Derivative Instruments

3 Months Ended

Mar. 31, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

9. Derivative Instruments

The Company uses commodity derivative instruments to reduce its exposure to commodity price volatility for a portion of its forecasted crude oil and natural gas production and thereby achieve a more predictable level of cash flows to support the Company’s drilling and completion capital expenditure program. The Company does not enter into derivative instruments for speculative or trading purposes. The Company’s commodity derivative instruments consist of fixed price swaps, three-way collars and purchased and sold call options, which are described below.

Fixed Price Swaps: The Company receives a fixed price and pays a variable market price to the counterparties over specified periods for contracted volumes.

Three-Way Collars: A three-way collar is a combination of options including a purchased put option (fixed floor price), a sold call option (fixed ceiling price) and a sold put option (fixed sub-floor price). These contracts offer a higher fixed ceiling price relative to a costless collar but limit the Company’s protection from decreases in commodity prices below the fixed floor price. At settlement, if the market price is between the fixed floor price and the fixed sub-floor price or is above the fixed ceiling price, the Company receives the fixed floor price or pays the market price, respectively. If the market price is below the fixed sub-floor price, the Company receives the market price plus the difference between the fixed floor price and the fixed sub-floor price. If the market price is between the fixed floor price and fixed ceiling price, no payments are due from either party.

Sold Call Options: These contracts give the counterparties the right, but not the obligation, to buy contracted volumes from the Company over specified periods and prices in the future. At settlement, if the market price exceeds the fixed price of the call option, the Company pays the counterparty the excess. If the market price settles below the fixed price of the call option, no payment is due from either party. These contracts require the counterparties to pay premiums to the Company that represent the fair value of the call option as of the date of purchase.

Purchased Call Options: These contracts give the Company the right, but not the obligation, to buy contracted volumes from the counterparties over specified periods and prices in the future. At settlement, if the market price exceeds the fixed price of the call option, the counterparties pay the Company the excess. If the market price settles below the fixed price of the call option, no payment is due from either party. These contracts require the Company to pay premiums to the counterparties that represent the fair value of the call option as of the date of purchase.

All of the Company’s purchased call options were executed contemporaneously with sales of call options to increase the fixed price of existing sold call options and therefore are presented on a net basis in the summary of open crude oil derivative positions below.

Premiums: In lieu of receiving payments for premiums from its counterparties of sold call options, the Company has used the associated premium value to obtain higher fixed prices on fixed price swaps which were executed contemporaneously with those sold call options. The Company elected to defer payment of premiums associated with its purchased call options until the applicable contracts settle on a monthly basis. As of March 31, 2017, the Company had premium obligations of approximately $4.2 million, of which $2.0 million is classified as current derivative liabilities and $2.2 million is classified as noncurrent derivative liabilities on the Company’s consolidated balance sheets. As of December 31, 2016, the Company had premium obligations of approximately $4.6 million, of which $2.0 million was classified as current derivative liabilities and $2.6 million was classified as noncurrent derivative liabilities on the Company’s consolidated balance sheets.

The following sets forth a summary of the Company’s crude oil derivative positions at average NYMEX prices as of March 31, 2017:

Period	Type of Contract	Crude Oil Volumes (in Bbls/d)	Weighted Average Floor Price ($/Bbl)		Weighted Average Ceiling Price ($/Bbl)
Q2 2017	Fixed Price Swaps	12,000		$50.13
Q3 2017	Fixed Price Swaps	6,000		$54.15
Q4 2017	Fixed Price Swaps	3,000		$55.01
FY 2018	Sold Call Options	2,488				$60.00
FY 2018	Net Sold Call Options	900				$75.00
FY 2019	Sold Call Options	2,975				$62.50
FY 2019	Net Sold Call Options	900				$77.50
FY 2020	Sold Call Options	3,675			$65.00
FY 2020	Net Sold Call Options	900			$80.00

The following sets forth a summary of the Company’s natural gas derivative positions at average NYMEX prices as of March 31, 2017:

Period	Type of Contract	Natural Gas Volumes (in MMBtu/d)	Weighted Average Floor Price ($/MMBtu)		Weighted Average Ceiling Price ($/MMBtu)
Q2 - Q4 2017	Fixed Price Swaps	20,000		$3.30
Q2 - Q4 2017	Sold Call Options	33,000				$3.00
FY 2018	Sold Call Options	33,000				$3.25
FY 2019	Sold Call Options	33,000				$3.25
FY 2020	Sold Call Options	33,000				$3.50

See “Note 13. Subsequent Events” for details of derivative positions entered into subsequent to March 31, 2017.

The Company typically has numerous hedge positions that span several time periods and often result in both fair value asset and liability positions held with that counterparty, which positions are all offset to a single fair value asset or liability at the end of each reporting period, including the deferred premiums associated with its hedge positions. The Company nets its derivative instrument fair values executed with the same counterparty along with deferred premiums pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract.

Counterparties to the Company’s derivative instruments who are also lenders under the Company’s credit agreement allow the Company to satisfy any need for margin obligations associated with derivative instruments where the Company is in a net liability position with its counterparties with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting. Counterparties who are not lenders under the Company’s credit agreement can require derivative contracts to be novated to a lender if the net liability position exceeds our unsecured credit limit with that counterparty and therefore do not require the posting of cash collateral.

Because the counterparties have investment grade credit ratings, or the Company has obtained guarantees from the applicable counterparty’s investment grade parent company, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its derivative instruments. Although the Company does not currently anticipate nonperformance from its counterparties, it continually monitors the credit ratings of its counterparties or its counterparty’s parent company.

Derivative Assets and Liabilities

All derivative instruments are recorded on the Company’s consolidated balance sheets as either an asset or liability measured at fair value. The combined derivative instrument fair value assets and liabilities recorded in the Company’s consolidated balance sheets as of March 31, 2017 and December 31, 2016 are summarized below:

	March 31, 2017
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Derivative assets
Derivative assets-current		$2,417			($1,381	)		$1,036
Derivative assets-non current	106			(106		)	—
Derivative liabilities
Derivative liabilities-current	(8,837		)	1,381			(7,456		)
Derivative liabilities-non current	(18,781		)	106			(18,675		)
Total		($25,095	)		$—			($25,095	)

	December 31, 2016
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Derivative assets
Derivative assets-current		$6,507			($5,270	)		$1,237
Derivative assets-non current	1,313			(1,313		)	—
Derivative liabilities
Derivative liabilities-current	(27,871		)	5,270			(22,601		)
Derivative liabilities-non current	(28,841		)	1,313			(27,528		)
Total		($48,892	)		$—			($48,892	)

See “Note 10. Fair Value Measurements” for additional details regarding the fair value of the Company’s derivative positions.

(Gain) Loss on Derivatives, Net

The Company has elected not to meet the criteria to qualify its derivative instruments for hedge accounting treatment. Therefore, all gains and losses as a result of changes in the fair value of derivative instruments are recognized as (gain) loss on derivatives, net in the Company’s consolidated statements of operations in the period in which the changes occur. The effect of derivative instruments on the Company’s consolidated statements of operations for the three months ended March 31,2017 and 2016 by commodity is summarized below:

	Three Months Ended March 31,
	2017			2016
	(In thousands)
(Gain) Loss on Derivatives, Net
Crude oil		($18,480	)		($21,891	)
Natural gas	(6,836		)	11,338
Total (Gain) Loss on Derivatives, Net		($25,316	)		($10,553	)

The cash flow impacts of the Company’s derivative instruments are presented as separate line items within the net cash provided by operating activities in the Company’s consolidated statements of cash flows.