(11) Derivative Instruments

(a) Commodity Derivative Positions

The Company periodically enters into natural gas, NGLs, and oil derivative contracts with counterparties to hedge the price risk associated with its production. These derivatives are not entered into for trading purposes. To the extent that changes occur in the market prices of natural gas, NGLs, and oil, the Company is exposed to market risk on these open contracts. This market risk exposure is generally offset by the change in market prices of natural gas, NGLs, and oil recognized upon the ultimate sale of the Company’s production.

The Company was party to various fixed price commodity swap contracts that settled during the years ended December 31, 2016, 2017, and 2018. The Company enters into these swap contracts when management believes that favorable future sales prices for the Company’s production can be secured. Under these swap agreements, when actual commodity prices upon settlement exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty. When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company receives the difference from the counterparty. In addition, the Company has entered into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (“NYMEX”) index price and a local index price.

The Company has also entered into natural gas collar contracts, which establish ceiling and floor prices for the sale of notional volumes of natural gas as specified in the collar contracts. Under these contracts, the Company pays the difference between the ceiling price and the published index price in the event the published index price is above the ceiling price. When the published index price is below the floor price, the Company receives the difference between the floor price and the published index price. No amounts are paid or received if the index price is between the floor and the ceiling prices. The index prices in our collars are consistent with the index prices used to sell our production.

The Company’s derivative contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in the Company’s statements of operations.

As of December 31, 2018, the Company’s fixed price natural gas positions from January 1, 2019 through December 31, 2023 were as follows (abbreviations in the table refer to the index to which the swap position is tied, as follows: NYMEX=Henry Hub):


	Natural gas MMbtu/day	Weighted average index price
Three months ending March 31, 2019:
NYMEX ($/MMBtu)	2,330,000	$	3.62
Three months ending June 30, 2019:
NYMEX ($/MMBtu)	755,000	$	3.26
Three months ending September 30, 2019:
NYMEX ($/MMBtu)	755,000	$	3.32
Three months ending December 31, 2019:
NYMEX ($/MMBtu)	755,000	$	3.45
Year ending December 31, 2020:
NYMEX ($/MMBtu)	1,417,500	$	3.00
Year ending December 31, 2021:
NYMEX ($/MMBtu)	710,000	$	3.00
Year ending December 31, 2022:
NYMEX ($/MMBtu)	850,000	$	3.00
Year ending December 31, 2023:
NYMEX ($/MMBtu)	90,000	$	2.91

As of December 31, 2018, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of Chicago City Gate to the NYMEX Henry Hub natural gas price, totaled 225,000 MMbtu/day for January 2019 with pricing differentials ranging from $0.215 to $0.40.

As of December 31, 2018, the Company’s fixed price natural gas collar positions from April 1, 2019 through December 31, 2019 were as follows (abbreviations in the table refer to the index to which the collar position is tied, as follows: NYMEX=Henry Hub.


	Natural gas	Weighted average index price
	MMbtu/day	Ceiling price		Floor price
Three months ending June 30, 2019:
NYMEX ($/MMBtu)	1,575,000	$	3.30	$	2.50
Three months ending September 30, 2019:
NYMEX ($/MMBtu)	1,575,000	$	3.30	$	2.50
Three months ending December 31, 2019:
NYMEX ($/MMBtu)	1,575,000	$	3.52	$	2.50

An initial premium of $13 million was paid at the inception of natural gas collar contracts with one counterparty, and is recorded as a derivative asset measured at fair value.

(b)Marketing Derivatives

In 2017, due to delay of the in-service date for a pipeline on which the Company is to be an anchor shipper, the Company realized it would not be able to fulfill its delivery obligations under a 2018 natural gas sales contract. In order to acquire gas to fulfill its delivery obligations, the Company entered into several natural gas purchase agreements with index-based pricing to purchase gas for resale under this sales contract. Subsequently, the Company and the counterparty to the sales contract came to an agreement that the Company’s delivery obligations under the contract would not begin until the earlier of (1) the in-service date of the pipeline and (2) January 1, 2019. Consequently, in December 2017, the Company entered into natural gas sales agreements with index-based pricing to resell the purchased gas for delivery during the period from February to October 2018. The natural gas that it had purchased for January was sold on the spot market during January. As a result of severe cold weather in the local area in January resulting in wide basis premiums at the index for these contracts, the Company realized a cash gain on these contracts of $73 million during the year ended December 31, 2018.

The Company determined that these gas purchase and sales agreements should be accounted for as derivatives and measured at fair value at the end of each period. The Company recognized a loss in the fourth quarter of 2017 of $21 million. For the year ended December 31, 2018, the Company recognized a fair value gain of $94 million and realized proceeds of $73 million.

The following table presents a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the consolidated balance sheets as of December 31, 2017 and 2018. None of the Company’s derivative instruments are designated as hedges for accounting purposes.


	December 31, 2017			December 31, 2018
	Balance sheet location	Fair value		Balance sheet location	Fair value
		(In thousands)			(In thousands)
Asset derivatives not designated as hedges for accounting purposes:
Commodity derivatives - current	Derivative instruments	$	460,685	Derivative instruments	$	245,263
Commodity derivatives - noncurrent	Derivative instruments		841,257	Derivative instruments		362,169

Total asset derivatives			1,301,942			607,432

Liability derivatives not designated as hedges for accounting purposes:
Marketing derivatives - current	Derivative instruments		21,394	Derivative instruments		—
Commodity derivatives - current	Derivative instruments		7,082	Derivative instruments		532
Commodity derivatives - noncurrent	Derivative instruments		207	Derivative instruments		—

Total liability derivatives			28,683			532

Net derivatives		$	1,273,259		$	606,900

The following table presents the gross values of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets as of the dates presented, all at fair value (in thousands):


	December 31, 2017						December 31, 2018
	Gross amounts on balance sheet		Gross amounts offset on balance sheet		Net amounts of assets (liabilities) on balance sheet		Gross amounts on balance sheet		Gross amounts offset on balance sheet		Net amounts of assets (liabilities) on balance sheet
Commodity derivative assets	$	1,367,554		(65,612)		1,301,942	$	658,830		(51,398)		607,432
Commodity derivative liabilities	$	(72,901)		65,612		(7,289)	$	(51,930)		51,398		(532)
Marketing derivative assets	$	311,083		(311,083)		—	$	—		—		—
Marketing derivative liabilities	$	(332,477)		311,083		(21,394)	$	—		—		—

The following is a summary of derivative fair value gains and losses and where such values are recorded in the consolidated statements of operations for the years ended December 31, 2016, 2017, and 2018 (in thousands):


	Statement of operations	Year ended December 31,
	location	2016		2017		2018
Commodity derivative fair value gains (losses)	Revenue	$	(514,181)		658,283		(87,594)
Marketing derivative fair value gains (losses)	Revenue	$	—		(21,394)		94,081

Commodity derivative fair value gains (losses) for the years ended December 31, 2017 and 2018, include gains of $750 million and $370 million, respectively, related to certain natural gas derivatives that were monetized prior to their contractual settlement dates. Proceeds received from the monetizations are classified as operating cash flows on the Company’s consolidated statement of cash flows for the year ended December 31, 2017 and 2018. The 2017 monetizations were effected by reducing the average fixed index prices on certain natural gas swap contracts maturing from 2018 through 2022 while maintaining the total volumes hedged. The 2018 monetizations were affected by the early settlement of April through December 2019 swaps and reducing the average fixed index prices on certain natural gas swap contracts maturing in 2020 while maintaining the total volumes hedged. The April through December 2019 swaps were replaced with collar agreements for which the Company paid a $13 million premium. The Company’s commodity derivative position presented in Note 11(a) reflects the volume and adjusted fixed price indices after the monetization.

The fair value of derivative instruments was determined using Level 2 inputs.