Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

v2.4.0.8
Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2013
Derivative Financial Instruments

5.  Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and interest rates. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. Our derivative financial instruments currently consist of crude oil swap contracts.  All of the derivative counterparties are also lenders or affiliates of lenders participating in our revolving bank credit facility.  We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations. Additional collateral is not required by us due to the derivative counterparties’ collateral rights as lenders and we do not require collateral from our derivative counterparties.

In accordance with GAAP, we record each derivative contract on the balance sheet as an asset or a liability at its fair value.  We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts are recognized currently in earnings. For additional information about fair value measurements, refer to Note 7.

Commodity Derivatives.  We have entered into commodity swap contracts to manage a portion of our exposure to commodity price risk from sales of oil through December 2014.  While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements.  During the six months ended June 30, 2013 and 2012, our derivative contracts consisted entirely of crude oil contracts.  The crude oil swap contracts are comprised of a portion based on Brent crude oil prices and a portion based on West Texas Intermediate (“WTI”) crude oil prices.  The Brent based swaps are priced off the Brent crude oil price quoted on the IntercontinentalExchange, known as ICE.  The WTI based swaps are priced off the New York Mercantile Exchange, known as NYMEX.  Although our Gulf of Mexico crude oil is based off the WTI crude oil price plus a premium, the realized prices received for our Gulf of Mexico crude oil have been closer to the Brent crude oil price because of competition with foreign supplied crude oil, which is based off the Brent crude oil price.  Therefore, a portion of the swap oil contracts are priced off the Brent crude oil price to mitigate a portion of the price risk associated with our Gulf of Mexico crude oil production.

As of June 30, 2013, our open commodity derivatives contracts were as follows: 

 

 

Swaps – Oil

 

 

Priced off Brent (ICE)

 

Priced off WTI (NYMEX)

Termination Period

 

Notional
Quantity  (Bbls)

 

Weighted
Average
Contract Price

 

Notional
Quantity  (Bbls)

 

Weighted
Average

Contract Price

2013:

3rd quarter

 

  405,800

 

$

  103.85

 

  185,000

 

$

  97.13

 

4th quarter

  

  294,400

  

 

  101.98

  

  520,000

  

 

  97.38

2014:

1st quarter

    

  180,000

    

 

  97.38

     

  59,000

    

 

  97.02

 

2nd quarter

 

  172,900

 

 

  97.38

 

—

 

 

—

 

3rd quarter

 

  165,600

 

 

  97.38

 

—

 

 

—

 

4th quarter

 

  156,400

 

 

  97.37

 

—

 

 

—

 

 

 

  1,375,100

 

$

  100.27

 

  764,000

 

$

  97.29

 

 

 

 

 

 

 

 

 

 

 

 

    Bbls = barrels

The following balance sheet line items included amounts related to the estimated fair value of our open derivative contracts as indicated in the following table (in thousands):

 

June 30,
2013

 

December 31,
2012

Prepaid and other assets

$

  2,635

 

$

—

Other Assets (noncurrent)

 

  221

 

 

—

Accrued liabilities

 

  475

 

 

  6,355

Other liabilities (noncurrent)

 

—

 

 

  3,046

Changes in the fair value of our commodity derivative contracts are recognized currently in earnings and were as follows (in thousands):

 

Three Months Ended
June 30,

 

 

Six Months Ended
June 30,

 

 

2013

 

 

2012

 

 

2013

 

 

2012

 

Derivative (gain) loss:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Realized

$

(1,961

)

 

$

  285

 

 

$

  2,310

 

 

$

  6,084

 

        Unrealized

 

(10,879

)

 

 

(50,157

)

 

 

(11,783

)

 

 

(16,322

)

        Total

$

(12,840

)

 

$

(49,872

)

 

$

(9,473

)

 

$

(10,238

)

 

Offsetting Commodity Derivatives.  As of June 30, 2013 and December 31, 2012, all of our derivative agreements allowed for netting of derivative gains and losses upon settlement.  In general, the terms of the agreements provide for offsetting of amounts payable or receivable between us and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.  If an event of default were to occur causing an acceleration of payment under our revolving bank credit facility, that event may also trigger an acceleration of settlement of our derivative instruments.   If we were required to settle all of our open derivative instruments, we would be able to net payments and receipts per counterparty pursuant to the derivative agreements.

Although our derivative agreements allow for netting, which would allow for recording assets and liabilities per counterparty on a net basis, we account for our derivative contracts on a gross basis per contract as either an asset or liability. 

The following table presents disclosures required by ASU 2011-11 and ASU 2013-01 and provides a reconciliation of the gross assets and liabilities reflected in the balance sheet and the potential effects of master netting agreements on the fair value of open derivative contracts as of June 30, 2013.

 

 

Derivative

Assets

 

Derivative

Liabilities

 

Gross amounts presented in the balance sheet

$

  2,856

 

$

  475

 

Amounts not offset in the balance sheet

 

(348

)

 

(348

)

Net amounts

$

  2,508

 

$

  127

 

 

There were no potential effects of master netting agreements on the fair value of open derivative contracts as of December 31, 2012 due to all open derivative contracts being valued as liabilities.