Financial Instruments

9 Months Ended

Sep. 30, 2015

(11) Financial Instruments:

Fair Value Measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Company’s interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014:


September 30, 2015 (Thousands of dollars)	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance as of September 30, 2015
Assets
Commodity derivative contracts	$	—	$	—	$	5,649		$	5,649

Total assets	$	—	$	—	$	5,649		$	5,649


Liabilities
Interest rate derivative contracts		—		—		(76	)		(76	)

Total liabilities	$	—	$	—	$	(76	)	$	(76	)


December 31, 2014 (Thousands of dollars)	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance as of December 31, 2014
Assets
Commodity derivative contracts	$	—	$	—	$	16,901		$	16,901
Interest rate derivative contracts		—		—		26			26

Total assets	$	—	$	—	$	16,927		$	16,927


Liabilities
Interest rate derivative contracts		—		—		(170	)		(170	)

Total liabilities	$	—	$	—	$	(170	)	$	(170	)

The derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.

The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the nine months ended September 30, 2015.


(Thousands of dollars)
Net assets – December 31, 2014	$	16,757
Total realized and unrealized gains / losses:
Included in earnings (a)		3,470
Included in other comprehensive income		69
Purchases, sales, issuances and settlements		(14,723	)

Net assets – September 30, 2015	$	5,573

(a)	Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments, and interest rate swap instruments are reported as an increase or reduction to interest expense.

Derivative Instruments:

The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company’s exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company’s exposure to commodity price risk inherent in the Company’s oil and gas production operations. The Company does not apply hedge accounting to any of its commodity based derivatives. Both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings.

Interest rate swap derivatives are treated as cash-flow hedges and are used to fix or float interest rates on existing debt. The value of these interest rate swaps at September 30, 2015 and December 31, 2014 is located in accumulated other comprehensive loss, net of tax. Settlement of the swaps is recorded within interest expense.

The following table sets forth the effect of derivative instruments on the condensed consolidated balance sheets at September 30, 2015 and December 31, 2014:


		Fair Value
(Thousands of dollars)	Balance Sheet Location	September 30, 2015			December 31, 2014
Asset Derivatives:
Derivatives designated as cash-flow hedging instruments:
Interest rate swap contracts	Derivative assets	$	—		$	12
Interest rate swap contracts	Other assets	$	—		$	13
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts	Derivative Contracts		4,861			14,629
Natural gas commodity contracts	Derivative Contracts		788			2,273

Total		$	5,649		$	16,927

Liability Derivatives:
Derivatives designated as cash-flow hedging instruments:
Interest rate swap contracts	Derivative liability short-term	$	(76	)	$	(170	)

Total		$	(76	)	$	(170	)

Total derivative instruments		$	5,573		$	16,757

The following table sets forth the effect of derivative instruments on the condensed consolidated statement of operations for the nine-month periods ended September 30, 2015 and 2014:


(Thousands of dollars)	Location of gain/loss recognized in income	Amount of gain/loss recognized in income
(Thousands of dollars)	Location of gain/loss recognized in income	2015			2014
Derivative designated as cash-flow hedge instruments:
Interest rate swap contracts	Interest expense	$	(217	)	$	(210	)
Derivatives not designated as cash-flow hedge instruments
Natural gas commodity contracts	Unrealized gain (loss) on derivative instruments, net		(1,484	)		565
Crude oil commodity contracts	Unrealized gain (loss) on derivative instruments, net		(9,768	)		1,796
Natural gas commodity contracts (a)	Realized gain (loss) on derivative instruments, net		2,061			(580	)
Crude oil commodity contracts	Realized gain (loss) on derivative instruments, net		12,878			(1,992	)

		$	3,470		$	(421	)

(a)

In January 2014, the Company unwound and monetized natural gas swaps with original settlement dates from January 2015 through December 2015 for net proceeds of $276,000. In September 2014, the Company unwound and monetized crude oil swaps with original settlement dates from January 2016 through December 2016 for net proceeds of $703,000. The $979,000 gains associated with these early settlement transactions are included in realized gain on derivative instruments for the nine months ended September 30, 2014.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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