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Derivative Instruments
 6 Months Ended
Jun. 30, 2014
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
The Company utilizes derivative financial instruments to manage risks related to changes in oil prices. As of June 30, 2014, the Company utilized two-way and three-way costless collar options, swaps, swaps with sub-floors and deferred premium puts to reduce the volatility of oil prices on a significant portion of its future expected oil production. A two-way collar is a combination of options: a sold call and a purchased put. The purchased put establishes a minimum price (floor) and the sold call establishes a maximum price (ceiling) the Company will receive for the volumes under contract. A three-way collar is a combination of options: a sold call, a purchased put and a sold put. The purchased put establishes a minimum price (floor), unless the market price falls below the sold put (sub-floor), at which point the minimum price would be NYMEX West Texas Intermediate (“WTI”) crude oil index price plus the difference between the purchased put and the sold put strike price. The sold call establishes a maximum price (ceiling) the Company will receive for the volumes under contract. A swap is a sold call and a purchased put established at the same price (both ceiling and floor). A swap with a sub-floor is a swap coupled with a sold put (sub-floor) at which point the minimum price would be WTI crude oil index price plus the difference between the swap and the sold put strike price. For the deferred premium puts, the Company agrees to pay a premium to the counterparty at the time of settlement. At settlement, if the WTI price is below the floor price of the put, the Company receives the difference between the floor price and the WTI price multiplied by the contract volumes, less the premium. If the WTI price settles at or above the floor price of the put, the Company pays only the premium.
All derivative instruments are recorded on the Company’s Condensed Consolidated Balance Sheet as either assets or liabilities measured at fair value (see Note 6 – Fair Value Measurements). 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 fair value are recognized in the other income (expense) section of the Company’s Condensed Consolidated Statement of Operations as a net gain or loss on derivative instruments. The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in making a payment to or receiving a payment from the counterparty. These cash settlements are reflected as investing activities in the Company’s Condensed Consolidated Statement of Cash Flows.
As of June 30, 2014, the Company had the following outstanding commodity derivative instruments, all of which settle monthly based on the average WTI crude oil index price:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted Average Deferred Premium
 
 
Settlement
Period
 
Derivative
Instrument
 
Total Notional
Amount of Oil
 
Weighted Average Prices
 
 
Fair Value
Asset
(Liability)
 
 
 
Swap
 
Sub-Floor
 
Floor
 
Ceiling
 
 
 
 
 
 
(Barrels)
 
($/Barrel)
 
 
 
(In thousands)
2014
 
Two-way collars
 
1,855,500

 
 
 
 
 
$
94.92

 
$
106.16

 
 
 
$
(3,019
)
2014
 
Three-way collars
 
1,615,500

 
 
 
$
70.57

 
$
90.57

 
$
105.20

 
 
 
(3,774
)
2014
 
Swaps
 
1,858,500

 
$
96.13

 
 
 
 
 
 
 
 
 
(14,339
)
2014
 
Swaps with sub-floors
 
1,098,000

 
$
92.60

 
$
70.00

 
 
 
 
 
 
 
(12,194
)
2015
 
Two-way collars
 
2,388,500

 
 
 
 
 
$
87.98

 
$
103.21

 
 
 
(2,738
)
2015
 
Three-way collars
 
263,500

 
 
 
$
70.59

 
$
90.59

 
$
105.25

 
 
 
(489
)
2015
 
Swaps
 
5,263,500

 
$
90.81

 
 
 
 
 
 
 
 
 
(34,657
)
2015
 
Swaps with sub-floors
 
186,000

 
$
92.60

 
$
70.00

 
 
 
 
 
 
 
(1,544
)
2015
 
Deferred premium puts
 
1,086,000

 
 
 
 
 
$
90.00

 
 
 
$
2.55

 
(549
)
2016
 
Two-way collars
 
155,000

 
 
 
 
 
$
86.00

 
$
103.42

 
 
 
92

2016
 
Swaps
 
310,000

 
$
90.15

 
 
 
 
 
 
 
 
 
(1,048
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
(74,259
)

The following table summarizes the location and fair value of all outstanding commodity derivative instruments recorded in the Company’s Condensed Consolidated Balance Sheet for the periods presented:
 
Fair Value of Derivative Instrument Assets (Liabilities)
 
 
 
 
Fair Value
Commodity
 
Balance Sheet Location
 
June 30, 2014
 
December 31, 2013
 
 
 
 
(In thousands)
Crude oil
 
Derivative instruments — current assets
 
$
—

 
$
2,264

Crude oil
 
Derivative instruments — non-current assets
 
—

 
1,333

Crude oil
 
Derivative instruments — current liabilities
 
(62,415
)
 
(8,188
)
Crude oil
 
Derivative instruments — non-current liabilities
 
(11,844
)
 
(139
)
Total derivative instruments
 
 
 
$
(74,259
)
 
$
(4,730
)

The following table summarizes the location and amounts of gains and losses from the Company’s commodity derivative instruments for the periods presented:
 
 
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
Statement of Operations Location
 
2014
 
2013
 
2014
 
2013
 
 
 
(In thousands)
Non-cash change in fair value of derivative instruments
Net gain (loss) on derivative instruments
 
$
(54,165
)
 
$
11,345

 
$
(69,529
)
 
$
(4,953
)
Derivative settlements
Net gain (loss) on derivative instruments
 
(11,405
)
 
1,246

 
(13,644
)
 
2,932

Total net gain (loss) on derivative instruments
 
$
(65,570
)
 
$
12,591

 
$
(83,173
)
 
$
(2,021
)

In accordance with the FASB’s authoritative guidance on disclosures about offsetting assets and liabilities, the Company is required to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting agreement. The Company’s derivative instruments are presented as assets and liabilities on a net basis by counterparty, as all counterparty contracts provide for net settlement. No margin or collateral balances are deposited with counterparties, and as such, gross amounts are offset to determine the net amounts presented in the Company’s Condensed Consolidated Balance Sheet.
The following tables summarize gross and net information about the Company’s commodity derivative instruments for the periods presented:
Offsetting of Derivative Assets
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Assets Presented
in the Balance Sheet
 
 
(In thousands)
As of June 30, 2014
 
$
22,988

 
$
(22,988
)
 
$
—

As of December 31, 2013
 
22,743

 
(19,146
)
 
3,597

 
 
 
 
 
 
 
Offsetting of Derivative Liabilities
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Liabilities Presented
in the Balance Sheet
 
 
(In thousands)
As of June 30, 2014
 
$
97,247

 
$
(22,988
)
 
$
74,259

As of December 31, 2013
 
27,473

 
(19,146
)
 
8,327