5.Property, Plant and Equipment

Property, plant and equipment (“PP&E”) is stated at cost, less accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful service life of the asset.

PP&E consists of the following:

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Depreciation expense totaled $30.3 million, $27.9 million, and $23.4 million for the years ended December 31, 2022, 2021 and 2020, respectively. PP&E cash expenditures totaled $146.5 million, $74.7 million, and $139.6 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Accrued PP&E additions totaled $26.4 million, $5.5 million, and $13.2 million at December 31, 2022, 2021, and 2020, respectively.

Asset Exchanges

During the year ended December 31, 2022, we completed multiple nonmonetary transactions. The transactions included exchanges of wells, facilities, permits and other assets. The total net book value of the divested assets and liabilities was $3.8 million. The acquired assets were recorded at a total fair value of $3.2 million, which resulted in a total pre-tax loss of $0.6 million.

Asset Disposals

During the first quarter of 2022, management committed to a plan to sell certain assets located in the Midland Basin and determined that these assets met all the criteria for classification as assets held for sale. These assets were re-measured at their fair values less costs to sell, which resulted in the recognition of pre-tax impairment expense of $15.6 million during the first quarter of 2022. We estimated the fair value of the assets using indicative bids, which were representative of a Level 2 fair value measurement, and we ceased recording depreciation on the assets. During the third quarter of 2022, we closed the sale of these assets for proceeds of $7.4 million and recorded a gain of $0.1 million.

For the year ended December 31, 2022, we disposed of other assets. We received $7.3 million in cash and recognized a de minimis gain on disposal of assets. The asset cost and accumulated depreciation related to these assets were $8.0 million and $0.8 million, respectively, at the time of disposal.

For the year ended December 31, 2021, we recognized a loss on disposal of assets of $0.2 million. The asset cost and accumulated depreciation related to these assets were $0.8 million and $0.3 million, respectively, at the time of disposal, and the salvage value received was $0.3 million.

For the year ended December 31, 2020, we recognized a loss on disposal of assets of $0.1 million. The asset cost and accumulated depreciation related to these assets were $0.4 million and $0.2 million, respectively, at the time of disposal, and the salvage value received was $0.1 million.

Abandoned Assets

In June 2022, management determined that two previously acquired saltwater disposal (“SWD”) wells were no longer economically beneficial to the operations of the Company due to required workover costs and determined that the SWD wells should be shut-in and taken out of service. Accordingly, we removed the cost and the associated accumulated depreciation and recognized a charge of $4.2 million for the remaining book value of the SWD wells.

In late second quarter 2022, management removed the cost of a SWD well that was under construction in Texas. The well had encountered technical difficulties during the drilling phase and progress on the well ceased. Management’s evaluation of the well determined that abandoning the asset was the most prudent course of action. Accordingly, we removed the cost of the asset and recognized a charge of $1.6 million.

In the third quarter of 2022, we recognized a charge of $9.2 million related to a stand-alone SWD well that has been taken out of service.

In the fourth quarter of 2022, we commenced the retirement work on several SWD wells that had previously been taken out of service and had their cost removed. In connection with this work, we revised the asset retirement obligation related to these SWD wells to reflect the estimated cost of the retirement work. The resulting charge of $1.1 million was recorded to abandoned well costs.

In late third quarter 2021, management completed its evaluation of the performance of a SWD well, located in Eddy County, New Mexico and concluded that the well should be shut-in and taken out of service. We drilled this well in the second quarter of 2017 and encountered technical difficulties requiring significant incremental capital expenditure. The asset was put into service in May of 2018. During July 2021, we re-entered the well bore to address anomalies. After technical testing, management concluded that it was probable that abandoning the asset was the most prudent course of action as the well is unable to remain in service in its current condition. Accordingly, we removed the cost and the associated accumulated depreciation and recognized a charge of $28.5 million for the remaining net book value of the well.

Asset Impairment

In addition to the impairment loss on assets disposed of during the year ended December 31, 2022, noted above, we recognized a loss on impairment of assets of $0.1 million, $1.6 million, $1.0 million for the years ended December 31, 2022, 2021 and 2020, respectively, which is included in abandoned projects expense. In 2021, the asset cost and accumulated depreciation related to these assets was $1.6 million and $0, respectively at the time of impairment. In 2020, the asset cost and accumulated depreciation related to these assets was $1.0 million and $0, respectively at the time of impairment.