DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

NOTE 6 — DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

As a part of the ASD Credit Agreement, we entered into a warrant agreement with Chambers which required American Shale to sell the Lenders for a total of $2 million a warrant for 19,500 shares representing 19.5% of American Shale’s stock at $263.44 per share. The warrant expires on February 28, 2015. The warrant includes a put option whereby the Lenders can require American Shale to repurchase the warrant as of February 28, 2015, or earlier if certain events occur . Under the put option, American Shale would pay the excess of the fair value per share of the stock over $263.44 times the number of shares exercisable less any distributions or similar payments defined by the agreement. In certain circumstances, American Shale has the option to transfer working interest in all of its wells equal to the value of the put option instead of paying in cash. As a result of the contingent put, the warrant is accounted for as a liability with changes in its fair value reported in earnings.

On May 9, 2013 our subsidiary, American Shale , entered into costless collars covering approximately 85% of its expected natural gas production from wells that were considered proved developed producing (“PDP”) as of that date. Neither oil nor natural gas liquids have been hedged, but the BTU associated with our ethane production was essentially hedged, since it is sold as part of the natural gas stream. The costless collars consist of long put options (floor) with a strike price of $4.00 per MMBtu and offsetting short calls (ceiling) with a strike price of $4.28 per MMBtu. The aforementioned volumes are hedged beginning with the June 2013 contract and ending with the April 2015 contract. A total of 3.4 MMBtu are hedged over this period, with monthly volumes declining from a high of approximately 207,000 MMBtu in June 2013 to 113,000 MMBtu in April 2015. The fair value of these commodity contracts was $522,733 at September 30, 2013.

The Company has a master netting agreement on the gas hedge and therefore the current asset and liability are netted on the condensed consolidated balance sheet and the non-current asset and liability are netted on the condensed consolidated balance sheet.

The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. The Company has netting arrangements with BP Energy Company that provide for offsetting payables against receivables from separate derivative instruments.

The following tables summarize the approximate volumes and average contract prices of contracts the Company had in place as of September 30, 2013:

Gas Collars
Contract Period	Volumes		Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MMBtu)		(per MMBtu)		(per MMBtu)
Remainder of 2013		504,061	$	4.00	$	4.28
2014		1,650,248	$	4.00	$	4.28
2015		464,825	$	4.00	$	4.28
All gas collars*		2,619,134

* Gas collars are comprised of IF Henry Hub (100%).

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

	As of September 30, 2013
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Commodity derivative	Current assets	$	464,874	Current liabilities	$	—
Commodity derivative	Noncurrent assets		57,859	Noncurrent liabilities		—
Warrant derivative liability			—	Noncurrent liabilities		2,213,033
		$	522,733		$	2,213,033

	As of December 31, 2012
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Commodity derivative	Current assets	$	—	Current liabilities	$	—
Commodity derivative	Noncurrent assets		—	Noncurrent liabilities		—
Warrant derivative liability			—	Noncurrent liabilities		2,808,278
		$	—		$	2,808,273

The table below summarizes the realized and unrealized gains and losses related to our derivative instruments for the three and nine months ended September 30, 2013 and 2012.

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013		2012
Realized gains on commodity derivative	$	237,419		$	—		$	237,419	$	639
Change in fair value of commodity derivative		(136,623	)		—			522,733		—
Change in fair value of warrant derivative liability		3,806			(63,023	)		595,245		780,317
Total realized and unrealized gains recorded	$	104,602		$	(63,023	)	$	1,355,397	$	780,956

These realized and unrealized gains and losses are recorded in the accompanying unaudited condensed consolidated statements of operations as derivative gains (losses).