RE: caza15 Oct 2014 12:03
Gain (Loss) on Risk Management Contracts
The Company has entered into commodity price derivative contracts to limit exposure to declining crude oil prices in accordance with its covenants under the Note Purchase Agreement. All derivative contracts are approved by management before the Company enters into them. The Company's risk management strategy is dictated in part by covenants in the Note Purchase Agreement (as defined herein) which require the Company to hedge approximately 75% of its production. The contracts limit exposure to declining commodity prices, thereby protecting project economics and providing increased stability of cash flows and for capital expenditure programs.
Under these contracts, the Company receives or pays monthly a cash settlement on the covered production of the difference between the swap price specified in the applicable contract and the month average of the daily closing quoted spot price per barrel of West Texas Intermediate NYMEX crude oil. These agreements cover 93,782 barrels of oil at a swap price of $92.55, $90.04 and $96.11 during the year ending December 31, 2014 and cover 61,850 barrels of oil at a swap price of $87.05, $83.70 and $89.34 during the year ended December 31, 2015 and cover 8,428 barrels at a swap price of $85.23 during the year ended December 31, 2016.
The fair value of the Company's commodity price derivative contracts represents the estimated amount that would be received for settling the outstanding contracts on June 30, 2014, and will be different than what will eventually be realized. The fair value of these assets at a particular point in time is affected by underlying commodity prices, expected commodity price volatility and the duration of the contract and is determined by the expected future settlements of the underlying commodity. The gain or loss on such contracts is made up of two components; the realized component, which reflects actual settlements that occurred during the period, and the unrealized component, which represents the change in the fair value of the contracts during the period.
For the three month period ended June 30, 2014 the Company recognized a loss of $278,795 on its settled commodity price derivative contracts and recorded an unrealized loss of $776,648 on unsettled commodity price derivative contracts due to higher commodity prices.
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