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Derivative Instruments

9 Months Ended

Sep. 30, 2019

(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 nine months ended September 30, 2018 and 2019. 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 also entered into NGL contracts, which establish a contractual price for the settlement month as a fixed percentage of the West Texas Intermediate Crude Oil index (“WTI”) price for the settlement month. When the percentage of the contractual price is above the contracted percentage, the Company pays the difference to the counterparty. When it is below the contracted percentage, the Company receives the difference from the counterparty.

In addition, the Company has 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 September 30, 2019, the Company’s fixed price natural gas, oil and NGL swap positions from October 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; NYMEX-WTI=West Texas Intermediate; ARA Butane =European Butane CIF ARA; FEI Butane = Butane Far East Asia Index; ARA Propane =European Propane CIF ARA; FEI Propane = Propane Far East Asia Index; Mont Belvieu Propane Non-TET=Mont Belvieu Propane; Mont Belvieu Butane Non-TET=Mont Belvieu Butane; Mont Belvieu Natural Gasoline Non-TET=Mont Belvieu Natural Gasoline):


	Natural gas MMBtu/day	Natural Gas Liquids Bbls/day	Oil Bbls/day	Weighted average index price
Three months ending December 31, 2019:
NYMEX ($/MMBtu)	996,766	—	—	$	3.23
ARA Propane ($/Gal)	—	10,113	—		0.68
FEI Propane ($/Gal)	—	9,809	—		0.81
Mont Belvieu Propane Non-TET ($/Gal)	—	8,000	—		0.50
Mont Belvieu Butane Non-TET ($/Gal)	—	4,000	—		0.59
Mont Belvieu Natural Gasoline Non-TET ($/Gal)	—	3,500	—		1.14
NYMEX-WTI ($/Bbl)	—	—	18,000		59.05
Total	996,766	35,422	18,000
Year ending December 31, 2020:
NYMEX ($/MMBtu)	2,227,500		—	$	2.87
ARA Propane ($/Gal)	—	9,761	—		0.65
FEI Propane ($/Gal)	—	2,045	—		0.81
Mont Belvieu Butane Non-TET ($/Gal)	—	2,000	—		0.57
NYMEX-WTI ($/Bbl)	—		12,000		56.60
Total	2,227,500	13,806	12,000
Year ending December 31, 2021:
NYMEX ($/MMBtu)	2,110,000			$	2.79
Year ending December 31, 2022:
NYMEX ($/MMBtu)	290,000			$	2.96
Year ending December 31, 2023:
NYMEX ($/MMBtu)	90,000			$	2.91

As of September 30, 2019, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of TCO to the NYMEX Henry Hub natural gas price, and NGL basis swap positions, which settle on the pricing index to basis differential of Mont Belvieu Butane to the European Butane CIF ARA natural gas liquids price, were as follows:


	Natural gas MMBtu/day	Natural Gas Liquids Bbls/day	Weighted average hedged differential
Three months ending December 31, 2019:
ARA to Mont Belvieu Non-TET ($/Gal)	—	4,050	$	0.25
Year ending December 31, 2020:
NYMEX to TCO ($/MMBtu)	60,000	—		0.353
ARA to Mont Belvieu Non-TET ($/Gal)	—	4,273	$	0.23
Total	60,000	4,273
Year ending December 31, 2021:
NYMEX to TCO ($/MMBtu)	40,000	—	$	0.414
Year ending December 31, 2022:
NYMEX to TCO ($/MMBtu)	60,000	—	$	0.515
Year ending December 31, 2023:
NYMEX to TCO ($/MMBtu)	50,000	—	$	0.525
Year ending December 31, 2024:
NYMEX to TCO ($/MMBtu)	50,000	—	$	0.530

As of September 30, 2019, the Company had natural gas and NGL contracts for October 1, 2019 through December 31, 2021 that fix the Mont Belvieu index price to percentages of WTI as follows:


	Natural Gas Liquids Bbls/day	Weighted average payout ratio
Three months ending December 31, 2019:
Mont Belvieu Propane to NYMEX-WTI	500		50	%
Mont Belvieu Natural Gasoline to NYMEX-WTI	13,900		81	%
Total	14,400
Year ending December 31, 2020:
Mont Belvieu Propane to NYMEX-WTI	500		50	%
Mont Belvieu Natural Gasoline to NYMEX-WTI	15,000		79	%
Total	15,500
Year ending December 31, 2021:
Mont Belvieu Natural Gasoline to NYMEX-WTI	13,000		78	%

As of September 30, 2019, the Company’s fixed price natural gas collar positions from October 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 (MMBtu/day)				Weighted average index price
	Ceiling		Floor		Ceiling price		Floor price
Three months ending December 31, 2019:
NYMEX ($/MMBtu)		1,575,000		1,333,234	$	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. As of September 30, 2019, the unamortized portion of the premium was $4.5 million.

(b)

Marketing Derivatives

In 2017, due to delay of the in-service date for a pipeline on which the Company is 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.

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. For the three and nine months ended September 30, 2018, the Company recognized a fair value loss of less than $1 million and a gain of $94 million, respectively. There were no marketing derivative fair value gains or losses during the three or nine months ended September 30, 2019.

(c)

Summary

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, 2018 and September 30, 2019. None of the Company’s derivative instruments are designated as hedges for accounting purposes.


	December 31, 2018			September 30, 2019
	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	$	245,263	Derivative instruments	$	411,774
Commodity derivatives - noncurrent	Derivative instruments		362,169	Derivative instruments		405,180

Total asset derivatives			607,432			816,954

Liability derivatives not designated as hedges for accounting purposes:
Commodity derivatives - current	Derivative instruments		532	Derivative instruments		—
Commodity derivatives - noncurrent	Derivative instruments		—	Derivative instruments		—

Total liability derivatives			532			—

Net derivatives		$	606,900		$	816,954

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, 2018						September 30, 2019
	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	$	658,830		(51,398)		607,432	$	838,795		(21,841)		816,954
Commodity derivative liabilities	$	(51,930)		51,398		(532)	$	(21,841)		21,841		—

The following is a summary of derivative fair value gains and losses and where such values are recorded in the unaudited condensed consolidated statements of operations (in thousands):


	Statement of operations	Three months ended September 30,				Nine months ended September 30,
	location	2018		2019		2018		2019
Commodity derivative fair value gains	Revenue	$	57,019		220,788		134,793		471,847
Marketing derivative fair value gains (losses)	Revenue	$	(42)		—		94,081		—

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