5. Risk Management and Derivative Instruments

The Company’s production is exposed to fluctuations in crude oil, NGLs and natural gas prices. The Company believes it is prudent to manage the variability in cash flows by, at times, entering into derivative financial instruments to economically hedge a portion of its crude and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and collars, to manage fluctuations in cash flows resulting from changes in commodity prices.

Swaps: The Company receives or pays a fixed price for the commodity and pays or receives a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

Three-way collars: A three-way collar contains a fixed floor price (long put), fixed sub-floor price (short put), and a fixed ceiling price (short call). If the market price exceeds the ceiling strike price, the Company receives the ceiling strike price and pays the market price. If the market price is between the ceiling and the floor strike price, no payments are due from either party. If the market price is below the floor price but above the sub-floor price, the Company receives the floor strike price and pays the market price. If the market price is below the sub-floor price, the Company receives the market price plus the difference between the floor and the sub-floor strike prices and pays the market price.

These derivative contracts are placed with major financial institutions that the Company believes are minimal credit risks. The crude oil and natural gas reference prices upon which the commodity derivative contracts are based reflect various market indices that management believes correlates with actual prices received by the Company for its crude and natural gas production.

Inherent in the Company’s portfolio of commodity derivative contracts are certain business risks, including market risk and credit risk. Market risk is the risk that the price of the commodity will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not require collateral from its counterparties but does attempt to minimize its credit risk associated with derivative instruments by entering into derivative instruments only with counterparties that are large financial institutions, which management believes present minimal credit risk. In addition, to mitigate its risk of loss due to default, the Company has entered into agreements with its counterparties on its derivative instruments that allow the Company to offset its asset position with its liability position in the event of default by the counterparty. Due to the netting arrangements, had the Company’s counterparties failed to perform under existing commodity derivative contracts at March 31, 2018, the Company would not have experienced a loss.

Commodity Derivative Contracts

The Company entered into various oil and natural gas derivative contracts that extend through December 31, 2020, summarized as follows:

	NYMEX WTI
	Fixed Swaps			Three-Way Collars
	Hedge Position (Bbls)	Weighted Avg Strike Price		Hedge Position (Bbls)	Weighted Avg Ceiling Price		Weighted Avg Floor Price		Weighted Avg Sub-Floor Price
Quarter Ended:
March 31, 2018(1)	99,000	$	50.61	225,000	$	62.14	$	50.00	$	40.00
June 30, 2018(1)	154,750	$	51.97	182,000	$	60.65	$	50.00	$	40.00
September 30, 2018(1)	151,800	$	55.23	184,000	$	59.93	$	50.00	$	40.00
December 31, 2018(1)	289,800	$	57.79	46,000	$	56.70	$	50.00	$	40.00
March 31, 2019(1)	—	$	—	180,000	$	63.14	$	53.75	$	43.75
June 30, 2019(1)	—	$	—	182,000	$	63.14	$	53.75	$	43.75
September 30, 2019(1)	—	$	—	184,000	$	63.14	$	53.75	$	43.75
December 31, 2019(1)	—	$	—	184,000	$	63.14	$	53.75	$	43.75
March 31, 2020(1)	—	$	—	91,000	$	65.75	$	50.00	$	40.00
June 30, 2020(1)	—	$	—	91,000	$	65.75	$	50.00	$	40.00
September 30, 2020(1)	—	$	—	92,000	$	65.75	$	50.00	$	40.00
December 31, 2020(1)	—	$	—	92,000	$	65.75	$	50.00	$	40.00

	NYMEX HENRY HUB
	Fixed Swaps			Three-Way Collars
	Hedge Position (MMBtu)	Weighted Avg Strike Price		Hedge Position (MMBtu)	Weighted Avg Ceiling Price		Weighted Avg Floor Price		Weighted Avg Sub-Floor Price
Quarter Ended:
March 31, 2018(1)(2)	1,350,000	$	3.47	1,530,000	$	4.38	$	3.25	$	2.50
June 30, 2018(1)	915,000	$	2.79	1,365,000	$	3.40	$	3.00	$	2.50
September 30, 2018(1)	1,380,000	$	2.79	1,380,000	$	3.40	$	3.00	$	2.50
December 31, 2018(1)	1,380,000	$	2.91	1,380,000	$	3.40	$	3.00	$	2.50
March 31, 2019(1)	1,350,000	$	2.98	1,350,000	$	3.40	$	3.00	$	2.50

(1)

Positions shown represent open commodity derivative contract positions as of March 31, 2018.

(2)

During the second quarter of 2017, the Company entered into natural gas three-way collars with long call ceilings in order to offset its Q1 2018 natural gas fixed swaps.

Balance Sheet Presentation

The following table summarizes the net fair values of commodity derivative instruments by the appropriate balance sheet classification in the Company’s unaudited condensed consolidated balance sheets for the periods presented (in thousands):

Type	Balance Sheet Location (1)	March 31, 2018			December 31, 2017
Gas swaps	Derivative financial instruments — current assets	$	—		$	821
Oil collars	Derivative financial instruments — current assets	—			(760		)
Gas collars	Derivative financial instruments — current assets	—			701

Total derivative financial instruments — current assets		$	—		$	762


Oil swaps	Derivative financial instruments — current liabilities	$	(4,291	)	$	(3,679	)
Gas swaps	Derivative financial instruments — current liabilities	(131		)	—
Oil collars	Derivative financial instruments — current liabilities	(2,494		)	(370		)
Gas collars	Derivative financial instruments — current liabilities	854			616

Total derivative financial instruments — current liabilities		$	(6,062	)	$	(3,433	)


Oil collars	Derivative financial instruments — noncurrent liabilities	$	(950	)	$	(523	)
Gas collars	Derivative financial instruments — noncurrent liabilities	—			(39		)

Total derivative financial instruments — noncurrent liabilities		$	(950	)	$	(562	)


Total derivative fair value at period end		$	(7,012	)	$	(3,233	)

(1)

The fair values of commodity derivative instruments reported in the Company’s unaudited condensed consolidated balance sheets are subject to netting arrangements and qualify for net presentation.

The following table summarizes the location and fair value amounts of all commodity derivative instruments in the unaudited condensed consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited condensed consolidated balance sheets for the periods presented (in thousands):

		March 31, 2018
Not Designated as		Gross Recognized			Gross Amounts			Net Recognized Fair Value
ASC 815 Hedges	Balance Sheet Location Classification	Assets/Liabilities			Offset			Assets/Liabilities
Derivative Assets:
Commodity contracts	Derivative financial instruments — current	$	2,134		$	(2,134	)	$	—
Commodity contracts	Derivative financial instruments — noncurrent	4,121			(4,121		)	—

		$	6,255		$	(6,255	)	$	—

Derivative Liabilities:
Commodity contracts	Derivative financial instruments — current	$	(8,196	)	$	2,134		$	(6,062	)
Commodity contracts	Derivative financial instruments — noncurrent	(5,071		)	4,121			(950		)

		$	(13,267	)	$	6,255		$	(7,012	)

		December 31, 2017
Not Designated as		Gross Recognized			Gross Amounts			Net Recognized Fair Value
ASC 815 Hedges	Balance Sheet Location Classification	Assets/Liabilities			Offset			Assets/Liabilities
Derivative Assets:
Commodity contracts	Derivative financial instruments — current	$	3,479		$	(2,717	)	$	762
Commodity contracts	Derivative financial instruments — noncurrent	905			(905		)	—
		$	4,384		$	(3,622	)	$	762
Derivative Liabilities:
Commodity contracts	Derivative financial instruments — current	$	(6,150	)	$	2,717		$	(3,433	)
Commodity contracts	Derivative financial instruments — noncurrent	(1,467		)	905			(562		)
		$	(7,617	)	$	3,622		$	(3,995	)

Gains/Losses on Commodity Derivative Contracts

The Company does not designate its commodity derivative contracts as hedging instruments for financial reporting purposes. Accordingly, commodity derivative contracts are marked-to-market each quarter with the change in fair value during the periodic reporting period recognized currently as a gain or loss in gains (losses) on commodity derivative contracts—net within revenues in the unaudited condensed consolidated statements of operations.

The following table presents net cash received for commodity derivative contracts and unrealized net gains recorded by the Company related to the change in fair value of the derivative instruments in gains (losses) on commodity derivative contracts—net for the periods presented (in thousands):

	For the Three Months
	Ended March 31,
	2018			2017
Net cash received (paid) for commodity derivative contracts	$	(160	)	$	811
Unrealized net gains (losses)	(3,779		)	4,054

Gains (losses) on commodity derivative contracts—net	$	(3,939	)	$	4,865

Cash settlements, as presented in the table above, represent realized gains (losses) related to the Company’s derivative instruments. In addition to cash settlements, the Company also recognizes fair value changes on its derivative instruments in each reporting period. The changes in fair value result from new positions and settlements that may occur during each reporting period, as well as the relationships between contract prices and the associated forward curves.