During 2012, actual oil, NGLs, and natural gas commodity prices were significantly lower than the Company's guidance. This resulted in actual revenue and funds from operations in 2012 being lower than guidance. Due to lower commodity prices during the middle half of 2012, the Company shifted gas-weighted capital projects to the fourth quarter. This shift resulted in a lower average daily production compared to guidance and also contributed to actual revenue and funds from operations being lower than guidance. Exit guidance of 8,500 boe/d was successfully achieved. Actual capital expenditures in 2012 exceeded budget as a result of property acquisitions, land acquisitions, and new farm-in opportunities as a result of the success of the Edson Cardium.
CRITICAL ACCOUNTING ESTIMATES
Management is required to make estimates, judgments, and assumptions in the application of IFRS that affect the reported amounts of assets and liabilities at the date of the financial statements and revenues and expenses for the period then ended. Certain of these estimates may change from period to period resulting in a material impact on the Company's results from operations, financial position, and change in financial position. The following summarizes the Company's significant critical accounting estimates.
Oil and natural gas reserves
The Company engages a qualified, independent oil and gas reserves evaluator to perform an estimation of the amount of the Company's oil and natural gas reserves at least annually. Reserves form the basis for the calculation of depletion and assessment of impairment of oil and natural gas assets. Reserves are estimated using the definitions of reserves prescribed by National Instrument 51-101 and the Canadian Oil and Gas Evaluation Handbook.
Proved plus probable reserves are defined as the estimated quantities of crude oil, natural gas liquids including condensate, and natural gas that geological and engineering data demonstrate a 50 percent probability of being recovered at the reported level. Due to the inherent uncertainties and the necessarily limited nature of reservoir data, estimates of reserves are inherently imprecise, require the application of judgment, and are subject to change as additional information becomes available. The estimates are made using all available geological and reservoir data as well as historical production data. Estimates are reviewed and revised as appropriate. Revisions occur as a result of changes in prices, costs, fiscal regimes, reservoir performance, or changes in the Company's plans.
Exploration and evaluation assets
Exploration and evaluation assets are assessed for impairment (i) if sufficient data exists to determine technical feasibility and commercial viability, (ii) if facts and circumstances suggest that the carrying amount exceeds the recoverable amount, and (iii) upon transfer to property, plant, and equipment. For purposes of impairment testing, exploration and evaluation assets are allocated to CGUs. Impairment tests by their nature involve estimates and judgment, which for exploration and evaluation assets include estimates of proved and probable reserves found, the market value of undeveloped land, and future development plans. Crocotta allocated its exploration and evaluation assets to specific CGUs for the purpose of impairment testing.
Property, plant, and equipment
For the purpose of impairment testing, items of property, plant, and equipment, which includes oil and natural gas development and production assets, are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets (CGU). The recoverable amount of an asset or a CGU is the greater of its value in use and its fair value less costs to sell. The Company uses fair value less costs to sell for its impairment tests which is determined as the net present value of the estimated future cash flows expected to arise from the continued use of the CGU, including any expansion prospects, and its eventual disposal, using assumptions that an independent market participant may take into account. These cash flows are discounted by an appropriate discount rate which would be applied by such a market participant to arrive at a net present value of the CGU. The significant estimates and judgments include proved plus probable reserves, the estimated value of those reserves, including future commodity prices, the discount rate used to present value the estimated future cash flows, and other assumptions that an independent market participant may take into account, including acquisition metrics of recent transactions for similar assets.
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