Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.8.0.1
Derivative Instruments and Hedging Activities
 3 Months Ended
Mar. 31, 2018
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 received for 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 a mix of collars, swaps, put and call options and similar 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 instruments 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 while continuing to be obligated under higher commodity price contracts subject to any right of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument; see Note 7 for additional information regarding fair value.

The Company executes commodity derivative contracts under master agreements with netting provisions that provide for offsetting assets against liabilities. 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 benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See Note 7 for additional information regarding fair value.

Derivatives not designated as hedging instruments

The Company records its derivative contracts at fair value in the consolidated balance sheets and records changes in fair value as a gain or loss on derivative contracts in the consolidated statements of operations. Cash settlements are also recorded as a gain or loss on derivative contracts in the consolidated statements of operations.

The following table reflects the fair value of the Company’s derivative instruments for the periods presented: 
 
 
Balance Sheet Presentation
 
Asset Fair Value
 
Liability Fair Value
 
Net Derivative Fair Value
Commodity
 
Classification
 
Line Description
 
3/31/2018
 
12/31/2017
 
3/31/2018
 
12/31/2017
 
3/31/2018
 
12/31/2017
Natural gas
 
Current
 
Fair value of derivatives
 
$
317

 
$
406

 
$
—

 
$
—

 
$
317

 
$
406

Oil
 
Current
 
Fair value of derivatives
 
3,893

 
—

 
(25,912
)
 
(27,744
)
 
(22,019
)
 
(27,744
)
Oil
 
Non-current
 
Fair value of derivatives
 
—

 
—

 
(2,942
)
 
(1,284
)
 
(2,942
)
 
(1,284
)
Totals
 
 
 
 
 
$
4,210

 
$
406

 
$
(28,854
)
 
$
(29,028
)
 
$
(24,644
)
 
$
(28,622
)


As previously discussed, the Company’s derivative contracts are subject to master netting arrangements. The Company’s policy is to present the fair value of derivative contracts on a net basis in the consolidated balance sheet. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:
 
March 31, 2018
 
Presented without
 
 
 
As Presented with
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of derivatives
$
10,638

 
$
(6,428
)
 
$
4,210


 
 
 
 
 
Current liabilities: Fair value of derivatives
$
(32,340
)
 
$
6,428

 
$
(25,912
)
Long-term liabilities: Fair value of derivatives
(2,942
)
 
—

 
(2,942
)

 
December 31, 2017
 
Presented without
 
 
 
As Presented with
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of derivatives
$
406

 
$
—

 
$
406

 
 
 
 
 
 
Current liabilities: Fair value of derivatives
$
(27,744
)
 
$
—

 
$
(27,744
)
Long-term liabilities: Fair value of derivatives
(1,284
)
 
—

 
(1,284
)


For the periods indicated, the Company recorded the following related to its derivatives in the consolidated statement of operations as gain or loss on derivative contracts:
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Oil derivatives
 
 
 
 
Net loss on settlements
 
$
(8,916
)
 
$
(2,524
)
Net gain on fair value adjustments
 
4,067

 
17,266

Total gain (loss) on oil derivatives
 
$
(4,849
)
 
$
14,742

Natural gas derivatives
 
 
 
 
Net gain on settlements
 
$
457

 
$
33

Net gain (loss) on fair value adjustments
 
(89
)
 
528

Total gain on natural gas derivatives
 
$
368

 
$
561

 
 
 
 
 
Total gain (loss) on oil & natural gas derivatives
 
$
(4,481
)
 
$
15,303


Derivative positions

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of March 31, 2018:  
 
For the Remainder of
 
For the Full Year of
Oil contracts (WTI)
2018
 
2019
Swap contracts
 
 
 
Total volume (MBbls)
1,559

 
—

Weighted average price per Bbl
$
51.88

 
$
—

Collar contracts (two-way collars)
 
 
 
Total volume (MBbls)
275

 
—

Weighted average price per Bbl
 
 
 
Ceiling (short call)
$
60.50

 
$
—

Floor (long put)
$
50.00

 
$
—

Collar contracts combined with short puts (three-way collars)
 
 
 
Total volume (MBbls)
2,612

 
2,739

Weighted average price per Bbl
 
 
 
Ceiling (short call option)
$
60.86

 
$
62.96

Floor (long put option)
$
48.95

 
$
53.67

Short put option
$
39.21

 
$
43.67


 
For the Remainder of
 
For the Full Year of
Oil contracts (Midland basis differential)
2018
 
2019
Swap contracts
 
 
 
Volume (MBbls)
3,895

 
—

Weighted average price per Bbl
$
(0.86
)
 
$
—


 
For the Remainder of
 
For the Full Year of
Natural gas contracts (Henry Hub)
2018
 
2019
Swap contracts
 
 
 
   Total volume (BBtu)
4,125

 
—

   Weighted average price per MMBtu
$
2.91

 
—


Subsequent Event

The following derivative contract was executed subsequent to March 31, 2018:

For the Remainder of
 
For the Full Year of
Oil contracts (WTI)
2018
 
2019
Collar contracts combined with short puts (three-way collars)
 
 
 
Volume (MBbls)
—

 
730

Weighted average price per Bbl
 
 
 
Ceiling (short call option)
$
—

 
$
66.53

Floor (long put option)
$
—

 
$
55.00

Short put option
$
—

 
$
45.00