DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Our hedging strategy is designed to protect our near and intermediate term cash flows from future declines in oil and natural gas prices. This protection is essential to capital budget planning, which is sensitive to expenditures that must be committed to in advance, such as rig contracts and the purchase of tubular goods. We enter into derivative transactions to secure a commodity price for a portion of our expected future production that is acceptable at the time of the transaction. We do not enter into derivative transactions for trading purposes.

All derivatives are recognized as assets or liabilities on the balance sheet and are measured at fair value. At the end of each quarterly period, these derivatives are marked-to-market. If the derivative does not qualify or is not designated as a cash flow hedge, subsequent changes in the fair value of the derivative are recognized in earnings through derivative income (expense) in the statement of operations. If the derivative qualifies and is designated as a cash flow hedge, subsequent changes in the fair value of the derivative are recognized in stockholders’ equity through other comprehensive income (loss), net of related taxes, to the extent the hedge is considered effective. Monthly settlements of effective hedges are reflected in revenue from oil and natural gas production. Monthly settlements of ineffective hedges and derivatives not designated or that do not qualify for hedge accounting are recognized in earnings through derivative income (expense). The resulting cash flows from all monthly settlements are reported as cash flows from operating activities.

Through December 31, 2016, we designated our commodity derivatives as cash flow hedges for accounting purposes upon entering into the contracts. A small portion of our cash flow hedges were typically determined to be ineffective because oil and natural gas price changes in the markets in which we sell our products were not 100% correlative to changes in the underlying price basis indicative in the derivative contract. We had no outstanding derivatives at December 31, 2016. With respect to our 2017 and 2018 commodity derivative contracts, we have elected to not designate these contracts as cash flow hedges for accounting purposes. Accordingly, the net changes in the mark-to-market valuations and the monthly settlements on these derivative contracts will be recorded in earnings through derivative income (expense).

We have entered into put contracts, fixed-price swaps and collar contracts with various counterparties for a portion of our expected 2017 and 2018 oil and natural gas production from the Gulf Coast Basin. All of our derivative transactions have been carried out in the over-the-counter market and are not typically subject to margin-deposit requirements. The use of derivative instruments involves the risk that the counterparties will be unable to meet the financial terms of such transactions. The counterparties to all of our derivative instruments have an "investment grade" credit rating. We monitor the credit ratings of our derivative counterparties on an ongoing basis. Although we typically enter into derivative contracts with multiple counterparties to mitigate our exposure to any individual counterparty, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, we may not realize the benefit of some of our derivative instruments and incur a loss. At August 7, 2017, our derivative instruments were with five counterparties, two of which accounted for approximately 69% of our contracted volumes. Currently, all of our outstanding derivative instruments are with lenders under our current bank credit facility. 

Put contracts are purchased at a rate per unit of hedged production that fluctuates with the commodity futures market. The historical cost of the put contract represents our maximum cash exposure. We are not obligated to make any further payments under the put contract regardless of future commodity price fluctuations. Under put contracts, monthly payments are made to us if the New York Mercantile Exchange ("NYMEX") prices fall below the agreed upon floor price, while allowing us to fully participate in commodity prices above the floor. Swaps typically provide for monthly payments by us if prices rise above the swap price or monthly payments to us if prices fall below the swap price. Collar contracts typically require payments by us if the NYMEX average closing price is above the ceiling price or payments to us if the NYMEX average closing price is below the floor price. Settlements for our oil put contracts, oil collar contracts and fixed-price oil swaps are based on an average of the NYMEX closing price for West Texas Intermediate crude oil during the entire calendar month. Settlements for our natural gas collar contracts and fixed-price natural gas swaps are based on the NYMEX price for the last day of a respective contract month.

The following tables illustrate our derivative positions for calendar years 2017 and 2018 as of August 7, 2017:

		Put Contracts (NYMEX)
		Oil
		Daily Volume (Bbls/d)	Price ($ per Bbl)
2017	February - December	1,000	$	50.00
2017	February - December	1,000	50.00
2017	July - December	1,000	41.10
2018	January - December	1,000	54.00
2018	January - December	1,000	45.00

		Fixed-Price Swaps (NYMEX)
		Natural Gas			Oil
		Daily Volume (MMBtus/d)	Swap Price ($ per MMBtu)		Daily Volume (Bbls/d)	Swap Price ($ per Bbl)
2017	March - December				1,000	$	53.90
2017	July - December	6,000	$	3.00
2017	July - December	5,000	3.00
2018	January - December				1,000	52.50

		Collar Contracts (NYMEX)
		Natural Gas					Oil
		Daily Volume (MMBtus/d)	Floor Price ($ per MMBtu)		Ceiling Price ($ per MMBtu)		Daily Volume (Bbls/d)	Floor Price ($ per Bbl)		Ceiling Price ($ per Bbl)
2017	March - December						1,000	$	50.00	$	56.45
2017	April - December						1,000	50.00		56.75
2018	January - December	6,000	$	2.75	$	3.24	1,000	45.00		55.35

Derivatives not designated or not qualifying as hedging instruments

The following table discloses the location and fair value amounts of derivatives not designated or not qualifying as hedging instruments, as reported in our balance sheet, at June 30, 2017 (Successor) (in millions). We had no outstanding hedging instruments at December 31, 2016 (Predecessor). 

Fair Value of Derivatives Not Designated or Not Qualifying as Hedging Instruments at
June 30, 2017
(Successor)
	Asset Derivatives			Liability Derivatives
Description	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Current assets: Fair value of derivative contracts	$	8.0	Current liabilities: Fair value of derivative contracts	$	0.3
	Long-term assets: Fair value of derivative contracts	3.4		Long-term liabilities: Fair value of derivative contracts	—
		$	11.4		$	0.3

Gains or losses related to changes in fair value and cash settlements for derivatives not designated or not qualifying as hedging instruments are recorded as derivative income (expense) in the statement of operations. The following table discloses the before tax effect of our derivatives not designated or not qualifying as hedging instruments on the statement of operations for the three months ended June 30, 2017 (Successor), the period from January 1, 2017 through February 28, 2017 (Predecessor) and the period from March 1, 2017 through June 30, 2017 (Successor) (in millions).

Gain (Loss) Recognized in Derivative Income (Expense)
	Successor		Successor		Predecessor
	Three Months Ended June 30, 2017		Period from March 1, 2017 through June 30, 2017		Period from January 1, 2017 through February 28, 2017
Description
Commodity contracts:
Cash settlements	$	1.3	$	1.4	$	—
Change in fair value	4.2		6.7		(1.8		)
Total gains (losses) on derivatives not designated or not qualifying as hedging instruments	$	5.5	$	8.1	$	(1.8	)

Derivatives qualifying as hedging instruments

None of our derivative contracts outstanding as of June 30, 2017 (Successor) were designated as accounting hedges. We had no outstanding derivatives at December 31, 2016 (Predecessor). At June 30, 2016, we had outstanding derivatives that were designated and qualified as hedging instruments. The following tables disclose the before tax effect of derivatives qualifying as hedging instruments, as reported in the statement of operations, during the three and six months ended June 30, 2016 (Predecessor) (in millions):

Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Operations
for the Three Months Ended June 30, 2016
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives			Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) (a)			Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	2016			Location	2016		Location	2016
Commodity contracts	$	(8.6	)	Operating revenue - oil/natural gas production	$	8.9	Derivative income (expense), net	$	(0.6	)
Total	$	(8.6	)		$	8.9		$	(0.6	)

(a) For the three months ended June 30, 2016, effective hedging contracts increased oil revenue by $5.1 million and increased natural gas revenue by $3.8 million.

Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Operations
for the Six Months Ended June 30, 2016
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives			Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) (a)			Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	2016			Location	2016		Location	2016
Commodity contracts	$	(4.0	)	Operating revenue - oil/natural gas production	$	21.7	Derivative income (expense), net	$	(0.5	)
Total	$	(4.0	)		$	21.7		$	(0.5	)

(a) For the six months ended June 30, 2016, effective hedging contracts increased oil revenue by $14.4 million and increased natural gas revenue by $7.3 million.

Offsetting of derivative assets and liabilities

Our derivative contracts are subject to netting arrangements. It is our policy to not offset our derivative contracts in presenting the fair value of these contracts as assets and liabilities in our balance sheet. The following table presents the potential impact of the offset rights associated with our recognized assets and liabilities at June 30, 2017 (Successor) (in millions):

	As Presented Without Netting			Effects of Netting			With Effects of Netting
Current assets: Fair value of derivative contracts	$	8.0		$	(0.3	)	$	7.7
Long-term assets: Fair value of derivative contracts	3.4			—			3.4
Current liabilities: Fair value of derivative contracts	(0.3		)	0.3			—
Long-term liabilities: Fair value of derivative contracts	—			—			—

We had no outstanding derivative contracts at December 31, 2016 (Predecessor).

Derivatives, Policy [Policy Text Block]

Our hedging strategy is designed to protect our near and intermediate term cash flows from future declines in oil and natural gas prices. This protection is essential to capital budget planning, which is sensitive to expenditures that must be committed to in advance, such as rig contracts and the purchase of tubular goods. We enter into derivative transactions to secure a commodity price for a portion of our expected future production that is acceptable at the time of the transaction. We do not enter into derivative transactions for trading purposes.

All derivatives are recognized as assets or liabilities on the balance sheet and are measured at fair value. At the end of each quarterly period, these derivatives are marked-to-market. If the derivative does not qualify or is not designated as a cash flow hedge, subsequent changes in the fair value of the derivative are recognized in earnings through derivative income (expense) in the statement of operations. If the derivative qualifies and is designated as a cash flow hedge, subsequent changes in the fair value of the derivative are recognized in stockholders’ equity through other comprehensive income (loss), net of related taxes, to the extent the hedge is considered effective. Monthly settlements of effective hedges are reflected in revenue from oil and natural gas production. Monthly settlements of ineffective hedges and derivatives not designated or that do not qualify for hedge accounting are recognized in earnings through derivative income (expense). The resulting cash flows from all monthly settlements are reported as cash flows from operating activities.

Through December 31, 2016, we designated our commodity derivatives as cash flow hedges for accounting purposes upon entering into the contracts. A small portion of our cash flow hedges were typically determined to be ineffective because oil and natural gas price changes in the markets in which we sell our products were not 100% correlative to changes in the underlying price basis indicative in the derivative contract. We had no outstanding derivatives at December 31, 2016. With respect to our 2017 and 2018 commodity derivative contracts, we have elected to not designate these contracts as cash flow hedges for accounting purposes. Accordingly, the net changes in the mark-to-market valuations and the monthly settlements on these derivative contracts will be recorded in earnings through derivative income (expense).

We have entered into put contracts, fixed-price swaps and collar contracts with various counterparties for a portion of our expected 2017 and 2018 oil and natural gas production from the Gulf Coast Basin. All of our derivative transactions have been carried out in the over-the-counter market and are not typically subject to margin-deposit requirements. The use of derivative instruments involves the risk that the counterparties will be unable to meet the financial terms of such transactions. The counterparties to all of our derivative instruments have an "investment grade" credit rating. We monitor the credit ratings of our derivative counterparties on an ongoing basis. Although we typically enter into derivative contracts with multiple counterparties to mitigate our exposure to any individual counterparty, if any of our counterparties were to default on its obligations to us under the derivative contracts or seek bankruptcy protection, we may not realize the benefit of some of our derivative instruments and incur a loss. At August 7, 2017, our derivative instruments were with five counterparties, two of which accounted for approximately 69% of our contracted volumes. Currently, all of our outstanding derivative instruments are with lenders under our current bank credit facility. 

Put contracts are purchased at a rate per unit of hedged production that fluctuates with the commodity futures market. The historical cost of the put contract represents our maximum cash exposure. We are not obligated to make any further payments under the put contract regardless of future commodity price fluctuations. Under put contracts, monthly payments are made to us if the New York Mercantile Exchange ("NYMEX") prices fall below the agreed upon floor price, while allowing us to fully participate in commodity prices above the floor. Swaps typically provide for monthly payments by us if prices rise above the swap price or monthly payments to us if prices fall below the swap price. Collar contracts typically require payments by us if the NYMEX average closing price is above the ceiling price or payments to us if the NYMEX average closing price is below the floor price. Settlements for our oil put contracts, oil collar contracts and fixed-price oil swaps are based on an average of the NYMEX closing price for West Texas Intermediate crude oil during the entire calendar month. Settlements for our natural gas collar contracts and fixed-price natural gas swaps are based on the NYMEX price for the last day of a respective contract month.