10. Derivative Instruments

12 Months Ended

Dec. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

The Company is required to recognize all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. The Company has not designated its derivative instruments as hedges for accounting purposes and, as such, marks its derivative instruments to fair value and recognizes the realized and unrealized changes in fair value in its statements of operations under the captions “Loss on Settled Derivatives” and “Losses on the mark-to-market of derivatives.”

The Company has utilized swap and collar derivative contracts to hedge against the variability in cash flows associated with the forecasted sale of crude oil production. While the use of these derivative instruments limits the downside risk of adverse price movements, their use also limits the upside revenue potential of upward price movements.

For a fixed price swap contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price and the Company is required to make a payment to the counterparty if the settlement price for any period is greater than the swap price. For a collar contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price, the Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price and no payment is required by either party if the settlement price for any settlement period is between the floor price and the ceiling price.

The Company’s derivative contracts are settled based on reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West Texas Intermediate (“WTI”) pricing.

As of December 31, 2015, the Company had outstanding derivative contracts with respect to future production as follows:

Crude Oil Swaps
	Oil		Fixed
Settlement Period	(Barrels)		Price
April 1, 2016 – May 31, 2016		10,000	$	90.36
April 1, 2016 – May 31, 2016		4,000	$	88.15
April 1, 2016 – May 31, 2016		15,000	$	62.88

Crude Oil Costless Collars

	Oil	Floor/Ceiling
Settlement Period	(Barrels)	Price	Basis
April 1, 2016 – May 31, 2016	3,334	$80.00/$89.50	NYMEX

As of December 31, 2015, the Company had total volume on open commodity swaps of 29,000 barrels at a weighted average price of approximately $75.84.

Derivative Liquidations

On September 24, 2015, the Company settled all its 2017 and 2018 derivative contracts and the majority of its 2016 derivative contracts prior to the expiration of their contractual maturities, resulting in the receipt of cash proceeds totaling $6,255,000. The resulting gain is included in realized gain on derivatives for the year ended December 31, 2015.

Derivative Gains and Losses

The following table presents realized and unrealized gains and losses on derivative instruments for the periods presented:

	Years Ended
	December 31,
	2015			2014
Realized gain on derivatives:
Crude oil fixed price swaps	$	10,325,126		$	511,451
Crude oil collars		1,152,527			–
Realized gain on derivatives, net	$	11,477,653		$	511,451
Gain (loss) on the mark-to-market of derivatives:
Crude oil fixed price swaps	$	(5,669,678	)	$	6,827,126
Crude oil collars		(755,667	)		966,295
Gain (loss) on the mark-to-market of derivatives, net	$	(6,425,345	)	$	7,793,421

Balance Sheet Offsetting of Derivative Assets and Liabilities

ASU No 2011-11, Balance Sheet (Topic 210)-Disclosures about Offsetting Assets and Liabilities, requires an entity to disclose information about offsetting arrangements to enable financial statement users to understand the effects of netting arrangements on an entity’s financial position. The Company adopted the provision of the standard upon entering into our first derivative contract and has provided the applicable disclosures below with respect to its derivative instruments.

All of the Company’s derivative contracts are carried at their fair value in the condensed balance sheets under the captions “Current portion of derivative instruments” and “Derivative instruments”. Derivative instruments from the same counterparty that are subject to contractual terms which provide for net settlement are reported on a net basis in the condensed balance sheets. The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under the netting arrangements with counterparties, and the resulting net amounts presented in the condensed balance sheets for the periods presented, all at fair value.

December 31, 2015

December 31, 2014

Gross

Net

Gross

Net

Gross

amounts

amounts of

Gross

amounts

amounts of

amounts of

offset

assets

amounts of

offset

assets

recognized

on balance

on balance

recognized

on balance

on balance

assets

sheet

sheet

assets

sheet

sheet

Commodity derivative assets

$

1,154,417

$

(17

)

$

1,154,400

$

7,620,896

$

(41,151

)

$

7,579,745

December 31, 2015

December 31, 2014

Gross

Net

Gross

Net

Gross

amounts

amounts of

Gross

amounts

amounts of

amounts of

offset

liabilities

amounts of

offset

liabilities

recognized

on balance

on balance

recognized

on balance

on balance

liabilities

sheet

sheet

liabilities

sheet

sheet

Commodity derivative liabilities

$

–

$

–

$

–

$

–

$

–

$

–

The following table reconciles the net amounts disclosed above to the individual financial statement line items in the condensed balance sheets:

	December 31,
	2015		2014
Derivative assets	$	1,154,400	$	3,571,803
Noncurrent derivative assets		–		4,007,942
Net amount of assets on the balance sheet		1,154,400		7,579,745
Derivative liabilities		–		–
Noncurrent derivative liabilities		–		–
Net amounts of liabilities on the balance sheet		–		–
Total derivative assets, net	$	1,154,400	$	7,579,745