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Financial Instruments
 9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Financial Instruments
(10) Financial Instrument
s
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 natural gas, crude oil price swaps and natural gas liquid 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 September 30, 2019 and December 31, 2018:
 
September 30, 2019
  
Quoted Prices in

Active Markets

For Identical

Assets (Level 1)
 
  
Significant

Other

Observable

Inputs (Level 2)
 
  
Significant

Unobservable

Inputs (Level 3)
 
  
Balance at

September 30,

2019
 
(Thousands of dollars)
  
 
 
  
 
 
  
 
 
  
 
 
Assets
  
   
  
   
  
   
  
   
Commodity derivative contracts
  
$
—  
 
  
$
—  
 
  
$
1,838
 
  
$
1,838
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total assets
  
 
—  
 
  
$
—  
 
  
$
1,838
 
  
$
1,838
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Liabilities
  
   
  
   
  
   
  
   
Commodity derivative contracts
  
$
—  
 
  
$
—  
 
  
$
(361
) 
  
$
(361
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total liabilities
  
$
—  
 
  
$
—  
 
  
$
(361
) 
  
$
(361
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
 
December 31, 2018
  
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,

2018
 
(Thousands of dollars)
  
 
 
  
 
 
  
 
 
  
 
 
Assets
  
   
  
   
  
   
  
   
Commodity derivative contracts
  
$
—  
 
  
$
—  
 
  
$
2,394
 
  
$
2,394
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total assets
  
$
—  
 
  
$
—  
 
  
$
2,394
 
  
$
2,394
 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Liabilities
  
   
  
   
  
   
  
   
Commodity derivative contract
  
$
—  
 
  
$
—  
 
  
$
(98
) 
  
$
(98
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
Total liabilities
  
$
—  
 
  
$
—  
 
  
$
(98
) 
  
$
(98
) 
 
  
 
 
 
  
 
 
 
  
 
 
 
  
 
 
 
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 , crude oil, natural gas liquids, 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, 2019.
 
(Thousands of dollars)
  
 
 
Net Asset– December 31, 2018
  
$
2,296
 
Total realized and unrealized (gains) losses:
  
   
Included in earnings (a)
  
 
(1,787
) 
Purchases, sales, issuances and settlements
  
 
968
 
 
  
 
 
 
Net Assets September 30, 2019
  
$
1,477
 
 
  
 
 
 
 
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.
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 are treated as cash-flow hedges and are used to fix our floating interest rates on existing debt. The value of interest rate swaps if applicable, would be recorded in accumulated other comprehensive loss, net of tax. There are no current interest rate swaps for the periods ending September 30, 2019 and December 31, 2018.
 
The following table sets forth the effect of derivative instruments on the consolidated balance sheets at September 30, 2019 and December 31, 2018:
 
 
  
 
 
  
Fair Value
 
(Thousands of dollars)
  
Balance Sheet Location
 
  
September 30,

2019
 
  
December 31,

2018
 
Asset Derivatives:
  
   
  
   
  
   
Derivatives not designated as cash-flow hedging instruments:
  
   
  
   
  
   
Natural gas commodity contracts
  
 
Derivative asset short-term
 
  
$
67
 
  
$
63
 
Natural gas liquid contracts
  
 
Derivative asset short-term
 
  
 
123
 
  
 
138
 
Crude oil commodity contracts
  
 
Derivative asset short-term
 
  
 
1,648
 
  
 
1,473
 
Natural gas commodity contracts
  
 
Derivative asset long-term and
other assets
 
 
  
 
—  
 
  
 
7
 
Crude oil commodity contracts
  
 
Derivative asset long-term and
other assets
 
 
  
 
—  
 
  
 
713
 
 
  
   
  
 
 
 
  
 
 
 
Total
  
   
  
$
1,838
 
  
$
2,394
 
 
  
   
  
 
 
 
  
 
 
 
Liability Derivatives:
  
   
  
   
  
   
Derivatives not designated as cash-flow hedging instruments:
  
   
  
   
  
   
Crude oil commodity contracts
  
 
Derivative liability short-term
 
  
$
(361
) 
  
$
—  
 
Natural gas commodity contracts
  
 
Derivative liability short-term
 
  
 
—  
 
  
 
(75
) 
Natural gas liquid contracts
  
 
Derivative liability short-term
 
  
 
—  
 
  
 
(13
) 
Natural gas commodity contracts
  
 
Derivative liability long-term
 
  
 
—  
 
  
 
(10
) 
 
  
   
  
 
 
 
  
 
 
 
Total
  
   
  
$
(361
) 
  
$
(98
) 
 
  
   
  
 
 
 
  
 
 
 
Total derivative instruments
  
   
  
$
1,477
 
  
$
2,296
 
 
  
   
  
 
 
 
  
 
 
 
The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the nine-month period ended September 30, 2019 and 2018:
 
 
  
Location of gain (loss) recognized in income
  
Amount of gain/loss

recognized in income
 
(Thousands of dollars)
  
2019
 
  
2018
 
Derivatives not designated as cash-flow hedge instruments:
  
 
  
   
  
   
Natural gas commodity contracts
  
Unrealized gain (loss) on derivative instruments, net
  
$
82
 
  
$
(359
) 
Crude oil commodity contracts
  
Unrealized loss on derivative instruments, net
  
 
(900
) 
  
 
(7,148
) 
Natural gas liquids contracts
  
Unrealized loss on derivative instruments, net
  
 
(1
) 
  
 
(645
) 
Natural gas commodity contracts
  
Realized gain on derivative instruments, net
  
 
90
 
  
 
124
 
Crude oil commodity contracts
  
Realized loss on derivative instruments, net
  
 
(1,302
) 
  
 
(2,895
) 
Natural gas liquids contracts
  
Realized gain (loss) on derivative instruments, net
  
 
244
 
  
 
(154
) 
 
  
 
  
 
 
 
  
 
 
 
 
  
 
  
$
(1,787
) 
  
$
(11,077
)