Freeport-McMoRan 2013 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS
36 | FREEPORT-McMoRan
results, geological and geophysical evaluations, the assignment
of proved reserves, availability of capital and other factors.
Because the transfer of unevaluated property to the full cost
pool requires significant judgment and the ceiling test used
to evaluate impairment of our proved oil and gas properties
requires us to make several estimates and assumptions that are
subject to risk and uncertainty, changes in these estimates
and assumptions could result in the impairment of our oil and
gas properties. Events that could result in impairment of our oil
and gas properties include, but are not limited to, decreases in
future crude oil and natural gas prices, decreases in estimated
proved oil and natural gas reserves, increases in production,
development or abandonment costs and any event that might
otherwise have a material adverse effect on our oil and gas
production levels or costs.
Impairment of Goodwill. We account for business combinations
using the acquisition method of accounting, which requires us
to allocate the purchase price to the assets acquired and liabilities
assumed based on their estimated fair values on the acquisition
date. Determining the fair values of assets acquired and liabilities
assumed requires management’s judgment, the utilization
of independent valuation experts, and often involves the use of
significant estimates and assumptions, including future cash
flows, discount rates and forward prices. The excess of acquisition
consideration over the fair values of assets acquired and liabilities
assumed is recorded as goodwill. As of December 31, 2013, our
consolidated balance sheet included $1.9 billion of goodwill, all of
which had been assigned to our U.S. oil and gas reporting unit.
As described in Note 2, the final valuation of assets acquired,
liabilities assumed and noncontrolling interests in the 2013 oil and
gas acquisitions is not complete, and any adjustments to these
values could impact the amount of goodwill recorded.
Goodwill is required to be evaluated for impairment on at least
an annual basis, or at any other time if events or circumstances
indicate that its carrying amount may no longer be recoverable.
We conduct a qualitative or quantitative goodwill impairment
assessment during the fourth quarter of each year. A qualitative
assessment involves examining relevant events and circumstances
that could have a negative impact on our goodwill, such as
macroeconomic conditions, industry and market conditions, cost
factors that have a negative effect on earnings and cash flows,
overall financial performance, dispositions and acquisitions, and
any other relevant events or circumstances. After assessing the
relevant events and circumstances for the qualitative impairment
assessment during fourth-quarter 2013, we determined that
performing a quantitative goodwill impairment test was
unnecessary, and no goodwill impairment was recognized.
Crude oil and natural gas prices and our estimated oil and
natural gas reserves represent the most significant assumptions
used in our assessment to evaluate goodwill for impairment.
long-lived assets include, but are not limited to, decreases in
future metal prices, decreases in estimated recoverable proven
and probable mineral reserves and any event that might
otherwise have a material adverse effect on mine site production
levels or costs.
Impairment of Oil and Gas Properties. As discussed in Note 1, we
follow the full cost method of accounting for our oil and gas
operations, whereby all costs associated with oil and gas property
acquisition, exploration and development activities are capitalized
and amortized to expense under the UOP method on a country-by-
country basis using estimates of proved oil and natural gas reserves
relating to each country where such activities are conducted.
In evaluating our oil and gas properties for impairment,
estimates of future cash flows are used (refer to Note 1 for further
discussion of the ceiling test calculation). Additionally, SEC
rules require that we price our future oil and gas production at the
twelve-month average of the first-day-of-the-month historical
reference prices adjusted for location and quality differentials.
Such prices are utilized except where different prices are fixed
and determinable from applicable contracts for the remaining term
of those contracts excluding derivatives. The pricing in ceiling
test impairment calculations required by full cost accounting may
cause results that do not reflect current market conditions that
exist at the end of an accounting period. For example, in periods
of increasing oil and gas prices, the use of a twelve-month
historical average price in the ceiling test calculation may result in
an impairment. Conversely, in times of declining prices, ceiling
test calculations may not result in an impairment.
At December 31, 2013, the ceiling with respect to our oil and gas
properties exceeded the net capitalized costs of those properties
by approximately 4 percent, and we did not record an impairment.
Given the volatility of crude oil and natural gas prices, it is likely
that our estimate of discounted future net revenues from proved oil
and natural gas reserves will change in the near term. If crude oil
and natural gas prices decline in the future, even if only by a small
amount, impairments of our oil and gas properties could occur.
At December 31, 2013, we also had $10.9 billion of costs for
unproved oil and gas properties, which are excluded from
amortization. These costs will be transferred into the amortization
base as the properties are evaluated and proved reserves are
established or if impairment is determined. We assess our
unproved properties at least annually, and if impairment is
indicated, the cumulative drilling costs incurred to date for such
property and all or a portion of the associated leasehold costs are
transferred to the full cost pool and subject to amortization.
Accordingly, an impairment of unproved properties does not
immediately result in the recognition of a charge to the
consolidated statements of income, but rather increases the costs
subject to amortization. The transfer of costs into the amortization
base involves a significant amount of judgment and may be
subject to changes over time based on our drilling plans and