Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.10.0.1
Derivative Instruments
6 Months Ended
Jun. 30, 2018
Derivative Instruments.  
Derivative Instruments

(11)Derivative Instruments

(a)Commodity Derivative Positions

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 entered into 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.

The Company was party to various fixed price commodity swap contracts that settled during the six months ended June 30, 2017 and 2018.  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 upon settlement exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty.  When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company receives the difference from the counterparty.

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, 2018, the Company’s fixed price natural gas, NGLs, and oil swap positions from July 1, 2018 through December 31, 2023 were as follows (abbreviations in the table refer to the index to which the swap position is tied, as follows: NYMEX=Henry Hub; Mont Belvieu-Propane=Mont Belvieu Propane; NYMEX-WTI=West Texas Intermediate):

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas
MMbtu/day

 

Oil
Bbls/day

 

Natural Gas
Liquids
Bbls/day

 

Weighted
average index
price

 

Three months ending September 30, 2018:

 

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

2,002,500

 

 —

 

 —

 

$

3.45

 

NYMEX-WTI ($/Bbl)

 

 —

 

6,000

 

 —

 

$

56.99

 

Mont Belvieu-Propane ($/Gallon)

 

 —

 

 —

 

26,000

 

$

0.76

 

Total

 

2,002,500

 

6,000

 

26,000

 

 

 

 

Three months ending December 31, 2018:

 

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

2,002,500

 

 —

 

 —

 

$

3.53

 

NYMEX-WTI ($/Bbl)

 

 —

 

6,000

 

 —

 

$

56.99

 

Mont Belvieu-Propane ($/Gallon)

 

 —

 

 —

 

26,000

 

$

0.77

 

Total

 

2,002,500

 

6,000

 

26,000

 

 

 

 

Year ending December 31, 2019:

 

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

2,330,000

 

 

 

 

 

$

3.50

 

Year ending December 31, 2020:

 

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

1,417,500

 

 

 

 

 

$

3.25

 

Year ending December 31, 2021:

 

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

710,000

 

 

 

 

 

$

3.00

 

Year ending December 31, 2022:

 

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

850,000

 

 

 

 

 

$

3.00

 

Year ending December 31, 2023:

 

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

90,000

 

 

 

 

 

$

2.91

 

 

(b)Marketing Derivatives

In 2017, due to delay of the in-service date for a pipeline on which the Company is to be an anchor shipper, the Company realized it would not be able to fulfill its delivery obligations under a natural gas sales contract commencing in January 2018 until late 2018. In order to acquire gas to fulfill its delivery obligations, the Company entered into several natural gas purchase agreements with index-based pricing to purchase gas for resale under this sales contract. Subsequently, the Company and the counterparty to the sales contract came to an agreement that the Company’s delivery obligations under the contract would not begin until the earlier of (1) the in-service date of the pipeline and (2) January 1, 2019. Consequently, in December 2017, the Company entered into natural gas sales agreements with index-based pricing to resell the purchased gas for delivery during the period from February to October 2018.  The natural gas that it had purchased for January was sold on the spot market during January.  As a result of severe cold weather in the local area in January resulting in wide basis premiums at the index for these contracts, the Company realized a cash gain on these contracts of $94.2 million during the six months ended June 30, 2018.

The Company determined that these gas purchase and sales agreements should be accounted for as derivatives and measured at fair value at the end of each period.  The Company recognized a loss in the fourth quarter of 2017 of $21.4 million.  For the three and six months ended June 30, 2018, the Company recognized a net gain (loss) of ($0.1) and $94.1 million, respectively. The estimated fair value of these contracts of $21.4 million at June 30, 2018 is included in current Derivative liabilities on the Company’s condensed consolidated balance sheet, and will be recognized as cash settled losses in future periods through October 2018.

(c)Summary

The following table presents 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, 2017 and June 30, 2018.  None of the Company’s derivative instruments are designated as hedges for accounting purposes.

 

 

 

 

 

 

 

 

 

 

 

 

 

  

December 31, 2017

  

June 30, 2018

 

 

  

Balance sheet
location

  

Fair value

  

Balance sheet
location

  

Fair value

 

 

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Asset derivatives not designated as hedges for accounting purposes:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives - current

 

Derivative instruments

 

$

460,685

  

Derivative instruments

 

$

420,842

 

Commodity derivatives - noncurrent

 

Derivative instruments

 

 

841,257

  

Derivative instruments

 

 

763,592

 

 

 

 

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

 

1,301,942

 

 

 

 

1,184,434

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability derivatives not designated as hedges for accounting purposes:

 

 

 

 

 

 

 

 

 

 

 

Marketing derivatives - current

 

Derivative instruments

 

 

21,394

  

Derivative instruments

 

 

21,428

 

Commodity derivatives - current

 

Derivative instruments

 

 

7,082

  

Derivative instruments

 

 

9,233

 

Commodity derivatives - noncurrent

 

Derivative instruments

 

 

207

  

Derivative instruments

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

 

28,683

 

 

 

 

30,661

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivatives

 

 

 

$

1,273,259

 

 

 

$

1,153,773

 

 

The following table presents the gross values 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, 2017

 

June 30, 2018

 

 

 

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

 

$

1,367,554

 

 

(65,612)

 

 

1,301,942

 

$

1,242,069

 

 

(57,635)

 

 

1,184,434

 

Commodity derivative liabilities

 

$

(72,901)

 

 

65,612

 

 

(7,289)

 

$

(66,868)

 

 

57,635

 

 

(9,233)

 

Marketing derivative assets

 

$

311,083

 

 

(311,083)

 

 

 —

 

$

 —

 

 

 —

 

 

 —

 

Marketing derivative liabilities

 

$

(332,477)

 

 

311,083

 

 

(21,394)

 

$

(21,428)

 

 

 —

 

 

(21,428)

 

 

The following is a summary of derivative fair value gains and losses and where such values are recorded in the condensed consolidated statements of operations for the three and six months ended June 30, 2017 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of
operations

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

location

 

2017

 

2018

 

2017

 

2018

 

Commodity derivative fair value gains

 

Revenue

 

$

85,641

 

 

55,336

 

$

524,416

 

 

77,773

 

Marketing derivative fair value gains (losses)

 

Revenue

 

$

 —

 

 

(110)

 

$

 —

 

 

94,124

 

 

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