Derivative Financial Instruments

6 Months Ended

Jun. 30, 2017

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. As of June 30, 2017, all derivative counterparties were members of the Company’s credit facility lender group and all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of swap and collar arrangements. 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 June 30, 2017, the Company had commodity derivative contracts outstanding as summarized in the tables below:

Oil Swaps

Contract Period	NYMEX WTI Volumes	Weighted-Average  Contract Price
	(MBbls)	(per Bbl)
Third quarter 2017	1,340	$	46.66
Fourth quarter 2017	1,254	$	46.35
2018	1,493	$	46.82
Total	4,087

Subsequent to June 30, 2017, the Company entered into derivative fixed price swap contracts for 2018 for a total of 2.0 million Bbls of oil production at a weighted-average contract price of $50.37 per Bbl.

Oil Collars

Contract Period	NYMEX WTI  Volumes	Weighted- Average Floor  Price		Weighted- Average Ceiling  Price
	(MBbls)	(per Bbl)		(per Bbl)
Third quarter 2017	583	$	45.00	$	54.05
Fourth quarter 2017	1,086	$	47.51	$	56.05
2018	5,030	$	50.00	$	58.07
2019	3,128	$	50.00	$	58.84
Total	9,827

Oil Basis Swaps

Contract Period	Midland-Cushing Volumes	Weighted-Average  Contract Price (1)
	(MBbls)	(per Bbl)
Third quarter 2017	566	$	(1.62	)
Fourth quarter 2017	1,798	$	(1.52	)
2018	6,868	$	(1.39	)
2019	3,963	$	(1.45	)
Total	13,195

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⁽¹⁾   Represents the price differential between WTI prices at Midland, Texas and WTI prices at Cushing, Oklahoma.

Natural Gas Swaps

Contract Period	Sold Volumes	Weighted-Average  Contract Price		Purchased Volumes (1)		Weighted- Average Contract Price		Net Volumes
	(BBtu)	(per MMBtu)		(BBtu)		(per MMBtu)		(BBtu)
Third quarter 2017	23,657	$	4.01	—		$	—	23,657
Fourth quarter 2017	22,001	$	3.98	—		$	—	22,001
2018	93,014	$	3.41	(30,606	)	$	4.27	62,408
2019	41,394	$	3.76	(24,415	)	$	4.34	16,979
Total (2)	180,066			(55,021	)			125,045

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⁽¹⁾  During 2016, the Company restructured certain of its natural 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 other cash or other consideration was included as part of the restructuring.

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

NGL Swaps

	OPIS Purity Ethane Mont Belvieu			OPIS Propane Mont Belvieu Non-TET			OPIS Normal Butane Mont Belvieu Non-TET			OPIS Isobutane Mont Belvieu Non-TET			OPIS Natural Gasoline 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		Volumes	Weighted-Average Contract Price
	(MBbls)	(per Bbl)		(MBbls)	(per Bbl)		(MBbls)	(per Bbl)		(MBbls)	(per Bbl)		(MBbls)	(per Bbl)
Third quarter 2017	906	$	9.48	588	$	21.91	163	$	32.42	140	$	33.28	222	$	48.43
Fourth quarter 2017	966	$	9.65	550	$	21.91	149	$	32.34	128	$	33.23	203	$	48.41
2018	4,017	$	11.00	2,021	$	23.38	225	$	33.99	188	$	33.56	305	$	48.62
2019	3,112	$	12.27	214	$	22.66	—	$	—	—	$	—	—	$	—
2020	539	$	11.13	—	$	—	—	$	—	—	$	—	—	$	—
Total	9,540			3,373			537			456			730

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 $61.9 million as of June 30, 2017, and a net liability of $91.7 million as of December 31, 2016.

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

	As of June 30, 2017
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	85,962	Current liabilities	$	36,296
Commodity contracts	Noncurrent assets	82,194		Noncurrent liabilities	69,915
Derivatives not designated as hedging instruments		$	168,156		$	106,211

	As of December 31, 2016
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	54,521	Current liabilities	$	115,464
Commodity contracts	Noncurrent assets	67,575		Noncurrent liabilities	98,340
Derivatives not designated as hedging instruments		$	122,096		$	213,804

Offsetting of Derivative Assets and Liabilities

As of June 30, 2017, and December 31, 2016, 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	June 30,   2017			December 31, 2016			June 30,   2017			December 31, 2016
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	168,156		$	122,096		$	(106,211	)	$	(213,804	)
Amounts not offset in the accompanying balance sheets	(64,628		)	(118,080		)	64,628			118,080
Net amounts	$	103,528		$	4,016		$	(41,583	)	$	(95,724	)

The following table summarizes the components of the net derivative (gain) loss presented in the accompanying statements of operations:

	For the Three Months Ended   June 30,						For the Six Months Ended   June 30,
	2017			2016			2017			2016
	(in thousands)
Derivative settlement (gain) loss:
Oil contracts	$	2,754		$	(72,164	)	$	11,838		$	(172,156	)
Gas contracts	(21,751		)	(31,439		)	(39,257		)	(72,492		)
NGL contracts	2,694			1,893			11,109			(4,090		)
Total derivative settlement gain	$	(16,303	)	$	(101,710	)	$	(16,310	)	$	(248,738	)
Total net derivative (gain) loss:
Oil contracts	$	(38,194	)	$	60,773		$	(87,784	)	$	50,341
Gas contracts	(6,038		)	62,489			(50,506		)	38,466
NGL contracts	(10,957		)	40,089			(31,673		)	60,316
Total net derivative (gain) loss	$	(55,189	)	$	163,351		$	(169,963	)	$	149,123

Credit Related Contingent Features

As of June 30, 2017, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. Under the Credit Agreement and derivative contracts, the Company is required to secure 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 recent reserve report.