DERIVATIVE INSTRUMENTS

We periodically use derivative instruments to mitigate volatility in commodity prices. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future cash flow from favorable price changes. Depending on changes in oil and gas futures markets and management’s view of underlying supply and demand trends, we may increase or decrease our derivative positions from current levels.

As of June 30, 2018, we have entered into oil and gas collars and oil basis swaps. Under our collars, we receive the difference between the published index price and a floor price if the index price is below the floor price or we pay the difference between the ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and the ceiling prices. By using a collar, we have fixed the minimum and maximum prices we can receive on the underlying production. Our basis swaps are settled based on the difference between a published index price minus a fixed differential and the applicable local index price under which the underlying production is sold. By using a basis swap, we have fixed the differential between the published index price and certain of our physical pricing points. For our Permian oil production, the basis swaps fix the price differential between the WTI NYMEX (Cushing Oklahoma) price and the WTI Midland price. For our Permian and Mid-Continent gas production, the contract prices in our collars are consistent with the index prices used to sell our production. The following tables summarize our outstanding derivative contracts as of June 30, 2018 (subsequent to June 30, 2018 through August 6, 2018, we have not entered into any additional derivative contracts):



Oil Collars	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2018:
WTI (1)
Volume (Bbls)	—		—		3,220,000		2,668,000		5,888,000
Weighted Avg Price - Floor	$	—	$	—	$	49.80	$	51.03	$	50.36
Weighted Avg Price - Ceiling	$	—	$	—	$	60.49	$	61.74	$	61.06
2019:
WTI (1)
Volume (Bbls)	2,070,000		2,093,000		1,472,000		736,000		6,371,000
Weighted Avg Price - Floor	$	51.83	$	51.83	$	53.50	$	57.00	$	52.81
Weighted Avg Price - Ceiling	$	63.77	$	63.77	$	67.13	$	68.04	$	65.04

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(1)	The index price for these collars is West Texas Intermediate (“WTI”) as quoted on the New York Mercantile Exchange (“NYMEX”).



Gas Collars	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Total
2018:
PEPL (1)
Volume (MMBtu)	—		—		11,960,000		9,200,000		21,160,000
Weighted Avg Price - Floor	$	—	$	—	$	2.19	$	2.12	$	2.16
Weighted Avg Price - Ceiling	$	—	$	—	$	2.48	$	2.42	$	2.45
Perm EP (2)
Volume (MMBtu)	—		—		9,200,000		7,360,000		16,560,000
Weighted Avg Price - Floor	$	—	$	—	$	1.92	$	1.81	$	1.87
Weighted Avg Price - Ceiling	$	—	$	—	$	2.14	$	2.03	$	2.09
Waha (3)
Volume (MMBtu)	—		—		920,000		920,000		1,840,000
Weighted Avg Price - Floor	$	—	$	—	$	1.35	$	1.35	$	1.35
Weighted Avg Price - Ceiling	$	—	$	—	$	1.56	$	1.56	$	1.56
2019:
PEPL (1)
Volume (MMBtu)	8,100,000		8,190,000		5,520,000		2,760,000		24,570,000
Weighted Avg Price - Floor	$	2.08	$	2.08	$	1.92	$	1.90	$	2.02
Weighted Avg Price - Ceiling	$	2.39	$	2.39	$	2.26	$	2.33	$	2.36
Perm EP (2)
Volume (MMBtu)	6,300,000		6,370,000		4,600,000		1,840,000		19,110,000
Weighted Avg Price - Floor	$	1.73	$	1.73	$	1.50	$	1.35	$	1.64
Weighted Avg Price - Ceiling	$	1.95	$	1.95	$	1.74	$	1.55	$	1.86
Waha (3)
Volume (MMBtu)	900,000		910,000		920,000		920,000		3,650,000
Weighted Avg Price - Floor	$	1.35	$	1.35	$	1.35	$	1.35	$	1.35
Weighted Avg Price - Ceiling	$	1.56	$	1.56	$	1.56	$	1.56	$	1.56

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(1)	The index price for these collars is Panhandle Eastern Pipe Line, Tex/OK Mid-Continent Index (“PEPL”) as quoted in Platt’s Inside FERC.


(2)	The index price for these collars is El Paso Natural Gas Company, Permian Basin Index (“Perm EP”) as quoted in Platt’s Inside FERC.


(3)	The index price for these collars is Waha West Texas Natural Gas Index (“Waha”) as quoted in Platt’s Inside FERC.



Oil Basis Swaps	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Total
2018:
WTI Midland (1)
Volume (Bbls)	—			—			2,484,000			2,024,000			4,508,000
Weighted Avg Differential (2)	$	—		$	—		$	(3.89	)	$	(4.56	)	$	(4.19	)
2019:
WTI Midland (1)
Volume (Bbls)	1,710,000			1,729,000			1,288,000			552,000			5,279,000
Weighted Avg Differential (2)	$	(5.17	)	$	(5.17	)	$	(6.84	)	$	(10.73	)	$	(6.16	)

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(1)	The index price we pay under these basis swaps is WTI Midland as quoted by Argus Americas Crude.


(2)	The index price we receive under these basis swaps is WTI as quoted on the NYMEX less the weighted average differential shown in the table.

Derivative Gains and Losses

Net gains and losses on our derivative instruments are a function of fluctuations in the underlying commodity index prices as compared to the contracted prices and the monthly cash settlements (if any) of the instruments. We have elected not to designate our derivatives as hedging instruments for accounting purposes and, therefore, we do not apply hedge accounting treatment to our derivative instruments. Consequently, changes in the fair value of our derivative instruments and cash settlements on the instruments are included as a component of operating costs and expenses as either a net gain or loss on derivative instruments. Cash settlements of our contracts are included in cash flows from operating activities in our statements of cash flows. The following table presents the components of Loss (gain) on derivative instruments, net for the periods indicated.



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017
Change in fair value of derivative instruments, net:
Gas contracts	$	14,566		$	(5,748	)	$	2,777		$	(27,939	)
Oil contracts	(397		)	(16,418		)	(5,156		)	(44,148		)
	14,169			(22,166		)	(2,379		)	(72,087		)
Cash (receipts) payments on derivative instruments, net:
Gas contracts	(9,918		)	(1,308		)	(15,037		)	1,136
Oil contracts	17,448			965			34,956			4,581
	7,530			(343		)	19,919			5,717
Loss (gain) on derivative instruments, net	$	21,699		$	(22,509	)	$	17,540		$	(66,370	)

Derivative Fair Value

Our derivative contracts are carried at their fair value on our balance sheet using Level 2 inputs and are subject to master netting arrangements, which allow us to offset recognized asset and liability fair value amounts on contracts with the same counterparty. Our accounting policy is to not offset asset and liability positions in our balance sheets.

The following tables present the amounts and classifications of our derivative assets and liabilities as of June 30, 2018 and December 31, 2017, as well as the potential effect of netting arrangements on our recognized derivative asset and liability amounts.



		June 30, 2018
(in thousands)	Balance Sheet Location	Asset			Liability
Oil contracts	Current assets — Derivative instruments	$	57,768		$	—
Gas contracts	Current assets — Derivative instruments	15,175			—
Oil contracts	Non-current assets — Derivative instruments	1,106			—
Gas contracts	Non-current assets — Derivative instruments	1,224			—
Oil contracts	Current liabilities — Derivative instruments	—			88,814
Gas contracts	Current liabilities — Derivative instruments	—			1,666
Oil contracts	Non-current liabilities — Derivative instruments	—			11,237
Gas contracts	Non-current liabilities — Derivative instruments	—			274
Total gross amounts presented in the balance sheet		75,273			101,991
Less: gross amounts not offset in the balance sheet		(68,377		)	(68,377		)
Net amount		$	6,896		$	33,614

		December 31, 2017
(in thousands)	Balance Sheet Location	Asset			Liability
Gas contracts	Current assets — Derivative instruments	$	15,151		$	—
Gas contracts	Non-current assets — Derivative instruments	2,086			—
Oil contracts	Current liabilities — Derivative instruments	—			42,066
Oil contracts	Non-current liabilities — Derivative instruments	—			4,268
Total gross amounts presented in the balance sheet		17,237			46,334
Less: gross amounts not offset in the balance sheet		(17,237		)	(17,237		)
Net amount		$	—		$	29,097

We are exposed to financial risks associated with our derivative contracts from non-performance by our counterparties. We mitigate our exposure to any single counterparty by contracting with a number of financial institutions, each of which have a high credit rating and is a member of our bank credit facility. Our member banks do not require us to post collateral for our derivative liability positions. Because some of the member banks have discontinued derivative activities, in the future we may enter into derivative instruments with counterparties outside our bank group to obtain competitive terms and to spread counterparty risk.