Quarterly report pursuant to Section 13 or 15(d)

Hedging Activities

v2.4.0.8
Hedging Activities
 9 Months Ended
Sep. 30, 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 September 30, 2014, the Company had the following fixed price swaps in place:
 
 
Daily Volume
(Bbls/day)
 
Weighted
Average Price
October 2014 - December 2014
2,000

 
$
101.50


 
Daily Volume (MMBtu/day)
 
Weighted
Average Price
October 2014 - December 2014
155,000

 
$
4.07

January 2015 - March 2015
175,000

 
$
4.08

April 2015
185,000

 
$
4.07

May 2015 - December 2015
195,000

 
$
4.07

January 2016 - March 2016
135,000

 
$
4.03

April 2016
125,000

 
$
4.03

May 2016 - December 2016
30,000

 
$
4.01


At September 30, 2014 the fair value of derivative assets and liabilities related to the fixed price swaps and swaptions was as follows:
 
 
(In thousands)
Short-term derivative instruments - asset
$
5,753

Long-term derivative instruments - asset
$
1,156

Short-term derivative instruments - liability
$
3,891

Long-term derivative instruments - liability
$
2,771



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 nine months ending September 30, 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 and nine months ended September 30, 2014 and 2013 are presented below.
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
 
(In thousands)
Reduction to oil and condensate sales
$
—

 
$
(1,617
)
 
$
—

 
$
(4,818
)

At September 30, 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 gain of $29.5 million and $23.0 million related to hedge ineffectiveness for the three and nine months ended September 30, 2014, respectively, which is included in oil and condensate and gas sales in the consolidated statements of operations. 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 sales in the consolidated statements of operations.