Derivative Commodity Instruments | 9 Months Ended |
Sep. 30, 2014 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
Derivative Commodity Instruments | ' |
DERIVATIVE COMMODITY INSTRUMENTS |
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We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. Such instruments may include over-the-counter (OTC) swaps and basis swaps typically executed with investment and commercial banks and energy-trading firms. Derivative transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions. |
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Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net gain position with thirteen of our active counterparties and in a net loss position with the remaining one at September 30, 2014. The largest counterparty net gain positions at September 30, 2014, J.P. Morgan Ventures Energy Corporation, J Aron & Company and Bank of Montreal, constituted approximately $8.5 million, $4.4 million and $3.7 million, respectively, of Energen’s total gain on fair value of derivatives. |
Prior to June 30, 2013, Energen used cash flow hedge accounting where applicable for its derivative transactions. The effective portion of the gain or loss on the derivative instrument was recognized in accumulated other comprehensive income as a component of shareholders’ equity and subsequently reclassified as gain (loss) on derivative instruments, net when the forecasted transaction affected earnings. The ineffective portion of a derivative’s change in fair value was required to be recognized immediately in gain (loss) on derivative instruments, net. All other derivative transactions not designated as cash flow hedge accounting are accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net. |
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Effective March 31, 2013 and June 30, 2013, Energen dedesignated from cash flow hedge accounting 5,078 thousand barrels (MBbl) and 2,353 MBbl, respectively, of various New York Mercantile Exchange (NYMEX) oil contracts associated with the Permian Basin due to lack of correlation. Gains and losses from inception of the hedge to the dedesignation date were frozen in accumulated other comprehensive income until the forecasted transactions actually occurred. Subsequent gains or losses will be accounted for as mark-to-market transactions and recognized immediately through gain (loss) on derivative instruments, net. |
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Effective June 30, 2013, Energen elected to discontinue the use of cash flow hedge accounting and to dedesignate all remaining derivative commodity instruments that were previously designated as cash flow hedges. As a result of discontinuing hedge accounting, any gains or losses from inception of the hedge to June 30, 2013 were frozen in accumulated other comprehensive income until the forecasted transactions actually occurred. Any subsequent gains or losses will be accounted for as mark-to-market and recognized immediately through gain (loss) on derivative instruments, net. As a result of Energen’s election to discontinue hedge accounting, all derivative transactions entered into subsequent to June 30, 2013 will be accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net. |
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The following tables detail the offsetting of derivative assets and liabilities as well as the fair values of derivatives on the balance sheets: |
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(in thousands) | 30-Sep-14 |
| | Gross Amounts Not Offset in the Balance Sheets | |
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| Gross Amounts Recognized at Fair Value | Gross Amounts Offset in the Balance Sheets | Net Amount Presented in the Balance Sheets | Financial Instruments | Cash Collateral Received | Net Fair Value Presented in the Balance Sheets |
Derivatives not designated as hedging instruments | | | | |
Assets | | | | | | |
Derivative instruments | $ | 37,039 | | $ | (6,844 | ) | $ | 30,195 | | $ | — | | $ | — | | $ | 30,195 | |
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Noncurrent derivative instruments | 6,581 | | (823 | ) | 5,758 | | — | | — | | 5,758 | |
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Total derivative assets | 43,620 | | (7,667 | ) | 35,953 | | — | | — | | 35,953 | |
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Liabilities | | | | | | |
Derivative instruments | 7,652 | | (6,844 | ) | 808 | | — | | — | | 808 | |
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Noncurrent derivative instruments | 1,463 | | (823 | ) | 640 | | — | | — | | 640 | |
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Total derivative liabilities | 9,115 | | (7,667 | ) | 1,448 | | — | | — | | 1,448 | |
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Total derivatives | $ | 34,505 | | $ | — | | $ | 34,505 | | $ | — | | $ | — | | $ | 34,505 | |
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(in thousands) | 31-Dec-13 |
| | Gross Amounts Not Offset in the Balance Sheets | |
| Gross Amounts Recognized at Fair Value | Gross Amounts Offset in the Balance Sheets | Net Amount Presented in the Balance Sheets | Financial Instruments | Cash Collateral Received | Net Fair Value Presented in the Balance Sheets |
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Derivatives not designated as hedging instruments | | | | |
Assets | | | | | | |
Derivative instruments | $ | 36,223 | | $ | (18,760 | ) | $ | 17,463 | | $ | — | | $ | — | | $ | 17,463 | |
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Noncurrent derivative instruments | 7,992 | | (2,553 | ) | 5,439 | | — | | — | | 5,439 | |
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Total derivative assets | 44,215 | | (21,313 | ) | 22,902 | | — | | — | | 22,902 | |
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Liabilities | | | | | | |
Derivative instruments | 49,062 | | (18,760 | ) | 30,302 | | — | | — | | 30,302 | |
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Noncurrent derivative instruments | 2,553 | | (2,553 | ) | — | | — | | — | | — | |
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Total derivative liabilities | 51,615 | | (21,313 | ) | 30,302 | | — | | — | | 30,302 | |
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Total derivatives | $ | (7,400 | ) | $ | — | | $ | (7,400 | ) | $ | — | | $ | — | | $ | (7,400 | ) |
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Energen had a net $2.2 million and a net $8.2 million deferred tax liability included in current deferred income taxes on the balance sheets related to derivative items included in accumulated other comprehensive income as of September 30, 2014, and December 31, 2013, respectively. |
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The following tables detail the effect of derivative commodity instruments in cash flow hedging relationships on the financial statements: |
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(in thousands) | Location on Statements of Income | Three months | Three months | | | | | | | | | | | |
ended | ended | | | | | | | | | | | |
30-Sep-14 | 30-Sep-13 | | | | | | | | | | | |
Net gain recognized in other comprehensive income on derivatives (effective portion), net of tax of $18 and $42 | — | $ | 29 | | $ | 69 | | | | | | | | | | | | |
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Gain reclassified from accumulated other comprehensive income into income (effective portion) | Gain (loss) on derivative instruments, net | $ | 5,992 | | $ | 8,455 | | | | | | | | | | | | |
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Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | Gain (loss) on derivative instruments, net | $ | — | | $ | (22 | ) | | | | | | | | | | | |
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(in thousands) | Location on Statements of Income | Nine months | Nine months | | | | | | | | | | | |
ended | ended | | | | | | | | | | | |
30-Sep-14 | 30-Sep-13 | | | | | | | | | | | |
Net gain (loss) recognized in other comprehensive income on derivatives (effective portion), net of tax of $25 and ($6,669) | — | $ | 40 | | $ | (10,882 | ) | | | | | | | | | | | |
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Gain reclassified from accumulated other comprehensive income into income (effective portion) | Gain (loss) on derivative instruments, net | $ | 15,781 | | $ | 29,391 | | | | | | | | | | | | |
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Gain recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing) | Gain (loss) on derivative instruments, net | $ | — | | $ | 835 | | | | | | | | | | | | |
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The following tables detail the effect of open and closed derivative commodity instruments not designated as hedging instruments on the income statement: |
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(in thousands) | Location on Statements of Income | Three months | Three months | | | | | | | | | | | |
ended | ended | | | | | | | | | | | |
30-Sep-14 | 30-Sep-13 | | | | | | | | | | | |
Gain (loss) recognized in income on derivatives | Gain (loss) on derivative instruments, net | $ | 141,743 | | $ | (92,313 | ) | | | | | | | | | | | |
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(in thousands) | Location on Statements of Income | Nine months | Nine months | | | | | | | | | | | |
ended | ended | | | | | | | | | | | |
30-Sep-14 | 30-Sep-13 | | | | | | | | | | | |
Loss recognized in income on derivatives | Gain (loss) on derivative instruments, net | $ | (6,283 | ) | $ | (70,735 | ) | | | | | | | | | | | |
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As of September 30, 2014, $3.6 million, net of tax, of deferred net gains on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified and reported in earnings as revenues during the next twelve-month period. During 2013, we had a discontinuance of hedge accounting when Energen determined it was probable certain forecasted volumes would not occur due to certain properties being sold. This discontinuance of hedge accounting resulted in $1.7 million of after-tax losses being recognized into gain (loss) on derivative instruments, net during the nine months ended September 30, 2014. |
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As of September 30, 2014, Energen had entered into the following transactions for the remainder of 2014 and subsequent years: |
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Production Period | Total Hedged Volumes | Average Contract | Description | | | | | | | | | | | | | | |
Price | | | | | | | | | | | | | | |
Oil | | | | | | | | | | | | | | | | | |
2014 | 2,502 | MBbl | $92.66 Bbl | NYMEX Swaps | | | | | | | | | | | | | | |
2015 | 8,280 | MBbl | $89.30 Bbl | NYMEX Swaps | | | | | | | | | | | | | | |
Oil Basis Differential | | | | | | | | | | | | | | | | | |
2014 | 300 | MBbl | $(3.30) Bbl | WTS/WTI Basis Swaps* | | | | | | | | | | | | | | |
2014 | 600 | MBbl | $(3.08) Bbl | WTI/WTI Basis Swaps** | | | | | | | | | | | | | | |
2015 | 2,160 | MBbl | $(4.30) Bbl | WTS/WTI Basis Swaps* | | | | | | | | | | | | | | |
2015 | 6,120 | MBbl | $(5.11) Bbl | WTI/WTI Basis Swaps** | | | | | | | | | | | | | | |
Natural Gas Liquids | | | | | | | | | | | | | | | | | |
2014 | 18.5 | MMgal | $0.93 Gal | Liquids Swaps | | | | | | | | | | | | | | |
Natural Gas | | | | | | | | | | | | | | | | | |
2014 | 2.6 | Bcf | $4.57 Mcf | NYMEX Swaps | | | | | | | | | | | | | | |
2014 | 7.6 | Bcf | $4.62 Mcf | Basin Specific Swaps - San Juan | | | | | | | | | | | | | | |
2014 | 2.6 | Bcf | $3.81 Mcf | Basin Specific Swaps - Permian | | | | | | | | | | | | | | |
2015 | 23 | Bcf | $4.13 Mcf | Basin Specific Swaps - San Juan | | | | | | | | | | | | | | |
2015 | 6 | Bcf | $4.20 Mcf | Basin Specific Swaps - Permian | | | | | | | | | | | | | | |
Natural Gas Basis Differential | | | | | | | | | | | | | | | | | | |
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2014 | 1.5 | Bcf | $(0.09) Mcf | San Juan Basis Swaps | | | | | | | | | | | | | | |
2014 | 0.6 | Bcf | $(0.17) Mcf | Permian Basis Swaps | | | | | | | | | | | | | | |
*WTS - West Texas Sour/Midland, WTI - West Texas Intermediate/Cushing | | | | | | | | | | | | | | | |
**WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing | | | | | | | | | | | | | | | |
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As of September 30, 2014, the maximum term over which Energen has hedged exposures to the variability of cash flows is through December 31, 2015. |