C COMMODITY DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

C COMMODITY DERIVATIVE INSTRUMENTS

Objective and Strategies for Using Commodity Derivative Instruments – In order to mitigate the effect of commodity price uncertainty and enhance the predictability of cash flows relating to the marketing of the Company’s crude oil and natural gas, the Company enters into crude oil and natural gas price commodity derivative instruments with respect to a portion of the Company’s expected production. The commodity derivative instruments used include variable to fixed price commodity swaps, two-way and three-way collars.

The fixed price swap and two-way collar contracts entitle the Company to receive settlement from the counterparty for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable for each calculation period is less than the fixed strike price or floor price. The Company would pay the counterparty if the settlement price for the scheduled trading days applicable for each calculation period is more than the fixed strike price or selling price, which would be the product of the notional quantity per calculation period and the excess of the floating price over the fixed or ceiling price with respect to each calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional quantity per calculation period and the excess of the fixed or floor price over the floating price with respect to each calculation period.

A three-way collar consists of a two-way collar contract combined with a put option contract sold by the Company with a strike price below the floor price of the two-way collar. The Company receives price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, the Company receives the cash market price plus the difference between the two put option strike prices. This type of instrument allows the Company to capture more value in a rising commodity price environment, but limits the benefits in a downward commodity price environment.

While these instruments mitigate the cash flow risk of future reductions in commodity prices, they may also curtail benefits from future increases in commodity prices.

The Company elected to discontinue hedge accounting for all commodity derivative instruments beginning with the 2013 financial year. The balance in other comprehensive income (“OCI”) at year-end 2012 will remain in accumulated other comprehensive income (“AOCI”) until such time that the original hedged forecasted transaction occurs. The last of these contracts will expire in December 2016. Starting with year 2013, mark-to-market adjustments to the contracts that were in AOCI at year-end 2012 will not be made to AOCI, but instead are recognized in earnings, as are all other commodity derivative contracts going forward. As a result of discontinuing the application of hedge accounting, the Company’s earnings are potentially more volatile. See Note B – Fair Value Measurements for a discussion of methods and assumptions used to estimate the fair values of the Company’s commodity derivative instruments.

Counterparty Credit Risk – Commodity derivative instruments expose the Company to counterparty credit risk. The Company’s commodity derivative instruments are with Société Générale (“SocGen”) which is rated “A” by Standard and Poor’s, “A2” by Moody’s, and “A” by Fitch. Commodity derivative contracts are executed under master agreements which allow the Company, in the event of default, to elect early termination of all contracts. If the Company chooses to elect early termination, all asset and liability positions would be netted and settled at the time of election.

In conjunction with certain derivative hedging activity, the Company deferred the payment of $153,389 put premiums ($128,886 in both current other deferred charges and current other accrued liabilities and $24,503 in both other noncurrent assets and other noncurrent liabilities) for production months January 2015 through December 2015. The put premium liabilities become payable monthly as the hedge production month becomes the prompt production month. The Company will begin amortizing the deferred put premium liabilities in January 2015.

Commodity derivative instruments open as of September 30, 2014 are provided below. Natural gas prices are New York Mercantile Exchange (“NYMEX”) Henry Hub prices, and crude oil prices are NYMEX West Texas Intermediate, except for the oil swaps noted below that are based on Argus Light Louisiana Sweet.

	Prices are Weighted Averages
	2014	2015		2016
	Settlement	Settlement		Settlement
NATURAL GAS (MMBtu):
3-way collars
Volume	415,862	2,377,371		1,122,533
Ceiling sold price (call)	$4.35	$4.47		$4.35
Floor purchased price (put)	$4.07	$4.00		$4.10
Floor sold price (short put)	$3.30	$3.25		$3.25
Swaps
Volume	382,570	458,622		-
Price	$4.05	$4.08		-
Reverse Swaps
Volume	122,974	293,234		-
Price	$4.27	$4.33		-
CRUDE OIL (Bbls):
3-way collars
Volume	11,400	89,512		70,263
Ceiling sold price (call)	$103.70	$104.36		$106.39
Floor purchased price (put)	$90.99	$86.49		$92.38
Floor sold price (short put)	$69.34	$65.82		$72.38
Swaps				-
Volume	43,375	-		-
Price	$95.46
Swaps with short puts
Volume	13,500	-		-
Swap price	$89.34
Floor sold price (short put)	$70.00	-		-
Reverse Swaps
Volume	33,999	-		-
Price	$95.30	-		-
Swaps at Argus Light Louisiana Sweet
Volume	10,453	-		-
Price	$99.40	-		-
Put Spread
Volume	-	27,588		-
Floor purchased price (put)	-	$90.00	*	-
Floor sold price (short put)	-	$75.00	*	-

* Contracts include a premium to be paid by the Company of $5.56 per barrel as the contracts mature ($153,389 total premium). The premium is not included in these prices.

Derivatives for each commodity are netted on the Consolidated Balance Sheets as they are all contracts with the same counterparty. The following table presents the fair value and balance sheet location of each classification of commodity derivative contracts on a gross basis without regard to same-counterparty netting:

	Fair value as of
	September 30,	December 31,
	2014	2013
Asset commodity derivatives:
Current assets	$ 1,576,732	$ 1,109,403
Noncurrent assets	1,617,039	2,861,225
	3,193,771	3,970,628
Liability commodity derivatives:
Current liabilities	(1,193,129)	(1,786,535)
Noncurrent liabilities	(1,089,315)	(2,261,237)
	(2,282,444)	(4,047,772)
Total commodity derivative instruments	$ 911,327	$ (77,144)

Sales of natural gas and crude oil on the Consolidated Statements of Operations are comprised of the following:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2014	2013	2014	2013
Sales of natural gas and crude oil	$ 7,821,497	$ 6,832,601	$ 31,837,566	$ 19,086,656
Gains (losses) realized on commodity
derivatives	(223,614)	(148,436)	(2,264,661)	(148,678)
Gains (losses) unrealized on
commodity derivatives	2,607,959	(823,361)	921,026	439,478
Amortized gains from benefit of sold
qualified gas options	23,438	18,150	70,313	54,450
Total sales of natural gas and crude oil	$ 10,229,280	$ 5,878,954	$ 30,564,244	$ 19,431,906

A reconciliation of the components of accumulated other comprehensive income (loss) in the Consolidated Statements of Changes in Equity is presented below:

	Nine Months Ended		Year Ended
	September 30, 2014		December 31, 2013
	Before tax	After tax	Before tax	After tax
Balance, beginning of period	$ 63,041	$ 38,770	$ 437,140	$ 268,841
Other reclassifications due to expired contracts
previously subject to hedge accounting rules	67,446	41,479	(301,499)	(185,422)
Amortized gains from benefit of sold qualified
options realized in income	(70,313)	(43,242)	(72,600)	(44,649)
Balance, end of period	$ 60,174	$ 37,007	$ 63,041	$ 38,770