DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

NOTE 8 — DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

On May 9, 2013 our subsidiary, American Shale, entered into costless collars (“BP Hedge”) 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 1.6 MMBtu is 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 $32,174 and $(125,773) at September 30, 2014 and December 31, 2013, respectively.

On May 21, 2014 American Shale, entered into fixed price hedges (“Morgan Stanley Fixed I”) covering approximately 90% of its expected natural gas production from PDP wells 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 hedges consist of long put options (floor) with strike prices ranging between $4.38 per MMBtu to $4.06 per MMBtu. The hedges begin with the June 2014 contract and end with the December 2018 contract. A total of 13,932,171 MMBtu is hedged over this period, with monthly volumes declining from a high of 444,534 MMBtu in July 2014 to 171,940 MMBtu in November 2018. The fair value of these commodity contracts was $577,585 at September 30, 2014.

On August 20, 2014 American Shale, entered into fixed price hedges (“Morgan Stanley Fixed II”) covering approximately 90% of its expected natural gas production from PDP wells 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 hedges consist of long put options (floor) with a fixed strike price of $3.92 per MMBtu. The hedges begin with the September 2014 contract and end with the December 2018 contract. A total of 10,499,038 MMBtu is hedged over this period, with monthly volumes declining from a high of 326,700 MMBtu in January 2015 to 33,200 MMBtu in November 2014. The fair value of these commodity contracts was $(878,168) at September 30, 2014.

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 for gas collars and gas hedges as of September 30, 2014:

Contract Period of BP Hedge	Volumes		Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MMBtu)		(per MMBtu)		(per MMBtu)
2014		371,808	$	4.00	$	4.28
2015		464,825	$	4.00	$	4.28
All gas collars*		836,633

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

Contract Period of Morgan Stanley Fixed I	Volumes		Weighted- Average Fixed Price
	(MMBtu)		(per MMBtu)
2014		971,987	$	4.38
2015		3,581,893	$	4.11
2016		3,058,358	$	4.06
2017		2,528,996	$	4.16
2018		2,193,294	$	4.29
All gas hedges*		12,334,528

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

Contract Period of Morgan Stanley Fixed II	Volumes		Weighted- Average Fixed Price
	(MMBtu)		(per MMBtu)
2014		586,700	$	3.92
2015		2,249,200	$	3.92
2016		2,887,048	$	3.92
2017		2,528,996	$	3.92
2018		2,193,294	$	3.92
All gas hedges*		10,445,238

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

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 could 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 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 Shale entered into an agreement with the holders of all of its outstanding warrants 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 detail the fair value of derivatives recorded in the accompanying balance sheets, by category:

	As of September 30, 2014
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Commodity derivative	Current assets	$	780,148	Current liabilities	$	217,451
Commodity derivative	Noncurrent assets		—	Noncurrent liabilities		831,106
		$	780,148		$	1,048,557
	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
		$	—		$	125,773

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, 2014 and 2013.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2014		2013			2014			2013
Realized gains (loss) on commodity derivative	$	530,150	$	237,419		$	80,103		$	237,419
Change in fair value of commodity derivative		2,432,946		(136,623	)		(142,636	)		522,733
Change in fair value of warrant derivative liability		—		3,806			—			595,245
Total realized and unrealized gains (loss) recorded	$	2,963,096	$	104,602		$	(62,533	)	$	1,355,397

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