DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

Commodity Derivatives

Forest periodically enters into commodity derivative instruments in order to moderate the effects of wide fluctuations in commodity prices on Forest’s cash flow and to manage its exposure to commodity price risk. Forest’s commodity derivative instruments generally serve as effective economic hedges of commodity price exposure; however, Forest has elected not to designate its derivatives as hedging instruments for accounting purposes. As such, Forest recognizes all changes in fair value of its derivative instruments as unrealized gains or losses on derivative instruments in the line item “Realized and unrealized losses (gains) on derivative instruments, net” in the Condensed Consolidated Statement of Operations.

The table below sets forth Forest’s outstanding commodity swaps as of June 30, 2014.

Commodity Swaps
	Natural Gas (NYMEX HH)			Oil (NYMEX WTI)
Remaining Swap Term	Bbtu Per Day	Weighted Average Hedged Price per MMBtu		Barrels Per Day	Weighted Average Hedged Price per Bbl
July 2014 - December 2014	70	$	4.38	3,500	$	95.34
Calendar 2015	50	4.21		1,000	89.25

The table below sets forth Forest’s outstanding commodity collars as of June 30, 2014.

Commodity Collars
	Natural Gas (NYMEX HH)
Collar Term	Bbtu Per Day	Hedged Floor and Ceiling Price per MMBtu
January 2015 - March 2015	20	$ 4.50/5.31
Calendar 2015	10	4.10/4.30

In connection with several of its natural gas and oil swaps, Forest granted option instruments (swaptions and puts) to the swap counterparties in exchange for Forest receiving premium hedged prices on the natural gas and oil swaps. Under the terms of the swaption agreements, the counterparties have the option to enter into future swaps with Forest. The swaptions may not be exercised until their expiration dates. Under the terms of the put agreements, the counterparties have the option to put specified quantities of oil to Forest at specified prices. The puts may be exercised monthly by the counterparties. The table below sets forth the outstanding options as of June 30, 2014.

Commodity Options
		Natural Gas (NYMEX HH)			Oil (NYMEX WTI)
Underlying Term	Option Expiration	Underlying Bbtu Per Day	Underlying Hedged Price per MMBtu		Underlying Barrels Per Day	Underlying Hedged Price per Bbl
Natural Gas Swaptions:
Calendar 2016	December 2014	10	$	4.18	—	$	—
Oil Swaptions:
Calendar 2015	December 2014	—	—		3,000	100.00
Calendar 2015	December 2014	—	—		1,000	106.00
Calendar 2015	December 2014	—	—		1,000	99.00
Calendar 2016	December 2015	—	—		1,000	98.00
Oil Put Options:
Monthly Calendar 2014	Monthly Calendar 2014	—	—		2,000	70.00

Fair Value and Gains and Losses

The table below summarizes the location and fair value amounts of Forest’s derivative instruments reported in the Condensed Consolidated Balance Sheets as of the dates indicated. These derivative instruments are not designated as hedging instruments for accounting purposes. For financial reporting purposes, Forest does not offset asset and liability fair value amounts recognized for derivative instruments with the same counterparty under its master netting arrangements. See “Credit Risk” below for more information regarding Forest’s master netting arrangements and gross and net presentation of derivative instruments. See also Note 7 for more information on the fair values of Forest’s derivative instruments.

	June 30, 2014		December 31, 2013
	(In Thousands)
Current assets:
Derivative instruments:
Commodity	$	395	$	5,192
Long-term assets:
Derivative instruments:
Commodity	$	363	$	400
Current liabilities:
Derivative instruments:
Commodity	$	13,503	$	4,542
Long-term liabilities:
Derivative instruments:
Commodity	$	1,940	$	—

The table below summarizes the amount of derivative instrument gains and losses reported in the Condensed Consolidated Statements of Operations as realized and unrealized losses (gains) on derivative instruments, net, for the periods indicated. Realized gains and losses represent cash settlements on derivative instruments and unrealized gains and losses represent changes in the fair value of derivative instruments. These derivative instruments are not designated as hedging instruments for accounting purposes.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2014		2013			2014		2013
	(In Thousands)
Commodity derivatives:
Realized losses (gains)	$	4,296	$	1,106		$	8,756	$	(8,543	)
Unrealized losses (gains)	7,345		(32,823		)	15,736		2,338
Interest rate derivatives:
Realized gains	—		(9,803		)	—		(12,885		)
Unrealized losses	—		9,910			—		13,060
Realized and unrealized losses (gains) on derivative instruments, net	$	11,641	$	(31,610	)	$	24,492	$	(6,030	)

Due to the volatility of oil and natural gas prices, the estimated fair values of Forest’s commodity derivative instruments are subject to large fluctuations from period to period. Forest has experienced the effects of these commodity price fluctuations and expects that volatility in commodity prices will continue.

Credit Risk

Forest executes with each of its derivative counterparties an International Swap and Derivatives Association, Inc. (“ISDA”) Master Agreement, which is a standard industry form contract containing general terms and conditions applicable to many types of derivative transactions. Additionally, Forest executes, with each of its derivative counterparties, a Schedule, which modifies the terms and conditions of the ISDA Master Agreement according to the parties’ requirements and the specific types of derivatives to be transacted. As of June 30, 2014, all but one of Forest’s derivative counterparties are lenders, or affiliates of lenders, under the Credit Facility. The terms of the Credit Facility provide that any security granted by Forest thereunder shall also extend to and be available to those lenders that are counterparties to derivative transactions. None of these counterparties requires collateral beyond that already pledged under the Credit Facility. The remaining counterparty, a purchaser of Forest’s natural gas production, generally owes money to Forest and therefore does not require collateral under the ISDA Master Agreement and Schedule it has executed with Forest.

The ISDA Master Agreements and Schedules contain cross-default provisions whereby a default under the Credit Facility will also cause a default under the derivative agreements. Such events of default include non-payment, breach of warranty, non-performance of the financial covenant, default on other indebtedness, certain pension plan events, certain adverse judgments, change of control events, and a failure of the liens securing the Credit Facility. In addition, bankruptcy and insolvency events with respect to Forest or certain of its U.S. subsidiaries will result in an automatic acceleration of the indebtedness under the Credit Facility. None of these events of default is specifically credit-related, but some could arise if there were a general deterioration of Forest’s credit. The ISDA Master Agreements and Schedules contain a further credit-related termination event that would occur if Forest were to merge with another entity and the creditworthiness of the resulting entity was materially weaker than that of Forest.

The majority of Forest’s derivative counterparties are financial institutions that are engaged in similar activities and have similar economic characteristics that, in general, could cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. Forest does not require the posting of collateral for its benefit under its derivative agreements. However, the ISDA Master Agreements and Schedules generally contain netting provisions whereby if on any date amounts would otherwise be payable by each party to the other, then on such date, the party that owes the larger amount will pay the excess of that amount over the smaller amount owed by the other party, thus satisfying each party’s obligations. These provisions generally apply to all derivative transactions, or all derivative transactions of the same type (e.g., commodity, interest rate, etc.), with the particular counterparty. If all counterparties failed, Forest would be exposed to a risk of loss equal to this net amount owed to Forest, the fair value of which was $.1 million at June 30, 2014. If Forest suffered an event of default, each counterparty could demand immediate payment, subject to notification periods, of the net obligations due to it under the derivative agreements. At June 30, 2014, Forest owed a net derivative liability to its counterparties, the fair value of which was $14.8 million. In the absence of netting provisions, at June 30, 2014, Forest would be exposed to a risk of loss of $.8 million under its derivative agreements, and Forest’s derivative counterparties would be exposed to a risk of loss of $15.4 million.

For financial reporting purposes, Forest has elected not to offset asset and liability fair value amounts recognized for derivative instruments with the same counterparty under its master netting arrangements, although such derivative instruments are subject to enforceable master netting arrangements. The following tables disclose information regarding the potential effect of netting arrangements on Forest’s Condensed Consolidated Balance Sheets as of the dates indicated.

	Derivative Assets
	June 30, 2014			December 31, 2013
	(In Thousands)
Gross amounts of recognized assets	$	758		$	5,592
Gross amounts offset in the balance sheet	—			—
Net amounts of assets presented in the balance sheet	758			5,592
Gross amounts not offset in the balance sheet:
Derivative instruments	(641		)	(1,049		)
Cash collateral received	—			—
Net amount	$	117		$	4,543

	Derivative Liabilities
	June 30, 2014			December 31, 2013
	(In Thousands)
Gross amounts of recognized liabilities	$	15,443		$	4,542
Gross amounts offset in the balance sheet	—			—
Net amounts of liabilities presented in the balance sheet	15,443			4,542
Gross amounts not offset in the balance sheet:
Derivative instruments	(641		)	(1,049		)
Cash collateral pledged	—			—
Net amount	$	14,802		$	3,493

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was enacted, which included derivatives reform as part of a broader financial regulatory reform. Congress delegated many of the details of the Dodd-Frank Act to federal regulatory agencies. Forest currently expects that the Dodd-Frank Act and related rules will have little impact on its existing derivative transactions under its outstanding ISDA Master Agreements and Schedules. However, the legislation could have a substantial impact on Forest’s counterparties and increase the cost of Forest’s derivative agreements in the future.