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April 3, 2014
SEC Reviews of Oil & Gas Companies Focused on Non-GAAP Presentation of Derivatives
Market participants in the Oil & Gas industry might want to know about a recent accounting trend.

Our analysts have picked up on a recent trend that might prove valuable to market participants, and in particular, those in the Oil & Gas industry.

The SEC has been sending comment letters to many different companies in the Oil & Gas sector, asking about their accounting procedures. The government agency has been asking about their presentation of derivatives, specifically whether the disclosures constitute non-GAAP measures.

SEC looks into RRC
An example of one of these letters was sent to the Fort Worth, Texas-based Range Resources Corporation (RRC). The SEC asked the independent Oil & Gas exploration and production company how certain approaches used in its Form 10-K filed for Fiscal Year 2012 complied with GAAP.

"We note that you identify several components of derivative fair value income for derivatives not accounted for as hedges, including three categories of realized gain or loss that you indicate had been reported as another component of derivative fair value income labeled 'change in fair value of derivatives that do not qualify for hedge accounting' prior to settlement," the government agency stated in the letter. "Tell us why you believe these items accurately portray the accounting required by FASB ASC 815-10-35-2, and do not constitute non-GAAP measures as defined in Item 10(e)(2) of Regulation S-K, if this is your view."

Letter sent to EOG
The SEC sent a similar comment letter to another Texas-based Oil & Gas company, EOG Resources (EOG), asking about certain disclosures made in its Fiscal Year 2012 Form 8-K press release. In this instance, the government regulator wanted to know more about the firm's non-GAAP presentation of commodity derivatives contracts.

"We note that you present non-GAAP measures in your filing which include offsetting adjustments for the total gain on commodity derivative contracts and the realized gain on commodity derivative contracts (i.e., to eliminate the unrealized gains / losses associated with commodity derivative transactions)," the letter stated. The government agency asked the company to provide some clarification.

"The stated purpose of these adjustments is for the non-GAAP measures to 'reflect actual net cash realized from financial commodity price transactions.' Please tell us whether the adjustment for realized gains on commodity derivative contracts is equal to the net cash receipts from / payments for commodity derivatives settled during the period."

Linn Energy draws interest of regulators
One highly-visible firm that has fallen under the watchful eye of the SEC is Houston-based Linn Energy, LLC. This independent oil and natural gas company revealed in July 2013 that the Commission had launched an informal inquiry into its accounting methods and hedging strategy, according to Energy Risk.

In addition, Linn Energy revealed that the SEC was also looking into a proposed merger with Denver, Colo.-based producer Berry Petroleum, the media outlet reported. Linn agreed to buy Berry in February 2013. Linn Energy has generated substantial visibility by building up assets all over the U.S., and grew to be one of the 15 largest E&P companies in the nation between 2003 and 2013.

It's not unusual for the SEC to focus on a specific area in a given industry. The SEC's interest in this one company might have spurred the regulator to look into the disclosures of other Oil & Gas firms.

A search of our SEC Comment Letter database reveals that the correspondence about these specific issues between the SEC and similar Oil & Gas companies involves over 60 letters and about 20 different companies, since July 2013.

Audit Analytics' comprehensive database of SEC Comment Letters enables unparalleled trending of comment letter issues. Each letter is reviewed by our team of analysts and is classified according to a proprietary taxonomy of over 2,500 issues. Letters can be filtered by accounting standards (ASC, EITF, etc.), keyword, people (SEC staff, lawyers, executives), company, industry and more. Please contact Audit Analytics for an online demonstration or to learn more about our data sets. You can call us at (508) 476-7007 or e-mail info@auditanalytics.com

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