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9. Derivative Instruments
 9 Months Ended
Sep. 30, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments

 

The Company is required to recognize all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. The Company has not designated its derivative instruments as cash flow hedges for accounting purposes and, as such, marks its derivative instruments to fair value and recognizes the realized and unrealized changes in fair value in its statements of operations under the captions “Loss on settled derivatives” and “Loss on the mark-to-market of derivatives.”

 

The Company has utilized swap and collar derivative contracts. While the use of these derivative instruments limits the downside risk of adverse price movements, their use also limits the upside revenue potential of upward price movements.

 

For a fixed price swap contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price and the Company is required to make a payment to the counterparty if the settlement price for any period is greater than the swap price. For a collar contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price, the Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price and no payment is required by either party if the settlement price for any settlement period is between the floor price and the ceiling price.

 

The Company’s derivative contracts are settled based on reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West Texas Intermediate (“WTI”) pricing.

 

As of September 30, 2015, the Company had outstanding derivative contracts with respect to future production as follows:

 

Crude Oil Swaps

 

Settlement Period  Oil (Barrels)   Fixed Price 
October 1, 2015 – December 31, 2015   6,000   $88.28 
October 1, 2015 – December 31, 2015   5,250   $89.70 
October 1, 2015 – December 31, 2015   3,000   $92.38 
October 1, 2015 – December 31, 2015   7,500   $90.16 
October 1, 2015 – December 31, 2015   36,000   $61.87 
April 1, 2016 – May 31, 2016   15,000   $62.88 
April 1, 2016 – May 31, 2016   10,000   $90.36 
April 1, 2016 – May 31, 2016   4,000   $88.15 

 

Crude Oil Costless Collars

 

       Floor/Ceiling     
Settlement Period  Oil (Barrels)   Price   Basis 
October 1, 2015 – December 31, 2015   9,000    $75.00/$95.60    NYMEX 
April 1, 2016 – May 31, 2016   3,334    $80.00/$89.50    NYMEX 

 

As of September 30, 2015, the Company had total volume on open commodity swaps of 86,750 barrels at a weighted average price of approximately $73.55 per barrel.

 

Derivative Liquidations

On September 24, 2015, the Company settled all its 2017 and 2018 derivative contracts and the majority of its 2016 derivative contracts prior to the expiration of their contractual maturities, resulting in the receipt of cash proceeds totaling $6,255,000. The resulting gain is included in gain (loss) on settled derivatives for the nine months ended September 30, 2015.

 

Derivative Gains and Losses

The following table presents realized and unrealized gains and losses on derivative instruments for the periods presented:

 

   Nine Months Ended 
   September 30, 
   2015   2014 
Gain (loss) on settled derivatives:          
Crude oil fixed price swaps  $8,579,756   $(449,135)
Crude oil collars   857,147    – 
Gain (loss) on settled derivatives, net  $9,436,903   $(449,135)
           
Gain (loss) on the mark-to-market of derivatives:          
Crude oil fixed price swaps  $(4,366,810)  $1,012,502 
Crude oil collars   (519,374)   40,137 
Gain (loss) on the mark-to-market of derivatives, net  $(4,886,184)  $1,052,639 

 

Balance Sheet Offsetting of Derivative Assets and Liabilities

In accordance with FASB issued ASU No. 2011-11, Balance Sheet (Topic 210)-Disclosures about Offsetting Assets and Liabilities, all of the Company’s derivative contracts are carried at their fair value in the condensed balance sheets under the captions “Derivative instruments” and “Noncurrent derivative instruments”. Derivative instruments from the same counterparty that are subject to contractual terms which provide for net settlement are reported on a net basis in the condensed balance sheets. The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under the netting arrangements with counterparties, and the resulting net amounts presented in the condensed balance sheets for the periods presented, all at fair value.

 

   September 30, 2015   December 31, 2014 
       Gross   Net       Gross   Net 
   Gross   amounts   amounts of   Gross   amounts   amounts of 
   amounts of   offset   assets   amounts of   offset   assets 
   recognized   on balance   on balance   recognized   on balance   on balance 
   assets   sheet   sheet   assets   sheet   sheet 
Commodity derivative assets  $2,694,001   $(440)  $2,693,561   $7,620,896   $(41,151)  $7,579,745 

 

 

    September 30, 2015    December 31, 2014 
         Gross    Net         Gross    Net 
    Gross    amounts    amounts of    Gross    amounts    amounts of 
    amounts of    offset    liabilities    amounts of    offset    liabilities 
    recognized    on balance    on balance    recognized    on balance    on balance 
    liabilities    sheet    sheet    liabilities    sheet    sheet 
Commodity derivative liabilities  $–   $–   $–   $–   $–   $– 

 

The following table reconciles the net amounts disclosed above to the individual financial statement line items in the condensed balance sheets:

 

   September 30,   December 31, 
   2015   2014 
Derivative assets  $2,693,561   $3,571,803 
Noncurrent derivative assets   –    4,007,942 
Net amount of assets on the balance sheet   2,693,561    7,579,745 
           
Current portion of derivative liabilities   –    – 
Derivative liabilities   –    – 
Net amount of liabilities on the balance sheet   –    – 
Total derivative assets (liabilities), net  $2,693,561   $7,579,745