v2.4.0.8
Fair Value of Financial and Derivative Instruments
 9 Months Ended
Sep. 30, 2013
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Fair Value of Financial and Derivative Instruments

6. Fair Value of Financial and Derivative Instruments

At September 30, 2013, we had the following commodity derivatives positions outstanding:

 

Commodity and Period

    Contract
Type		    Volume Transacted    Contract Price

Crude Oil

   

2013

    Collar    650 Bbls/d    $90.00/Bbl – $105.80/Bbl

2013

    Collar    450 Bbls/d    $90.00/Bbl – $101.45/Bbl

2013 (1)

    Collar    1,200 Bbls/d    $90.35/Bbl – $100.35/Bbl

2014

    Collar    550 Bbls/d    $90.00/Bbl – $105.50/Bbl

2014

    Collar    950 Bbls/d    $85.05/Bbl – $95.05/Bbl

2015

    Collar    2,600 Bbls/d    $84.00/Bbl – $91.00/Bbl

Crude Oil Basis Differential (Midland/Cushing)

         

2013 (2)

    Swap    2,300 Bbls/d    $1.10/Bbl

2014

    Swap    1,500 Bbls/d    $0.55/Bbl

Natural Gas Liquids

         

Propane 2013 (3)

    Swap    550 Bbls/d    $42.00/Bbl

Propane 2014

    Swap    500 Bbls/d    $41.16/Bbl

Natural Gasoline 2013 (3)

    Swap    200 Bbls/d    $90.72/Bbl

Natural Gasoline 2014

    Swap    175 Bbls/d    $83.37/Bbl

Natural Gas

         

2013

    Swap    200,000 MMBtu/month    $3.54/MMBtu

2013

    Swap    190,000 MMBtu/month    $3.80/MMBtu

2013 (4)

    Collar    100,000 MMBtu/month    $4.00/MMBtu – $4.36/MMBtu

2014

    Swap    360,000 MMBtu/month    $4.18/MMBtu

 

(1) February 2013 – December 2013
(2) March 2013 – December 2013
(3) September 2013 – December 2013
(4) May 2013 – December 2013

 

Subsequent to September 30, 2013, we entered into a natural gas swap covering 200,000 MMBtu per month for 2015 at a contract price of $4.10/MMBtu.

The following table summarizes the fair value of our open commodity derivatives as of September 30, 2013, and December 31, 2012 (in thousands).

 

    Asset/Liability Derivatives  
        Fair Value  
        September 30,     December 31,  
   

Balance Sheet Location

   2013     2012  

Derivatives not designated as hedging instruments

      

Commodity derivatives

  

Unrealized (loss) gain on commodity derivatives

   $ (814 )    $ 2,433   

The following table summarizes the change in the fair value of our commodity derivatives (in thousands).

 

          Three Months Ended     Nine Months Ended  
          September 30,     September 30,  
    

Income Statement Location

    2013     2012     2013     2012  

Derivatives not designated as hedging instruments

            

Commodity derivatives

   

Realized (loss) gain on commodity derivatives

    $ (840 )    $ 423      $ (1,247 )    $ 300   
  

Unrealized (loss) gain on commodity derivatives

      (3,438 )      (4,185 )      (3,248 )      2,582   
     

 

 

    

 

 

    

 

 

    

 

 

  
      $ (4,278 )    $ (3,762 )    $ (4,495 )    $ 2,882   
     

 

 

    

 

 

    

 

 

    

 

 

  

Unrealized gains and losses, at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of our commodity derivatives contracts are recorded in earnings as they occur and included in other income (expense) on our consolidated statements of operations. We estimate the fair values of swap contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets. Realized gains and losses are also included in other income (expense) on our consolidated statements of operations.

We are exposed to credit losses in the event of nonperformance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.

To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:

 

  •   Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At September 30, 2013, we had no Level 1 measurements.

 

  •   Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data which is derived by combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. At September 30, 2013, all of our commodity derivatives were valued using Level 2 measurements.

 

  •   Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At September 30, 2013, we had no Level 3 measurements.

Financial Instruments Not Recorded at Fair Value

The following table sets forth the fair values of financial instruments that are not recorded at fair value on our financial statements (in thousands).

 

     September 30, 2013  
     Carrying
Amount		      Fair Value  

Senior Notes

    $ 250,000       $ 251,250   
  

 

 

     

 

 

  

The fair value of the Senior Notes uses pricing that is readily available in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.