Derivative Commodity Instruments

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Commodity Instruments

DERIVATIVE COMMODITY INSTRUMENTS

We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. Such instruments may include over-the-counter (OTC) swaps and basis swaps typically executed with investment and commercial banks and energy-trading firms. Derivative transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions.

Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net gain position with thirteen of our active counterparties and in a net loss position with the remaining one at September 30, 2014. The largest counterparty net gain positions at September 30, 2014, J.P. Morgan Ventures Energy Corporation, J Aron & Company and Bank of Montreal, constituted approximately $8.5 million, $4.4 million and $3.7 million, respectively, of Energen’s total gain on fair value of derivatives.

Prior to June 30, 2013, Energen used cash flow hedge accounting where applicable for its derivative transactions. The effective portion of the gain or loss on the derivative instrument was recognized in accumulated other comprehensive income as a component of shareholders’ equity and subsequently reclassified as gain (loss) on derivative instruments, net when the forecasted transaction affected earnings. The ineffective portion of a derivative’s change in fair value was required to be recognized immediately in gain (loss) on derivative instruments, net. All other derivative transactions not designated as cash flow hedge accounting are accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net.

Effective March 31, 2013 and June 30, 2013, Energen dedesignated from cash flow hedge accounting 5,078 thousand barrels (MBbl) and 2,353 MBbl, respectively, of various New York Mercantile Exchange (NYMEX) oil contracts associated with the Permian Basin due to lack of correlation. Gains and losses from inception of the hedge to the dedesignation date were frozen in accumulated other comprehensive income until the forecasted transactions actually occurred. Subsequent gains or losses will be accounted for as mark-to-market transactions and recognized immediately through gain (loss) on derivative instruments, net.

Effective June 30, 2013, Energen elected to discontinue the use of cash flow hedge accounting and to dedesignate all remaining derivative commodity instruments that were previously designated as cash flow hedges. As a result of discontinuing hedge accounting, any gains or losses from inception of the hedge to June 30, 2013 were frozen in accumulated other comprehensive income until the forecasted transactions actually occurred. Any subsequent gains or losses will be accounted for as mark-to-market and recognized immediately through gain (loss) on derivative instruments, net. As a result of Energen’s election to discontinue hedge accounting, all derivative transactions entered into subsequent to June 30, 2013 will be accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net.

The following tables detail the offsetting of derivative assets and liabilities as well as the fair values of derivatives on the balance sheets:

(in thousands)	September 30, 2014
								Gross Amounts Not Offset in the Balance Sheets
	Gross Amounts Recognized at Fair Value		Gross Amounts Offset in the Balance Sheets			Net Amount Presented in the Balance Sheets		Financial Instruments		Cash Collateral Received		Net Fair Value Presented in the Balance Sheets
Derivatives not designated as hedging instruments
Assets
Derivative instruments	$	37,039	$	(6,844	)	$	30,195	$	—	$	—	$	30,195
Noncurrent derivative instruments	6,581		(823		)	5,758		—		—		5,758
Total derivative assets	43,620		(7,667		)	35,953		—		—		35,953
Liabilities
Derivative instruments	7,652		(6,844		)	808		—		—		808
Noncurrent derivative instruments	1,463		(823		)	640		—		—		640
Total derivative liabilities	9,115		(7,667		)	1,448		—		—		1,448
Total derivatives	$	34,505	$	—		$	34,505	$	—	$	—	$	34,505

(in thousands)	December 31, 2013
										Gross Amounts Not Offset in the Balance Sheets
	Gross Amounts Recognized at Fair Value			Gross Amounts Offset in the Balance Sheets			Net Amount Presented in the Balance Sheets			Financial Instruments		Cash Collateral Received		Net Fair Value Presented in the Balance Sheets
Derivatives not designated as hedging instruments
Assets
Derivative instruments	$	36,223		$	(18,760	)	$	17,463		$	—	$	—	$	17,463
Noncurrent derivative instruments	7,992			(2,553		)	5,439			—		—		5,439
Total derivative assets	44,215			(21,313		)	22,902			—		—		22,902
Liabilities
Derivative instruments	49,062			(18,760		)	30,302			—		—		30,302
Noncurrent derivative instruments	2,553			(2,553		)	—			—		—		—
Total derivative liabilities	51,615			(21,313		)	30,302			—		—		30,302
Total derivatives	$	(7,400	)	$	—		$	(7,400	)	$	—	$	—	$	(7,400	)

Energen had a net $2.2 million and a net $8.2 million deferred tax liability included in current deferred income taxes on the balance sheets related to derivative items included in accumulated other comprehensive income as of September 30, 2014, and December 31, 2013, respectively.

The following tables detail the effect of derivative commodity instruments in cash flow hedging relationships on the financial statements:

(in thousands)	Location on Statements of Income	Three months ended September 30, 2014		Three months ended September 30, 2013
Net gain recognized in other comprehensive income on derivatives (effective portion), net of tax of $18 and $42	—	$	29	$	69
Gain reclassified from accumulated other comprehensive income into income (effective portion)	Gain (loss) on derivative instruments, net	$	5,992	$	8,455
Loss recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) on derivative instruments, net	$	—	$	(22	)

(in thousands)	Location on Statements of Income	Nine months ended September 30, 2014		Nine months ended September 30, 2013
Net gain (loss) recognized in other comprehensive income on derivatives (effective portion), net of tax of $25 and ($6,669)	—	$	40	$	(10,882	)
Gain reclassified from accumulated other comprehensive income into income (effective portion)	Gain (loss) on derivative instruments, net	$	15,781	$	29,391
Gain recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) on derivative instruments, net	$	—	$	835

The following tables detail the effect of open and closed derivative commodity instruments not designated as hedging instruments on the income statement:

(in thousands)	Location on Statements of Income	Three months ended September 30, 2014		Three months ended September 30, 2013
Gain (loss) recognized in income on derivatives	Gain (loss) on derivative instruments, net	$	141,743	$	(92,313	)

(in thousands)	Location on Statements of Income	Nine months ended September 30, 2014			Nine months ended September 30, 2013
Loss recognized in income on derivatives	Gain (loss) on derivative instruments, net	$	(6,283	)	$	(70,735	)

As of September 30, 2014, $3.6 million, net of tax, of deferred net gains on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified and reported in earnings as revenues during the next twelve-month period. During 2013, we had a discontinuance of hedge accounting when Energen determined it was probable certain forecasted volumes would not occur due to certain properties being sold. This discontinuance of hedge accounting resulted in $1.7 million of after-tax losses being recognized into gain (loss) on derivative instruments, net during the nine months ended September 30, 2014.

As of September 30, 2014, Energen had entered into the following transactions for the remainder of 2014 and subsequent years:

Production Period	Total Hedged Volumes		Average Contract Price	Description
Oil
2014	2,502	MBbl	$92.66 Bbl	NYMEX Swaps
2015	8,280	MBbl	$89.30 Bbl	NYMEX Swaps
Oil Basis Differential
2014	300	MBbl	$(3.30) Bbl	WTS/WTI Basis Swaps*
2014	600	MBbl	$(3.08) Bbl	WTI/WTI Basis Swaps**
2015	2,160	MBbl	$(4.30) Bbl	WTS/WTI Basis Swaps*
2015	6,120	MBbl	$(5.11) Bbl	WTI/WTI Basis Swaps**
Natural Gas Liquids
2014	18.5	MMgal	$0.93 Gal	Liquids Swaps
Natural Gas
2014	2.6	Bcf	$4.57 Mcf	NYMEX Swaps
2014	7.6	Bcf	$4.62 Mcf	Basin Specific Swaps - San Juan
2014	2.6	Bcf	$3.81 Mcf	Basin Specific Swaps - Permian
2015	23.0	Bcf	$4.13 Mcf	Basin Specific Swaps - San Juan
2015	6.0	Bcf	$4.20 Mcf	Basin Specific Swaps - Permian
Natural Gas Basis Differential
2014	1.5	Bcf	$(0.09) Mcf	San Juan Basis Swaps
2014	0.6	Bcf	$(0.17) Mcf	Permian Basis Swaps
*WTS - West Texas Sour/Midland, WTI - West Texas Intermediate/Cushing
**WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing

As of September 30, 2014, the maximum term over which Energen has hedged exposures to the variability of cash flows is through December 31, 2015.