NOTE 6. RISK MANAGEMENT

The Company’s business activities expose it to risks associated with changes in the market price of oil, natural gas and natural gas liquids. In addition, the Exit Credit Facility and the New Credit Facility (each as defined below in Note 9) expose the Company to risks associated with changes in interest rates. As such, future earnings are subject to fluctuation due to changes in the market prices of oil, natural gas and natural gas liquids and interest rates. The Company uses derivatives to reduce its risk of volatility in the prices of oil, natural gas and natural gas liquids. The Company policies do not permit the use of derivatives for speculative purposes.

The Company has elected not to designate any of its derivatives as hedging instruments. Accordingly, changes in the fair value of derivatives are recorded immediately to operations as “Gain (loss) on derivatives, net” in the unaudited condensed consolidated statements of operations.

In September 2019, in conjunction with the closings of the sales of oil and natural gas properties in the Barnett Shale and the Mid-Continent area, the Company unwound certain of its derivatives, which resulted in the receipt of a cash settlement of $7.9 million. The natural gas derivatives unwound included 2,990,000 MMBtus and 10,980,000 MMBtus for the periods of October through December 2019 and January through December 2020, respectively. The crude oil derivatives unwound included 85,400 Bbls and 228,750 Bbls for the periods of September through December 2019 and January through December 2020, respectively. The natural gas liquids derivatives unwound included 283,040 Bbls and 656,970 Bbls for the periods of September through December 2019 and January through December 2020, respectively.

As of September 30, 2019, the Company had entered into derivatives with the following terms:


		Weighted Average
Period Covered	Hedged Volume	Fixed Price
Oil (Bbls):
Swaps - October 2019 to December 2019	121,900	$	63.53
Swaps - January 2020 to December 2020	439,200	$	60.50

Natural Gas (MMBtus):
Swaps - October 2019 to December 2019	3,450,000	$	2.78
Swaps - January 2020 to December 2020	12,810,000	$	2.68

Natural Gas Liquids (Bbls):
Swaps - October 2019 to December 2019	30,360	$	22.50
Swaps - January 2020 to December 2020	111,630	$	20.71

In November 2019, the Company terminated 124,000 MMBtus of natural gas swaps for the month of December 2019 at a weighted average fixed price of $2.78 per MMBtu and 1,464,000 MMBtus of natural gas swaps for the period of January 2020 to December 2020 at a weighted average fixed price of $2.64 per MMBtu. These terminations resulted in a net cash settlement received of $150,000.

The following table sets forth the fair values and classification of the Company’s outstanding derivatives:


					Net Amounts
	Gross		Gross Amounts		of Assets
	Amount of		Offset in the		Presented in the
	Recognized		Consolidated		Consolidated
	Assets		Balance Sheet		Balance Sheet
As of September 30, 2019:
Derivative asset	$	8,745	$	—	$	8,745
Long-term derivative asset		1,933		—		1,933
Total	$	10,678	$	—	$	10,678

As of December 31, 2018:
Derivative asset	$	18,048	$	(2,596)	$	15,452
Long-term derivative asset		8,565		(66)		8,499
Total	$	26,613	$	(2,662)	$	23,951

Derivative liability	$	3,761	$	(2,596)	$	1,165
Long-term derivative liability		66		(66)		—
Total	$	3,827	$	(2,662)	$	1,165

The Company has entered into master netting arrangements with its counterparties. The amounts above are presented on a net basis in the unaudited condensed consolidated balance sheets when such amounts are with the same counterparty. In addition, the Company has recorded accounts payable and receivable balances related to settled derivatives that are subject to the master netting agreements. These amounts are not included in the above table; however, under the master netting agreements, the Company has the right to offset these positions against forward exposure related to outstanding derivatives.