Annual report pursuant to Section 13 and 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

v2.4.1.9
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
 12 Months Ended
Dec. 31, 2014
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT [Abstract]  
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
NOTE 14     DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

The Company utilizes commodity swap contracts, swaptions and costless 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 positions are carried at their fair value on the balance sheet and are marked-to-market at the end of each period.  Any realized gains and losses are recorded to loss on settled derivatives and unrealized gains or losses are recorded to losses on the mark-to-market of derivative instruments on the statement of comprehensive income.

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.

Crude Oil Derivative Contracts Cash-flow Not Designated as Hedges

The Company recorded realized losses on settled derivatives of $7.9, $12.2 million and $0.4 million as a loss on settled derivatives in the statement of comprehensive income for the years ended December 31, 2014, 2013 and 2012, respectively.  The Company recorded (losses) gains of $171.3, $(21.3) million and $15.1 million as (losses) gains on the mark-to-market of derivatives in the statement of comprehensive income for the years ended December 31, 2014, 2013 and 2012, respectively.  Mark-to-market gains and losses represent changes in fair values of derivatives that have not been settled.
 
The following table reflects open commodity swap contracts as of December 31, 2014, the associated volumes and the corresponding fixed price.

Settlement Period
  
Oil (Barrels)
    
Fixed Price
  
Swaps-Crude Oil
            
01/01/15 – 06/30/15
     360,000       89.15  
01/01/15 – 06/30/15
     60,000       90.50  
01/01/15 – 06/30/15
     180,000       88.55  
01/01/15 – 06/30/15
     180,000       88.00  
01/01/15 – 06/30/15
     60,000       90.75  
01/01/15 – 06/30/15
     60,000       90.25  
01/01/15 – 06/30/15
     90,000       89.00  
01/01/15 – 06/30/15
     90,000       89.00  
01/01/15 – 12/31/15
     720,000       89.00  
01/01/15 – 12/31/15
     360,000       89.00  
01/01/15 – 12/31/15
     360,000       89.02  
01/01/15 – 12/31/15
     180,000       89.00  
01/01/15 – 12/31/15
     180,000       89.00  
07/01/15 – 12/31/15(1)
    180,000       90.75  
07/01/15 – 12/31/15(1)
    180,000       91.00  
07/01/15 – 12/31/15(1)
    180,000       91.25  
07/01/15 – 06/30/16
     360,000       89.00  
07/01/15 – 06/30/16
     360,000       90.00  
07/01/15 – 06/30/16
     360,000       91.00  
01/01/16 – 06/30/16
     180,000       90.00  
01/01/16 – 06/30/16
     90,000       90.00  
01/01/16 – 06/30/16
     90,000       90.00  
_________________

(1)
The Company has entered into crude oil derivative contracts that give counterparties the option to extend certain current derivative contracts for an additional six-month period.  Options covering a notional volume of 90,000 barrels per month are exercisable on or about December 31, 2015.  If the counterparties exercise all such options, the notional volume of the Company’s existing crude oil derivative contracts will increase by 90,000 barrels per month at an average price of $91.00 per barrel for each month during the period January 1, 2016 through June 30, 2016.

As of December 31, 2014, the Company had a total volume on open commodity swaps of 4.9 million barrels at a weighted average price of approximately $89.53.

The following table reflects the weighted average price of open commodity derivative contracts as of December 31, 2014, by year with associated volumes.

Weighted Average Price
Of Open Commodity Swap Contracts
  
Year
  
Volumes (Bbl)
    
Weighted
Average Price
  
2015
     3,960,000       89.43  
2016
     900,000       90.00  

We determine the estimated fair value of derivative instruments using a market approach based on several factors, including quoted market prices in active markets and quotes from third parties, among other things.  The Company also performs an internal valuation to ensure the reasonableness of third party quotes.  In consideration of counterparty credit risk, the Company assessed the possibility of whether the counterparty to the derivative would default by ailing to make any contractually required payments.  Additionally, the Company considers that it is of substantial credit quality and has the financial resources and willingness to meet its potential repayment obligations associated with the derivative transactions.  For further details regarding our derivative contracts see Note 12, Fair Value in the Notes to the Financial Statements.
 
The following table sets forth the amounts, on a gross basis, and classification of the Company’s outstanding derivative financial instruments at December 31, 2014 and 2013, respectively.  Certain amounts may be presented on a net basis on the consolidated 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
    
 December 31,
Estimated Fair Value
 
2014
      
2013
                     
Derivative Assets:
                    
Swap Contracts
  
Current Assets
     $ 
      128,893,220
     $ 
            62,890
Swap Contracts
  
Non-Current Assets
      
25,013,011
      
1,745,405
Total Derivative Assets
         $ 
      153,906,231
     $ 
       1,808,295
                     
Derivative Liabilities:
                    
Swap Contracts
  
Current Liabilities
      
                        -
      
   (19,111,820)
Costless Collars
  
Current Assets/Liabilities
      
-
      
(7,826)
Swap Contracts
  
Non-Current Liabilities
      
-
      
(637,208)
Swaption Contracts
  
Non-Current Liabilities
     $ 
(579,070)
     $ 
-
Total Derivative Liabilities
         $ 
          (579,070)
     $ 
   (19,756,854)

The following disclosures are applicable to the Company’s financial statements, as of December 31, 2014, 2013 and 2012:

Derivative Type
  
Location of Loss for Effective and Ineffective Portion of Derivative in Income
  
Amount of Loss Reclassified from AOCI into Income
  
       
Year Ended December 31,
  
       
2014
    
2013
    
2012
  
Commodity – Cash Flow
  
Loss on Settled Derivatives
   $ -     $ -     $ 101,309  

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 December 31, 2014
  
   
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
   $ 128,893,220     $ -     $ 128,893,220  
Non-Current Assets
     25,013,011       -       25,013,011  
Total Derivative Assets
   $ 153,906,231     $ -     $ 153,906,231  
                         
Offsetting of Derivative Liabilities:
          
Current Liabilities
   $ -     $ -     $ -  
Non-Current Liabilities
     (579,070 )     -       (579,070 )
Total Derivative Liabilities
   $ (579,070 )   $ -     $ (579,070 )
 
   
Estimated Fair Value at December 31, 2013
  
   
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
   $ 629,178     $ (566,288 )   $ 62,890  
Non-Current Assets
     2,589,079       (843,674 )     1,745,405  
Total Derivative Assets
   $ 3,218,257     $ (1,409,962 )   $ 1,808,295  
                         
Offsetting of Derivative Liabilities:
          
Current Liabilities
   $ (19,685,934 )   $ 566,288     $ (19,119,646 )
Non-Current Liabilities
     (1,480,882 )     843,674       (637,208 )
Total Derivative Liabilities
   $ (21,166,816 )   $ 1,409,962     $ (19,756,854 )

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 December 31, 2014.  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 12 for the aggregate fair value of all derivative instruments that were in a net liability position at December 31, 2014 and 2013.