Derivative Financial Instruments

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Commodity Derivative 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 swaps and basis swaps 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 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 Consolidated Balance Sheets and 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 following table sets forth the Company’s outstanding derivative contracts at December 31, 2020. When aggregating multiple contracts, the weighted average contract price is disclosed.


Period	Commodity	Volume (Bbls / MMBtu)	Price ($/Bbl / $/MMBtu)
2021	Crude Oil Swap	2,294,000	$51.17
2021	Crude Oil Basis Swap (1)	1,825,000	$1.05
2022	Crude Oil Swap	365,000	$47.70
2021	Natural Gas Swap	4,380,000	$2.76
2021	Natural Gas Basis Swap (2)	4,380,000	$(0.45)

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

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

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


		December 31, 2020						December 31, 2019
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	$	11,071	$	(3,562)	$	7,509	$	13,321	$	(4,461)	$	8,860
Commodity contracts	Derivative liability - current	$	4,492	$	(3,562)	$	930	$	11,350	$	(4,461)	$	6,889
Interest rate swaps	Derivative liability - current	$	205	$	—	$	205	$	—	$	—	$	—
Commodity contracts	Derivative asset - noncurrent	$	396	$	—	$	396	$	1,031	$	(261)	$	770
Commodity contracts	Derivative liability - noncurrent	$	—	$	—	$	—	$	261	$	(261)	$	—
Interest rate swaps	Derivative liability - noncurrent	$	173	$	—	$	173	$	—	$	—	$	—

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


Derivatives not designated as hedging contracts under ASC Topic 815			Years Ended December 31,
	Statement of Cash Flows Location	Statement of Operations Location	2020		2019
Unrealized gain (loss)	Not presented separately	Not presented separately	$	3,855	$	(59,849)
Realized gain	Operating portion of net cash received in settlement of derivative contracts	Not presented separately	56,044		15,866
	Total (gain) loss on derivative contracts, net	Gain (loss) on derivative contracts, net	$	59,899	$	(43,983)