Derivative Instruments

9 Months Ended

Sep. 30, 2023

Derivative Instruments.

Derivative Instruments

(11) Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations, and it may use derivative instruments to manage its commodity price risk.  In addition, the Company periodically enters into contracts that contain embedded features that are required to be bifurcated and accounted for separately as derivatives.

(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 and nine months ended September 30, 2022 and 2023. 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. Under these basis swap agreements, when actual commodity prices upon settlement exceed the fixed price provided by the swap contracts, the Company receives the difference from the counterparty. When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company pays the difference to the counterparty.

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, 2023, the Company’s fixed price swap positions excluding Martica, the Company’s consolidated VIE, were as follows:

				Weighted
				Average
Commodity / Settlement Period	Index	Contracted Volume		Price
Natural Gas
October-December 2023	Henry Hub	43,000	MMBtu/day	$	2.37	/MMBtu

The Company has a call option and an embedded put option tied to NYMEX pricing for the production volumes associated with the Company’s retained interest in the volumetric production payment transaction (“VPP”) properties. The put option was embedded within another contract, and since the embedded put option was not clearly and closely related to its host contract, the Company bifurcated this derivative instrument and reflects it at fair value in the unaudited condensed consolidated financial statements. As of September 30, 2023, the Company’s call option and embedded put option arrangements were as follows:

							Embedded
				Call Option			Put Option
Commodity / Settlement Period	Index	Contracted Volume		Strike Price			Strike Price
Natural Gas
October-December 2023	Henry Hub	55,000	MMBtu/day	$	2.466	/MMBtu	$	2.466	/MMBtu
January-December 2024	Henry Hub	53,000	MMBtu/day		2.477	/MMBtu		2.527	/MMBtu
January-December 2025	Henry Hub	44,000	MMBtu/day		2.564	/MMBtu		2.614	/MMBtu
January-December 2026	Henry Hub	32,000	MMBtu/day		2.629	/MMBtu		2.679	/MMBtu

As of September 30, 2023, 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 were as follows:

				Weighted Average
Commodity / Settlement Period	Index to Basis Differential	Contracted Volume		Hedged Differential
Natural Gas
October-December 2023	NYMEX to TCO	50,000	MMBtu/day	$	0.525	/MMBtu
January-December 2024	NYMEX to TCO	50,000	MMBtu/day		0.530	/MMBtu

As of September 30, 2023, the Company’s fixed price swap positions for Martica, the Company’s consolidated VIE, were as follows:

				Weighted
				Average
Commodity / Settlement Period	Index	Contracted Volume		Price
Natural Gas
October-December 2023	Henry Hub	31,366	MMBtu/day	$	2.35	/MMBtu
January-December 2024	Henry Hub	23,885	MMBtu/day		2.33	/MMBtu
January-March 2025	Henry Hub	18,021	MMBtu/day		2.53	/MMBtu
Natural Gasoline
October-December 2023	Mont Belvieu Natural Gasoline-OPIS Non-TET	217	Bbl/day		40.74	/Bbl
Oil
October-December 2023	West Texas Intermediate	71	Bbl/day		44.66	/Bbl
January-December 2024	West Texas Intermediate	43	Bbl/day		44.02	/Bbl
January-March 2025	West Texas Intermediate	39	Bbl/day		45.06	/Bbl

(b) Summary

The table below presents a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the condensed consolidated balance sheets (in thousands).

				(Unaudited)
	Balance Sheet	December 31,		September 30,
	Location	2022		2023
Asset derivatives not designated as hedges for accounting purposes:
Embedded derivatives—current	Derivative instruments	$	1,900		2,563
Embedded derivatives—noncurrent	Derivative instruments		9,844		6,627
Total asset derivatives (1)			11,744		9,190
Liability derivatives not designated as hedges for accounting purposes:
Commodity derivatives—current (2)	Derivative instruments		97,765		31,134
Commodity derivatives—noncurrent (2)	Derivative instruments		345,280		52,584
Total liability derivatives (1)			443,045		83,718
Net derivatives liability (1)		$	(431,301)		(74,528)

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

(2) As of December 31, 2022, $47 million of commodity derivative liabilities, including $28 million of current commodity derivatives and $19 million of noncurrent commodity derivatives, are attributable to the Company’s consolidated VIE, Martica. As of September 30, 2023, $15 million of commodity derivative liabilities, including $9 million of current commodity derivatives and $6 million of noncurrent commodity derivatives, are attributable to the Company’s consolidated VIE, Martica.

The following table sets forth 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 condensed consolidated balance sheets as of the dates presented, all at fair value (in thousands):

							(Unaudited)
	December 31, 2022						September 30, 2023
					Net Amounts of						Net Amounts of
	Gross		Gross		Assets		Gross		Gross		Assets
	Amounts		Amounts Offset		(Liabilities) on		Amounts		Amounts Offset		(Liabilities) on
	Recognized		Recognized		Balance Sheet		Recognized		Recognized		Balance Sheet
Commodity derivative assets	$	276		(276)		—		495		(495)		—
Embedded derivative assets		11,744		—		11,744		9,190		—		9,190
Commodity derivative liabilities		(443,321)		276		(443,045)		(84,213)		495		(83,718)

The following table sets forth 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	2022		2023		2022		2023
Commodity derivative fair value gains (losses) (1)	Revenue	$	(500,557)		5,290		(1,732,720)		138,602
Embedded derivative fair value losses (1)	Revenue	$	(29,966)		(1,842)		(74,845)		(678)

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

Commodity derivative fair value gains (losses) for the nine months ended September 30, 2023, includes a loss of $202 million related to the early settlement of the Company’s natural gas swaption agreement during the first quarter of 2023.  The payment for this early settlement is classified as an operating cash flow on the Company’s condensed consolidated statement of cash flows.