Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

v3.3.1.900
Derivative Instruments
 12 Months Ended
Dec. 31, 2015
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
DERIVATIVE INSTRUMENTS
DERIVATIVE INSTRUMENTS
Oil, Natural Gas and Natural Gas Liquids Derivative Instruments
The Company seeks to reduce its exposure to unfavorable changes in oil, natural gas and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and natural gas liquids prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production.
Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on Argus Louisiana Light Sweet Crude for oil, the NYMEX West Texas Intermediate for oil, the NYMEX Henry Hub for natural gas and Mont Belvieu for propane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2015.
 
Location
Daily Volume (Bbls/day)
 
Weighted
Average Price
January 2016 - June 2016
ARGUS LLS
1,500

 
$
63.03

January 2016 - June 2016
NYMEX WTI
1,000

 
$
61.40

 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
January 2016 - March 2016
NYMEX Henry Hub
415,000

 
$
3.56

April 2016
NYMEX Henry Hub
425,000

 
$
3.52

May 2016 - June 2016
NYMEX Henry Hub
355,000

 
$
3.42

July 2016 - September 2016
NYMEX Henry Hub
375,000

 
$
3.38

October 2016
NYMEX Henry Hub
405,000

 
$
3.33

November 2016 - December 2016
NYMEX Henry Hub
430,000

 
$
3.30

January 2017 - March 2017
NYMEX Henry Hub
317,500

 
$
3.25

April 2017 - June 2017
NYMEX Henry Hub
272,500

 
$
3.31

July 2017 - December 2017
NYMEX Henry Hub
210,000

 
$
3.12

January 2018 - December 2018
NYMEX Henry Hub
160,000

 
$
3.01

January 2019 - March 2019
NYMEX Henry Hub
20,000

 
$
3.37


 
Location
Daily Volume (Bbls/day)
 
Weighted
Average Price
January 2016 - December 2016
Mont Belvieu
1,000

 
$
20.16


The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes.
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
January 2016 - March 2016
NYMEX Henry Hub
75,000

 
$
3.25

April 2016 - December 2016
NYMEX Henry Hub
95,000

 
$
3.18

January 2017 - March 2017
NYMEX Henry Hub
20,000

 
$
2.91


For a portion of the combined natural gas derivative instruments containing fixed price swaps and sold call options, the counterparty has an option to extend the terms an additional twelve months for the period January 2017 through December 2017. These options expire in December 2016. If executed, the Company would have additional fixed price swaps for 30,000 MMBtu per day at a weighted average price of $3.33 and additional short call options for 30,000 MMBtu per day at a weighted average ceiling price of $3.33.
In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of MichCon or Tetco M2 to the NYMEX Henry Hub natural gas price. As of December 31, 2015, the Company's had the following natural gas basis swap positions for MichCon and Tetco M2, respectively.
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
January 2016 - March 2016
MichCon
70,000

 
$
0.11

April 2016 - December 2016
MichCon
40,000

 
$
0.02

November 2016 - March 2017
Tetco M2
50,000

 
$
(0.59
)

Balance sheet presentation
The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2015 and 2014:
 
 
December 31,
 
2015
 
2014
 
(In thousands)
Short-term derivative instruments - asset
$
142,794

 
$
78,391

Long-term derivative instruments - asset
$
51,088

 
$
24,448

Short-term derivative instruments - liability
$
437

 
$
—

Long-term derivative instruments - liability
$
6,935

 
$
—


Gains and losses
For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. The Company has no cash flow hedges in place for the year ended December 31, 2015 and 2014, as all fixed price swaps, swaptions and basis swaps had either been deemed ineffective at their inception or had been accounted for using the mark-to-market accounting method. Amounts reclassified out of accumulated other comprehensive (loss) income as a reduction to oil and condensate sales for the year ended December 31, 2013 were approximately $9.8 million.  
At December 31, 2015 and 2014, no amounts related to fixed price swaps, swaptions or basis swaps remain in accumulated other comprehensive income (loss).
The following table presents the gain and loss recognized in gas sales, oil and condensate sales and natural gas liquids sales in the accompanying consolidated statements of operations due to the change in fair value of derivative instruments for the years ended December 31, 2015, 2014, and 2013.
 
Gain (loss) on derivative instruments
 
For the Year Ended December 31,
 
2015
 
2014
 
2013
 
(In thousands)
Gas sales
$
72,412

 
$
115,324

 
$
(12,484
)
Oil and condensate sales
10,149

 
5,824

 
(5,705
)
Natural gas liquids sales
1,110

 
—

 
—

Total
$
83,671

 
$
121,148

 
$
(18,189
)
The $18.2 million loss in 2013 was comprised of $9.1 million related to hedge ineffectiveness and $9.1 million related to amortization of other comprehensive income.
The Company delivered approximately 46% of its 2015 production under fixed price swaps.
Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.