DERIVATIVE INSTRUMENTS/HEDGING

12 Months Ended

Dec. 31, 2015

Derivative Instruments/Hedging

Derivative Instruments/Hedging

4. DERIVATIVE INSTRUMENTS/HEDGING

We periodically enter into derivative instruments to mitigate a portion of our potential exposure to a decline in commodity prices and the corresponding negative impact on cash flow available for reinvestment. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our hedging positions.

The following tables summarize our derivative contracts as of December 31, 2015:

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
Oil Three-Way Collars:
2016:
WTI (1)
Volume (Bbls)		273,000		273,000		276,000		276,000		1,098,000
Wtd Avg Price - Lower Floor	$	40.00	$	40.00	$	40.00	$	40.00	$	40.00
Wtd Avg Price - Upper Floor	$	50.00	$	50.00	$	50.00	$	50.00	$	50.00
Wtd Avg Price - Ceiling	$	60.00	$	60.00	$	60.00	$	60.00	$	60.00

(1) WTI refers to West Texas Intermediate price as quoted on the New York Mercantile Exchange.

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
Gas Collars:
2016:
PEPL (1)
Volume (MMBtu)		910,000		910,000		920,000		920,000		3,660,000
Wtd Avg Price - Floor	$	2.70	$	2.70	$	2.70	$	2.70	$	2.70
Wtd Avg Price - Ceiling	$	2.85	$	2.85	$	2.85	$	2.85	$	2.85
Perm EP (1)
Volume (MMBtu)		1,820,000		1,210,000		920,000		920,000		4,870,000
Wtd Avg Price - Floor	$	2.75	$	2.75	$	2.75	$	2.75	$	2.75
Wtd Avg Price - Ceiling	$	3.12	$	3.09	$	3.06	$	3.06	$	3.09
2017:
Perm EP (1)
Volume (MMBtu)		900,000		910,000		—		—		1,810,000
Wtd Avg Price - Floor	$	2.75	$	2.75	$	—	$	—	$	2.75
Wtd Avg Price - Ceiling	$	3.36	$	3.36	$	—	$	—	$	3.36

(1) PEPL refers to Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index as quoted in Platt’s Inside FERC. Perm EP refers to El Paso Natural Gas Company, Permian Basin Index as quoted in Platt’s Inside FERC.

A three-way collar is a combination of three options: lower floor (sold put), upper floor (bought put) and ceiling (sold call).  If the published index price is below the lower floor, we receive the difference between the two floors.  If the index price is between the two floors, we receive the difference between the upper floor and the index price.  If the index price is between the upper floor and the ceiling, we do not receive or pay any amounts.  If the index price is above the ceiling, we pay the excess over the ceiling price.

Under a collar agreement, we receive the difference between the published index price and a floor price if the index price is below the floor. We pay the difference between the ceiling price and the index price if the index price is above the contracted ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling price.

Subsequent to December 31, 2015, we entered into the following gas hedges:

	First		Second		Third		Fourth
	Quarter		Quarter		Quarter		Quarter		Total
Gas Collars:
2016:
PEPL
Volume (MMBtu)		—		1,820,000		1,840,000		1,840,000		5,500,000
Wtd Avg Price - Floor	$	—	$	2.13	$	2.13	$	2.13	$	2.13
Wtd Avg Price - Ceiling	$	—	$	2.70	$	2.70	$	2.70	$	2.70
Perm EP
Volume (MMBtu)		—		1,820,000		1,840,000		1,840,000		5,500,000
Wtd Avg Price - Floor	$	—	$	2.25	$	2.25	$	2.25	$	2.25
Wtd Avg Price - Ceiling	$	—	$	2.77	$	2.77	$	2.77	$	2.77
2017:
PEPL
Volume (MMBtu)		1,800,000		1,820,000		—		—		3,620,000
Wtd Avg Price - Floor	$	2.13	$	2.13	$	—	$	—	$	2.13
Wtd Avg Price - Ceiling	$	2.70	$	2.70	$	—	$	—	$	2.70
Perm EP
Volume (MMBtu)		1,800,000		1,820,000		—		—		3,620,000
Wtd Avg Price - Floor	$	2.25	$	2.25	$	—	$	—	$	2.25
Wtd Avg Price - Ceiling	$	2.77	$	2.77	$	—	$	—	$	2.77

We have elected not to account for our derivatives as cash flow hedges. Therefore, we recognize settlements and changes in the assets or liabilities relating to our open derivative contracts in earnings. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows.

The following table presents the net (gains) and losses from settlements and changes in fair value of our derivative contracts, and the (gains)losses only from settlements during the periods shown below.

(in thousands)	2015		2014		2013
(Gain) loss on derivative instruments, net	$	(11,246)	$	(3,762)	$	209
Settlement (gains) losses	$	—	$	(7,641)	$	4,088

Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to enforceable master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our policy is to not offset asset and liability positions in our accompanying balance sheets. 

The following table presents the amounts and classifications of our derivative assets and liabilities as of December 31, 2015, as well as the potential effect of netting arrangements on contracts with the same counterparty. We did not have any outstanding contracts as of December 31, 2014.

December 31, 2015:
(in thousands)	Balance Sheet Location	Asset		Liability
Oil contracts	Current assets — Derivative instruments	$	6,774	$	—
Natural gas contracts	Current assets — Derivative instruments		3,971		—
Natural gas contracts	Non-current assets — Derivative instruments		501		—
Total gross amounts presented in accompanying balance sheet			11,246		—
Less: gross amounts not offset in the accompanying balance sheet			—		—
Net amount:		$	11,246	$	—

We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which have a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our hedge liability positions. Because some of the member banks have discontinued hedging activities, in the future we may hedge with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk.