Risk Management and Derivative Instruments

6 Months Ended

Jun. 30, 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, NGL and natural gas prices. The Company believes it is prudent to manage the variability in cash flows by entering into derivative financial instruments to economically hedge a portion of its crude oil, NGL and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and collars, to reduce 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, NGL and natural 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 crude oil, NGL 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 June 30, 2015 would have been approximately $35.9 million.

Commodity Derivative Contracts

As of June 30, 2015, the Company had the following open commodity derivative contract positions:

	Hedged	Weighted-Average
	Volume	Fixed Price
Oil (Bbls):
WTI Swaps — 2015	2,208,000	$	71.56
Natural Gas (MMBtu):
Swaps — 2015(1)	9,200,000	$	4.13

(1) Includes 1,550,000 MMBtus in natural gas swaps that priced during the period, but had not cash settled as of June 30, 2015.

Balance Sheet Presentation

The following table summarizes the gross fair values of derivative instruments by the appropriate balance sheet classification; however, the derivative instruments are subject to netting arrangements and qualify for net presentation in the Company’s unaudited condensed consolidated balance sheets at June 30, 2015 and December 31, 2014, respectively (in thousands):

Type	Balance Sheet Location (1)	June 30, 2015			December 31, 2014
Oil Swaps	Derivative financial instruments — Current Assets	$	27,708		$	106,450
Oil Swaps	Derivative financial instruments — Current Liabilities	(2,869		)	—
Gas Swaps	Derivative financial instruments — Current Assets	9,152			20,259
Total derivative fair value at period end		$	33,991		$	126,709

(1) The fair values of commodity derivative instruments reported in the Company’s condensed 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 unaudited condensed consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited condensed consolidated balance sheets at June 30, 2015 and December 31, 2014, respectively (in thousands):

		June 30, 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	$	36,860	$	1,002	$	35,858
Commodity contracts	Derivative financial instruments - noncurrent	—		—		—
		$	36,860	$	1,002	$	35,858
Derivative liabilities:
Commodity contracts	Derivative financial instruments - current	$	2,869	$	1,002	$	1,867
Commodity contracts	Derivative financial instruments - noncurrent	—		—		—
		$	2,869	$	1,002	$	1,867

		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 net cash received (paid) for commodity derivative contracts and unrealized net gains (losses) recorded by the Company related to the change in fair value of the derivative instruments in “Gains (losses) on commodity derivative contracts — net” for the periods presented:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2015			2014			2015			2014
	(in thousands)						(in thousands)
Net cash received (paid) for commodity derivative contracts	$	42,189		$	(17,138	)	$	94,797		$	(31,948	)
Unrealized net gains (losses)	(61,482		)	(14,329		)	(92,718		)	(22,192		)
Gains (losses) on commodity derivative contracts - net	$	(19,293	)	$	(31,467	)	$	2,079		$	(54,140	)