Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.2.0.727
Derivative Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2015
Derivative Instruments and Hedging Activities [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 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 that have 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 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

 

06/30/2015

 

12/31/2014

 

06/30/2015

 

12/31/2014

 

06/30/2015

 

12/31/2014

Natural gas

 

Current

 

Fair value of derivatives

 

$
671 

 

$
1,262 

 

$
(1)

 

$
(7)

 

$
670 

 

$
1,255 

Oil

 

Current

 

Fair value of derivatives

 

 
6,218 

 

 
26,588 

 

 
(1,621)

 

 
(1,242)

 

 
4,597 

 

 
25,346 

Oil

 

Non-current

 

Other assets, net

 

 
205 

 

 

—

 

 

—

 

 

—

 

 
205 

 

 

—

 

 

Totals

 

 

 

$
7,094 

 

$
27,850 

 

$
(1,622)

 

$
(1,249)

 

$
5,472 

 

$
26,601 

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2015

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$
8,370 

 

$
(1,481)

 

$
6,889 

Long-term assets: Other assets, net

 

 
205 

 

 

—

 

 
205 

Current liabilities: Fair value of derivatives

 

$
(3,103)

 

$
1,481 

 

$
(1,622)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2014

 

 

Presented without

 

 

 

As Presented with

 

 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$
27,850 

 

$

—

 

$
27,850 

Current liabilities: Fair value of derivatives

 

$
(1,249)

 

$

—

 

$
(1,249)

 

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,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

Oil derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$
4,511 

 

$
(1,569)

 

$
14,464 

 

$
(2,341)

Net loss on fair value adjustments

 

 
(12,755)

 

 
(3,097)

 

 
(20,544)

 

 
(4,546)

  Total loss

 

$
(8,244)

 

$
(4,666)

 

$
(6,080)

 

$
(6,887)

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$
454 

 

$
(77)

 

$
845 

 

$
(179)

Net gain (loss) on fair value adjustments

 

 
(459)

 

 
58 

 

 
(585)

 

 
(132)

  Total gain (loss)

 

$
(5)

 

$
(19)

 

$
260 

 

$
(311)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loss on derivative contracts

 

$
(8,249)

 

$
(4,685)

 

$
(5,820)

 

$
(7,198)

 

Derivative positions

 

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of June 30, 2015:  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Oil contracts

 

2015

 

2015

 

2016

 

2016

 

2016

 

2016

Swap contracts (NYMEX):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (MBbls)

 

 
520 

 

 
442 

 

 
91 

 

 
91 

 

 
92 

 

 
92 

  Weighted average price per Bbl

 

$
67.22 

 

$
64.93 

 

$
63.50 

 

$
63.50 

 

$
63.50 

 

$
63.50 

Swap contracts (Midland basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

differential):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 
382 

 

 
327 

 

 

—

 

 

—

 

 

—

 

 

—

  Weighted average price per Bbl

 

$
(2.39)

 

$
(2.38)

 

$

—

 

$

—

 

$

—

 

$

—

Collar contracts combined with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

short puts (three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (MBbls)

 

 

—

 

 

—

 

 
91 

 

 
91 

 

 
92 

 

 
92 

   Weighted average price per Bbl

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$

—

 

$

—

 

$
70.00 

 

$
70.00 

 

$
70.00 

 

$
70.00 

     Floor (long put)

 

$

—

 

$

—

 

$
60.00 

 

$
60.00 

 

$
60.00 

 

$
60.00 

     Short put

 

$

—

 

$

—

 

$
45.00 

 

$
45.00 

 

$
45.00 

 

$
45.00 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

 

September 30,

 

December 31,

 

March 31,

 

June 30,

 

September 30,

 

December 31,

Natural gas contracts

 

2015

 

2015

 

2016

 

2016

 

2016

 

2016

Collar contracts combined with

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

short puts (three-way collar):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Volume (BBtu)

 

 
207 

 

 
161 

 

 

—

 

 

—

 

 

—

 

 

—

  Weighted average price per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  MMBtu

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     Ceiling (short call)

 

$
4.32 

 

$
4.32 

 

$

—

 

$

—

 

$

—

 

$

—

     Floor (long put)

 

$
3.85 

 

$
3.85 

 

$

—

 

$

—

 

$

—

 

$

—

     Short put

 

$
3.25 

 

$
3.25 

 

$

—

 

$

—

 

$

—

 

$

—

Swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total volume (BBtu)

 

 
219 

 

 
228 

 

 

—

 

 

—

 

 

—

 

 

—

  Weighted average price per

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  MMBtu

 

$
3.98 

 

$
3.96 

 

$

—

 

$

—

 

$

—

 

$

—

Short call contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Short call volume (BBtu)

 

 
110 

 

 
111 

 

 

—

 

 

—

 

 

—

 

 

—

  Short call price per MMBtu

 

$
5.00 

 

$
5.00 

 

$

—

 

$

—

 

$

—

 

$

—