NOTE 10: Derivatives

The Company has entered into fixed swap contracts and costless collar contracts. These instruments are intended to reduce the Company’s exposure to short-term fluctuations in the price of oil and natural gas. Fixed swap contracts set a fixed price and provide payments to the Company if the index price is below the fixed price, or require payments by the Company if the index price is above the fixed price. Collar contracts set a fixed floor price and a fixed ceiling price and provide payments to the Company if the index price falls below the floor or require payments by the Company if the index price rises above the ceiling. These contracts cover only a portion of the Company’s natural gas and oil production and provide only partial price protection against declines in natural gas and oil prices. These derivative instruments may expose the Company to risk of financial loss and limit the benefit of future increases in prices. All of the Company’s derivative contracts are with Bank of Oklahoma and are secured. The derivative instruments have settled or will settle based on the prices below.

Derivative contracts in place as of June 30, 2014



	Production volume
Contract period	covered per month	Index	Contract price
Natural gas costless collars
July - December 2014	140,000 Mmbtu	NYMEX Henry Hub	$3.75 floor / $4.50 ceiling

Natural gas fixed price swaps
July - December 2014	140,000 Mmbtu	NYMEX Henry Hub	$4.11
April - September 2014	50,000 Mmbtu	NYMEX Henry Hub	$4.20
April - September 2014	50,000 Mmbtu	NYMEX Henry Hub	$4.18
April - September 2014	50,000 Mmbtu	NYMEX Henry Hub	$4.21
May - October 2014	30,000 Mmbtu	NYMEX Henry Hub	$4.30
October - December 2014	40,000 Mmbtu	NYMEX Henry Hub	$4.61

Oil costless collars
January - December 2014	4,000 Bbls	NYMEX WTI	$85.00 floor / $100.00 ceiling
July - December 2014	5,000 Bbls	NYMEX WTI	$90.00 floor / $97.00 ceiling

Oil fixed price swaps
January - December 2014	3,000 Bbls	NYMEX WTI	$94.50
July - December 2014	4,000 Bbls	NYMEX WTI	$95.25
July - December 2014	5,000 Bbls	NYMEX WTI	$94.20
January - March 2015	6,000 Bbls	NYMEX WTI	$92.85
June - December 2014	4,000 Bbls	NYMEX WTI	$99.40
January - June 2015	7,000 Bbls	NYMEX WTI	$96.80
January - June 2015	5,000 Bbls	NYMEX WTI	$97.40
April - December 2015	5,000 Bbls	NYMEX WTI	$94.56
July - December 2015	7,000 Bbls	NYMEX WTI	$93.91

Derivative contracts in place as of September 30, 2013



	Production volume
Contract period	covered per month	Index	Contract price
Natural gas costless collars
February - December 2013	80,000 Mmbtu	NYMEX Henry Hub	$3.75 floor / $4.25 ceiling
February - December 2013	50,000 Mmbtu	NYMEX Henry Hub	$3.75 floor / $4.30 ceiling
February - December 2013	100,000 Mmbtu	NYMEX Henry Hub	$3.75 floor / $4.05 ceiling
November 2013 - April 2014	160,000 Mmbtu	NYMEX Henry Hub	$4.00 floor / $4.55 ceiling

Natural gas fixed price swaps
March - October 2013	100,000 Mmbtu	NYMEX Henry Hub	$3.505
March - October 2013	70,000 Mmbtu	NYMEX Henry Hub	$3.400
April - December 2013	40,000 Mmbtu	NYMEX Henry Hub	$3.655
May - November 2013	100,000 Mmbtu	NYMEX Henry Hub	$4.320

Oil costless collars
March - December 2013	3,000 Bbls	NYMEX WTI	$90.00 floor / $102.00 ceiling
March - December 2013	4,000 Bbls	NYMEX WTI	$90.00 floor / $101.50 ceiling
May - December 2013	2,000 Bbls	NYMEX WTI	$90.00 floor / $97.50 ceiling
January - June 2014	4,000 Bbls	NYMEX WTI	$90.00 floor / $101.50 ceiling

Oil fixed price swaps
September - December 2013	4,000 Bbls	NYMEX WTI	$105.25

The Company has elected not to complete all of the documentation requirements necessary to permit these derivative contracts to be accounted for as cash flow hedges. The Company’s fair value of derivative contracts was a net liability of $2,006,229 as of June 30, 2014, and a net asset of $425,198 as of September 30, 2013.

The fair value amounts recognized for the Company’s derivative contracts executed with the same counterparty under a master netting arrangement may be offset. The Company has the choice to offset or not, but that choice must be applied consistently. A master netting arrangement exists if the reporting entity has multiple contracts with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. Offsetting the fair values recognized for the derivative contracts outstanding with a single counterparty results in the net fair value of the transactions being reported as an asset or a liability in the Condensed Balance Sheets. The Company has chosen to present the fair values of its derivative contracts under master netting agreements using a net fair value presentation.

The following table summarizes and reconciles the Company's derivative contracts’ fair values at a gross level back to net fair value presentation on the Company's Condensed Balance Sheets at June 30, 2014, and September 30, 2013. The Company adopted the accounting guidance requiring additional disclosures for balance sheet offsetting of assets and liabilities effective January 1, 2013. The Company has offset all amounts subject to master netting agreements in the Company's Condensed Balance Sheets at June 30, 2014, and September 30, 2013.



	6/30/2014						9/30/2013
	Fair Value (a)						Fair Value (a)
	Commodity Contracts						Commodity Contracts
	Current Assets		Current Liabilities			Non-Current Liabilities	Current Assets		Current Liabilities
Gross amounts recognized	$	15,871	$	1,959,962	$	62,138	$	665,099	$	239,901
Offsetting adjustments		(15,871)		(15,871)		-		(239,901)		(239,901)
Net presentation on Condensed Balance Sheets	$	-	$	1,944,091	$	62,138	$	425,198	$	-

(a) See Fair Value Measurements section for further disclosures regarding fair value of financial instruments.

The fair value of derivative assets and derivative liabilities is adjusted for credit risk. The impact of credit risk was immaterial for all periods presented.