Derivative and Hedging Financial Instruments

9 Months Ended

Sep. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative and Hedging Financial Instruments

NOTE 8 — DERIVATIVE AND HEDGING FINANCIAL INSTRUMENTS

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.

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.

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 $4.11 and $3.92, respectively, to the then 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 $1,813,863 and $5,841,395 at September 30, 2016 and December 31, 2015, respectively.

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. The hedges consist of basis 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 $10,292 and $(1,727,720) at September 30, 2016 and December 31, 2015, respectively.

The Company has a master netting agreement on the gas hedges 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. We net our gas hedges separately from our gas basis hedges.

The use of derivative transactions involves the risk that the counterparty 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 hedges and gas basis hedges as of September 30, 2016:

Contract Period Of Morgan Stanley Restrike	Volumes		Weighted- Average Fixed Price
	(MMBtu)		(per MMBtu)
2016		1,251,001	$	3.27
2017		3,248,187	$	3.27
2018		2,542,645	$	3.27
All gas hedges		7,041,833
Contract Period Of Morgan Stanley Fixed III	Volumes		Basis Swap Fixed Price
	(MMBtu)		(per MMBtu)
2016		574,741	$	(1.12	)
2017		1,518,648	$	(1.12	)
2018		1,209,491	$	(1.12	)
All gas basis hedges*		3,302,880

* 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 condensed consolidated balance sheets, by category:

	As of September 30, 2016 (unaudited)
	Derivative Assets				Derivative Liabilities
	Balance Sheet Classification		Fair Value		Balance Sheet Classification		Fair Value
Commodity derivative		Current assets	$	1,091,835		Current liabilities	$	28,234
Commodity derivative		Noncurrent assets		1,104,800		Noncurrent liabilities		344,246
			$	2,196,635			$	372,480
	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

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, 2016 and 2015.

	Three Months Ended September 30, (Unaudited)				Nine Months Ended September 30, (Unaudited)
	2016		2015		2016			2015
Cash settlements on commodity derivatives	$	463,299	$	2,108,934	$	2,992,891		$	14,238,371
Change in fair value of commodity derivatives		1,637,144		813,129		(2,289,520	)		(4,468,047	)
Total contract gains recorded	$	2,100,443	$	2,922,063	$	703,371		$	9,770,324

These gains and losses are recorded in the accompanying unaudited condensed consolidated statements of operations as gain on derivative assets.

Under the terms of each derivative contract, these contracts are in cross-default with the Company’s default on its notes with Morgan Stanley as further discussed in Note 7. Under the terms of the Forbearance Agreement discussed in Note 7, because the affiliate counterparty of the derivative contracts has also agreed to forbear on exercising its rights it is entitled to under default, we believe the classifications disclosed in the condensed consolidated balance sheets is appropriate.