12. Derivative Instruments

Commodity Derivative Instruments

The Company uses commodity derivative instruments to mitigate the effects of commodity price volatility for a portion of its forecasted sales of production and achieve a more predictable level of cash flow. Since the Company derives a significant portion of its revenues from sales of crude oil, crude oil price volatility represents the Company’s most significant commodity price risk. While the use of commodity derivative instruments limits or partially reduces the downside risk of adverse commodity price movements, such use also limits the upside from favorable commodity price movements. The Company does not enter into commodity derivative instruments for speculative purposes.

The Company’s commodity derivative instruments, which settle on a monthly basis over the term of the contract for contracted volumes, consist of over-the-counter price swaps, three-way collars, sold call options, and basis swaps, each of which is described below.

Price swaps are settled based on differences between a fixed price and the settlement price of a referenced index. If the settlement price of the referenced index is below the fixed price, the Company receives the difference from the counterparty. If the referenced settlement price is above the fixed price, the Company pays the difference to the counterparty.

Three-way collars consist of a purchased put option (floor price), a sold call option (ceiling price) and a sold put option (sub-floor price) and are settled based on differences between the floor or ceiling prices and the settlement price of a referenced index or the difference between the floor price and sub-floor price. If the settlement price of the referenced index is below the sub-floor price, the Company receives the difference between the floor price and sub-floor price from the counterparty. If the settlement price of the referenced index is between the floor price and sub-floor price, the Company receives the difference between the floor price and the settlement price of the referenced index from the counterparty. If the settlement price of the referenced index is between the floor price and ceiling price, no payments are due to or from either party. If the settlement price of the referenced index is above the ceiling price, the Company pays the difference to the counterparty.

Sold call options are settled based on differences between the ceiling price and the settlement price of a referenced index. If the settlement price of the referenced index is above the ceiling price, the Company pays the difference to the counterparty. If the settlement price of the referenced index is below the ceiling price, no payments are due to or from either party. Premiums from the sale of call options have been used to enhance the fixed price of certain contemporaneously executed price swaps. Purchased call options executed contemporaneously with sold call options in order to increase the ceiling price of existing sold call options have been presented on a net basis in the table below.

Basis swaps are settled based on differences between a fixed price differential and the differential between the settlement prices of two referenced indexes. If the differential between the settlement prices of the two referenced indexes is greater than the fixed price differential, the Company receives the difference from the counterparty. If the differential between the settlement prices of the two referenced indexes is less than the fixed price differential, the Company pays the difference to the counterparty.

The referenced index of the Company’s price swaps, three-way collars, and sold call options is U.S. New York Mercantile Exchange (“NYMEX”) West Texas Intermediate (“WTI”) for crude oil and NYMEX Henry Hub for natural gas, as applicable. The index price the Company receives on its crude oil basis swaps is Argus WTI Cushing (“WTI Cushing”) plus or minus a fixed price differential and the index price it pays is Argus WTI Midland (“WTI Midland”) or Argus Light Louisiana Sweet (“LLS”). The index price the Company receives on its natural gas basis swaps is NYMEX Henry Hub minus a fixed price differential and the index price it pays is Platt’s Inside FERC West Texas Waha (“Waha”).

The Company has incurred premiums on certain of its commodity derivative instruments in order to obtain a higher floor price and/or higher ceiling price. Payment of these premiums are deferred until the applicable contracts settle on a monthly basis over the term of the contract or, in some cases, during the final 12 months of the contract and are referred to as deferred premium obligations.

As of March 31, 2019, the Company had the following outstanding commodity derivative instruments at weighted average contract volumes and prices:



Commodity	Period	Type of Contract	Index	Volumes (Bbls per day)	Fixed Price ($ per Bbl)		Sub-Floor Price ($ per Bbl)		Floor Price ($ per Bbl)		Ceiling Price ($ per Bbl)		Fixed Price Differential ($ per Bbl)
Crude oil	2Q19	Three-Way Collars	NYMEX WTI	27,000	—			$41.67		$50.96		$74.23	—
Crude oil	2Q19	Basis Swaps	LLS-WTI Cushing	6,000	—		—		—		—			$5.16
Crude oil	2Q19	Basis Swaps	WTI Midland-WTI Cushing	7,609	—		—		—		—			($4.38	)
Crude oil	2Q19	Sold Call Options	NYMEX WTI	3,875	—		—		—			$81.07	—

Crude oil	3Q19	Three-Way Collars	NYMEX WTI	27,000	—			$41.67		$50.96		$74.23	—
Crude oil	3Q19	Basis Swaps	LLS-WTI Cushing	6,000	—		—		—		—			$5.16
Crude oil	3Q19	Basis Swaps	WTI Midland-WTI Cushing	9,100	—		—		—		—			($4.44	)
Crude oil	3Q19	Sold Call Options	NYMEX WTI	3,875	—		—		—			$81.07	—

Crude oil	4Q19	Three-Way Collars	NYMEX WTI	27,000	—			$41.67		$50.96		$74.23	—
Crude oil	4Q19	Basis Swaps	WTI Midland-WTI Cushing	9,200	—		—		—		—			($4.64	)
Crude oil	4Q19	Sold Call Options	NYMEX WTI	3,875	—		—		—			$81.07	—

Crude oil	2020	Price Swaps	NYMEX WTI	3,000		$55.06	—		—		—		—
Crude oil	2020	Three-Way Collars	NYMEX WTI	6,000	—			$45.00		$55.00		$64.69	—
Crude oil	2020	Basis Swaps	WTI Midland-WTI Cushing	10,658	—		—		—		—			($1.68	)
Crude oil	2020	Sold Call Options	NYMEX WTI	4,575	—		—		—			$75.98	—

Crude oil	2021	Basis Swaps	WTI Midland-WTI Cushing	8,000	—		—		—		—			$0.18



Commodity	Period	Type of Contract	Index	Volumes (MMBtu per day)	Fixed Price ($ per MMBtu)	Sub-Floor Price ($ per MMBtu)	Floor Price ($ per MMBtu)	Ceiling Price ($ per MMBtu)		Fixed Price Differential ($ per MMBtu)
Natural gas	2Q19	Basis Swaps	Waha-NYMEX Henry Hub	14,000	—	—	—	—			($2.12	)
Natural gas	2Q19	Sold Call Options	NYMEX Henry Hub	33,000		—	—		$3.25	—

Natural gas	3Q19	Basis Swaps	Waha-NYMEX Henry Hub	15,000	—	—	—	—			($1.60	)
Natural gas	3Q19	Sold Call Options	NYMEX Henry Hub	33,000		—	—		$3.25	—

Natural gas	4Q19	Basis Swaps	Waha-NYMEX Henry Hub	15,000	—	—	—	—			($1.05	)
Natural gas	4Q19	Sold Call Options	NYMEX Henry Hub	33,000		—	—		$3.25	—

Natural gas	2020	Basis Swaps	Waha-NYMEX Henry Hub	25,811	—	—	—	—			($0.71	)
Natural gas	2020	Sold Call Options	NYMEX Henry Hub	33,000		—	—		$3.50	—

The Company typically has numerous commodity derivative instruments outstanding with a counterparty that were executed at various dates, for various contract types, commodities and time periods often resulting in both commodity derivative asset and liability positions with that counterparty. The Company nets its commodity derivative instrument fair values executed with the same counterparty, along with any deferred premium obligations, to a single asset or liability pursuant to International Swap Dealers Association Master Agreements (“ISDAs”), which provide for net settlement over the term of the contract and in the event of default or termination of the contract.

Counterparties to the Company’s commodity derivative instruments who are also lenders under the Company’s credit agreement (“Lender Counterparty”) allow the Company to satisfy any need for margin obligations associated with commodity derivative instruments where the Company is in a net liability position with the Lender Counterparty with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting. Counterparties to the Company’s commodity derivative instruments who are not lenders under the Company’s credit agreement (“Non-Lender Counterparty”) can require commodity derivative instruments to be novated to a Lender Counterparty if the Company’s net liability position exceeds the Company’s unsecured credit limit with the Non-Lender Counterparty and therefore do not require the posting of cash collateral.

Because each Lender Counterparty has an investment grade credit rating and the Company has obtained a guaranty from each Non-Lender Counterparty’s parent company which has an investment grade credit rating, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its commodity derivative instruments. Although the Company does not currently anticipate nonperformance from its counterparties, it continually monitors the credit ratings of each Lender Counterparty and each Non-Lender Counterparty’s parent company. As of March 31, 2019, the Company has outstanding commodity derivative instruments with fifteen counterparties to minimize its credit exposure to any individual counterparty.

Contingent Consideration Arrangements

The purchase and sale agreements for the acquisition of properties in the Delaware Basin from ExL Petroleum Management, LLC and ExL Petroleum Operating Inc. (the “ExL Acquisition”) in 2017 and divestitures of the Company’s assets in the Niobrara in 2018, and Marcellus and Utica in 2017, included contingent consideration arrangements that require the Company to pay or entitle the Company to receive specified amounts if commodity prices exceed specified thresholds, which are summarized in the tables below. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” of the Notes to Consolidated Financial Statements in the 2018 Annual Report for further discussion of these transactions. See “—Cash received (paid) for settlements of contingent consideration arrangements, net” below for discussion of the settlements that occurred during the first quarter of 2019.

Contingent ExL Consideration



	Year	Threshold ⁽¹⁾		Period Cash Flow Occurs	Statement of Cash Flows Presentation	Contingent Payment - Annual			Acquisition Date Fair Value			Remaining Contingent Payments - Aggregate Limit
						(In thousands)
										($52,300	)

Actual Settlement	2018		$50.00	1Q19	Financing		($50,000	)

Remaining Potential Settlements	2019-2021	50.00		⁽²⁾	⁽²⁾	(50,000		)					($75,000	)


(1)	The price used to determine whether the specified threshold for each year has been met is the average daily closing spot price per barrel of WTI crude oil as measured by the U.S. Energy Information Administration (“U.S. EIA”).

(2)

Cash paid for settlements of contingent consideration arrangements are classified as cash flows from financing activities up to the acquisition date fair value with any excess classified as cash flows from operating activities. Therefore, if the commodity price threshold is reached, $2.3 million of the next contingent payment will be presented in cash flows from financing activities with the remainder, as well as all subsequent contingent payments, presented in cash flows from operating activities. If the pricing threshold is met, the payment is made and the cash flow occurs, in the first quarter of the following year.

Contingent Niobrara Consideration



	Year	Threshold ⁽¹⁾	Period Cash Flow Occurs	Statement of Cash Flows Presentation	Contingent Receipt - Annual		Divestiture Date Fair Value		Remaining Contingent Payments - Aggregate Limit
					(In thousands)
								$7,880

Actual Settlement	2018	$55.00	1Q19	Financing		$5,000				$10,000

Remaining Potential Settlements	2019	55.00	1Q20	⁽²⁾	5,000
	2020	60.00	1Q21	⁽²⁾	5,000


(1)	The price used to determine whether the specified threshold for each year has been met is the average daily closing spot price per barrel of WTI crude oil as measured by the U.S. EIA.


(2)	If the commodity price threshold is reached, $2.9 million of the next contingent receipt will be presented in cash flows from financing activities with the remainder, as well as all subsequent contingent receipts, presented in cash flows from operating activities.

Contingent Marcellus Consideration



	Year	Threshold ⁽¹⁾	Period Cash Flow Occurs	Statement of Cash Flows Presentation	Contingent Receipt - Annual		Divestiture Date Fair Value		Remaining Contingent Payments - Aggregate Limit
					(In thousands)
								$2,660

Actual Settlement	2018	$3.13	1Q19	N/A		$—				$6,000

Remaining Potential Settlements	2019	3.18	1Q20	⁽²⁾	3,000
	2020	3.30	1Q21	⁽²⁾	3,000


(1)	The price used to determine whether the specified threshold for each year has been met is the average monthly settlement price per MMBtu of Henry Hub natural gas for the next calendar month, as determined on the last business day preceding each calendar month as measured by the CME Group Inc.


(2)	For the three months ended March 31, 2019, there was no settlement for the Contingent Marcellus Consideration. Therefore, if the commodity price threshold is reached, $2.7 million of the contingent receipt will be presented in cash flows from financing activities with the remainder, as well as all subsequent contingent receipts, presented in cash flows from operating activities.

Contingent Utica Consideration



	Year	Threshold ⁽¹⁾	Period Cash Flow Occurs	Statement of Cash Flows Presentation	Contingent Receipt - Annual		Divestiture Date Fair Value		Remaining Contingent Payments - Aggregate Limit
					(In thousands)
								$6,145

Actual Settlement	2018	$50.00	1Q19	Financing		$5,000				$10,000

Remaining Potential Settlements	2019	53.00	1Q20	⁽²⁾	5,000
	2020	56.00	1Q21	⁽²⁾	5,000


(1)	The price used to determine whether the specified threshold for each year has been met is the average daily closing spot price per barrel of WTI crude oil as measured by the U.S. EIA.


(2)	If the commodity price threshold is reached, $1.1 million of the next contingent receipt will be presented in cash flows from financing activities with the remainder, as well as all subsequent contingent receipts, presented in cash flows from operating activities.

Derivative Assets and Liabilities

The derivative instrument asset and liability fair values recorded in the consolidated balance sheets as of March 31, 2019 and December 31, 2018 are summarized below:



	March 31, 2019
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Commodity derivative instruments		$11,513			($8,208	)		$3,305
Contingent Niobrara Consideration	3,409			—			3,409
Contingent Marcellus Consideration	218			—			218
Contingent Utica Consideration	3,926			—			3,926
Derivative assets		$19,066			($8,208	)		$10,858
Commodity derivative instruments	4,271			(4,173		)	98
Contingent Niobrara Consideration	1,803			—			1,803
Contingent Marcellus Consideration	670			—			670
Contingent Utica Consideration	2,279			—			2,279
Other long-term assets		$9,023			($4,173	)		$4,850

Commodity derivative instruments		($30,843	)		($1,113	)		($31,956	)
Deferred premium obligations	(9,321		)	9,321			—
Contingent ExL Consideration	(44,038		)	—			(44,038		)
Derivative liabilities-current		($84,202	)		$8,208			($75,994	)
Commodity derivative instruments	(14,884		)	1,702			(13,182		)
Deferred premium obligations	(2,471		)	2,471			—
Contingent ExL Consideration	(15,545		)	—			(15,545		)
Other long-term liabilities		($32,900	)		$4,173			($28,727	)



	December 31, 2018
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Commodity derivative instruments		$50,406			($20,502	)		$29,904
Contingent Niobrara Consideration	5,000			—			5,000
Contingent Utica Consideration	5,000			—			5,000
Derivative assets		$60,406			($20,502	)		$39,904
Commodity derivative instruments	6,083			(4,236		)	1,847
Contingent Niobrara Consideration	2,035			—			2,035
Contingent Marcellus Consideration	1,369			—			1,369
Contingent Utica Consideration	2,501			—			2,501
Other long-term assets		$11,988			($4,236	)		$7,752

Commodity derivative instruments		($15,345	)		$10,140			($5,205	)
Deferred premium obligations	(10,362		)	10,362			—
Contingent ExL Consideration	(50,000		)	—			(50,000		)
Derivative liabilities-current		($75,707	)		$20,502			($55,205	)
Commodity derivative instruments	(10,751		)	518			(10,233		)
Deferred premium obligations	(3,718		)	3,718			—
Contingent ExL Consideration	(30,584		)	—			(30,584		)
Other long-term liabilities		($45,053	)		$4,236			($40,817	)

See “Note 13. Fair Value Measurements” for additional information regarding the fair value of the Company’s derivative instruments.

(Gain) loss on derivatives, net

The components of “Loss on derivatives, net” in the consolidated statements of income for the three months ended March 31, 2019 and 2018 are summarized below:



	Three Months Ended March 31,
	2019			2018
	(In thousands)
(Gain) loss on derivatives, net
Crude oil		$62,761			$29,511
NGL	(6		)	(1,765		)
Natural gas	(2,070		)	(3,045		)
Contingent ExL Consideration	28,999			5,830
Contingent Niobrara Consideration	(3,177		)	(385		)
Contingent Marcellus Consideration	481			470
Contingent Utica Consideration	(3,704		)	(1,020		)
Loss on derivatives, net		$83,284			$29,596

Cash received (paid) for derivative settlements, net

For the three months ended March 31, 2019, the Company paid $50.0 million from the first annual settlement of the Contingent ExL Consideration and received $10.0 million from the first annual settlements of the Contingent Niobrara Consideration and the Contingent Utica Consideration as the specified pricing thresholds for fiscal year 2018 for each contingent consideration arrangement were exceeded. The cash paid and received for those contingent consideration settlements are classified as cash flows from financing activities as each of the settlements were less than their respective acquisition or divestiture date fair values. For the three months ended March 31, 2018, there were no settlements of contingent consideration arrangements.

The components of “Cash paid for derivative settlements, net” and “Cash paid for settlements of contingent consideration arrangements, net” in the consolidated statements of cash flows for the three months ended March 31, 2019 and 2018 are summarized below:



	Three Months Ended March 31,
	2019			2018
Cash Flows From Operating Activities	(In thousands)
Cash received (paid) for commodity derivative settlements, net
Crude oil		($320	)		($12,123	)
NGL	623			(432		)
Natural gas	(300		)	52
Deferred premium obligations	(2,641		)	(1,862		)
Cash paid for commodity derivative settlements, net		($2,638	)		($14,365	)

Cash Flows From Financing Activities
Cash received (paid) for settlements of contingent consideration arrangements, net
Contingent ExL Consideration		($50,000	)		$—
Contingent Niobrara Consideration	5,000			—
Contingent Utica Consideration	5,000			—
Cash paid for settlements of contingent consideration arrangements, net		($40,000	)		$—