Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2016

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.

The nature of a derivative instrument must be evaluated to determine if it qualifies as a hedging instrument. If the instrument qualifies as a hedging instrument, it is recorded as either an asset or liability measured at fair value and subsequent changes in the derivative’s fair value are recognized in stockholders’ equity through other comprehensive income (loss), net of related taxes, to the extent the hedge is considered effective. Monthly settlements of effective hedges are reflected in revenue from oil and natural gas production and cash flows from operating activities. Instruments not qualifying as hedging instruments are recorded in our balance sheet at fair value and subsequent changes in fair value are recognized in earnings through derivative expense (income). Monthly settlements of ineffective hedges and derivative instruments not qualifying as hedging instruments are recognized in earnings through derivative expense (income) and cash flows from operating activities.

We have entered into fixed-price swaps and 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 November 7, 2016, 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 November 7, 2016:

	Fixed-Price Swaps (NYMEX)
	Natural Gas		Oil
	Daily Volume (MMBtus/d)	Swap Price ($)	Daily Volume (Bbls/d)	Swap Price ($)
2016	10,000	4.110	1,000	49.75
2016	10,000	4.120	1,000	52.78
2016			1,000	90.00

	Collar (NYMEX)
	Oil
	Daily Volume (Bbls/d)	Floor Price ($)	Ceiling Price ($)
2016	1,000	45.00	54.75

We previously discontinued hedge accounting for certain 2015 natural gas contracts, as it became no longer probable, subsequent to the sale of our non-core Gulf of Mexico ("GOM") conventional shelf properties, that our GOM natural gas production would be sufficient to cover the GOM volumes hedged. 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 September 30, 2016, we had accumulated other comprehensive income of $3.9 million, net of tax, related to the fair value of our effective cash flow hedges that were outstanding as of September 30, 2016. The $3.9 million 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 September 30, 2016 and December 31, 2015.

Fair Value of Derivatives Qualifying as Hedging Instruments at
September 30, 2016
(In millions)
	Asset Derivatives			Liability Derivatives
Description	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Current assets: Fair value of derivative contracts	$	6.3	Current liabilities: Fair value of derivative contracts	$	—
	Long-term assets: Fair value of derivative contracts	—		Long-term liabilities: Fair value of derivative contracts	—
		$	6.3		$	—
Fair Value of Derivatives Qualifying as Hedging Instruments at
December 31, 2015
(In millions)
	Asset Derivatives			Liability Derivatives
Description	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Current assets: Fair value of derivative contracts	$	38.6	Current liabilities: Fair value of derivative contracts	$	—
	Long-term assets: Fair value of derivative contracts	—		Long-term liabilities: Fair value of derivative contracts	—
		$	38.6		$	—

The following tables disclose the before tax effect of derivatives qualifying as hedging instruments, as reported in the statement of operations, for the three and nine month periods ended September 30, 2016 and 2015.

Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Operations
for the Three Months Ended September 30, 2016 and 2015
(In millions)
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)
	2016		2015		Location	2016		2015		Location	2016			2015
Commodity contracts	$	2.3	$	31.6	Operating revenue - oil/natural gas production	$	7.7	$	39.9	Derivative income (expense), net	$	(0.2	)	$	1.2
Total	$	2.3	$	31.6		$	7.7	$	39.9		$	(0.2	)	$	1.2

(a) For the three months ended September 30, 2016, effective hedging contracts increased oil revenue by $5.3 million and increased natural gas revenue by $2.4 million. For the three months ended September 30, 2015, effective hedging contracts increased oil revenue by $36.3 million and increased natural gas revenue by $3.6 million.

Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Operations
for the Nine Months Ended September 30, 2016 and 2015
(In millions)
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)
	2016			2015		Location	2016		2015		Location	2016			2015
Commodity contracts	$	(1.7	)	$	35.7	Operating revenue - oil/natural gas production	$	29.4	$	107.1	Derivative income (expense), net	$	(0.7	)	$	1.7
Total	$	(1.7	)	$	35.7		$	29.4	$	107.1		$	(0.7	)	$	1.7

(a) For the nine months ended September 30, 2016, effective hedging contracts increased oil revenue by $19.7 million and increased natural gas revenue by $9.7 million. For the nine months ended September 30, 2015, effective hedging contracts increased oil revenue by $96.8 million and increased natural gas revenue by $10.3 million.

Derivatives not qualifying as hedging instruments:

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 three and nine month periods ended September 30, 2016 and 2015.

Gain (Loss) Recognized in Derivative Income (Expense) (In millions)
	Three Months Ended September 30,					Nine Months Ended September 30,
Description	2016		2015			2016		2015
Commodity contracts:
Cash settlements	$	—	$	3.8		$	—	$	11.0
Change in fair value	—		(2.6		)	—		(7.9		)
Total gains (losses) on non-qualifying hedges	$	—	$	1.2		$	—	$	3.1

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 September 30, 2016 and December 31, 2015, all of our derivative contracts were in an asset position and therefore, there was no potential impact of the rights of offset.