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Derivative Activities
 9 Months Ended
Sep. 30, 2013
Derivative Activities

(11) DERIVATIVE ACTIVITIES

We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We do not utilize complex derivatives as we typically utilize commodity swaps or collars to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. In 2011, we sold NGLs derivative swap contracts (“sold swaps”) for the natural gasoline (or C5) component of natural gas liquids and in 2012, we entered into purchased derivative swaps (“re-purchased swaps”) for C5 volumes. These re-purchased swaps were, in some cases, with the same counterparties as our sold swaps. We entered into these re-purchased swaps to lock in certain natural gasoline derivative gains. In second quarter 2012, we entered into NGLs derivative swap contracts for the propane (or C3) component of NGLs and in third quarter 2013, we also entered into NGLs derivative swap contracts for the normal butane (or C4) component of NGLs. The fair value of our derivative contracts, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally the New York Mercantile Exchange (“NYMEX”), approximated a net unrealized pre-tax gain of $66.0 million at September 30, 2013. These contracts expire monthly through December 2015.

The following table sets forth our derivative volumes by year as of September 30, 2013:

Period

 

Contract Type

 

Volume Hedged

 

Weighted
Average Hedge Price

Natural Gas

 

 

 

 

 

 

2013

 

Collars

 

280,000 Mmbtu/day

 

$ 4.59–$ 5.05

2014

 

Collars

 

447,500 Mmbtu/day

 

$ 3.84–$ 4.48

2015

 

Collars

 

145,000 Mmbtu/day

 

$ 4.07–$ 4.56

2013

 

Swaps

 

293,370 Mmbtu/day

 

$

  3.82

2014

 

Swaps

 

30,000 Mmbtu/day

 

$

  4.17

2015

 

Swaps

 

7,500 Mmbtu/day

 

$

  4.16

 

 

 

 

 

 

 

Crude Oil

 

 

 

 

 

 

2013

 

Collars

 

3,000 bbls/day

 

$ 90.60–$ 100.00

2014

 

Collars

 

2,000 bbls/day

 

$ 85.55–$ 100.00

2013

 

Swaps

 

6,825 bbls/day

 

$

  96.79

2014

 

Swaps

 

7,000 bbls/day

 

$

  94.14

2015

 

Swaps

 

2,000 bbls day

 

$

  90.20

 

 

 

 

 

 

 

NGLs (Natural Gasoline)

 

 

 

 

 

 

2013

 

Sold Swaps

 

8,000 bbls/day

 

$

  89.64

2013

 

Re-purchased Swaps

 

1,500 bbls/day

 

$

  76.30

 

 

 

 

 

 

 

NGLs (Propane)

 

 

 

 

 

 

2013

 

Swaps

 

11,000 bbls/day

 

$

  37.87

2014

 

Swaps

 

7,000 bbls/day

 

$

  40.38

 

 

 

 

 

 

 

NGLs (Normal butane)

 

 

 

 

 

 

2013

 

Swaps

 

2,000 bbls/day

 

$

  55.44

2014

 

Swaps

 

2,000 bbls/day

 

$

  54.60

Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. Fair value is determined based on the difference between the fixed contract price and the underlying market price at the determination date. Through February 28, 2013, changes in the fair value of our derivatives that qualified for hedge accounting were recorded as a component of AOCI in the stockholders’ equity section of the accompanying consolidated balance sheets, which is later transferred to natural gas, NGLs and oil sales when the underlying physical transaction occurs and the hedging contract is settled. As of September 30, 2013, an unrealized pre-tax derivative gain of $32.3 million ($19.7 million after tax) was recorded in AOCI. See additional discussion below regarding the discontinuance of hedge accounting. If the derivative does not qualify as a hedge or is not designated as a hedge, changes in fair value of these non-hedge derivatives are recognized in earnings in derivative fair value income or loss.

For those derivative instruments that qualified or were designated for hedge accounting, settled transaction gains and losses are determined monthly, and are included as increases or decreases to natural gas, NGLs and oil sales in the period the hedged production is sold. Through February 28, 2013, we had elected to designate our commodity derivative instruments that qualified for hedge accounting as cash flow hedges. Natural gas, NGLs and oil sales include $27.4 million of gains in third quarter 2013 compared to gains of $61.5 million in the same period of 2012 related to settled hedging transactions. Natural gas, NGLs and oil sales include $94.4 million of gains in the first nine months 2013 compared to gains of $197.7 million in the same period of 2012. Any ineffectiveness associated with these hedge derivatives is reflected in derivative fair value income or loss in the accompanying statements of operations. The ineffective portion is generally calculated as the difference between the changes in fair value of the derivative and the estimated change in future cash flows from the item hedged. Derivative fair value (loss) income for the three months ended September 30, 2013 includes ineffective losses (unrealized and realized) of $39,000 compared to a loss of $3.7 million in the three months ended September 30, 2012. Derivative fair value (loss) income for the nine months ended September 30, 2013 includes ineffective losses (unrealized and realized) of $2.9 million compared to a loss of $1.6 million in the same period of 2012. During the nine months ended September 30, 2013, we recognized a pre-tax gain of $3.9 million in derivative fair value (loss) income as a result of the discontinuance of hedge accounting where we determined the transaction was probable not to occur primarily due to the sale of our Delaware and Permian Basin properties in New Mexico and West Texas.

Discontinuance of Hedge Accounting

Effective March 1, 2013, we elected to de-designate all commodity contracts that were previously designated as cash flow hedges and elected to discontinue hedge accounting prospectively. AOCI included $103.6 million ($63.2 million after tax) of unrealized net gains, representing the marked-to-market value of the effective portion of our cash flow hedges as of February 28, 2013. As a result of discontinuing hedge accounting, the marked-to-market values included in AOCI as of the de-designation date were frozen and will be reclassified into earnings in natural gas, NGLs and oil sales in future periods as the underlying hedged transactions occur. As of September 30, 2013, we expect to reclassify into earnings $22.1 million of unrealized net gains in the remaining months of 2013 and $10.2 million of unrealized net gains in 2014 from AOCI.

With the election to de-designate hedging instruments, all of our derivative instruments continue to be recorded at fair value with unrealized gains and losses recognized immediately in earnings rather than in AOCI. These marked-to-market adjustments will produce a degree of earnings volatility that can be significant from period to period, but such adjustments will have no cash flow impact relative to changes in market prices. The impact to cash flow occurs upon settlement of the underlying contract.

Derivative Fair Value (Loss) Income

The following table presents information about the components of derivative fair value (loss) income for the three months and the nine months ended September 30, 2013 and 2012 (in thousands):

 

 

Three Months Ended
September 30,

 

 

Nine Months Ended
September 30,

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivatives that did not qualify or were not designated for hedge accounting (a)

$

(34,219

)

 

$

(53,646

)

 

$

  28,350

 

 

$

  30,075

 

Realized gain (loss) on settlement–natural gas (a) (b)

 

  5,815

 

 

 

—

 

 

 

(17,913

) 

 

 

—

 

Realized (loss) gain on settlement–oil (a) (b)

 

(8,005

)

 

 

  1,955

 

 

 

(8,218

)

 

 

(1,899

)

Realized (loss) gain on settlement–NGLs (a) (b)

 

(3,907

)

 

 

  14,682

 

 

 

(1,759

)

 

 

  20,442

 

Hedge ineffectiveness

 

–realized

 

(854

) 

 

 

  988

 

 

 

(445

)

 

 

  3,451

 

 

 

–unrealized

 

  815

 

 

 

(4,707

)

 

 

(2,485

)

 

 

(5,061

)

Derivative fair value (loss) income

$

(40,355

)

 

$

(40,728

)

 

$

(2,470

)

 

$

  47,008

 

(a) Derivatives that did not qualify or were not designated for hedge accounting. Change in fair value of derivatives line also includes gains of $3.1 million in third quarter 2013 and gains of $25.5 million in the first nine months 2013 related to discontinuance of hedge accounting.

(b) These amounts represent the realized gains and losses on settled derivatives that did not qualify or were not designated for hedge accounting, which before settlement are included in the category in this same table referred to as change in fair value of derivatives that did not qualify or were not designated for hedge accounting.

Derivative Assets and Liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of September 30, 2013 and December 31, 2012 is summarized below. The assets and liabilities are netted where derivatives with both gain and loss positions are held by a single counterparty and we have master netting arrangements.

The tables below provide additional information relating to our master netting arrangements with our derivative counterparties (in thousands):

 

 

 

 

September 30, 2013

 

 

 

 

Gross Amounts of
Recognized Assets

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
Assets Presented in the
Balance Sheet

 

 

 

 

 

 

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

Natural gas

 

–swaps

$

  10,965

  

  

$

(2,046

)

  

$

  8,919

 

 

 

–collars

 

  71,699

 

 

 

(1,720

)

 

 

  69,979

 

Crude oil

 

–swaps

 

  2,962

 

 

 

(7,766

)

 

 

(4,804

)

 

 

–collars

 

  137

 

 

 

(1,803

)

 

 

(1,666

)

NGLs

 

–C5 swaps

 

  3,374

 

 

 

(1,461

)

 

 

  1,913

 

 

 

–C3 swaps

 

  7

 

 

 

(552

)

 

 

(545

)

 

 

–C4 swaps

 

  406

 

 

 

(135

)

 

 

  271

 

 

 

 

$

  89,550

 

 

$

(15,483

)

 

$

  74,067

 

 

 

 

 

 

September 30, 2013

 

 

 

 

Gross Amounts of
Recognized (Liabilities)

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
(Liabilities) Presented in the
Balance Sheet

 

 

 

 

 

 

 

 

 

 

Derivative (liabilities):

 

 

 

 

 

 

 

 

Natural gas

 

–swaps

$

(1,219

)

 

$

  2,046

 

 

$

  827

 

 

 

–collars

 

(1,720

)

 

 

  1,720

 

 

 

—

 

Crude oil

 

–swaps

 

(7,766

)

 

 

  7,766

 

 

 

—

 

 

 

–collars

 

(1,803

)

 

 

  1,803

 

 

 

—

 

NGLs

 

–C5 swaps

 

(9

)

 

 

  1,461

 

 

 

  1,452

 

 

 

–C3 swaps

 

(10,469

)

 

 

  552

 

 

 

(9,917

)

 

 

–C4 swaps

 

(571

)

 

 

  135

 

 

 

(436

)

 

 

 

$

(23,557

)

 

$

  15,483

 

 

$

(8,074

)

 

 

 

 

 

 

December 31, 2012

 

 

 

 

Gross Amounts of
Recognized Assets

 

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
Assets Presented in the
Balance Sheet

 

 

 

 

 

 

 

 

 

 

Derivative assets:

 

 

 

 

 

 

 

 

Natural gas

 

–swaps

$

  10,746

  

 

$

(3,242

)

 

$

  7,504

  

 

 

–collars

 

  128,410

 

 

 

(6,155

)

 

 

  122,255

 

 

 

–basis swaps

 

  993

 

 

 

—

 

 

 

  993

 

Crude oil

 

–swaps

 

  9,650

 

 

 

—

 

 

 

  9,650

 

 

 

–collars

 

  2,222

 

 

 

—

 

 

 

  2,222

 

NGLs

 

–C5  swaps

 

  13,055

 

 

 

(2,412

)

 

 

  10,643

 

 

 

 

$

  165,076

 

 

$

(11,809

)

 

$

  153,267

 

 

 

 

 

December 31, 2012

 

 

 

 

Gross Amounts of
Recognized (Liabilities)

 

Gross Amounts
Offset in the
Balance Sheet

 

 

Net Amounts of
(Liabilities) Presented in the
Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative (liabilities):

 

 

 

 

 

 

 

 

 

 

 

Natural gas

 

–swaps

$

(3,242

)

 

$

(221

)

 

$

(3,463

)

 

 

–collars

 

(9,618

)

 

 

  9,618

 

 

 

—

 

NGLs

 

–C5 swaps

 

(137

)

 

 

  2,412

 

 

 

  2,275

 

 

 

–C3 swaps

 

(6,746

)

 

 

—

 

 

 

(6,746

)

 

 

 

$

(19,743

)

 

$

  11,809

 

 

$

(7,934

)

 

The table below provides data about the fair value of our derivative contracts. Derivative assets and liabilities shown below are presented as gross assets and liabilities, without regard to master netting arrangements, which are considered in the presentation of derivative assets and liabilities in the accompanying consolidated balance sheets (in thousands):

 

 

September 30, 2013

 

 

 

 

December 31, 2012

 

 

Assets

  

  

  

(Liabilities)

 

 

 

 

 

 

Assets

  

  

  

(Liabilities)

 

 

 

 

 

 

Carrying
Value

 

 

Carrying
Value

 

 

Net
Carrying
Value

 

 

Carrying
Value

 

 

Carrying
Value

 

 

Net
Carrying
Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives that qualified for cash flow hedge accounting (before discontinuance of hedge accounting):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swaps (a)

$

  7,091

 

  

$

(3,960

)

 

$

  3,131

 

 

$

  22,236

 

  

$

(3,242

)

 

$

  18,994

 

Collars (a)

 

  38,685

 

  

 

(10,356

)

 

 

  28,329

 

 

 

  129,878

 

  

 

(9,721

)

 

 

  120,157

 

 

$

  45,776

 

  

$

(14,316

)

 

$

  31,460

 

 

$

  152,114

 

  

$

(12,963

)

 

$

  139,151

 

Derivatives that did not qualify or were not designated for hedge accounting:

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

Sold swaps (a)

$

  16,159

 

  

$

(23,072

)

 

$

(6,913

)

 

$

  7,316

 

  

$

(8,904

)

 

$

(1,588

)

Re-purchased swaps (a)

 

  1,462

 

  

 

—

 

 

 

  1,462

 

 

 

  5,920

 

  

 

—

 

 

 

  5,920

 

Collars (a)

 

  42,943

 

  

 

(2,959

)

 

 

  39,984

 

 

 

  857

 

  

 

—

 

 

 

  857

 

Basis swaps (a)

 

—

 

  

 

—

 

 

 

—

 

 

 

  993

 

  

 

—

 

 

 

  993

 

 

$

  60,564

 

  

$

(26,031

)

 

$

  34,533

 

 

$

  15,086

 

  

$

(8,904

)

 

$

  6,182

  

(a) Included in unrealized derivatives in the accompanying consolidated balance sheets. See additional discussion above regarding the discontinuance of hedge accounting.

The effects of our cash flow hedges (or those derivatives that previously qualified for hedge accounting) on accumulated other comprehensive income in the accompanying consolidated balance sheets is summarized below (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

Change in Hedge
Derivative Fair Value

 

 

Realized Gain (Loss)
Reclassified from OCI
into Revenue (a)

 

 

Change in Hedge
Derivative Fair Value

 

 

Realized Gain (Loss)
Reclassified from OCI
into Revenue (a)

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swaps

$

—

 

  

$

(33,311

)

 

$

  2,765

 

 

$

  18,204

 

  

$

  125

 

 

$

  22,525

 

 

$

  14,687

 

 

$

  69,851

 

Put options

 

—

 

  

 

(994

)

 

 

—

 

 

 

(682

)

  

 

—

 

 

 

(1,908

)

 

 

—

 

 

 

(998

)

Collars

 

—

 

  

 

(51,344

)

 

 

  25,357

 

 

 

  43,945

 

 

 

(7,015

)

 

 

  32,704

 

 

 

  83,630

 

 

 

  128,823

 

Income taxes

 

—

 

  

 

  33,403

 

 

 

(10,967

)

 

 

(23,972

)

  

 

  2,687

 

 

 

(21,780

)

 

 

(38,343

)

 

 

(76,805

)

 

$

—

 

  

$

(52,246

)

 

$

  17,155

 

 

$

  37,495

 

 

$

(4,203

)

 

$

  31,541

 

 

$

  59,974

 

 

$

  120,871

 

(a) For realized gains upon derivative contract settlement, the reduction in AOCI is offset by an increase in revenues, NGLs and oil sales. For realized losses upon derivative contract settlement, the increase in AOCI is offset by a decrease in revenues. See additional discussion above regarding the discontinuance of hedge accounting.

 

 

The effects of our non-hedge derivatives (or those derivatives that do not qualify for hedge accounting) and the ineffective portion of our hedge derivatives on our consolidated statements of operations is summarized below (in thousands):

 

 

 

Three Months Ended September 30,

 

 

Gain (Loss) Recognized in
Income (Non‑hedge Derivatives)

 

 

Gain (Loss) Recognized in
Income (Ineffective Portion)

 

 

Derivative Fair Value
Income (Loss)

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swaps

$

(48,277

) 

 

$

(45,998

)

 

$

(39

)

 

$

(1,556

)

 

$

(48,316

)

 

$

(47,554

)

Re-purchased swaps

 

  1,595

 

 

 

  12,822

 

 

 

—

 

 

 

—

 

 

 

  1,595

 

 

 

  12,822

 

Collars

 

  6,366

 

 

 

(1,714

)

 

 

—

 

 

 

(2,163

)

 

 

  6,366

 

 

 

(3,877

)

Call options

 

—

 

 

 

(2,119

)

 

 

—

 

 

 

—

 

 

 

—

 

 

 

(2,119

)

Total

$

(40,316

)

 

$

(37,009

)

 

$

(39

)

 

$

(3,719

)

 

$

(40,355

)

 

$

(40,728

)

 

 

Nine Months Ended September 30,

 

 

Gain (Loss) Recognized in
Income (Non‑hedge Derivatives)

 

 

Gain (Loss) Recognized in
Income (Ineffective Portion)

 

 

Derivative Fair Value
Income (Loss)

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Swaps

$

(26,350

)

 

$

  30,330

 

 

$

(2,034

)

 

$

(890

)

 

$

(28,384

)

 

$

  29,440

 

Re-purchased swaps

 

  1,117

 

 

 

  4,078

 

 

 

—

 

 

 

—

 

 

 

  1,117

 

 

 

  4,078

 

Collars

 

  25,783

 

 

 

  3,381

 

 

 

(896

)

 

 

(720

) 

 

 

  24,887

 

 

 

  2,661

 

Call options

 

—

 

 

 

  10,829

 

 

 

—

 

 

 

—

 

 

 

—

 

 

 

  10,829

 

Basis swaps

 

(90

)

 

 

—

 

 

 

 

 

 

 

—

 

 

 

(90

)

 

 

—

 

Total

$

  460

 

 

$

  48,618

 

 

$

(2,930

)

 

$

(1,610

)

 

$

(2,470

)

 

$

  47,008