Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2017

Disclosure Text Block

Derivative Instruments and Hedging Activities

7.        Derivative Instruments and Hedging Activities

The Company uses derivative instruments to mitigate volatility in commodity prices. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our hedging positions.

The following tables summarize our hedging positions as of September 30, 2017:

Hedging Positions

	September 30, 2017
						Weighted		Final
		Low		High		Average		Expiration
Oil swaps	Exercise price	$	44.60	$	85.60	$	51.97	December 2020
	Offset exercise price	$	42.00	$	42.00	$	42.00
	Net barrels per month		55,000		216,000		116,462
Natural gas swaps	Exercise price	$	2.76	$	4.57	$	2.98	December 2020
	Net MMbtu per month		700,000		1,890,000		1,169,231
Natural gas liquids swaps	Exercise price	$	18.06	$	72.52	$	29.08	December 2018
	Barrels per month		130,000		145,000		139,333
Natural gas basis swaps	Exercise price	$	(0.50)	$	(0.30)	$	(0.39)	March 2019
	Net MMbtu per month		300,000		800,000		564,706
Oil collars	Puts (floors)	$	45.00	$	50.00	$	48.52	December 2019
	Calls (ceilings)	$	56.60	$	61.00	$	59.64
	Net barrels per month		65,000		73,000		67,500
Natural gas collars	Puts (floors)	$	2.55	$	2.55	$	2.55	December 2019
	Calls (ceilings)	$	3.08	$	3.41	$	3.19
	Net barrels per month		950,000		1,050,000		990,833

The Company recognized net losses on derivative instruments of $32.5 million and net gains of $11.3 million for the three and nine months ended September 30, 2017, respectively. The Company recognized net gains on derivative instruments of $4.0 million and net losses of $18.8 million for the three and nine months ended September 30, 2016, respectively.

The Company routinely enters into oil and natural gas swap contracts as seller, thus resulting in a fixed price. During 2016 and 2017, the Company realized certain mark-to-market gains associated with oil and natural gas hedges the Company had in place for years 2018 and 2019. The gains were effectively realized by purchasing, as opposed to selling, oil and natural gas swap contracts for an equal volume that was associated with the initial hedge transaction. Therefore, as prices fluctuate, the loss (or gain) on any single contract in 2018 and 2019 will be offset by an equal gain (or loss). This essentially leaves the underlying production open to fluctuations in market prices. Based on the original contract terms of these purchased swaps, the gains would be recognized as the hedge contracts mature in 2018 and 2019. See further discussion below. Information related to these purchased oil and natural gas swap contracts is presented in the table above as the “offset exercise price”, and the volumes in the table above are presented “net” of such purchased oil and natural gas swap contracts.

During the three and nine months ended September 30, 2017, the Company unwound its realized 2018 and 2019 hedges resulting in approximately $14.8 million and $42.8 million, respectively, of recognized gains which have been included in Net gain (loss) on commodity derivatives on the Company’s Consolidated Statement of Operations.

Offsetting Assets and Liabilities

As of September 30, 2017, the counterparties to our commodity derivative contracts consisted of seven financial institutions. All of our counterparties or their affiliates are also lenders under the Revolver. We are not generally required to post additional collateral under our derivative agreements.

Our derivative agreements contain set-off provisions that state that in the event of default or early termination, any obligation owed by the defaulting party may be offset against any obligation owed to the defaulting party.

The following table presents information about our commodity derivative contracts that are netted on our Consolidated Balance Sheet as of September 30, 2017 and December 31, 2016:

					Net Amounts
			Gross		of Assets /		Gross Amounts
	Gross Amounts		Amounts		Liabilities		Not
	of Recognized		Offset in the		Presented in		Offset in the
	Assets /		Balance		the Balance		Balance
(in thousands of dollars)	Liabilities		Sheet		Sheet		Sheet		Net Amount
September 30, 2017
Commodity derivative contracts
Assets	$	18,805	$	(9,607)	$	9,198	$	—	$	9,198
Liabilities		(30,658)		9,607		(21,051)		—		(21,051)
December 31, 2016
Commodity derivative contracts
Assets	$	79,649	$	(20,805)	$	58,844	$	—	$	58,844
Liabilities		(36,664)		20,805		(15,859)		—		(15,859)