Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts at fair value. Changes in derivative fair values are recognized in earnings.

Chapter 11 Proceedings

Both a default by the Company under its senior credit facility and a Chapter 11 filing by the Company constitute defaults under its commodity derivative contracts. As a result, certain commodity derivative contracts were settled in the second quarter of 2016 and prior to their contractual maturities (“early settlements”) after the Chapter 11 filings occurred, resulting in $17.9 million of cash receipts during the nine-month period ended September 30, 2016. Additionally, new agreements have been executed with four counterparties for current and future trading purposes.

Commodity Derivatives

The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. The Company seeks to manage this risk through the use of commodity derivative contracts, which allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. None of the Company’s commodity derivative contracts may be terminated prior to contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. Cash settlements and valuation gains and losses on commodity derivative contracts are included in (gain) loss on derivative contracts in the unaudited condensed consolidated statements of operations. Commodity derivative contracts are settled on a monthly basis. Derivative assets and liabilities arising from the Company’s commodity derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the consolidated balance sheets. At September 30, 2016, the Company’s commodity derivative contracts consisted of fixed price swaps and basis swaps, which are described below:



Fixed price swaps	The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.

Basis swaps	The Company receives a payment from the counterparty if the settled price differential is greater than the stated terms of the contract and pays the counterparty if the settled price differential is less than the stated terms of the contract, which guarantees the Company a price differential for oil or natural gas from a specified delivery point.

The Company recorded gain on commodity derivative contracts of $0.3 million and $42.2 million for the three-month periods ended September 30, 2016 and 2015, respectively, which include net cash receipts upon settlement of $14.6 million and $67.3 million, respectively. The Company recorded a loss (gain) on commodity derivative contracts of $4.8 million and $(59.0) million for the nine-month periods ended September 30, 2016 and 2015, respectively, which includes net cash receipts upon settlement of $72.6 million and $278.6 million, respectively. Included in the net cash receipts for the nine-month period ended September 30, 2016 is $17.9 million of cash receipts related to early settlements.

Master Netting Agreements and the Right of Offset. The Company has master netting agreements with all of its commodity derivative counterparties and has presented its derivative assets and liabilities with the same counterparty on a net basis in the consolidated balance sheets. As a result of the netting provisions, the Company's maximum amount of loss under commodity derivative transactions due to credit risk is limited to the net amounts due from its counterparties. As of September 30, 2016, the counterparties to the Company’s open commodity derivative contracts consisted of four financial institutions, which are also lenders under the Company’s senior credit facility. The Company is not required to post additional collateral under its commodity derivative contracts as the majority of the counterparties to the Company’s commodity derivative contracts share in the collateral supporting the Company’s senior credit facility. The following tables summarize (i) the Company's commodity derivative contracts on a gross basis, (ii) the effects of netting assets and liabilities for which the right of offset exists based on master netting arrangements and (iii) for the Company’s net derivative liability positions, the applicable portion of shared collateral under the senior credit facility (in thousands):

September 30, 2016



	Gross Amounts		Gross Amounts Offset			Amounts Net of Offset		Financial Collateral			Net Amount
Assets
Derivative contracts - current	$	11,319	$	(1,127	)	$	10,192	$	—		$	10,192
Derivative contracts - noncurrent	110		(40		)	70		—			70
Total	$	11,429	$	(1,167	)	$	10,262	$	—		$	10,262
Liabilities
Derivative contracts - current	$	4,109	$	(1,127	)	$	2,982	$	(2,982	)	$	—
Derivative contracts - noncurrent	975		(40		)	935		(935		)	—
Total	$	5,084	$	(1,167	)	$	3,917	$	(3,917	)	$	—

December 31, 2015



	Gross Amounts		Gross Amounts Offset			Amounts Net of Offset		Financial Collateral			Net Amount
Assets
Derivative contracts - current	$	85,524	$	(1,175	)	$	84,349	$	—		$	84,349
Derivative contracts - noncurrent	—		—			—		—			—
Total	$	85,524	$	(1,175	)	$	84,349	$	—		$	84,349
Liabilities
Derivative contracts - current	$	1,748	$	(1,175	)	$	573	$	(573	)	$	—
Derivative contracts - noncurrent	—		—			—		—			—
Total	$	1,748	$	(1,175	)	$	573	$	(573	)	$	—

At September 30, 2016, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps

Natural Gas Price Swaps

Natural Gas Basis Swaps

Debt - Embedded Derivatives

Debt Holder Conversion Feature. As discussed further in Note 4 and Note 6, the Convertible Senior Unsecured Notes contain a conversion feature that prior to the Chapter 11 filings was exercisable at the holders’ option. This conversion feature was identified as an embedded derivative as the feature (i) possessed economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, the Convertible Senior Unsecured Notes, and (ii) separate, stand-alone instruments with the same terms would qualify as derivative instruments. As such, the holders’ conversion feature was bifurcated and accounted for separately from the Convertible Senior Unsecured Notes. The holders’ conversion feature was recorded at fair value each reporting period with changes in fair value included in interest expense in the unaudited condensed consolidated statement of operations prior to the Chapter 11 filings, at which time, the remaining value of the holders’ conversion feature was written-off and included in reorganization items on the accompanying unaudited condensed consolidated statement of operations for the nine-month period ended September 30, 2016.

Mandatory Prepayment Feature - PGC Senior Secured Notes. As discussed further in Note 4 and Note 6, the Senior Secured Notes contain a mandatory prepayment feature that prior to the petition date was triggered if the outstanding principal amount of the unsecured 8.75% Senior Notes due 2020 exceeded $100.0 million on October 15, 2019. With respect to the PGC Senior Secured Notes, which were issued at a substantial discount, this mandatory prepayment feature was identified as an embedded derivative as the feature (i) possessed economic characteristics that were not clearly and closely related to the economic characteristics of the host contract, the PGC Senior Secured Notes, and (ii) separate, stand-alone instruments with the same terms would qualify as derivative instruments. As such, the mandatory prepayment feature contained in the PGC Senior Secured Notes was bifurcated and accounted for separately from those notes. The mandatory prepayment feature contained in the PGC Senior Secured notes was recorded at fair value each reporting period with changes in fair value included in interest expense in the accompanying consolidated statement of operations prior to the Chapter 11 filings, at which time, the remaining value of the mandatory prepayment feature was written-off and included in reorganization items on the accompanying unaudited condensed consolidated statements of operations for the nine-month period ended September 30, 2016.

Fair Value of Derivatives

The following table presents the fair value of the Company’s derivative contracts as of September 30, 2016 and December 31, 2015 on a gross basis without regard to same-counterparty netting (in thousands):



Type of Contract	Balance Sheet Classification	September 30, 2016			December 31, 2015
Derivative assets
Oil price swaps	Derivative contracts-current	$	10,812		$	68,224
Oil collars - three way	Derivative contracts-current	—			17,300
Natural gas price swaps	Derivative contracts-current	507			—
Natural gas price swaps	Derivative contracts-noncurrent	110			—
Derivative liabilities
Oil price swaps	Derivative contracts-current	(2,415		)	—
Natural gas price swaps	Derivative contracts-current	(1,524		)	—
Natural gas basis swaps	Derivative contracts-current	(170		)	(1,748		)
Debt holder conversion feature	Current maturities of long-term debt	—			(29,355		)
Mandatory prepayment feature - PGC Senior Secured Notes	Current maturities of long-term debt	—			(2,941		)
Oil price swaps	Derivative contracts-noncurrent	(941		)	—
Natural gas price swaps	Derivative contracts-noncurrent	(34		)	—
Total net derivative contracts		$	6,345		$	51,480

See Note 4 for additional discussion of the fair value measurement of the Company’s derivative contracts and Note 6 for discussion of the debt holder conversion feature.

Notional (MBbls)

Weighted Average
Fixed Price

October 2016 - December 2016

January 2017 - December 2017