Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.5.0.2
Derivative Instruments
 6 Months Ended
Jun. 30, 2016
Derivative Instruments.  
Derivative Instruments

(8)Derivative Instruments

 

(a)Commodity Derivatives

 

The Company periodically enters into natural gas, NGLs, and oil derivative contracts with counterparties to hedge the price risk associated with its production.  These derivatives are not held for trading purposes.  To the extent that changes occur in the market prices of natural gas, NGLs, and oil, the Company is exposed to market risk on these open contracts.  This market risk exposure is generally offset by the change in market prices of natural gas, NGLs, and oil recognized upon the ultimate sale of the Company’s production.

 

During the six months ended June 30, 2015 and 2016, the Company was party to various natural gas and NGLs fixed price swap contracts.  The Company enters into these swap contracts when management believes that favorable future sales prices for the Company’s production can be secured.  Under these swap agreements, when actual commodity prices exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty.  When actual commodity prices are below the contractually provided fixed price, the Company receives the difference from the counterparty.

 

In addition to fixed price swap contracts, the Company has entered into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (“NYMEX”) index price and a local index price at which the Company sells a portion of its natural gas production.  The Company’s derivative swap contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in the Company’s statements of operations.

 

As of June 30, 2016, the Company’s fixed price natural gas and NGLs swap contracts under short positions from July 1, 2016 through December 31, 2022 were as follows (abbreviations in the table refer to the index to which the swap position is tied, as follows: TCO=Columbia Gas Transmission; NYMEX=Henry Hub; CGTLA=Columbia Gas Louisiana Onshore; CCG=Chicago City Gate; Mont Belvieu-TET=Mont Belvieu Propane):

 

 

 

 

 

 

 

 

 

 

 

Natural gas
MMbtu/day

 

Propane
Bbls/day

 

Weighted
average index
price

 

Three months ending September 30, 2016:

 

 

 

 

 

 

 

 

TCO ($/MMBtu)

 
60,000

 

 —

 

$
4.81

 

Dominion South ($/MMBtu)

 
272,500

 

 —

 

$
5.24

 

NYMEX ($/MMBtu)

 
1,110,000

 

 —

 

$
3.44

 

CGTLA ($/MMBtu)

 
170,000

 

 —

 

$
4.03

 

Mont Belvieu-TET ($/Gallon)

 

 —

 
30,000

 

$
0.58

 

Total

 
1,612,500

 
30,000

 

 

 

 

Three months ending December 31, 2016:

 

 

 

 

 

 

 

 

TCO ($/MMBtu)

 
60,000

 

 —

 

$
5.01

 

Dominion South ($/MMBtu)

 
272,500

 

 —

 

$
5.47

 

NYMEX ($/MMBtu)

 
1,110,000

 

 —

 

$
3.57

 

CGTLA ($/MMBtu)

 
170,000

 

 —

 

$
4.20

 

Mont Belvieu-TET ($/Gallon)

 

 —

 
30,000

 

$
0.61

 

Total

 
1,612,500

 
30,000

 

 

 

 

Year ending December 31, 2017:

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 
1,370,000

 

 —

 

$
3.39

 

CGTLA ($/MMBtu)

 
420,000

 

 —

 

$
4.27

 

CCG ($/MMBtu)

 
70,000

 

 —

 

$
4.57

 

Mont Belvieu-TET ($/Gallon)

 

 —

 
31,500

 

$
0.42

 

Total

 
1,860,000

 
31,500

 

 

 

 

Year ending December 31, 2018:

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 
2,002,500

 

 —

 

$
3.91

 

Mont Belvieu-TET ($/Gallon)

 

 —

 
2,000

 

$
0.65

 

Total

 
2,002,500

 
2,000

 

 

 

 

Year ending December 31, 2019:

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 
2,330,000

 

 

 

$
3.70

 

Year ending December 31, 2020:

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 
1,377,500

 

 

 

$
3.66

 

Year ending December 31, 2021:

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 
630,000

 

 

 

$
3.36

 

Year ending December 31, 2022:

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 
120,000

 

 

 

$
3.24

 

 

 

As of June 30, 2016, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of TCO to the NYMEX Henry Hub natural gas price, were as follows:

 

 

 

 

 

 

 

 

 

Natural gas
MMbtu/day

 

Hedged
Differential

 

 

 

 

 

 

 

 

Six months ending December 31, 2016:

 
290,000

 

$
(0.45)

 

 

 

 

 

 

 

 

Year ending December 31, 2017:

 
125,000

 

$
(0.49)

 

 

 

As of June 30, 2016, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of NYMEX Henry Hub to the TCO natural gas price, were as follows:

 

 

 

 

 

 

 

 

 

Natural gas
MMbtu/day

 

Hedged
Differential

 

 

 

 

 

 

 

 

Six months ending December 31, 2016:

 
170,000

 

$
0.34

 

 

 

 

 

 

 

 

Year ending December 31, 2017:

 
125,000

 

$
0.30

 

 

(b)Summary

 

The following is a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the consolidated balance sheets as of December 31, 2015 and June 30, 2016.  None of the Company’s derivative instruments are designated as hedges for accounting purposes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

June 30, 2016

 

 

 

Balance sheet
location

    

Fair value

 

Balance sheet
location

 

Fair value

 

 

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Asset derivatives not designated as hedges for accounting purposes:

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Current assets

 

$
1,009,030

 

Current assets

 

$
429,920

 

Commodity contracts

 

Long-term assets

 

 
2,108,450

 

Long-term assets

 

 
1,673,907

 

 

 

 

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

 
3,117,480

 

 

 

 
2,103,827

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability derivatives not designated as hedges for accounting purposes:

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Current liabilities

 

 

 —

 

Current liabilities

 

 
2,726

 

Commodity contracts

 

Long-term liabilities

 

 

 —

 

Long-term liabilities

 

 
5,179

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

 

 —

 

 

 

 
7,905

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivatives

 

 

 

$
3,117,480

 

 

 

$
2,095,922

 

 

 

The following table presents the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets as of the dates presented, all at fair value (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2015

 

June 30, 2016

 

 

 

Gross
amounts on
balance sheet

 

Gross amounts
offset on
balance sheet

 

Net amounts

of assets on

balance sheet

 

Gross
amounts on
balance sheet

 

Gross amounts
offset on
balance sheet

 

Net amounts

of assets (liabilities) on

balance sheet

 

Commodity derivative assets

 

$
3,163,639

 

 
(46,159)

 

 
3,117,480

 

$
2,303,100

 

 
(199,273)

 

 
2,103,827

 

Commodity derivative liabilities

 

$

 —

 

 

 —

 

 

 —

 

$
(8,308)

 

 
403

 

 
(7,905)

 

 

 

The following is a summary of derivative fair value gains and where such values are recorded in the condensed consolidated statements of operations for three and six months ended June 30, 2015 and 2016 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of
operations

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

location

 

2015

 

2016

 

2015

 

2016

 

Commodity derivative fair value gains (losses)

 

Revenue

 

$
(2,227)

 

 
(684,634)

 

$
757,327

 

 
(404,710)

 

 

The fair value of commodity derivative instruments was determined using Level 2 inputs.