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Financial Instruments
 12 Months Ended
Dec. 31, 2015
Fair Value Disclosures [Abstract]  
Financial Instruments

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 at December 31, 2015 and 2014:

 

December 31, 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 at
December 31,
2015		  

Liabilities

        

Interest rate derivative contracts

   $ —       $ —       $ (7 )    $ (7 ) 
 

 

 

    

 

 

    

 

 

    

 

 

  

Total liabilities

   $ —       $ —       $ (7 )    $ (7 ) 
 

 

 

    

 

 

    

 

 

    

 

 

  

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 at
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 years ended December 31, 2015 and 2014.

 

     Year Ended December 31,  

(Thousands of dollars)

    2015      2014  

Net assets (liabilities) at beginning of period

    $ 16,757       $ (865 ) 

Total realized and unrealized gains (losses):

      

Included in earnings (a)

      3,966         17,420   

Included in other comprehensive income (loss)

      137         48   

Purchases, sales, issuances and settlements

      (20,867 )       154   
  

 

 

     

 

 

  

Net assets (liabilities) at end of period

    $ (7 )     $ 16,757   
  

 

 

     

 

 

  

 

(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 commodity derivative instruments are recognized in earnings.

Interest rate swap derivatives continue to be treated as cash-flow hedges and are used to fix our float interest rates on existing debt. The value of these interest rate swaps at December 31, 2015 and 2014 are located in accumulated other comprehensive loss, net of tax. Settlement of the swaps, which began in January 2014, are recognized within interest expense.

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

 

          Fair Value at December 31,  

(Thousands of dollars)

    Balance Sheet Location    2015      2014  

Asset Derivatives:

   

Derivatives designated as cash-flow hedging instruments:

         

Interest rate swap contracts

    Derivative contracts    $ —         $ 12   

Interest rate swap contracts

    Derivative contracts long-term      —           13   

Derivatives not designated as cash-flow hedging instruments:

         

Crude oil commodity contracts

    Derivative contracts      —           14,629   

Natural gas commodity contracts

    Derivative contracts      —           2,273   
     

 

 

     

 

 

  

Total

       $ —         $ 16,927   
     

 

 

     

 

 

  

Liability Derivatives:

   

Derivatives designated as cash-flow hedging instruments:

         

Interest rate swap contracts

    Derivative liability short-term    $ (7 )     $ (170 ) 
     

 

 

     

 

 

  

Total

       $ (7 )     $ (170 ) 
     

 

 

     

 

 

  

Total derivative instruments

       $ (7 )     $ 16,757   
     

 

 

     

 

 

  

The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the years ended December 31, 2015 and 2014:

 

     Location of gain/loss recognized    Amount of gain/loss
recognized in income		  

(Thousands of dollars)

   

in income

    2015      2014  

Derivative designated as cash-flow hedge instruments:

         

Interest rate swap contracts

    Interest expense    $ (284 )     $ (289 ) 

Derivatives not designated as cash-flow hedge instruments:

         

Natural gas commodity contracts

    Unrealized (loss) gain on derivative instruments, net      (2,273 )       2,542   

Crude oil commodity contracts

    Unrealized (loss) gain on derivative instruments, net      (14,628 )       15,032   

Natural gas commodity contracts (a)

    Realized gain (loss) on derivative instruments, net      3,017         (529 ) 

Crude oil commodity contracts (a)

    Realized gain on derivative instruments, net      18,134         664   
     

 

 

     

 

 

  
      $ 3,966       $ 17,420   
     

 

 

     

 

 

  

 

(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 year ended December 31, 2014.