COMMODITY DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 futures, swaps, and options to manage exposure to commodity price risk inherent in the Company’s oil and natural gas operations.

Futures contracts and commodity price swap agreements are used to fix the price of expected future oil and natural gas sales at major industry trading locations such as Henry Hub, Louisiana for natural gas and Cushing, Oklahoma for oil.  Basis swaps are used to fix or float the price differential between product prices at one market location versus another.  Options are used to establish a floor price, a ceiling price, or a floor and ceiling price (collar) for expected future oil and natural gas sales.

A three-way collar is a combination of three options:  a sold call, a purchased put, and a sold put.  The sold call establishes the maximum price that the Company will receive for the contracted commodity volumes.  The purchased put establishes the minimum price that the Company will receive for the contracted volumes unless the market price for the commodity falls below the sold put strike price, at which point the minimum price equals the reference price (e.g., NYMEX) plus the excess of the purchased put strike price over the sold put strike price.

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 does not apply hedge accounting to any of its derivative instruments.  As a result, gains and losses associated with derivative instruments are recognized currently in earnings.  Net derivative losses attributable to derivatives previously subject to hedge accounting resided in AOCI and were reclassified to earnings as the transactions to which the derivatives related were recognized in earnings.  The remaining contracts that were subject to hedge accounting expired during 2015 and AOCI is now zero.

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 remained in AOCI until the original hedged forecasted transactions occurred.  The last of these contracts expired in December 2015.  No mark-to-market adjustments for commodity derivative contracts are made to AOCI, but instead are recognized in earnings.  As a result of discontinuing the application of hedge accounting, the Company’s earnings are potentially more volatile.  See Note 8 – 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 SocGen which is rated “A” by Standard and Poor’s, “A2” by Moody’s, “A” by Fitch and “A (high)” by DBRS.  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.

On February 18, 2015, the Company settled all of its natural gas and crude oil options, realizing $4.03 million.  The Company retained its existing natural gas swap positions.  Concurrent with the settlement of the Company’s option positions and during the following day, the Company entered into new swap transactions for crude oil and natural gas for the balance of 2015 and all of 2016.  In addition, the Company entered into three-way collars for 2017 for both natural gas and crude oil.

In conjunction with certain derivative hedging activity, the Company deferred the payment of $153,389 put premiums which was recorded in both current other deferred charges and current other accrued liabilities at year-end 2014 and was for production months January 2015 through December 2015.  The put premium liabilities became payable monthly as the hedge production month became the prompt production month.  The Company amortized the deferred put premium liabilities in January and February 2015; however, the liability for the remainder of the year was settled as part of the $4.03 million settlement.

Commodity derivative instruments open as of December 31, 2015 are provided below.  Natural gas prices are New York Mercantile Exchange (“NYMEX”) Henry Hub prices, and crude oil prices are NYMEX West Texas Intermediate (“WTI”), except for the oil swaps noted below that are based on Argus Light Louisiana Sweet (“LLS”).

	2016		2017
	Settlement		Settlement
NATURAL GAS (MMBtu):
Swaps
Volume		298,957		-
Price (NYMEX)	$	3.28		-
3-way collars
Volume		-		67,361
Ceiling sold price (call) (NYMEX)		-	$	4.03
Floor purchased price (put) (NYMEX)		-	$	3.50
Floor sold price (short put) (NYMEX)		-	$	3.00
CRUDE OIL (Bbls):
Put spread
Volume		138,286		-
Floor purchased price (put) (LLS)	$	62.27		-
Floor sold price (short put) (LLS)	$	40.00		-
3-way collars
Volume		-		113,029
Ceiling sold price (call) (WTI)		-	$	77.00
Floor purchased price (put) (WTI)		-	$	60.00
Floor sold price (short put) (WTI)		-	$	45.00

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 December 31,
	2015			2014
Asset commodity derivatives:
Current assets	$	3,069,115		$	6,413,935
Noncurrent assets		1,841,120			3,163,891
		4,910,235			9,577,826
Liability commodity derivatives:
Current liabilities		(411,068	)		(3,075,398	)
Noncurrent liabilities		(770,579	)		(1,760,782	)
		(1,181,647	)		(4,836,180	)
Total commodity derivative instruments	$	3,728,588		$	4,741,646

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

	Years Ended December 31,
	2015			2014			2013
Sales of natural gas and crude oil	$	18,680,584		$	38,659,392		$	28,235,413
Gains (losses) realized from sale of commodity derivatives		4,030,000			-			-
Other gains (losses) realized on commodity derivatives		1,958,793			(1,420,217	)		(524	)
Unrealized gains (losses) on commodity derivatives		(949,967	)		4,724,985			(231,886	)
Amortized gains from benefit of sold qualified gas options		-			93,750			72,600
Total revenue from natural gas and crude oil	$	23,719,410		$	42,057,910		$	28,075,603

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

	Years Ended December 31,
	2015						2014				2013
	Before tax			After tax			Before tax		After tax		Before tax			After tax
Balance, beginning of period	$	63,091		$	38,801		$	63,041	$	38,770	$	437,140		$	268,841
Sale of unexpired contracts
previously subject to hedge
accounting rules		(119,917	)		(73,749	)		-		-		-			-
Other reclassifications due to expired
contracts previously subject to
hedge accounting rules		56,826			34,948			50		31		(374,099	)		(230,071	)
Balance, end of period	$	-		$	-		$	63,091	$	38,801	$	63,041		$	38,770