Derivative Instruments

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

In prior years, the Company hedged a significant portion of its forecasted oil production to reduce exposure to commodity price fluctuations and provide long-term cash flow predictability to manage its business. The Company also, from time to time, entered into derivative contracts for a portion of its natural gas consumption. The direct NGL hedging market has been constrained in terms of price, volume, duration and number of counterparties, which limited the Company’s ability to effectively hedge its NGL production. As a result, the Company has not directly hedged its NGL production.

The Company entered into commodity hedging transactions primarily in the form of swap contracts, collars and three-way collars. Swap contracts are designed to provide a fixed price. Collar contracts specify floor and ceiling prices to be received as compared to floating market prices. Three-way collar contracts combine a short put (the lower price), a long put (the middle price) and a short call (the higher price) to provide a higher ceiling price as compared to a regular collar and limit downside risk to the market price plus the difference between the middle price and the lower price if the market price drops below the lower price.

The Company entered into these transactions with respect to a portion of its projected production to provide an economic hedge of the risk related to the future commodity prices received. The Company does not enter into derivative contracts for trading purposes. The Company did not designate any of its contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings. See Note 8 for fair value disclosures about oil and natural gas commodity derivatives.

The following table summarizes derivative positions for the period indicated as of December 31, 2014:

	2015
Oil positions:
Three-way collars (NYMEX WTI):
Hedged volume (MBbls)	1,095
Short put ($/Bbl)	$	70.00
Long put ($/Bbl)	$	90.00
Short call ($/Bbl)	$	101.62

During the fourth quarter of 2014, the Company canceled all of its ICE Brent – NYMEX WTI basis swaps for 2015 and received cash settlements of approximately $12 million. Currently, the Company has no outstanding ICE Brent – NYMEX WTI basis swaps.

The Company did not enter into any commodity derivative contracts during the period from December 17, 2013 through December 31, 2013. During the period from January 1, 2013 through December 16, 2013, the Company entered into commodity derivative contracts consisting of oil three-way collars for 2013 through 2014, oil trade month roll swaps, oil collars and oil swaps for 2014 and oil basis swaps for 2013 through 2015.

Settled derivatives on oil production for the year ended December 31, 2014, included volumes of 9,125 MBbls at an average contract price of $92.16 per Bbl. The oil derivatives are settled based on the average closing price of NYMEX light crude oil for each day of the delivery month.

Balance Sheet Presentation

The Company’s commodity derivatives are presented on a net basis in “derivative instruments” on the balance sheets. The following summarizes the fair value of derivatives outstanding on a gross basis:

	December 31,
	2014		2013
	(in thousands)
Assets:
Commodity derivatives	$	60,843	$	28,291
Liabilities:
Commodity derivatives	$	17,149	$	45,226

By using derivative instruments to economically hedge exposures to changes in commodity prices, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company’s counterparties are current participants or affiliates of participants in its Credit Facility or were participants or affiliates of participants in its Credit Facility at the time it originally entered into the derivatives. The Credit Facility is secured by the Company’s oil, natural gas and NGL reserves; therefore, the Company is not required to post any collateral. The Company does not receive collateral from its counterparties. The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $61 million at December 31, 2014. The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company’s minimum credit quality standard, or have a guarantee from an affiliate that meets the Company’s minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company’s counterparties on an ongoing basis. In accordance with the Company’s standard practice, its commodity derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss due to counterparty nonperformance is somewhat mitigated.

Gains (Losses) on Derivatives

Gains and losses on oil and natural gas derivatives were net gains of approximately $79 million for the year ended December 31, 2014, and net losses of approximately $5 million and $35 million for the periods from December 17, 2013 through December 31, 2013, and January 1, 2013 through December 16, 2013, respectively. Gains and losses on oil and natural gas derivatives were net gains of approximately $65 million for the year ended December 31, 2012. For the year ended December 31, 2014, period from January 1, 2013 through December 16, 2013, and year ended December 31, 2012, the Company received cash settlements of approximately $19 million, $182,000 and $20 million, respectively.

Discontinuance of Hedge Accounting

In 2010, the Company elected to de-designate all of its derivatives contracts that had been previously designated as cash flow hedges. As a result of discontinuing hedge accounting, the fair values of the Company’s open derivative instruments designated as cash flow hedges, less any ineffectiveness recognized, were frozen in AOCL and reclassified into earnings as the original hedge transactions settled. For the year ended December 31, 2012, a loss of approximately $11 million and a gain of approximately $2 million of noncash amortization of AOCL related to discontinuing hedge accounting were reclassified from AOCL to oil, natural gas and NGL sales and interest expense, respectively. As of December 31, 2012, the entire balance of AOCL had been reclassified into earnings.