7. DERIVATIVE FINANCIAL INSTRUMENTS:

Objectives and Strategy: The Company’s major market risk exposure is in the pricing applicable to its natural gas and oil production. Realized pricing is currently driven primarily by the prevailing price for the Company’s natural gas production. Historically, prices received for natural gas production have been volatile and unpredictable. Pricing volatility is expected to continue. The prices we receive for our production depend on many factors outside of our control, including volatility in the differences between product prices at sales points and the applicable index price.

The Company relies on various types of derivative instruments to manage its exposure to commodity price risk and to provide a level of certainty in the Company’s forward cash flows supporting the Company’s capital investment program. These types of instruments may include fixed price swaps, costless collars, or basis differential swaps. These contracts are financial instruments, and do not require or allow for physical delivery of the hedged commodity. While mitigating the effects of fluctuating commodity prices, these derivative contracts may limit the benefits we would receive from increases in commodity prices above the fixed hedge prices.

The Company’s hedging policy limits the volumes hedged to not be greater than 50% of its forecasted production volumes without Board approval. During the three and nine months ended September 30, 2018, the Board approved all commodity derivative hedge contracts for volumes exceeding 50% of forecasted production volumes.

Fair Value of Commodity Derivatives: FASB ASC 815 requires that all derivatives be recognized on the Condensed Consolidated Balance Sheets as either an asset or liability and be measured at fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not apply hedge accounting to any of its derivative instruments.

Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at fair value on the Condensed Consolidated Balance Sheets and the associated unrealized gains and losses are recorded as current income or expense in the Condensed Consolidated Statements of Operations. Unrealized gains or losses on commodity derivatives represent the non-cash change in the fair value of these derivative instruments.

Commodity Derivative Contracts: At September 30, 2018, the Company had the following open commodity derivative contracts to manage commodity price risks. For the fixed price swaps, the Company receives the fixed price for the contract and pays the variable price to the counterparty. For the basis swaps, the Company receives a fixed price for the difference between two sales points for a specified commodity volume over a specified time period. The reference prices of these commodity derivative contracts are typically referenced to index prices as published by independent third parties.

Year	Index	Total Volumes		Weighted Average Price per Unit			Fair Value - September 30, 2018
		(in millions)					Asset (Liability)
Natural gas fixed price swaps		(Mmbtu)		($/Mmbtu)
2018 (October through December)	NYMEX-Henry Hub		60.5	$	2.88		$	(9,536	)
2019	NYMEX-Henry Hub		163.9	$	2.82			(188	)
2020	NYMEX-Henry Hub		15.5	$	2.76			(1,673	)

Natural gas basis swaps (1)		(Mmbtu)		($/Mmbtu)
2018 (October through December)	NW Rockies Basis Swap		51.5	$	(0.66	)	$	(4,170	)
2019	NW Rockies Basis Swap		84.5	$	(0.70	)		(10,523	)
2020	NW Rockies Basis Swap		—	$	—			—

Crude oil fixed price swaps		(Bbl)		($/Bbl)
2018 (October through December)	NYMEX-WTI		0.6	$	60.45		$	(7,472	)
2019	NYMEX-WTI		1.7	$	58.83			(21,295	)
2020	NYMEX-WTI		0.1	$	60.05			(734	)

⁽¹⁾	Represents swap contracts that fix the basis differentials for gas sold at or near Opal, Wyoming and the value of natural gas established on the last trading day of the month by the NYMEX for natural gas swaps for the respective period.

Subsequent to September 30, 2018 and through October 25, 2018, the Company entered into the following open commodity derivative contracts to manage commodity price risk.

Type

Index

Remaining Contract Period

Volume/MMBTU/Day

Weighted Average

Floor Price

($/MMBTU)

Weighted Average Ceiling Price

($/MMBTU)

Collars

NYMEX

January - March 2020

100,000

2.75

3.18

The following table summarizes the pre-tax realized and unrealized gain (loss) the Company recognized related to its derivative instruments in the Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2018 and 2017:

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
Commodity Derivatives:	2018			2017			2018			2017
Realized gain (loss) on commodity derivatives - natural gas	$	(5,468	)	$	8,884		$	6,958		$	8,016
Realized loss on commodity derivatives - oil		(5,318	)		—			(10,008	)		—
Unrealized gain (loss) on commodity derivatives		(11,018	)		(4,234	)		(72,557	)		4,133
Total gain (loss) on commodity derivatives	$	(21,804	)	$	4,650		$	(75,607	)	$	12,149

The realized gain or loss on commodity derivatives relates to actual amounts received or paid or to be received or paid under the Company’s derivative contracts and the unrealized gain or loss on commodity derivatives represents the change in the fair value of these derivative instruments over the remaining term of the contract.