Risk Management and Derivative Instruments

3 Months Ended

Mar. 31, 2015

Risk Management and Derivative Instruments

Risk Management and Derivative Instruments

5. Risk Management and Derivative Instruments

The Company’s production is exposed to fluctuations in crude oil, NGLs and natural gas prices. The Company periodically utilizes derivative financial instruments to provide partial protection against declines in oil, natural gas and NGLs prices by reducing the risk of price volatility and the effect such volatility could have on the Company’s operations and its ability to finance its capital budget and operations. The Company’s decision on the quantity and price at which it chooses to hedge its production is based on its view of existing and forecasted oil, natural gas and NGLs production volumes, planned drilling projects and current and future market conditions. The Company currently utilizes swaps to manage fluctuations in cash flows resulting from changes in commodity prices. These derivative contracts are placed with major financial institutions that the Company believes are minimal credit risks. The oil, NGLs and gas reference prices, upon which the commodity derivative contracts are based, reflect various market indices that management believes have a high degree of historical correlation with actual prices received by the Company for its oil, NGLs and natural gas production.

Inherent in the Company’s portfolio of commodity derivative contracts are certain business risks, including market risk and credit risk. Market risk is the risk that the price of the commodity will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not require collateral from its counterparties but does attempt to minimize its credit risk associated with derivative instruments by entering into derivative instruments only with counterparties that are large financial institutions, which management believes present minimal credit risk. In addition, to mitigate its risk of loss due to default, the Company has entered into agreements with its counterparties on its derivative instruments that allow the Company to offset its asset position with its liability position in the event of default by the counterparty. Due to the netting arrangements, had the Company’s counterparties failed to perform under existing commodity derivative contracts, the maximum loss at March 31, 2015 would have been approximately $95.5 million.

Commodity Derivative Contracts

As of March 31, 2015, the Company had the following open commodity derivative contract positions:

	Hedged Volume	Weighted-Average Fixed Price
Oil (Bbls):
WTI Swaps — 2015	2,196,000	$	88.04
Natural Gas (MMBtu):
Swaps — 2015 (1)	13,750,000	$	4.13

(1) Includes 1,500,000 MMBtus in natural gas swaps that priced during the period, but had not cash settled as of March 31, 2015.

Balance Sheet Presentation

The following table summarizes the gross fair values of derivative instruments by the appropriate balance sheet classification, even when the derivative instruments are subject to netting arrangements and qualify for net presentation in the Company’s unaudited condensed consolidated balance sheets at March 31, 2015 and December 31, 2014, respectively (in thousands):

Type	Balance Sheet Location (1)	March 31, 2015		December 31, 2014
Oil Swaps	Derivative financial instruments — Current Assets	$	79,344	$	106,450
Gas Swaps	Derivative financial instruments — Current Assets	16,129		20,259
Total derivative fair value at period end		$	95,473	$	126,709

(1) The fair values of commodity derivative instruments reported in the Company’s consolidated balance sheets are subject to netting arrangements and qualify for net presentation. The following table summarizes the location and fair value amounts of all derivative instruments in the consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheets at March 31, 2015 and December 31, 2014, respectively (in thousands):

		March 31, 2015
Not Designated as ASC 815 Hedges:	Balance Sheet Classification	Gross Recognized Assets/ Liabilities		Gross Amounts Offset		Net Recognized Fair Value Assets/ Liabilities
Derivative assets:
Commodity contracts	Derivative financial instruments - current	$	95,473	$	—	$	95,473
Commodity contracts	Derivative financial instruments - noncurrent	—		—		—
		$	95,473	$	—	$	95,473
Derivative liabilities:
Commodity contracts	Derivative financial instruments - current	$	—	$	—	$	—
Commodity contracts	Derivative financial instruments - noncurrent	—		—		—
		$	—	$	—	$	—

		December 31, 2014
Not Designated as ASC 815 Hedges:	Balance Sheet Classification	Gross Recognized Assets/ Liabilities		Gross Amounts Offset		Net Recognized Fair Value Assets/ Liabilities
Derivative assets:
Commodity contracts	Derivative financial instruments - current	$	126,709	$	—	$	126,709
Commodity contracts	Derivative financial instruments - noncurrent	—		—		—
		$	126,709	$	—	$	126,709
Derivative liabilities:
Commodity contracts	Derivative financial instruments - current	$	—	$	—	$	—
Commodity contracts	Derivative financial instruments - noncurrent	—		—		—
		$	—	$	—	$	—

Gains (losses) on Commodity Derivative Contracts

The Company does not designate its commodity derivative contracts as hedging instruments for financial reporting purposes. Accordingly, commodity derivative contracts are marked-to-market each quarter with the change in fair value during the periodic reporting period recognized currently as a gain or loss in “Gains (losses) on commodity derivative contracts - net” within revenues in the unaudited condensed consolidated statements of operations.

The following table presents “Gains (losses) on commodity derivative contracts — net” for the periods presented:

	For the Three Months Ended March 31,
	2015			2014
	(in thousands)
Net cash received (paid) for commodity derivative contracts	$	52,608		$	(14,810	)
Unrealized net losses	(31,236		)	(7,863		)
Gains (losses) on commodity derivative contracts - net	$	21,372		$	(22,673	)

Cash settlements, as presented in the table above, represent realized gains or losses related to the Company’s derivative instruments. In addition to cash settlements, the Company also recognizes fair value changes on its derivative instruments in each reporting period. The changes in fair value result from new positions and settlements that may occur during each reporting period, as well as the relationships between contract prices and the associated forward curves.