Capital Expenditures
Compass’ primary sources of capital resources and liquidity are cash flows from operations and borrowing capacity under the Compass Credit Agreement. The Fiscal 2016 Quarter capital expenditures for Compass were $1.8 million, which primarily consisted of recompletion activities in the Permian and North Louisiana properties.
The following table presents Compass’ capital expenditures for the Fiscal 2016 Quarter and fiscal year 2016 (in millions):
|
| | | | | | | | | | | | |
| | Fiscal Three Months | | January-September Forecast | | Fiscal Year |
| | 2016 | | 2016 | | 2016 |
Capital expenditures: | | | | | | |
Development capital | | $ | 1.1 |
| | $ | 4.0 |
| | $ | 5.1 |
|
Gas gathering and water pipelines | | 0.4 |
| | — |
| | 0.4 |
|
Corporate and other | | 0.3 |
| | 1.1 |
| | 1.4 |
|
Total | | $ | 1.8 |
| | $ | 5.1 |
| | $ | 6.9 |
|
Derivative financial instruments
Compass periodically uses oil and natural gas derivatives financial instruments to manage its exposure to commodity prices. These transactions limit exposure to declines in commodity prices, but also limit the benefits Compass would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of its derivative financial instrument management activities consists of non-cash income or expense due to changes in the fair value of its derivative financial instruments. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if Compass terminates a contract prior to its expiration. Compass does not designate these instruments as hedging instruments for financial reporting purposes and, as a result, Compass recognizes the change in the respective instruments’ fair value in earnings.
The impacts of realized and unrealized changes in the fair value of derivative financial instruments resulted in a net gain of $1.7 million for the Fiscal 2016 Quarter and net gain of $18.7 million for the Fiscal 2015 Quarter primarily as a result of both decreased natural gas and crude oil prices. Based on the nature of Compass’ derivative financial instruments, increases in the related commodity price typically result in a decrease to the value of Compass’ derivative financial instruments. The significant fluctuations demonstrate the high volatility in oil and natural gas prices between each of the periods. The ultimate settlement amount of the unrealized portion of the derivative financial instruments is dependent on future commodity prices.
Compass’ production is generally sold at prevailing market prices. However, Compass periodically enters into derivative financial instruments for a portion of its production when market conditions are deemed favorable and oil and natural gas prices exceed Compass’ minimum internal price targets.
Compass’ objective in entering into derivative financial instruments is to mitigate the impact of price fluctuations and achieve a more predictable cash flow associated with Compass’ operations. These transactions limit Compass’ exposure to declines in prices, but also limit the benefits Compass would realize if commodity prices increase.
Compass’ total cash receipts for the Fiscal 2016 Quarter were $8.3 million, or $1.28 per Mcfe, compared to cash receipts of $2.4 million, or $0.31 per Mcfe for the Fiscal 2015 Quarter. As noted above, the significant fluctuations between settlements on Compass’ derivative financial instruments demonstrate the volatility in commodity prices.
The following table presents Compass’ natural gas equivalent prices, before and after the impact of the cash settlements of its derivative financial instruments:
|
| | | | | | | | |
| | Fiscal Quarter |
Average realized pricing: | | 2016 | | 2015 |
Natural gas equivalent per Mcfe | | $ | 2.57 |
| | $ | 4.41 |
|
Cash settlements on derivative financial instruments, per Mcfe | | 1.28 |
| | 0.31 |
|
Net price per Mcfe, including derivative financial instruments | | $ | 3.85 |
| | $ | 4.72 |
|
