Interest rate risk. Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The interest charged on the outstanding bank loans fluctuates with the interest rates posted by the lenders. The Company has not entered into any mitigating interest rate hedges or swaps, however the Company has $50 million and $46 million of convertible debentures with fixed interest rates of 7.5% and 7.25% respectively, maturing January 31, 2016 and June 30, 2017 (see note 9). Had the borrowing rate on bank loans been 100 basis points higher (or lower) throughout the year ended December 31, 2012, earnings would have been affected by $0.6 million (December 31, 2011 - $0.4 million) based on the average bank debt balance outstanding during the year.
Commodity price risk. Commodity price risk is the risk that the fair value or future cash flows will fluctuate as a result of changes in commodity prices. Commodity prices for oil and natural gas are impacted by both the relationship between the Canadian and U.S. dollar and world economic events that dictate the levels of supply and demand.
It is the Company's policy to economically hedge some oil and natural gas sales through the use of various financial derivative forward sales contracts and physical sales contracts. The Company does not apply hedge accounting for these contracts. The Company's production is usually sold using "spot" or near term contracts, with prices fixed at the time of transfer of custody or on the basis of a monthly average market price. The Company, however, may give consideration in certain circumstances to the appropriateness of entering into long term, fixed price sales contracts. The Company does not enter into commodity contracts other than to meet the Company's expected sale requirements.
At December 31, 2012 the following derivative contracts were outstanding and recorded at estimated fair value:
Weighted Average Fixed PriceType of Volume (NYMEX Contract(1) Commodity (bbls/day) Canadian $) Remaining PeriodFinancial Crude oil 1,200 $ 89.73/bbl January 1, 2013 to March 31, swap 2013Financial Crude oil 1,100 $ 89.81/bbl April 1, 2013 to June 30, swap 2013Financial Crude oil 900 $ 90.54/bbl July 1, 2013 to September 30, swap 2013Financial Crude oil 800 $ 90.56/bbl October 1, 2013 to December swap 31, 2013----------------------------------------------------------------------------(1) Swap indicates fixed price payable to Anderson in exchange for floating price payable to counterparty.
The estimated fair value of the financial oil contracts has been determined on the amounts the Company would receive or pay to terminate the oil contracts. At December 31, 2012, the Company estimates that it would pay $1.1 million to terminate these contracts.
The fair value of the financial commodity risk management contracts have been allocated to current and non-current liabilities on a contract by contract basis as follows:
December December 31, 2012 31, 2011Current asset $ - $ 1,384Current liability (1,097) - -------------------------Net asset (liability) position $ (1,097) $ 1,384----------------------------------------------------------------------------
