Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

v3.6.0.2
Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 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, 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 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

 

12/31/2016

 

12/31/2015

 

12/31/2016

 

12/31/2015

 

12/31/2016

 

12/31/2015

Natural gas

 

Current

 

Fair value of derivatives

 

$

—

 

$

—

 

$

 (593)

 

$

—

 

$

 (593)

 

$

—

Oil

 

Current

 

Fair value of derivatives

 

 

 103 

 

 

 19,943 

 

 

 (17,675)

 

 

—

 

 

 (17,572)

 

 

 19,943 

Oil

 

Non-current

 

Fair value of derivatives

 

 

—

 

 

—

 

 

 (28)

 

 

—

 

 

 (28)

 

 

—



 

Total

 

 

 

$

 103 

 

$

 19,943 

 

$

 (18,296)

 

$

—

 

$

 (18,193)

 

$

 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:







 

 

 

 

 

 

 

 

 



 

For the Year Ended 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 Year Ended 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:





 

 

 

 

 

 

 

 

 



 

For the Year Ended December 31,



 

 

2016

 

 

2015

 

 

2014

Natural gas derivatives

 

 

 

 

 

 

 

 

 

Net gain (loss) on settlements

 

$

 102 

 

$

 1,717 

 

$

 (84)

Net gain (loss) on fair value adjustments

 

 

 (593)

 

 

 (1,255)

 

 

 1,267 

   Total gain (loss)

 

$

 (491)

 

$

 462 

 

$

 1,183 

Oil derivatives

 

 

 

 

 

 

 

 

 

Net gain on settlements

 

$

 17,801 

 

$

 33,299 

 

$

 4,170 

Net gain (loss) on fair value adjustments

 

 

 (37,543)

 

 

 (5,403)

 

 

 26,383 

   Total gain (loss)

 

$

 (19,742)

 

$

 27,896 

 

$

 30,553 



 

 

 

 

 

 

 

 

 

Total gain (loss) on derivative contracts

 

$

 (20,233)

 

$

 28,358 

 

$

 31,736 



Derivative positions



Listed in the tables below are the outstanding oil and natural gas derivative contracts as of December 31, 2016:





 

 

 

 

 

 



 

For the Full Year of

 

For the Full Year of

Oil contracts

 

2017

 

2018

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 

 

$

—

Deferred premium put option

 

 

 

 

 

 

   Total volume (MBbls)

 

 

 498 

 

 

—

   Premium per Bbl

 

$

 2.05 

 

$

—

   Weighted average price per Bbl

 

 

 

 

 

 

      Long put option

 

$

 50.00 

 

$

—

Deferred premium put spread option

 

 

 

 

 

 

   Total volume (MBbls)

 

 

 506 

 

 

—

   Premium per Bbl

 

$

 2.45 

 

$

—

   Weighted average price per Bbl

 

 

 

 

 

 

      Long put option

 

$

 50.00 

 

$

—

      Short put option

 

$

 40.00 

 

$

—

Collar contracts (WTI, two-way collars)

 

 

 

 

 

 

   Total volume (MBbls)

 

 

 1,351 

 

 

—

   Weighted average price per Bbl

 

 

 

 

 

 

      Ceiling (short call)

 

$

 58.19 

 

$

—

      Floor (long put)

 

$

 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 differential)

 

 

 

 

 

 

   Volume (MBbls)

 

 

 2,004 

 

 

 1,825 

   Weighted average price per Bbl

 

$

 (0.52)

 

$

 (1.02)



 

 

 

 

 

 

Natural gas contracts

 

 

 

 

 

 

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 

 

$

—

Collar contracts (Henry Hub, two-way collars)

 

 

 

 

 

 

   Total volume (BBtu)

 

 

 1,460 

 

 

—

   Weighted average price per MMBtu

 

 

 

 

 

 

      Ceiling (short call option)

 

$

 3.68 

 

$

—

      Floor (long put option)

 

$

 3.00 

 

$

—



Subsequent event



The following derivative contracts were executed subsequent to December 31, 2016:





 

 

 

 

 

 



 

For the Remainder of

 

For the Remainder of

Oil contracts

 

2017

 

2018

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

 

 

 

 

 

 

   Total volume (MBbls)

 

 

—

 

 

 2,738 

   Weighted average price per Bbl

 

 

 

 

 

 

      Ceiling (short call option)

 

$

—

 

$

 62.84 

      Floor (long put option)

 

$

—

 

$

 50.00