DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2013

Derivative Instruments And Hedging Activities Disclosure [Abstract]

DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

NOTE 10 - DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

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 $(125,773) at December 31, 2013.

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

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 would have contractually expired on February 28, 2015. The warrant included 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 had the option to transfer the 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 December 20, 2013, American entered into an agreement with the holders of warrants representing 19.5% of the stock of American Shale whereby American Shale agreed to purchase the warrants from the holders for $9 million. The proceeds from the increased borrowings under the A&R Credit Agreement were used to partially fund the purchase of the warrants from the holders.

The following tables summarize the approximate volumes and average contract prices of contracts the Company had in place as of December 31, 2013:

Gas Collars
Contract Period	Volumes		Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MMBtu)		(per MMBtu)		(per MMBtu)
2014		1,650,248	$	4.00	$	4.28
2015		464,825	$	4.00	$	4.28
All gas collars *		2,115,073

* Gas collars are priced based on Inside FERC - Henry Hub (100%).

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

	As of December 31, 2013
	Derivative Assets			Derivative Liabilities
	Balance Sheet         Classification	Fair Value		Balance Sheet         Classification	Fair Value
Commodity derivative	Current assets	$	—	Current liabilities	$	58,176
Commodity derivative	Noncurrent assets		—	Noncurrent liabilities		67,597
Warrant derivative liability			—	Noncurrent liabilities		—
		$			$	125,773

	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
		$	—		$	2,808,278

The table below summarizes the realized and unrealized gains and losses related to our derivative instruments for the years ended December 31, 2013 and 2012.

	Twelve Months Ended December 31,
	2013			2012
Realized gains on commodity derivative	$	432,158		$	639
Change in fair value of commodity derivative		(125,773	)		—
Change in fair value of warrant derivative		808,278			(808,278	)
Realized loss on warrant derivative		(7,000,000	)
Total realized and unrealized gains/(losses) recorded	$	(5,885,337	)	$	(807,639	)

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