5. COMMODITY DERIVATIVE INSTRUMENTS

3 Months Ended

Mar. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

5. 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.

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 remained in accumulated other comprehensive income (“AOCI”) until the original hedged forecasted transaction occurred.  The last of these contracts expired in December 2015 and the Company’s AOCI balance is now zero.  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 4 – 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”) whose long-term senior unsecured debt 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 March 31, 2016 are provided below.  Natural gas prices are New York Mercantile Exchange (“NYMEX”) Henry Hub prices, and crude oil prices are Argus Light Louisiana Sweet (“LLS”).

	2016			2017
	Settlement			Settlement
NATURAL GAS (MMBtu):
Swaps
Volume		406,655			-
Price	$	2.657	*		-
3-way collars
Volume		-			248,023
Ceiling sold price (call)		-		$	3.280	*
Floor purchased price (put)		-		$	2.946	*
Floor sold price (short put)		-		$	2.381	*
CRUDE OIL (Bbls):
Put spread
Volume		98,902			-
Floor purchased price (put)	$	62.27			-
Floor sold price (short put)	$	40.00			-
3-way collars
Volume		23,449			113,029
Ceiling sold price (call) (WTI)	$	47.15		$	77.00
Floor purchased price (put) (WTI)	$	40.00		$	60.00
Floor sold price (short put) (WTI)	$	30.00		$	45.00
Swaps
Volume		11,533			-
Price	$	40.25			-

           *Price is a weighted average

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
	March 31,			December 31,
	2016			2015
Asset commodity derivatives:
Current assets	$	2,765,219		$	3,069,115
Noncurrent assets		1,467,664			1,841,120
		4,232,883			4,910,235
Liability commodity derivatives:
Current liabilities		(625,057	)		(411,068	)
Noncurrent liabilities		(667,414	)		(770,579	)
		(1,292,471	)		(1,181,647	)
Total commodity derivative instruments	$	2,940,412		$	3,728,588

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

	Three Months Ended
	March 31,
	2016			2015
Sales of natural gas and crude oil	$	2,931,586		$	4,572,679
Gains (losses) realized from sale of commodity derivatives		-			4,030,000
Other gains (losses) realized on commodity derivatives		1,159,114			906,834
Unrealized gains (losses) on commodity derivatives		(788,176	)		(3,866,266	)
Total revenue from natural gas and crude oil	$	3,302,524		$	5,643,247

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

	Three Months Ended				Year Ended
	March 31, 2016				December 31, 2015
	Before tax		After tax		Before tax			After tax
Balance, beginning of period	$	-	$	-	$	63,091		$	38,801
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
Balance, end of period	$	-	$	-	$	-		$	-