Derivative Financial Instruments

12 Months Ended

Dec. 31, 2014

Derivative Financial Instruments

Derivative Financial Instruments

11.Derivative Financial Instruments

The Company is exposed to risks associated with unfavorable changes in the market price of oil and natural gas as a result of the forecasted sale of its production and uses derivative instruments to hedge or reduce its exposure to certain of these risks. For these derivative instruments, the Company did not elect hedge accounting for accounting purposes and, accordingly, recorded the net change in the mark-to-market valuation of these derivative instruments in the Consolidated Statements of Operations.

All of Sabine’s derivative instruments serve as economic hedges and are recorded at fair value with gains and losses recognized immediately in earnings. 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.

Throughout the year ended December 31, 2014, the Company has executed derivative contracts as market conditions allowed in order to economically hedge anticipated future cash flows from oil and natural gas producing activities. These include both oil and natural gas fixed-price swap agreements covering certain portions of anticipated 2015 production volumes. The Company executed option contracts including purchased and written oil and natural gas call agreements, as well as purchased and written oil and natural gas put agreements, covering certain portions of anticipated 2015 oil and natural gas production. Additionally, Sabine has sold a swaption agreement allowing the counterparty the option to execute a fixed price swap agreement at a contracted price on contracted volumes before an expiration date. Sabine’s sold swaption contract expires at December 31, 2015. No material premiums were recognized as a result of these option agreements. None of the fixed-price swap or option contracts were designated for hedge accounting, with all mark-to-market changes in fair value recognized currently in earnings. See the table below for specific volume, timing, and pricing details regarding Sabine’s outstanding trade positions.

Additionally, prior to the year ended December 31, 2014, the Company purchased natural gas puts, wrote oil and natural gas calls, and wrote oil and natural gas puts for periods from 2015 through 2016, for which a net premium was recognized. In March 2014, Sabine restructured certain sold call contracts for which the Company had previously recognized a premium liability related to 2015 volumes. As a result of this restructuring, the Company released $4.4 million of premium liability into earnings, recognized in “Gain (loss) on derivative instruments” on the Consolidated Statement of Operations for the year ended December 31, 2014. The net unamortized premium included in short-term derivative liabilities is $4.6 million at December 31, 2014. No unamortized premium remained in long-term derivative liabilities at December 31, 2014. See the table below for specific volume, timing, and pricing details regarding Sabine’s derivative positions. 

Throughout the year ended December 31, 2013, the Company executed derivative contracts as market conditions allowed in order to economically hedge our anticipated future cash flows from oil and natural gas producing activities. These include both oil and natural gas fixed-price swap agreements covering certain portions of our anticipated 2013, 2014, and 2015 production volumes. Additionally, the Company executed option contracts including purchased and written oil and natural gas call agreements, as well as purchased and written oil and natural gas put agreements, covering certain portions of our anticipated 2014 oil and natural gas production. No material premiums were recognized as a result of these option agreements. None of the fixed-price swap or option contracts executed during 2013 were designated for hedge accounting, with all mark-to-market changes in fair value recognized currently in earnings. The net unamortized premium included in short term and long term derivative liabilities was $7.2 million and $9.0 million, respectively, at December 31, 2013.

The following swaps and options were outstanding with associated notional volumes and contracted swap, floor, and ceiling prices that represent hedge weighted average prices for the index specified as of December 31, 2014:

Natural Gas
			Weighted Average Prices
Settlement Period	Derivative Instrument	Notional Amount	Swap		Sub Floor		Floor		Ceiling
		(MMbtu)	($/MMbtu)		($/MMbtu)		($/MMbtu)		($/MMbtu)
2015	Collar	5,450,000	$	—	$	—	$	4.23	$	4.63
2015	Swap	38,325,000	$	4.15	$	—	$	—	$	—
2015	Swap with sub floor	37,595,000	$	4.20	$	3.54	$	—	$	—
2016	Sold call	21,960,000	$	—	$	—	$	—	$	5.00

Oil
			Weighted Average Prices
Settlement Period	Derivative Instrument	Notional Amount	Swap		Sub Floor		Floor		Ceiling
		(Bbl)	($/Bbl)
2015	Swap	2,206,350	$	90.02	$	—	$	—	$	—
2015	Swap with sub floor	339,450	$	89.50	$	73.47	$	—	$	—
2016	Swaption	366,000	$	98.00	$	—	$	—	$	—

The following swaps and options were outstanding with associated notional volumes and contracted swap, floor, and ceiling prices that represent hedge weighted average prices for the index specified as of December 31, 2013:

Natural Gas
			Weighted Average Prices
Settlement Period	Derivative Instrument	Notional Amount	Swap		Sub Floor		Floor		Ceiling
		(MMbtu)	($/MMbtu)		($/MMbtu)		($/MMbtu)		($/MMbtu)
2014	Swap	19,722,000	$	4.06	$	—	$	—	$	—
2014	Swap with sub floor	3,128,000	$	3.99	$	3.25	$	—	$	—
2014	Three-way collar	4,554,000	$	—	$	3.50	$	4.50	$	5.25
2014	Three-way collar	3,096,000	$	—	$	3.50	$	4.50	$	4.50
2014	Three-way collar	18,775,000	$	—	$	3.25	$	4.50	$	4.50
2015	Swap	18,250,000	$	4.09	$	—	$	—	$	—
2015	Sold call	21,900,000	$	—	$	—	$	—	$	5.25
2016	Sold call	21,960,000	$	—	$	—	$	—	$	5.00

Oil
			Weighted Average Prices
Settlement Period	Derivative Instrument	Notional Amount	Swap		Sub Floor		Floor		Ceiling
		(Bbl)	($/Bbl)
2014	Swap	1,264,725	$	92.25	$	—	$	—	$	—
2014	Swap with sub floor	122,275	$	89.13	$	70.00	$	—	$	—
2014	Sold call	73,000	$	—	$	—	$	—	$	100.00
2015	Swap	365,000	$	89.50	$	—	$	—	$	—
2015	Sold call	200,750	$	—	$	—	$	—	$	106.36

Effective February 3, 2015, Sabine executed additional oil swap agreements on 366,000 Bbl at $64.25/Bbl of anticipated 2016 production, collar agreements on 366,000 Bbl at ($60.00/Bbl / $68.05/Bbl) of anticipated 2016 production and natural gas swap agreements on 11,712,000 MMbtu at an average price of $3.26/MMbtu of anticipated 2016 production. Additionally, effective February 18, 2015, Sabine executed oil swap agreements on 274,500 Bbl of anticipated Bbl at $62.79 of anticipated 2016 production and 547,500 Bbl at $64.80/Bbl of anticipated 2017 production and natural gas swap agreements on 12,810,000 MMbtu at an average price of $3.27/MMbtu of anticipated 2016 production.

The Company recorded a short-term derivative asset of $160.2 million, and recorded a short-term and a long‑term derivative liability of $4.6 million and $2.3 million, respectively, for the fair value of the derivative instruments as of December 31, 2014. The Company recorded a short term and a long term derivative asset of $7.8 million and $4.3 million, respectively, and recorded a short term and a long term derivative liability of $11.6 million and $11.3 million, respectively, related to the fair value of the derivative instrument’s prices on related volumes as of December 31, 2013.

	For the Year Ended December 31,
	2014		2013		2012
	(in thousands)
Gain on commodity derivative instruments	$	121,669	$	814	$	29,267

Sabine paid $10.8 million, received $46.2 million and received $104.9 million on settlements of derivatives in 2014, 2013 and 2012, respectively.

Sabine’s derivative contracts are executed with counterparties under certain master netting agreements that allow the Company to offset assets due from, and liabilities due to, the counterparties. The table below presents the carrying value of Sabine’s derivative assets and liabilities both before and after the impact of such netting agreements on the Consolidated Balance Sheets as of December 31, 2014 and December 31, 2013:

	Derivative Assets
		December 31,		December 31,
		2014		2013
		(in thousands)
		Fair Value
Current assets	DerivativeInstruments	$	191,765	$	15,859
Current liabilities (1)	DerivativeInstruments		—		2,826
Total current asset fair value		$	191,765		18,685
Other assets	DerivativeInstruments		—		6,488
Long-term liabilities (1)	DerivativeInstruments		—		223
Total long-term asset fair value			—		6,711
Less:  Counterparty set-off			(31,548)		(13,258)
Total derivative asset net fair value		$	160,217	$	12,138

	Derivative Liabilities
		December 31,		December 31,
		2014		2013
		(in thousands)
		Fair Value
Current liabilities	DerivativeInstruments	$	(4,645)	$	(14,451)
Current assets (1)	DerivativeInstruments		(31,548)		(8,052)
Total current liability fair value			(36,193)		(22,503)
Long-term liabilities	DerivativeInstruments		(2,269)		(11,496)
Other assets (1)	DerivativeInstruments		—		(2,156)
Total long-term liability fair value			(2,269)		(13,652)
Less:  Counterparty set-off			31,548		13,258
Total derivative liability net fair value		$	(6,914)	$	(22,897)

(1) Impact of counterparty right of set-off for derivative instruments subject to certain master netting agreements.

At December 31, 2014, and December 31, 2013, none of the Company’s outstanding derivatives contained credit-risk related contingent features that would result in a material adverse impact to Sabine upon any change in the Company’s credit ratings.