Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

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DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
6 Months Ended
Jun. 30, 2018
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, basis swaps, 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
June 30,
 
Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
Cash Received (Paid) on Settled Derivatives
$
(12,266,857
)
 
$
2,341,030

 
$
(20,396,994
)
 
$
2,245,371

Non-Cash Mark-to-Market Gain (Loss) on Derivatives
(29,935,931
)
 
14,172,002

 
(42,077,245
)
 
31,228,544

Gain (Loss) on Derivative Instruments, Net
$
(42,202,788
)
 
$
16,513,032

 
$
(62,474,239
)
 
$
33,473,915


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.

As of June 30, 2018, the Company had a total volume on open commodity swaps of 7.5 million barrels at a weighted average price of approximately $55.60 per barrel. The following table reflects the weighted average price of open commodity swap derivative contracts as of June 30, 2018, by year with associated volumes.

Year
 
Volumes (Bbl)
 
Weighted
Average Price ($)
2018
 
2,003,660

 
57.83

2019
 
3,160,000

 
55.85

2020
 
1,730,980

 
52.55

2021 and beyond
 
631,600

 
55.67



The following table sets forth the amounts, on a gross basis, and classification of the Company’s outstanding derivative financial instruments at June 30, 2018 and December 31, 2017, 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
 
June 30, 2018 Estimated Fair Value
 
December 31, 2017 Estimated Fair Value
Derivative Liabilities:
 
 
 
 

 
 

Swap Contracts
 
Current Liabilities
 
$
(43,644,644
)
 
$
(18,681,891
)
Swap Contracts
 
Noncurrent Liabilities
 
(28,611,421
)
 
(11,496,929
)
Total Derivative Liabilities
 
 
 
$
(72,256,065
)
 
$
(30,178,820
)


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 June 30, 2018
 
Gross Amounts of
Recognized Assets (Liabilities)
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Balance Sheet
Offsetting of Derivative Assets:
 
 
Current Assets
$
12,921

 
$
(12,921
)
 
$

Noncurrent Assets
13,659

 
(13,659
)
 

Total Derivative Assets
$
26,580

 
$
(26,580
)
 
$

 
 
 
 
 
 
Offsetting of Derivative Liabilities:
 
 

Current Liabilities
$
(43,657,565
)
 
$
12,921

 
$
(43,644,644
)
Noncurrent Liabilities
(28,625,080
)
 
13,659

 
(28,611,421
)
Total Derivative Liabilities
$
(72,282,645
)
 
$
26,580

 
$
(72,256,065
)

 
Estimated Fair Value at December 31, 2017
 
Gross Amounts of
Recognized Assets (Liabilities)
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Assets (Liabilities) Presented in the Balance Sheet
Offsetting of Derivative Assets:
 
 
Current Assets
$

 
$

 
$

Non-Current Assets

 

 

Total Derivative Assets
$

 
$

 
$

 
 
 
 
 
 
Offsetting of Derivative Liabilities:
 
 

Current Liabilities
$
(18,681,891
)
 
$

 
$
(18,681,891
)
Non-Current Liabilities
(11,496,929
)
 

 
(11,496,929
)
Total Derivative Liabilities
$
(30,178,820
)
 
$

 
$
(30,178,820
)


All of the Company’s outstanding derivative instruments are covered by International Swap Dealers Association Master Agreements (“ISDAs”) entered into with BP Energy Company, Macquarie Bank Limited, and Fifth Third Bank.  The Company’s obligations under the derivative instruments are secured pursuant to the term loan credit agreement and related agreements, and no additional collateral had been posted by the Company as of June 30, 2018.  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 June 30, 2018 and December 31, 2017.

In June 2018, the Company entered into five independent, separately negotiated exchange agreements with holders of the Company’s 2020 Notes. Pursuant to each such exchange agreement, the Company agreed to issue the holder shares of its common stock in exchange for certain 2020 Notes held by such holder. The Company subjected the holders to various restrictions on the sale of the shares of common stock issued to them. These restrictions are of varying lengths and subject to varying exceptionsAs compensation for the inability to sell shares during the restricted period, the exchange agreements contained provisions whereby, if at the end of the applicable restricted sale period the Company’s common stock trades below specified levels, the Company may be required to pay additional consideration to the holder in the form of cash or additional shares of common stock. In connection with these provisions, for the three and six months ended June 30, 2018, the Company recorded a debt exchange derivative liability of $10.9 million which was included in the loss on the extinguishment of debt on the condensed statement of operations.