Quarterly report pursuant to Section 13 or 15(d)

Hedging Activities

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Hedging Activities
 3 Months Ended
Mar. 31, 2014
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 2013 and 2014, the Company entered into fixed price swap and swaption 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 for oil and on the NYMEX Henry Hub for natural gas. At March 31, 2014, the Company had the following fixed price swaps in place:
 
 
Daily Volume
(Bbls/day)
 
Weighted
Average Price
April - December 2014
2,000

 
$
101.50


 
Daily Volume (MMBtu/day)
 
Weighted
Average Price
April 2014
105,000

 
$
4.01

May 2014
130,000

 
$
4.05

June - December 2014
155,000

 
$
4.07

January - December 2015
175,000

 
$
4.08

January - March 2016
105,000

 
$
4.04

April 2016
95,000

 
$
4.04


At March 31, 2014 the fair value of derivative assets and liabilities related to the fixed price swaps and swaptions was as follows:
 
 
(In thousands)
Long-term derivative instruments - asset
$
2,565

Short-term derivative instruments - liability
$
29,755

Long-term derivative instruments - liability
$
4,277



All fixed price swaps and swaptions 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. The Company had no cash flow hedges in place for the three months ending March 31, 2014, as all fixed price swaps and swaptions were deemed ineffective at their inception. Amounts reclassified out of accumulated other comprehensive income (loss) into earnings as a component of oil and condensate sales for the three months ended March 31, 2014 and 2013 are presented below.
 
 
Three months ended March 31,
 
2014
 
2013
 
(In thousands)
Reduction to oil and condensate sales
$
—

 
$
(2,957
)

At March 31, 2014, no amounts related to fixed price swaps remain in accumulated other comprehensive income (loss).
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 $8.7 million related to hedge ineffectiveness for the three months ended March 31, 2014, which is included in oil and condensate and gas sales in the consolidated statements of operations. The Company recognized a loss of $0.2 million related to hedge ineffectiveness for the three months ended March 31, 2013, which is included in oil and condensate sales in the consolidated statements of operations.