Derivative Instruments

9 Months Ended

Sep. 30, 2016

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 in the context of U.S. GAAP.

Commodity Derivatives

We typically 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.

We terminated all of our pre-petition derivative contracts for $22.9 million, $22.6 million and $17.5 million and reduced our amounts outstanding under the RBL by $22.9 million, $16.6 million and $12.5 million in March 2016, April 2016 and May 2016, respectively. In connection with these transactions, the counterparties to the derivative contracts, which are also affiliates of lenders under the RBL, transferred the cash proceeds that were used for RBL repayments directly to the administrative agent under the RBL. Accordingly, all of these RBL repayments have been presented as non-cash financing activities on our Condensed Consolidated Statement of Cash Flows for the period January 1, 2016 through September 12, 2016.

On May 13, 2016, the Bankruptcy Court approved our motion to enter into new commodity derivative contracts. Accordingly, we hedged a substantial portion of our future crude oil production through the end of 2019, as required in the RSA, at a weighted-average price of approximately $48.62 per barrel. We are currently unhedged with respect to natural gas production.

The following table sets forth our commodity derivative positions as of September 30, 2016:

		Average
		Volume Per	Weighted Average Price			Fair Value
	Instrument	Day	Floor/Swap		Ceiling	Asset		Liability
Crude Oil:		(barrels)	($/barrel)
Fourth quarter 2016	Swaps	5,940	$	47.69		$	—	$	709
First quarter 2017	Swaps	4,408	$	48.62		—		737
Second quarter 2017	Swaps	4,408	$	48.62		—		1,106
Third quarter 2017	Swaps	4,408	$	48.62		—		1,335
Fourth quarter 2017	Swaps	4,408	$	48.62		—		1,518
First quarter 2018	Swaps	3,476	$	49.12		—		1,131
Second quarter 2018	Swaps	3,476	$	49.12		—		1,244
Third quarter 2018	Swaps	3,476	$	49.12		—		1,353
Fourth quarter 2018	Swaps	3,476	$	49.12		—		1,451
First quarter 2019	Swaps	2,916	$	49.90		—		1,051
Second quarter 2019	Swaps	2,916	$	49.90		—		1,117
Third quarter 2019	Swaps	2,916	$	49.90		—		1,179
Fourth quarter 2019	Swaps	2,916	$	49.90		—		1,247

Financial Statement Impact of Derivatives

The impact of our derivative activities on income is included in “Derivatives” in our Condensed Consolidated Statements of Operations. The following tables summarize the effects of our derivative activities for the periods presented:

	Successor			Predecessor
	Period From September 13, 2016			Period from July 1, 2016		Three Months Ended
	Through September 30, 2016			through September 12, 2016		September 30, 2015
Derivative gains (losses)	$	(4,369	)	$	8,934	$	44,701

	Successor			Predecessor
	Period From September 13, 2016			Period From January 1, 2016			Nine Months Ended
	Through September 30, 2016			Through September 12, 2016			September 30, 2015
Derivative gains (losses)	$	(4,369	)	$	(8,333	)	$	52,073

The effects of derivative gains and (losses) and cash settlements (except for those cash settlements attributable to the aforementioned termination transactions) are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in “Derivative contracts” on our Condensed Consolidated Statements of Cash Flows under “Net losses (gains)” and “Cash settlements, net.”

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:

		Successor				Predecessor
		Fair Values as of
		September 30, 2016				December 31, 2015
		Derivative		Derivative		Derivative		Derivative
Type	Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
Commodity contracts	Derivative assets/liabilities – current	$	446	$	3,888	$	97,956	$	—
Commodity contracts	Derivative assets/liabilities - noncurrent	—		11,291		—		—
		$	446	$	15,179	$	97,956	$	—

As of September 30, 2016, we reported a net commodity derivative liability of $14.7 million. The contracts associated with this position are with three counterparties, all of which are investment grade financial institutions. 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. Furthermore, our derivative contracts are not subject to margin calls or similar accelerations. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.