Derivative Financial Instruments | Derivative Financial Instruments Commodity derivative transactions Due to the volatility of oil and natural gas prices, Legacy periodically enters into price-risk management transactions (e.g., swaps, enhanced swaps or collars) for a portion of its oil and natural gas production to achieve a more predictable cash flow, as well as to reduce exposure from price fluctuations. While the use of these arrangements limits Legacy’s ability to benefit from increases in the prices of oil and natural gas, it also reduces Legacy’s potential exposure to adverse price movements. Legacy’s arrangements, to the extent it enters into any, apply to only a portion of its production, provide only partial price protection against declines in oil and natural gas prices and limit Legacy’s potential gains from future increases in prices. None of these instruments are used for trading or speculative purposes and required no upfront or deferred cash premium paid or payable to our counterparty. All of these price risk management transactions are considered derivative instruments . These derivative instruments are intended to reduce Legacy’s price risk and may be considered hedges for economic purposes, but Legacy has chosen not to designate them as cash flow hedges for accounting purposes. Therefore, all derivative instruments are recorded on the balance sheet at fair value with changes in fair value being recorded in current period earnings. By using derivative instruments to mitigate exposures to changes in commodity prices, Legacy exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes Legacy, which creates credit risk. Legacy minimizes the credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties, most of whom are current or former members of Legacy's lending group. The following table sets forth a reconciliation of the changes in fair value of Legacy's commodity derivatives for the three and six months ended June 30, 2015 and 2014 : Three Months Ended Six Months Ended June 30, June 30, 2015 2014 2015 2014 (In thousands) Beginning fair value of commodity derivatives $ 133,242 $ 5,397 $ 153,099 $ 17,673 Total gain (loss) - oil derivatives (12,649 ) (33,770 ) 945 (46,030 ) Total gain (loss) - natural gas derivatives (848 ) 2,337 6,038 (1,289 ) Crude oil derivative cash settlements paid (received) (27,364 ) 6,244 (59,564 ) 8,800 Natural gas derivative cash settlements paid (received) (9,825 ) (234 ) (17,962 ) 820 Ending fair value of commodity derivatives $ 82,556 $ (20,026 ) $ 82,556 $ (20,026 ) Certain of our commodity derivatives and interest rate derivatives are presented on a net basis on the Consolidated Balance Sheets. The following table summarizes the gross fair values of our derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on our Consolidated Balance Sheets as of the dates indicated below (in thousands): June 30, 2015 Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Offsetting Derivative Assets: (In thousands) Commodity derivatives $ 136,664 $ (54,108 ) $ 82,556 Total derivative assets $ 136,664 $ (54,108 ) $ 82,556 Offsetting Derivative Liabilities: Commodity derivatives $ (54,108 ) $ 54,108 $ — Interest rate derivatives (985 ) — (985 ) Total derivative liabilities $ (55,093 ) $ 54,108 $ (985 ) December 31, 2014 Gross Amounts of Recognized Assets Gross Amounts Offset in the Consolidated Balance Sheets Net Amounts Presented in the Consolidated Balance Sheets Offsetting Derivative Assets: (In thousands) Commodity derivatives $ 223,778 $ (70,679 ) $ 153,099 Total derivative assets $ 223,778 $ (70,679 ) $ 153,099 Offsetting Derivative Liabilities: Commodity derivatives $ (70,679 ) $ 70,679 $ — Interest rate derivatives (2,080 ) — (2,080 ) Total derivative liabilities $ (72,759 ) $ 70,679 $ (2,080 ) As of June 30, 2015 , Legacy had the following NYMEX West Texas Intermediate ("WTI") crude oil swaps paying floating prices and receiving fixed prices for a portion of its future oil production as indicated below: Average Time Period Volumes (Bbls) Price per Bbl Price Range per Bbl July-December 2015 282,522 $79.51 $52.00 - $99.85 2016 228,600 $87.94 $86.30 - $99.85 2017 182,500 $84.75 $84.75 As of June 30, 2015 , Legacy had the following Midland-to-Cushing crude oil differential swaps paying a floating differential and receiving a fixed differential for a portion of its future oil production as indicated below: Average Time Period Volumes (Bbls) Price per Bbl Price Range per Bbl July-December 2015 1,656,000 $(1.78) $(1.75) - $(1.90) 2016 2,928,000 $(1.60) $(1.50) - $(1.75) As of June 30, 2015 , Legacy had the following NYMEX WTI crude oil derivative three-way collar contracts that combine a long put, a short put and a short call as indicated below: Average Short Average Long Average Short Time Period Volumes (Bbls) Put Price per Bbl Put Price per Bbl Call Price per Bbl July-December 2015 673,440 $64.78 $89.78 $110.57 2016 621,300 $63.37 $88.37 $106.40 2017 72,400 $60.00 $85.00 $104.20 As of June 30, 2015 , Legacy had the following NYMEX WTI crude oil enhanced swap contracts that combine a short put, a long put and a fixed-price swap as indicated below: Average Long Average Short Average Time Period Volumes (Bbls) Put Price per Bbl Put Price per Bbl Swap Price per Bbl 2016 183,000 $57.00 $82.00 $91.70 2017 182,500 $57.00 $82.00 $90.85 2018 127,750 $57.00 $82.00 $90.50 As of June 30, 2015 , Legacy had the following NYMEX WTI crude oil enhanced swap contracts that combine a short put and a fixed-price swap as indicated below: Average Short Put Average Swap Time Period Volumes (Bbls) Price per Bbl Price per Bbl July-December 2015 506,000 $77.73 $93.98 As of June 30, 2015 , Legacy had the following NYMEX Henry Hub, West Texas Waha, ANR-OK and CIG-Rockies natural gas swaps paying floating natural gas prices and receiving fixed prices for a portion of its future natural gas production as indicated below: Average Price Time Period Volumes (MMBtu) Price per MMBtu Range per MMBtu July-December 2015 11,706,400 $4.13 $3.11 - $5.82 2016 23,019,200 $3.43 $3.32 - $5.30 2017 21,600,000 $3.37 $3.32 - $3.39 2018 21,600,000 $3.37 $3.32 - $3.39 2019 19,800,000 $3.38 $3.38 - $3.39 As of June 30, 2015 , Legacy had the following NYMEX Henry Hub natural gas derivative three-way collar contracts that combine a long put, a short put and a short call as indicated below: Average Short Put Average Long Put Average Short Call Time Period Volumes (MMBtu) Price per MMBtu Price per MMBtu Price per MMBtu July-December 2015 4,020,000 $3.66 $4.21 $5.01 2016 5,580,000 $3.75 $4.25 $5.08 2017 5,040,000 $3.75 $4.25 $5.53 As of June 30, 2015 , Legacy had the following Henry Hub NYMEX to Northwest Pipeline, NGPL Midcon, California SoCal NGI, San Juan Basin and West Texas WAHA natural gas differential swaps paying a floating differential and receiving a fixed differential for a portion of its future natural gas production as indicated below: July-December 2015 Average Volumes (MMBtu) Price per MMBtu NWPL 6,000,000 $(0.13) NGPL 240,000 $(0.15) SoCal 120,000 $0.19 San Juan 240,000 $(0.12) WAHA 3,000,000 $(0.10) Interest rate derivative transactions Due to the volatility of interest rates, Legacy periodically enters into interest rate risk management transactions in the form of interest rate swaps for a portion of its outstanding debt balance. These transactions allow Legacy to reduce exposure to interest rate fluctuations. While the use of these arrangements limits Legacy’s ability to benefit from decreases in interest rates, it also reduces Legacy’s potential exposure to increases in interest rates. Legacy’s arrangements, to the extent it enters into any, apply to only a portion of its outstanding debt balance, provide only partial protection against interest rate increases and limit Legacy’s potential savings from future interest rate declines. It is never management’s intention to hold or issue derivative instruments for speculative trading purposes. Conditions sometimes arise where actual borrowings are less than notional amounts hedged, which has, and could result in overhedged amounts. Legacy accounts for these interest rate swaps at fair market value and included in the consolidated balance sheet as assets or liabilities. Legacy does not designate these derivatives as cash flow hedges, even though they reduce its exposure to changes in interest rates. Therefore, the mark-to-market of these instruments is recorded in current earnings as a component of interest expense. The total impact on interest expense from the mark-to-market and settlements was as follows: Three Months Ended Six Months Ended June 30, June 30, 2015 2014 2015 2014 (In thousands) Beginning fair value of interest rate swaps $ (1,540 ) $ (4,047 ) $ (2,080 ) $ (4,759 ) Total loss on interest rate swaps (143 ) (109 ) (291 ) (283 ) Cash settlements paid 698 824 1,386 1,710 Ending fair value of interest rate swaps $ (985 ) $ (3,332 ) $ (985 ) $ (3,332 ) The table below summarizes the interest rate swap position as of June 30, 2015 : Estimated Fair Market Value at Notional Amount Fixed Rate Effective Date Maturity Date June 30, 2015 (Dollars in thousands) $ 29,000 3.070 % 10/16/2007 10/16/2015 $ (277 ) $ 13,000 3.112 % 11/16/2007 11/16/2015 (160 ) $ 12,000 3.131 % 11/28/2007 11/28/2015 (149 ) $ 50,000 2.500 % 10/10/2008 10/10/2015 (399 ) Total fair market value of interest rate derivatives $ (985 ) |