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Derivative Activities | 12 Months Ended
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Dec. 31, 2016
Derivative Instruments And Hedging Activities Disclosure [Abstract] |
Derivative Activities |
(11) | Derivative Activities
We use commodity-based derivative contracts to manage exposure to commodity price fluctuations. We do not enter into these arrangements for speculative or trading purposes. We do not utilize complex derivatives as we typically utilize commodity swap or collar contracts to (1) reduce the effect of price volatility of the commodities we produce and sell and (2) support our annual capital budget and expenditure plans. Their fair value, represented by the estimated amount that would be realized upon termination, based on a comparison of the contract price and a reference price, generally NYMEX for natural gas and crude oil or Mont Belvieu for NGLs, approximated a net loss of $187.2 million at December 31, 2016. These contracts expire monthly through December 2018. The following table sets forth the derivative volumes by year as of December 31, 2016, excluding our basis and freight swaps which are discussed separately below:
Period |  | Contract Type |  | Volume Hedged |  | Weighted Average Hedge Price
Natural Gas |  |  |  |  |  |
2017 |  | Swaps (1) |  | 840,692 Mmbtu/day |  | $ 3.19
2018 |  | Swaps |  | 276,712 Mmbtu/day |  | $ 3.12
2017 |  | Collar (1) |  | 42,750 Mmbtu/day |  | $ 3.48-$ 4.15
2017 |  | Purchased Put (1) |  | 175,890 Mmbtu/day |  | $ 3.48 (2)
2017 |  | Sold Call |  | 9,041 Mmbtu/day |  | $ 3.75 (3)
Crude Oil |  |  |  |  |  |
2017 |  | Swaps (1) |  | 8,542 bbls/day |  | $ 55.77
2018 |  | Swaps |  | 2,750 bbls/day |  | $ 54.24
NGLs (C2-Ethane) |  |  |  |  |  |
2017 |  | Swaps |  | 3,000 bbls/day |  | $ 0.27/gallon
NGLs (C3-Propane) |  |  |  |  |  |
2017 |  | Swaps |  | 11,610 bbls/day |  | $ 0.55/gallon
2018 |  | Swaps |  | 5,699 bbls/day |  | $ 0.65/gallon
NGLs (NC4-Normal Butane) |  |  |  |  |  |
2017 |  | Swaps |  | 7,000 bbls/day |  | $ 0.73/gallon
2018 |  | Swaps |  | 2,000 bbls/day |  | $ 0.78/gallon
NGLs (C5-Natural Gasoline) |  |  |  |  |  |
2017 |  | Swaps |  | 5,250 bbls/day |  | $ 1.06/gallon
2018 |  | Swaps |  | 1,000 bbls/day |  | $ 1.18/gallon
(1) Includes derivative instruments assumed in connection with the MRD Merger. (2) Weighted average deferred premium is ($0.32). (3) Weighted average deferred premium is $0.31. Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, changes in fair value of these non-hedge derivatives are recognized in earnings in derivative fair value income or loss. Basis Swap Contracts In addition to the swaps and options above, at December 31, 2016, we had natural gas basis swap contracts which lock in the differential between NYMEX and certain of our physical pricing points in Appalachia. These contracts settle monthly through December 2018 and include a total volume of 66,210,000 Mmbtu. The fair value of these contracts was a gain of $11.8 million on December 31, 2016. At December 31, 2016, we also had propane spread swap contracts which lock in the differential between Mont Belvieu and international propane indexes. The contracts settle monthly through December 2018 and include a total volume of 1,637,500 barrels in 2017 and 750,000 barrels in 2018. The fair value of these contracts was a loss of $742,000 on December 31, 2016. Freight Swap Contracts In connection with our international propane sales, we utilize propane swaps. To further hedge our propane price, at December 31, 2016, we had freight swap contracts which lock in the freight rate for a specific trade route on the Baltic Exchange. These contracts settle monthly beginning in fourth quarter 2017 through December 2018 and cover 5,000 metric tons per month with a fair value gain of $65,000 on December 31, 2016. These contracts use observable third-party pricing inputs that we consider to be Level 2 fair value classification. Discontinuance of Hedge Accounting Effective March 1, 2013, we elected to de-designate all commodity contracts that were previously designated as cash flow hedges and elected to discontinue hedge accounting prospectively. As a result of discontinuing hedge accounting, the mark-to-market values included in AOCI as of the de-designation date were frozen and were reclassified into earnings in natural gas, NGLs and oil sales in future periods as the underlying hedged transactions occurred. As of December 31, 2014, all frozen values have been reclassified to earnings. For those derivative instruments that qualified for hedge accounting, settled transaction gains and losses were determined monthly and were included as increases or decreases to natural gas, NGLs and oil sales in the period the hedged production was sold. Natural gas, NGLs and oil sales include $10.2 million of gains in 2014 related to settled hedging transactions. Any ineffectiveness associated with these hedge derivatives are reflected in derivative fair value in the accompanying consolidated statements of operations. The ineffective portion is calculated as the difference between the changes in fair value of the derivative and the estimated change in future cash flows from the item hedged. Derivative assets and liabilities The combined fair value of derivatives included in the accompanying consolidated balance sheets as of December 31, 2016 and 2015 is summarized below (in thousands). As of December 31, 2016, we are conducting derivative activities with twenty-two counterparties, of which all but five are secured lenders in our bank credit facility. We believe all of these counterparties are acceptable credit risks. At times, such risks may be concentrated with certain counterparties. The credit worthiness of our counterparties is subject to periodic review. The assets and liabilities are netted where derivatives with both gain and loss positions are held by a single counterparty and we have master netting arrangements.
|  |  | December 31, 2016 |
|  |  | Gross Amounts of Recognized Assets |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Net Amounts of Assets Presented in the Balance Sheet |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |  |
Natural gas | –swaps |  | $ | 13,213 |  |  | $ | (11,425 | ) |  | $ | 1,788 |
| –basis swaps |  |  | 12,535 |  |  |  | (9,437 | ) |  |  | 3,098 |
| –collars |  |  | 6,298 |  |  |  | (6,298 | ) |  |  | — |
| –puts |  |  | 18,159 |  |  |  | (15,429 | ) |  |  | 2,730 |
Crude oil | –swaps |  |  | 9,356 |  |  |  | (3,489 | ) |  |  | 5,867 |
NGLs | –C2 ethane swaps |  |  | 53 |  |  |  | (53 | ) |  |  | — |
| –C3 propane spread swaps |  |  | 17,396 |  |  |  | (17,396 | ) |  |  | — |
| –NC4 butane swaps |  |  | 4 |  |  |  | (4 | ) |  |  | — |
Freight | –swaps |  |  | 65 |  |  |  | (65 | ) |  |  | — |
|  |  | $ | 77,079 |  |  | $ | (63,596 | ) |  | $ | 13,483 |
|  |  | December 31, 2016 |
|  |  | Gross Amounts of Recognized (Liabilities) |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Net Amounts of (Liabilities) Presented in the Balance Sheet |
Derivative (liabilities): |  |  |  |  |  |  |  |  |  |  |  |  |
Natural gas | –swaps |  | $ | (158,359 | ) |  | $ | 11,425 |  |  | $ | (146,934 | )
| –basis swaps |  |  | (687 | ) |  |  | 9,437 |  |  |  | 8,750 |
| –collars |  |  | (2,625 | ) |  |  | 6,298 |  |  |  | 3,673 |
| –puts |  |  | — |  |  |  | 15,429 |  |  |  | 15,429 |
| –calls |  |  | (1,041 | ) |  |  | — |  |  |  | (1,041 | )
Crude oil | –swaps |  |  | (13,206 | ) |  |  | 3,489 |  |  |  | (9,717 | )
NGLs | –C2 ethane swaps |  |  | (1,008 | ) |  |  | 53 |  |  |  | (955 | )
| –C3 propane swaps |  |  | (32,437 | ) |  |  | — |  |  |  | (32,437 | )
| –C3 propane spread swaps |  |  | (18,138 | ) |  |  | 17,396 |  |  |  | (742 | )
| –NC4 butane swaps |  |  | (13,419 | ) |  |  | 4 |  |  |  | (13,415 | )
| –C5 natural gasoline swaps |  |  | (12,176 | ) |  |  | — |  |  |  | (12,176 | )
Freight | –swaps |  |  | — |  |  |  | 65 |  |  |  | 65 |
|  |  | $ | (253,096 | ) |  | $ | 63,596 |  |  | $ | (189,500 | )
|  | December 31, 2015 |
|  | Gross Amounts of Recognized Assets |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Net Amounts of Assets Presented in the Balance Sheet |
Derivative assets: |  |  |  |  |  |  |  |  |  |  |  |
Natural gas | –swaps | $ | 219,357 |  |  | $ | (10,245 | ) |  | $ | 209,112 |
| –natural gas basis swaps |  | 8,251 |  |  |  | (2,765 | ) |  |  | 5,486 |
Crude oil | –swaps |  | 38,699 |  |  |  | — |  |  |  | 38,699 |
NGLs | –C3 swaps |  | 15,884 |  |  |  | — |  |  |  | 15,884 |
| –C3 propane spread swaps |  | 2,497 |  |  |  | (2,497 | ) |  |  | — |
| –C4 swaps |  | 6,968 |  |  |  | — |  |  |  | 6,968 |
| –C5 swaps |  | 12,694 |  |  |  | (81 | ) |  |  | 12,613 |
|  | $ | 304,350 |  |  | $ | (15,588 | ) |  | $ | 288,762 |
|  | December 31, 2015 |
|  | Gross Amounts of Recognized (Liabilities) |  |  | Gross Amounts Offset in the Balance Sheet |  |  | Net Amounts of (Liabilities) Presented in the Balance Sheet |
Derivative (liabilities): |  |  |  |  |  |  |  |  |  |  |
Natural gas | –swaps | $ | (10,245 | ) |  | $ | 10,245 |  |  | $ | — |
| –natural gas basis swaps |  | (2,786 | ) |  |  | 2,765 |  |  |  | (21 | )
NGLs | –C3 propane spread swaps |  | (3,633 | ) |  |  | 2,497 |  |  |  | (1,136 | )
| –C5 swaps |  | (81 | ) |  |  | 81 |  |  |  | — |
|  | $ | (16,745 | ) |  | $ | 15,588 |  |  | $ | (1,157 | )
The effects of our derivatives on our consolidated statements of operations for the last three years are summarized below (in thousands).
|  | Year Ended December 31, |
|  | Derivative Fair Value Income (Loss) |
|  | 2016 |  |  | 2015 |  |  | 2014 |
Commodity Swaps |  | $ | (265,466 | ) |  | $ | 398,020 |  |  | $ | 367,484 |
Re-purchased swaps |  |  | — |  |  |  | 851 |  |  |  | — |
Collars |  |  | (6,926 | ) |  |  | 16,539 |  |  |  | 42,836 |
Basis swaps |  |  | 29,154 |  |  |  | 954 |  |  |  | (26,800 | )
Puts |  |  | (18,201 | ) |  |  | — |  |  |  | — |
Calls |  |  | (18 | ) |  |  | — |  |  |  | — |
Freight swaps |  |  | 66 |  |  |  | — |  |  |  | — |
Total |  | $ | (261,391 | ) |  | $ | 416,364 |  |  | $ | 383,520 |

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