Commodity Derivatives

9 Months Ended

Sep. 30, 2014

Commodity Derivatives [Abstract]

Commodity Derivatives

8. Commodity Derivatives

On March 27, 2014, we entered into the following commodity positions to hedge our oil production price risk, effective from April 1, 2014, to September 30, 2014. No positions were outstanding at September 30, 2014.

The following table summarizes the fair value of our open commodity derivatives as of December 31, 2013:

	Liability Derivatives
	Balance Sheet	Fair Value
	Location	December 31, 2013
Derivatives not designated as hedging instruments
Commodity derivatives	Current Liabilities	$	4,000

The following table summarizes the change in fair value of our commodity derivatives:

		Fair Value
	Income Statement Location	Three Months Ended September 30,					Nine Months Ended September 30,
		2014		2013			2014			2013
Derivatives not designated as hedging instruments
Unrealized gain (loss) on commodity derivatives	Other Income (Expense)	$	44,000	$	(50,000	)	$	4,000		$	(50,000	)
Realized loss on commodity derivatives	Other Income (Expense) - Miscellaneous	$	-	$	-		$	(882	)	$	-

Unrealized gains and losses, at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts.  Changes in the fair value of our commodity derivative contracts are recorded in earnings as they occur and included in other income (expense) on our consolidated statements of operations.  We estimate the fair values of collar contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities.  We internally valued the option contracts using industry-standard option pricing models and observable market inputs.  We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets.  Realized gains and losses are also included in other income (expense) on our consolidated statements of operations.

We are exposed to credit losses in the event of non-performance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations.  However, we do not anticipate non-performance by the counterparties over the term of the commodity derivatives positions.

To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.  These inputs can be readily observable, market corroborated or generally unobservable.  We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information.  We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value.  The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement).  The three levels of fair value hierarchy are as follows:

· Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At September 30, 2014, we had no Level 1 measurements.

· Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.  Level 2 includes those financial instruments that are valued using models or other valuation methodologies.  These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures.  Our derivatives, which consist of commodity collars, are valued using commodity market data which is derived by combining raw inputs and quantitative models and processes to generate forward curves.  Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2.  At September 30, 2014, we had no Level 2 measurements.

· Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources.  These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.  At September 30, 2014, we had no Level 3 measurements.