Derivative Financial Instruments

3 Months Ended

Mar. 31, 2016

Derivative Instruments Not Designated as Hedging Instruments [Abstract]

Derivative Financial Instruments

Note 10 - Derivative Financial Instruments

Summary of Oil, Gas, and NGL Derivative Contracts in Place

The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. All contracts are entered into for other-than-trading purposes. The Company’s derivative contracts consist of swap and collar arrangements for oil, gas, and NGLs. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference.  For collar arrangements, the Company receives the difference between an agreed upon index and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.

As of March 31, 2016, the Company had commodity derivative contracts outstanding through the second quarter of 2020 as summarized in the tables below. During the three months ended March 31, 2016, the Company restructured certain of its gas derivative contracts by buying fixed price volumes to offset existing 2018 and 2019 fixed price swap contracts totaling 55.0 million MMBtu. The Company then entered into new 2017 fixed price swap contracts totaling 38.6 million MMBtu with a contract price of $4.43 per MMBtu. No cash or other consideration was included as part of the restructuring. The net result of buying fixed price volumes in 2018 and 2019 is that the Company does not have any protection against natural gas price volatility in those years.

Subsequent to March 31, 2016, the Company entered into derivative fixed price swap contracts through the fourth quarter of 2018 for a total of 37.9 million MMBtu of gas production with contract prices ranging from $2.36 to $3.19 per MMBtu, as well as a derivative fixed price swap contract through the fourth quarter of 2017 for 1.0 million Bbls of oil production with a contract price of $47.15 per Bbl. Additionally, subsequent to March 31, 2016, the Company entered into derivative collar contracts through the fourth quarter of 2017 for a total of 2.7 million Bbls of oil production with contract floor prices ranging from $40.00 to $45.00 per Bbl and contract ceiling prices ranging from $50.35 to $52.85 per Bbl.

The following tables summarize the approximate volumes and average contract prices of contracts the Company had in place as of March 31, 2016:

Oil Swaps

Contract Period	NYMEX WTI Volumes	Weighted-Average  Contract Price
	(Bbls)	(per Bbl)
Second quarter 2016	1,752,000	$	86.73
Third quarter 2016	1,840,000	$	71.80
Fourth quarter 2016	1,399,000	$	67.73
2017	2,035,000	$	44.84
All oil swaps	7,026,000

Natural Gas Swaps

Contract Period	Sold Volumes	Weighted-Average  Contract Price		Purchased Volumes		Weighted- Average Contract Price		Net Volumes
	(MMBtu)	(per MMBtu)		(MMBtu)		(per MMBtu)		(MMBtu)
Second quarter 2016	20,780,000	$	3.40	—		$	—	20,780,000
Third quarter 2016	18,830,000	$	3.38	—		$	—	18,830,000
Fourth quarter 2016	18,988,000	$	3.69	—		$	—	18,988,000
2017	85,019,000	$	4.09	—		$	—	85,019,000
2018	30,606,000	$	4.27	(30,606,000	)	$	4.27	—
2019	24,415,000	$	4.34	(24,415,000	)	$	4.34	—
All gas swaps*	198,638,000			(55,021,000	)			143,617,000

*Total net volumes of natural gas swaps are comprised of IF El Paso Permian (2%), IF HSC (97%), and IF NNG Ventura (1%).

NGL Swaps

	OPIS Purity Ethane Mont Belvieu			OPIS Propane Mont Belvieu Non-TET			OPIS Normal Butane Mont Belvieu Non-TET			OPS Isobutane Mont Belvieu Non-TET
Contract Period	Volumes	Weighted-Average  Contract Price		Volumes	Weighted-Average Contract Price		Volumes	Weighted-Average Contract Price		Volumes	Weighted-Average Contract Price
	(Bbls)	(per Bbl)		(Bbls)	(per Bbl)		(Bbls)	(per Bbl)		(Bbls)	(per Bbl)
Second quarter 2016	828,000	$	8.28	949,000	$	19.64	208,000	$	24.02	174,000	$	24.68
Third quarter 2016	751,000	$	8.70	863,000	$	19.03	186,000	$	21.86	155,000	$	22.42
Fourth quarter 2016	687,000	$	8.71	792,000	$	18.53	170,000	$	21.86	141,000	$	22.42
2017	3,062,000	$	8.92	—	$	—	—	$	—	—	$	—
2018	2,435,000	$	10.18	—	$	—	—	$	—	—	$	—
2019	1,200,000	$	10.92	—	$	—	—	$	—	—	$	—
2020	539,000	$	11.13	—	$	—	—	$	—	—	$	—
Total NGL swaps	9,502,000			2,604,000			564,000			470,000

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The fair value of the commodity derivative contracts was a net asset of $355.6 million as of March 31, 2016, and a net asset of $488.4 million as of December 31, 2015.

The following tables detail the fair value of derivatives recorded in the accompanying balance sheets, by category:

	As of March 31, 2016
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	281,596	Current liabilities	$	8,211
Commodity contracts	Noncurrent assets	160,732		Noncurrent liabilities	78,514
Derivatives not designated as hedging instruments		$	442,328		$	86,725

	As of December 31, 2015
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	367,710	Current liabilities	$	8
Commodity contracts	Noncurrent assets	120,701		Noncurrent liabilities	—
Derivatives not designated as hedging instruments		$	488,411		$	8

Offsetting of Derivative Assets and Liabilities

As of March 31, 2016, and December 31, 2015, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.  

The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts:

	Derivative Assets						Derivative Liabilities
	As of						As of
Offsetting of Derivative Assets and Liabilities	March 31, 2016			December 31, 2015			March 31, 2016			December 31, 2015
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	442,328		$	488,411		$	(86,725	)	$	(8	)
Amounts not offset in the accompanying balance sheets	(86,725		)	(8		)	86,725			8
Net amounts	$	355,603		$	488,403		$	—		$	—

The following table summarizes the components of the derivative gain presented in the accompanying statements of operations:

	For the Three Months Ended March 31,
	2016			2015
	(in thousands)
Derivative settlement gain:
Oil contracts	$	(99,992	)	$	(106,214	)
Gas contracts	(41,053		)	(34,232		)
NGL contracts	(5,983		)	(20,783		)
Total derivative settlement gain	$	(147,028	)	$	(161,229	)
Total derivative (gain) loss:
Oil contracts	$	(10,432	)	$	(73,860	)
Gas contracts	(24,023		)	(82,339		)
NGL contracts	20,227			2,032
Total derivative gain	$	(14,228	)	$	(154,167	)

Credit Related Contingent Features

As of March 31, 2016, and through the filing date of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. On or before June 10, 2016, the Company is obligated to mortgage additional assets so that the Company’s obligations under the Amended Credit Agreement and derivative contracts are secured by mortgages on assets having a value equal to at least 90 percent of the total PV-9 of the Company’s proved oil and gas properties evaluated in the most recently approved reserve report.