Derivative Activities

3 Months Ended

Mar. 31, 2014

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. 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 loss of $53.4 million at March 31, 2014. These contracts expire monthly through December 2016. The following table sets forth our derivative volumes by year as of March 31, 2014:

Period	Contract Type	Volume Hedged	Weighted Average Hedge Price
Natural Gas
2014	Collars	447,500 Mmbtu/day	$ 3.84–$ 4.48
2015	Collars	145,000 Mmbtu/day	$ 4.07–$ 4.56
2014	Swaps	240,145 Mmbtu/day	$ 4.18
2015	Swaps	234,966 Mmbtu/day	$ 4.19
2016	Swaps	60,000 Mmbtu/day	$ 4.18
Crude Oil
2014	Collars	2,000 bbls/day	$ 85.55–$ 100.00
2014	Swaps	9,169 bbls/day	$ 94.40
2015	Swaps	6,000 bbls day	$ 89.48
NGLs (C3-Propane)
2014	Swaps	12,000 bbls/day	$ 1.02/gallon
NGLs (NC4-Normal butane)
2014	Swaps	4,000 bbls/day	$ 1.34/gallon
NGLs (C5-Natural Gasoline)
2014	Swaps	1,000 bbls/day	$ 2.11/gallon

Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. Through February 28, 2013, changes in the fair value of our derivatives that qualified for hedge accounting were recorded as a component of accumulated other comprehensive income (“ 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 March 31, 2014, an unrealized pre-tax derivative gain of $8.1 million ($5.0 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 were determined monthly, and were included as increases or decreases to natural gas, NGLs and oil sales in the period the hedged production was 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 $2.2 million of gains in first quarter 2014 compared to gains of $36.5 million in the same period of 2013 related to settled hedging transactions. 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 for the three months ended March 31, 2014 includes no ineffective gains or losses compared to a loss of $2.9 million in the three months ended March 31, 2013. During the three months ended March 31, 2013, we recognized a pre-tax gain of $2.3 million in derivative fair value loss 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 March 31, 2014, we expect to reclassify into earnings $8.1 million of unrealized net gains in the remaining months of 2014.

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.

Basis Swap Contracts

At March 31, 2014, we had natural gas basis swap contracts that are not designated for hedge accounting, which lock in the differential between NYMEX and certain of our physical pricing options in Appalachia. These contracts are for 254,164 Mmbtu/day and settle monthly through March 2015. The fair value of these contracts was a loss of $3.7 million on March 31, 2014.

Derivative Assets and Liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of March 31, 2014 and December 31, 2013 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):

		March 31, 2014
		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	$	8,347	$	—		$	8,347
	–collars		7,328		(584	)		6,744
	–basis swaps		3,123		(3,123	)		—
Crude oil	–swaps		1,179		(273	)		906
NGLs	–C3 swaps		1,877		(1,877	)		—
	–C4 swaps		3,159		(3,159	)		—
		$	25,013	$	(9,016	)	$	15,997

		March 31, 2014
		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	$	(27,720	)	$	—	$	(27,720	)
	–collars		(26,738	)		584		(26,154	)
	–basis swaps		(6,762	)		3,123		(3,639	)
Crude oil	–swaps		(10,027	)		273		(9,754	)
	–collars		(972	)		—		(972	)
NGLs	–C3 swaps		(9,692	)		1,877		(7,815	)
	–C4 swaps		—			3,159		3,159
	–C5 swaps		(101	)		—		(101	)
		$	(82,012	)	$	9,016	$	(72,996	)

		December 31, 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	$	4,240	$	(1,218	)	$	3,022
	–collars		16,057		(7,671	)		8,386
	–basis swaps		7,686		(7,686	)		—
Crude oil	–swaps		3,567		(1,321	)		2,246
NGLs	–C3 swaps		826		(826	)		—
	–C4 swaps		863		(863	)		—
	–C5 swaps		121		(121	)		—
		$	33,360	$	(19,706	)	$	13,654

		December 31, 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	$	(4,790	)	$	1,218	$	(3,572	)
	–collars		(13,345	)		7,671		(5,674	)
	–basis swaps		(3,756	)		7,686		3,930
Crude oil	–swaps		(4,711	)		1,321		(3,390	)
	–collars		(398	)		—		(398	)
NGLs	–C3 swaps		(18,172	)		826		(17,346	)
	–C4 swaps		(757	)		863		106
	–C5 swaps		—			121		121
		$	(45,929	)	$	19,706	$	(26,223	)

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

	Three Months Ended March 31,
	Change in Hedge Derivative Fair Value					Realized Gain (Loss) Reclassified from OCI into Revenue (a)
	2014		2013			2014			2013
Swaps	$	—	$	125		$	836		$	8,047
Collars		—		(7,015	)		1,328			30,732
Income taxes		—		2,687			(924	)		(15,124	)
	$	—	$	(4,203	)	$	1,240		$	23,655

^(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 March 31,
	Gain (Loss) Recognized in Income (Non-hedge Derivatives)						Gain (Loss) Recognized in Income (Ineffective Portion)					Derivative Fair Value Income (Loss)
	2014			2013			2014		2013			2014			2013
Swaps	$	(44,073	)	$	(43,076	)	$	—	$	(1,995	)	$	(44,073	)	$	(45,071	)
Re-purchased swaps		—			1,185			—		—			—			1,185
Collars		(39,148	)		(55,003	)		—		(896	)		(39,148	)		(55,899	)
Call options		(63,629	)		(90	)		—		—			(63,629	)		(90	)
Total	$	(146,850	)	$	(96,984	)	$	—	$	(2,891	)	$	(146,850	)	$	(99,875	)