Derivative Instruments

The Company seeks to reduce its exposure to commodity price volatility by hedging a portion of its production through commodity derivative instruments. When the conditions for hedge accounting are met, the Company may designate its commodity derivatives as cash flow hedges. The changes in fair value of derivative instruments that qualify for hedge accounting treatment are recorded in other comprehensive income (loss) until the hedged oil or natural gas quantities are produced. If a derivative does not qualify for hedge accounting treatment, the changes in the fair value of the derivative are recorded in the income statement as derivative income (expense). At September 30, 2017, the Company's derivative instruments were designated as effective cash flow hedges.

Oil and gas sales include additions (reductions) related to the settlement of gas hedges of $618,000 and ($144,000) for the three months ended September 30, 2017 and 2016, respectively. Oil and gas sales include additions related to the settlement of gas hedges of $404,000 and $2,043,000 for the nine months ended September 30, 2017 and 2016, respectively.

As of September 30, 2017, the Company had entered into the following commodity derivative instruments:



Production Period	Instrument Type	Daily Volumes	Weighted Average Price
Natural Gas:
October - December 2017	Swap	40,000 Mmbtu	$3.22
January - March 2018	Swap	35,000 Mmbtu	$3.24

At September 30, 2017, the Company had recognized accumulated other comprehensive income of approximately $0.3 million related to the estimated fair value of its effective cash flow hedges. Based on estimated future commodity prices as of September 30, 2017, the Company would reclassify approximately $0.3 million, net of taxes, of accumulated other comprehensive income into oil and gas sales during the next twelve months.

Derivatives designated as hedging instruments:

The following tables reflect the fair value of the Company’s effective cash flow hedges in the consolidated financial statements (in thousands):

Effect of Cash Flow Hedges on the Consolidated Balance Sheets at September 30, 2017 and December 31, 2016:



	Commodity Derivatives
Period	Balance Sheet Location	Fair Value
September 30, 2017	Derivative asset	$	765
September 30, 2017	Derivative liability	$	(283	)
December 31, 2016	Derivative liability	$	(3,947	)
December 31, 2016	Other long-term liabilities	$	(803	)

Effect of Cash Flow Hedges on the Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2017 and 2016:



Instrument	Amount of Gain Recognized in Other Comprehensive Income		Location of Gain Reclassified into Income	Amount of Gain (Loss) Reclassified into oil and gas sales
Commodity Derivatives at September 30, 2017	$	591	Oil and gas sales	$	618
Commodity Derivatives at September 30, 2016	$	101	Oil and gas sales	$	(144	)

Effect of Cash Flow Hedges on the Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2017 and 2016:



Instrument	Amount of Gain Recognized in Other Comprehensive Income		Location of Gain Reclassified into Income	Amount of Gain Reclassified into oil and gas sales
Commodity Derivatives at September 30, 2017	$	5,636	Oil and gas sales	$	404
Commodity Derivatives at September 30, 2016	$	307	Oil and gas sales	$	2,043