DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
|9 Months Ended|
Sep. 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.
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 $7,017,599 and $8,096,075 in the statement of comprehensive income for the three months ended September 30, 2014 and 2013, respectively. The Company recorded a gain of $68,600,900 and a loss of $29,353,161 on the mark-to-market of derivative instruments in the statement of comprehensive income for the three months ended September 30, 2014 and 2013, respectively. The Company recorded realized losses on settled derivatives of $25,084,349 and $8,966,175 in the statement of comprehensive income for the nine months ended September 30, 2014 and 2013, respectively. The Company recorded a gain of $25,433,684 and a loss of $27,254,147 on the mark-to-market of derivative instruments in the statement of comprehensive income for the nine months ended September 30, 2014 and 2013, respectively.
The following table reflects open commodity swap contracts as of September 30, 2014, the associated volumes and the corresponding fixed price.
As of September 30, 2014, the Company had a total volume on open commodity swaps of 5.8 million barrels at a weighted average price of approximately $89.57.
The following table reflects the weighted average price of open commodity swap derivative contracts as of September 30, 2014, by year with associated volumes.
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 September 30, 2014.
The following table sets forth the amounts, on a gross basis, and classification of the Company’s outstanding derivative financial instruments at September 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:
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.
All of the Company’s outstanding derivative instruments are covered by International Swap Dealers Association Master Agreements (“ISDAs”) entered into with counterparties that are also lenders under the Company’s Revolving Credit Facility. The Company’s obligations under the derivative instruments are secured pursuant to the Revolving Credit Facility, and no additional collateral had been posted by the Company as of September 30, 2014. The ISDAs may provide that as a result of certain circumstances, such as cross-defaults, a counterparty may require all outstanding derivative instruments under an ISDA to be settled immediately. See Note 10 for the aggregate fair value of all derivative instruments that were in a net liability position at September 30, 2014 and December 31, 2013.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://www.xbrl.org/2003/role/presentationRef