Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

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DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
9 Months Ended
Sep. 30, 2015
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT [Abstract]  
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
NOTE 11     DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

The Company utilizes commodity swap contracts, swaptions and 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 instruments are recorded on the Company’s balance sheet as either assets or liabilities measured at their fair value (see Note 10).  The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes.  If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in the fair value are recognized in the revenues section of the Company’s condensed statements of operations as a gain or loss on derivative instruments.  Mark-to-market gains and losses represent changes in fair values of derivatives that have not been settled.  The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in making or receiving a payment to or from the counterparty.  These cash settlements represent the cumulative gains and losses on the Company’s derivative instruments for the periods presented and do not include a recovery of costs that were paid to acquire or modify the derivative instruments that were settled.

The following table presents cash settlements on matured or liquidated derivative instruments and non-cash gains and losses on open derivative instruments for the periods presented.  Cash receipts and payments below reflect proceeds received upon early liquidation of derivative positions and gains or losses on derivative contracts which matured during the period, calculated as the difference between the contract price and the market settlement price of matured contracts.  Non-cash gains and losses below represent the change in fair value of derivative instruments which continue to be held at period-end and the reversal of previously recognized non-cash gains or losses on derivative contracts that matured or were liquidated during the period.

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2015
   
2014
   
2015
   
2014
 
Cash Received (Paid) on Derivatives:
                       
Crude Oil Fixed Price Swaps
  $ 42,958,080     $ (6,950,759 )   $ 113,732,460     $ (24,719,289 )
Crude Oil Collars (1)
    -       (66,840 )     202,450       (365,060 )
Cash Received (Paid) on Derivatives, Net
    42,958,080       (7,017,599 )     113,934,910       (25,084,349 )
Non-Cash Gain (Loss) on Derivatives:
                               
Crude Oil Fixed Price Swaps
    8,408,682       67,863,469       (59,115,913 )     25,346,339  
Crude Oil Collars
    -       737,431       -       87,345  
Non-Cash Gain (Loss) on Derivatives, Net
    8,408,682       68,600,900       (59,115,913 )     25,433,684  
Gain on Derivative Instruments, Net
  $ 51,366,762     $ 61,583,301     $ 54,818,997     $ 349,335  
___________________
 
(1)
Net cash receipts for crude oil collars for the three- and nine-month periods ended September 30, 2015 include approximately $202,000 of proceeds received from crude oil derivative contracts that were settled in the second quarter of 2015 prior to their contractual maturities.
 
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.

The following table reflects open commodity swap contracts as of September 30, 2015, the associated volumes and the corresponding fixed price.

Settlement Period
 
Oil (Barrels)
   
Fixed Price ($)
 
Swaps-Crude Oil
           
10/01/15 – 12/31/15
    180,000       89.00  
10/01/15 – 12/31/15
    90,000       89.00  
10/01/15 – 12/31/15
    90,000       89.02  
10/01/15 – 12/31/15
    45,000       89.00  
10/01/15 – 12/31/15
    45,000       89.00  
10/01/15 – 12/31/15(1)
    90,000       90.75  
10/01/15 – 12/31/15(1)
    90,000       91.00  
10/01/15 – 12/31/15(1)
    90,000       91.25  
10/01/15 – 06/30/16
    270,000       89.00  
10/01/15 – 06/30/16
    270,000       90.00  
10/01/15 – 06/30/16
    270,000       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  
07/01/16 – 12/31/16
    180,000       65.00  
07/01/16 – 12/31/16
    180,000       64.93  
07/01/16 – 12/31/16
    90,000       65.00  
07/01/16 – 12/31/16
    180,000       65.00  
07/01/16 – 12/31/16
    180,000       64.93  
07/01/16 – 12/31/16
    90,000       65.30  
___________________

(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 September 30, 2015, the Company had a total volume on open commodity swaps of 2.8 million barrels at a weighted average price of approximately $81.87 per barrel.

The following table reflects the weighted average price of open commodity swap derivative contracts as of September 30, 2015, by year with associated volumes.

Weighted Average Price
Of Open Commodity Swap Contracts
 
Year
 
Volumes (Bbl)
   
Weighted
Average Price ($)
 
2015
    990,000       89.82  
2016
    1,800,000       77.50  

The following table sets forth the amounts, on a gross basis, and classification of the Company’s outstanding derivative financial instruments at September 30, 2015 and December 31, 2014, respectively.  Certain amounts may be presented on a net basis on the condensed financial statements when such amounts are with the same counterparty and subject to a master netting arrangement:
 
Type of Crude Oil Contract
 
Balance Sheet Location
 
September 30, 2015
Estimated
Fair Value
   
December 31, 2014
Estimated
Fair Value
 
                 
Derivative Assets:
               
Swap Contracts
 
Current Assets
  $ 87,881,527     $ 128,893,220  
Swap Contracts
 
Non-Current Assets
    6,330,398       25,013,011  
Total Derivative Assets
      $ 94,211,925     $ 153,906,231  
                     
Derivative Liabilities:
                   
Swaption Contracts
 
Current Liabilities
  $ (678 )   $ -  
Swaption Contracts
 
Non-Current Liabilities
    -       (579,070 )
Total Derivative Liabilities
      $ (678 )   $ (579,070 )

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, 2015
 
   
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
  $ 87,881,527     $ -     $ 87,881,527  
Non-Current Assets
    6,330,398       -       6,330,398  
Total Derivative Assets
  $ 94,211,925     $ -     $ 94,211,925  
                         
Offsetting of Derivative Liabilities:
         
Current Liabilities
  $ (678 )   $ -     $ (678 )
Non-Current Liabilities
    -       -       -  
Total Derivative Liabilities
  $ (678 )   $ -     $ (678 )
                         


   
Estimated Fair Value at December 31, 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
  $ 128,893,220     $ -     $ 128,893,220  
Non-Current Assets
    25,013,011       -       25,013,011  
Total Derivative Assets
  $ 153,906,231     $ -     $ 153,906,231  
                         
Offsetting of Derivative Liabilities:
         
Current Liabilities
  $ -     $ -     $ -  
Non-Current Liabilities
    (579,070 )     -       (579,070 )
Total Derivative Liabilities
  $ (579,070 )   $ -     $ (579,070 )
 
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, 2015.  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, 2015 and December 31, 2014.