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, 2018, the Company had no outstanding derivative contracts.

Oil and gas sales include additions related to the settlement of oil hedges of ($401,000) and $618,000 for the three months ended September 30, 2018 and 2017, respectively. Oil and gas sales include additions (reductions) related to the settlement of gas hedges of $805,000 and $0 and oil hedges of ($1,026,000) and $404,000 for the nine months ended September 30, 2018 and 2017, respectively. On June 14, 2018, the Company's hedging counterparty, Koch Supply & Trading, LP, terminated the only outstanding hedge contract resulting in a settlement of $0.5 million. The settlement at the termination date remained in accumulated other comprehensive loss and is being reclassified to earnings as the hedged volumes are produced over the original term of the contract.

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, 2018 and December 31, 2017:



	Commodity Derivatives
Period	Balance Sheet Location	Fair Value
September 30, 2018	Derivative liability	$	—
December 31, 2017	Derivative asset	$	1,174
December 31, 2017	Derivative liability	$	(731	)

Effect of Cash Flow Hedges on the Consolidated Statements of Operations and Comprehensive Loss for the three months ended September 30, 2018 and 2017:



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 - September 30, 2018	$	—	Oil and gas sales	$	(401	)
Commodity Derivatives - September 30, 2017	$	591	Oil and gas sales	$	618

Effect of Cash Flow Hedges on the Consolidated Statements of Operations and Comprehensive Loss for the nine months ended September 30, 2018 and 2017:



Instrument	Amount of Gain (Loss) Recognized in Other Comprehensive Income			Location of Gain Reclassified into Income	Amount of Gain (Loss) Reclassified into Oil and Gas Sales
Commodity Derivatives - September 30, 2018	$	(990	)	Oil and gas sales	$	(222	)
Commodity Derivatives - September 30, 2017	$	5,636		Oil and gas sales	$	404