NOTE 9 - DERIVATIVES

The Company’s derivative instruments as of December 31, 2019 and 2018, include the following:



	December 31,
	2019			2018
	(In thousands)
Derivative assets (liabilities):
Derivative assets - current	$	427		$	2,551
Derivative assets - non-current⁽¹⁾	187			1,822
Derivative liabilities - current⁽³⁾	(5,044		)	(515		)
Derivative liabilities - non-current^{(2) (3) (4)}	(2,439		)	(4,699		)
Total derivative liabilities, net	$	(6,869	)	$	(841	)

⁽¹⁾The non-current derivative assets are included in other assets in the consolidated balance sheets.

⁽²⁾The non-current derivative liabilities are included in long-term derivative instruments and other non-current liabilities in the consolidation balance sheets.

⁽³⁾The ARM sales agreement includes an embedded derivative. As of December 31, 2019, the embedded derivative is included as current liabilities and non-current liabilities of $0.8 million and $2.4 million, respectively.

⁽⁴⁾Includes $2.0 million embedded derivative associated with Second Lien Term Loan and $2.7 million in commodity derivatives as of December 31, 2018.

Embedded Derivatives

As discussed in Note 21 - Commitments and Contingencies, the ARM sales agreement contains minimum quantity commitments. Should the Company be unable to meet those minimum commitments, the agreement contains a two way make whole provision that allows for net settlement. As of December 31, 2019, the Company concluded it is no longer probable they will be able to make delivery of the minimum quantities specified in the agreement. The Company has, therefore recorded the fair value of the embedded derivative as of December 31, 2019. The net settlement feature for remaining future minimum commitment volumes are considered embedded derivatives that are recorded, with changes in fair value included in the Company’s consolidated statement of operations.

As of December 31, 2019, the derivative liability associated with the ARM sales agreement was approximately $3.2 million with $0.8 million recorded in current derivative instruments and $2.4 million recorded in long-term derivative instruments on the Company’s consolidated balance sheets.

As discussed in Note 11 - Long-Term Debt, the Second Lien Term Loan contained conversion features that were exercisable at the option of the lead lender thereunder or, in certain circumstances, the Company. The conversion features have been identified as embedded derivatives which (i) contain economic characteristics that are not clearly and closely related to the host contract, the Second Lien Term Loan, and (ii) are separate, stand-alone instruments with similar terms that would qualify as derivative instruments. As such, the conversion features were bifurcated and accounted for separately from the Second Lien Term Loan. The conversion features are recorded at fair value for each reporting period with changes in fair value included in the Company’s consolidated statement of operations for each reporting period.

As of December 31, 2018, the derivative liabilities associated with the Second Lien Term Loan were approximately $2.0 million. On March 5, 2019, the embedded derivative associated with the Second Lien Term Loan was written off against the gain on extinguishment of debt following the extinguishment of the Second Lien Term Loan on March 5, 2019, pursuant to the provisions of the 2019 Transaction Agreement (as defined in Note 11 - Long-Term Debt).

Commodity Derivatives

To reduce the impact of fluctuations in oil and natural gas prices on the Company’s revenues and to protect the economics of property acquisitions, the Company periodically enters into derivative contracts with respect to a portion of its projected oil and natural gas production through various transactions that fix or modify the future prices to be realized. The derivative contracts may include fixed-for-floating price swaps (whereby, on the settlement date, the Company will receive or pay an amount based on the difference between a pre-determined fixed price and a variable market price for a notional quantity of production), put options (whereby the Company pays a cash premium in order to establish a fixed floor price for a notional quantity of production and, on the settlement date, receives the excess, if any, of the fixed floor price over a variable market price), and costless collars (whereby, on the settlement date, the Company receives the excess, if any, of a variable market price over a fixed floor price up to a fixed ceiling price for a notional quantity of production).

Our hedging activities are intended to support oil and natural gas prices at targeted levels and manage exposure to oil and natural gas price fluctuations, as well as to meet our obligations under our Revolving Credit Agreement (as defined in Note 11 - Long-Term Debt). It is our policy to enter into derivative contracts only with counterparties that are creditworthy and competitive market makers. All of our derivatives are designated as unsecured. Certain of our derivative counterparties may require the posting of cash collateral under certain conditions. The Company does not enter into derivative contracts for speculative trading purposes.

All of our derivatives are accounted for as mark-to-market activities. Under Accounting Standard Codification (“ASC”) Topic 815, “Derivatives and Hedging,” these instruments are recorded on the Company’s consolidated balance sheets at fair value as either short-term or long-term assets or liabilities based on their anticipated settlement date. The Company nets derivative assets and liabilities by commodity for counterparties where a legal right to such offset exists. Because the Company has elected not to designate its current derivative contracts as cash flow hedges for accounting purposes, changes in the fair values of the derivatives are recognized in current earnings.

The following table presents the Company’s derivative position for the production periods indicated as of December 31, 2019:



Description		Notional Volume (Bbls/d)	Production Period	Weighted Average Price ($/Bbl)
Oil Positions

Oil Swaps		1,028	January 2020 - December 2020	$	56.28
Oil Swaps		370	January 2021 - December 2021	$	53.07

Basis Swaps (1)		1,500	January 2020 - December 2020	$	(5.62	)

3 Way Collar	Floor sold price (put)	228	January 2020 - December 2020	$	40.00
3 Way Collar	Floor purchase price (put)	228	January 2020 - December 2020	$	50.00
3 Way Collar	Ceiling sold price (call)	228	January 2020 - December 2020	$	59.60
3 Way Collar	Floor sold price (put)	80	January 2021 - December 2021	$	37.50
3 Way Collar	Floor purchase price (put)	80	January 2021 - December 2021	$	47.50
3 Way Collar	Ceiling sold price (call)	80	January 2021 - December 2021	$	59.30

Oil Collar	Floor purchase price (put)	512	January 2020 - December 2020	$	49.50
Oil Collar	Ceiling sold price (call)	512	January 2020 - December 2020	$	63.87
Oil Collar	Floor purchase price (put)	742	January 2021 - December 2021	$	50.00
Oil Collar	Ceiling sold price (call)	742	January 2021 - December 2021	$	59.70

Description		Notional Volume (MMBtus/d)	Production Period	Weighted Average Price ($/MMBtu)
Natural Gas Positions

Gas Swaps		4,557	January 2020 - December 2020	$	2.57
Gas Swaps		4,184	January 2021 - March 2021	$	2.77

3 Way Collar	Floor sold price (put)	563	January 2020 - December 2020	$	1.60
3 Way Collar	Floor purchase price (put)	563	January 2020 - December 2020	$	2.10
3 Way Collar	Ceiling sold price (call)	563	January 2020 - December 2020	$	3.00
3 Way Collar	Floor sold price (put)	133	January 2021 - December 2021	$	1.65
3 Way Collar	Floor purchase price (put)	133	January 2021 - December 2021	$	2.15
3 Way Collar	Ceiling sold price (call)	133	January 2021 - December 2021	$	3.05
Gas Collar	Floor purchase price (put)	2,748	January 2020 - December 2020	$	2.55
Gas Collar	Ceiling sold price (call)	2,748	January 2020 - December 2020	$	3.07
Gas Collar	Floor purchase price (put)	4,464	January 2021 - December 2021	$	2.20
Gas Collar	Ceiling sold price (call)	4,464	January 2021 - December 2021	$	2.97


⁽¹⁾	The weighted average price under these basis swaps is the fixed price differential between the index prices of the Midland WTI and the Cushing WTI.

The table below summarizes the Company’s net gain (loss) on commodity derivatives for the year ended December 31, 2019 and 2018:



	Year Ended December 31,
	2019			2018
	(in thousands)
Unrealized gain (loss) on unsettled derivatives	$	(5,575	)	$	1,977
Net settlements paid on derivative contracts	(3,214		)	(2,742		)
Net settlements receivable (payable) on derivative contracts	(196		)	820
Net gain (loss) on commodity derivatives	$	(8,985	)	$	55

The following information summarizes the gross fair values of derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on the Company’s consolidated balance sheets as of December 31, 2019 and as of December 31, 2018:



	As of December 31, 2019
	Gross Amount of Recognized Assets and Liabilities			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Offsetting Derivative Assets:
Current assets	$	1,009		$	(582	)	$	427
Long-term assets	359			(172		)	187
Total assets	$	1,368		$	(754	)	$	614
Offsetting Derivative Liabilities:
Current liabilities	$	(4,827	)	$	582		$	(4,245	)
Current embedded derivative liabilities	(799		)	—			(799		)
Long-term commodity derivative liabilities	(172		)	172			—
Long-term embedded derivative liabilities	(2,439		)	—			(2,439		)
Total liabilities	$	(8,237	)	$	754		$	(7,483	)



	As of December 31, 2018
	Gross Amount of Recognized Assets and Liabilities			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Offsetting Derivative Assets:
Current assets	$	4,122		$	(1,571	)	$	2,551
Long-term assets	1,854			(32		)	1,822
Total assets	$	5,976		$	(1,603	)	$	4,373
Offsetting Derivative Liabilities:
Current liabilities	$	(2,086	)	$	1,571		$	(515	)
Long-term commodity derivative liabilities	(2,766		)	32			(2,734		)
Long-term embedded derivative liabilities	(1,965		)	—			(1,965		)
Total liabilities	$	(6,817	)	$	1,603		$	(5,214	)