Derivative Activities

9 Months Ended

Sep. 30, 2016

Derivative Instruments And Hedging Activities Disclosure [Abstract]

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 options 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”) for natural gas and crude oil or Mont Belvieu for NGLs, approximated a net asset of $150.9 million at September 30, 2016. These contracts expire monthly through December 2018. The following table sets forth our commodity-based derivative volumes by year as of September 30, 2016, excluding our basis and freight swaps which are discussed separately below:

Period	Contract Type	Volume Hedged	Weighted Average Hedge Price
Natural Gas
2016	Swaps (1)	901,739 Mmbtu/day	$ 3.32
2017	Swaps (1)	478,192 Mmbtu/day	$ 3.14
2018	Swaps	70,000 Mmbtu/day	$ 2.92
2016	Collar (1)	32,609 Mmbtu/day	$ 4.00-$ 4.71
2017	Collar (1)	34,521 Mmbtu/day	$ 4.00-$ 5.06
2016	Purchased Put (1)	218,478 Mmbtu/day	$ 3.54 (2)
2017	Purchased Put (1)	175,890 Mmbtu/day	$ 3.48 (3)
Crude Oil
2016	Swaps (1)	8,640 bbls/day	$ 69.49
2017	Swaps (1)	5,416 bbls/day	$ 57.18
2018	Swaps	500 bbls/day	$ 54.25
2016	Collar (1)	848 bbls/day	$ 80.00-$ 99.70
NGLs (C2-Ethane)
2016	Swaps (1)	5,839 bbls/day	$ 0.46/gallon
2017	Swaps	3,000 bbls/day	$ 0.27/gallon
NGLs (C3-Propane)
2016	Swaps (1)	11,142 bbls/day	$ 0.75/gallon
2017	Swaps	6,966 bbls/day	$ 0.52/gallon
NGLs (iC4-isobutane)
2016	Swaps (1)	1,969 bbls/day	$ 1.21/gallon
NGLs (NC4-Normal Butane)
2016	Swaps (1)	6,071 bbls/day	$ 0.72/gallon
2017	Swaps	1,500 bbls/day	$ 0.65/gallon
NGLs (C5-Natural Gasoline)
2016	Swaps (1)	8,142 bbls/day	$ 1.36/gallon
2017	Swaps	2,000 bbls/day	$ 0.98/gallon

⁽¹⁾ Includes derivative instruments assumed in connection with the Memorial Merger.

⁽²⁾ Weighted average deferred premium is ($0.34).

⁽³⁾ Weighted average deferred premium is ($0.32).

Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. 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 as derivative fair value income or loss.

Basis Swap Contracts

In addition to the swaps above, at September 30, 2016, we had natural gas basis swap contracts which lock in the differential between NYMEX and certain of our physical pricing indices primarily in Appalachia. These contracts settle monthly through December 2017 and include a total volume of 59,385,000 Mmbtu. The fair value of these contracts was a gain of $13.8 million on September 30, 2016.

At September 30, 2016, we also had propane spread swap contracts which lock in the differential between Mont Belvieu and international propane indices. The contracts settle monthly through December 2017 and include a total volume of 525,000 barrels in 2016 and 1,837,500 barrels in 2017. The fair value of these contracts was a gain of $4.1 million on September 30, 2016.

Freight Swap Contracts

In connection with our international propane spread swaps, at September 30, 2016, we had freight swap contracts which lock in the freight rate for a specific trade route on the Baltic Exchange. These contracts settle monthly in fourth quarter 2016 and fourth quarter 2017 and cover 5,000 metric tons per month with a fair value loss of $155,000 on September 30, 2016. These contracts use observable third-party pricing inputs that we consider to be a Level 2 fair value classification.

Derivative Assets and Liabilities

The combined fair value of derivatives included in the accompanying consolidated balance sheets as of September 30, 2016 and December 31, 2015 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, 2016
		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	$	68,069	$	(24,934	)	$	43,135
	–basis swaps		15,066		(1,191	)		13,875
	–collars		15,086		¾			15,086
	–puts		50,792		(145	)		50,647
Crude oil	–swaps		29,696		(1,292	)		28,404
	–collars		2,416		¾			2,416
NGLs	–C2 ethane swaps		6,332		(185	)		6,147
	–C3 propane swaps		8,535		(3,719	)		4,816
	–C3 propane spread swaps		12,585		(8,506	)		4,079
	–NC4 butane swaps		1,282		(371	)		911
	–iC4 isobutane swaps		3,557		¾			3,557
	–C5 natural gasoline swaps		9,722		(2,820	)		6,902
Freight	–swaps		2		(157	)		(155	)
		$	223,140	$	(43,320	)	$	179,820

		September 30, 2016
		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	$	(31,557	)	$	24,934	$	(6,623	)
	–basis swaps		(1,278	)		1,191		(87	)
	–puts		¾			145		145
Crude oil	–swaps		(2,456	)		1,292		(1,164	)
NGLs	–C2 ethane swaps		(185	)		185		¾
	–C3 propane swaps		(3,538	)		3,719		181
	–C3 propane spread swaps		(8,506	)		8,506		¾
	–NC4 butane swaps		(2,407	)		371		(2,036	)
	–C5 natural gasoline swaps		(4,447	)		2,820		(1,627	)
Freight	–swaps		(157	)		157		¾
		$	(54,531	)	$	43,320	$	(11,211	)

		December 31, 2015
		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	$	219,357	$	(10,245	)	$	209,112
	–basis swaps		8,251		(2,765	)		5,486
Crude oil	–swaps		38,699		¾			38,699
NGLs	–C3 propane swaps		15,884		¾			15,884
	–C3 propane spread swaps		2,497		(2,497	)		¾
	–NC4 butane swaps		6,968		¾			6,968
	–C5 natural gasoline swaps		12,694		(81	)		12,613
		$	304,350	$	(15,588	)	$	288,762

		December 31, 2015
		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	$	(10,245	)	$	10,245	$	¾
	–basis swaps		(2,786	)		2,765		(21	)
NGLs	–C3 propane spread swap		(3,633	)		2,497		(1,136	)
	–C5 natural gasoline swaps		(81	)		81		¾
		$	(16,745	)	$	15,588	$	(1,157	)

The effects of our derivatives on our consolidated statements of operations are summarized below (in thousands):

		Three Months Ended September 30,
		Derivative Fair Value Income (Loss)
		2016			2015
Commodity swaps	$	38,662		$	198,245
Re-purchased swaps		¾			1,683
Collars		1,320			5,626
Puts		2,842			¾
Basis swaps		21,853			(3,550	)
Freight swaps		(121	)		¾
Total	$	64,556		$	202,004

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		Nine Months Ended September 30,
		Derivative Fair Value Income (Loss)
		2016			2015
Commodity swaps	$	(40,270	)	$	281,921
Re-purchased swaps		¾			1,683
Collars		1,320			12,391
Puts		2,842			¾
Basis swaps		24,929			(5,943	)
Freight swaps		(155	)		¾
Total	$	(11,334	)	$	290,052