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Derivative instruments
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative instruments
Derivative instruments
Overview
Our results of operations, financial condition and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties. To mitigate a portion of this exposure, we enter into various types of derivative instruments, including commodity price swaps, enhanced price swaps, costless collars, put options, and basis protection swaps.
For commodity price swaps, we receive a fixed price for the hedged commodity and pay a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.
Collars contain a fixed floor price (purchased put) and ceiling price (sold call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party. A three-way collar contract consists of a standard collar contract plus a sold put with a price below the floor price of the collar. The sold put option requires us to make a payment to the counterparty if the market price is below the sold put option price. If the market price is greater than the sold put option price, the result is the same as it would have been with a standard collar contract only. By combining the collar contract with the sold put option, we are entitled to a net payment equal to the difference between the floor price of the standard collar and the sold put option price if the market price falls below the sold put option price. This strategy enables us to increase the floor and the ceiling price of the collar beyond the range of a traditional costless collar utilizing the value associated with the sale of a put option.
Put options may be purchased from the counterparty by paying a cash premium at the time the put options are purchased or paying later when the put options settle. If the market price is below the put strike price at the settlement date, we will receive a payment from the counterparty. Purchased put options are designed to provide a fixed price floor with the opportunity for upside if commodity prices increase.
We enhance the value of certain oil swaps by combining them with sold puts or put spread contracts. Sold puts require us to make a payment to the counterparty if the market price is below the put strike price at the settlement date. If the market price is greater than the sold put price, the result is the same as it would have been with a swap contract only. A put spread is a combination of a sold put and a purchased put. If the market price falls below the purchased put option price, we will receive the spread between the sold put option price and the purchased put option price from the counterparty. The use of a sold put allows us to receive an above-market swap price while the purchased put provides a measure of downside protection.
We use basis protection swaps to reduce basis risk. Basis is the difference between the physical commodity being hedged and the price of the futures contract used for hedging. Basis risk is the risk that an adverse change in the futures market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. Basis risk exists in natural gas primarily due to the geographic price differentials between cash market locations and futures contract delivery locations. Natural gas basis protection swaps are arrangements that guarantee a price differential for natural gas from a specified pricing point. We receive a payment from the counterparty if the price differential is greater than the stated terms of the contract and pay the counterparty if the price differential is less than the stated terms of the contract.
We enter into crude oil derivative contracts for a portion of our natural gas liquids production. The following table summarizes our crude oil derivatives outstanding as of June 30, 2014: 
 
 
 
 
Weighted average fixed price per Bbl
Period and type of contract
 
Volume
MBbls
 
Swaps
 
Sold puts
 
Purchased puts
 
Sold calls
2014
 
 
 
 
 
 
 
 
 
 
Swaps
 
369

 
$
91.89

 
$
—

 
$
—

 
$
—

Three-way collars
 
1,200

 
$
—

 
$
75.50

 
$
93.25

 
$
101.94

Enhanced swaps
 
420

 
$
97.89

 
$
80.00

 
$
—

 
$
—

Put spread enhanced swaps
 
1,415

 
$
93.93

 
$
80.00

 
$
60.00

 
$
—

Purchased puts (1)
 
420

 
$
—

 
$
—

 
$
60.00

 
$
—

2015
 
 
 
 
 
 
 
 
 
 
Enhanced swaps
 
6,058

 
$
92.92

 
$
80.00

 
$
—

 
$
—

Purchased puts (1)
 
5,548

 
$
—

 
$
—

 
$
60.00

 
$
—

2016
 
 
 
 
 
 
 
 
 
 
Enhanced swaps
 
2,760

 
$
92.25

 
$
80.00

 
$
—

 
$
—

___________
(1)
Puts covering 840 Mbbls in 2014 were purchased during the second quarter of 2013 for $664. The 2015 puts were purchased during the second quarter of 2014 for $1,220.

The following tables summarize our natural gas derivative instruments outstanding as of June 30, 2014: 
Period and type of contract
 
Volume
BBtu
 
Weighted
average
fixed price
per MMBtu
2014
 
 
 
 
Natural gas swaps
 
10,280

 
$
4.05

Natural gas basis protection swaps
 
10,440

 
$
0.24

2015
 
 
 
 
Natural gas swaps
 
22,170

 
$
4.20

Natural gas basis protection swaps
 
2,400

 
$
0.18

2016
 
 
 
 
Natural gas swaps
 
7,800

 
$
4.33


Effect of derivative instruments on the consolidated balance sheets
All derivative financial instruments are recorded on the balance sheet at fair value. See Note 6—Fair value measurements for additional information regarding fair value measurements. The estimated fair values of derivative instruments are provided below. The carrying amounts of these instruments are equal to the estimated fair values. 
 
As of June 30, 2014
 
As of December 31, 2013
 
Assets
 
Liabilities
 
Net value
 
Assets
 
Liabilities
 
Net value
Natural gas swaps
$
1,129

 
$
(5,086
)
 
$
(3,957
)
 
$
1,457

 
$
(3,706
)
 
$
(2,249
)
Oil swaps
—

 
(4,232
)
 
(4,232
)
 
112

 
(2,807
)
 
(2,695
)
Oil collars
75

 
(4,067
)
 
(3,992
)
 
2,776

 
(4
)
 
2,772

Oil enhanced swaps
—

 
(51,299
)
 
(51,299
)
 
6,988

 
(6,212
)
 
776

Oil purchased puts
339

 
—

 
339

 
74

 
—

 
74

Natural gas basis differential swaps
21

 
(552
)
 
(531
)
 
1,706

 
(63
)
 
1,643

Total derivative instruments
1,564

 
(65,236
)
 
(63,672
)
 
13,113

 
(12,792
)
 
321

Less:
 
 
 
 
 
 
 
 
 
 
 
Netting adjustments (1)
1,261

 
(1,261
)
 
—

 
4,558

 
(4,558
)
 
—

Current portion asset (liability)
—

 
(46,818
)
 
(46,818
)
 
2,152

 
(8,234
)
 
(6,082
)
 
$
303

 
$
(17,157
)
 
$
(16,854
)
 
$
6,403

 
$
—

 
$
6,403

___________
(1)
Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same counterparty. Positive and negative positions with a counterparty are netted only to the extent that they relate to the same current versus noncurrent classification on the balance sheet.
We discontinued hedge accounting effective April 1, 2010. Net derivative gains (losses) attributable to derivatives previously subject to hedge accounting were deferred through accumulated other comprehensive income (loss) (“AOCI”). As of December 31, 2013, there are no longer any deferred gains in AOCI as all the previously deferred gains (losses) have been reclassified into earnings upon the sale of the hedged production.
Derivative settlements outstanding at June 30, 2014 and December 31, 2013 were as follows: 
 
June 30,
2014
 
December 31,
2013
Derivative settlements receivable included in accounts receivable
$
—

 
$
4,616

Derivative settlements payable included in accounts payable and accrued liabilities
$
8,674

 
$
377


Effect of derivative instruments on the consolidated statements of operations
We do not apply hedge accounting to any of our derivative instruments. As a result, all gains and losses associated with our derivative contracts are recognized immediately as non-hedge derivative gains (losses) in the consolidated statements of operations. Gain from oil hedging activities, which is a component of total revenues in the consolidated statements of operations, consists of the reclassification of hedge gains on discontinued oil hedges from AOCI into net income upon settlement of the contracts.
Non-hedge derivative (losses) gains in the consolidated statements of operations are comprised of the following: 
 
 
Three months ended
 
Six months ended
 
 
June 30,
 
June 30,
 
 
2014
 
2013
 
2014
 
2013
Change in fair value of commodity price swaps
 
$
1,948

 
$
15,044

 
$
(3,245
)
 
$
(4,320
)
Change in fair value of collars
 
(3,901
)
 
1,547

 
(6,764
)
 
(6,738
)
Change in fair value of enhanced swaps and put options
 
(42,337
)
 
8,765

 
(52,698
)
 
10,796

Change in fair value of natural gas basis differential contracts
 
(313
)
 
1,514

 
(2,174
)
 
1,690

Amortization of put premium
 
(166
)
 
—

 
(332
)
 
—

(Payments on) receipts from settlement of commodity price swaps
 
(5,773
)
 
312

 
(11,623
)
 
4,837

(Payments on) receipts from settlement of collars
 
(1,220
)
 
5,825

 
(1,261
)
 
11,556

(Payments on) receipts from settlement enhanced swaps
 
(7,001
)
 
—

 
(8,993
)
 
—

Receipts from (payments on) settlement of natural gas basis differential contracts
 
767

 
(115
)
 
(105
)
 
(475
)
 
 
$
(57,996
)
 
$
32,892

 
$
(87,195
)
 
$
17,346