Derivative Instruments

3 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

We utilize derivative instruments to mitigate our financial exposure to crude oil and natural gas price volatility. Our derivative instruments are not formally designated as hedges.

Commodity Derivatives

We utilize collars and swaps, which are placed with financial institutions that we believe are acceptable credit risks, to hedge against the variability in cash flows associated with anticipated sales of our future oil and gas production. While the use of derivative instruments limits the risk of adverse price movements, such use may also limit future revenues from favorable price movements.

The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such contract.

We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for NYMEX Henry Hub gas and West Texas Intermediate crude oil closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position and our own credit risk if the derivative is in a liability position.

The following table sets forth our commodity derivative positions as of March 31, 2015:

		Average
		Volume Per	Weighted Average Price				Fair Value
	Instrument	Day	Floor/Swap		Ceiling		Asset		Liability
Crude Oil:		(barrels)	($/barrel)
Second quarter 2015 1	Collars	4,000	$	87.50	$	94.66	$	10,045	$	—
Third quarter 2015 1	Collars	3,000	$	86.67	$	94.73	6,063		—
Fourth quarter 2015 1	Collars	3,000	$	86.67	$	94.73	5,738		—
Second quarter 2015 1	Swaps	9,000	$	91.81			27,053		—
Third quarter 2015 1	Swaps	8,000	$	91.06			23,139		—
Fourth quarter 2015 1	Swaps	8,000	$	91.06			21,918		—
First quarter 2016	Swaps	4,000	$	88.12			11,392		—
Second quarter 2016	Swaps	4,000	$	88.12			10,933		—
Third quarter 2016	Swaps	4,000	$	88.12			10,649		—
Fourth quarter 2016	Swaps	4,000	$	88.12			10,262		—
Settlements to be received in subsequent period							13,061		—

_______________________

¹ Certain crude oil derivative transactions include put options we sold. All of the put options carry a $70.00 strike price. If the price of WTI Crude Oil settles below $70.00 per barrel for any given measurement period, the cash received by us on the derivative settlement will be limited to the difference between the Floor/Swap price and the $70.00 put option strike price. The sum of the notional volumes attached to the short puts is 6,000 barrels per day for the second quarter of 2015, and 5,000 barrels per day for the third and fourth quarters of 2015.

Financial Statement Impact of Derivatives

The impact of our derivatives activities on income is included in the Derivatives caption on our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:

	Three Months Ended
	March 31,
	2015			2014
Cash settlements and gains (losses):
Cash (paid) received for:
Commodity contract settlements	$	37,492		$	(3,057	)
Losses attributable to:
Commodity contracts	(14,625		)	(12,605		)
	$	22,867		$	(15,662	)

The effects of derivative gains and (losses) and cash settlements of our commodity derivatives are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in the Derivative contracts section of our Condensed Consolidated Statements of Cash Flows under the Net losses (gains) and Cash settlements, net captions.

The following table summarizes the fair values of our derivative instruments, as well as the locations of these instruments on our Condensed Consolidated Balance Sheets as of the dates presented:

		Fair Values as of
		March 31, 2015				December 31, 2014
		Derivative		Derivative		Derivative		Derivative
Type	Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
Commodity contracts	Derivative assets/liabilities – current	$	118,409	$	—	$	128,981	$	—
Commodity contracts	Derivative assets/liabilities – noncurrent	31,844		—		35,897		—
		$	150,253	$	—	$	164,878	$	—

As of March 31, 2015, we reported a commodity derivative asset of $150.3 million. The contracts associated with this position are with seven counterparties, all of which are investment grade financial institutions, and are substantially concentrated with five of those counterparties. This concentration may impact our overall credit risk, either positively or negatively, in that these counterparties may be similarly affected by changes in economic or other conditions. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.