Derivative Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments.

Derivative Instruments

(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 three months ended March 31, 2019 and 2020. 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 derivative 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 also entered into a call option agreement that gives the counterparty the right, but not the obligation, to enter into a fixed price swap agreement on a specified future date for a specific amount of production for a specified future period.

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 March 31, 2020, the Company’s fixed price natural gas, oil and NGL swap positions from April 1, 2020 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 Propane =European Propane CIF ARA):

		Natural Gas		Weighted
	Natural gas	Liquids	Oil	average index
	MMBtu/day	Bbls/day	Bbls/day	price
Nine months ending December 31, 2020:
NYMEX ($/MMBtu)	2,227,500		—	$	2.87
ARA Propane ($/Gal)	—	10,352	—		0.65
NYMEX-WTI ($/Bbl)	—	—	26,000		55.63
Total	2,227,500	10,352	26,000
Year ending December 31, 2021:
NYMEX ($/MMBtu)	2,400,000		—	$	2.80
NYMEX-WTI ($/Bbl)	—		3,000		55.16
Total	2,400,000		3,000
Year ending December 31, 2022:
NYMEX ($/MMBtu)	687,500			$	2.48
Year ending December 31, 2023:
NYMEX ($/MMBtu)	50,000			$	2.39

A portion of the NYMEX-WTI ($/Bbl) in 2020 combined with the Mont Belvieu Natural Gasoline to NYMEX-WTI are intended to fix the price of Natural Gasoline.

In addition, we have a call option agreement, which entitles the holder the right, but not the obligation, to enter into a fixed price swap agreement on December 21, 2023 to purchase 427,500 MMBtu per day at a price of $2.77 per MMBtu for the year ending December 31, 2024.

As of March 31, 2020, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of the Columbia Gas Transmission pipeline (“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	Weighted
	Natural gas	Liquids	average hedged
	MMBtu/day	Bbls/day	differential
Three months ending June 30, 2020:
ARA to Mont Belvieu Non-TET ($/Gal)	—	1,602	$	0.22
Nine months ending December 31, 2020:
NYMEX to TCO ($/MMBtu)	60,000		$	0.353
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 March 31, 2020, the Company had NGL contracts for April 1, 2020 through December 31, 2021 that fix the Mont Belvieu index price for natural gasoline to percentages of WTI as follows:

		Weighted
	Gas	average
	Liquids	Payout
	Bbls/day	Ratio
Nine months ending December 31, 2020:
Mont Belvieu Natural Gasoline to NYMEX-WTI	18,800	80	%
Year ending December 31, 2021:
Mont Belvieu Natural Gasoline to NYMEX-WTI	18,650	78	%

A portion of the Mont Belvieu Natural Gasoline to NYMEX-WTI combined with the NYMEX-WTI ($/Bbl) in 2020 are intended to fix the price of Natural Gasoline.

(b) 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, 2019 and March 31, 2020. None of the Company’s derivative instruments are designated as hedges for accounting purposes and the fair value of derivative instruments was determined using Level 2 inputs.

	December 31, 2019			March 31, 2020
	Balance sheet	Fair value		Balance sheet	Fair value
	location	(In thousands)		location	(In thousands)
Asset derivatives not designated as hedges for accounting purposes:
Commodity derivatives—current	Derivative instruments	$	422,849	Derivative instruments	$	816,444
Commodity derivatives—noncurrent	Derivative instruments		333,174	Derivative instruments		284,461
Total asset derivatives			756,023			1,100,905
Liability derivatives not designated as hedges for accounting purposes:
Commodity derivatives—current	Derivative instruments		6,721	Derivative instruments		—
Commodity derivatives—noncurrent	Derivative instruments		3,519	Derivative instruments		215
Total liability derivatives			10,240			215
Net derivatives		$	745,783		$	1,100,690

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, 2019						March 31, 2020
	Gross		Gross amounts		Net amounts of		Gross		Gross amounts		Net amounts of
	amounts on		offset on		assets (liabilities)		amounts on		offset on		assets (liabilities)
	balance sheet		balance sheet		on balance sheet		balance sheet		balance sheet		on balance sheet
Commodity derivative assets	$	882,817		(126,794)		756,023	$	1,193,046		(92,141)		1,100,905
Commodity derivative liabilities	$	(137,034)		126,794		(10,240)	$	(92,356)		92,141		(215)

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 for the three months ended March 31, 2019 and 2020 (in thousands):

	Statement of
	operations	Three months ended March 31,
	location	2019		2020
Commodity derivative fair value gains (losses)	Revenue	$	(77,368)		565,833