Derivative Instruments

6 Months Ended

Jun. 30, 2017

Derivative Instruments.

Derivative Instruments

(9)Derivative Instruments

(a)Commodity Derivative Positions

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 six months ended June 30, 2016 and 2017.  The Company enters into these swap contracts when management believes that favorable future sales prices for the Company’s production can be secured.  Under these swap agreements, when actual commodity prices upon settlement exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty.  When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company receives the difference from 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 June 30, 2017, the Company’s fixed price natural gas, NGLs, and oil swap positions from July 1, 2017 through December 31, 2023 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 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)	1,417,500			$	3.63
Year ending December 31, 2021:
NYMEX ($/MMBtu)	710,000			$	3.31
Year ending December 31, 2022:
NYMEX ($/MMBtu)	850,000			$	3.16
Year ending December 31, 2023:
NYMEX ($/MMBtu)	90,000			$	2.91

As of June 30, 2017, 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 ($/MMBtu)
Six months ending December 31, 2017:	125,000	$	(0.51)

As of June 30, 2017, 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 ($/MMBtu)
Six months ending December 31, 2017:	125,000	$	0.38

(b)Commodity Derivative Fair Values

The following table presents 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, 2016 and June 30, 2017.  None of the Company’s derivative instruments are designated as hedges for accounting purposes.

	December 31, 2016			June 30, 2017
	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	$	73,022	Current assets		452,005
Commodity contracts	Long-term assets		1,731,063	Long-term assets		1,600,165
Total asset derivatives			1,804,085			2,052,170
Liability derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current liabilities		203,635	Current liabilities		3,279
Commodity contracts	Long-term liabilities		234	Long-term liabilities		172
Total liability derivatives			203,869			3,451
Net derivatives		$	1,600,216			2,048,719

The following table presents the gross values 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, 2016						June 30, 2017
	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	$	1,914,245		(110,160)		1,804,085	$	2,161,257		(109,087)		2,052,170
Commodity derivative liabilities	$	(324,667)		120,798		(203,869)	$	(3,451)		—		(3,451)

The following is a summary of derivative fair value gains and where such values are recorded in the condensed consolidated statements of operations for the three and six months ended June 30, 2016 and 2017 (in thousands):

	Statement of operations	Three months ended June 30,				Six months ended June 30,
	location	2016		2017		2016		2017
Commodity derivative fair value gains (losses)	Revenue	$	(684,634)		85,641	$	(404,710)		524,416

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