Note 9 — Derivative Instruments

Resolute enters into commodity derivative contracts to manage its exposure to oil and gas price volatility. Resolute has not elected to designate derivative instruments as hedges under the provisions of FASB ASC Topic 815, Derivatives and Hedging. As a result, these derivative instruments are marked to market at the end of each reporting period and changes in the fair value are recorded in the accompanying consolidated statements of operations. Gains and losses on commodity derivative instruments from Resolute’s price risk management activities are recognized in other income (expense). The cash flows from derivatives are reported as cash flows from operating activities unless the derivative contract is deemed to contain a financing element. Derivatives deemed to contain a financing element are reported as financing activities in the condensed consolidated statement of cash flows.

 

The Company utilizes fixed price swaps, basis swaps, option contracts and two-and three-way collars. These instruments generally entitle Resolute (the floating price payer in most cases) to receive settlement from the counterparty (the fixed price payer in most cases) for each calculation period in amounts, if any, by which the settlement price for the scheduled trading days applicable to each calculation period is less than the fixed strike price or floor price. The Company would pay the counterparty if the settlement price for the scheduled trading days applicable to each calculation period exceeds the fixed strike price or ceiling price. The amount payable by Resolute, if the floating price is above the fixed or ceiling price, is the product of the notional contract quantity and the excess of the floating price over the fixed or ceiling price per calculation period. The amount payable by the counterparty, if the floating price is below the fixed or floor price, is the product of the notional contract quantity and the excess of the fixed or floor price over the floating price per calculation period. A three-way collar consists of a two-way collar contract combined with a put option contract sold by the Company with a strike price below the floor price of the two-way collar. The Company receives price protection at the purchased put option floor price of the two-way collar if commodity prices are above the sold put option strike price. If commodity prices fall below the sold put option strike price, the Company receives the cash market price plus the variance between the two put option strike prices. This type of instrument captures more value in a rising commodity price environment, but limits the benefits in a downward commodity price environment. Basis swaps are used in connection with gas swaps in order to fix the price differential between the NYMEX Henry Hub price and the index price at which the gas production is sold.

During 2013, the Company paid $10.7 million to restructure or terminate certain 2013 derivative contacts. The Company will incur premium payments associated with the oil collars and options of $5.0 million in 2014. As of December 31, 2013, the fair value of the Company’s commodity derivatives was a net liability of $10.6 million.

The following table represents Resolute’s commodity swap contracts as of December 31, 2013:

 

		Oil (NYMEX WTI)								Gas (NYMEX Henry Hub)
Year		Bbl per Day				Weighted Average Swap Price Per Bbl				MMBtu per Day				Weighted Average Swap Price Per MMBtu
2014			5,500			$	92.94				5,000			$	4.165

The following table represents Resolute’s two-way commodity collar contracts as of December 31, 2013:

 

		Oil (NYMEX WTI)
Year		Bbl per Day				Weighted Average Floor Price Per Bbl				Weighted Average Ceiling Price Per Bbl
2014			1,500			$	65.00			$	110.00

The following table represents Resolute’s commodity call and put option contracts as of December 31, 2013:

 

		Oil (NYMEX WTI)
Year		Bought Call Bbl per Day				Weighted Average Bought Call Price Per Bbl				Bought Put Bbl per Day				Weighted Average Bought Put Price Per Bbl				Sold Put Bbl Per Day				Weighted Average Sold Put Price Per Bbl
2014			2,500			$	108.66				1,200			$	85.00				3,700			$	70.68

The following table represents Resolute’s three-way commodity collar contracts as of December 31, 2013:

 

		Oil (NYMEX WTI)
Year		Bbl Per Day				Weighted Average Short Put Price Per Bbl				Weighted Average Floor Price Per Bbl				Weighted Average Ceiling Price Per Bbl
2014			2,000			$	70.00			$	85.00			$	100.83

The following table represents Resolute’s basis swaps as of December 31, 2013:

 

		Gas (Rocky Mountain (CIG)
Year		MMBtu per Day				Weighted Average Price Differential per MMBtu
2014			1,000			$	0.590

Subsequent to December 31, 2013, the Company entered into additional commodity derivative contracts as summarized below:

 

		Oil (NYMEX WTI)
Swap		Swap Bbl per Day				Weighted Average Swap Price Per Bbl
January 1, 2015 – June 30, 2015			1,000			$	90.31
2015			3,000			$	89.05

 

		Oil (NYMEX WTI)
Two-Way Collar		Bbl per Day				Weighted Average Floor Price per Bbl				Weighted Average Ceiling Price Per Bbl
2015			1,000			$	84.17			$	92.10

 

		Gas (NYMEX Henry Hub)
Three-Way Collar		MMBtu Per Day				Weighted Average Short Put Price Per MMBtu				Weighted Average Floor Price Per MMBtu				Weighted Average Ceiling Price Per MMBtu
January 1, 2015 – March 31, 2015			5,000			$	3.75			$	4.50			$	5.55

Resolute does not offset the fair value amounts of derivative assets and liabilities with the same counterparty for financial reporting purposes. See Note 10 for the location and fair value amounts of Resolute’s commodity derivative instruments reported in the consolidated balance sheets at December 31, 2013.

The table below summarizes the location and amount of commodity derivative instrument gains and losses reported in the consolidated statements of income (in thousands):

 

		Year Ended December 31,
		2013				2012				2011
Other income (expense):
Commodity derivative settlements		$	(35,812	)		$	(22,920	)		$	(20,799	)
Mark-to-market gain			20,476				28,096				15,478
Commodity derivative instruments gain (loss)		$	(15,336	)		$	5,176			$	(5,321	)

Credit Risk and Contingent Features in Derivative Instruments

Resolute is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above. All counterparties are lenders under Resolute’s Credit Facility. Accordingly, Resolute is not required to provide any credit support to its counterparties other than cross collateralization with the properties securing the Credit Facility. Resolute’s derivative contracts are documented with industry standard contracts known as a Schedule to the Master Agreement and International Swaps and Derivative Association, Inc. Master Agreement (“ISDA”). Typical terms for each ISDA include credit support requirements, cross default provisions, termination events, and set-off provisions. Resolute has set-off provisions with its lenders that, in the event of counterparty default, allow Resolute to set-off amounts owed under the Credit Facility or other general obligations against amounts owed for derivative contract liabilities.

The maximum amount of loss in the event of all counterparties defaulting is $0.6 million as of December 31, 2013, due to the set off provisions noted above.