Derivative and Hedging Financial Instruments

12 Months Ended

Dec. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative and Hedging Financial Instruments

NOTE 11 - 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 December 31, 2015 and 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 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 $0 and $5,878,302 at December 31, 2015 and 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 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 $0 and $1,941,465 at December 31, 2015 and 2014, respectively.

When the administrative agent consented to the monetization of a portion of American Shale’s natural gas hedges under the April 27, 2015 Consent and Agreement, related to the Credit Agreement, the Fixed I and Fixed II hedge volumes in years 2016 through 2018 were combined (“Morgan Stanley Restrike’). The hedges reflect resetting the strike price from $3.92 to the current market price of $3.27. The fair value of these commodity contracts for the hedges volumes in years 2016 through 2018 in total was $5,841,396 at December 31, 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 $(1,727,720) and $(716,488) at December 31, 2015 and 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 for gas collars and gas hedges as of December 31, 2015:

Contract Period Of Morgan Stanley Restrike	Volumes		Weighted- Average Fixed Price
	(MMBtu)		(per MMBtu)
2016		4,166,789	$	3.27
2017		3,300,403	$	3.27
2018		2,796,751	$	3.27
All gas basis hedges*		10,263,943

Contract Period Of Morgan Stanley Fixed III	Volumes		Basis Swap Fixed Price
	(MMBtu)		(per MMBtu)
2016		1,878,290	$	(1.12	)
2017		1,539,998	$	(1.12	)
2018		1,329,467	$	(1.12	)
All gas basis hedges*		4,747,755

* Gas basis hedges are based on the difference between TETCO M2 and IF Henry Hub (100%).

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

	As of December 31, 2015
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Commodity derivative	Current assets	$	3,417,887	Current liabilities	$	474,696
Commodity derivative	Noncurrent assets		2,423,508	Noncurrent liabilities		1,253,024
		$	5,841,395		$	1,727,720

	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 years ended December 31, 2015 and 2014.

	Twelve Months Ended December 31,
	2015			2014
Realized gains on commodity derivative	$	15,756,161		$	949,094
Change in fair value of commodity derivative		(3,399,993	)		7,639,441
Total realized and unrealized gains/(losses) recorded	$	12,356,168		$	8,588,535

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