Physical Delivery Contracts and Commodity Derivatives

9 Months Ended

Sep. 30, 2014

Physical Delivery Contracts and Oil and Commodity Derivatives [Abstract]

Physical Delivery Contracts and Commodity Derivatives

Note 11 – Physical Delivery Contracts and Commodity Derivatives

The Company at times enters into oil and gas physical delivery contracts to effectively provide pricing hedges. At September 30, 2014, the Company has a fixed price contract requiring physical delivery of approximately 1,000 Bbl/day at an average price of $96.70 per Bbl for October 2014 through August 2015. Because this contract is not expected to be net cash settled, it is considered to be a normal sales contract and not a derivative. Therefore, this contract is not recorded at fair value in the Consolidated Financial Statements. Other than the above mentioned contract, the Company’s other oil and gas sales contracts approximate index prices.

The Company has historically used commodity-based derivative contracts to manage exposure to commodity prices on certain of its oil and natural gas production. The Company does not hold or issue derivative financial instruments for speculative or trading purposes.

The Company’s swap agreements as of September 30, 2014 are summarized in the table below:

	Natural Gas				Oil
			Weighted				Weighted
			Average				Average
Period	MMBtu		Price (a)		Bbl		Price (b)
Oct - Dec 2014		250,000	$	4.16		12,000	$	93.79
Jan - Mar 2015		220,000	$	4.06		5,000	$	94.52
Apr - Jun 2015		170,000	$	4.04		3,000	$	94.80
Jul - Sep 2015		180,000	$	4.05		2,000	$	94.80
Oct - Dec 2015		180,000	$	4.05		-		-
Jan - Mar 2016		30,000	$	4.20		-		-
Apr - Jun 2016		10,000	$	4.20		-		-

(a) NYMEX Henry Hub Natural Gas futures contract for the respective delivery month.

(b) NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective delivery month.

For its swap instruments, the Company receives a fixed price for the hedged commodity and pays a floating 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.

The following table summarizes the fair value of the derivatives recorded in the Consolidated Balance Sheets. These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	September 30, 2014		December 31, 2013
Commodity derivative contracts:
Current assets	$	147	$	-
Non-current assets	$	4	$	-
Current liabilities	$	-	$	226
Non-current liabilities	$	-	$	100

The table below summarizes the realized and unrealized gains and losses related to the Company’s derivative instruments for the three and nine months ended September 30, 2014 and 2013. These realized and unrealized losses are recorded and included in commodity derivative gain or loss in the accompanying Consolidated Statements of Operations.

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2014			2013			2014			2013
Commodity derivative contracts:
Realized losses	$	(54	)	$	(79	)	$	(556	)	$	(176	)
Unrealized gains (losses)		743			(186	)		477			(14	)
Total realized and unrealized gains (losses), net	$	689		$	(265	)	$	(79	)	$	(190	)

Realized losses are included in cash flows from operating activities in the Company’s Consolidated Statements of Cash Flows.

The counterparty in all of the Company’s derivative instruments is the lender in the Company’s bank credit facility; accordingly, the Company is not required to post collateral since the bank is secured by the Company’s oil and natural gas assets. The Company nets its derivative instrument fair value amounts executed with its counterparty pursuant to an ISDA master agreement, which provides for the net settlement over the term of the contract and in the event of default or termination of the contract. The following table summarizes the location and fair value amounts of all derivative instruments in the Consolidated Balance Sheet as of September 30, 2014, as well as the gross recognized derivative assets, liabilities and amounts offset in the Consolidated Balance Sheet:

						Net
	Gross					Recognized
	Recognized		Gross			Fair Value
	Assets/		Amounts			Assets/
Balance Sheet Classification (in thousands)	Liabilities		Offset			Liabilities
Commodity derivative assets:
Current derivative asset	$	215	$	(68	)	$	147
Other long-term assets		14		(10	)		4
Total derivative assets	$	229	$	(78	)	$	151
Commodity derivative liabilities:
Current derivative liability		68		(68	)		-
Non-current derivative liability		10		(10	)		-
Total derivative liabilities	$	78	$	(78	)	$	-

Due to the volatility of oil and natural gas prices, the estimated fair value of the Company’s derivatives are subject to large fluctuations from period to period.