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Derivative Instruments and Hedging Activities
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Hedging Activities  
Derivative Instruments and Hedging Activities

5. Derivative Instruments and Hedging Activities

 

The Company periodically enters into commodity derivatives to manage its exposure to price fluctuations on natural gas and crude oil production. The Company’s credit agreement restricts the ability of the Company to enter into commodity derivatives other than to hedge or mitigate risks to which the Company has actual or projected exposure or as permitted under the Company’s risk management policies and where such derivatives do not subject the Company to material speculative risks. All of the Company’s derivatives are used for risk management purposes and are not held for trading purposes.

 

Effective April 1, 2014, the Company elected to discontinue hedge accounting for its commodity derivatives on a prospective basis. Through March 31, 2014, the Company elected to designate its commodity derivatives as cash flow hedges for accounting purposes. Accordingly, the change in the fair value of derivatives designated as hedges that are effective is recorded to accumulated other comprehensive income (loss) in stockholders’ equity in the Condensed Consolidated Balance Sheet. The ineffective portion of the change in the fair value of derivatives designated as hedges and the change in fair value of realized cash settlements of derivatives not designated as hedges are recorded as a component of operating revenues in gain (loss) on derivative instruments in the Condensed Consolidated Statement of Operations.

 

As a result of discontinuing hedge accounting, the unrealized loss included in accumulated other comprehensive income (loss) as of April 1, 2014 of $73.4 million ($44.2 million net of tax) was frozen and will be reclassified into natural gas and crude oil revenues in the Statement of Operations in future periods as the underlying hedge transactions occur. As of June 30, 2014, the Company  expects to reclassify $30.4 million in after-tax losses associated with its commodity derivatives from accumulated other comprehensive income (loss) to natural gas and crude oil revenues in the Condensed Consolidated Statement of Operations over the next six months.

 

As of June 30, 2014, the Company had the following outstanding commodity derivatives:

 

 

 

 

 

 

 

 

 

Collars

 

Swaps

 

 

 

 

 

 

 

 

 

Floor

 

Ceiling

 

 

 

Type of Contract

 

Volume

 

Contract Period

 

Range

 

Weighted-Average

 

Range

 

Weighted-Average

 

Weighted- Average

 

Natural gas

 

169.8

 

Bcf

 

Jul. 2014 - Dec. 2014

 

$3.60-$4.37

 

$

4.13

 

$4.22-$4.80

 

$

4.51

 

 

 

Natural gas

 

53.6

 

Bcf

 

Jul. 2014 - Dec. 2014

 

 

 

 

 

 

 

 

 

$

4.05

 

Crude oil

 

368.0

 

Mbbl

 

Jul. 2014 - Dec. 2014

 

 

 

 

 

 

 

 

 

$

97.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas prices are stated per Mcf and crude oil prices are stated per barrel.

 

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet

 

 

 

 

 

Fair Values of Derivative Instruments

 

 

 

 

 

Derivative Assets

 

Derivative Liabilities

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

December 31,

 

(In thousands)

 

Balance Sheet Location

 

2014

 

2013

 

2014

 

2013

 

Derivatives Designated as Hedges

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

$

—

 

$

3,019

 

$

—

 

$

—

 

Commodity contracts

 

Derivative instruments (current liabilites)

 

—

 

—

 

—

 

13,912

 

Derivatives Not Designated as Hedges

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Other current assets

 

954

 

—

 

—

 

—

 

Commodity contracts

 

Derivative instruments (current liabilites)

 

—

 

—

 

38,493

 

—

 

 

 

 

 

$

954

 

$

3,019

 

$

38,493

 

$

13,912

 

 

Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet

 

 

 

June 30,

 

December 31,

 

(In thousands)

 

2014

 

2013

 

Derivative Assets

 

 

 

 

 

Gross amounts of recognized assets

 

$

13,312

 

$

13,792

 

Gross amounts offset in the statement of financial position

 

(12,358

)

(10,773

)

Net amounts of assets presented in the statement of financial position

 

954

 

3,019

 

Gross amounts of financial instruments not offset in the statement of financial position

 

—

 

373

 

Net amount

 

$

954

 

$

3,392

 

 

 

 

 

 

 

Derivative Liabilities

 

 

 

 

 

Gross amounts of recognized liabilities

 

$

50,851

 

$

24,685

 

Gross amounts offset in the statement of financial position

 

(12,358

)

(10,773

)

Net amounts of liabilities presented in the statement of financial position

 

38,493

 

13,912

 

Gross amounts of financial instruments not offset in the statement of financial position

 

490

 

—

 

Net amount

 

$

38,983

 

$

13,912

 

 

Effect of Derivative Instruments on Accumulated Other Comprehensive Income (Loss)

 

The amount of gain (loss) recognized in accumulated other comprehensive income (loss) on derivatives (effective portion) is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Commodity contracts

 

$

—

 

$

115,113

 

$

(133,310

)

$

54,167

 

 

The amount of gain (loss) reclassified from accumulated other comprehensive income (loss) into income (effective portion) is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2014 (1)

 

2013

 

2014 (1)

 

2013

 

Natural gas revenues

 

$

(22,320

)

$

(272

)

$

(92,877

)

$

13,056

 

Crude oil and condensate revenues

 

(636

)

2,094

 

(854

)

4,136

 

 

 

$

(22,956

)

$

1,822

 

$

(93,731

)

$

17,192

 

 

 

(1)     The Company ceased hedge accounting effective April 1, 2014. For the three and six months ended June 30, 2014, approximately $23.0 million related to amounts previously frozen in accumulated other comprehensive income (loss) were reclassified into income.

 

Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations

 

The amount of gain (loss) recognized in the Condensed Consolidated Statement of Operations on derivative instruments is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2014

 

2013

 

2014

 

2013

 

Derivatives Designated as Hedges

 

 

 

 

 

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

Natural gas

 

$

—

 

$

(272

)

$

(70,557

)

$

13,056

 

Crude oil and condensate

 

—

 

2,094

 

(218

)

4,136

 

 

 

$

—

 

$

1,822

 

$

(70,775

)

$

17,192

 

Derivatives Not Designated as Hedges

 

 

 

 

 

 

 

 

 

Realized

 

 

 

 

 

 

 

 

 

Natural gas

 

$

(22,320

)

$

—

 

$

(22,320

)

$

—

 

Crude oil and condensate

 

(636

)

—

 

(636

)

—

 

Gain (loss) on derivative instruments

 

(15,262

)

—

 

(15,262

)

—

 

Unrealized

 

 

 

 

 

 

 

 

 

Gain (loss) on derivative instruments

 

12,933

 

—

 

12,933

 

—

 

 

 

$

(25,285

)

$

—

 

$

(25,285

)

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(25,285

)

$

1,822

 

$

(96,060

)

$

17,192

 

 

For the three and six months ended June 30, 2014 and 2013, respectively, there was no ineffectiveness recorded in the Condensed Consolidated Statement of Operations related to derivative instruments designated as hedges.

 

Additional Disclosures about Derivative Instruments and Hedging Activities

 

The use of derivative instruments involves the risk that the counterparties will be unable to meet their obligations under the agreements. The Company enters into derivative contracts with multiple counterparties in order to limit its exposure to individual counterparties. The Company also has netting arrangements with each of its counterparties that allow it to offset assets and liabilities from separate derivative contracts with that counterparty.

 

Certain counterparties to the Company’s derivative instruments are also lenders under its revolving credit facility. The Company’s revolving credit facility and derivative instruments contain certain cross default and acceleration provisions that may require immediate payment of its derivative liabilities in certain situations.