Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.8.0.1
Derivative Instruments
9 Months Ended
Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
We utilize derivative instruments to mitigate our financial exposure to commodity price volatility. Our derivative instruments are not formally designated as hedges in the context of GAAP.
We typically utilize collars and swaps, which are placed with financial institutions that we believe are acceptable credit risks, to hedge against the variability in cash flows associated with anticipated sales of our future commodity production. At times, we also utilize option contracts. While the use of derivative instruments limits the risk of adverse price movements, such use may also limit future revenues from favorable price movements.
The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such contract.
We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for West Texas Intermediate (“WTI”) crude oil, and Louisiana Light Sweet (“LLS”) and New York Mercantile Exchange (“NYMEX”) Henry Hub gas and closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position and our own credit risk if the derivative is in a liability position.
We terminated all of our pre-petition derivative contracts from March 2016 through May 2016 for $63.0 million and reduced amounts outstanding under the pre-petition credit agreement (the “RBL”) by $52.0 million. In connection with these transactions, the counterparties to the derivative contracts, which were also affiliates of lenders under the RBL, transferred the cash proceeds that were used for RBL repayments directly to the administrative agent under the RBL. Accordingly, all of these RBL repayments have been presented as non-cash financing activities on our Condensed Consolidated Statement of Cash Flows for the Predecessor period from January 1, 2016 through the Petition Date. Subsequent to the Petition Date, we entered into a series of new commodity derivative contracts. Accordingly, we hedged a substantial portion of our estimated future crude oil production through the end of 2019. We are currently unhedged with respect to NGL and natural gas production.
In August 2017, in anticipation of the closing of the Acquisition, we bought a series of put option contracts for 4,000 barrels of oil per day (“BOPD”) for each of the quarterly periods ending in 2018 with a strike price of $55.00 per barrel. We incurred premiums ranging from $8.00 to $9.50 per barrel which were deferred. In early October and subsequent to the closing of the Acquisition, we sold the underlying put options and converted the contracts to fixed price swaps with 1,000 BOPD for each of the quarterly periods ending in 2018 for a weighted-average WTI-based swap price of $49.00 per barrel, 1,000 BOPD for each of the quarterly periods ending in 2018 for a weighted-average swap price based on the LLS index of $50.83 per barrel and 2,000 BOPD for each of the quarterly periods in 2019 for a weighted-average swap price based on the LLS index of $50.86 per barrel. Premiums that were due upon the sale of the put option contracts were settled via a reduction in the strike price of the resulting swap contracts. We also entered into additional hedge contracts in October 2017 (see below).
The following table sets forth our commodity derivative positions, presented on a net basis by period of maturity, as of September 30, 2017:
 
 
 
Average
 
Weighted
 
 
 
 
 
 
 
Volume Per
 
Average
 
Fair Value
 
Instrument
 
Day
 
Price
 
Asset
 
Liability
Crude Oil:
 
 
(barrels)
 
($/barrel)
 
 
 
Fourth quarter 2017
Swaps
 
4,381

 
$
48.59

 
$

 
$
1,361

First quarter 2018
Swaps/Put option 1
 
8,513

 
$
47.98

 

 
2,427

Second quarter 2018
Swaps/Put option 1
 
8,484

 
$
47.98

 

 
1,971

Third quarter 2018
Swaps/Put option 1
 
8,455

 
$
47.98

 

 
1,563

Fourth quarter 2018
Swaps/Put option 1
 
8,455

 
$
47.98

 

 
1,251

First quarter 2019
Swaps
 
2,946

 
$
49.87

 

 
356

Second quarter 2019
Swaps
 
2,921

 
$
49.87

 

 
307

Third quarter 2019
Swaps
 
2,897

 
$
49.87

 

 
258

Fourth quarter 2019
Swaps
 
2,898

 
$
49.87

 

 
231

Settlements to be paid in subsequent period
 
 
 
 

 


 
172


_______________________
1
As discussed above, the put option contracts were unwound and converted to fixed price swaps in early October 2017. Including the effect of these transactions as well as additional hedge contracts entered into in October 2017, we have hedged our crude oil production as follows: remainder of 2017 - 4,381 BOPD at a weighted-average WTI-based price of $48.59 per barrel and 663 BOPD at a weighted-average LLS-based price of $56.18 per barrel, 2018 - 5,477 BOPD at a weighted-average WTI-based price of $49.30 per barrel and 1,500 BOPD at a weighted-average LLS-based price of $51.97 per barrel, 2019 - 2,915 BOPD at a weighted-average WTI-based price of $49.87 per barrel and 2,500 BOPD at a weighted-average LLS-based price of $51.30 per barrel and 2020 - 1,000 BOPD at a weighted-average WTI-based price of $50.35 per barrel.
Financial Statement Impact of Derivatives
The impact of our derivative activities on income is included in “Derivatives” in our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:
 
Successor
 
 
Predecessor
 
Three Months Ended
 
Period from September 13, 2016
 
 
Period from July 1, 2016
 
September 30, 2017
 
Through September 30, 2106
 
 
Through September 12, 2016
 
 
 
 
 
 
 
Derivative gains (losses)
$
(12,275
)
 
$
(4,369
)
 
 
$
8,934


 
Successor
 
 
Predecessor
 
Nine Months Ended
 
Period from September 13, 2016
 
 
Period from January 1, 2016
 
September 30, 2017
 
Through September 30, 2106
 
 
Through September 12, 2016
 
 
 
 
 
 
 
Derivative gains (losses)
$
15,802

 
$
(4,369
)
 
 
$
(8,333
)

The effects of derivative gains and (losses) and cash settlements (except for those cash settlements attributable to the aforementioned termination transactions) are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in the “Derivative contracts” section of our Condensed Consolidated Statements of Cash Flows under “Net (gains) losses” and “Cash settlements, net.”
The following table summarizes the fair values of our derivative instruments presented on a gross basis, as well as the locations of these instruments on our Condensed Consolidated Balance Sheets as of the dates presented:
 
 
 
September 30, 2017
 
December 31, 2016
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
 
Derivative assets/liabilities – current
$
6,140

 
$
13,634

 
$

 
$
12,932

Commodity contracts
 
Derivative assets/liabilities – noncurrent
2,520

 
4,923

 

 
14,437

 
 
 
$
8,660

 
$
18,557

 
$

 
$
27,369


As of September 30, 2017, we reported total commodity derivative assets of $8.7 million. The contracts associated with this position are with three counterparties, all of which are investment grade financial institutions. This concentration may impact our overall credit risk in that these counterparties may be similarly affected by changes in economic or other conditions. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. Furthermore, our derivative contracts are not subject to margin calls or similar accelerations. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.