6. DERIVATIVE FINANCIAL INSTRUMENTS:

Objectives and Strategy: The Company’s major market risk exposure is in the pricing applicable to its natural gas and oil production. Realized pricing is currently driven primarily by the prevailing price for the Company’s natural gas production. Historically, prices received for natural gas production have been volatile and unpredictable. Pricing volatility is expected to continue. The prices we receive for our production depend on many factors outside of our control, including volatility in the differences between product prices at sales points and the applicable index price.

The Company relies on various types of derivative instruments to manage its exposure to commodity price risk and to provide a level of certainty in the Company’s forward cash flows supporting the Company’s capital investment program. These types of instruments may include fixed price swaps, costless collars, or basis differential swaps. These contracts are financial instruments, and do not require or allow for physical delivery of the hedged commodity. While mitigating the effects of fluctuating commodity prices, these derivative contracts may limit the benefits we would receive from increases in commodity prices above the fixed hedge prices.

The Company’s hedging policy limits the volumes hedged to not be greater than 50% of its forecasted production volumes without Board approval.

Fair Value of Commodity Derivatives: FASB ASC 815 requires that all derivatives be recognized on the Consolidated Balance Sheets as either an asset or liability and be measured at fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not apply hedge accounting to any of its derivative instruments.

Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at fair value on the Consolidated Balance Sheets and the associated unrealized gains and losses are recorded as current income or expense in the Consolidated Statements of Operations. Unrealized gains or losses on commodity derivatives represent the non-cash change in the fair value of these derivative instruments and do not impact operating cash flows on the cash flow statement.

Commodity Derivative Contracts: At September 30, 2017, the Company had the following open commodity derivative contracts to manage commodity price risks. For the fixed price swaps, the Company receives the fixed price for the contract and pays the variable price to the counterparty. For the collars, the Company pays the counterparty if the market price is above the ceiling price and the counterparty pays the Company if the market price is below the floor on a notional quantity. The reference prices of these commodity derivative contracts are typically referenced to index prices as published by independent third parties.

Natural Gas:

Type	Commodity Reference Price	Remaining Contract Period	Volume - MMBTU/Day		Average Price /MMBTU		Fair Value - September 30, 2017
							Asset (Liability)
Fixed price swaps
	NYMEX-Henry Hub	October 2017		575,000	$	3.17	$			3,430
	NYMEX-Henry Hub	Apr - Oct 2018		120,000	$	2.96	$			480

Type	Commodity Reference Price	Remaining Contract Period	Volume - MMBTU/Day		Floor Price ($/MMBTU)		Ceiling Price ($/MMBTU)		Fair Value - September 30, 2017
									Asset (Liability)
Collars
	NYMEX-Henry Hub	Jan - Mar 2018		40,000	$	3.23	$	3.54	$	222

The following table summarizes the pre-tax realized and unrealized gain (loss) the Company recognized related to its derivative instruments in the Consolidated Statements of Operations for the periods ended September 30, 2017 and 2016:

	For the Three Months					For the Nine Months
	Ended September 30,					Ended September 30,
Commodity Derivatives:	2017			2016		2017		2016
Realized gain on commodity derivatives-natural gas (1)	$	8,884		$	—	$	8,016	$	—
Unrealized (loss) gain on commodity derivatives (1)		(4,234	)		—		4,133		—
Total gain on commodity derivatives	$	4,650		$	—	$	12,149	$	—

⁽¹⁾	Included in gain on commodity derivatives in the Consolidated Statements of Operations.

The realized gain or loss on commodity derivatives relates to actual amounts received or paid or to be received or paid under the Company’s derivative contracts and the unrealized gain or loss on commodity derivatives represents the change in the fair value of these derivative instruments over the remaining term of the contract.