Derivative Financial Instruments

9 Months Ended

Sep. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

DERIVATIVE FINANCIAL INSTRUMENTS

Commodity Derivative Instruments and Concentration of Risk

Objective and Strategy

The Company utilizes basis swap contracts, three-way collars and put spread options to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects.

Oil Production Derivative Activities

All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, NYMEX WTI oil prices. The Company uses put spread options to manage oil price volatility and basis swap contracts to reduce basis risk between NYMEX prices and the actual index prices at which the oil is sold.

The following table sets forth the volumes associated with the Company's outstanding oil derivative contracts expiring during the periods indicated and the weighted average oil prices for those contracts: 

Crude Options	Three Months Ending December 31, 2016			Year Ending December 31, 2017			Year Ending December 31, 2018
Purchased:
Puts (1)
Notional (MBbl)	2,160			7,248			900
Weighted average strike price	$	45.03		$	49.28		$	52.50
Sold:
Puts (1)
Notional (MBbl)	(2,160		)	(7,248		)	(900		)
Weighted average strike price	$	32.78		$	37.62		$	40.00
Basis swap contracts: (2)
Midland-Cushing index swap volume (MBbl)	758			4,290			—
Price differential ($/Bbl)	$	(0.87	)	$	(1.03	)	$	—

(1)	Excludes 9,114 notional MBbls with a fair value of $73.8 million related to amounts recognized under master netting agreements with derivative counterparties.
(2)	Represents swaps that fix the basis differentials between the index prices at which the Company sells its oil produced in the Permian Basin and the Cushing WTI price.

Natural Gas Production Derivative Activities

All material physical sales contracts governing the Company's natural gas production are tied directly or indirectly to NYMEX Henry Hub natural gas prices or regional index prices where the natural gas is sold. The Company uses three-way collars to manage natural gas price volatility.

The following table sets forth the volumes associated with the Company's outstanding natural gas derivative contracts expiring during the periods indicated and the weighted average natural gas prices for those contracts:

Natural Gas Three-Way Collars	Year Ending December 31, 2017
Purchased:
Puts
Notional (MMbtu)	5,700
Weighted average strike price	$	2.75
Sold:
Puts
Notional (MMbtu)	(5,700		)
Weighted average strike price	$	2.36
Calls
Notional (MMbtu)	(5,700		)
Weighted Average Strike Price	$	4.02

Effect of Derivative Instruments on the Condensed Consolidated Financial Statements

All of the Company’s derivatives are accounted for as non-hedge derivatives and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company recognized gains on derivatives of $1.4 million and $34.3 million for the three months ended September 30, 2016 and 2015, respectively. The Company recognized loss on derivatives of $23.8 million and gain on derivatives of $23.7 million for the nine months ended September 30, 2016 and 2015, respectively. The gains and losses are included in the condensed consolidated statements of operations line item, "Gain (loss) on derivatives."The fair value of the derivative instruments is discussed in Note 14—Disclosures about Fair Value of Financial Instruments.

The Company classifies the fair value amounts of derivative assets and liabilities as gross current or noncurrent derivative assets or gross current or noncurrent derivative liabilities, whichever the case may be, excluding those amounts netted under master netting agreements. The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts. During the three and nine months ended September 30, 2016 and 2015, the Company did not receive or post any margins in connection with collateralizing its derivative positions.

The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with the brokers as of the reporting dates indicated (in thousands):

	Gross Amount			Netting Adjustments			Net Exposure
September 30, 2016
Derivative assets with right of offset or    master netting agreements	$	127,322		$	(73,768	)	$	53,554
Derivative liabilities with right of offset or    master netting agreements	(107,355		)	73,768			(33,587		)
December 31, 2015
Derivative assets with right of offset or    master netting agreements	407,052			(297,951		)	109,101
Derivative liabilities with right of offset or    master netting agreements	(347,611		)	297,951			(49,660		)

Concentration of Credit Risk

The financial integrity of the Company’s exchange-traded contracts is assured by NYMEX through financial safeguards and transaction guarantees, and is therefore subject to nominal credit risk. Over-the-counter traded options expose the Company to counterparty credit risk. These over-the-counter options are entered into with a large multinational financial institution with an investment grade credit rating or through brokers that require all the transaction parties to collateralize their open option positions. The gross and net credit exposure from our commodity derivative contracts as of September 30, 2016 and December 31, 2015 is summarized in the preceding table.

The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines and assesses the impact on fair values of its counterparties’ creditworthiness. The Company typically enters into International Swap Dealers Association Master Agreements ("ISDA Agreements") with its derivative counterparties. The terms of the ISDA Agreements provide the Company and its counterparties and brokers with rights of net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The Company routinely exercises its contractual right to offset realized gains against realized losses when settling with derivative counterparties. The Company did not incur any losses due to counterparty bankruptcy filings during the three and nine months ended September 30, 2016 or the year ended December 31, 2015.

Credit Risk Related Contingent Features in Derivatives

Certain commodity derivative instruments contain provisions that require the Company to either post additional collateral or immediately settle any outstanding liability balances upon the occurrence of a specified credit risk related event. These events, which are defined by the existing commodity derivative contracts, are primarily downgrades in the credit ratings of the Company and its affiliates. None of the Company’s commodity derivative instruments were in a net liability position with respect to any individual counterparty at September 30, 2016 or December 31, 2015.