5. 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 March 31, 2020, 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)



	June 30,			September 30,			December 31,			Total
		Average			Average			Average			Average
	Volume	Price		Volume	Price		Volume	Price		Volume	Price
2020	50,960	$	53.50	49,224	$	53.50	47,624	$	53.50	147,808	$	53.50

Fixed Price Swaps – NYMEX (Henry Hub)



	June 30,			September 30,			December 31,			Total
		Average			Average			Average			Average
	Volume	Price		Volume	Price		Volume	Price		Volume	Price
2020	102,008	$	2.85	99,136	$	2.85	96,200	$	2.85	297,344	$	2.85

The following table sets forth a reconciliation of the changes in fair value of the Partnership’s commodity derivatives for the three months ended March 31, 2020 and the year ended December 31, 2019 (in thousands):


	Three Months Ended		Year Ended
	March 31, 2020		December 31, 2019
Beginning fair value of commodity derivatives	$	(759)	$	3,914
Net gains (losses) on crude oil derivatives		4,826		(4,031)
Net gains on natural gas derivatives		122		259
Net settlements received on derivative contracts:
Oil		(381)		(807)
Natural gas		(94)		(94)
Ending fair value of commodity derivatives	$	3,714	$	(759)

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



	Location of Gain (Loss)	Three Months Ended March 31,
Derivative Type	in Income	2020		2019
Commodity – Mark-to-Market	Oil sales	$	4,826	$	(4,484)
Commodity – Mark-to-Market	Natural gas sales		122		(40)
		$	4,948	$	(4,524)

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 March 31, 2020 and December 31, 2019, the impact of non-performance credit risk on the valuation of our derivative instruments was not significant.

Earnout Derivative

Refer to Note 4 “Fair Value Measurements.”