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Derivatives and Risk Management
6 Months Ended
Jun. 30, 2018
Derivatives and Risk Management [Abstract]  
Derivatives and Risk Management

(7)  DERIVATIVES AND RISK MANAGEMENT



The Company is exposed to volatility in market prices and basis differentials for natural gas, oil and NGLs which impacts the predictability of its cash flows related to the sale of those commodities.  These risks are managed by the Company’s use of certain derivative financial instruments. As of June  30, 2018 and December 31, 2017, the Company’s derivative financial instruments consisted of fixed price swaps, two-way costless collars, three-way costless collars, basis swaps, call options and interest rate swaps.  A description of the Company’s derivative financial instruments is provided below:



 

Fixed price swaps

If the Company sells a fixed price swap, the Company receives a fixed price for the contract and pays a floating market price to the counterparty.  If the Company purchases a fixed price swap, the Company receives a floating market price for the contract and pays a fixed price to the counterparty.



 

Two-way costless collars

Arrangements that contain a fixed floor price (purchased put option) and a fixed ceiling price (sold call option) based on an index price which, in aggregate, have no net cost.  At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the floor and ceiling prices, no payments are due from either party, and (3) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price.



 

Three-way costless collars

Arrangements that contain a purchased put option, a sold call option and a sold put option based on an index price which, in aggregate, have no net cost.  At the contract settlement date, (1) if the index price is higher than the sold call strike price, the Company pays the counterparty the difference between the index price and sold call strike price, (2) if the index price is between the purchased put strike price and the sold call strike price, no payments are due from either party, (3) if the index price is between the sold put strike price and the purchased put strike price, the Company will receive the difference between the purchased put strike price and the index price, and (4) if the index price is below the sold put strike price, the Company will receive the difference between the purchased put strike price and the sold put strike price.



 

Basis swaps

Arrangements that guarantee a price differential for natural gas from a specified delivery point. If the Company sells a basis swap, the Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.  If the Company purchases a basis swap, the Company pays the counterparty if the price differential is greater than the stated terms of the contract and receives a payment from the counterparty if the price differential is less than the stated terms of the contract.



 

Call options

The Company purchases and sells call options in exchange for a premium. If the Company purchases a call option, the Company receives from the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party.  If the Company sells a call option, the Company pays the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party.



 

Interest rate swaps

Interest rate swaps are used to fix or float interest rates on existing or anticipated indebtedness.  The purpose of these instruments is to manage the Company’s existing or anticipated exposure to unfavorable interest rate changes.



 



The Company chooses counterparties for its derivative instruments that it believes are creditworthy at the time the transactions are entered into, and the Company closely monitors the credit ratings of these counterparties.  Additionally, the Company performs both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable.  However, there can be no assurance that a counterparty will be able to meet its obligations to the Company.  The Company presents its derivative positions on a gross basis and does not net the asset and liability positions where counterparty master netting arrangements contain provisions for net settlement.



The following tables provide information about the Company’s financial instruments that are sensitive to changes in commodity prices and that are used to protect the Company’s exposure.  None of the financial instruments below are designated for hedge accounting treatment.  The tables present the notional amount, the weighted average contract prices and the fair value by expected maturity dates as of June 30, 2018:





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial Protection on Production



 

 

Weighted Average Price per MMBtu

 

 

 



Volume (Bcf)

 

Swaps

 

Sold Puts

 

Purchased Puts

 

Sold Calls

 

Basis Differential

 

Fair Value at June 30, 2018
($ in millions)

Natural Gas

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold fixed price swaps

156 

 

$

2.96 

 

$

–  

 

$

–  

 

$

–  

 

$

–  

 

$

Two-way costless collars

 

 

–  

 

 

–  

 

 

2.90 

 

 

3.27 

 

 

–  

 

 

–  

Three-way costless collars

143 

 

 

–  

 

 

2.40 

 

 

2.97 

 

 

3.37 

 

 

–  

 

 

13 

Total

305 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

14 

2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold fixed price swaps

147 

 

$

2.93 

 

$

–  

 

$

–  

 

$

–  

 

$

–  

 

$

25 

Two-way costless collars

53 

 

 

–  

 

 

–  

 

 

2.80 

 

 

2.98 

 

 

–  

 

 

Three-way costless collars

133 

 

 

–  

 

 

2.49 

 

 

2.93 

 

 

3.34 

 

 

–  

 

 

12 

Total

333 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

43 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold fixed price swaps

 

$

2.77 

 

$

–  

 

$

–  

 

$

–  

 

$

–  

 

$

–  

Three-way costless collars

47 

 

 

–  

 

 

2.43 

 

 

2.80 

 

 

3.09 

 

 

–  

 

 

Total

49 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sold Basis Swaps

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

44 

 

$

–  

 

$

–  

 

$

–  

 

$

–  

 

$

(0.58)

 

$

(2)

2019

11 

 

 

–  

 

 

–  

 

 

–  

 

 

–  

 

 

1.24 

 

 

(3)

Total

55 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(5)













 

 

 

 

 

 

 



Volume
(MBbls)

 

Weighted Average Strike Price per Bbl

 

Fair Value at
June 30, 2018
($ in millions)

Propane

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

Sold fixed price swaps

1,555 

 

$

34.86 

 

$

(7)

2019

 

 

 

 

 

 

 

Sold fixed price swaps

1,324 

 

$

32.43 

 

$

(2)



 

 

 

 

 

 

 

Ethane

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

Sold fixed price swaps

1,398 

 

$

11.85 

 

$

(2)

2019

 

 

 

 

 

 

 

Sold fixed price swaps

1,734 

 

$

11.59 

 

$

–  











 

 

 

 

 

 

 

Other Derivative Contracts



Volume

(Bcf)

 

Weighted Average Strike Price per MMBtu

 

Fair Value at
June 30, 2018
($ in millions)

Purchased Call Options - Natural Gas

 

 

 

 

 

 

 

2020

68 

 

$

3.63 

 

$

2021

57 

 

 

3.52 

 

 

Total

125 

 

 

 

 

$



 

 

 

 

 

 

 

Sold Call Options - Natural Gas

 

 

 

 

 

 

 

2018

31 

 

$

3.50 

 

$

–  

2019

52 

 

 

3.50 

 

 

(3)

2020

137 

 

 

3.39 

 

 

(10)

2021

114 

 

 

3.33 

 

 

(8)

Total

334 

 

 

 

 

$

(21)



 

 

 

 

 

 

 



Volume

(MBbl)

 

Weighted Average Strike Price per Bbl

 

Fair Value at
June 30, 2018
($ in millions)

Sold Call Options - Oil

 

 

 

 

 

 

 

2018

552 

 

$

65.00 

 

$

(5)

2019

270 

 

 

65.00 

 

 

(2)

Total

822 

 

 

 

 

$

(7)









 

 

 

 

 

 

 

 

 

 



Volume (Bcf)

 

Weighted Average Strike Price per MMBtu

 

Basis Differential

 

Fair Value at
June 30, 2018
($ in millions)

Storage (1)

 

 

 

 

 

 

 

 

 

 

2018

 

 

 

 

 

 

 

 

 

 

Purchased fixed price swaps

 

$

2.76 

 

$

–  

 

$

–  

Sold fixed price swaps

–  

 

 

2.89 

 

 

–  

 

 

–  

Purchased basis swaps

 

 

–  

 

 

(0.88)

 

 

–  

Sold basis swaps

–  

 

 

–  

 

 

(0.63)

 

 

–  

Total

 

 

 

 

 

 

 

$

–  

2019

 

 

 

 

 

 

 

 

 

 

Sold fixed price swaps

 

$

3.03 

 

$

–  

 

$

–  

Sold basis swaps

 

 

–  

 

 

(0.44)

 

 

–  

Total

 

 

 

 

 

 

 

$

–  



(1)

The Company has entered into certain derivatives to protect the value of volumes of natural gas injected into a storage facility that will be withdrawn at a later date.



The Company is a party to interest rate swaps that were entered into to mitigate the Company’s exposure to volatility in interest rates.  The interest rate swaps have a notional amount of $170 million and expire in June 2020.  The Company did not designate the interest rate swaps for hedge accounting treatment.  Changes in the fair value of the interest rate swaps are included in gain (loss) on derivatives on the unaudited condensed consolidated statements of operations.



The balance sheet classification of the assets and liabilities related to derivative financial instruments (none of which are designated for hedge accounting treatment) are summarized below as of June 30, 2018 and December 31, 2017:







 

 

 

 

 

 

 

 

 

Derivative Assets

 

 

 



 

Balance Sheet Classification

 

Fair Value

 



 

 

 

June 30,
2018

 

December 31, 2017

 

Derivatives not designated as hedging instruments:

 

 

(in millions)

 

Sold fixed price swaps - natural gas

 

Derivative assets

 

$

19 

 

$

38 

 

Two-way costless collars - natural gas

 

Derivative assets

 

 

 

 

 

Three-way costless collars - natural gas

 

Derivative assets

 

 

39 

 

 

82 

 

Sold basis swaps - natural gas

 

Derivative assets

 

 

 

 

 

Purchased call options - natural gas

 

Derivative assets

 

 

–  

 

 

 

Sold fixed price swaps - natural gas

 

Other long-term assets

 

 

15 

 

 

18 

 

Two-way costless collars - natural gas

 

Other long-term assets

 

 

 

 

–  

 

Three-way costless collars - natural gas

 

Other long-term assets

 

 

31 

 

 

39 

 

Purchased call options - natural gas

 

Other long-term assets

 

 

 

 

–  

 

Interest rate swaps

 

Other long-term assets

 

 

 

 

–  

 

     Total derivative assets

 

 

 

$

130 

 

$

186 

(1)



 

 

 

Derivative Liabilities

 

 

 



 

Balance Sheet Classification

 

Fair Value

 



 

 

 

June 30,
2018

 

December 31, 2017

 

Derivatives not designated as hedging instruments:

 

 

 

(in millions)

 

Sold fixed price swaps - natural gas

 

Derivative liabilities

 

$

 

$

–  

 

Sold fixed price swaps - propane

 

Derivative liabilities

 

 

 

 

–  

 

Sold fixed price swaps - ethane

 

Derivative liabilities

 

 

 

 

–  

 

Two-way costless collars - natural gas

 

Derivative liabilities

 

 

 

 

 

Three-way costless collars - natural gas

 

Derivative liabilities

 

 

22 

 

 

36 

 

Sold basis swaps - natural gas

 

Derivative liabilities

 

 

10 

 

 

23 

 

Sold call options - natural gas

 

Derivative liabilities

 

 

 

 

 

Sold call options - oil

 

Derivative liabilities

 

 

 

 

–  

 

Interest rate swaps

 

Derivative liabilities

 

 

–  

 

 

 

Sold fixed price swaps - natural gas

 

Other long-term liabilities

 

 

–  

 

 

 

Two-way costless collars - natural gas

 

Other long-term liabilities

 

 

 

 

–  

 

Three-way costless collars - natural gas

 

Other long-term liabilities

 

 

22 

 

 

30 

 

Sold call options - natural gas

 

Other long-term liabilities

 

 

18 

 

 

15 

 

     Total derivative liabilities

 

 

 

$

109 

 

$

110 

 

(1)

Excludes $1 million in premiums paid related to certain natural gas call options recognized as a component of derivative assets within current assets on the condensed consolidated balance sheet at December 31, 2017.  As certain natural gas call options settled, the premium was amortized and recognized as a component of gain (loss) on derivatives on the unaudited condensed consolidated statement of operations.



At June 30, 2018, the net fair value of the Company’s financial instruments related to commodities was a  $20 million asset.  The net fair value of the Company’s interest rate swaps was a  $1 million asset as of June 30, 2018. 



Derivative Contracts Not Designated for Hedge Accounting



As of June 30, 2018, the Company had no positions designated for hedge accounting treatment.  Gains and losses on derivatives that are not designated for hedge accounting treatment, or that do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives on the unaudited condensed consolidated statements of operations.  Accordingly, the gain (loss) on derivatives component of the statement of operations reflects the gains and losses on both settled and unsettled derivatives.  The Company calculates gains and losses on settled derivatives as the summation of gains and losses on positions which have settled within the reporting period.  Only the settled gains and losses are included in the Company’s realized commodity price calculations.



The following tables summarize the before-tax effect of the Company’s derivative instruments not designated for hedge accounting on the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017:





 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unsettled Gain (Loss) on Derivatives Recognized in Earnings



 

 

 

 



 

Consolidated Statement of Operations

 

For the three months ended

 

For the six months ended



 

Classification of Gain (Loss)

 

June 30,

 

June 30,

Derivative Instrument

 

on Derivatives, Unsettled

 

2018

 

2017

 

2018

 

2017



 

 

 

(in millions)

Sold fixed price swaps - natural gas

 

Gain (Loss) on Derivatives

 

$

(26)

 

$

58 

 

$

(29)

 

$

176 

Sold fixed price swaps - propane

 

Gain (Loss) on Derivatives

 

 

(12)

 

 

–  

 

 

(9)

 

 

–  

Sold fixed price swaps - ethane

 

Gain (Loss) on Derivatives

 

 

(2)

 

 

–  

 

 

(2)

 

 

–  

Two-way costless collars - natural gas

 

Gain (Loss) on Derivatives

 

 

(1)

 

 

14 

 

 

 

 

45 

Three-way costless collars - natural gas

 

Gain (Loss) on Derivatives

 

 

(24)

 

 

31 

 

 

(29)

 

 

88 

Sold basis swaps - natural gas

 

Gain (Loss) on Derivatives

 

 

(4)

 

 

60 

 

 

16 

 

 

(43)

Purchased call options - natural gas

 

Gain (Loss) on Derivatives

 

 

(12)

 

 

–  

 

 

 

 

–  

Sold call options - natural gas

 

Gain (Loss) on Derivatives

 

 

31 

 

 

11 

 

 

(3)

 

 

53 

Sold call options - oil

 

Gain (Loss) on Derivatives

 

 

(6)

 

 

–  

 

 

(6)

 

 

–  

Interest rate swaps

 

Gain (Loss) on Derivatives

 

 

–  

 

 

(1)

 

 

 

 

–  

Total gain (loss) on unsettled derivatives

 

$

(56)

 

$

173 

 

$

(54)

 

$

319 



Settled Gain (Loss) on Derivatives Recognized in Earnings (1)



 

 

 

 



 

Consolidated Statement of Operations

 

For the three months ended

 

For the six months ended



 

Classification of Gain (Loss)

 

June 30,

 

June 30,

Derivative Instrument

 

on Derivatives, Settled

 

2018

 

2017

 

2018

 

2017



 

 

 

(in millions)

Sold fixed price swaps - natural gas

 

Gain (Loss) on Derivatives

 

$

13 

 

$

(9)

 

$

13 

 

$

(25)

Sold fixed price swaps - propane

 

Gain (Loss) on Derivatives

 

 

(1)

 

 

–  

 

 

(1)

 

 

–  

Two-way costless collars - natural gas

 

Gain (Loss) on Derivatives

 

 

–  

 

 

–  

 

 

 

 

(3)

Three-way costless collars - natural gas

 

Gain (Loss) on Derivatives

 

 

12 

 

 

(1)

 

 

19 

 

 

(5)

Sold basis swaps - natural gas

 

Gain (Loss) on Derivatives

 

 

(3)

 

 

(29)

 

 

(24)

 

 

(30)

Purchased call options - natural gas

 

Gain (Loss) on Derivatives

 

 

–  

 

 

–  

 

 

(2)

 

(6)

Sold call options - natural gas

 

Gain (Loss) on Derivatives

 

 

–  

 

 

–  

 

 

(1)

 

 

–  

Sold call options - oil

 

Gain (Loss) on Derivatives

 

 

(1)

 

 

–  

 

 

(1)

 

 

–  

Interest rate swaps

 

Gain (Loss) on Derivatives

 

 

–  

 

 

–  

 

 

–  

 

 

–  

Total gain (loss) on settled derivatives

 

$

20 

 

$

(39)

 

$

11 

 

$

(69)



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total gain (loss) on derivatives

 

 

 

$

(36)

 

$

134 

 

$

(43)

 

$

250 



(1)

The Company calculates gain (loss) on derivatives, settled, as the summation of gains and losses on positions that settled within the period.



(2)

Includes $1 million amortization of premiums paid related to certain natural gas call options for the six months ended June 30, 2018, which is included in gain (loss) on derivatives on the unaudited condensed consolidated statements of operations.