Freeport-McMoRan 2014 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS
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first-day-of-the-month historical reference oil price required to be
used under SEC full cost accounting rules in determining the
December 31, 2014, ceiling amount was $94.99 per barrel.
Because the ceiling test limitation uses a twelve-month historical
average price, if oil prices remain below the twelve-month 2014
average of $94.99 per barrel the ceiling limitation will decrease in
2015. In particular, the effect of weaker oil prices than the 2014
average is expected to result in significant additional ceiling test
impairments of our oil and gas properties during 2015. Brent
crude oil prices averaged $77.08 per barrel during fourth-quarter
2014 and were $57.33 per barrel at December 31, 2014, and $60.22
per barrel at February 20, 2015.
At December 31, 2014, we also had $10.1 billion of costs for
unproved oil and gas properties, which are excluded from
amortization. These costs will be transferred into the amortization
base (i.e., full cost pool) 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 and the costs subject to the ceiling
limitation under the full cost accounting method. 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 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. In connection
with our oil and gas acquisitions in 2013, we recorded goodwill, all
of which was assigned to our U.S. oil and gas reporting unit.
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.
During the fourth quarter of each year, we conduct a qualitative
goodwill impairment assessment, which 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 2014, including the significant decline in oil prices,
we determined that performing a quantitative goodwill
impairment test was necessary. These evaluations resulted in
impairment charges totaling $1.7 billion ($1.7 billion to net loss
attributable to common stockholders) for the full carrying value of
goodwill. Crude oil prices and our estimates of oil reserves at
December 31, 2014, represent the most significant assumptions
used in our evaluation of goodwill. Forward strip Brent oil prices
used in our estimates as of December 31, 2014, ranged from
approximately $62 per barrel to $80 per barrel for the years 2015
through 2021. Refer to Notes 1 and 2 for further discussion.
Environmental Obligations. Our current and historical operating
activities are subject to various national, state and local
environmental laws and regulations that govern the protection of
the environment, and compliance with those laws requires
significant expenditures. Environmental expenditures are
expensed or capitalized, depending upon their future economic
benefits. The guidance provided by U.S. GAAP requires that
liabilities for contingencies be recorded when it is probable that
obligations have been incurred and the cost can be reasonably
estimated. At December 31, 2014, environmental obligations
recorded in our consolidated balance sheet totaled $1.2 billion,
which reflect obligations for environmental liabilities attributed
to the Comprehensive Environmental Response, Compensation,
and Liability Act of 1980 (CERCLA) or analogous state programs
and for estimated future costs associated with environmental
matters. Refer to Notes 1 and 12 for further discussion of
environmental obligations, including a summary of changes
in our estimated environmental obligations for the three years
ending December 31, 2014.
Accounting for environmental obligations represents a critical
accounting estimate because changes to environmental laws and
regulations and/or circumstances affecting our operations could