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Derivatives
9 Months Ended
Jun. 30, 2012
Derivatives [Abstract]  
Derivatives

NOTE 11: Derivatives

The Company has entered into fixed swap contracts, basis protection swaps and costless collar contracts. These derivative 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. Basis protection swaps guarantee a price differential to NYMEX for natural gas from a specified delivery point (CEGT and PEPL currently). The Company receives a payment from the counterparty if the price differential is greater than the agreed terms of the contract and pays the counterparty if the price differential is less than the agreed terms of the contract. Collar contracts set a fixed floor price and a fixed ceiling price and provide for payments to the Company if the basis adjusted price falls below the floor or require payments by the Company if the basis adjusted 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 unsecured. The derivative instruments have settled or will settle based on the prices below which are adjusted for location differentials and tied to certain pipelines in Oklahoma.

 

Derivative contracts in place as of June 30, 2012

(prices below reflect the Company’s net price from the listed Oklahoma pipelines)

 

             

Contract period

 

Production volume

covered per month

 

Indexed (1)

pipeline

 

Fixed price

Natural gas basis protection swaps

           

January - December 2012

  50,000 Mmbtu   CEGT   NYMEX - $.29

January - December 2012

  40,000 Mmbtu   CEGT   NYMEX - $.30

January - December 2012

  50,000 Mmbtu   PEPL   NYMEX - $.29

January - December 2012

  50,000 Mmbtu   PEPL   NYMEX - $.30
       

Natural gas costless collars

           

March - October 2012

  50,000 Mmbtu   NYMEX Henry Hub   $2.50 floor/$3.25 ceiling

April - October 2012

  120,000 Mmbtu   NYMEX Henry Hub   $2.50 floor/$3.10 ceiling

April - October 2012

  60,000 Mmbtu   NYMEX Henry Hub   $2.50 floor/$3.20 ceiling

April - October 2012

  50,000 Mmbtu   NYMEX Henry Hub   $2.50 floor/$3.20 ceiling

April - October 2012

  50,000 Mmbtu   NYMEX Henry Hub   $2.50 floor/$3.45 ceiling

April - October 2012

  50,000 Mmbtu   NYMEX Henry Hub   $2.50 floor/$3.30 ceiling
       

Oil costless collars

           

January - December 2012

  2,000 Bbls   NYMEX WTI   $90 floor/$105 ceiling

February - December 2012

  3,000 Bbls   NYMEX WTI   $90 floor/$110 ceiling

May - December 2012

  2,000 Bbls   NYMEX WTI   $90 floor/$114 ceiling

 

(1) CEGT - Centerpoint Energy Gas Transmission’s East pipeline in Oklahoma

PEPL - Panhandle Eastern Pipeline Company’s Texas/Oklahoma mainline

 

Derivative contracts in place as of September 30, 2011

(prices below reflect the Company’s net price from the listed Oklahoma pipelines)

 

             

Contract period

 

Production volume

covered per month

 

Indexed (1)

pipeline

 

Fixed price

Natural gas fixed price swaps

           

April - October 2011

  50,000 Mmbtu   NYMEX Henry Hub   $4.65

April - October 2011

  50,000 Mmbtu   NYMEX Henry Hub   $4.65

April - October 2011

  50,000 Mmbtu   NYMEX Henry Hub   $4.70

April - October 2011

  50,000 Mmbtu   NYMEX Henry Hub   $4.75

May - October 2011

  50,000 Mmbtu   NYMEX Henry Hub   $4.50

May - October 2011

  50,000 Mmbtu   NYMEX Henry Hub   $4.60

June - October 2011

  50,000 Mmbtu   NYMEX Henry Hub   $4.63
       

Natural gas basis protection swaps

           

January - December 2011

  50,000 Mmbtu   CEGT   NYMEX - $.27

January - December 2011

  50,000 Mmbtu   CEGT   NYMEX - $.27

January - December 2011

  50,000 Mmbtu   PEPL   NYMEX - $.26

January - December 2011

  50,000 Mmbtu   PEPL   NYMEX - $.27

January - December 2011

  70,000 Mmbtu   PEPL   NYMEX - $.36

January - December 2012

  50,000 Mmbtu   CEGT   NYMEX - $.29

January - December 2012

  40,000 Mmbtu   CEGT   NYMEX - $.30

January - December 2012

  50,000 Mmbtu   PEPL   NYMEX - $.29

January - December 2012

  50,000 Mmbtu   PEPL   NYMEX - $.30
       

Oil costless collars

           

April - December 2011

  5,000 Bbls   NYMEX WTI   $100 floor/$112 ceiling

 

(1) CEGT - Centerpoint Energy Gas Transmission’s East pipeline in Oklahoma

PEPL - Panhandle Eastern Pipeline Company’s Texas/Oklahoma mainline

While the Company believes that its derivative contracts are effective in achieving the risk management objective for which they were intended, 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 an asset of $169,472 as of June 30, 2012, and a net asset of $215,940 as of September 30, 2011. Realized and unrealized gains and (losses) for the periods ended June 30, 2012, and June 30, 2011, are scheduled below:

 

                                 
Gains (losses) on   Three months ended     Nine months ended  

derivative contracts

  6/30/2012     6/30/2011     6/30/2012     6/30/2011  

Realized

  $ 221,350     $ 195,210     $ 496,465     $ 1,681,060  

Increase (decrease) in fair value

    (140,186     149,646       (46,468     (1,348,877
   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 81,164     $ 344,856     $ 449,997     $ 332,183  
   

 

 

   

 

 

   

 

 

   

 

 

 

To the extent that a legal right of offset exists, the Company nets the fair value of its derivative contracts with the same counterparty in the accompanying balance sheets. The following table summarizes the Company’s derivative contracts as of June 30, 2012, and September 30, 2011:

 

 

                     
   

Balance Sheet

Location

  6/30/2012
Fair Value
    9/30/2011
Fair Value
 

Asset Derivatives:

                   

Derivatives not designated as Hedging Instruments:

                   

Commodity contracts

  Short-term derivative contracts   $ 169,472     $ 269,329  

Commodity contracts

  Long-term derivative contracts     —         —    
       

 

 

   

 

 

 

Total Asset Derivatives (a)

      $ 169,472     $ 269,329  
       

 

 

   

 

 

 
       

Liability Derivatives:

                   

Derivatives not designated as Hedging Instruments:

                   

Commodity contracts

  Short-term derivative contracts   $ —       $ —    

Commodity contracts

  Long-term derivative contracts     —         53,389  
       

 

 

   

 

 

 

Total Liability Derivatives (a)

      $ —       $ 53,389  
       

 

 

   

 

 

 

 

(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.