Derivative Instruments

12 Months Ended

Dec. 31, 2016

Derivative Instruments.

Derivative Instruments

(11) Derivative Instruments

(a) Commodity Derivatives

The Company periodically enters into natural gas, NGLs, and oil derivative contracts with counterparties to hedge the price risk associated with its production.  These derivatives are not held for trading purposes.  To the extent that changes occur in the market prices of natural gas, NGLs, and oil, the Company is exposed to market risk on these open contracts.  This market risk exposure is generally offset by the change in market prices of natural gas, NGLs, and oil recognized upon the ultimate sale of the Company’s production.

The Company was party to various fixed price commodity swap contracts that settled during the years ended December 31, 2014,  2015, and 2016.  The Company enters into these swap contracts when management believe that favorable future sales prices for the Company’s production can be secured.  Under these swap agreements, when actual commodity prices exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty.  When actual commodity prices are below the contractually provided fixed price, the Company receives the difference from the counterparty.  When actual commodity prices are above the contractually provided fixed price, the Company pays the difference to the counterparty.  In addition to fixed price swap contracts, the Company has entered into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (“NYMEX”) index price and a local index price at which the Company sells a portion of its natural gas production.  The Company’s derivative swap contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in the Company’s statements of operations.

As of December 31, 2016, the Company’s fixed price natural gas and NGLs swap positions from January 1, 2017 through December 31, 2022 were as follows (abbreviations in the table refer to the index to which the swap position is tied, as follows: NYMEX=Henry Hub; CGTLA=Columbia Gas Louisiana Onshore; CCG=Chicago City Gate; Mont Belvieu-Ethane=Mont Belvieu Purity Ethane; Mont Belvieu-Propane=Mont Belvieu Propane; NYMEX-WTI=West Texas Intermediate):

	Natural gas MMbtu/day	Oil Bbls/day	Natural Gas Liquids Bbls/day	Weighted average index price
Three months ending March 31, 2017:
NYMEX ($/MMBtu)	1,370,000	—	—	$	3.52
CGTLA ($/MMBtu)	420,000	—	—	$	4.39
CCG ($/MMBtu)	70,000	—	—	$	4.76
NYMEX-WTI ($/Bbl)	—	3,000	—	$	54.75
Mont Belvieu-Ethane ($/Gallon)	—	—	20,000	$	0.25
Mont Belvieu-Propane ($/Gallon)	—	—	27,500	$	0.40
Total	1,860,000	3,000	47,500
Three months ending June 30, 2017:
NYMEX ($/MMBtu)	1,370,000	—	—	$	3.26
CGTLA ($/MMBtu)	420,000	—	—	$	4.13
CCG ($/MMBtu)	70,000	—	—	$	4.38
NYMEX-WTI ($/Bbl)	—	3,000	—	$	54.75
Mont Belvieu-Ethane ($/Gallon)	—	—	20,000	$	0.25
Mont Belvieu-Propane ($/Gallon)	—	—	27,500	$	0.38
Total	1,860,000	3,000	47,500
Three months ending September 30, 2017:
NYMEX ($/MMBtu)	1,370,000	—	—	$	3.33
CGTLA ($/MMBtu)	420,000	—	—	$	4.20
CCG ($/MMBtu)	70,000	—	—	$	4.45
NYMEX-WTI ($/Bbl)	—	3,000	—	$	54.75
Mont Belvieu-Ethane ($/Gallon)	—	—	20,000	$	0.25
Mont Belvieu-Propane ($/Gallon)	—	—	27,500	$	0.39
Total	1,860,000	3,000	47,500
Three months ending December 31, 2017:
NYMEX ($/MMBtu)	1,370,000	—	—	$	3.46
CGTLA ($/MMBtu)	420,000	—	—	$	4.37
CCG ($/MMBtu)	70,000	—	—	$	4.68
NYMEX-WTI ($/Bbl)	—	3,000	—	$	54.75
Mont Belvieu-Ethane ($/Gallon)	—	—	20,000	$	0.25
Mont Belvieu-Propane ($/Gallon)	—	—	27,500	$	0.40
Total	1,860,000	3,000	47,500
Year ending December 31, 2018:
NYMEX ($/MMBtu)	2,002,500		—	$	3.91
Mont Belvieu-Propane ($/Gallon)	—		2,000	$	0.65
Total	2,002,500		2,000
Year ending December 31, 2019:
NYMEX ($/MMBtu)	2,330,000			$	3.70
Year ending December 31, 2020:
NYMEX ($/MMBtu)	1,367,500			$	3.66
Year ending December 31, 2021:
NYMEX ($/MMBtu)	660,000			$	3.35
Year ending December 31, 2022:
NYMEX ($/MMBtu)	760,000			$	3.20

As of December 31, 2016, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of TCO to the NYMEX Henry Hub natural gas price, were as follows:

	Natural gas MMbtu/day	Hedged Differential
Year ending December 31, 2017:	125,000	$	(0.49)

As of December 31, 2016, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of NYMEX Henry Hub to the TCO natural gas price, were as follows:

	Natural gas MMbtu/day	Hedged Differential
Year ending December 31, 2017:	125,000	$	0.30

(b) Summary

The following is a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the consolidated balance sheets as of December 31, 2015 and 2016.  None of the Company’s derivative instruments are designated as hedges for accounting purposes.

	December 31, 2015			December 31, 2016
	Balance sheet location	Fair value		Balance sheet location	Fair value
		(In thousands)			(In thousands)
Asset derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current assets	$	1,009,030	Current assets		73,022
Commodity contracts	Long-term assets		2,108,450	Long-term assets		1,731,063
Total asset derivatives			3,117,480			1,804,085
Liability derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current liabilities		—	Current liabilities		203,635
Commodity contracts	Long-term liabilities		—	Long-term liabilities		234
Total liability derivatives			—			203,869
Net derivatives		$	3,117,480			1,600,216

The following table presents the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets as of the dates presented, all at fair value (in thousands):

	December 31, 2015						December 31, 2016
	Gross amounts on balance sheet		Gross amounts offset on balance sheet		Net amounts of assets on balance sheet		Gross amounts on balance sheet		Gross amounts offset on balance sheet		Net amounts of assets (liabilities) on balance sheet
Commodity derivative assets	$	3,163,639		(46,159)		3,117,480	$	1,914,245		(110,160)		1,804,085
Commodity derivative liabilities	$	—		—		—	$	(324,667)		120,798		(203,869)

The following is a summary of derivative fair value gains (losses) and where such values are recorded in the consolidated statements of operations for the years ended December 31, 2014,  2015, and 2016 (in thousands):

	Statement of operations	Year ended December 31,
	location	2014		2015		2016
Commodity derivative fair value gains (losses)	Revenue	$	868,201		2,381,501		(514,181)

The fair value of commodity derivative instruments was determined using Level 2 inputs.