Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.8.0.1
Derivative Instruments
 9 Months Ended
Sep. 30, 2017
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 natural gas, oil 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 September 30, 2017. 
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
Remaining 2017
NYMEX Henry Hub
765,000

 
$
3.19

2018
NYMEX Henry Hub
898,000

 
$
3.06

2019
NYMEX Henry Hub
112,000

 
$
3.01


 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
Remaining 2017
ARGUS LLS
1,500

 
$
53.12

2018
ARGUS LLS
1,000

 
$
53.91

Remaining 2017
NYMEX WTI
4,500

 
$
54.89

2018
NYMEX WTI
3,000

 
$
52.24

 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
Remaining 2017
Mont Belvieu C3
3,000

 
$
26.63

2018
Mont Belvieu C3
3,500

 
$
28.03

Remaining 2017
Mont Belvieu C5
250

 
$
49.14

2018
Mont Belvieu C5
500

 
$
46.62


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
Remaining 2017
NYMEX Henry Hub
65,000

 
$
3.11

2018
NYMEX Henry Hub
103,000

 
$
3.25

2019
NYMEX Henry Hub
135,000

 
$
3.07


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 original terms an additional twelve months for the period January 2018 through December 2018. The option to extend the terms expires in December 2017. If extended, the Company would have additional fixed price swaps for 30,000 MMBtu per day at a weighted average price of $3.36 per MMBtu and additional short call options for 30,000 MMBtu per day at a weighted average ceiling price of $3.36 per MMBtu.
For a portion of the natural gas fixed price swaps listed above, the counterparty has an option to extend the original terms an additional twelve months for the period January 2019 through December 2019. The option to extend the terms expires in December 2018. If executed, the Company would have additional fixed price swaps for 100,000 MMBtu per day at a weighted average price of $3.05 per MMBtu.
In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of NGPL Mid-Continent to NYMEX Henry Hub. As of September 30, 2017, the Company had the following natural gas basis swap positions for NGPL Mid-Continent.
 
Location
Daily Volume (MMBtu/day)
 
Hedged Differential
Remaining 2017
NGPL Mid-Continent
50,000

 
$
(0.26
)
2018
NGPL Mid-Continent
12,000

 
$
(0.26
)

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 September 30, 2017 and December 31, 2016:
 
September 30, 2017
 
December 31, 2016
 
(In thousands)
Short-term derivative instruments - asset
$
35,332

 
$
3,488

Long-term derivative instruments - asset
$
6,409

 
$
5,696

Short-term derivative instruments - liability
$
29,130

 
$
119,219

Long-term derivative instruments - liability
$
19,712

 
$
26,759


Gains and Losses
The following table presents the gain and loss recognized in Net (loss) gain on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2017 and 2016.
 
Net (loss) gain on derivative instruments
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Natural gas derivatives
$
(7,077
)
 
$
33,167

 
$
135,868

 
$
(43,454
)
Oil derivatives
(6,571
)
 
1,708

 
12,477

 
362

Natural gas liquids derivatives
(9,212
)
 
406

 
(6,757
)
 
(1,284
)
Total
$
(22,860
)
 
$
35,281

 
$
141,588

 
$
(44,376
)

Offsetting of derivative assets and liabilities
As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value.
 
As of September 30, 2017
 
Gross Assets (Liabilities)
 
Gross Amounts
 
 
 
Presented in the
 
Subject to Master
 
Net
 
Consolidated Balance Sheets
 
Netting Agreements
 
Amount
 
(In thousands)
Derivative assets
$
41,741

 
$
(36,969
)
 
$
4,772

Derivative liabilities
$
(48,842
)
 
$
36,969

 
$
(11,873
)
 
As of December 31, 2016
 
Gross Assets (Liabilities)
 
Gross Amounts
 
 
 
Presented in the
 
Subject to Master
 
Net
 
Consolidated Balance Sheets
 
Netting Agreements
 
Amount
 
(In thousands)
Derivative assets
$
9,184

 
$
(9,184
)
 
$
—

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

 
$
(136,794
)

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.