Derivatives

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

1.    Commodity derivatives

The Company engages in derivative transactions such as collars, swaps, puts and basis swaps to hedge price risks due to unfavorable changes in oil and natural gas prices related to its oil and natural gas production. As of September 30, 2014, the Company had 53 open derivative contracts with financial institutions which extend from October 2014 to December 2017. None of these contracts were designated as hedges for accounting purposes. The contracts are recorded at fair value on the balance sheet and gains and losses are recognized in current period earnings. Gains and losses on derivatives are reported on the unaudited consolidated statements of operations in the respective "Gain (loss) on derivatives" amounts.

Each collar transaction has an established price floor and ceiling. When the settlement price is below the price floor established by these collars, the Company receives an amount from its counterparty equal to the difference between the settlement price and the price floor multiplied by the hedged contract volume. When the settlement price is above the price ceiling established by these collars, the Company pays its counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the hedged contract volume.

Each swap transaction has an established fixed price. When the settlement price is below the fixed price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is above the fixed price, the Company pays its counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume.

Each put transaction has an established floor price. The Company pays its counterparty a premium in order to enter into the put transaction. When the settlement price is below the floor price, the counterparty pays the Company an amount equal to the difference between the settlement price and the fixed price multiplied by the hedged contract volume. When the settlement price is above the floor price, the put option expires.

The oil basis swap transaction has an established fixed basis differential. The Company's oil basis swap differential is between the West Texas Intermediate Argus Midland ("Argus Midland") index crude oil price and the West Texas Intermediate Argus Cushing ("Argus Cushing") index crude oil price. When the Argus Cushing price less the fixed basis differential is greater than the actual Argus Midland price, the difference multiplied by the hedged contract volume is paid to the Company by the counterparty. When the Argus Cushing price less the fixed basis differential is less than the actual Argus Midland price, the difference multiplied by the hedged contract volume is paid by the Company to the counterparty.

During the first quarter of 2014, the Company unwound a physical commodity contract and the associated oil basis swap financial derivative contract which hedged the differential between the Light Louisiana Sweet Argus and the Brent International Petroleum Exchange index oil prices. Prior to its unwind, the physical commodity contract qualified to be scoped out of mark-to-market accounting in accordance with the normal purchase and normal sale scope exemption. Once modified to settle financially in the unwind agreement, the contract ceased to qualify for the normal purchase and normal sale scope exemption, therefore requiring it to be marked-to-market. The Company received net proceeds of $76.7 million from the early termination of these contracts. The Company agreed to settle the contracts early due to the counterparty's decision to exit the physical commodity trading business.

During the nine months ended September 30, 2014, the Company entered into additional commodity contracts to hedge a portion of its estimated future production. The following table summarizes information about these additional commodity derivative contracts:

	Aggregate volumes	Swap price		Floor price		Ceiling price		Contract period
Oil (volumes in Bbl):
Swap	288,000	$	103.56	$	—	$	—	July 2014	-	December 2014
Swap	672,000	$	96.56	$	—	$	—	January 2015	-	December 2015
Price collars	696,000	$	—	$	80.00	$	100.20	January 2016	-	December 2016
Swap	640,500	$	84.85	$	—	$	—	January 2016	-	December 2016
Swap	933,300	$	84.80	$	—	$	—	January 2016	-	December 2016
Price collars	2,263,000	$	—	$	80.00	$	100.00	January 2017	-	December 2017
Natural gas (volumes in MMBtu):
Swaps	5,508,000	$	4.32	$	—	$	—	March 2014	-	December 2014
Price collar	3,797,500	$	—	$	4.00	$	5.50	May 2014	-	December 2014
Price collar	20,440,000	$	—	$	3.00	$	5.95	January 2015	-	December 2015
Price collar	18,666,000	$	—	$	3.00	$	5.60	January 2016	-	December 2016

The following table summarizes open positions as of September 30, 2014, and represents, as of such date, derivatives in place through December 2017 on annual production volumes:

	Remaining Year 2014			Year 2015		Year 2016		Year 2017
Oil positions:(1)
Puts:
Hedged volume (Bbl)	135,000			456,000		—		—
Weighted-average price ($/Bbl)	$	75.00		$	75.00	$	—	$	—
Swaps:
Hedged volume (Bbl)	685,999			672,000		1,573,800		—
Weighted-average price ($/Bbl)	$	96.35		$	96.56	$	84.82	$	—
Collars:
Hedged volume (Bbl)	736,500			6,557,020		2,556,000		2,263,000
Weighted-average floor price ($/Bbl)	$	86.42		$	79.81	$	80.00	$	80.00
Weighted-average ceiling price ($/Bbl)	$	104.89		$	95.40	$	93.77	$	100.00
Basis swap:(2)
Hedged volume (Bbl)	552,000			—		—		—
Weighted-average price ($/Bbl)	$	(1.00	)	$	—	$	—	$	—
Natural gas positions:(3)
Swaps:
Hedged volume (MMBtu)	1,656,000			—		—		—
Weighted-average price ($/MMBtu)	$	4.32		$	—	$	—	$	—
Collars:
Hedged volume (MMBtu)	3,826,000			28,600,000		18,666,000		—
Weighted-average floor price ($/MMBtu)	$	3.37		$	3.00	$	3.00	$	—
Weighted-average ceiling price ($/MMBtu)	$	5.50		$	5.96	$	5.60	$	—

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(1) Oil derivatives are settled based on the average of the daily settlement prices for the First Nearby Month of the West Texas Intermediate NYMEX Light Sweet Crude Oil Futures Contract for each NYMEX Trading Day during each month.

(2) The associated oil basis swap is settled on the differential between the Argus Midland and the Argus Cushing index oil prices.

(3) Natural gas derivatives are settled based on the Inside FERC index price for West Texas Waha for the calculation period.

The following represents cash settlements received (paid) for matured derivatives for the periods presented:

	Three months ended September 30,					Nine months ended September 30,
(in thousands)	2014		2013			2014			2013
Commodity derivatives received (paid)	$	4,531	$	(3,975	)	$	(1,320	)	$	888
Interest rate derivatives paid	—		(94		)	—			(300		)
Cash settlements received (paid) for matured derivatives, net	$	4,531	$	(4,069	)	$	(1,320	)	$	588

2.    Interest rate derivatives

The Company is exposed to market risk for changes in interest rates related to any drawn amount on its Senior Secured Credit Facility. In prior periods, interest rate derivative agreements were used to manage a portion of the exposure related to changing interest rates by converting floating-rate debt to fixed-rate debt. If the London Interbank Offered Rate ("LIBOR") was lower than the fixed rate in the contract, the Company was required to pay the counterparties the difference, and conversely, the counterparties were required to pay the Company if LIBOR was higher than the fixed rate in the contract. The Company did not designate the interest rate derivatives as cash flow hedges; therefore, the changes in fair value of these instruments were recorded in current earnings. The Company had one interest rate swap and one interest rate cap outstanding for a notional amount of $100.0 million with fixed pay rates of 1.11% and 3.00%, respectively, until their expiration in September 2013. No interest rate derivatives were in place during the period ended September 30, 2014.

3.    Balance sheet presentation

The Company’s oil and natural gas commodity derivatives are presented on a net basis in "Derivatives" on the unaudited consolidated balance sheets.

The following summarizes the fair value of derivatives outstanding on a gross basis as of September 30, 2014 and December 31, 2013, respectively:

(in thousands)	September 30, 2014		December 31, 2013
Assets:
Commodity derivatives:
Oil derivatives	$	25,988	$	140,496
Natural gas derivatives	1,930		657
Total assets	$	27,918	$	141,153
Liabilities:
Commodity derivatives:
Oil derivatives(1)	$	16,081	$	56,818
Natural gas derivatives(2)	1,139		2,278
Total liabilities	$	17,220	$	59,096
Net derivative position	$	10,698	$	82,057

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(1) The oil derivatives fair value includes a deferred premium liability of $10.1 million and $11.1 million as of September 30, 2014 and December 31, 2013, respectively.

(2) The natural gas derivatives fair value includes a deferred premium liability of $1.0 million and $1.6 million as of September 30, 2014 and December 31, 2013, respectively.

By using derivatives to hedge exposures to changes in commodity prices and interest rates, the Company exposes itself to credit risk and market risk. Market risk is the exposure to changes in the market price of oil and natural gas, which are subject to fluctuations from a variety of factors, including changes in supply and demand. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, thereby creating credit risk. The Company’s counterparties are or originally were participants in the Senior Secured Credit Facility which is secured by the Company’s oil and natural gas reserves; therefore, the Company is not required to post any collateral. The Company does not require collateral from its counterparties. The Company minimizes the credit risk in derivatives by: (i) limiting its exposure to any single counterparty, (ii) entering into derivatives only with counterparties that are also lenders in the Senior Secured Credit Facility and meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard, and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity and interest rate derivatives are subject to counterparty netting under agreements governing such derivatives and, therefore, the risk of such loss is somewhat mitigated as of September 30, 2014.