Derivative Financial Instruments

The Company’s hedging activities consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swap agreements. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, 2021. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow.

The Company’s derivative instruments are cash flow hedge transactions in which it is hedging the variability of cash flow related to a forecasted transaction. The Company does not enter into derivative instruments for trading or other speculative purposes. These transactions are recorded in the Condensed Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations.

The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.

The Company had the following open crude oil and natural gas derivative contracts as of June 30, 2019:



	Price Swaps
Period	Commodity	Volume (Bbls / MMBtu)	Weighted Average Price ($/Bbl / $/MMBtu)
Q3 - Q4 2019	Crude Oil	1,177,600	$	65.64
Q1 - Q4 2020	Crude Oil	1,830,000	$	63.80
Q1 - Q4 2021	Crude Oil	365,000	$	55.53
Q3 - Q4 2019	Crude Oil Basis Swap(1)	1,012,000	$	(5.29	)
Q3 - Q4 2019	Crude Oil Basis Swap(2)	184,000	$	4.50
Q1 - Q4 2020	Crude Oil Basis Swap(1)	1,830,000	$	(2.14	)
Q3 - Q4 2019	Natural Gas	1,564,000	$	2.85
Q1 - Q4 2020	Natural Gas	2,562,000	$	2.85
Q3 - Q4 2019	Natural Gas Basis Swap(3)	1,564,000	$	(1.16	)
Q1 - Q4 2020	Natural Gas Basis Swap(3)	2,562,000	$	(1.07	)


(1)	The basis differential price is between WTI Midland Argus Crude and the WTI NYMEX.


(2)	The basis differential price is between LLS Argus Crude and the WTI NYMEX.


(3)	The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX.

Subsequent to June 30, 2019, the Company entered into additional hedges consisting of Crude Oil Swaps on 731 MBbls at a price of $54.47/Bbl for 2020 and 2021, WTI Midland Argus Crude Basis Swaps on 366 MBbls at a price of $0.55/Bbl for 2020 and WTI Midland Argus Crude Basis Swaps on 730 MBbls at a price of $0.85/Bbl for 2021.

The following table summarizes the location and fair value amounts of all derivative instruments in the Condensed Consolidated Balance Sheets as well as the gross recognized derivative assets, liabilities, and amounts offset in the Condensed Consolidated Balance Sheets (in thousands):



		June 30, 2019							December 31, 2018
Derivatives not designated as hedging contracts under ASC Topic 815	Balance Sheet Location	Gross Recognized Assets / Liabilities		Gross Amounts Offset			Net Recognized Assets / Liabilities		Gross Recognized Assets / Liabilities		Gross Amounts Offset			Net Recognized Assets / Liabilities
Commodity contracts	Derivative asset - current	$	17,346	$	(8,768	)	$	8,578	$	48,662	$	(4,774	)	$	43,888
Commodity contracts	Derivative liability - current	$	8,944	$	(8,768	)	$	176	$	5,302	$	(4,774	)	$	528
Commodity contracts	Derivative asset - noncurrent	$	8,583	$	(1,649	)	$	6,934	$	23,605	$	(2,484	)	$	21,121
Commodity contracts	Derivative liability - noncurrent	$	2,748	$	(1,649	)	$	1,099	$	4,375	$	(2,484	)	$	1,891

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivatives instruments in the Condensed Consolidated Statements of Operations (in thousands):



Derivatives not designated as hedging contracts under ASC Topic 815			Three Months Ended June 30,					Six Months Ended June 30,
	Statement of Cash Flows Location	Statement of Operations Location	2019		2018			2019			2018
Unrealized gain (loss)	Not separately presented	Not separately presented	$	4,902	$	(5,858	)	$	(48,354	)	$	(6,858	)
Realized gain (loss)	Operating portion of net cash paid in settlement of derivative contracts	Not separately presented	4,594		(4,992		)	9,956			(9,267		)
	Total gain (loss) on derivative contracts, net	Gain (loss) on derivative contracts, net	$	9,496	$	(10,850	)	$	(38,398	)	$	(16,125	)