Commodity Derivatives

We have entered into various types of derivative transactions covering some of our projected natural gas, NGLs, and oil production. These transactions are intended to reduce our exposure to market price volatility by setting the price(s) we will receive for that production. Our decisions on the price(s), type, and quantity of our production hedged is based, in part, on our view of current and future market conditions. As of December 31, 2013, our derivative transactions consisted of the following types of hedges:


•	Swaps. We receive or pay a fixed price for the hedged commodity and pay or receive a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.


•	Collars. A collar contains a fixed floor price (put) and a ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party.

We have documented policies and procedures to monitor and control the use of derivative instruments. We do not engage in derivative transactions for speculative purposes. In August 2012, we determined on a prospective basis, to enter into economic hedges without electing cash flow hedge accounting. Therefore, the change in fair value, on all commodity derivatives entered into after that determination, will be reflected in the income statement and not in accumulated other comprehensive income (OCI).

At December 31, 2013, the following non-designated hedges were outstanding:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Jan’14 – Dec’14	Natural gas – swap	80,000 MMBtu/day	$4.24	IF – NYMEX (HH)
Jan’14 – Dec’14	Natural gas – collar	10,000 MMBtu/day	$3.75-4.37	IF – NYMEX (HH)
Jan’14 – Jun’14	Crude oil – swap	500 Bbl/day	$100.03	WTI – NYMEX
Jan’14 – Dec’14	Crude oil – swap	3,000 Bbl/day	$91.77	WTI – NYMEX
Jan’14 – Dec’14	Crude oil – collar	4,000 Bbl/day	$90.00-96.08	WTI – NYMEX

Subsequent to December 31, 2013, the following non-designated hedges were entered into:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Mar'14	Natural gas – basis swap	30,000 MMBtu/day	$(0.095)	NGPL-TXOK
Mar'14	Natural gas – basis swap	60,000 MMBtu/day	$(0.027)	NGPL-Midcon

The following tables present the fair values of our derivative transactions and the location within our balance sheets where those values are recorded at December 31:



		Derivative Assets Fair Value
	Balance Sheet Location	2013		2012
		(In thousands)
Derivatives designated as hedging instruments
Commodity derivatives:
Current	Current derivative assets	$	—	$	13,674
Long-term	Non-current derivative assets	—		—
Total derivatives designated as hedging instruments		—		13,674
Derivatives not designated as hedging instruments
Commodity derivatives:
Current	Current derivative assets	515		2,878
Long-term	Non-current derivative assets	—		—
Total derivatives not designated as hedging instruments		515		2,878
Total derivative assets		$	515	$	16,552



		Derivative Liabilities Fair Value
	Balance Sheet Location	2013		2012
		(In thousands)
Derivatives designated as hedging instruments
Commodity derivatives:
Current	Current derivative liabilities	$	—	$	1,005
Long-term	Non-current derivative liabilities	—		—
Total derivatives designated as hedging instruments		—		1,005
Derivatives not designated as hedging instruments
Commodity derivatives:
Current	Current derivative liabilities	5,561		943
Long-term	Non-current derivative liabilities	—		562
Total derivatives not designated as hedging instruments		5,561		1,505
Total derivative liabilities		$	5,561	$	2,510

If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty in our balance sheets.

We recognized in accumulated other comprehensive income (OCI) the effective portion of any changes in fair value and reclassified the recognized gains (losses) on the sales to oil and natural gas revenue as the underlying transactions were settled. All cash flow hedges expired as of December 31, 2013, therefore we had no balance in accumulated OCI at December 31, 2013 and at December 31, 2012, we had a gain of $7.6 million, net of tax.

For our economic hedges that we elected not to apply cash flow accounting to, any changes in their fair value occurring before their maturity (i.e., temporary fluctuations in value) are reported in gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net in our consolidated statements of income. Changes in the fair value of derivatives that were designated as cash flow hedges, to the extent they were effective in offsetting cash flows attributable to the hedged risk, were recorded in OCI until the hedged item was recognized into earnings. When the hedged item was recognized into earnings, it was reported in oil and natural gas revenues. Any change in fair value that resulted from ineffectiveness was recognized in gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net.

Effect of Derivative Instruments on the Consolidated Balance Sheets (cash flow hedges) for the year ended December 31:



Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) ⁽¹⁾
	2013		2012
	(In thousands)
Commodity derivatives	$	—	$	7,587

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(1)	Net of taxes.

Effect of derivative instruments on the Consolidated Statements of Income (cash flow hedges) for the year ended December 31:



Derivative Instrument	Location of Gain or (Loss) Reclassified from Accumulated OCI into Income & Location of Gain or (Loss) Recognized in Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income ⁽¹⁾				Amount of Gain or (Loss) Recognized in Income ⁽²⁾
		2013		2012		2013			2012
		(In thousands)
Commodity derivatives	Oil and natural gas revenue ⁽¹⁾	$	603	$	51,853	$	—		$	—
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net⁽²⁾	—		—		(190		)	(2,616		)
	Total	$	603	$	51,853	$	(190	)	$	(2,616	)

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(1)	Effective portion of gain (loss).


(2)	Ineffective portion of gain (loss).

Effect of Derivative Instruments on the Consolidated Statements of Income (derivatives not designated as hedging instruments) for the year ended December 31:



	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments		2013			2012
		(In thousands)
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net ⁽¹⁾	$	(8,184	)	$	1,373
Total		$	(8,184	)	$	1,373

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(1)	Amount settled during the period is a loss of $(1,764) and $0, respectively.