Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.5.0.2
Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities [Abstract]  
Derivative Instruments and Hedging Activities

Note 6 - 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 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 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

 

09/30/2016

 

12/31/2015

 

09/30/2016

 

12/31/2015

 

09/30/2016

 

12/31/2015

Natural gas

 

Current

 

Fair value of derivatives

 

$

 29 

 

$

—

 

$

 (233)

 

$

—

 

$

 (204)

 

$

—

Natural gas

 

Non-current

 

Fair value of derivatives

 

 

 3 

 

 

—

 

 

—

 

 

—

 

 

 3 

 

 

—

Oil

 

Current

 

Fair value of derivatives

 

 

 3,473 

 

 

 19,943 

 

 

 (7,553)

 

 

—

 

 

 (4,080)

 

 

 19,943 

Oil

 

Non-current

 

Fair value of derivatives

 

 

 54 

 

 

—

 

 

 (2,936)

 

 

—

 

 

 (2,882)

 

 

—

 

 

Totals

 

 

 

$

 3,559 

 

$

 19,943 

 

$

 (10,722)

 

$

—

 

$

 (7,163)

 

$

 19,943 



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, 2016



 

Presented without

 

 

 

As Presented with



 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

 3,591 

 

$

 (89)

 

$

 3,502 

Long-term assets: Fair value of derivatives

 

 

 57 

 

 

—

 

 

 57 



 

 

 

 

 

 

 

 

 

Current liabilities: Fair value of derivatives

 

 

 (7,875)

 

 

 89 

 

 

 (7,786)

Long-term liabilities: Fair value of derivatives

 

$

 (2,936)

 

$

—

 

$

 (2,936)







 

 

 

 

 

 

 

 

 



 

 

December 31, 2015



 

Presented without

 

 

 

As Presented with



 

Effects of Netting

 

Effects of Netting

 

Effects of Netting

Current assets: Fair value of derivatives

 

$

 19,943 

 

$

—

 

$

 19,943 



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,



 

 

2016

 

 

2015

 

 

2016

 

 

2015

Oil derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain on settlements

 

$

 4,252 

 

$

 9,399 

 

$

 15,467 

 

$

 23,863 

Net gain (loss) on fair value adjustments

 

 

 699 

 

 

 13,758 

 

 

 (26,904)

 

 

 (6,787)

   Total gain (loss)

 

$

 4,951 

 

$

 23,157 

 

$

 (11,437)

 

$

 17,076 

Natural gas derivatives

 

 

 

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

 (161)

 

$

 390 

 

$

 357 

 

$

 1,235 

Net gain (loss) on fair value adjustments

 

 

 345 

 

 

 (264)

 

 

 (201)

 

 

 (848)

   Total gain

 

$

 184 

 

$

 126 

 

$

 156 

 

$

 387 



 

 

 

 

 

 

 

 

 

 

 

 

Total gain (loss) on derivative contracts

 

$

 5,135 

 

$

 23,283 

 

$

 (11,281)

 

$

 17,463 



Derivative positions



Listed in the tables below are the outstanding oil and natural gas derivative contracts as of September 30, 2016:  





 

 

 

 

 

 



 

For the Remainder of

 

For the Full Year of

Oil contracts

 

2016

 

2017

Swap contracts (WTI)

 

 

 

 

 

 

   Total volume (MBbls)

 

 

 184 

 

 

—

   Weighted average price per Bbl

 

$

 58.23 

 

$

—

Swap contracts combined with short puts (WTI, enhanced swaps)

 

 

 

 

 

 

   Total volume (MBbls)

 

 

—

 

 

 730 

   Weighted average price per Bbl

 

 

 

 

 

 

      Swap

 

$

—

 

$

 44.50 

      Short put option

 

$

—

 

$

 30.00 

Collar contracts combined with short puts (WTI, three-way collars)

 

 

 

 

 

 

   Volume (MBbls)

 

 

 184 

 

 

—

   Weighted average price per Bbl

 

 

 

 

 

 

      Ceiling (short call option)

 

$

 65.00 

 

$

—

      Floor (long put option)

 

$

 55.00 

 

$

—

      Short put option

 

$

 40.33 

 

$

—

Collar contracts (WTI, two-way collars)

 

 

 

 

 

 

   Total volume (MBbls)

 

 

 184 

 

 

 438 

   Weighted average price per Bbl

 

 

 

 

 

 

      Ceiling (short call)

 

$

 46.50 

 

$

 59.05 

      Floor (long put)

 

$

 37.50 

 

$

 47.50 

Call option contracts (short position)

 

 

 

 

 

 

   Total volume (MBbls)

 

 

—

 

 

 670 

   Weighted average price per Bbl

 

 

 

 

 

 

      Call strike price

 

$

—

 

$

 50.00 

Swap contracts (Midland basis differentials)

 

 

 

 

 

 

   Volume (MBbls)

 

 

 368 

 

 

—

   Weighted average price per Bbl

 

$

 0.17 

 

$

—



 

 

 

 

 

 

Natural gas contracts

 

 

 

 

 

 

Swap contracts (Henry Hub)

 

 

 

 

 

 

   Total volume (BBtu)

 

 

 552 

 

 

—

   Weighted average price per MMBtu

 

$

 2.52 

 

$

—

Collar contracts combined with short puts (Henry Hub, three-way collars)

 

 

 

 

 

 

   Total volume (BBtu)

 

 

—

 

 

 1,460 

   Weighted average price per MMBtu

 

 

 

 

 

 

      Ceiling (short call option)

 

$

—

 

$

 3.71 

      Floor (long put option)

 

$

—

 

$

 3.00 

      Short put option

 

$

—

 

$

 2.50 



Subsequent event



The following derivative contract was executed subsequent to September 30, 2016:







 

 

 

 

 

 



 

For the Remainder of

 

For the Remainder of

Oil contracts

 

2016

 

2017

Collar contracts (WTI, two-way collars)

 

 

 

 

 

 

   Total volume (MBbls)

 

 

—

 

 

 1,095 

   Weighted average price per Bbl

 

 

 

 

 

 

      Ceiling (short call option)

 

$

—

 

$

 57.79 

      Floor (long put option)

 

$

—

 

$

 47.50