Derivative And Financial Instruments | 9 Months Ended |
Sep. 30, 2013 |
Derivative And Financial Instruments [Abstract] | ' |
Derivative And Financial Instruments | ' |
5. DERIVATIVE AND FINANCIAL INSTRUMENTS |
To reduce the impact of fluctuations in oil and natural gas prices on our revenues, we periodically enter into derivative contracts with respect to a portion of our projected oil and natural gas production through various transactions that fix or modify the future prices to be realized. These transactions are normally price swaps whereby we will receive a fixed price for our production and pay a variable market price to the contract counterparty. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It is never our intention to enter into derivative contracts for speculative trading purposes. |
Under ASC Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. We will net derivative assets and liabilities for counterparties where we have a legal right of offset. Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met. We have elected to designate only a portion of our current derivative contracts as hedges; however, changes in the fair value of all of our derivative instruments are recognized in earnings and included as realized and unrealized gains (losses) on derivative instruments in the condensed consolidated statements of operations. |
As of September 30, 2013, we had the following derivative contracts in place for the periods indicated, all of which are accounted for as mark-to-market activities: |
MTM Fixed Price Swaps—NYMEX (Henry Hub) |
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| For the quarter ended (in MMBtu) |
| March 31, | | June 30, | | September 30, | | December 31, | | Total |
| | | Average | | | | Average | | | | Average | | | | Average | | | | Average |
| Volume | | Price | | Volume | | Price | | Volume | | Price | | Volume | | Price | | Volume | | Price |
2013 | | | | | | | | | | | | | | | | 1,691,540 | | $ | 6.18 | | 1,691,540 | | $ | 6.18 |
2014 | 1,575,000 | | $ | 5.75 | | 1,592,500 | | $ | 5.75 | | 1,610,000 | | $ | 5.75 | | 1,610,000 | | $ | 5.75 | | 6,387,500 | | $ | 5.75 |
2015 | 1,011,055 | | $ | 4.27 | | 971,604 | | $ | 4.27 | | 938,968 | | $ | 4.27 | | 908,492 | | $ | 4.27 | | 3,830,119 | | $ | 4.27 |
2016 | 441,492 | | $ | 4.31 | | 426,825 | | $ | 4.31 | | 414,329 | | $ | 4.31 | | 403,684 | | $ | 4.31 | | 1,686,330 | | $ | 4.31 |
| | | | | | | | | | | | | | | | | | | | | 13,595,489 | | | |
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MTM Fixed Price Basis Swaps– CenterPoint Energy Gas Transmission (East), ONEOK Gas Transportation (Oklahoma), or Southern Star Central Gas Pipeline (Texas, Oklahoma, and Kansas) |
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| For the quarter ended (in MMBtu) |
| March 31, | | June 30, | | September 30, | | December 31, | | Total |
| | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted |
| Volume | | Average $ | | Volume | | Average $ | | Volume | | Average $ | | Volume | | Average $ | | Volume | | Average $ |
2013 | | | | | | | | | | | | | | | | 1,223,985 | | $ | 0.39 | | 1,223,985 | | $ | 0.39 |
2014 | 1,178,422 | | $ | 0.39 | | 1,133,022 | | $ | 0.39 | | 1,084,270 | | $ | 0.39 | | 1,047,963 | | $ | 0.39 | | 4,443,677 | | $ | 0.39 |
| | | | | | | | | | | | | | | | | | | | | 5,667,662 | | | |
MTM Fixed Price Basis Swaps–West Texas Intermediate (WTI) |
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| For the quarter ended (in Bbls) |
| March 31, | | June 30, | | September 30, | | December 31, | | Total |
| | | Average | | | | Average | | | | Average | | | | Average | | | | Average |
| Volume | | Price | | Volume | | Price | | Volume | | Price | | Volume | | Price | | Volume | | Price |
2013 | | | | | | | | | | | | | | | | 65,256 | | $ | 99.93 | | 65,256 | | $ | 99.93 |
2014 | 60,928 | | $ | 94.64 | | 57,154 | | $ | 94.67 | | 53,797 | | $ | 94.72 | | 50,597 | | $ | 94.80 | | 222,476 | | $ | 94.70 |
2015 | 47,747 | | $ | 90.95 | | 45,065 | | $ | 91.00 | | 42,672 | | $ | 91.04 | | 40,329 | | $ | 91.10 | | 175,813 | | $ | 91.02 |
2016 | 17,957 | | $ | 85.50 | | 16,985 | | $ | 85.50 | | 16,048 | | $ | 85.50 | | 15,127 | | $ | 85.50 | | 66,117 | | $ | 85.50 |
| | | | | | | | | | | | | | | | | | | | | 529,662 | | | |
The table below outlines the classification of our derivative financial instruments on the condensed consolidated balance sheet (in thousands): |
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| | | | Fair Value of Asset/(Liability) | | | | | | | | | | | | | | | | |
| | Location of Asset/(Liability) | | On Balance Sheet | | | | | | | | | | | | | | | | |
Derivative Type | | On Balance Sheet | | 30-Sep-13 | | 31-Dec-12 | | | | | | | | | | | | | | | | |
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Commodity – MTM | | Risk management assets - current | | $ | 13,581 | | $ | 19,005 | | | | | | | | | | | | | | | | |
Commodity – MTM | | Risk management assets - non-current | | | 4,644 | | | 12,025 | | | | | | | | | | | | | | | | |
| | Total gross assets | | | 18,225 | | | 31,030 | | | | | | | | | | | | | | | | |
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Commodity – MTM | | Risk management assets – current | | | -1,385 | | | -1,040 | | | | | | | | | | | | | | | | |
Commodity – MTM | | Risk management assets – non-current | | | -240 | | | -946 | | | | | | | | | | | | | | | | |
Commodity – MTM | | Rick management liabilities – current | | | — | | | -523 | | | | | | | | | | | | | | | | |
Commodity – MTM | | Risk management liabilities – non-current | | | — | | | -637 | | | | | | | | | | | | | | | | |
Interest Rate - MTM | | Risk management assets – non-current | | | — | | | -3,648 | | | | | | | | | | | | | | | | |
| | Total gross liabilities | | | -1,625 | | | -6,794 | | | | | | | | | | | | | | | | |
| | Total net assets and liabilities | | $ | 16,600 | | $ | 24,236 | | | | | | | | | | | | | | | | |
The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands): |
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| | | | Amount of Gain/(Loss) in Income | | | | | | | | | | | | | | | | |
| | Location of Gain/(Loss) | | For the Three Months Ended September 30, | | | | | | | | | | | | | | | | |
Derivative Type | | in Income | | 2013 | | 2012 | | | | | | | | | | | | | | | | |
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Commodity – MTM – Unrealized | | Natural gas sales | | $ | -2,995 | | $ | -8,746 | | | | | | | | | | | | | | | | |
Commodity – MTM – Unrealized | | Oil and liquids sales | | | -1,350 | | | -1,412 | | | | | | | | | | | | | | | | |
Commodity – MTM – Realized | | Natural gas sales | | | 4,174 | | | 5,934 | | | | | | | | | | | | | | | | |
Commodity – MTM – Realized | | Oil and liquids sales | | | -235 | | | 302 | | | | | | | | | | | | | | | | |
Interest Rate – MTM – Unrealized | | Interest expense | | | — | | | 92 | | | | | | | | | | | | | | | | |
Interest Rate – MTM - Realized | | Interest expense | | | — | | | -460 | | | | | | | | | | | | | | | | |
| | Total | | $ | -406 | | $ | -4,290 | | | | | | | | | | | | | | | | |
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| | | | Amount of Gain/(Loss) in Income | | | | | | | | | | | | | | | | |
| | Location of Gain/(Loss) | | For the Nine Months Ended September 30, | | | | | | | | | | | | | | | | |
Derivative Type | | in Income | | 2013 | | 2012 | | | | | | | | | | | | | | | | |
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Commodity – MTM – Unrealized | | Natural gas sales | | $ | -10,124 | | $ | -9,329 | | | | | | | | | | | | | | | | |
Commodity – MTM – Unrealized | | Oil and liquids sales | | | -1,160 | | | 876 | | | | | | | | | | | | | | | | |
Commodity – MTM – Realized | | Natural gas sales | | | 11,448 | | | 19,200 | | | | | | | | | | | | | | | | |
Commodity – MTM – Realized | | Oil and liquids sales | | | 272 | | | 426 | | | | | | | | | | | | | | | | |
Interest Rate – MTM – Unrealized | | Interest expense | | | 3,648 | | | 697 | | | | | | | | | | | | | | | | |
Interest Rate – MTM - Realized | | Interest expense | | | -3,713 | | | -1,746 | | | | | | | | | | | | | | | | |
| | Total | | $ | 371 | | $ | 10,124 | | | | | | | | | | | | | | | | |
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| | | | Amount of Gain/(Loss) Reclassified from | | | | | | | | | | | | | | | | |
| | Location of Gain/(Loss) for | | AOCI into Income – Effective | | | | | | | | | | | | | | | | |
| | Effective and Ineffective | | For the Three Months Ended September 30, | | | | | | | | | | | | | | | | |
Derivative Type | | Portion of Derivative in Income | | 2013 | | 2012 | | | | | | | | | | | | | | | | |
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Commodity – Cash Flow | | Natural gas sales | | $ | — | | $ | 1,722 | | | | | | | | | | | | | | | | |
| | Total | | $ | — | | $ | 1,722 | | | | | | | | | | | | | | | | |
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| | | | Amount of Gain/(Loss) Reclassified from | | | | | | | | | | | | | | | | |
| | Location of Gain/(Loss) for | | AOCI into Income – Effective | | | | | | | | | | | | | | | | |
| | Effective and Ineffective | | For the Nine Months Ended September 30, | | | | | | | | | | | | | | | | |
Derivative Type | | Portion of Derivative in Income | | 2013 | | 2012 | | | | | | | | | | | | | | | | |
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Commodity – Cash Flow | | Natural gas sales | | $ | — | | $ | 4,367 | | | | | | | | | | | | | | | | |
| | Total | | $ | — | | $ | 4,367 | | | | | | | | | | | | | | | | |
Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently with two counterparties. We generally execute commodity derivative instruments under master agreements which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net cash settled at the time of election. |
We monitor the creditworthiness of our counterparties; however, we are not able to predict sudden changes in counterparties’ creditworthiness. In addition, if such changes are sudden, we may be limited in our ability to mitigate an increase in counterparty credit risk. Possible actions would be to transfer our position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of our counterparties not perform, we may not realize the benefit of some of our derivative instruments with lower commodity prices and may incur losses. We include a measure of counterparty credit risk in our estimates of the fair values of the derivative instruments in an asset position. |
We currently use our reserve-based credit facility to provide credit support for our derivative transactions. As a result, we do not post cash collateral with our counterparties, and have minimal non-performance credit risk on our liabilities with our counterparties. We utilize observable market data for credit default swaps to assess the impact of non-performance credit risk when evaluating our net assets from counterparties. At September 30, 2013, the impact of non-performance credit risk on the valuation of our net assets from counterparties was not significant. At September 30, 2012, the impact of non-performance credit risk on the valuation of our net assets from counterparties was $0.2 million, of which $0.1 million was reflected as a decrease to our non-cash mark-to-market gain and $0.1 million was reflected in our accumulated other comprehensive loss. |
Under the terms of our reserve-based credit facility, we have agreed to hedge 100% of our reasonably estimated projected natural gas production for 2015 and 2016. All of the required 2015 hedges are in place, and we have agreed to enter into the remaining 2016 hedges on or before December 31, 2013. In the event that the 2016 hedges are not in place by December 31, 2013, our borrowing base will automatically be reduced by the shortfall of actual hedges as compared to 50% of the reasonably estimated projected natural gas production, not to exceed an amount equal to $3.0 million times the calculated percentage of hedging shortfall. We expect to enter into the 2016 hedges prior to December 31, 2013. |
Hedge Liquidation, Repositioning and Novation |
In the first quarter of 2013, we liquidated or repositioned certain of our hedges. In connection with the sale of our Robinson’s Bend Field assets in the Black Warrior Basin of Alabama, we liquidated 395,218 MMbtu of NYMEX swaps in 2013 and 1,634,530 MMbtu of NYMEX swaps in 2014 at a cost of $0.3 million. In addition, we reduced our outstanding NYMEX swap positions in 2013 by 1,041,814 MMbtu by executing offsetting trades with one of our counterparties at a fixed price of $3.66. These transactions ensure that our outstanding derivative positions in future periods are lower than our expected future natural gas production in those periods. We also amended a 2014 to 2015 oil trade with one of our hedge counterparties to lower the stated swap price from $98.10 to $93.50, on a total of 58,157 barrels of oil. We received proceeds of approximately $0.2 million upon execution of the amendment. The proceeds were used for working capital purposes. |
In March 2013, we reduced our outstanding interest rate swaps that fix our LIBOR rate through 2014 to $30 million, which increased our interest rate swap settlements by $2.1 million. This position was terminated in May 2013 resulting in an offsetting non-cash gain in our mark-to-market interest swap activities. |
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