Financial Instruments and Risk Management

3 Months Ended

Mar. 31, 2016

Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

Note J – Financial Instruments and Risk Management (Contd.)

Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S.  At March 31, 2016 and 2015 short-term derivative instrument were outstanding in Canada for approximately $11.3 million and $15.5 million, respectively, to manage the currency risks of certain U.S. dollar accounts receivable associated with sale of Canadian crude oil.  The worksheet impact from marking to market these foreign currency derivative contracts improved loss before income taxes by $0.3million and $38 thousand for the three-month periods ended March 31, 2016 and 2015, respectively.

At March 31, 2016 and December 31, 2015, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

	March 31, 2016			December 31, 2015
(Thousands of dollars)	Asset (Liability) Derivatives			Asset (Liability) Derivatives
Type of Derivative Contract	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity	Accounts receivable	$	65,518	Accounts receivable	$	89,358
Foreign exchange	Accounts receivable		276	Accounts payable		29

For the three-month period ended March 31, 2016 and 2015, the gains and losses recognized in the Consolidated Statements of Operations for derivative instruments not designated as hedging instruments are presented in the following table.

			Gain (Loss)
		Three Months Ended
(Thousands of dollars)		March 31,
Type of Derivative Contract	Statement of Operations Location		2016	2015
Commodity	Sales and other operating revenues	$	13,189	–
Foreign exchange	Interest and other income		305	63
		$	13,494	63

Interest Rate Risks

In 2011 the Company entered into a series of derivative contracts known as forward starting interest rate swaps to manage interest rate risk associated with $350 million of 10-year notes that were sold in May 2012.  These interest rate swaps matured in May 2012.  Under hedge accounting rules, the Company deferred the net cost associated with these contracts to match the payment of interest on these notes through 2022.  During each of the three-month periods ended March 31, 2016 and 2015, $0.7 million of the deferred loss on the interest rate swaps was charged to Interest expense in the Consolidated Statement of Operations.  The remaining loss deferred on these matured contracts at March 31, 2016 was $18.1 million, which is recorded, net of income taxes of $6.3 million, in Accumulated Other Comprehensive Loss in the Consolidated Balance Sheet.  The Company expects to charge approximately $2.1 million of this deferred loss to Interest expense in the Consolidated Statement of Operations during the remaining nine months of 2016.

Fair Values – Recurring

The Company carries certain assets and liabilities at fair value in its Consolidated Balance Sheets.  The fair value hierarchy is based on the quality of inputs used to measure fair value, with Level 1 being the highest quality and Level 3 being the lowest quality.  Level 1 inputs are quoted prices in active markets for identical assets or liabilities.  Level 2 inputs are observable inputs other than quoted prices included within Level 1.  Level 3 inputs are unobservable inputs which reflect assumptions about pricing by market participants.

Note J – Financial Instruments and Risk Management (Contd.)

The carrying value of assets and liabilities recorded at fair value on a recurring basis at March 31, 2016 and December 31, 2015 are presented in the following table.

	March 31, 2016					December 31, 2015
(Thousands of dollars)	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets:
Foreign currency exchange         derivative contracts	$	–	276	–	276	–	–	–	–
Commodity derivative         contracts		–	65,518	–	65,518	–	89,358	–	89,358
	$	–	65,794	–	65,794	–	89,358	–	89,358
Liabilities:
Nonqualified employee         savings plans	$	12,628	–	–	12,628	12,971	–	–	12,971
Foreign currency exchange         derivative contracts		–	–	–	–	–	29	–	29
	$	12,628	–	–	12,628	12,971	29	–	13,000

The fair value of WTI crude oil derivative contracts was determined based on active market quotes for WTI crude oil at the balance sheet date.  The fair value of foreign exchange derivative contracts in each year was based on market quotes for similar contracts at the balance sheet dates.  The income effect of changes in the fair value of crude oil derivative contracts is recorded in Sales and Other Operating Revenues in the Consolidated Statements of Operations while the effects of changes in fair value of foreign exchange derivative contracts is recorded in Interest and Other Income.  The nonqualified employee savings plan is an unfunded savings plan through which participants seek a return via phantom investments in equity securities and/or mutual funds.  The fair value of this liability was based on quoted prices for these equity securities and mutual funds.  The income effect of changes in the fair value of the nonqualified employee savings plan is recorded in Selling and General Expenses in the Consolidated Statements of Operations.  The Company offsets certain assets and liabilities related to derivative contracts when the legal right of offset exists.  There were no offsetting positions recorded at March 31, 2016 and December 31, 2015.

Fair Values – Nonrecurring

As a result of significantly lower commodity prices during the first quarter of 2016, the Company recognized approximately $95.1 million in pretax noncash impairment charges related to producing properties.  The fair value information associated with these impaired properties is presented in the following table.

	March 31, 2016
						Total
					Net Book	Pretax
					Value	(Noncash)
	Fair Value				Prior to	Impairment
		Level 1	Level 2	Level 3	Impairment	Loss
(Thousands of dollars)
Assets:
Impaired proved properties
Canada	$	–	–	71,967	167,055	95,088

The fair values were determined by internal discounted cash flow models using estimates of future production, prices from futures exchanges, costs and a discount rate believed to be consistent with those used by principal market participants in the applicable region.