Quarterly report pursuant to Section 13 or 15(d)

10. Derivative Instruments

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10. Derivative Instruments
9 Months Ended
Sep. 30, 2016
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments

The Company is required to recognize all derivative instruments on the balance sheet as either assets or liabilities measured at fair value. The Company has not designated its derivative instruments as cash flow hedges for accounting purposes and, as such, marks its derivative instruments to fair value and recognizes the realized and unrealized changes in fair value in its statements of operations under the captions “Loss on settled derivatives” and “Loss on the mark-to-market of derivatives.”

 

The Company has utilized swap and collar derivative contracts. While the use of these derivative instruments limits the downside risk of adverse price movements, their use also limits the upside revenue potential of upward price movements.

 

For a fixed price swap contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is less than the swap price and the Company is required to make a payment to the counterparty if the settlement price for any period is greater than the swap price. For a collar contract, the counterparty is required to make a payment to the Company if the settlement price for any settlement period is below the floor price, the Company is required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price and no payment is required by either party if the settlement price for any settlement period is between the floor price and the ceiling price.

 

The Company’s derivative contracts are settled based on reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West Texas Intermediate (“WTI”) pricing.

 

As of September 30, 2016, the Company had no outstanding derivative contracts. All of our then outstanding derivative contracts, with a mark-to-market liability valuation of $3,134,336, were transferred to BRHC as part of the debt restructuring.

 

Derivative Gains and Losses

The following table presents realized and unrealized gains and losses on derivative instruments for the periods presented:

 

    Nine Months Ended  
    September 30,  
    2016     2015  
Realized gain on derivatives:                
Crude oil fixed price swaps   $ 922,872     $ 8,579,756  
Crude oil collars     120,154       857,147  
Realized gain on derivatives, net   $ 1,043,026     $ 9,436,903  
                 
Loss on the mark-to-market of derivatives:                
Crude oil fixed price swaps   $ (4,157,491 )   $ (4,366,810 )
Crude oil collars     (131,245 )     (519,374 )
Loss on the mark-to-market of derivatives, net   $ (4,288,736 )   $ (4,886,184 )

 

Balance Sheet Offsetting of Derivative Assets and Liabilities

In accordance with FASB issued ASU No. 2011-11, Balance Sheet (Topic 210)-Disclosures about Offsetting Assets and Liabilities, all of the Company’s derivative contracts are carried at their fair value in the condensed balance sheets under the captions “Derivative instruments” and “Noncurrent derivative instruments”. Derivative instruments from the same counterparty that are subject to contractual terms which provide for net settlement are reported on a net basis in the condensed balance sheets. The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under the netting arrangements with counterparties, and the resulting net amounts presented in the condensed balance sheets as part of discontinued operations for the periods presented, all at fair value.

 

    December 31, 2015  
          Gross     Net  
    Gross     amounts     amounts of  
    amounts of     offset     assets  
    recognized     on balance     on balance  
    assets     sheet     sheet  
Commodity derivative assets   $ 1,154,417     $ (17 )   $ 1,154,400  

 

      December 31, 2015  
              Gross       Net  
      Gross       amounts       amounts of  
      amounts of       offset       liabilities  
      recognized       on balance       on balance  
      liabilities       sheet       sheet  
Commodity derivative liabilities   $     $     $  

 

The following table reconciles the net amounts disclosed above to the individual financial statement line items in the condensed balance sheets:

 

    December 31,  
    2015  
Current assets from discontinued operations   $ 1,154,400  
Non-current assets from discontinued operations      
Net amount of assets on the balance sheet     1,154,400  
         
Current liabilities from discontinued operations      
Non-current liabilities from discontinued operations      
Net amounts of liabilities on the balance sheet      
Total derivative assets, net   $ 1,154,400