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
6 Months Ended
Jun. 30, 2014
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, swaptions 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.

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 losses on the mark-to-market of derivative instruments on the statement of comprehensive income (loss).

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 recorded realized losses on settled derivatives of $11,248,770 and $498,817 in the statement of comprehensive income (loss) for the three months ended June 30, 2014 and 2013, respectively.  The Company recorded a loss of $35,307,533 and a gain of $17,009,668 on the mark-to-market of derivative instruments in the statement of comprehensive income (loss) for the three months ended June 30, 2014 and 2013, respectively.  The Company recorded realized losses on settled derivatives of $18,066,750 and $870,100 in the statement of comprehensive income (loss) for the six months ended June 30, 2014 and 2013, respectively.  The Company recorded a loss of $43,167,216 and a gain of $2,099,013 on the mark-to-market of derivative instruments in the statement of comprehensive income (loss) for the six months ended June 30, 2014 and 2013, respectively.
 
The following table reflects open commodity swap contracts as of June 30, 2014, the associated volumes and the corresponding fixed price.

Settlement Period
 
Oil (Barrels)
   
Fixed Price
 
Swaps-Crude Oil
           
07/01/14 – 12/31/14
    120,000       91.65  
07/01/14 – 12/31/14
    232,500       88.55  
07/01/14 – 12/31/14
    232,500       88.60  
07/01/14 – 12/31/14
    232,500       88.40  
07/01/14 – 12/31/14
    232,500       88.50  
07/01/14 – 12/31/14
    60,000       91.35  
07/01/14 – 12/31/14
    60,000       90.00  
07/01/14 – 12/31/14
    120,000       90.15  
07/01/14 – 12/31/14
    120,000       91.00  
07/01/14 – 12/31/14
    60,000       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  
07/01/14 – 06/30/15
    420,000       89.15  
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 – 06/30/15
    90,000       89.00  
01/01/15 – 06/30/15
    90,000       89.00  
01/01/15 – 12/31/15
    720,000       89.00  
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  
07/01/15 – 12/31/15(1)
    180,000       90.75  
07/01/15 – 12/31/15(1)
    180,000       91.00  
07/01/15 – 12/31/15(1)
    180,000       91.25  
07/01/15 – 06/30/16
    360,000       89.00  
07/01/15 – 06/30/16
    360,000       90.00  
07/01/15 – 06/30/16
    360,000       91.00  
01/01/16 – 06/30/16
    180,000       90.00  
01/01/16 – 06/30/16
    90,000       90.00  
01/01/16 – 06/30/16
    90,000       90.00  
_________________
 
(1)
The Company has entered into crude oil derivative contracts that give counterparties the option to extend certain current derivative contracts for an additional six-month period.  Options covering a notional volume of 90,000 barrels per month are exercisable on or about December 31, 2015.  If the counterparties exercise all such options, the notional volume of the Company’s existing crude oil derivative contracts will increase by 90,000 barrels per month at an average price of $91.00 per barrel for each month during the period January 1, 2016 through June 30, 2016.

As of June 30, 2014, the Company had a total volume on open commodity swaps of 6.8 million barrels at a weighted average price of approximately $89.61.
 
The following table reflects the weighted average price of open commodity swap derivative contracts as of June 30, 2014, by year with associated volumes.

Weighted Average Price
Of Open Commodity Swap Contracts
 
Year
 
Volumes (Bbl)
   
Weighted
Average Price
 
2014
    1,920,000     $ 89.79  
2015
    3,960,000       89.43  
2016
    900,000       90.00  

In addition to the open commodity swap contracts, the Company has entered into costless collar contracts.  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 contracts.  The following table reflects open costless collar contracts as of June 30, 2014.

Term
 
Oil (Barrels)
   
Floor/Ceiling Price
 
Basis
Costless Collars – Crude Oil
             
07/01/14 – 12/31/14
    120,000     $ 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 June 30, 2014 and December 31, 2013, 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
 
June 30, 2014
Estimated
Fair Value
   
December 31, 2013 Estimated
Fair Value
 
Derivative Assets:
               
Swap Contracts
 
Current Assets
  $ -     $ 62,890  
Swap Contracts
 
Non-Current Assets
    -       1,745,405  
Total Derivative Assets
      $ -     $ 1,808,295  
                     
Derivative Liabilities:
                   
Swap Contracts
 
Current Liabilities
  $ (44,452,095 )   $ (19,111,820 )
Swap Contracts
 
Non-Current Liabilities
    (12,389,078 )     (637,208 )
Costless Collars
 
Current Liabilities
    (657,912 )     (7,826 )
Swaption Contracts
 
Non-Current Liabilities
    (3,616,689 )     -  
Total Derivative Liabilities
      $ (61,115,774 )   $ (19,756,854 )

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 June 30, 2014
 
   
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
  $ -     $ -     $ -  
Non-Current Assets
    -       -       -  
Total Derivative Assets
  $ -     $ -     $ -  
                         
Offsetting of Derivative Liabilities:
         
Current Liabilities
  $ (45,110,007 )   $ -     $ (45,110,007 )
Non-Current Liabilities
    (16,005,767 )     -       (16,005,767 )
Total Derivative Liabilities
  $ (61,115,774 )   $ -     $ (61,115,774 )
                         

   
Estimated Fair Value at December 31, 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
  $ 629,178     $ (566,288 )   $ 62,890  
Non-Current Assets
    2,589,079       (843,674 )     1,745,405  
Total Derivative Assets
  $ 3,218,257     $ (1,409,962 )   $ 1,808,295  
                         
Offsetting of Derivative Liabilities:
         
Current Liabilities
  $ (19,685,934 )   $ 566,288     $ (19,119,646 )
Non-Current Liabilities
    (1,480,882 )     843,674       (637,208 )
Total Derivative Liabilities
  $ (21,166,816 )   $ 1,409,962     $ (19,756,854 )