Derivatives

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

a. 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 production. As of September 30, 2015, the Company had 37 open derivative contracts with financial institutions that extend from October 2015 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 "Gain (loss) on derivatives, net" line item.

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, which can be deferred until settlement, 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 transactions have an established fixed basis differential. The Company's oil basis swaps' differential is between the West Texas Intermediate-Argus Americas Crude (Midland) ("WTI Midland") index crude oil price and the WTI NYMEX (defined below) index crude oil price. When the WTI NYMEX price less the fixed basis differential is greater than the actual WTI Midland price, the difference multiplied by the hedged contract volume is paid to the Company by the counterparty. When the WTI NYMEX price less the fixed basis differential is less than the actual WTI 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 that 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.

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

	Three months ended September 30,				Nine months ended September 30,
(in thousands)	2015		2014		2015		2014
Cash settlements received (paid) for matured commodity derivatives	$	66,142	$	4,531	$	175,879	$	(1,320	)
Early terminations of commodity derivatives received	—		—		—		76,660
Cash settlements received for derivatives, net	$	66,142	$	4,531	$	175,879	$	75,340

The following table summarizes open positions as of September 30, 2015, and represents, as of such date, derivatives in place through December 2017 on annual production volumes:

	Remaining Year 2015			Year 2016		Year 2017
Oil positions:(1)
Puts:
Hedged volume (Bbl)	114,000			—		—
Weighted-average price ($/Bbl)	$	75.00		$	—	$	—
Swaps:
Hedged volume (Bbl)	168,000			1,573,800		—
Weighted-average price ($/Bbl)	$	96.56		$	84.82	$	—
Collars:
Hedged volume (Bbl)	1,641,880			3,654,000		2,628,000
Weighted-average floor price ($/Bbl)	$	79.81		$	73.99	$	77.22
Weighted-average ceiling price ($/Bbl)	$	95.41		$	89.63	$	97.22
Totals:
Total volume hedged with ceiling price (Bbl)	1,809,880			5,227,800		2,628,000
Weighted-average ceiling price ($/Bbl)	$	95.51		$	88.18	$	97.22
Total volume hedged with floor price (Bbl)	1,923,880			5,227,800		2,628,000
Weighted-average floor price ($/Bbl)	$	80.99		$	77.25	$	77.22
Basis swaps:(2)
Hedged volume (Bbl)	920,000			—		—
Weighted-average price ($/Bbl)	$	(1.95	)	$	—	$	—
Natural gas positions:(3)
Collars:
Hedged volume (MMBtu)	7,192,000			18,666,000		5,475,000
Weighted-average floor price ($/MMBtu)	$	3.00		$	3.00	$	3.00
Weighted-average ceiling price ($/MMBtu)	$	5.96		$	5.60	$	4.00

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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 ("WTI NYMEX").

(2) The associated oil basis swaps are settled on the differential between the WTI Midland and the WTI NYMEX index oil prices.

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

b. Balance sheet presentation

In accordance with the Company's standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives. The Company's oil and natural gas commodity derivatives are presented on a net basis as "Derivatives" on the unaudited consolidated balance sheets. See Note 9.a for a summary of the fair value of derivatives on a gross basis.

By using derivatives to hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. For the Company, 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 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 derivative 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 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.