Financial Instruments and Risk Management

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Instruments and Risk Management

ses derivative instruments to manage certain risks related to commodity prices, foreign currency exchange rates and interest rates. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by the Company’s senior management. The Company does not hold any derivatives for speculative purposes and it does not use derivatives with leveraged or complex features. Derivative instruments are traded with creditworthy major financial institutions or over national exchanges such as the New York Mercantile Exchange (NYMEX). The Company has a risk management control system to monitor commodity price risks and any derivatives obtained to manage a portion of such risks. For accounting purposes, the Company has not designated commodity and foreign currency derivative contracts as hedges, and therefore, it recognizes all gains and losses on these derivative contracts in its Consolidated Statements of Operations. Certain interest rate derivative contracts were accounted for as hedges and the gain or loss associated with recording the fair value of these contracts was deferred in Accumulated other comprehensive loss until the anticipated transactions occur.

Commodity Price Risks

At June 30, 2019, the Company had 20,000 barrels per day in WTI crude oil swap financial contracts maturing through the end of 2019 at an average price of $63.64 and 20,000 barrels per day in WTI crude oil swap financial contracts maturing ratably during 2020 at an average price of $60.10. Under these contracts, which matured monthly, the Company pays the average monthly price in effect and receives the fixed contract prices.

At June 30, 2018, the Company had 21,000 barrels per day in WTI crude oil swap financial contracts maturing ratably during 2018.

Foreign Currency Exchange Risks

The Company is subject to foreign currency exchange risk associated with operations in countries outside the U.S. The Company had no foreign currency exchange short-term derivatives outstanding at June 30, 2019 and 2018.

At June 30, 2019 and December 31, 2018, the fair value of derivative instruments not designated as hedging instruments are presented in the following table.

June 30, 2019

December 31, 2018

(Thousands of dollars)

Asset (Liability) Derivatives

Type of Derivative Contract

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Commodity

Accounts receivable

56,193

Accounts receivable

3,837

For the three-month and six-month periods ended June 30, 2019 and June 30, 2018 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)				Gain (Loss)
(Thousands of dollars)		Three Months Ended June 30,				Six months ended June 30,
Type of Derivative Contract	Statement of Operations Location	2019		2018		2019	2018
Commodity	Gain (loss) on crude contracts	$	57,916	(37,624	)	57,916	(67,126	)

Interest Rate Risks

Under hedge accounting rules, the Company deferred the net cost associated with derivative contracts purchased to manage interest rate risk associated with 10 years notes sold in May 2012 to match the payment of interest on these notes through 2022. During each of the six-month periods ended June 30, 2019 and 2018, $1.5 million of the deferred loss on the interest rate swaps was charged to Interest expense in the Consolidated Statement of Operations. The remaining loss (net of tax) deferred on these matured contracts at June 30, 2019 was $6.7 million, which is recorded, net of income taxes of $1.8 million, in Accumulated other comprehensive loss in the Consolidated Balance Sheet. The Company expects to charge approximately $1.5 million of this deferred loss to Interest expense, net in the Consolidated Statement of Operations during the remaining six months of 2019.

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.

The carrying value of assets and liabilities recorded at fair value on a recurring basis at June 30, 2019 and December 31, 2018 are presented in the following table.



	June 30, 2019					December 31, 2018
(Thousands of dollars)	Level 1		Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets:
Commodity derivative contracts	$	—	56,193	—	56,193	—	3,837	—	3,837
	$	—	56,193	—	56,193	—	3,837	—	3,837

Liabilities:
Nonqualified employee savings plans	$	16,061	—	—	16,061	13,845	—	—	13,845
Contingent consideration	—		—	178,409	178,409	—	—	47,730	47,730
	$	16,061	—	178,409	194,470	13,845	—	47,730	61,575

The fair value of WTI crude oil derivative contracts in 2018 and 2019 were based on active market quotes for WTI crude oil. The income effect of changes in the fair value of crude oil derivative contracts is recorded in Gain (loss) on crude contracts in the Consolidated Statements of Operations.

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 contingent consideration, related to two recent acquisitions, is valued using a Monte Carlo simulation model. The income effect of changes in the fair value of the contingent consideration is recorded in Other (income) expense 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 June 30, 2019 and December 31, 2018.

Subsequent to the balance sheet date, the Company has entered into additional derivative instruments to manage certain risks related to commodity prices.