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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
Our hedging strategy is designed to protect our near and intermediate term cash flows from future declines in oil and natural gas prices. This protection is essential to capital budget planning, which is sensitive to expenditures that must be committed to in advance, such as rig contracts and the purchase of tubular goods. We enter into derivative transactions to secure a commodity price for a portion of our expected future production that is acceptable at the time of the transaction. These derivatives are generally designated as cash flow hedges upon entering into the contracts. We do not enter into derivative transactions for trading purposes. We have no fair value hedges.
We have entered into fixed-price swaps and costless collars with various counterparties for a portion of our expected 2016 oil and natural gas production from the Gulf Coast Basin. Our fixed-price oil swap settlements and oil collar settlements are based on an average of the New York Mercantile Exchange (“NYMEX”) closing price for West Texas Intermediate crude oil during the entire calendar month. Our fixed-price gas swap settlements are based on the NYMEX price for the last day of a respective contract month. Swaps typically provide for monthly payments by us if prices rise above the swap price or monthly payments to us if prices fall below the swap price. Collar contracts typically require payments by us if the NYMEX average closing price is above the ceiling price or payments to us if the NYMEX average closing price is below the floor price. Our fixed-price swap contracts are with The Toronto-Dominion Bank, The Bank of Nova Scotia and Natixis. Our oil collar contract is with The Bank of Nova Scotia.
All of our derivative transactions have been carried out in the over-the-counter market and are not typically subject to margin-deposit requirements. The use of derivative instruments involves the risk that the counterparties will be unable to meet the financial terms of such transactions. The counterparties to all of our derivative instruments have an "investment grade" credit rating. We monitor the credit ratings of our derivative counterparties on an ongoing basis. Although we have entered into derivative contracts with multiple counterparties to mitigate our exposure to any individual counterparty, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, we may not realize the benefit of some of our derivative instruments and incur a loss. At December 31, 2015, two counterparties accounted for approximately 86% of our contracted volumes. All of our derivative instruments are with lenders under our bank credit facility.
The following tables illustrate our derivative positions for calendar year 2016 as of February 22, 2016:
 
 
Fixed-Price Swaps (NYMEX)
 
 
Natural Gas
 
Oil
 
 
Daily Volume
(MMBtus/d)
 
Swap Price
($/MMBtu)
 
Daily Volume
(Bbls/d)
 
Swap Price
($/Bbl)
2016
 
10,000

 
4.110

 
1,000

 
49.75

2016
 
10,000

 
4.120

 
1,000

 
52.78

2016
 
 
 
 
 
1,000

 
90.00

 
Costless Collar (NYMEX)
 
Oil
 
Daily Volume
(Bbls/d)
 
Floor Price ($)
 
Ceiling Price ($)
2016
1,000

 
45.00

 
54.75

 
 
 
 
 
 

All of our derivative instruments at December 31, 2013 were designated as effective cash flow hedges. During 2014, certain of our natural gas derivative instruments no longer qualified as cash flow hedges, as it was no longer probable, subsequent to the sale of our non-core GOM conventional shelf properties (see Note 6 – Divestitures), that GOM natural gas production would be sufficient to cover the GOM volumes hedged. Accordingly, we discontinued hedge accounting for certain contracts for the months of August through December 2014 and January through December 2015. Additionally, a small portion of our cash flow hedges are typically determined to be ineffective because oil and natural gas price changes in the markets in which we sell our products are not 100% correlative to changes in the underlying price basis indicative in the derivative contract. At December 31, 2015, we had accumulated other comprehensive income of $24,025, net of tax, related to the fair value of our effective cash flow hedges that were outstanding as of December 31, 2015.The $24,025 of accumulated other comprehensive income will be reclassified into earnings in the next 12 months.
Derivatives qualifying as hedging instruments:
The following tables disclose the location and fair value amounts of derivatives qualifying as hedging instruments, as reported in our balance sheet, at December 31, 2015 and 2014:
Fair Value of Derivatives Qualifying as Hedging Instruments at
December 31, 2015
 
 
Asset Derivatives
 
Liability Derivatives
Description
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value    
Commodity contracts
 
Current assets: Fair value of derivative contracts
 
$
38,576

 
Current liabilities: Fair value of derivative contracts
 

 
 
Long-term assets: Fair value of derivative contracts
 

 
Long-term liabilities: Fair value of derivative contracts
 

 
 
 
 
$
38,576

 
 
 
$

Fair Value of Derivatives Qualifying as Hedging Instruments at
December 31, 2014
 
 
Asset Derivatives
 
Liability Derivatives
Description
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Commodity contracts
 
Current assets: Fair value of derivative contracts
 
$
127,033

 
Current liabilities: Fair value of derivative contracts
 
$

 
 
Long-term assets: Fair value of derivative contracts
 
14,333

 
Long-term liabilities: Fair value of derivative contracts
 

 
 
 
 
$
141,366

 
 
 
$


The following table discloses the before tax effect of derivatives qualifying as hedging instruments, as reported in the statement of operations, for the years ended December 31, 2015, 2014 and 2013:
Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Operations
for the Years Ended December 31, 2015, 2014, and 2013
Derivatives in Cash
Flow Hedging
Relationships
 
Amount of Gain
(Loss) Recognized
in Other
Comprehensive
Income on
Derivatives
 
Gain (Loss) Reclassified from
Accumulated Other Comprehensive Income
into Income
(Effective Portion) (a)
 
Gain (Loss) Recognized in Income
on Derivatives
(Ineffective Portion)
 
 
 
 
Location
 
 
 
Location
 
 
 
 
2015
 
 
 
2015
 
 
 
2015
Commodity contracts
 
$
52,630

 
Operating revenue -
oil/natural gas production
 
$
149,955

 
Derivative income (expense), net
 
$
2,713

Total
 
$
52,630

 
 
 
$
149,955

 
 
 
$
2,713

 
 
 
 
 
 
 
 
 
 
 
 
 
2014
 
 
 
2014
 
 
 
2014
Commodity contracts
 
$
136,097

 
Operating revenue -
oil/natural gas production
 
$
526

 
Derivative income (expense), net
 
$
5,721

Total
 
$
136,097

 
 
 
$
526

 
 
 
$
5,721

 
 
 
 
 
 
 
 
 
 
 
 
 
2013
 
 
 
2013
 
 
 
2013
Commodity contracts
 
$
(26,945
)
 
Operating revenue -
oil/natural gas production
 
$
20,289

 
Derivative income (expense), net
 
$
(2,090
)
Total
 
$
(26,945
)
 
 
 
$
20,289

 
 
 
$
(2,090
)
(a)
For the year ended December 31, 2015, effective hedging contracts increased oil revenue by $135,617 and increased natural gas revenue by $14,338. For the year ended December 31, 2014, effective hedging contracts increased oil revenue by $7,929 and (decreased) natural gas revenue by $7,403. For the year ended December 31, 2013, effective hedging contracts increased oil revenue by $3,520 and increased natural gas revenue by $16,769.
Derivatives not qualifying as hedging instruments:
The following table discloses the location and fair value amounts of our derivatives not qualifying as hedging instruments, as reported in our balance sheet, at December 31, 2015 and 2014:
Fair Value of Derivatives Not Qualifying as Hedging Instruments
Description
 
Balance Sheet Location
 
December 31, 2015
 
December 31, 2014
Commodity contracts
 
Current assets: Fair value of derivative contracts
 
$

 
$
12,146


Gains or losses related to changes in fair value and cash settlements for derivatives not qualifying as hedging instruments are recorded as derivative income (expense) in the statement of operations. The following table discloses the before tax effect of our derivatives not qualifying as hedging instruments on the statement of operations for the years ended December 31, 2015 and 2014. All of our derivatives for the year ended December 31, 2013 qualified as hedging instruments.
Gain (Loss) Recognized in Derivative Income (Expense)
 
 
Year Ended
Description
 
December 31, 2015
 
December 31, 2014
Commodity contracts:
 
 
 
 
Cash settlements
 
$
17,385

 
$
1,484

Change in fair value
 
(12,146
)
 
12,146

Total gain on non-qualifying derivatives
 
$
5,239

 
$
13,630


Offsetting of derivative assets and liabilities:
Our derivative contracts are subject to netting arrangements. It is our policy to not offset our derivative contracts in presenting the fair value of these contracts as assets and liabilities in our balance sheet. As of December 31, 2015 and 2014, all of our derivative contracts were in an asset position and therefore, there was no potential impact of the rights of offset.