6. DERIVATIVE AND FINANCIAL INSTRUMENTS

To reduce the impact of fluctuations in oil and natural gas prices on our revenues, we periodically enter into derivative contracts with respect to a portion of our projected oil and natural gas production through various transactions that fix or modify the future prices to be realized. These hedging activities are intended to support oil and natural gas prices at targeted levels and to manage exposure to oil and natural gas price fluctuations. It is never our intention to enter into derivative contracts for speculative trading purposes.

Under Topic 815, “Derivatives and Hedging,” all derivative instruments are recorded on the condensed consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. We will net derivative assets and liabilities for counterparties where we have a legal right of offset. Changes in the derivatives’ fair values are recognized currently in earnings unless specific hedge accounting criteria are met. We have not elected to designate any of our current derivative contracts as hedges; however, changes in the fair value of all of our derivative instruments are recognized in earnings and included in natural gas sales and oil sales in the condensed consolidated statements of operations.

As of September 30, 2019, we had the following derivative contracts in place for the periods indicated, all of which are accounted for as mark-to-market activities:

Fixed Price Basis Swaps – West Texas Intermediate (WTI)


	Three Months Ended (volume in Bbls)
	March 31,			June 30,			September 30,			December 31,			Total
		Average			Average			Average			Average			Average
	Volume	Price		Volume	Price		Volume	Price		Volume	Price		Volume	Price
2019	—	$	—	—	$	—	—	$	—	54,824	$	60.52	54,824	$	60.52
2020	52,776	$	53.50	50,960	$	53.50	49,224	$	53.50	47,624	$	53.50	200,584	$	53.50
													255,408

Fixed Price Swaps – NYMEX (Henry Hub)


	Three Months Ended (volume in MMBtu)
	March 31,			June 30,			September 30,			December 31,			Total
		Average			Average			Average			Average			Average
	Volume	Price		Volume	Price		Volume	Price		Volume	Price		Volume	Price
2019	—	$	—	—	$	—	—	$	—	108,552	$	2.85	108,552	$	2.85
2020	105,104	$	2.85	102,008	$	2.85	99,136	$	2.85	96,200	$	2.85	402,448	$	2.85
													511,000

The following table sets forth a reconciliation of the changes in fair value of the Partnership’s commodity derivatives for the nine months ended September 30, 2019 and the year ended December 31, 2018 (in thousands):


	Nine Months Ended		Year Ended
	September 30, 2019		December 31, 2018
Beginning fair value of commodity derivatives	$	3,914	$	1,231
Net gains (losses) on crude oil derivatives		(2,482)		1,400
Net gains (losses) on natural gas derivatives		210		(84)
Net settlements paid (received) on derivative contracts:
Oil		(610)		1,330
Natural gas		(56)		37
Ending fair value of commodity derivatives	$	976	$	3,914

The effect of derivative instruments on our condensed consolidated statements of operations was as follows (in thousands):



	Location of Gain (Loss)	Three Months Ended September 30,				Nine Months Ended September 30,
Derivative Type	in Income	2019		2018		2019		2018
Commodity – Mark-to-Market	Oil sales	$	1,195	$	(2,454)	$	(2,482)	$	(8,110)
Commodity – Mark-to-Market	Natural gas sales		57		23		210		27
		$	1,252	$	(2,431)	$	(2,272)	$	(8,083)

Derivative instruments expose us to counterparty credit risk. Our commodity derivative instruments are currently contracted with three counterparties. We generally execute commodity derivative instruments under master agreements which allow us, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If we choose to elect early termination, all asset and liability positions with the defaulting counterparty would be net cash settled at the time of election. We include a measure of counterparty credit risk in our estimates of the fair values of derivative instruments. As of September 30, 2019 and December 31, 2018, the impact of non-performance credit risk on the valuation of our derivative instruments was not significant.

Earnout Derivative

Refer to Note 5 “Fair Value Measurements.”