Derivative and Hedging Financial Instruments

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative and Hedging Financial Instruments

NOTE 9 — DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

On May 9, 2013 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 contract period of this BP Hedge was completed in April 2015. The fair value of these commodity contracts was $0 and $410,389 at September 30, 2015 and December 31, 2014, respectively.

On May 21, 2014, American Shale, entered into fixed price hedges (“Morgan Stanley Fixed I”), which, when combined with existing hedges covered 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 swaps 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 are 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. Under the April 27, 2015 Consent and Agreement, related to the Morgan Stanley Credit Agreement, the administrative agent also consented to the monetization of a portion of American Shale’s natural gas hedges. The hedge was monetized in April 2015 for the hedges volumes in years 2016 through 2018 by resetting the strike price from $4.11 to the current market price of $3.27. The fair value of these commodity contracts was $1,265,173 and $5,878,302 at September 30, 2015 and December 31, 2014, respectively.

On August 20, 2014, American Shale, entered into fixed price hedges (“Morgan Stanley Fixed II”), which, when combined with existing hedges, covered 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 swaps 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 are hedged over this period, with monthly volumes declining from a high of 326,700 MMBtu in January 2015 to 45,854 MMBtu in November 2018. Under the April 27, 2015 Consent and Agreement, related to the Morgan Stanley Credit Agreement, the administrative agent also consented to the monetization of a portion of American Shale’s natural gas hedges. The hedge was monetized in April 2015 for the hedges volumes in years 2016 through 2018 by resetting the strike price from $3.92 to the current market price of $3.27. The fair value of these commodity contracts was $472,588 and $1,941,465 at September 30, 2015 and December 31, 2014, respectively.

The fair value of the Fixed I and Fixed II commodity contracts for the hedges volumes in years 2016 through 2018 in total was $2,798,905 at September 30, 2015.

On December 23, 2014 American Shale, entered into Basis Swap fixed price hedges (“Morgan Stanley Fixed III”) covering approximately 50% of its expected natural gas production from PDP wells as of December 23, 2014. 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 swaps with a fixed strike price of $(1.12) per MMBtu. The hedges begin with the December 2014 contract and end with the December 2018 contract. A total of 7,301,209 MMBtu are hedged over this period, with monthly volumes declining from a high of 266,891 MMBtu in December 2014 to 104,084 MMBtu in November 2018. The fair value of these commodity contracts was $(1,491,045) and $(716,488) at September 30, 2015 and December 31, 2014, respectively.

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 Morgan Stanley 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, 2015, following the monetization of hedges that took place in April 2015:

Contract Period Of Morgan Stanley Fixed I	Volumes		Weighted- Average Fixed Price
	(MMBtu)		(per MMBtu)
2015		893,151	$	4.11
2016		3,174,357	$	3.27
2017		2,783,102	$	3.27
2018		1,939,187	$	3.27
All gas hedges*		8,789,797

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

Contract Period Of Morgan Stanley Fixed II	Volumes		Weighted- Average Fixed Price
	(MMBtu)		(per MMBtu)
2015		382,817	$	3.92
2016		992,431	$	3.27
2017		771,407	$	3.27
2018		603,458	$	3.27
All gas hedges*		2,750,113

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

Contract Period Of Morgan Stanley Fixed III	Volumes		Basis Swap Fixed Price
	(MMBtu)		(per MMBtu)
2015		553,830	$	(1.12	)
2016		1,878,290	$	(1.12	)
2017		1,539,998	$	(1.12	)
2018		1,329,467	$	(1.12	)
All gas hedges*		5,301,585

* Gas hedges 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, 2015
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Commodity derivative	Current assets	$	3,160,081	Current liabilities	$	226,633
Commodity derivative	Noncurrent assets		1,376,585	Noncurrent liabilities		1,264,412
		$	4,536,666		$	1,491,045
	As of December 31, 2014
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Commodity derivative	Current assets	$	5,420,309	Current liabilities	$	—
Commodity derivative	Noncurrent assets		2,809,847	Noncurrent liabilities		716,488
		$	8,230,156		$	716,488

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, 2015 and 2014.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015			2014
Realized gains (loss) on commodity derivative	$	2,108,934	$	530,150	$	14,238,371		$	80,103
Change in fair value of commodity derivative		813,129		2,432,946		(4,468,047	)		(142,636	)
Change in fair value of warrant derivative liability				—					—
Total realized and unrealized gains (loss) recorded	$	2,922,063	$	2,963,096	$	9,770,324		$	(62,533	)

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