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Note 3 - Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note 3. Derivative Financial Instruments

Commodity Derivative Instruments

The Company’s hedging activities primarily 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 September 30, 2020:

	*Price Swaps*
		*Volume*		*Weighted Average Price*
Period	*Commodity*	*(Bbls / MMBtu)*		*($/Bbl / $/MMBtu)*
Q4 2020	Crude Oil		552,000	$	60.65
Q1 - Q4 2021	Crude Oil		1,460,000	$	55.16
Q4 2020	Crude Oil Basis Swap (1)		598,000	$	(1.50	)
Q4 2020	Crude Oil Basis Swap (2)		92,000	$	2.55
Q4 2020	Crude Oil Roll Swap (3)		552,000	$	(1.79	)
Q1 - Q4 2021	Crude Oil Basis Swap (1)		1,825,000	$	1.05
Q4 2020	Natural Gas		644,000	$	2.85
Q1 - Q4 2021	Natural Gas		4,380,000	$	2.76
Q4 2020	Natural Gas Basis Swap (4)		644,000	$	(1.07	)
Q1 - Q4 2021	Natural Gas Basis Swap (4)		4,380,000	$	(0.45	)

(1)

The basis differential price is between WTI Midland Crude and the WTI NYMEX.

(2)

The basis differential price is between WTI Houston and the WTI NYMEX.

(3)

The swap is between WTI Roll and the WTI NYMEX.

(4)

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

Interest Rate Swaps

At times, the Company’s hedging activities include the use of interest rate swaps entered into in order to manage cash flow variability resulting from changes in interest rates. These derivative instruments are not accounted for under hedge accounting.

The Company had the following interest rate swaps as of September 30, 2020:

Effective Dates	Notional Amount		Fixed Rate
May 5, 2020 to May 5, 2022	$	125,000,000		0.286	%
May 5, 2022 to May 5, 2023	$	100,000,000		0.286	%
May 5, 2023 to May 7, 2024	$	75,000,000		0.286	%

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):

		*September 30, 2020*							*December 31, 2019*
Derivatives not		*Gross*					*Net*		*Gross*					*Net*
designated as hedging	*Balance*	*Recognized*		*Gross*			*Recognized*		*Recognized*		*Gross*			*Recognized*
contracts under ASC	*Sheet*	*Assets /*		*Amounts*			*Assets /*		*Assets /*		*Amounts*			*Assets /*
Topic 815	*Location*	*Liabilities*		*Offset*			*Liabilities*		*Liabilities*		*Offset*			*Liabilities*
Commodity contracts	Derivative asset - current	$	26,773	$	(1,676	)	$	25,097	$	13,321	$	(4,461	)	$	8,860
Commodity contracts	Derivative liability - current	$	2,539	$	(1,676	)	$	863	$	11,350	$	(4,461	)	$	6,889
Interest rate swaps	Derivative liability - current	$	177	$	—		$	177	$	—	$	—		$	—
Commodity contracts	Derivative asset - noncurrent	$	4,727	$	—		$	4,727	$	1,031	$	(261	)	$	770
Commodity contracts	Derivative liability - noncurrent	$	355	$	—		$	355	$	261	$	(261	)	$	—
Interest rate swaps	Derivative liability - noncurrent	$	222	$	—		$	222	$	—	$	—		$	—

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 and Condensed Consolidated Statements of Cash Flows (in thousands):

			*Three Months Ended*					*Nine Months Ended*
*Derivatives not designated as hedging contracts under ASC Topic 815*			*September 30,*					*September 30,*
	*Statement of Cash Flows Location*	*Statement of Operations Location*	*2020*			*2019*		*2020*		*2019*
Unrealized (loss) gain	Not separately presented	Not separately presented	$	(14,543	)	$	15,021	$	25,466	$	(33,332	)
Realized gain	Operating portion of net cash received in settlement of derivative contracts	Not separately presented		8,503			3,705		47,599		13,660
	Total (loss) gain on derivative contracts, net	(Loss) gain on derivative contracts, net	$	(6,040	)	$	18,726	$	73,065	$	(19,672	)

Included in Accounts receivable under the subheading of Joint interest billings and other in the Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019 are $3.6 million and $0.6 million, respectively, related to commodity hedge contracts settled as of that date for which the cash has not been received.