DERIVATIVE FINANCIAL INSTRUMENTS

From time to time, the Company uses derivative financial instruments to mitigate its exposure to commodity price risk associated with oil, natural gas and natural gas liquids prices. These instruments consist of put and call options in the form of costless collars and swap contracts. The Company records derivative financial instruments in its consolidated balance sheet as either assets or liabilities measured at fair value. The Company has elected not to apply hedge accounting for its existing derivative financial instruments. As a result, the Company recognizes the change in derivative fair value between reporting periods currently in its consolidated statement of operations as an unrealized gain or unrealized loss. The fair value of the Company’s derivative financial instruments is determined using industry-standard models that consider various inputs including: (i) quoted forward prices for commodities, (ii) time value of money and (iii) current market and contractual prices for the underlying instruments, as well as other relevant economic measures. RBC, Comerica Bank, The Bank of Nova Scotia and SunTrust Bank (or affiliates thereof) were the counterparties for the Company’s commodity derivatives at March 31, 2014. The Company has considered the credit standings of the counterparties in determining the fair value of its derivative financial instruments.

The Company has entered into various costless collar contracts to mitigate its exposure to fluctuations in oil prices, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss pursuant to any of these transactions is the arithmetic average of the settlement prices for the NYMEX West Texas Intermediate oil futures contract for the first nearby month corresponding to the calculation period’s calendar month. When the settlement price is below the price floor established by one or more of these collars, the Company receives from the counterparty an amount equal to the difference between the settlement price and the price floor multiplied by the contract oil volume. When the settlement price is above the price ceiling established by one or more of these collars, the Company pays to the counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract oil volume.

The Company has entered into various costless collar transactions for natural gas, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss to the Company pursuant to any of these transactions is the settlement price for the NYMEX Henry Hub natural gas futures contract for the delivery month corresponding to the calculation period’s calendar month for the settlement date of that contract period. When the settlement price is below the price floor established by one or more of these collars, the Company receives from the counterparty an amount equal to the difference between the settlement price and the price floor multiplied by the contract natural gas volume. When the settlement price is above the price ceiling established by one or more of these collars, the Company pays to the counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract natural gas volume.

The Company has entered into various swap contracts to mitigate its exposure to fluctuations in natural gas liquids (“NGL”) prices, each with an established fixed price. For each calculation period, the settlement price for determining the realized gain or loss to the Company pursuant to any of these transactions is the arithmetic average of any current month for delivery on the nearby month futures contracts of the underlying commodity as stated on the “Mont Belvieu Spot Gas Liquids Prices: NON-TET prop” on the pricing date. When the settlement price is below the fixed price established by one or more of these swaps, the Company receives from the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract NGL volume. When the settlement price is above the fixed price established by one or more of these swaps, the Company pays to the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract NGL volume.

At March 31, 2014, the Company had various costless collar contracts open and in place to mitigate its exposure to oil and natural gas price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and price floor and ceiling. Each contract is set to expire at varying times during 2014 and 2015.

At March 31, 2014, the Company had various swap contracts open and in place to mitigate its exposure to NGL price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and fixed price. Each contract is set to expire at varying times during 2014 and 2015.

The following is a summary of the Company’s open costless collar contracts for oil and natural gas and open swap contracts for NGL at March 31, 2014.



Commodity	Calculation Period	Notional Quantity (Bbl/month)	Price Floor ($/Bbl)	Price Ceiling ($/Bbl)	Fair Value of Asset (Liability) (thousands)
Oil	04/01/2014 - 06/30/2014	8,000	90.00	114.00	$	4
Oil	04/01/2014 - 06/30/2014	12,000	90.00	115.50	6
Oil	04/01/2014 - 12/31/2014	10,000	85.00	100.55	(141		)
Oil	04/01/2014 - 12/31/2014	12,200	85.00	100.40	(180		)
Oil	04/01/2014 - 12/31/2014	15,000	85.00	97.50	(423		)
Oil	04/01/2014 - 12/31/2014	30,000	85.00	98.00	(786		)
Oil	04/01/2014 - 12/31/2014	12,000	85.00	100.00	(196		)
Oil	04/01/2014 - 12/31/2014	15,000	87.00	97.00	(429		)
Oil	04/01/2014 - 12/31/2014	20,000	88.00	95.60	(711		)
Oil	04/01/2014 - 12/31/2014	20,000	90.00	97.00	(495		)
Oil	04/01/2014 - 12/31/2014	12,000	90.00	97.90	(233		)
Oil	04/01/2014 - 12/31/2014	15,000	90.00	97.90	(295		)
Oil	04/01/2014 - 12/31/2014	15,000	90.00	98.00	(293		)
Oil	04/01/2014 - 12/31/2014	15,000	90.00	101.15	(77		)
Total open oil costless collar contracts					(4,249		)



Commodity	Calculation Period	Notional Quantity (MMBtu/month)	Price Floor ($/MMBtu)	Price Ceiling ($/MMBtu)	Fair Value of Asset (Liability) (thousands)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.00	5.15	(87	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.25	5.21	(74	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.25	5.22	(74	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.25	5.37	(58	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.25	5.42	(54	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.50	4.90	(103	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.75	4.75	(110	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	3.75	4.77	(103	)
Natural Gas	04/01/2014 - 12/31/2014	100,000	4.00	4.60	(100	)
Natural Gas	04/01/2014 - 12/31/2015	100,000	3.75	4.36	(420	)
Natural Gas	04/01/2014 - 12/31/2015	100,000	3.75	4.45	(334	)
Natural Gas	01/01/2015 - 12/31/2015	100,000	3.75	4.60	(78	)
Natural Gas	01/01/2015 - 03/31/2015	200,000	4.00	4.84	(122	)
Natural Gas	01/01/2015 - 12/31/2015	100,000	3.75	4.65	(65	)
Natural Gas	01/01/2015 - 12/31/2015	200,000	3.75	5.04	67
Total open natural gas costless collar contracts					(1,715	)



Commodity	Calculation Period	Notional Quantity (Gal/month)	Fixed Price ($/Gal)	Fair Value of Asset (Liability) (thousands)
Propane	04/01/2014 - 12/31/2014	116,000	0.950	(130		)
Propane	04/01/2014 - 12/31/2014	84,000	1.143	51
Propane	04/01/2014 - 12/31/2014	68,000	1.150	48
Propane	04/01/2014 - 12/31/2014	116,000	1.003	(76		)
Propane	04/01/2014 - 12/31/2014	60,000	1.015	(32		)
Propane	01/01/2015 - 12/31/2015	150,000	1.000	(59		)
Propane	01/01/2015 - 12/31/2015	68,000	1.073	32
Normal Butane	04/01/2014 - 12/31/2014	17,500	1.540	41
Normal Butane	04/01/2014 - 12/31/2014	45,500	1.550	112
Isobutane	04/01/2014 - 12/31/2014	22,000	1.640	69
Isobutane	04/01/2014 - 12/31/2014	37,000	1.640	116
Natural Gasoline	04/01/2014 - 12/31/2014	30,000	1.970	(36		)
Natural Gasoline	04/01/2014 - 12/31/2014	41,000	2.000	(33		)
Total open NGL swap contracts				103
Total open derivative financial instruments				$	(5,861	)

These derivative financial instruments are subject to master netting arrangements within specific commodity types, i.e., oil, natural gas and NGL, by counterparty. Derivative financial instruments with Counterparty A are not subject to master netting across commodity types, while derivative financial instruments with Counterparties B, C and D allow for cross-commodity master netting provided the settlement dates for the commodities are the same. The Company does not present different types of commodities with the same counterparty on a net basis in its consolidated balance sheet.

The following table presents the gross asset balances of the Company’s derivative financial instruments, the amounts subject to master netting arrangements, the amounts that the Company has presented on a net basis, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of March 31, 2014 (in thousands).



Derivative Instruments	Gross amounts of recognized assets		Gross amounts netted in the condensed consolidated balance sheet			Net amounts of assets presented in the condensed consolidated balance sheet		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current assets	$	766	$	(766	)	$	—	$	—
Other assets	—		—			—		—
Counterparty B
Current assets	805		(805		)	—		—
Other assets	604		(353		)	251		—
Counterparty C
Current assets	1,789		(1,690		)	99		99
Other assets	653		(637		)	16		11
Counterparty D
Current assets	43		(43		)	—		—
Other assets	—		—			—		—
Total	$	4,660	$	(4,294	)	$	366	$	110

The following table presents the gross liability balances of the Company’s derivative financial instruments, the amounts subject to master netting arrangements, the amounts that the Company has presented on a net basis, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of March 31, 2014 (in thousands).



Derivative Instruments	Gross amounts of recognized liabilities		Gross amounts netted in the condensed consolidated balance sheet			Net amounts of liabilities presented in the condensed consolidated balance sheet		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current liabilities	$	2,331	$	(766	)	$	1,565	$	—
Other liabilities	—		—			—		—
Counterparty B
Current liabilities	2,282		(805		)	1,477		—
Other liabilities	353		(353		)	—		—
Counterparty C
Current liabilities	4,765		(1,690		)	3,075		99
Other liabilities	637		(637		)	—		11
Counterparty D
Current liabilities	153		(43		)	110		—
Other liabilities	—		—			—		—
Total	$	10,521	$	(4,294	)	$	6,227	$	110



Derivative Instruments	Gross amounts of recognized assets		Gross amounts netted in the condensed consolidated balance sheet			Net amounts of assets presented in the condensed consolidated balance sheet		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current assets	$	1,746	$	(1,746	)	$	—	—
Other assets	—		—			—		—
Counterparty B
Current assets	1,371		(1,371		)	—		—
Other assets	841		(668		)	173		—
Counterparty C
Current assets	2,886		(2,873		)	13		—
Other assets	1,046		(1,046		)	—		—
Counterparty D
Current assets	6		—			6		—
Other assets	—		—			—		—
Total	$	7,896	$	(7,704	)	$	192	$	—



Derivative Instruments	Gross amounts of recognized liabilities		Gross amounts netted in the condensed consolidated balance sheet			Net amounts of liabilities presented in the condensed consolidated balance sheet		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current liabilities	$	2,550	$	(1,746	)	$	804	$	—
Other liabilities	—		—			—		—
Counterparty B
Current liabilities	2,136		(1,371		)	765		—
Other liabilities	668		(668		)	—		—
Counterparty C
Current liabilities	3,996		(2,873		)	1,123		—
Other liabilities	1,299		(1,046		)	253		—
Counterparty D
Current liabilities	—		—			—		—
Other liabilities	—		—			—		—
Total	$	10,649	$	(7,704	)	$	2,945	$	—

The following table summarizes the location and aggregate fair value of all derivative financial instruments recorded in the unaudited condensed consolidated statements of operations for the periods presented (in thousands). These derivative financial instruments are not designated as hedging instruments.



		Three Months Ended March 31,
Type of Instrument	Location in Condensed Consolidated Statement of Operations	2014			2013
Derivative Instrument
Oil	Revenues: Realized loss on derivatives	$	(942	)	$	(237	)
Natural Gas	Revenues: Realized (loss) gain on derivatives	(589		)	524
NGL	Revenues: Realized (loss) gain on derivatives	(312		)	105
Realized (loss) gain on derivatives		(1,843		)	392
Oil	Revenues: Unrealized loss on derivatives	(2,050		)	(2,728		)
Natural Gas	Revenues: Unrealized loss on derivatives	(1,267		)	(2,511		)
NGL	Revenues: Unrealized gain on derivatives	209			414
Unrealized loss on derivatives		(3,108		)	(4,825		)
Total		$	(4,951	)	$	(4,433	)