Derivative Instruments

12 Months Ended

Dec. 31, 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 years ended December 31, 2021, 2022 and 2023. As of December 31, 2023, the Company has no fixed price commodity swap contracts. 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 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 and comprehensive income (loss).

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 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 consolidated financial statements. As of December 31, 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
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 December 31, 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
January-December 2024	NYMEX to TCO	50,000	MMBtu/day		0.530	/MMBtu

In addition, the Company had a swaption agreement, which entitled the counterparty the right, but not the obligation, to enter into a fixed price swap agreement on December 21, 2023 to purchase 427,500 MMBtu/d at a price of $2.77 per MMBtu for the year ending December 31, 2024. In 2023, the Company executed an early settlement of this swaption agreement and made a cash payment of $202 million.

As of December 31, 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
January-December 2024	Henry Hub	23,885	MMBtu/day		2.33	/MMBtu
January-March 2025	Henry Hub	18,021	MMBtu/day		2.53	/MMBtu
Oil
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 consolidated balance sheets (in thousands):

		December 31,
	Balance Sheet Location	2022		2023
Asset derivatives not designated as hedges for accounting purposes:
Embedded derivatives—current	Derivative instruments	$	1,900		5,175
Embedded derivatives—noncurrent	Derivative instruments		9,844		5,570
Total asset derivatives (1)			11,744		10,745
Liability derivatives not designated as hedges for accounting purposes:
Commodity derivatives—current (2)	Derivative instruments		97,765		15,236
Commodity derivatives—noncurrent (2)	Derivative instruments		345,280		32,764
Total liability derivatives (1)			443,045		48,000
Net derivatives liability (1)		$	(431,301)		(37,255)

(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 December 31, 2023, approximately $5 million of commodity derivative liabilities, including $3 million of current commodity derivatives and $2 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 consolidated balance sheets as of the dates presented, all at fair value (in thousands):

	December 31, 2022						December 31, 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)		—		406		(406)		—
Embedded derivative assets		11,744		—		11,744		10,745		—		10,745
Commodity derivative liabilities		(443,321)		276		(443,045)		(48,406)		406		(48,000)

The following table sets forth a summary of derivative fair value gains and losses and where such values are recorded in the consolidated statements of operations and comprehensive income (loss) (in thousands):

	Statement of
	Operations	Year Ended December 31,
	Location	2021		2022		2023
Commodity derivative fair value gains (losses) (1)	Revenue	$	(1,886,551)		(1,524,250)		165,448
Embedded derivative fair value gains (losses) (1)	Revenue		(49,958)		(91,586)		876

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

Commodity derivative fair value gains (losses) for the years ended December 31, 2021 and 2023 include losses of $5 million and $202 million related to the settlement of certain natural gas derivatives prior to the contractual settlement dates. Payments for these early settlements are classified as operating cash flows on the Company’s consolidated statement of cash flows for the years ended December 31, 2021 and 2023. There were no early settlements of commodity derivatives during the year ended December 31, 2022.

The Company’s commodity derivative position presented in Note 11(a) above reflects the volume and adjusted fixed price indices after the 2021 and 2023 early settlements of certain natural gas derivatives.