Quarterly report pursuant to Section 13 or 15(d)

Hedging Activities

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Hedging Activities
 9 Months Ended
Sep. 30, 2013
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
Hedging Activities
HEDGING ACTIVITIES
Oil Price Hedging Activities
The Company seeks to reduce its exposure to unfavorable changes in oil and natural gas prices, which are subject to significant and often volatile fluctuation, by entering into fixed price swaps. These contracts allow the Company to predict with greater certainty the effective oil and natural gas 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.
The Company accounts for its oil and natural gas derivative instruments as cash flow hedges for accounting purposes under FASB ASC 815 and related pronouncements. All derivative contracts are marked to market each quarter end and are included in the accompanying consolidated balance sheets as derivative assets and liabilities.
During 2012 and 2013, the Company entered into fixed price swap contracts for 2013 through 2016 with four financial institutions. The Company’s fixed price swap contracts are tied to the commodity prices on the International Petroleum Exchange (“IPE”) and NYMEX. The Company will receive the fixed price amount stated in the contract and pay to its counterparty the current market price as listed on the IPE for Brent Crude and the NYMEX WTI for oil and on the NYMEX Henry Hub for natural gas. At September 30, 2013, the Company had the following fixed price swaps in place:
 
 
Daily Volume
(Bbls/day)
 
Weighted
Average Price
October - December 2013
5,000

 
$
99.86

January - March 2014
4,000

 
$
104.75

April - December 2014
2,000

 
$
101.50


 
Daily Volume (MMBtu/day)
 
Weighted
Average Price
October - December 2013
10,000

 
$
4.00

January - December 2014
20,000

 
$
3.98

January 2015 - March 2016
15,000

 
$
3.97

April 2016
5,000

 
$
3.90


At September 30, 2013 the fair value of derivative assets related to the fixed price swaps was as follows:
 
 
(In thousands)
Short-term derivative instruments - asset
$
1,633

Long-term derivative instruments - asset
$
127

Short-term derivative instruments - liability
$
4,808

Long-term derivative instruments - liability
$
962

All fixed price swaps have been executed in connection with the Company’s oil and natural gas price hedging program. For fixed price swaps qualifying as cash flow hedges pursuant to FASB ASC 815, the realized contract price is included in oil and gas sales in the period for which the underlying production was hedged.
For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income (loss) until the hedged item is recognized in earnings. Amounts reclassified out of accumulated other comprehensive income (loss) into earnings as a component of oil and condensate sales for the nine months ended September 30, 2013 and 2012 are presented below.
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
 
(In thousands)
 
(In thousands)
Reduction to oil and condensate sales
$
(1,617
)
 
$
(185
)
 
$
(4,818
)
 
$
(646
)

The Company expects to reclassify $2.6 million out of accumulated other comprehensive income (loss) into earnings as a component of oil and condensate and gas sales during the remainder of the year ended December 31, 2013 related to fixed price swaps.
Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. The Company recognized a loss of $6.7 million and $1.3 million related to hedge ineffectiveness for the three and nine months ended September 30, 2013, respectively, which is included in oil and condensate and gas sales in the consolidated statements of operations. This loss was comprised of a loss of $3.0 million and a gain of $5.2 million related to hedge ineffectiveness for the three and nine months ended September 30, 2013, respectively, partially offset by a loss of $3.6 million and $6.5 million related to the amortization of other comprehensive income for the three and nine months ended September 30, 2013, respectively. The Company recognized a loss of $0.2 million and $0.1 million related to hedge ineffectiveness for the three and nine months ended September 30, 2012, respectively, which is included in oil and condensate sales in the consolidated statements of operations.