Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v2.4.0.8
Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2014
Derivative Financial Instruments

4.  Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and interest rates. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of our oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. 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.

In accordance with GAAP, we record each derivative contract on the balance sheet as an asset or a liability at its fair value.  For additional information about fair value measurements, refer to Note 6.  We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts are recognized currently in earnings.  The cash flows of all of our commodity derivative contracts are included in Net cash provided by operating activities on the statements of cash flows.

Commodity Derivatives.  We have entered into commodity swap contracts to manage a portion of our exposure to commodity price risk from sales of oil through December 2014.  While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements.  During the six months ended June 30, 2014 and during 2013, our derivative contracts consisted entirely of crude oil swap contracts.  The crude oil swap contracts are comprised of a portion based on Brent crude oil prices, a portion based on West Texas Intermediate (“WTI”) crude oil prices and a portion based on Light Louisiana Sweet (“LLS”) crude oil prices.  The Brent based swap contracts are priced off the Brent crude oil price quoted on the IntercontinentalExchange, known as ICE.  The WTI based swap contracts are priced off the New York Mercantile Exchange, known as NYMEX.  The LLS based swap contracts are priced from data provided by Argus, an independent media organization.  Although our Gulf of Mexico crude oil is based off the WTI crude oil price plus or minus a differential, the realized prices received for our Gulf of Mexico crude oil, up until October 2013, have been closer to the Brent crude oil price because of competition with foreign supplied crude oil, which is based off the Brent crude oil price.  Therefore, a portion of the oil swap contracts are priced off the Brent crude oil price to mitigate a portion of the price risk associated with our Gulf of Mexico crude oil production.

As of June 30, 2014, our open commodity derivative contracts were as follows:

 

 

 

 

Swaps – Oil

 

 

 

 

Priced off Brent

 

 

Priced off WTI

 

 

Priced off LLS

 

 

 

 

(ICE)

 

 

(NYMEX)

 

 

(ARGUS)

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

Notional

 

 

Average

 

 

Notional

 

 

Average

 

 

Notional

 

 

Average

 

 

 

 

Quantity

 

 

Contract

 

 

Quantity

 

 

Contract

 

 

Quantity

 

 

Contract

 

Termination Period

 

(Bbls)

 

 

Price

 

 

(Bbls)

 

 

Price

 

 

(Bbls)

 

 

Price

 

2014:

3rd Quarter

 

 

165,600

 

 

$

97.38

 

 

 

62,000

 

 

$

97.01

 

 

 

828,000

 

 

$

97.69

 

 

4th Quarter

 

 

156,400

 

 

 

97.37

 

 

 

—

 

 

 

—

 

 

 

460,000

 

 

 

98.12

 

 

 

 

 

322,000

 

 

$

97.37

 

 

 

62,000

 

 

$

97.01

 

 

 

1,288,000

 

 

$

97.84

 

 

Bbls = barrels

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

 

 

June 30,

 

 

December 31,

 

 

2014

 

 

2013

 

Prepaid and other assets

$

—

 

 

$

141

 

Accrued liabilities

 

15,543

 

 

 

9,423

 

 

Changes in the fair value of our commodity derivative contracts are recognized currently in earnings and were as follows (in thousands):

 

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

Derivative (gain) loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized

$

9,640

 

 

$

(1,961

)

 

$

14,310

 

 

$

2,310

 

Unrealized

 

3,439

 

 

 

(10,879

)

 

 

6,261

 

 

 

(11,783

)

Total

$

13,079

 

 

$

(12,840

)

 

$

20,571

 

 

$

(9,473

)

 

Offsetting Commodity Derivatives.  As of June 30, 2014 and December 31, 2013, all of our derivative agreements allowed for netting of derivative gains and losses upon settlement.  In general, the terms of the agreements provide for offsetting of amounts payable or receivable between us and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.  If an event of default were to occur causing an acceleration of payment under our revolving bank credit facility, that event may also trigger an acceleration of settlement of our derivative instruments.  If we were required to settle all of our open derivative instruments, we would be able to net payments and receipts per counterparty pursuant to the derivative agreements.  Although our derivative agreements allow for netting, which would allow for recording assets and liabilities per counterparty on a net basis, we account for our derivative contracts on a gross basis per contract as either an asset or liability.

The following table provides a reconciliation of the gross assets and liabilities reflected in the balance sheet and the potential effects of master netting agreements on the fair value of open derivative contracts (in thousands):

 

 

June 30, 2014

 

 

December 31, 2013

 

 

Derivative

 

 

Derivative

 

 

Derivative

 

 

Derivative

 

 

Assets

 

 

Liabilities

 

 

Assets

 

 

Liabilities

 

Gross amounts presented in the balance sheet

$

—

 

 

$

15,543

 

 

$

141

 

 

$

9,423

 

Amounts not offset in the balance sheet

 

—

 

 

 

—

 

 

 

(141

)

 

 

(141

)

Net Amounts

$

—

 

 

$

15,543

 

 

$

—

 

 

$

9,282