Note 10 – Derivative Financial Instruments

Summary of Oil, Gas, and NGL Derivative Contracts in Place

The Company has entered into various commodity derivative contracts to mitigate a portion of the exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. All contracts are entered into for other-than-trading purposes. The Company’s derivative contracts in place include swap and collar arrangements for oil, gas, and NGLs.

As of December 31, 2014, the Company had commodity derivative contracts outstanding through the fourth quarter of 2019 for a total of 14.7 million Bbls of oil production, 230.8 million MMBtu of gas production, and 781,000 Bbls of NGL production.

In a typical commodity swap agreement, if the agreed upon published third-party index price is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For collar agreements, the Company receives the difference between an agreed upon index and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.

The following tables summarize the approximate volumes and average contract prices of contracts the Company had in place as of December 31, 2014:

Oil Contracts

Oil Swaps



Contract Period	NYMEX WTI Volumes	Weighted- Average Contract Price
	(Bbls)	(per Bbl)
First quarter 2015	1,711,000	$	91.96
Second quarter 2015	1,639,000	$	91.26
Third quarter 2015	1,254,000	$	90.78
Fourth quarter 2015	1,137,000	$	90.15
2016	5,570,000	$	88.01
All oil swaps	11,311,000

Oil Collars



Contract Period	NYMEX WTI Volumes	Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(Bbls)	(per Bbl)		(per Bbl)
First quarter 2015	882,000	$	85.00	$	99.53
Second quarter 2015	709,000	$	85.00	$	94.06
Third quarter 2015	906,000	$	85.00	$	91.25
Fourth quarter 2015	869,000	$	85.00	$	92.19
All oil collars	3,366,000

Natural Gas Contracts

Gas Swaps



Contract Period	Volumes	Weighted- Average Contract Price
	(MMBtu)	(per MMBtu)
First quarter 2015	23,548,000	$	4.22
Second quarter 2015	15,985,000	$	3.90
Third quarter 2015	14,950,000	$	4.03
Fourth quarter 2015	13,570,000	$	4.02
2016	48,896,000	$	4.12
2017	37,414,000	$	4.16
2018	35,241,000	$	4.21
2019	28,159,000	$	4.28
All gas swaps*	217,763,000

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*Natural gas swaps are comprised of IF El Paso Permian (3%), IF HSC (82%), IF NGPL TXOK (1%), IF NNG Ventura (3%), and IF Enable East (11%).

Gas Collars



Contract Period	Volumes	Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MMBtu)	(per MMBtu)		(per MMBtu)
First quarter 2015	2,524,000	$	4.00	$	4.30
Second quarter 2015	2,297,000	$	4.00	$	4.30
Third quarter 2015	2,005,000	$	4.00	$	4.30
Fourth quarter 2015	6,176,000	$	3.97	$	4.30
All gas collars*	13,002,000

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*Natural gas collars are comprised of IF El Paso Permian (4%), IF HSC (80%), IF NNG Ventura (8%), and IF Enable East (8%).

NGL Contracts

NGL Swaps



Contract Period	Volumes	Weighted- Average Contract Price
	(Bbls)	(per Bbl)
First quarter 2015	781,000	$	55.42
All NGL swaps*	781,000

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*NGL swaps are comprised of OPIS Natural Gasoline Mt Belv Non TET (28%) and OPIS Propane Mt Belv TET (72%).

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The fair value of the commodity derivative contracts was a net asset of $592.1 million and $21.5 million at December 31, 2014 and 2013, respectively.

The following tables detail the fair value of derivatives recorded in the accompanying balance sheets, by category:



	As of December 31, 2014
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
	(in thousands)
Commodity Contracts	Current assets	$	402,668	Current liabilities	$	—
Commodity Contracts	Noncurrent assets	189,540		Noncurrent liabilities	70
Derivatives not designated as hedging instruments		$	592,208		$	70



	As of December 31, 2013
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
	(in thousands)
Commodity Contracts	Current assets	$	21,559	Current liabilities	$	26,380
Commodity Contracts	Noncurrent assets	30,951		Noncurrent liabilities	4,640
Derivatives not designated as hedging instruments		$	52,510		$	31,020

Offsetting of Derivative Assets and Liabilities

As of December 31, 2014 and 2013, all derivative instruments held by the Company were subject to enforceable master netting arrangements held by various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.

The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts:



	Derivative Assets						Derivative Liabilities
	As of December 31,						As of December 31,
Offsetting of Derivative Assets and Liabilities	2014			2013			2014			2013
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	592,208		$	52,510		$	(70	)	$	(31,020	)
Amounts not offset in the accompanying balance sheets	(70		)	(30,652		)	70			30,652
Net amounts	$	592,138		$	21,858		$	—		$	(368	)

Discontinuance of Cash Flow Hedge Accounting

As of January 1, 2011, the Company elected to de-designate all of its commodity derivative contracts that had been previously designated as cash flow hedges at December 31, 2010. Fair values at December 31, 2010, were frozen in AOCL as of the de-designation date and were reclassified into earnings as the original derivative transactions settled. As of September 30, 2013, all commodity derivative contracts that had been previously designated as cash flow hedges had settled and had been reclassified into earnings from AOCL.

Subsequent to December 31, 2010, the Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in AOCL. The Company had no derivatives designated as cash flow hedges for the years ended December 31, 2014, 2013, and 2012, and no new gains or losses were deferred to AOCL during these respective years. Please refer to Note 11 - Fair Value Measurements for more information regarding the Company’s derivative instruments, including its valuation techniques.

The following table summarizes the components of derivative gain presented in the accompanying statements of operations:



	For the Years Ended December 31,
	2014			2013			2012
	(in thousands)
Derivative settlement (gain) loss:
Oil contracts	$	(28,410	)	$	15,161		$	11,893
Gas contracts	26,706			(30,338		)	(47,270		)
NGL contracts	(10,911		)	(6,885		)	(8,887		)
Total derivative settlement gain ⁽¹⁾	$	(12,615	)	$	(22,062	)	$	(44,264	)

Total derivative (gain) loss:
Oil contracts	$	(457,082	)	$	14,665		$	(20,088	)
Gas contracts	(93,267		)	(14,053		)	(15,493		)
NGL contracts	(32,915		)	(3,692		)	(20,049		)
Total derivative gain ⁽²⁾	$	(583,264	)	$	(3,080	)	$	(55,630	)

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⁽¹⁾

Total derivative settlement gain is reported in the derivative cash settlements line item on the accompanying statements of cash flows within net cash provided by operating activities with the change in accrued settlements between years being reported in change in accounts receivable and change in accounts payable and accrued expenses line items. Total derivative settlement gains are adjusted by a $41.0 million decrease attributable to the change in current assets and liabilities at December 31, 2014.


⁽²⁾	Total derivative gain is reported in the derivative gain line item on the accompanying statements of cash flows within net cash provided by operating activities.

The following table details the effect of derivative instruments on AOCL and the accompanying statements of operations (net of income tax):



		Location on Accompanying Statements of Operations	For the Years Ended December 31,
	Derivatives	Location on Accompanying Statements of Operations	2014		2013		2012
			(in thousands)
Amount reclassified from AOCL	Commodity Contracts	Other operating revenues	$	—	$	1,115	$	(2,264	)

The realized net hedge loss for the year ended December 31, 2013, and net hedge gain for the year ended December 31, 2012, shown net of income tax in the table above, are comprised of realized settlements on commodity derivative contracts that were previously designated as cash flow hedges. Realized hedge gains or losses from the settlement of commodity derivatives previously designated as cash flow hedges are reported in the other operating revenues line item on the accompanying statements of operations. The Company realized a pre-tax net loss of $1.8 million and a pre-tax net gain of $3.9 million from its commodity derivative contracts that were previously designated as cash flow hedges for the years ended December 31, 2013, and 2012, respectively.

Credit Related Contingent Features

As of December 31, 2014, and through the filing date of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. The Company’s obligations under its credit facility and derivative contracts are secured by liens on at least 75 percent of the Company’s proved oil and gas properties.

Convertible Note Derivative Instrument

The contingent interest provision of the 3.50% Senior Convertible Notes was an embedded derivative instrument. The 3.50% Senior Convertible Notes were settled during the second quarter of 2012. Please refer to Note 5 - Long-term Debt for additional discussion.