DERIVATIVE FINANCIAL INSTRUMENTS | 7. DERIVATIVE FINANCIAL INSTRUMENTS We account for our derivative contracts under the provisions of ASC 815, “Derivatives and Hedging.” We have entered into forward-swap contracts and collar contracts to reduce our exposure to price risk in the spot market for oil, natural gas and natural gas liquids. From time to time, we also utilize financial basis swap contracts, which address the price differential between market-wide benchmark prices and other benchmark pricing referenced in certain of our oil, natural gas and natural gas liquids sales contracts. Substantially all of our hedging agreements are executed by affiliates of our lenders under the senior secured revolving credit facility described in Note 9, and are collateralized by the security interests of the respective affiliated lenders in certain of our assets under the senior secured revolving credit facility. The contracts settle monthly and are scheduled to coincide with oil production equivalent to barrels (Bbl) per month, natural gas production equivalent to volumes in millions of British thermal units (MMBtu) per month, and natural gas liquids production to volumes in gallons (Gal) per month. The contracts represent agreements between us and the counterparties to exchange cash based on a designated price, or in the case of financial basis hedging contracts, based on a designated price differential between various benchmark prices. Cash settlement occurs monthly. No derivative contracts have been entered into for trading or speculative purposes. From time to time, we enter into interest rate swap agreements with financial institutions to mitigate the risk of loss due to changes in interest rates. We have not designated any of our derivative contracts as fair value or cash flow hedges. Accordingly, we use mark-to-market accounting, recognizing changes in the fair value of derivative contracts in the condensed consolidated statements of operations at each reporting date. Derivative contracts are subject to master netting arrangements and are presented on a net basis in the condensed consolidated balance sheets. This netting can cause derivative assets to be ultimately presented in a liability account on the condensed consolidated balance sheets. Likewise, derivative liabilities could be presented in a derivative asset account. The following table summarizes the fair value and classification of our derivative instruments, none of which have been designated as hedging instruments under ASC 815: Fair Values of Derivative Contracts: June 30, 2017 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current assets $ 19,405 $ (4,403 ) $ 15,002 Derivative financial instruments, long-term 16,668 (7,795 ) 8,873 Total $ 36,073 $ (12,198 ) $ 23,875 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current liabilities $ 4,403 $ (4,403 ) $ — Derivative financial instruments, long-term liabilities 7,795 (7,795 ) — Total $ 12,198 $ (12,198 ) $ — December 31, 2016 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current assets $ 3,296 $ (3,213 ) $ 83 Derivative financial instruments, long-term 12,477 (11,754 ) 723 Total $ 15,773 $ (14,967 ) $ 806 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current liabilities $ 24,420 $ (3,213 ) $ 21,207 Derivative financial instruments, long-term liabilities 16,236 (11,754 ) 4,482 Total $ 40,656 $ (14,967 ) $ 25,689 The following table summarizes the effect of our derivative instruments in the condensed consolidated statements of operations: Derivatives not designated as hedging instruments under ASC 815 Three Months Ended Six Months Ended 2017 2016 2017 2016 (in thousands) Gain (loss) on derivative contracts Oil commodity contracts $ 16,451 $ (31,517 ) $ 42,537 $ (23,371 ) Natural gas commodity contracts 1,830 (6,584 ) 5,728 (3,770 ) Natural gas liquids commodity contracts (31 ) (192 ) 227 (337 ) Total gain (loss) on derivative contracts $ 18,250 $ (38,293 ) $ 48,492 $ (27,478 ) Although our counterparties provide no collateral, the master derivative agreements with each counterparty effectively allow us, so long as we are not a defaulting party, after a default or the occurrence of a termination event, to set-off an unpaid hedging agreement receivable against the interest of the counterparty in any outstanding balance under the senior secured revolving credit facility. If a counterparty were to default in payment of an obligation under the master derivative agreements, we could be exposed to commodity price fluctuations, and the protection intended by the hedge could be lost. The value of our derivative financial instruments would be impacted. We had the following open derivative contracts for crude oil at June 30, 2017: OIL DERIVATIVE CONTRACTS Volume Weighted Range Period and Type of Contract High Low 2017 Price Swap Contracts 1,133,500 $ 50.39 $ 57.25 $ 46.00 Collar Contracts Long Call Options 92,000 85.00 85.00 85.00 Short Call Options 989,000 60.47 85.00 54.40 Long Put Options 835,000 48.40 50.00 47.00 Short Put Options 713,000 36.97 40.00 35.00 2018 Price Swap Contracts 547,500 57.22 57.25 57.20 Collar Contracts Long Call Options 365,000 54.00 54.00 54.00 Short Call Options 2,190,000 60.87 62.00 60.50 Long Put Options 1,825,000 50.00 50.00 50.00 Short Put Options 2,190,000 40.26 42.00 40.00 2019 Collar Contracts Short Call Options 1,241,000 62.90 63.00 62.75 Long Put Options 1,241,000 50.00 50.00 50.00 Short Put Options 1,241,000 37.50 37.50 37.50 We had the following open derivative contracts for natural gas at June 30, 2017: NATURAL GAS DERIVATIVE CONTRACTS Volume in Weighted Range Period and Type of Contract High Low 2017 Price Swap Contracts 922,500 $ 3.40 $ 3.40 $ 3.39 Collar Contracts Short Call Options 6,072,000 3.65 4.11 3.25 Long Put Options 5,304,500 3.14 3.60 3.00 Long Call Options 615,000 2.95 2.95 2.95 Short Put Options 5,919,500 2.59 3.00 2.50 2018 Collar Contracts Short Call Options 6,582,000 5.26 5.53 4.00 Long Put Options 5,925,000 4.43 4.50 3.60 Short Put Options 5,925,000 3.92 4.00 3.00 In those instances where contracts are identical as to time period, volume and strike price, and counterparty, but opposite as to direction (long and short), the volumes and average prices have been netted in the two tables above. Prices stated in the table above for oil may settle against either the NYMEX or Brent ICE indices or may reflect a mix of positions settling on various of these benchmarks. We had the following open derivative contracts for natural gas liquids at June 30, 2017: NATURAL GAS LIQUIDS DERIVATIVE CONTRACTS Volume Weighted Range Period and Type of Contract High Low 2017 Price Swap Contracts Short Price Swaps 3,091,200 $ 0.47 $ 0.47 $ 0.47 We had the following open financial basis swaps at June 30, 2017: BASIS SWAP DERIVATIVE CONTRACTS Volume in MMBtu (1) Reference Price 1 Reference Price 2 Period Weighted 6,135,000 TEX/OKL Mainline (PEPL) NYMEX Henry Hub Jul ’17 — Dec ’17 $(0.25) 5,910,000 TEX/OKL Mainline (PEPL) NYMEX Henry Hub Jan ’18 — Oct ’18 (0.27) (1) Represents short swaps that fix the basis differentials between Tex/OKL Panhandle Eastern Pipeline (“PEPL”) Inside FERC (“IFERC”) and NYMEX Henry Hub. | NOTE 7 — DERIVATIVE FINANCIAL INSTRUMENTS We account for our derivative contracts under the provisions of ASC 815, “Derivatives and Hedging.” We have entered into forward-swap contracts and collar contracts to reduce our exposure to price risk in the spot market for oil, natural gas, and natural gas liquids. From time to time we also utilize financial basis swap contracts, which address the price differential between the benchmark index price and the specific locational index pricing referenced in certain of our crude oil, natural gas, and natural gas liquids sales contracts. Substantially all of our hedging agreements are executed by affiliates of the lenders under our senior secured revolving credit facility described in Note 10 below, and are collateralized by the security interests of the respective affiliated lenders in certain of our assets under the senior secured revolving credit facility. The contracts settle monthly and are scheduled to coincide with oil production equivalent to barrels (Bbl) per month, gas production equivalent to volumes in millions of British thermal units (MMBtu) per month, and natural gas liquids production to volumes in gallons (Gal) per month. The contracts represent agreements between us and the counter-parties to exchange cash based on a designated price, or in the case of financial basis hedging contracts, based on a designated price differential between various benchmark prices. Cash settlement occurs monthly. No derivative contracts have been entered into for trading purposes. From time to time, we enter into interest rate swap agreements with financial institutions to mitigate the risk of loss due to changes in interest rates. We have not designated any of our derivative contracts as fair value or cash flow hedges. Accordingly, we use mark-to-market accounting, recognizing changes in the fair value of derivative contracts in the consolidated statements of operations at each reporting date. Derivative contracts are subject to master netting arrangements and are presented on a net basis in the consolidated balance sheets. This netting can cause derivative assets to be ultimately presented in a (liability) account on the consolidated balance sheets. Likewise, derivative (liabilities) could be presented in an asset account. The following table summarizes the fair value (see Note 6 for further discussion of fair value) and classification of our derivative instruments, none of which have been designated as hedging instruments under ASC 815: December 31, 2016 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current assets $ 3,296 $ (3,213 ) $ 83 Derivative financial instruments, long-term assets 12,477 (11,754 ) 723 Total $ 15,773 $ (14,967 ) $ 806 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current liabilities $ 24,420 $ (3,213 ) $ 21,207 Derivative financial instruments, long-term liabilities 16,236 (11,754 ) 4,482 Total $ 40,656 $ (14,967 ) $ 25,689 December 31, 2015 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current assets $ 86,000 $ (23,369 ) $ 62,631 Derivative financial instruments, long-term assets 80,106 (38,471 ) 41,635 Total $ 166,106 $ (61,840 ) $ 104,266 Balance sheet location Gross Gross amounts Net Fair (in thousands) Derivative financial instruments, current liabilities $ 23,369 $ (23,369 ) $ — Derivative financial instruments, long-term liabilities 38,471 (38,471 ) — Total $ 61,840 $ (61,840 ) $ — The following table summarizes the effect of our derivative instruments in the consolidated statements of operations: Derivatives not designated as hedging instruments under ASC 815 Year Ended December 31, 2016 2015 2014 (in thousands) Gain (loss) on derivative contracts Oil commodity contracts $ (36,572 ) $ 113,295 $ 82,510 Natural gas commodity contracts (2,410 ) 10,712 14,049 Natural gas liquids commodity contracts (1,478 ) 134 — Total gain (loss) on derivative contracts $ (40,460 ) $ 124,141 $ 96,559 Other receivables include $7.8 million and $17.5 million of derivative positions settled, but not yet received as of December 31, 2016 and 2015, respectively. Although our counterparties provide no collateral, the master derivative agreements with each counterparty effectively allow the Company, so long as it is not a defaulting party, after a default or the occurrence of a termination event, to set-off an unpaid hedging agreement receivable against the interest of the counterparty in any outstanding balance under the senior secured revolving credit facility. If a counterparty were to default in payment of an obligation under the master derivative agreements, we could be exposed to commodity price fluctuations, and the protection intended by the hedge could be lost. The value of our derivative financial instruments would be impacted. We had the following open derivative contracts for crude oil at December 31, 2016: OIL DERIVATIVE CONTRACTS Volume Weighted Range Period and Type of Contract High Low 2017 Price Swap Contracts 1,460,000 $ 46.93 $ 48.43 $ 45.00 Collar Contracts Short Call Options 2,075,000 60.46 85.00 54.40 Long Put Options 1,527,500 48.39 50.00 47.00 Short Put Options 1,527,500 37.19 40.00 35.00 2018 Collar Contracts Short Call Options 1,825,000 60.64 60.90 60.50 Long Put Options 1,825,000 50.00 50.00 50.00 Short Put Options 1,825,000 40.00 40.00 40.00 2019 Collar Contracts Short Call Options 1,241,000 62.90 63.00 62.75 Long Put Options 1,241,000 50.00 50.00 50.00 Short Put Options 1,241,000 37.50 37.50 37.50 We had the following open derivative contracts for natural gas at December 31, 2016: NATURAL GAS DERIVATIVE CONTRACTS Volume in Weighted Range Period and Type of Contract High Low 2017 Price Swap Contracts 450,000 $ 2.47 $ 2.47 $ 2.47 Collar Contracts Short Call Options 10,220,000 3.68 3.94 3.56 Long Put Options 9,320,000 3.09 3.30 3.00 Long Call Options 1,125,000 3.44 3.56 3.25 Short Put Options 9,320,000 2.56 2.70 2.50 2018 Collar Contracts Short Call Options 6,132,000 5.34 5.53 4.00 Long Put Options 5,475,000 4.50 4.50 4.50 Short Put Options 5,475,000 4.00 4.00 4.00 In those instances where contracts are identical as to time period, volume, strike price, and counterparty, but opposite as to direction (long and short), the volumes and average prices have been netted in the two tables above. Prices stated in the table above for oil may settle against either NYMEX, Brent ICE, or Argus Louisiana Light Sweet Crude indices or quotations, or may reflect a mix of positions settling on various of these benchmarks. We had the following open derivative contracts for natural gas liquids at December 31, 2016: NATURAL GAS LIQUIDS DERIVATIVE CONTRACTS Volume Weighted Range Period and Type of Contract High Low 2017 Price Swap Contracts 5,371,800 $ 0.46 $ 0.47 $ 0.45 We had the following open financial basis swap contracts for natural gas at December 31, 2016: BASIS SWAP DERIVATIVE CONTRACTS Volume in MMBtu Reference Price 1 (1) Reference Price 2 (1) Period Weighted 12,470,000 NYMEX Henry Hub Tex/OKL Panhandle Eastern Pipeline Jan ’17 —Dec ’17 $(0.24) 5,910,000 NYMEX Henry Hub Tex/OKL Panhandle Eastern Pipeline Jan ’18 —Oct ’18 (0.27) (1) Represents short swaps that fix the basis differentials between Tex/OKL Panhandle Eastern Pipeline (“PEPL”) INSIDE FERC (“IFERC”) and NYMEX Henry Hub. |