Derivative Financial Instruments

6 Months Ended

Jun. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company utilizes commodity swap contracts, collar contracts and collar contracts with short puts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness.

Periodically, the Company may pay a premium to enter into commodity contracts. Premiums paid, if any, have been nominal in relation to the value of the underlying asset in the contract. The Company recognizes the nominal premium payments as an increase to the value of derivative assets when paid. All derivatives are adjusted to fair value as of each balance sheet date.

Oil production derivative activities. All material physical sales contracts governing the Company's oil production are tied directly to, or are highly correlated with, New York Mercantile Exchange ("NYMEX") West Texas Intermediate ("WTI") oil prices. The Company uses derivative contracts to manage oil price volatility and basis swap contracts to reduce basis risk between NYMEX prices and the actual index prices at which the oil is sold.

The following table sets forth the volumes per day associated with the Company's outstanding oil derivative contracts as of June 30, 2017 and the weighted average oil prices for those contracts:

	2017				Year Ending December 31, 2018
	Third Quarter		Fourth Quarter
Collar contracts:
Volume (Bbl)	6,000		6,000		—
Price per Bbl:
Ceiling	$	70.40	$	70.40	$	—
Floor	$	50.00	$	50.00	$	—
Collar contracts with short puts (a):
Volume (Bbl)	147,000		155,000		71,000
Price per Bbl:
Ceiling	$	62.03	$	62.12	$	60.38
Floor	$	49.81	$	49.82	$	50.07
Short put	$	41.07	$	41.02	$	40.00

 ____________________

(a) Subsequent to June 30, 2017, the Company entered into additional oil collar contracts with short puts for 26,000 Bbl per day of 2018 production with a ceiling price of $55.01 per Bbl, a floor price of $45.00 per Bbl and a short put price of $35.00 per Bbl.

NGL production derivative activities. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu, Texas or Conway, Kansas NGL component product prices. The Company uses derivative contracts to manage NGL component price volatility.

The following table sets forth the volumes per day associated with the Company's outstanding NGL derivative contracts as of June 30, 2017 and the weighted average NGL prices for those contracts:

	2017				Year Ending December 31,
	Third Quarter		Fourth Quarter		2018		2019
Butane collar contracts with short puts (a):
Volume (Bbl)	2,000		—		—		—
Price per Bbl:
Ceiling	$	36.12	$	—	$	—	$	—
Floor	$	29.25	$	—	$	—	$	—
Short put	$	23.40	$	—	$	—	$	—
Ethane collar contracts (b):
Volume (Bbl)	3,000		3,000		—		—
Price per Bbl:
Ceiling	$	11.83	$	11.83	$	—	$	—
Floor	$	8.68	$	8.68	$	—	$	—
Ethane basis swap contracts (c):
Volume (MMBtu)	6,920		6,920		6,920		6,920
Price differential ($/MMBtu)	$	1.60	$	1.60	$	1.60	$	1.60

 ____________________

(a) Represent collar contracts with short puts that reduce the price volatility of butane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.

(b) Represent collar contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices.

(c) Represent basis swap contracts that reduce the price volatility of ethane forecasted for sale by the Company at Mont Belvieu, Texas-posted prices. The basis swap contracts fix the basis differential on a NYMEX Henry Hub ("HH") MMBtu equivalent basis. The Company will receive the HH price plus the price differential on 6,920 MMBtu per day, which is equivalent to 2,500 Bbls per day of ethane.

Gas production derivative activities. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to HH gas prices or regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and basis swap contracts to reduce basis risk between HH prices and actual index prices at which the gas is sold.

The following table sets forth the volumes per day associated with the Company's outstanding gas derivative contracts as of June 30, 2017 and the weighted average gas prices for those contracts:

	2017						Year Ending December 31, 2018
	Third Quarter			Fourth Quarter
Collar contracts with short puts:
Volume (MMBtu)	290,000			300,000			62,329
Price per MMBtu:
Ceiling	$	3.57		$	3.60		$	3.56
Floor	$	2.95		$	2.96		$	2.91
Short put	$	2.47		$	2.47		$	2.37
Basis swap contracts:
Mid-Continent index swap volume (MMBtu) (a)	45,000			45,000			—
Price differential ($/MMBtu)	$	(0.32	)	$	(0.32	)	$	—
Permian Basin index swap volume (MMBtu) (b)	—			26,522			39,945
Price differential ($/MMBtu)	$	—		$	0.30		$	0.30

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(a) Represent swap contracts that fix the basis differentials between the index price at which the Company sells its Mid-Continent gas and the HH index price used in collar contracts with short puts.

(b) Represent swap contracts that fix the basis differentials between Permian Basin index prices and southern California index prices for Permian Basin gas forecasted for sale in southern California. Subsequent to June 30, 2017, the Company entered into additional basis swap contracts for 6,739 MMBtu per day of third quarter 2017 production with a price of $0.26 per MMBtu and 11,726 MMBtu per day of 2018 production with a price differential of $0.31 per MMBtu.

Diesel derivative activities. Periodically, the Company enters into diesel derivative swap contracts to mitigate fuel price risk. The diesel derivative swap contracts are priced at an index that is highly correlated to the prices that the Company incurs to fuel drilling rigs and its fracture stimulation fleet equipment. As of June 30, 2017, the Company was party to diesel derivative swap contracts for 1,000 Bbls per day for the remainder of 2017 at an average per Bbl fixed price of $63.00. Subsequent to June 30, 2017, the Company terminated its diesel derivative swap contracts for August through December 2017 for cash proceeds of $321 thousand.

Interest rate derivative activities. As of June 30, 2017, the Company was party to interest rate derivative contracts whereby the Company will receive the three-month LIBOR rate for the 10-year period from December 2017 through December 2027 in exchange for paying a fixed interest rate of 1.81 percent on a notional amount of $100 million on December 15, 2017.

Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives as of June 30, 2017 and December 31, 2016, and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The Company classifies the fair value amounts of derivative assets and liabilities as net current or noncurrent derivative assets or net current or noncurrent derivative liabilities, whichever the case may be, by commodity and counterparty. The Company enters into derivatives under master netting arrangements, which, in an event of default, allows the Company to offset payables to and receivables from the defaulting counterparty.

The aggregate fair value of the Company's derivative instruments reported in the accompanying consolidated balance sheets by type and counterparty, including the classification between current and noncurrent assets and liabilities, consists of the following:

Fair Value of Derivative Instruments as of June 30, 2017
Type	Consolidated Balance Sheet Location	Fair Value		Gross Amounts Offset in the Consolidated Balance Sheet			Net Fair Value Presented in the Consolidated Balance Sheet
		(in millions)
Derivatives not designated as hedging instruments
Asset Derivatives:
Commodity price derivatives	Derivatives - current	$	153	$	(2	)	$	151
Interest rate derivatives	Derivatives - current	$	5	$	—		5
Commodity price derivatives	Derivatives - noncurrent	$	30	$	(1	)	29
							$	185
Liability Derivatives:
Commodity and diesel price derivatives	Derivatives - current	$	5	$	(2	)	$	3
Commodity price derivatives	Derivatives - noncurrent	$	2	$	(1	)	1
							$	4

Fair Value of Derivative Instruments as of December 31, 2016
Type	Consolidated Balance Sheet Location	Fair Value		Gross Amounts Offset in the Consolidated Balance Sheet			Net Fair Value Presented in the Consolidated Balance Sheet
		(in millions)
Derivatives not designated as hedging instruments
Asset Derivatives:
Commodity price derivatives	Derivatives - current	$	33	$	(25	)	$	8
Interest rate derivatives	Derivatives - current	$	6	$	—		6
							$	14
Liability Derivatives:
Commodity price derivatives	Derivatives - current	$	102	$	(25	)	$	77
Commodity price derivatives	Derivatives - noncurrent	$	7	$	—		7
							$	84

The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.

The following table details the location of gains and losses recognized on the Company's derivative contracts in the accompanying consolidated statements of operations:

Derivatives Not Designated as	Location of Gain / (Loss) Recognized in	Three Months Ended June 30,						Six Months Ended June 30,
Hedging Instruments	Earnings on Derivatives	2017			2016			2017			2016
		(in millions)
Commodity price derivatives	Derivative gains (losses), net	$	136		$	(222	)	$	287		$	(177	)
Interest rate derivatives	Derivative gains (losses), net	(1		)	(7		)	(1		)	(9		)
Total		$	135		$	(229	)	$	286		$	(186	)