Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

v3.4.0.3
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
3 Months Ended
Mar. 31, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

The Company utilizes commodity swap contracts, swaptions and collars (purchased put options and written call options) to (i) reduce the effects of volatility in price changes on the crude oil commodities it produces and sells, (ii) reduce commodity price risk and (iii) provide a base level of cash flow in order to assure it can execute at least a portion of its capital spending.

All derivative instruments are recorded on the Company’s balance sheet as either assets or liabilities measured at their fair value (see Note 10).  The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes.  If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in the fair value are recognized in the revenues section of the Company’s condensed statements of operations as a gain or loss on derivative instruments.  Mark-to-market gains and losses represent changes in fair values of derivatives that have not been settled.  The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in making or receiving a payment to or from the counterparty.  These cash settlements represent the cumulative gains and losses on the Company’s derivative instruments for the periods presented and do not include a recovery of costs that were paid to acquire or modify the derivative instruments that were settled.

The following table presents cash settlements on matured or liquidated derivative instruments and non-cash gains and losses on open derivative instruments for the periods presented.  Cash receipts and payments below reflect proceeds received upon early liquidation of derivative positions and gains or losses on derivative contracts which matured during the period, calculated as the difference between the contract price and the market settlement price of matured contracts.  Non-cash gains and losses below represent the change in fair value of derivative instruments which continue to be held at period-end and the reversal of previously recognized non-cash gains or losses on derivative contracts that matured or were liquidated during the period.

 
Three Months Ended
March 31,
 
2016
 
2015
Cash Received (Paid) on Derivatives
$
25,446,900

 
$
39,994,650

Non-Cash Gain (Loss) on Derivatives
(21,983,017
)
 
(14,331,367
)
Gain on Derivative Instruments, Net
$
3,463,883

 
$
25,663,283


The Company has master netting agreements on individual crude oil contracts with certain counterparties and therefore the current asset and liability are netted on the balance sheet and the non-current asset and liability are netted on the balance sheet for contracts with these counterparties.

The following table reflects open commodity swap contracts as of March 31, 2016, the associated volumes and the corresponding fixed price.

Settlement Period
 
Oil (Barrels)
 
Fixed Price ($)
Swaps-Crude Oil
 
 
 
 
04/01/15 – 06/30/16
 
90,000

 
89.00

04/01/15 – 06/30/16
 
90,000

 
90.00

04/01/15 – 06/30/16
 
90,000

 
91.00

04/01/15 – 06/30/16
 
90,000

 
90.00

04/01/15 – 06/30/16
 
45,000

 
90.00

04/01/15 – 06/30/16
 
45,000

 
90.00

07/01/16 – 12/31/16
 
180,000

 
65.00

07/01/16 – 12/31/16
 
180,000

 
64.93

07/01/16 – 12/31/16
 
90,000

 
65.00

07/01/16 – 12/31/16
 
180,000

 
65.00

07/01/16 – 12/31/16
 
180,000

 
64.93

07/01/16 – 12/31/16
 
90,000

 
65.30


The following table reflects the weighted average price of open commodity swap derivative contracts as of March 31, 2016, by year with associated volumes.

Year
 
Volumes (Bbl)
 
Weighted
Average Price ($)
2016
 
1,350,000

 
73.33

2017 and beyond
 

 



The following table sets forth the amounts, on a gross basis, and classification of the Company’s outstanding derivative financial instruments at March 31, 2016 and December 31, 2015, respectively.  Certain amounts may be presented on a net basis on the condensed financial statements when such amounts are with the same counterparty and subject to a master netting arrangement:
Type of Crude Oil Contract
 
Balance Sheet Location
 
March 31, 2016 Estimated Fair Value
 
December 31, 2015 Estimated Fair Value
Derivative Assets:
 
 
 
 
 
 
Swap Contracts
 
Current Assets
 
$
42,628,541

 
$
64,611,558



The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions.  When the Company has netting arrangements with its counterparties that provide for offsetting payables against receivables from separate derivative instruments these assets and liabilities are netted on the balance sheet.  The tables presented below provide reconciliation between the gross assets and liabilities and the amounts reflected on the balance sheet.  The amounts presented exclude derivative settlement receivables and payables as of the balance sheet dates.

 
Estimated Fair Value at March 31, 2016
 
Gross Amounts of
Recognized Assets
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Assets Presented
in the Balance Sheet
Offsetting of Derivative Assets:
 
 
Current Assets
$
42,628,541

 
$

 
$
42,628,541


 
Estimated Fair Value at December 31, 2015
 
Gross Amounts of
Recognized Assets
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Assets Presented
in the Balance Sheet
Offsetting of Derivative Assets:
 
 
Current Assets
$
64,611,558

 
$

 
$
64,611,558



All of the Company’s outstanding derivative instruments are covered by International Swap Dealers Association Master Agreements (“ISDAs”) entered into with counterparties that are also lenders under the Company’s Revolving Credit Facility.  The Company’s obligations under the derivative instruments are secured pursuant to the Revolving Credit Facility, and no additional collateral had been posted by the Company as of March 31, 2016.  The ISDAs may provide that as a result of certain circumstances, such as cross-defaults, a counterparty may require all outstanding derivative instruments under an ISDA to be settled immediately.  See Note 10 for the aggregate fair value of all derivative instruments that were in a net liability position at March 31, 2016 and December 31, 2015.