Note 18 – Commitment and contingencies, page 117

 

4.           We note your disclosure indicating that you accrued $69.7 million in other long term liabilities as of December 31, 2008 associated with orders received from the U.S. Department of the Interior Minerals Management Services (“MMS”) which claim that you owe royalties on prior year oil and gas production.  We understand that you have reversed this accrual in the first quarter 2009, based on a favorable decision received by Kerr-McGee, an operator that contested similar orders it received from MMS.  As the decision in favor of Kerr McGee was affirmed on January 19, 2009, a date prior to the issuance of your financial statements, please explain why you believe that this event would not require recognition in your annual financial statements to comply with the guidance in paragraphs 1 through 8 of AU §560.

 

Response:    The Company’s leases on Garden Banks blocks 667, 668 and 669 contain provisions that state that a royalty is triggered in the event certain commodity price thresholds are exceeded, even on volumes for which a royalty would be suspended under certain provisions of the DeepWater Royalty Relief Act (“DWRRA”).  As such, the Company was party to a contract pursuant to which it had a contractual obligation to the MMS whenever the price thresholds were exceeded.  Absent that contractual obligation, these amounts would have been recognized as additional revenue from the applicable leases.  The litigation filed by Kerr McGee asserted that the commodity price thresholds in the leases on Garden Banks blocks 667, 668 and 669 were invalid under the DWRRA; therefore, there was no obligation to pay the MMS royalties.  Under the SAB Topic 13, revenue is generally not recognized until realized or realizable.  That same guidance states that revenue is not considered to be realized or realizable until several criteria are met including that persuasive evidence of an arrangement exists and collectability is reasonably assured (probable).  On January 12, 2009, the United States Court of Appeals for the Fifth Circuit rendered its decision affirming the district court’s decision in favor of Kerr McGee.  The Company believes that this event provided sufficient persuasive evidence to conclude that it was entitled to the revenue related to the disputed royalties and it was probable that the Company would not be required to pay to the MMS the disputed amounts.  As a result, the Company concluded that all criteria for revenue recognition were met in the first quarter of 2009.  The Company recognized revenue of $73.5 million and included disclosure of such in Note 6 of the March 31, 2009 Quarterly Report on Form 10-Q.

 

The Company advises the Staff that in early October 2009, the U.S. Supreme Court announced that it denied the MMS’ petition for certiorari to hear the case.

 

 

2001 Assessment

 

Question 1(A):

“Tell us the extent of any loss that you have accrued for this matter in your financial statements, the periods in which those amounts were recognized, and your estimate of the range of reasonably possible additional loss, following the guidance in FIN 14 and paragraphs 8 to 10 of SFAS 5.

 

Response:

 

After consulting with our Mexican counsel, we believe that under the Mexican and United States double taxation treaty, the services performed by Horizon’s subsidiaries to which the 2001 Assessment relates are not taxable and the 2001 Assessment is invalid. Our Mexican counsel has further advised that it is of the opinion that the Mexican tax courts will likely render a judgment absolving us of any liability associated with the 2001 Assessment. Based on the foregoing, our position has consistently been that the facts, circumstances and legal analysis with respect to the 2001 Assessment does not support a position that it is “more likely than not” a liability had been incurred as of the date of our financial statements as set forth in Paragraph 6 of FIN 48. Therefore, we have neither accrued a liability for, nor reserved against, the 2001 Assessment.

 

FIN 48, unlike FAS 5, does not require the estimate of tax contingencies within a possible range of loss; rather, the guidance requires measurement be based on the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. Given our conclusion stated above, for FIN 48 purposes we measure that exposure as zero.  However, the following is provided to respond to your question of what we

 

 

 

Years Subsequent to the 2001 Assessment

 

Question 1(B):

“Please quantify your exposure separately for all subsequent years that remain subject to audit by the tax authority, assuming they prevail in their position on your 2001 tax.”

 

Response:

 

As disclosed in our 2008 Form 10-K, Horizon’s 2002, 2003 and 2004 taxable years are currently under audit by the SAT, with all taxable years from 2002 through 2007 remaining open to examination. We have taken a similar tax position with respect to Horizon’s open taxable years subsequent to the 2001 Assessment, and fully expected the SAT to review these open tax years and to assert a claim of unpaid taxes related to services performed.  However, notwithstanding our belief that our position is valid and that we should prevail with respect to these taxable periods if a comparable assessment was made by the SAT, in early 2008 our management determined it was in our best interest to seek a negotiated resolution of this issue in an attempt to minimize the costs and time necessary to contest such matters with the SAT. Accordingly, management embarked on a proactive effort to develop a plan to settle the taxable years subsequent to 2001 with the SAT, none of which had yet entered the formal process of the Mexican tax court.

 

With the assistance of our Mexican counsel, in 2008 we approached the SAT with a non-binding offer of settlement using an approach and strategy that we believed was a reasonable and fair compromise.  We subsequently received a written statement by the SAT that it viewed favorably our methodology and overall approach as an acceptable solution. This written acknowledgement represented a material change from our prior communications with the SAT on this issue, because the SAT had previously adopted an “all or nothing” approach.  The SAT’s communication of its

 

 

 

As the estimated tax liability of $5.0 million was a result of Horizon operations prior to our acquisition of Horizon in 2007, we recorded the estimated tax liability and increased goodwill by the same amount as part of the purchase business combination. EITF Issue No. 93-7, “Uncertainties Related to Income Taxes in a Purchase Business Combination” specifically requires liabilities for uncertainties about tax returns of the acquired company for periods prior to the acquisition date to increase goodwill attributable to that acquisition.

 

During 2009, we successfully completed our negotiations with the SAT with respect to Horizon’s 2002 through 2004 taxable years, and paid an aggregate of approximately $2.1 million in settlement of these periods. This settlement for these tax years was consistent with our estimated uncertain tax benefit liability included in the $5 million described above. We have, however, been advised by our Mexican counsel that for procedural reasons particular to the Mexican tax court, we are unable to pursue settlement negotiations with respect to the 2001 Assessment similar to those completed in connection with Horizon’s 2002 to 2004 taxable years because the 2001 Assessment, which entered the Mexican tax court in the second quarter of 2008, is now subject to the formal process of the tax court.

 

Horizon’s 2002 and 2003 taxable years are now closed with the SAT as was disclosed in our second quarter 2009 Form 10-Q.  We expect to close the 2004 taxable year with the SAT during the fourth quarter of 2009. Following the successful settlement of Horizon’s 2004 taxable year, we intend to pursue a similar strategy to proactively settle the 2005 through 2007 taxable years. Given our success in settlement with respect to the prior periods, we are comfortable that the remaining unused portion of our estimated uncertain tax benefit liability we recorded is sufficient to provide for the settlements we expect to reach with the SAT for the tax years 2005 through 2007.  Our 2008 taxable year is also currently subject to audit with the SAT, and while we intend to pursue a similar settlement strategy for this taxable period, given that we did not utilize any of our assets in Mexico during 2008, we believe our exposure for this year is negligible, if not zero. We have been in communication with the SAT in this regard on a verbal

 

 

 

Question 1(C):

“Please explain why you have not disclosed this information.”

 

Response:

 

As stated previously, we disclosed in our 2008 Form 10-K all information regarding this tax contingency for tax years 2001 through 2008, following the guidance of FIN 48.  Specifically, we disclosed in Note 8 – Income Taxes: (i) our accrual of the $5.0 million tax liability as uncertain tax benefits, interest and penalty as of December 31, 2008, as part of the $5.4 million accrued globally for all international tax jurisdictions; (ii) a tabular reconciliation of the total amount of unrecognized tax benefits at the beginning and end of the period; (iii) the total amounts of interest and penalties recognized in our consolidated and combined statement of operations and the total amounts of interest and penalties recognized on our consolidated balance sheet; (v) a statement that we do not expect a significant change to the unrecognized tax benefits during the following 12 months; and (vi) a description of the tax years that remain subject to examination by the SAT.  Finally, although not required by FIN 48, for transparency we also disclosed the assessed tax amount and the nature of the contingency associated with the 2001 Assessment in both Note 8 – Income Taxes and Note 10 – Commitments and Contingencies.  We also disclosed our belief that the services forming the basis of the 2001 Assessment were not taxable, and that the 2001 Assessment was itself invalid. We appropriately qualified this statement by advising investors that the “ultimate outcome of this litigation and our potential liability from this assessment, if any, cannot be determined at this time.”

 

Controls and Procedures, page 136

 

6.           We note your use of the criterion set forth in “Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” in your principal executive officer and principal financial officer’s evaluation of your disclosure controls and procedures.  The COSO Framework is generally used as a criterion for an evaluation of the effectiveness of a company’s internal control over financial reporting.  Please clarify the use of the criterion in your disclosure controls and procedures evaluation or remove the reference to the criterion from your discussion of the evaluation of your disclosure controls and procedures.

 

Response:  The Company agrees with the Commission that the reference to the COSO Framework is used as a criterion for an evaluation of the effectiveness of the Company’s internal controls over financial reporting but not the evaluation of such controls and procedures.  Accordingly, the Company will remove all references to the COSO Framework from future disclosure within Item 9A. Controls and Procedures.

 

 

7.           We note your statement that “[b]ased on [your disclosure controls and procedures] evaluation, the principal executive officer and the principal financial officer believe that our disclosure controls and procedures were effective.....” Rather than state a belief, please revise to state whether your principal executive officer and principal financial officer came to a definitive conclusion regarding the effectiveness of your disclosure controls and procedures.

 

Response:  In future filings, the Company will modify the following sentence within subpart (a) of Item 9A, Controls and Procedures, to replace the word “believe” with “conclude” as follows:

 

           Based on this evaluation, the principal executive officer and principal financial officer conclude that our disclosure controls and procedures were effective as of the end of the fiscal year ended December 31, 2008 to ensure that information that is required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) indentified, recorded, processed, summarized and reported, on a timely basis and (ii) accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure.

 

 

8.           Please consolidate your disclosure in paragraphs (b) and (c).  Further, if you choose to separate your Item 308 of Regulation S-K disclosure from your Item 307 disclosure, include the changes in internal control over financial reporting disclosure with your Item 308 disclosure.

 

Response:  The Company will consolidate the disclosure in paragraphs (b) and (c) in our future filings.  In the event we separate our Item 308 disclosure from our Item 307 disclosure, we will include changes in internal control over financial reporting with our Item 308 disclosures in future periodic report filings.

 

 

 

 

Form 10-K for the Fiscal Year Ended December 31, 2008; Form 10-Q for the Fiscal Quarter Ended June 30, 2009; Form 10-Q for the Fiscal Quarter Ended March 31, 2009

 

Controls and Procedures

 

9.           We note your disclosure regarding the implementation of your enterprise resource planning system and the statement that the “[r]esulting impacts on internal controls over financial reporting were evaluated and determined not to be significant for [the reporting period].”  Please revise to state, if true, that the resulting impacts on internal control over financial reporting were determined not to be material for the reporting period.  If you are unable to make this assertion, please revise your disclosure to state that there have been changes in your internal control over financial reporting and discuss the changes.

 

Response:  The Company’s internal control changes related to the implementation of its enterprise resource planning system did not have a material impact on its internal controls over financial reporting for the fiscal year ended December 31, 2008 and the fiscal quarters ended March 31, 2009 and June 30, 2009.   The Company does not believe that we will need to continue to make reference to these changes in its future filings as management has now concluded that the enterprise resource planning system has not had and will not have any material effect on internal controls over financial reporting.

 

In further response to Staff’s Comments 6 through 9, the Company proposes that we expand the existing disclosure and include disclosure substantially similar to the following in our future periodic report filings with the Commission (based on Form 10-K in this example):

 

Item 9A.  Controls and Procedures.

 

(a) Evaluation of disclosure controls and procedures.  Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the fiscal year ended December 31, ____.  Based on this evaluation, the principal executive officer and the principal financial officer conclude that our disclosure controls and procedures were effective as of the end of the fiscal year ended December 31, ____ to ensure that information that is required to be disclosed by us in the reports we file or submit under the Exchange Act is (i) identified, recorded, processed, summarized and reported, on a timely basis and (ii) accumulated and communicated to our management, as appropriate, to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control over financial reporting.  There have been no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange

 

 

 

 

Act, in the fourth quarter of fiscal _____ that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Management’s Report on Internal Control Over Financial Reporting and the Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting thereon are set forth in Part II, Item 8 of this report on Form 10-K on page ___ and page ___, respectively.

 

 

Schedule 14A filed April 2, 2009

 

General

 

10.           Regarding the comments that follow for the Schedule 14A filed April 2, 2009, please confirm in writing that you will comply with comments in all future filings, and provide us with an example of the disclosure you intend to use in each case.  After our review of your responses, we may raise additional comments.

 

Response:  The Company confirms that all of our future Schedule 14A filings will be consistent with the responses provided below to each of the Staff’s comments, including incorporating any language provided below as applicable.

 

 

Compensation Discussion and Analysis, page 23

CEO Recommendation, page 26

 

11.           We note that your compensation committee is guided by recommendations from your president and CEO.  In addition, “[s]enior members of [y]our management team including the chief executive officer provide recommendations regarding many aspects of [y]our compensation program, including executive compensation.”  Please clarify the compensation committee’s role and authority with respect to final compensation determinations for the CEO and to what extent the CEO is permitted to make recommendations regarding his own salary.  See Item 407(e)(3) of Regulation S-K.

 

Response:  We propose that, in the event such disclosure remains true and correct, we expand the existing disclosure and include disclosure substantially similar to the following in our future Schedule 14A filings:

 

While the Compensation Committee considered the recommendations of the Chief Executive Officer with respect to the various elements of compensation for each executive officer, the Compensation Committee had complete discretion over all decisions regarding compensation for our executive officers, including for the Chief Executive Officer.  As the highest ranking officer involved in the management of the Company, the Chief Executive Officer

 

 

 

 

Determining Executive Compensation for 2008, page 24

 

12.           Please describe and clarify what is meant by the “internal equity and analysis of [y]our executive compensation program.”

 

Response:  In future filings the Company will clarify that when determining compensation for each of our executive officers, the Compensation Committee, in its discretion, may consider the level of compensation of each such officer relative to the others.  The Compensation Committee may consider a comparison of each executive officer’s relative compensation, performance, and special complexities or difficulties related to his or her position during the applicable period when making compensation determinations.  In future filings, we propose to delete the existing bullet on page 24 of the Company’s Schedule 14A filed April 2, 2009 addressing “internal equity analysis” and propose that, in the event such disclosure remains true and correct, include disclosure substantially similar to the following:

 

·	Information regarding the compensation, performance, responsibilities, difficulties and complexities related to each executive officer’s role in our company relative to the other executive officers; and

 

 

Market and Peer Group Review, page 24

 

13.           We note that the peer group for your shareholder return performance graph and the peer group used by your compensation committee differ.  Please explain the reason for the difference.

 

Response:  The Company believes that the disclosure of the selection process for the peer group for collecting compensation data and the rationale for the selection of such peer group is set forth on pages 24-25 of the Company’s Schedule 14A filed April 2, 2009.  This disclosure accurately reflects both our process and the disclosure requirements set forth in Schedule 14A and Regulation S-K.  We note that Item 2.01 of Regulation S-K requires a performance graph showing cumulative total returns of the Company compared to the total returns of a peer group determined on the basis of industry or line of business (or other criteria disclosed by the

 

 

 

 

Company).  A peer group selected on the basis of industry or line of business will not in all cases completely coincide with the objectives of the independent compensation consultant and the Compensation Committee.

 

The Company’s performance graph required by Item 2.01 of Regulation S-K includes a comparison to total returns to a peer group of twelve companies selected by the executive management team as examples of our closest competitors in our respective services business and our oil and gas exploration business.  The Company believes that this complies with the disclosure requirements in Item 2.01 of Regulation S-K.

 

On the other hand, the peer group used by our Compensation Committee is determined by that committee based on a peer group suggested by the independent compensation consultant engaged by the Compensation Committee.  The independent compensation consultant proposes companies to be included in the peer group and management annually reviews such proposal to ensure that the companies proposed by the compensation consultant are appropriate.  The Compensation Committee then reviews and approves the members of the peer group as it deems appropriate. The peer group proposed by the independent compensation consultant is comprised of companies in similar businesses and of similar size (based on revenue, market capitalization and enterprise value) that would be likely competitors for hiring executive talent, as opposed to being solely business competitors.  In addition, the members of the proposed peer group must have reliable compensation data, must generally conform to a traditional compensation structure and must generally have executive positions similar to ours.  In addition, considering these factors, the proposed peer group taken as a whole must contain a sufficient number of companies with reliable compensation information available so as to yield good reliable data for purposes of comparing executive compensation.

 

Cash Bonus Program, page 27

 

14.           We note that your inability to achieve your company performance financial objectives, your cash bonus awards were significantly reduced or, in the case of Mr. Kratz, were not paid at all.  Please provide factors used by the compensation committee used in making this determination, including the company performance financial objectives and group performance budgetary and other goals.

 

Response:  We point to the disclosure on page 27 of the Company’s Schedule 14A filed April 2, 2009 which states that “the committee awards bonuses for the previous year at its first meeting of the year based upon the exercise of its discretion.”   The amount of each element of executive compensation, including the amount of any cash bonus, is determined completely at the discretion of the Compensation Committee.  The Compensation Committee did not establish objectives for each individual executive officer for 2008.  Rather, the Compensation Committee engaged in a detailed discussion with respect to the performance of each executive officer. Based on those discussions, the Compensation Committee made a determination as to whether

 

 

 

 

the Company’s performance and/or the executive officer’s performance warranted the payment of a bonus, and if so, determined the amount of such bonus in its discretion considering many factors as it deemed appropriate.  These factors included the individual’s performance, the difficulty of the officer’s role, and the challenges and difficulties the officer may have faced during a difficult period for the Company, financially, and operationally.  In future filings we will disclose whether targets or goals were established with respect to a bonus for the executive officers and, if so, identify them if such disclosure would not result in substantial competitive harm to the Company.

 

2009 Bonus Plan, page 28

 

15.           Please disclose the material differences in compensation policies and performance with respect to individual named executive officers.  Refer to Section II.B.1 of Commission Release No. 33-8732A.  For example, there is a significant disparity in the amount of an increase in the 2009 bonus target for the CEO as compared to that of the other named executive officers.  Please provide a more detailed discussion of how and why the increase in the bonus target for the CEO differs so significantly from the increase given the other named executive officers.

 

Response:  The Company advises the Staff that as stated in the Company’s Schedule 14A filed April 2, 2009, an overall compensation goal for executive officers has been to set annual base salary at or near the 50th percentile of the peer group or survey data, and overall compensation (base salary, cash bonus opportunity and long term incentive compensation) at or near the 75th percentile of the peer group or survey data.  As a result, a substantial portion of overall compensation consists of incentive compensation consistent with our compensation principles.  With respect to fiscal 2009, base salary and long term incentive compensation were not increased from the 2008 compensation levels for each executive officer, other than Mr. Hajdik whose increase was due to an increase in his role and responsibilities at the Company.  As a result, any increase in the overall compensation target of each executive officer was directly reflected in the cash bonus opportunity and cash bonus opportunity for 2009 generally reflects the amounts obtained by subtracting base salary and long term incentive awards from the total compensation at or near the 75th percentile as determined by the peer group or survey data.  The amount of any actual cash bonus will be awarded at its first meeting in 2010 based upon the exercise of the Compensation Committee’s discretion after its review of the data provided by management and any other data deemed appropriate by such committee.  In future filings, we will include any required disclosure related to the determination of executive compensation levels.

 

 

·	The number of wells on production, the date you ran open hole logs for each well, and whether you expect to add additional wells;

 

The Bushwood field is currently producing from two wells out of the Lentic formation.  One additional well has been completed and production will commence once certain flowlines are installed .  The field was discovered in January 2007 and three separate accumulations have been proven through the wells and log dates listed below:

 

·	Garden Banks Block 506 #1 OH                                                                           January 4, 2007

·	Garden Banks Block 506 #1 ST1                                                                          January 30, 2007

·	Garden Banks Block 506 #1 ST2                                                                          February 22, 2007

·	Garden Banks Block 506 #2                                                                                 July 10, 2007

·	Garden Banks Block 506 #3                                                                                 December 19, 2007

·	Garden Banks Block 463 #1                                                                                 December 28, 2008

 

`           Two additional wells will have to be drilled as well as an updip sidetrack well to recover all currently estimated proved reserves.

 

·	The current production rate of the field and the expected maximum production rate the field is expected to achieve;

 

Limited test production was established in August 2008; however, Hurricane Ike caused severe damage to a third party pipeline, which required the field to be shut in until January 2009.  During this time the Company installed an alternative pipeline to allow  natural gas sales while additional damage is being repaired to a  third party pipeline.  The alternative pipeline constructed  by the Company allowed  the Bushwood field to commence sustained production  on January 17, 2009.  Currently, the field flows at a constrained gross rate of 31 million cubic feet of natural gas per day (MMcfd).  Once the third party pipeline is repaired, the expected peak gross rate for the Bushwood field will approximate 100 MMcfd.  Following the completion of another pipeline being constructed by the Company, an approximate additional 7,500 barrels of oil and 17 MMcfd of gas per day will be produced from the field.

 

·	The current status of the pipelines necessary to transport production to market;

 

As noted above, currently a third party pipeline owner is repairing the pipeline to service the natural gas production from the Bushwood field.   The Company has been informed by the third party pipeline owner that these repairs are on schedule to be completed in the fourth quarter of

 

 

 

·	The location where you are currently marketing the oil and gas production.

 

The Company is marketing its gas production at the Sabine Hub. Following installation of its oil  pipeline, its oil production will be marketed at the Stingray Separation Facility.

 

 

 

Significant Oil and Gas Properties, page 33

 

17.

Regarding the Bushwood field, we see that you report in the table that you have a 51% working interest, 314 BCFe of proved reserves net to your interest, and expect first production in January 2009.  We note that in your 2007 10-K you reported that you had a 100% working interest in this field, 206 BCFe of proved reserves net to your interest, and expected first production in 2008.  Please tell us the following:

 

·	How the reserves could have been increased by 52% in one year when there was no production and when your net interest decreased by 49%;

·	The reason the field was not placed into production in 2008;

·	Whether the engineer from Huddleston & Co. was informed of the decrease in working interest from 2007 when he performed his 2008 reserve audit.

 

Response:

 

·	How the reserves could have been increased by 52% in one year when there was no production and when your net interest decreased by 49%;

 

The increase in proved reserves related to the development of an Area of Mutual Interest (AMI) with the owners of Garden Banks Block 462 (see map below).  As a result of the AMI agreement, we were able to obtain supporting data to map a contiguous reservoir from Garden Banks Block 506 through the AMI block and onto Garden Banks Block 463.  Furthermore, the AMI concluded with the drilling of Garden Banks Block  463 #1 that extended proven limits for the proven Lentic reservoir and discovered a new accumulation deeper.  The product of additional acreage ownership, wellbore interest, well data and new pool discovery yielded the additional reserves net to ERT despite the lower working interest.

 

 

 

 

·	The reason the field was not placed into production in 2008;

 

As mentioned above in response to Comment 16, the Bushwood field commenced production in August 2008 but was shut in shortly thereafter because of Hurricane Ike.   Following Hurricane Ike there was substantial damages to a third party pipeline.   In January 2009, the Company was able to commence sustained production from the Bushwood field following the construction and installation of an alternative pipeline but at restricted rates due to smaller pipeline size in relation to the damaged third party pipeline.

 

 

·	Whether the engineer from Huddleston & Co. was informed of the decrease in working interest from 2007 when he performed his 2008 reserve audit.

 

The 314 Bcfe of proved reserves for the Bushwood field were based on internal reservoir estimates.  These estimates were reviewed by independent reservoir engineers, Huddleston & Co., Inc. which audited our internal estimates of proved reserves as described in “Summary of Natural Gas and Oil Reserve Data” and in Note 21 “Supplemental Oil and Gas Disclosures” on page 32 and pages 123 and 124, respectively, of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.  The audit included the review and discussion of all pertinent data including maps, log data and working/ net revenue interests.

 

 

Costs Incurred in Oil and Gas Producing Activities, page 122

 

18.           We note that you report $17.7 million in costs to acquire proved properties in 2008 on the first line of your table on page 122.  Tell us why the reserve reconciliation tables on pages 124 and 125 do not show any purchase of oil and gas reserves in 2008.

 

Response:  The Company acknowledges that the $17.7 million reported as proved property acquisition costs within the Company’s Cost Incurred in Oil and Gas Producing Activities disclosure represents the recorded capitalized interest associated with its development activities during 2008.   The Company has historically reported such amounts on this line; however, it acknowledges that these amounts are better categorized as a component of development costs.   Accordingly, we propose that in future periodic report filings, the Company will report its capitalized interest associated with development activities as development costs rather than proved property acquisition costs.

 

As the $17.7 million represented was recorded as capitalized interest rather than an actual acquisition of a producing property, the absence of any proved reserves is appropriate.

 

 

Estimated Quantities of Proved Oil and Gas Reserves, page 123

 

19.           We note that in 2008 there was a material decline in the percentage of reserves that were classified as proved undeveloped as compared to 2007.  Please disclose the reasons for this change in the relative significance of the undeveloped reserves.

 

Response:  A majority of the category movement was associated with the Bushwood gas reservoir where a significant amount of proved undeveloped reserves were converted to proved developed during 2009.  As previously noted in response to Comment 16, the Bushwood field was shut-in following Hurricane Ike and as such its proved developed reserves were reclassified to proved developed/shut in at December 31, 2008.  In addition, the Company sold properties in 2008 that represented a total of approximately 96 Bcfe of proved undeveloped reserves at year end 2007.

 

20.           We note that you report significant reserve changes in several line items of the reserve reconciliation table but do not provide explanations for those changes.  Please disclose the reasons for all significant changes as required by paragraph 11 of SFAS 69.

 

Response:  The Company utilizes the prescribed captions, as required under paragraph 11 of SFAS 69, that are significantly represented within its operations.   The Company believes that the explanation of these changes is provided for within our Changes in Standardized Measure of Discounted Future Net Cash Flows disclosure on page 127 of our Annual Report on Form 10-K

 

 

 

for the year ended December 31, 2008.  In this disclosure, the Company provides the amount of the changes in its future discounted cash flows caused by specific types of events or circumstances.   The Company believes that this information provides the data necessary to understand the effect of the changes to its estimated proved reserves.    For 2008, the significant amount of changes in reserves is attributed to changes in prices and production costs as noted by the $1.7 billion reduction in estimated future discounted cash flows.   This can be further illustrated by the inclusion of the average price per barrel of oil and per Mcf for natural gas as contained in the Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves.

 

In connection with responding to the Comments above, we acknowledge that:

 

·	we are responsible for the adequacy and accuracy of the disclosure in the filing;

·	staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and

·	we may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

 

If any member of the Staff has any questions concerning these matters or needs additional information or clarification, he or she should contact the undersigned at (281) 848-0431.

 

Very truly yours,

 

/s/ Anthony Tripodo

 

Anthony Tripodo, Executive Vice President and Chief Financial Officer

 

 

 

cc:	Karl Hiller (Branch Chief-Securities and Exchange Commission)

Michael Overman (Helix)

Lloyd Hajdik (Helix)

Robert Murphy (Helix)

Alisa Johnson (Helix)

Marty Hall (Helix)

 

 

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