Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

v3.6.0.2
Derivative Instruments
 12 Months Ended
Dec. 31, 2016
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
DERIVATIVE INSTRUMENTS
DERIVATIVE INSTRUMENTS
Natural Gas, Oil and Natural Gas Liquids Derivative Instruments
The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and natural gas liquids prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and natural gas liquids prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production.
Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas, Argus Louisiana Light Sweet Crude for oil, the NYMEX West Texas Intermediate for oil, and Mont Belvieu for propane and pentane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2016.
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
2017
NYMEX Henry Hub
531,171

 
$
3.17

2018
NYMEX Henry Hub
296,438

 
$
3.10

2019
NYMEX Henry Hub
4,932

 
$
3.37

 
Location
Daily Volume (Bbls/day)
 
Weighted
Average Price
2017
ARGUS LLS
1,748

 
$
51.97

2017
NYMEX WTI
3,353

 
$
54.98

2018
NYMEX WTI
899

 
$
55.31

 
Location
Daily Volume (Bbls/day)
 
Weighted
Average Price
2017
Mont Belvieu C3
1,630

 
$
25.70

2017
Mont Belvieu C5
250

 
$
49.14


The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes.
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
2017
NYMEX Henry Hub
60,068

 
$
3.12

2018
NYMEX Henry Hub
4,932

 
$
2.91


For a portion of the combined natural gas derivative instruments containing fixed price swaps and sold call options, the counterparty has an option to extend the terms an additional twelve months for the period January 2018 through December 2018. These options expire in December 2017. If executed, the Company would have additional fixed price swaps for 30,000 MMBtu per day with the option to double at a weighted average price of $3.36 and additional short call options for 30,000 MMBtu per day with the option to double at a weighted average ceiling price of $3.36.
In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Tetco M2 to the NYMEX Henry Hub natural gas price. As of December 31, 2016, the Company had the following natural gas basis swap positions for Tetco M2.
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
2017
Tetco M2
12,329

 
$
(0.59
)

Balance sheet presentation
The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2016 and 2015:
 
December 31,
 
2016
 
2015
 
(In thousands)
Short-term derivative instruments - asset
$
3,488

 
$
142,794

Long-term derivative instruments - asset
$
5,696

 
$
51,088

Short-term derivative instruments - liability
$
119,219

 
$
437

Long-term derivative instruments - liability
$
26,759

 
$
6,935

Gains and losses
For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, the effective portion of changes in fair value are recognized in accumulated other comprehensive income (loss) and subsequently reclassified out of accumulated other comprehensive income (loss) into earnings as the underlying hedged transaction impacts earnings. The Company had no cash flow hedges in place for the years ended December 31, 2016, 2015 and 2014, as all fixed price swaps, swaptions and basis swaps had either been deemed ineffective at their inception or had been accounted for using the mark-to-market accounting method.
The following table presents the gain and loss recognized in Net (loss) gain on gas, oil and NGL derivatives in the accompanying consolidated statements of operations due to derivative instruments for the years ended December 31, 2016, 2015, and 2014.
 
Gain (loss) on derivative instruments
 
For the Year Ended December 31,
 
2016
 
2015
 
2014
 
(In thousands)
Natural gas derivatives
$
(165,933
)
 
$
182,993

 
$
103,128

Oil derivatives
(5,387
)
 
19,201

 
6,171

Natural gas liquids derivatives
(3,186
)
 
1,319

 
—

Total
$
(174,506
)
 
$
203,513

 
$
109,299


The Company delivered approximately 77% of its 2016 production under fixed price swaps.
Offsetting of derivative assets and liabilities
The following table presents the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets as of the dates presented, all at fair value.
 
As of December 31, 2016
 
Derivative instruments, gross
 
Netting adjustments
 
Derivative instruments, net
 
(In thousands)
Derivative assets
$
9,184

 
$
(9,184
)
 
$
—

Derivative liabilities
$
(145,978
)
 
$
9,184

 
$
(136,794
)
 
As of December 31, 2015
 
Derivative instruments, gross
 
Netting adjustments
 
Derivative instruments, net
 
(In thousands)
Derivative assets
$
193,882

 
$
(7,372
)
 
$
186,510

Derivative liabilities
$
(7,372
)
 
$
7,372

 
$
—


Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.