Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

v2.4.0.8
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
9 Months Ended
Sep. 30, 2013
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT [Abstract]  
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
NOTE 12 DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

The Company utilizes commodity swap contracts and costless collars (purchased put options and written call options) to (i) reduce the effects of volatility in price changes on the crude oil commodities it produces and sells, (ii) reduce commodity price risk and (iii) provide a base level of cash flow in order to assure it can execute at least a portion of its capital spending.

On November 1, 2009, due to the volatility of price differentials in the Williston Basin, the Company de-designated all derivatives that were previously classified as cash flow hedges and, in addition, the Company has elected not to designate any subsequent derivative contracts as cash flow hedges. Beginning on November 1, 2009, all derivative positions are carried at their fair value on the balance sheet and are marked-to-market at the end of each period. Any realized gains and losses are recorded to loss on settled derivatives and unrealized gains or losses are recorded to unrealized gain (loss) on derivative instruments on the statement of comprehensive income rather than as a component of other comprehensive income (loss) or other income (expense).

The Company has master netting agreements on individual crude oil contracts with certain counterparties and therefore the current asset and liability are netted on the balance sheet and the non-current asset and liability are netted on the balance sheet for contracts with these counterparties.

Crude Oil Derivative Contracts Cash-flow Not Designated as Hedges

The Company had a realized (loss) gain on settled derivatives of $(8,096,075) and $1,701,296 for the three months ended September 30, 2013 and 2012, respectively. The Company had an unrealized loss on mark-to-market of derivative instruments of $29,353,161 and $22,308,470 for the three months ended September 30, 2013 and 2012, respectively. The Company had a realized loss on settled derivatives of $8,966,175 and $4,729,186 for the nine months ended September 30, 2013 and 2012, respectively. The Company had an unrealized (loss) gain on mark-to-market of derivative instruments of $(27,254,147) and $18,125,928 for the nine months ended September 30, 2013 and 2012, respectively.

The following table reflects open commodity swap contracts as of September 30, 2013, the associated volumes and the corresponding fixed price.


Settlement Period
 
Oil (Barrels)
   
Fixed Price
 
Swaps-Crude Oil
 
   
 
10/01/13 – 12/31/14
   
300,000
   
$
91.65
 
10/01/13 – 12/31/13
   
120,000
     
89.50
 
10/01/13 – 12/31/13
   
60,000
     
91.10
 
10/01/13 – 12/31/13
   
30,000
     
94.50
 
10/01/13 – 12/31/13
   
30,000
     
102.30
 
10/01/13 – 12/31/13
   
30,000
     
94.50
 
10/01/13 – 12/31/14
   
356,250
     
88.55
 
10/01/13 – 12/31/14
   
356,250
     
88.60
 
10/01/13 – 12/31/14
   
356,250
     
88.40
 
10/01/13 – 12/31/14
   
356,250
     
88.50
 
10/01/13 – 06/30/15
   
510,000
     
89.15
 
10/01/13 – 12/31/15
   
810,000
     
89.00
 
01/01/14 – 06/30/14
   
300,000
     
89.50
 
01/01/14 – 06/30/14
   
240,000
     
90.00
 
01/01/14 – 06/30/14
   
240,000
     
100.00
 
01/01/14 – 12/31/14
   
120,000
     
91.35
 
01/01/14 – 12/31/14
   
120,000
     
90.00
 
01/01/14 – 12/31/14
   
240,000
     
90.15
 
01/01/14 – 12/31/14
   
240,000
     
91.00
 
01/01/14 – 12/31/14
   
120,000
     
93.00
 
07/01/14 – 12/31/14
   
120,000
     
90.00
 
07/01/14 – 12/31/14
   
120,000
     
90.00
 
07/01/14 – 12/31/14
   
120,000
     
93.50
 
07/01/14 – 12/31/14
   
30,000
     
90.58
 
01/01/15 – 06/30/15
   
60,000
     
90.50
 
01/01/15 – 06/30/15
   
180,000
     
88.55
 
01/01/15 – 06/30/15
   
180,000
     
88.00
 
01/01/15 – 06/30/15
   
60,000
     
90.75
 
01/01/15 – 06/30/15
   
60,000
     
90.25
 
01/01/15 – 12/31/15
   
360,000
     
89.00
 
01/01/15 – 12/31/15
   
360,000
     
89.02
 
01/01/15 – 12/31/15
   
180,000
     
89.00
 
01/01/15 – 12/31/15
   
180,000
     
89.00
 

As of September 30, 2013, the Company had a total volume on open commodity swaps of 6.9 million barrels at a weighted average price of approximately $89.95.

In addition to the open commodity swap contracts the Company has entered into costless collars. The costless collars are used to establish floor and ceiling prices on anticipated crude oil production. There were no premiums paid or received by the Company related to the costless collar agreements. The following table reflects open costless collar agreements as of September 30, 2013.

Term
 
Oil (Barrels)
   
Floor/Ceiling Price
 
Basis
Costless Collars – Crude Oil
 
   
 
   
10/01/13 – 12/31/13
   
32,187
   
$
90.00/$103.50
 
NYMEX
10/01/13 – 12/31/13
   
28,481
   
$
90.00/$106.50
 
NYMEX
10/01/13 – 12/31/13
   
49,412
   
$
90.00/$110.00
 
NYMEX
10/01/13 – 12/31/13
   
39,737
   
$
95.00/$107.00
 
NYMEX
10/01/13 – 12/31/13
   
120,000
   
$
95.00/$110.70
 
NYMEX
10/01/13 – 12/31/13
   
170,047
   
$
85.00/$98.00
 
NYMEX
10/01/13 – 12/31/13
   
30,000
   
$
90.25/$97.95
 
NYMEX
10/01/13 – 12/31/13
   
48,000
   
$
95.00/$106.90
 
NYMEX
10/01/13 – 12/31/13
   
15,000
   
$
93.00/$100.00
 
NYMEX
01/01/14 – 12/31/14
   
240,000
   
$
90.00/$99.05
 
NYMEX

The following table sets forth the amounts, on a gross basis, and classification of the Company's outstanding derivative financial instruments at September 30, 2013 and December 31, 2012, respectively. Certain amounts may be presented on a net basis on the financial statements when such amounts are with the same counterparty and subject to a master netting arrangement:

Type of Contract
Balance Sheet Location
 
September 30, 2013
Estimated Fair Value
   
December 31, 2012
Estimated Fair Value
 
 
 
 
   
 
Derivative Assets:
 
 
   
 
Swap Contracts
Current Assets/Liabilities
 
$
619,662
   
$
680,647
 
Swap Contracts
Non-Current Assets
   
1,863,580
     
1,977,722
 
Costless Collars
Current Assets/Liabilities
   
60,860
     
11,769,415
 
Costless Collars
Non-Current Assets/Liabilities
   
120,398
     
5,629,996
 
Total Derivative Assets
 
 
$
2,664,500
   
$
20,057,780
 
 
 
               
Derivative Liabilities:
 
               
Swap Contracts
Current Assets/Liabilities
 
$
(21,336,245
)
 
$
(2,037,070
)
Swap Contracts
Non-Current Assets/Liabilities
   
(4,108,849
)
   
(3,170,945
)
Costless Collars
Current Assets/Liabilities
   
(1,163,093
)
   
(6,317,795
)
Costless Collars
Non-Current Liabilities
   
-
     
(5,221,510
)
Total Derivative Liabilities
 
 
$
(26,608,187
)
 
$
(16,747,320
)

The following disclosures are applicable to the Company's financial statements, as of September 30, 2013 and 2012, respectively:

 
Amount of Loss Reclassified from
AOCI into Income
 
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
Derivative Type
Location of Loss
for Effective and
Ineffective
Portion of Derivative
In Income
 
2013
   
2012
   
2013
   
2012
 
Commodity - Cash Flow
Loss on Settled Derivatives
 
$
-
   
$
-
   
$
-
   
$
101,309
 

The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. When the Company has netting arrangements with its counterparties that provide for offsetting payables against receivables from separate derivative instruments these assets and liabilities are netted on the balance sheet. The tables presented below provide reconciliation between the gross assets and liabilities and the amounts reflected on the balance sheet. The amounts presented exclude derivative settlement receivables and payables as of the balance sheet dates.

 
Estimated Fair Value at September 30, 2013
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts of Assets Presented in the Balance Sheet
 
 
 
 
 
Offsetting of Derivative Assets:
 
 
Current Assets
 
$
680,522
   
$
(657,830
)
 
$
22,692
 
Non-Current Assets
   
1,983,978
     
(1,049,433
)
   
934,545
 
Total Derivative Assets
 
$
2,664,500
   
$
(1,707,263
)
 
$
957,237
 
 
                       
Offsetting of Derivative Liabilities:
         
Current Liabilities
 
$
(22,499,338
)
 
$
657,830
   
$
(21,841,508
)
Non-Current Liabilities
   
(4,108,849
)
   
1,049,433
     
(3,059,416
)
Total Derivative Liabilities
 
$
(26,608,187
)
 
$
1,707,263
   
$
(24,900,924
)
 
                       
 
                       
 
Estimated Fair Value at December 31, 2012
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Balance Sheet
 
Net Amounts of Assets Presented in the Balance Sheet
 
 
                       
Offsetting of Derivative Assets:
         
Current Assets
 
$
12,450,062
   
$
(8,354,865
)
 
$
4,095,197
 
Non-Current Assets
   
7,607,719
     
(5,844,711
)
   
1,763,008
 
Total Derivative Assets
 
$
20,057,781
   
$
(14,199,576
)
 
$
5,858,205
 
 
                       
Offsetting of Derivative Liabilities:
         
Current Liabilities
 
$
(8,354,865
)
 
$
8,354,865
   
$
-
 
Non-Current Liabilities
   
(8,392,456
)
   
5,844,711
     
(2,547,745
)
Total Derivative Liabilities
 
$
(16,747,321
)
 
$
14,199,576
   
$
(2,547,745
)