Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

v2.4.0.8
Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities
Derivative Instruments and Hedging Activities

Objectives and Strategies for Using Derivative Instruments

The Company is exposed to fluctuations in oil and natural gas prices on the majority of its production. Consequently, the Company believes it is prudent to manage the variability in cash flows on a portion of its oil and natural gas production. The Company utilizes primarily a mix of collar, swap, put and call derivative financial instruments to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.

Counterparty risk and offsetting

The use of derivative transactions exposes the Company to the risk that a counterparty will be unable to meet its commitments. While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices. Counterparty credit risk is considered when determining a derivative instruments’ fair value; See Note 6 for additional information regarding fair value.
     
The Company executes commodity derivative transactions under master agreements that have netting provisions that provide for offsetting payables against receivables. In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer or terminate the arrangement.
Financial statement presentation and settlements

Settlements of the Company’s derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a New York Mercantile Exchange (“NYMEX”) price. The fair value of the Company’s derivative instruments, depending on the type of instruments, was determined by the use of present value methods or standard option valuation models with assumptions about commodity prices based on those observed in underlying markets. See Note 6 for additional information regarding fair value.

Beginning in 2012, the Company elected not to designate its executed derivative contracts, nor does it expect to designate future derivative contracts, as an accounting hedge under FASB ASC 815. Consequently, any derivative contract not designated as an accounting hedge will be carried at its fair value on the balance sheet and marked-to-market at the end of each period, with the change in value reflected as a gain or loss on the statement of operations. Gains and losses on derivatives that are not designated as hedges are recorded in earnings as a component of gain (loss) on derivative contracts. Within the gain (loss) on derivative contracts line of the statement of operations are gains (losses) on derivatives, net of settlement and gains (losses) on derivatives, settled.

Prior to 2012, the Company’s derivative contracts recorded on the Consolidated Balance Sheets were designated as cash flow hedges, and were recorded at fair market value with the changes in fair value recorded net of tax through OCI in stockholders’ equity. The cash settlements on effective derivative contracts were recorded as an increase or decrease in oil and natural gas sales.

The following table reflects the fair values of the Company’s derivative instruments for the periods presented (none of which were designated as hedging instruments under ASC 815):
 
 
Balance Sheet Presentation
 
Asset Fair Value
 
Liability Fair Value
 
Net Derivative Fair Value
Commodity
 
Classification
 
Line Description
 
12/31/13
 
12/31/12
 
12/31/13
 
12/31/12
 
12/31/13
 
12/31/12
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as Hedging Instruments under ASC 815
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas
 
Current
 
Fair market value of derivatives
 
$
60

 
$
—

 
$
—

 
$
(125
)
 
$
60

 
$
(125
)
Natural gas
 
Non-current
 
Other long-term liabilities
 
—

 
—

 
(72
)
 
(116
)
 
(72
)
 
(116
)
Oil
 
Current
 
Fair market value of derivatives
 
—

 
1,674

 
(1,036
)
 
—

 
(1,036
)
 
1,674

Oil
 
Non-current
 
Other long-term assets
 
—

 
250

 
—

 
—

 
—

 
250

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Totals
 
 
 
$
60

 
$
1,924

 
$
(1,108
)
 
$
(241
)
 
$
(1,048
)
 
$
1,683



The Company’s derivative contracts are subject to netting arrangements and, being representative of the way in which the contracts settle, are presented in the balance sheet at their fair values on a net basis based on the underlying commodity being hedged. The following presents the impact of this presentation to the Company’s recognized assets and liabilities at December 31, 2013:
 
 
Presented without
 
 
 
As Presented with
 
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of hedging contracts
 
$
8

 
$
52

 
$
60

Long-term assets: Fair value of hedging contracts
 
—

 
—

 
—

Current liabilities: Fair value of hedging contracts
 
1,088

 
(52
)
 
1,036

Long-term liabilities: Fair value of hedging contracts
 
(72
)
 
—

 
(72
)


Derivatives not designated as hedging instruments under ASC 815

For the periods indicated, the Company recorded the following related to its derivative instruments that were not designated as accounting hedges and are recorded in the Statement of Operations as gain or loss on derivative contracts:
 
For the year ended December 31,
 
2013
 
2012
 
2011
Natural gas derivatives
 
 
 
 
 
     Net (loss) gain on derivatives, settled
$
(147
)
 
$
34

 
$
—

     Net gain (loss) on derivatives, net of settlements
229

 
(241
)
 
—

          Subtotal gain (loss), net
$
82

 
$
(207
)
 
$
—

 
 
 
 
 
 
Oil derivatives
 
 
 
 
 
     Net gain, on derivatives, settled
$
1,518

 
$
—

 
$
—

     Net (loss) gain on derivatives, net of settlements
(2,960
)
 
1,924

 
—

          Subtotal (loss) gain, net
$
(1,442
)
 
$
1,924

 
$
—

 
 
 
 
 
 
Total (loss) gain on derivative instruments included in Statement of Operations
$
(1,360
)
 
$
1,717

 
$
—



Derivatives designated as hedging instruments under ASC 815

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations as an increase (decrease) to oil and natural gas sales for the effective portion and as an increase (decrease) to other (income) expense for the ineffective portion and amounts excluded from effectiveness testing:
 
For the year ended December 31,
 
2013
 
2012
 
2011
Amount of gain (loss) reclassified from OCI into income (effective portion)
$
—

 
$
1,420

 
$
(375
)
Amount of gain (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)
—

 
—

 
—



Derivative positions
In the first quarter of 2013, the Company monetized the remaining portion of its 2013 oil collar positions (for the period February - December 2013) of 40 Bbls per month. The proceeds from this transaction, combined with the proceeds from the sale of the below listed put for 30 Bbls per month, were used to finance the uplift in the oil swap for the period February - December 2013.

Listed in the table below are the outstanding oil and natural gas derivative contracts as of December 31, 2013:
Commodity
 
Instrument
 
Average Notional Volumes per Month
 
Quantity Type
 
Put/Call Price
 
Fixed-Price Swap
 
Period
 
Designation under ASC 815
 
 
Natural gas
 
Call Option
 
38
 
MMBtu
 
$
4.75

 
n/a

 
Jan14 - Mar14
 
Not Designated
 
 
Natural gas
 
Swap
 
60
 
MMBtu
 
n/a

 
$
4.36

 
Jan14 - Mar14
 
Not Designated
 
 
Natural gas
 
Call Option
 
38
 
MMBtu
 
$
4.75

 
n/a

 
Jan14 - Dec14
 
Not Designated
 
(a)
Oil
 
Swap
 
30
 
Bbls
 
n/a

 
$
93.35

 
Jan14 - Dec14
 
Not Designated
 
 
Oil
 
Put Option
 
30
 
Bbls
 
$
70.00

 
n/a

 
Jan14 - Dec14
 
Not Designated
 
 
Oil
 
Swap
 
9
 
Bbls
 
n/a

 
$
94.58

 
Jan14 - Dec14
 
Not Designated
 
 
Natural gas
 
Swap
 
46
 
MMBtu
 
n/a

 
$
4.25

 
Apr14 - Dec14
 
Not Designated
 
 
Natural gas
 
Call Option
 
38
 
MMBtu
 
$
4.75

 
n/a

 
Apr14 - Dec14
 
Not Designated
 
 
Natural gas
 
Call Option
 
37
 
MMBtu
 
$
5.00

 
n/a

 
Jan15 - Dec15
 
Not Designated
 
 

(a)
The short natural gas call option, when combined with the Company’s long production position, represents a “covered call,” and creates a $4.75/MMbtu ceiling during the covered period.

Subsequent Event Activity:

Derivative contracts executed subsequent to December 31, 2013 include the following:
Commodity
 
Instrument
 
Average Notional Volumes per Month
 
Quantity Type
 
Put/Call Price
 
Fixed-Price Swap
 
Period
 
Designation under ASC 815
Oil
 
Swap
 
15
 
Bbls
 
n/a
 
$
94.15

 
Feb14 - Mar14
 
Not Designated
Oil
 
Swap
 
15
 
Bbls
 
n/a
 
$
92.80

 
Apr14 - Jun14
 
Not Designated
Oil
 
Swap
 
15
 
Bbls
 
n/a
 
$
90.40

 
Jul14 - Sep14
 
Not Designated
Oil
 
Swap
 
15
 
Bbls
 
n/a
 
$
88.64

 
Oct14 - Dec14
 
Not Designated