excess tax benefits that were not previously recognized because the related tax deduction had not reduced taxes payable. We plan to adopt ASU 2016-09 during the quarter ended March 31, 2017 to be effective as of January 1, 2017.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which supersedes current lease guidance. The new lease standard requires all leases with a term greater than one year to be recognized on the balance sheet while maintaining substantially similar classifications for finance and operating leases. Lease expense recognition on the income statement will be effectively unchanged. This guidance is effective for reporting periods beginning after December 15, 2018 and early adoption is permitted. We do not plan to early adopt the standard. We enter into lease agreements to support our operations. These agreements are for leases on assets such as office space and vehicles. We are currently in the process of reviewing all contracts that could be applicable to this new guidance. We believe this new guidance will have a moderate impact to our consolidated balance sheet due to the recognition of lease-related assets and liabilities that were not previously recognized.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes.” This ASU requires that deferred tax assets and liabilities be classified as non-current on the balance sheet. The standard will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption will be permitted as of the beginning of an interim or annual reporting period. This standard may be applied either prospectively to all deferred tax assets and liabilities or retrospectively to all periods presented. Adoption of the new guidance will affect the presentation of our consolidated balance sheets and will not have a material impact on our consolidated financial statements.

In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory.” This ASU requires entities to measure most inventory at the lower of cost and net realizable value, thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and should be applied prospectively, with early adoption permitted. The adoption of this standard will not have a material impact on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs,” which requires net debt issuance costs directly related to our senior notes and our second lien term loan to be classified as a direct deduction from the carrying amount of the related senior notes and second lien term loan. We adopted this ASU as of March 31, 2016 and reclassified $7.3 million of debt issuance costs at December 31, 2015 from a non-current asset to a direct deduction in long-term debt. The debt issuance costs related to our revolving credit facility remains classified as a non-current asset due to the revolving nature of that facility.

In August 2014, the FASB issued ASU No. 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 requires management to assess an entity’s ability to continue as a going concern and to provide related footnote disclosures in certain circumstances. Certain disclosures are required should substantial doubt exist. This evaluation is performed each annual and interim reporting period to assess conditions or events within one year after the date that the financial statements are issued. This ASU was effective beginning December 31, 2016; however, no additional disclosures as contemplated by this ASU were warranted.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” that outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In summary, revenue recognition would occur upon the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, ASU 2014-09 requires enhanced financial statement disclosures over revenue recognition as part of the new accounting guidance. The standard will be effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. In March 2016, the FASB released certain implementation guidance through ASU 2016-08 to clarify principal versus agent considerations. We are evaluating the guidance to determine the method of adoption and the impact this standard will have on our consolidated financial statements and related disclosures. Based on our initial evaluation, though not currently quantified, the adoption of the standard is not expected to have a material impact on the timing of revenue recognized, results of operations or cash flows.