CRUDE OIL AND NATURAL GAS PROPERTIES

12 Months Ended

Dec. 31, 2018

The Company’s crude oil and natural gas properties are located entirely within the State of Colorado in the United States of America. The net capitalized costs related to the Company’s crude oil and natural gas activities were as follows:

	As of December 31,
	2018			2017
Proved oil and gas properties	$	41,017,944		$	22,144,336
Unproved oil and gas properties (1)		2,055,752			1,919,335
Wells in progress (2)		1,194,114			9,858,262
Total capitalized costs		44,267,810			33,921,963
Accumulated DDA and impairment		(14,395,458	)		(2,849,374	)
Net capitalized costs	$	29,723,352		$	31,072,589

(1)	Unproved oil and gas properties represent unevaluated costs the Company excludes from the amortization base until proved reserves are established or impairment is determined.

(2)	Costs from wells in progress are excluded from the amortization base until production commences.

During the years ended December 31, 2018 and 2017, DDA expense was $7.0 million and $2.8 million, respectively. As discussed below, the Company recorded impairment charges of $9.9 million and lease abandonment charges of $0.6 million during the fourth quarter of 2018.

Acquisitions and Divestitures, including Assets Held for Sale

2018 Activity

During 2018, the Company completed an asset exchange that increased its working interest in its operated producing property in exchange for cash and cancellation of joint interest billing receivables. No gain or loss was recognized on the exchange.

In June 2018, the Company executed two participation agreements with PEO whereby the Company agreed to acquire working interests in approximately 2,200 gross mineral acres for a total purchase price of $4.6 million (Note 11). The terms of the agreements allowed the Company to defer payment until December 31, 2018. As of December 31, 2018, the Company decided not to fund the agreement and recorded an abandonment charge of $0.6 million payable to PEO.

Effective June 1, 2018, the Company completed a conveyance of property in lieu of payment transaction with Providence Energy Partners III (“PEP III”), one of its lenders. The exchange conveyed the Company’s working interests in four producing wells, eight wells in various stages of drilling and completion, 16 proposed wells and the underlying mineral leases (the "Ocho Assets"). The conveyance of properties represented full and final settlement of $2.1 million outstanding principal balance under the supplemental line of credit with PEP III (Note 5). PEP III is considered an affiliate of PEO. As the transaction represented the conveyance of part of an interest in a proved property and did not have a significant impact on the DDA calculation, it has been recorded as a normal retirement. The carrying cost of the oil and gas properties was $0.8 million.

During the fourth quarter of 2018, as part of the plan to divest certain properties and improve liquidity, the Company began an active program to sell certain undeveloped properties along with some producing properties operated by other companies. As the plan did not represent a strategic shift, it did not qualify for accounting treatment as a discontinued operation. The Company evaluated the six criteria for classification of assets held for sale in accordance with FASB ASC 360-10-45-9. After the evaluation of these criteria, the assets were reclassified as Assets Held for Sale as of December 31, 2018.

The proceeds from the February 27, 2019 sale of the Assets held for sale was $16.1 million after adjusting for anticipated costs to sell. As the net unamortized costs of the properties was $26.0 million, the Company recorded an impairment provision of $9.9 million for the year ended December 31, 2018. On February 27, 2019, the Company closed on the sale for price of $16.5 million, after adjustments to the purchase price for amounts owed to the buyer of approximately $8.4 million and title defects of $0.1 million offset by revenue receivable of $7.5 million and net of brokers fees of $0.3 million, net, proceeds amounted to $15.3 million which were remitted to the Company’s Secured Lenders.

2017 Activity

On April 3, 2017, the Company completed an acquisition of oil and gas leases covering approximately 5,874 gross (1,462 net) acres in Adams and Weld Counties, Colorado. The seller reserved to itself all rights in the leases that exist below 50 feet above the top of the uppermost J Sand formation for those lands located in Township 7 North, Range 63 West in Weld County, Colorado. The acquisition was effective January 1, 2017. The net purchase price to the Company’s retained interest in the assets, following the Company’s working interest partner’s 50% participation in the transaction and a reduction in purchase price due to title defects, was $1.3 million. The Company paid $0.5 million of the Company’s net purchase price in cash, and $0.8 million was paid through the issuance of 450,000 shares of the Company’s common stock valued at $1.80 per share.

On April 21, 2017, the Company acquired a 9.37% royalty interest covering approximately 145 net acres located in Adams County, Colorado for a net purchase price of $0.6 million following the Company’s working interest partner’s 50% participation in the transaction. The acquisition was effective April 1, 2017. In connection with the acquisition, the Company paid a finders’ fee of 20,555 shares of common stock valued at $1.80 per share to a lease broker.

On May 9, 2017, the Company acquired 200 gross (70 net) acres in Adams County, Colorado for a net purchase price of $0.4 million following the Company’s working interest partner’s 50% participation in the transaction. The transaction was effective April 1, 2017.

On September 15, 2017, the Company completed a purchase of additional oil and gas leases covering approximately 400 gross (200 net) acres. The gross purchase price was $0.4 million, or $0.2 million to the Company’s retained interest following the Company’s working interest partner’s 50% participation in the transaction. The location of the acreage is contiguous with that of the acreage acquired in the April 3, 2017 transaction described above.

Costs Incurred in Crude Oil and Natural Gas Activities. Costs incurred in connection with the Company’s crude oil and natural gas acquisition, exploration and development activities for each of the years ended December 31, 2018 and 2017 are shown below:

	December 31,
	2018		2017
Exploration and abandonment costs	$	580,881	$	61,693
Development costs		33,393,215		18,771,794
Acquisition of properties
Proved		164,199		—
Unproved		342,982		4,049,380
Total	$	34,481,277	$	22,882,867

PetroShare Corp. 10-K