Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.8.0.1
Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2017
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 6 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 6 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 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
 
9/30/2017
 
12/31/2016
 
9/30/2017
 
12/31/2016
 
9/30/2017
 
12/31/2016
Natural gas
 
Current
 
Fair value of derivatives
 
$
431

 
$

 
$

 
$
(593
)
 
$
431

 
$
(593
)
Oil
 
Current
 
Fair value of derivatives
 
2,902

 
103

 
(6,380
)
 
(17,675
)
 
(3,478
)
 
(17,572
)
Oil
 
Non-current
 
Fair value of derivatives
 
1,121

 

 
(659
)
 
(28
)
 
462

 
(28
)
 
 
Totals
 
 
 
$
4,454

 
$
103

 
$
(7,039
)
 
$
(18,296
)
 
$
(2,585
)
 
$
(18,193
)


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:
 
September 30, 2017
 
Presented without
 
 
 
As Presented with
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of derivatives
$
5,441

 
$
(2,108
)
 
$
3,333

Long-term assets: Fair value of derivatives
1,388

 
(267
)
 
1,121


 
 
 
 
 
Current liabilities: Fair value of derivatives
$
(8,488
)
 
$
2,108

 
$
(6,380
)
Long-term liabilities: Fair value of derivatives
(926
)
 
267

 
(659
)

 
December 31, 2016
 
Presented without
 
 
 
As Presented with
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of derivatives
$
1,836

 
$
(1,733
)
 
$
103

 
 
 
 
 
 
Current liabilities: Fair value of derivatives
$
(20,001
)
 
$
1,733

 
$
(18,268
)
Long-term liabilities: Fair value of derivatives
(28
)
 

 
(28
)


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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Oil derivatives
 
 
 
 
 
 
 
Net gain (loss) on settlements
$
(1,373
)
 
$
4,252

 
$
(4,213
)
 
$
15,467

Net gain (loss) on fair value adjustments
(12,811
)
 
699

 
14,584

 
(26,904
)
Total gain (loss) on oil derivatives
$
(14,184
)
 
$
4,951

 
$
10,371

 
$
(11,437
)
Natural gas derivatives
 
 
 
 
 
 
 
Net gain (loss) on settlements
$
159

 
$
(161
)
 
$
241

 
$
357

Net gain (loss) on fair value adjustments
(137
)
 
345

 
1,024

 
(201
)
Total gain on natural gas derivatives
$
22

 
$
184

 
$
1,265

 
$
156

 
 
 
 
 
 
 
 
Total gain (loss) on oil & natural gas derivatives
$
(14,162
)
 
$
5,135

 
$
11,636

 
$
(11,281
)

Derivative positions

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of September 30, 2017:  
 
For the Remainder of
 
For the Full Year of
Oil contracts (WTI)
2017
 
2018
Swap contracts combined with short puts (enhanced swaps)
 
 
 
Total volume (MBbls)
184

 

Weighted average price per Bbl
 
 
 
Swap
$
44.50

 
$

Short put option
$
30.00

 
$

Swap contracts
 
 
 
Total volume (MBbls)
184

 
1,460

Weighted average price per Bbl
$
45.74

 
$
50.93

Deferred premium put spread option
 
 
 
Total volume (MBbls)
253

 

Premium per Bbl
$
2.45

 
$

Weighted average price per Bbl
 
 
 
Long put option
$
50.00

 
$

Short put option
$
40.00

 
$

Collar contracts (two-way collars)
 
 
 
Total volume (MBbls)
340

 

Weighted average price per Bbl
 
 
 
Ceiling (short call)
$
58.19

 
$

Floor (long put)
$
47.50

 
$

Call option contracts
 
 
 
Total volume (MBbls)
169

 

   Premium per Bbl
$
1.82

 
$

Weighted average price per Bbl
 
 
 
Short call strike price (a)
$
50.00

 
$

     Long call strike price (a)
$
50.00

 
$

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

 
3,468

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

 
$
60.86

Floor (long put option)
$

 
$
48.95

Short put option
$

 
$
39.21


(a)
Offsetting contracts.

 
For the Remainder of
 
For the Full Year of
Oil contracts (Midland basis differential)
2017
 
2018
Swap contracts
 
 
 
Volume (MBbls)
552

 
4,563

Weighted average price per Bbl
$
(0.52
)
 
$
(0.98
)

 
For the Remainder of
 
For the Full Year of
Natural gas contracts
2017
 
2018
Collar contracts combined with short puts (Henry Hub, three-way collars)
 
 
 
Total volume (BBtu)
368

 

Weighted average price per MMBtu
 
 
 
Ceiling (short call option)
$
3.71

 
$

Floor (long put option)
$
3.00

 
$

Short put option
$
2.50

 
$

Collar contracts (Henry Hub, two-way collars)
 
 
 
Total volume (BBtu)
856

 
720

Weighted average price per MMBtu
 
 
 
Ceiling (short call option)
$
3.77

 
$
3.84

Floor (long put option)
$
3.23

 
$
3.40

Swap contracts
 

 
 

Total volume (BBtu)
124

 

Weighted average price per MMBtu
$
3.39

 
$


Subsequent event

The following derivative contracts were executed subsequent to September 30, 2017:໿
 
For the Remainder of
 
For the Full Year of
Oil contracts (Midland basis differential)
2017
 
2018
Swap contracts
 
 
 
Volume (MBbls)

 
546

Weighted average price per Bbl
$

 
$
(0.23
)

 
 
 
 
For the Remainder of
 
For the Full Year of
Oil contracts (WTI)
2017
 
2018
Swap contracts
 
 
 
Volume (MBbls)

 
365

Weighted average price per Bbl
$

 
$
53.40