Derivative Commodity Instruments

6 Months Ended

Jun. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Commodity Instruments

DERIVATIVE COMMODITY INSTRUMENTS

We periodically enter into derivative commodity instruments to hedge our exposure to price fluctuations on oil, natural gas liquids and natural gas production. Such instruments may include over-the-counter (OTC) swaps and basis swaps typically executed with investment and commercial banks and energy-trading firms. Derivative transactions are pursuant to standing authorizations by the Board of Directors, which do not authorize speculative positions.

Due to the volatility of commodity prices, the estimated fair value of our derivative instruments is subject to fluctuation from period to period, which could result in significant differences between the current estimated fair value and the ultimate settlement price. Additionally, Energen is at risk of economic loss based upon the creditworthiness of our counterparties. We were in a net gain position with two of our active counterparties and in a net loss position with the remaining twelve at June 30, 2014. The counterparty net gain positions at June 30, 2014 constituted approximately $1.0 million.

Energen’s current policy is to not enter into agreements that require the posting of collateral. The majority of our counterparty agreements include provisions for net settlement of transactions payable on the same date and in the same currency. Most of the agreements include various contractual set-off rights, which may be exercised by the non-defaulting party in the event of an early termination due to a default.

Prior to June 30, 2013, Energen used cash flow hedge accounting where applicable for its derivative transactions. The effective portion of the gain or loss on the derivative instrument was recognized in accumulated other comprehensive income as a component of shareholders’ equity and subsequently reclassified as gain (loss) on derivative instruments, net when the forecasted transaction affects earnings. The ineffective portion of a derivative’s change in fair value was required to be recognized immediately in gain (loss) on derivative instruments, net. All other derivative transactions not designated as cash flow hedge accounting are accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net.

Effective March 31, 2013 and June 30, 2013, Energen dedesignated from cash flow hedge accounting 5,078 thousand barrels (MBbl) and 2,353 MBbl, respectively, of various New York Mercantile Exchange (NYMEX) oil contracts associated with the Permian Basin due to lack of correlation. Gains and losses from inception of the hedge to the dedesignation date were frozen and will remain in accumulated other comprehensive income until the forecasted transactions actually occur. Subsequent gains or losses will be accounted for as mark-to-market transactions and recognized immediately through gain (loss) on derivative instruments, net.

Effective June 30, 2013, Energen elected to discontinue the use of cash flow hedge accounting and to dedesignate all remaining derivative commodity instruments that were previously designated as cash flow hedges. As a result of discontinuing hedge accounting, any gains or losses from inception of the hedge to June 30, 2013 were frozen and will remain in accumulated other comprehensive income until the forecasted transactions actually occur. Any subsequent gains or losses will be accounted for as mark-to-market and recognized immediately through gain (loss) on derivative instruments, net. As a result of Energen’s election to discontinue hedge accounting, all derivative transactions entered into subsequent to June 30, 2013 will be accounted for as mark-to-market transactions with gains or losses recognized in the period of change in gain (loss) on derivative instruments, net.

The following tables detail the offsetting of derivative assets and liabilities as well as the fair values of derivatives on the balance sheets:

(in thousands)	June 30, 2014
										Gross Amounts Not Offset in the Balance Sheets
	Gross Amounts Recognized at Fair Value			Gross Amounts Offset in the Balance Sheets			Net Amount Presented in the Balance Sheets			Financial Instruments		Cash Collateral Received		Net Fair Value Presented in the Balance Sheets
Derivatives not designated as hedging instruments
Assets
Derivative instruments	$	14,540		$	(14,016	)	$	524		$	—	$	—	$	524
Noncurrent derivative instruments	2,076			(1,453		)	623			—		—		623
Total derivative assets	16,616			(15,469		)	1,147			—		—		1,147
Liabilities
Derivative instruments	110,229			(14,016		)	96,213			—		—		96,213
Noncurrent derivative instruments	23,158			(1,453		)	21,705			—		—		21,705
Total derivative liabilities	133,387			(15,469		)	117,918			—		—		117,918
Total derivatives	$	(116,771	)	$	—		$	(116,771	)	$	—	$	—	$	(116,771	)

(in thousands)	December 31, 2013
										Gross Amounts Not Offset in the Balance Sheets
	Gross Amounts Recognized at Fair Value			Gross Amounts Offset in the Balance Sheets			Net Amount Presented in the Balance Sheets			Financial Instruments		Cash Collateral Received		Net Fair Value Presented in the Balance Sheets
Derivatives not designated as hedging instruments
Assets
Derivative instruments	$	36,223		$	(18,760	)	$	17,463		$	—	$	—	$	17,463
Noncurrent derivative instruments	7,992			(2,553		)	5,439			—		—		5,439
Total derivative assets	44,215			(21,313		)	22,902			—		—		22,902
Liabilities
Derivative instruments	49,062			(18,760		)	30,302			—		—		30,302
Noncurrent derivative instruments	2,553			(2,553		)	—			—		—		—
Total derivative liabilities	51,615			(21,313		)	30,302			—		—		30,302
Total derivatives	$	(7,400	)	$	—		$	(7,400	)	$	—	$	—	$	(7,400	)

Energen had a net $4.5 million and a net $8.2 million deferred tax liability included in current deferred income taxes on the balance sheets related to derivative items included in accumulated other comprehensive income as of June 30, 2014, and December 31, 2013, respectively.

The following table details the effect of derivative commodity instruments in cash flow hedging relationships on the financial statements:

(in thousands)	Location on Statements of Income	Three months ended June 30, 2014		Three months ended June 30, 2013
Net gain recognized in other comprehensive income on derivatives (effective portion), net of tax of $6 and $9,713	—	$	9	$	15,847
Gain reclassified from accumulated other comprehensive income into income (effective portion)	Gain (loss) on derivative instruments, net	$	5,735	$	3,112
Gain recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) on derivative instruments, net	$	—	$	1,392

(in thousands)	Location on Statements of Income	Six months ended June 30, 2014		Six months ended June 30, 2013
Net gain (loss) recognized in other comprehensive income on derivatives (effective portion), net of tax of $7 and ($6,712)	—	$	11	$	(10,951	)
Gain reclassified from accumulated other comprehensive income into income (effective portion)	Gain (loss) on derivative instruments, net	$	9,789	$	20,935
Gain recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Gain (loss) on derivative instruments, net	$	—	$	858

The following table details the effect of open and closed derivative commodity instruments not designated as hedging instruments on the income statement:

(in thousands)	Location on Statements of Income	Three months ended June 30, 2014			Three months ended June 30, 2013
Gain (loss) recognized in income on derivatives	Gain (loss) on derivative instruments, net	$	(90,581	)	$	53,078

(in thousands)	Location on Statements of Income	Six months ended June 30, 2014			Six months ended June 30, 2013
Gain (loss) recognized in income on derivatives	Gain (loss) on derivative instruments, net	$	(148,026	)	$	21,577

As of June 30, 2014, $7.3 million, net of tax, of deferred net gains on derivative instruments recorded in accumulated other comprehensive income are expected to be reclassified and reported in earnings as revenues during the next twelve-month period. During 2013, we had a discontinuance of hedge accounting when Energen determined it was probable certain forecasted volumes would not occur due to certain properties being sold. This discontinuance of hedge accounting resulted in $3.0 million of after-tax losses being recognized into gain (loss) on derivative instruments, net during the six months ended June 30, 2014.

As of June 30, 2014, Energen had entered into the following transactions for the remainder of 2014 and subsequent years:

Production Period	Total Hedged Volumes		Average Contract Price	Description
Oil
2014	4,958	MBbl	$92.65 Bbl	NYMEX Swaps
2015	8,280	MBbl	$89.30 Bbl	NYMEX Swaps
Oil Basis Differential
2014	600	MBbl	$(3.30) Bbl	WTS/WTI Basis Swaps*
2014	1,200	MBbl	$(3.08) Bbl	WTI/WTI Basis Swaps**
Natural Gas Liquids
2014	35.8	MMgal	$0.93 Gal	Liquids Swaps
Natural Gas
2014	5.2	Bcf	$4.56 Mcf	NYMEX Swaps
2014	15.4	Bcf	$4.61 Mcf	Basin Specific Swaps - San Juan
2014	5.0	Bcf	$3.81 Mcf	Basin Specific Swaps - Permian
2015	23.0	Bcf	$4.13 Mcf	Basin Specific Swaps - San Juan
2015	6.0	Bcf	$4.20 Mcf	Basin Specific Swaps - Permian
Natural Gas Basis Differential
2014	3.1	Bcf	$(0.09) Mcf	San Juan Basis Swaps
2014	1.2	Bcf	$(0.17) Mcf	Permian Basis Swaps
*WTS - West Texas Sour/Midland, WTI - West Texas Intermediate/Cushing
**WTI - West Texas Intermediate/Midland, WTI - West Texas Intermediate/Cushing

As of June 30, 2014, the maximum term over which Energen has hedged exposures to the variability of cash flows is through December 31, 2015.