Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v2.4.0.8
Derivative Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

Note 5 - 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, puts, calls 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 a derivative instruments’ fair value; see Note 6 for additional information regarding fair value.

 

The Company executes commodity derivative contracts 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 benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, depending on the type of instrument, the Company utilizes present value methods or standard option valuation models 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 elected not to designate its derivative contracts as accounting hedges under Accounting Standards Codification 815. Consequently, the Company records its derivative contracts at fair value in the consolidated balance sheet and records changes in fair value as a gain or loss on derivative contracts in the consolidated statement of operations. Cash settlements are also recorded as gain or loss on derivative contracts in the consolidated statement 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

 

06/30/14

 

12/31/2013

 

06/30/2014

 

12/31/2013

 

06/30/2014

 

12/31/2013

Natural gas

 

Current

 

Fair value of derivatives

 

$

—

 

$

—

 

$
(114)

 

$

—

 

$
(114)

 

$

—

Natural gas

 

Current

 

Other current assets

 

 

—

 

 
60 

 

 

—

 

 

—

 

 

—

 

 
60 

Natural gas

 

Non-current

 

Other long-term liabilities

 

 

—

 

 

—

 

 
(29)

 

 
(72)

 

 
(29)

 

 
(72)

Oil

 

Current

 

Fair value of derivatives

 

 

—

 

 

—

 

 
(5,192)

 

 
(1,036)

 

 
(5,192)

 

 
(1,036)

Oil

 

Non-current

 

Other long-term assets

 

 
851 

 

 

—

 

 

—

 

 

—

 

 
851 

 

 

—

Oil

 

Non-current

 

Other long-term liabilities

 

 

—

 

 

—

 

 
(1,242)

 

 

—

 

 
(1,242)

 

 

—

 

 

Totals

 

 

 

$
851 

 

$
60 

 

$
(6,577)

 

$
(1,108)

 

$
(5,726)

 

$
(1,048)

 

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 at June 30, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$
26 

 

$
(26)

 

$

—

Long-term assets: Fair value of derivatives

 

 
851 

 

 

—

 

 
851 

Current liabilities: Fair value of derivatives

 

 
(5,332)

 

 
26 

 

 
(5,306)

Long-term liabilities: Fair value of derivatives

 

$
(1,271)

 

$

—

 

$
(1,271)

 

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 June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

 

2013

 

 

2014

 

 

2013

Natural gas derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net loss on settlements

 

$
(77)

 

$
(156)

 

$
(179)

 

$
(107)

Net gain (loss) on fair value adjustments

 

 
58 

 

 
485 

 

 
(132)

 

 
97 

Total gain (loss)

 

$
(19)

 

$
329 

 

$
(311)

 

$
(10)

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$
(1,569)

 

$
849 

 

$
(2,341)

 

$
1,422 

Net gain (loss) on fair value adjustments

 

 
(3,097)

 

 
803 

 

 
(4,546)

 

 
151 

Total gain (loss)

 

$
(4,666)

 

$
1,652 

 

$
(6,887)

 

$
1,573 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gain (loss) on derivative instruments

 

$
(4,685)

 

$
1,981 

 

$
(7,198)

 

$
1,563 

 

 

Derivative positions

 

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of June 30, 2014:

 

 

 

 

 

 

 

 

 

 

For the Six Months Ending December 31,

 

For the Year Ending December 31,

Oil contracts

 

2014

 

2015

Collar contracts combined with short puts (three-way collar):

 

 

 

 

 

 

  Volume (MBbls)

 

 

—

 

 
317 

  Price per Bbl

 

 

 

 

 

 

     Ceiling (short call)

 

 

—

 

$
99.10 

     Floor (long put)

 

 

—

 

$
90.00 

     Short put

 

 

—

 

$
75.00 

Swap contracts:

 

 

 

 

 

 

  Total volume (MBbls)

 

 
304 

 

 

—

  Weighted average price per Bbl

 

$
95.10 

 

 

—

Put spreads:

 

 

 

 

 

 

  Volume (MBbls)

 

 

—

 

 
276 

  Long put price per Bbl

 

 

—

 

$
90.00 

  Short put price per Bbl

 

 

—

 

$
75.00 

Swap contracts combined with short put:

 

 

 

 

 

 

  Volume (MBbls)

 

 
184 

 

 

—

  Swap price per Bbl

 

$
93.35 

 

 

—

  Short put price per Bbl

 

$
70.00 

 

 

—

 

 

 

 

 

 

 

 

 

For the Six Months Ending December 31,

 

For the Year Ending December 31,

Natural gas contracts

 

2014

 

2015

Call contracts:

 

 

 

 

 

 

  Volume (MMBtu)

 

 
230 

 

 

—

     Short call price per MMBtu (a)

 

$
4.75 

 

 

—

     Long call price per MMBtu (a)

 

$
4.75 

 

 

—

Swap contracts combined with short calls:

 

 

 

 

 

 

  Swap volume (MMBtu)

 

 
368 

 

 

—

  Swap price per MMBtu

 

$
4.25 

 

 

—

  Short call volume (MMBtu)

 

 

—

 

 
438 

  Short call price per MMBtu

 

 

—

 

$
5.00 

 

(a)Offsetting contracts.