Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v3.3.0.814
Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2015
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

4.  Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and from time to time, we use various derivative instruments to manage our exposure to this commodity price risk from sales of our oil and natural gas.  All of the derivative counterparties are also lenders or affiliates of lenders participating in our revolving bank credit facility.  We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations.  Additional collateral is not required by us due to the derivative counterparties’ collateral rights as lenders, and we do not require collateral from our derivative counterparties.

We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts were recognized currently in earnings during the periods presented.  The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows.

For information about fair value measurements, refer to Note 6.

Commodity Derivatives

During the second quarter of 2015, we entered into crude oil derivative contracts and natural gas derivative contracts for a portion of our anticipated future production.  Some of the commodity derivative contracts are known as “three-way collars” consisting of a purchased put option, a sold call option and a purchased call option, each at varying strike prices.  The strike prices of the contracts were set so that the contracts were premium neutral (“costless”), which means no net premium was paid to or received from a counterparty.  The three-way collar contracts are structured to provide price risk protection if the commodity price falls below the strike price of the put option and provides us the opportunity to benefit if the commodity price rises above the strike price of the purchased call option.  These contracts may have the effect of reducing some of our incremental income from favorable price movements if the commodity price is above certain levels, but have unlimited upside potential if prices rise above those levels.  In addition, we entered into oil derivative contracts known as “two-way”, “costless” collars, which consist of a purchased put option and a sold call option.  These two-way collars provide price risk protection if crude oil prices fall below certain levels, but may limit incremental income from favorable price movements above certain limits.  The oil contracts are based on West Texas Intermediate (“WTI”) crude oil prices as quoted off the New York Mercantile Exchange, known as NYMEX.  The natural gas contracts are based on Henry Hub natural gas prices as quoted off the NYMEX.  


As of December 31, 2014, we did not have any open derivative contracts.  During 2014, we used crude oil swap contracts and have used various derivative instruments in prior years to manage our exposure to commodity price risk from sales of our oil and natural gas.  While these contracts were intended to reduce the effects of price volatility, they may have limited incremental income from favorable price movements.

As of June 30, 2015, our open commodity derivative contracts were as follows:

 

Crude Oil:  Three-way collars, Priced off WTI (NYMEX)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

Notional

 

 

Weighted Average Contract Price

 

 

 

 

Quantity

 

 

Quantity

 

 

Put Option

 

 

Call Option

 

 

Call Option

 

Termination Period

 

(Bbls/day)

 

 

(Bbls)

 

 

(Bought)

 

 

(Sold)

 

 

(Bought)

 

2015:

3rd Quarter

 

 

6,000

 

 

 

552,000

 

 

$

50.00

 

 

$

60.00

 

 

$

62.30

 

 

4th Quarter

 

 

6,000

 

 

 

552,000

 

 

 

50.00

 

 

 

60.00

 

 

 

62.30

 

 

 

 

 

 

 

 

 

1,104,000

 

 

 

50.00

 

 

 

60.00

 

 

 

62.30

 

 

Crude Oil:  Two-way collars, Priced off WTI (NYMEX)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

Notional

 

 

Weighted Average Contract Price

 

 

 

 

Quantity

 

 

Quantity

 

 

Put Option

 

 

Call Option

 

Termination Period

 

(Bbls/day)

 

 

(Bbls)

 

 

(Bought)

 

 

(Sold)

 

2016:

1st Quarter

 

 

5,000

 

 

 

455,000

 

 

$

40.00

 

 

$

81.47

 

 

2nd Quarter

 

 

5,000

 

 

 

455,000

 

 

 

40.00

 

 

 

81.47

 

 

3rd Quarter

 

 

5,000

 

 

 

460,000

 

 

 

40.00

 

 

 

81.47

 

 

4th Quarter

 

 

5,000

 

 

 

460,000

 

 

 

40.00

 

 

 

81.47

 

 

 

 

 

 

 

 

 

1,830,000

 

 

 

40.00

 

 

 

81.47

 

 

Natural Gas:  Three-way collars, Priced off Henry Hub (NYMEX) (1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional

 

 

Notional

 

 

Weighted Average Contract Price

 

 

 

 

Quantity

 

 

Quantity

 

 

Put Option

 

 

Call Option

 

 

Call Option

 

Termination Period

 

(MMBTUs/day)

 

 

(MMBTUs)

 

 

(Bought)

 

 

(Sold)

 

 

(Bought)

 

2015:

3rd Quarter

 

 

30,000

 

 

 

1,830,000

 

 

$

2.25

 

 

$

3.25

 

 

$

3.51

 

 

4th Quarter

 

 

30,000

 

 

 

2,760,000

 

 

 

2.25

 

 

 

3.25

 

 

 

3.51

 

2016:

1st Quarter

 

 

40,000

 

 

 

3,640,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

2nd Quarter

 

 

40,000

 

 

 

3,640,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

3rd Quarter

 

 

40,000

 

 

 

3,680,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

4th Quarter

 

 

40,000

 

 

 

3,680,000

 

 

 

2.25

 

 

 

3.50

 

 

 

3.77

 

 

 

 

 

 

 

 

 

19,230,000

 

 

 

2.25

 

 

 

3.44

 

 

 

3.70

 

 

(1)

The natural gas derivative contracts are priced and closed in the last week prior to the related production month.  Natural gas derivative contracts related to July 2015 production were priced and closed in June 2015 and are not included in the above table as these were not open derivative contracts as of June 30, 2015.


 

The following balance sheet line items included amounts related to the estimated fair value of our open commodity derivative contracts as indicated in the following table (in thousands):

 

June 30,

 

 

December 31,

 

 

2015

 

 

2014

 

Accrued liabilities

$

535

 

 

$

—

 

Other liabilities (noncurrent)

 

544

 

 

 

—

 

Changes in the fair value of our commodity derivative contracts were as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Derivative loss

$

1,078

 

 

$

13,079

 

 

$

1,078

 

 

$

20,571

 

 

Cash payments on commodity derivative contract settlements, net, are included within Net cash provided by operating activities on the Condensed Consolidated Statements of Cash Flows and were as follows (in thousands):

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

Cash payments on derivative settlements, net

$

—

 

 

$

14,310