Derivative Financial Instruments

9 Months Ended

Sep. 30, 2015

Derivative Financial Instruments

Derivative Financial Instruments

12.Derivative Financial Instruments

The Company’s Bankruptcy Petition in July 2015 represented an event of default under Sabine’s existing derivative agreements resulting in a termination right by counterparties on all derivative positions at July 15, 2015. Additionally, certain of the Company’s derivative positions were terminated prior to July 15, 2015 as a result of defaults under Sabine’s derivate agreements that occurred prior to the filing of the Bankruptcy Petition. The terminations resulted in settlements of approximately $24.3 million for which such proceeds were used to reduce our New Revolving Credit Facility. Other terminations resulted in approximately $70.8 million of direct offsets against the New Revolving Credit Facility. As a result, the Company no longer has any derivatives beyond July 2015.

Throughout the nine months ended September 30, 2015, the Company did execute derivative contracts as market conditions allowed in order to economically hedge anticipated future cash flows from oil and natural gas producing activities. No contracts were executed during the three months ended September 30, 2015. These include both oil and natural gas fixed-price swap agreements covering certain portions of anticipated 2016 and 2017 production volumes. The Company executed option contracts including written oil call agreements, as well as purchased oil put agreements, covering certain portions of anticipated 2016 oil production. No material premiums were recognized as a result of these option agreements. None of the fixed-price swap or option contracts were designated for hedge accounting, with all mark-to-market changes in fair value recognized currently in earnings.

Additionally, prior to the nine months ended September 30, 2015, the Company purchased natural gas puts, wrote oil and natural gas calls, and wrote oil and natural gas puts for periods from 2015 through 2016. No material premiums were recognized as a result of these option agreements. Sabine sold a swaption agreement allowing the counterparty the option to execute a fixed price swap agreement at a contracted price on contracted volumes before an expiration date.

Throughout the nine months ended September 30, 2014, the Company purchased natural gas puts, wrote oil and natural gas calls, and wrote oil and natural gas puts for periods from 2014 through 2016, for which a net premium was recognized. In March 2014, Sabine restructured certain sold call contracts for which the Company had previously recognized a premium liability related to 2015 volumes. As a result of this restructuring, the Company released $4.4 million of premium liability into earnings, recognized in “Gain (loss) on derivative instruments” in the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2014.

To the extent the Company enters into derivatives, these positions are with counterparties who are Sabine’s lenders at the inception of the derivative. The Company’s credit facility provides for collateralization of amounts outstanding from the Company’s derivatives in addition to amounts outstanding under the facility. Additionally, default on any of the Company’s obligations under derivatives with counterparty lenders could result in acceleration of the amounts outstanding under the credit facility. The fair value for each derivative takes credit risk into consideration, whether it be Sabine’s counterparties’ or Sabine’s own. Derivatives are classified as current or non-current derivative assets and liabilities, based on the expected timing of settlements.

The table below presents the Company’s “Gain (loss) on derivative instruments” located in Other income (expenses) in the Condensed Consolidated Statements of Operations:

	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2015		2014		2015		2014
	(in thousands)
Gain (loss) on derivative instruments	$	16,241	$	37,430	$	33,897	$	(1,611)

Sabine received $2.6 million and paid $2.5 million on settlements of derivatives in three months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015 and 2014 Sabine received $92.0 million and paid $17.4million, respectively.

Sabine’s derivative contracts are executed with counterparties under certain master netting agreements that allow the Company to offset assets due from, and liabilities due to, the counterparties. The table below presents the carrying value of Sabine’s derivative assets and liabilities both before and after the impact of such netting agreements in the Condensed Consolidated Balance Sheets as of December 31, 2014. As a result of terminations, the Company no longer has any derivatives contracts in place at September 30, 2015:

	Derivative Assets as of December 31, 2014
		Fair Value
		(in thousands)
Current assets	DerivativeInstruments	$	191,765
Total current asset fair value			191,765
Less:  Counterparty set-off			(31,548)
Total derivative asset net fair value		$	160,217

	Derivative Liabilities as of December 31, 2014
		Fair Value
		(in thousands)
Current liabilities	DerivativeInstruments	$	(4,645)
Current assets	DerivativeInstruments		(31,548)
Total current liability fair value			(36,193)
Long-term liabilities	DerivativeInstruments		(2,269)
Total long-term liability fair value			(2,269)
Less:  Counterparty set-off			31,548
Total derivative liability net fair value		$	(6,914)

At December 31, 2014, none of the Company’s outstanding derivatives contained credit-risk related contingent features that would result in a material adverse impact to Sabine upon any change in the Company’s credit ratings.