Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

v3.8.0.1
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
9 Months Ended
Sep. 30, 2017
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
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Cash Received (Paid) on Derivatives
$
3,395,117

 
$
9,027,150

 
$
5,640,488

 
$
54,457,800

Non-Cash Gain (Loss) on Derivatives
(16,058,370
)
 
(5,645,586
)
 
15,170,174

 
(58,135,302
)
Gain (Loss) on Derivative Instruments, Net
$
(12,663,253
)
 
$
3,381,564

 
$
20,810,662

 
$
(3,677,502
)

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 September 30, 2017, the associated volumes and the corresponding fixed price.
Settlement Period
 
Oil (Barrels)
 
Fixed Price ($)
Swaps-Crude Oil
 
 
 
 
10/01/17 – 12/31/17
 
90,000

 
54.20

10/01/17 – 12/31/17
 
60,000

 
53.25

10/01/17 – 12/31/17
 
92,000

 
54.10

10/01/17 – 12/31/17
 
120,000

 
52.75

10/01/17 – 12/31/17
 
60,000

 
52.75

10/01/17 – 12/31/17
 
60,000

 
53.50

10/01/17 – 12/31/17
 
30,000

 
54.60

10/01/17 – 12/31/17
 
60,000

 
51.75

10/01/17 – 12/31/17
 
60,000

 
53.75

01/01/18 – 08/31/18
 
160,000

 
50.00

01/01/18 – 08/31/18
 
160,000

 
50.05

01/01/18 – 08/31/18
 
160,000

 
50.00

01/01/18 – 08/31/18
 
160,000

 
50.18

01/01/18 – 09/30/18
 
270,000

 
54.00

01/01/18 – 09/30/18
 
270,000

 
54.00

01/01/18 – 09/30/18
 
273,000

 
55.20

01/01/18 – 12/31/18
 
180,000

 
53.30

01/01/18 – 12/31/18
 
180,000

 
52.25

01/01/18 – 12/31/18
 
180,000

 
52.00

01/01/18 – 12/31/18
 
180,000

 
52.75

10/01/18 – 12/31/18
 
92,000

 
53.08

10/01/18 – 12/31/18
 
92,000

 
53.50



The following table reflects the weighted average price of open commodity swap derivative contracts as of September 30, 2017, by year with associated volumes.
Year
 
Volumes (Bbl)
 
Weighted
Average Price ($)
2017
 
632,000

 
53.36

2018
 
2,357,000

 
52.58

2019 and beyond
 

 



In addition to the open commodity swap contracts the Company has entered into costless collars. The costless collars are used to establish floor and ceiling prices on anticipated crude oil production. There were no premiums paid or received by the Company related to the costless collar agreements. The following table reflects open costless collar agreements as of September 30, 2017.
Settlement Period
 
Oil (Barrels)
 
Floor/Ceiling Price ($)
 
Basis
10/01/17 – 12/31/17
 
45,000

 
$50.00/$60.00
 
NYMEX
10/01/17 – 12/31/17
 
30,000

 
$50.00/$60.15
 
NYMEX
01/01/18 – 12/31/18
 
360,000

 
$50.00/$60.25
 
NYMEX


The following table sets forth the amounts, on a gross basis, and classification of the Company’s outstanding derivative financial instruments at September 30, 2017 and December 31, 2016, 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
 
September 30, 2017 Estimated Fair Value
 
December 31, 2016 Estimated Fair Value
Derivative Assets:
 
 
 
 
 
 
Swap Contracts
 
Current Assets
 
$
3,201,639

 
$
20,962

Costless Collar Contracts
 
Current Assets
 
678,742

 

Swap Contracts
 
Noncurrent Assets
 
550,795

 

Costless Collar Contracts
 
Noncurrent Assets
 
266,623

 

Total Derivative Assets
 
 
 
$
4,697,799

 
$
20,962

 
 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 

 
 

Swap Contracts
 
Current Liabilities
 
$
(1,263,002
)
 
$
(9,862,215
)
Costless Collar Contracts
 
Current Liabilities
 

 
(155,794
)
Swap Contracts
 
Noncurrent Liabilities
 

 
(1,738,329
)
Total Derivative Liabilities
 
 
 
$
(1,263,002
)
 
$
(11,756,338
)


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 September 30, 2017
 
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
$
3,880,381

 
$
(1,258,261
)
 
$
2,622,120

Noncurrent Assets
817,418

 

 
817,418

Total Derivative Assets
$
4,697,799

 
$
(1,258,261
)
 
$
3,439,538

 
 
 
 
 
 
Offsetting of Derivative Liabilities:
 
 

Current Liabilities
$
(1,263,002
)
 
$
1,258,261

 
$
(4,741
)
Noncurrent Liabilities

 

 

Total Derivative Liabilities
$
(1,263,002
)
 
$
1,258,261

 
$
(4,741
)
 
Estimated Fair Value at December 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
$
20,962

 
$
(16,445
)
 
$
4,517

Non-Current Assets

 

 

Total Derivative Assets
$
20,962

 
$
(16,445
)
 
$
4,517

 
 
 
 
 
 
Offsetting of Derivative Liabilities:
 
 

Current Liabilities
$
(10,018,009
)
 
$
16,445

 
$
(10,001,564
)
Non-Current Liabilities
(1,738,329
)
 

 
(1,738,329
)
Total Derivative Liabilities
$
(11,756,338
)
 
$
16,445

 
$
(11,739,893
)


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 September 30, 2017.  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 September 30, 2017 and December 31, 2016.