Risk Management and Derivative Instruments

12 Months Ended

Dec. 31, 2022

Risk Management and Derivative Instruments

Risk Management and Derivative Instruments

Note 5. Risk Management and Derivative Instruments

Derivative instruments are utilized to manage exposure to commodity price fluctuations and achieve a more predictable cash flow in connection with natural gas and oil sales from production. These transactions limit exposure to declines in prices but also limit the benefits that would be realized if prices increase.

Certain inherent business risks are associated with commodity and interest derivative contracts, including market risk and credit risk. Market risk is the risk that the price of natural gas or oil will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the counterparty to a contract. It is our policy to enter into derivative contracts, only with creditworthy counterparties, which generally are financial institutions, deemed by management as competent and competitive market makers. Some of the lenders, or certain of their affiliates, under our previous and current credit agreement are counterparties to our derivative contracts. While collateral is generally not required to be posted by counterparties, credit risk associated with derivative instruments is minimized by limiting exposure to any single counterparty and entering into derivative instruments only with creditworthy counterparties that are generally large financial institutions. Additionally, master netting agreements are used to mitigate risk of loss due to default with counterparties on derivative instruments. The Company enters into International Swaps and Derivatives Association Master Agreements (“ISDA Agreements”) with each of its counterparties. The terms of the ISDA Agreements provides the Company and each of its counterparties with rights of set-off upon the occurrence of defined acts of default by either the Company or its counterparty to a derivative, whereby the party not in default may set-off all liabilities owed to the defaulting party against all net derivative asset receivables from the defaulting party. At December 31, 2022, after taking into effect netting arrangements, the Company had no counterparty exposure related to its derivative instruments. See Note 8 for additional information regarding the Company’s Revolving Credit Facility.

Commodity Derivatives

A combination of commodity derivatives (e.g., floating-for-fixed swaps, put options, costless collars, and three-way collars) is used to manage exposure to commodity price volatility.

The Company enters into natural gas derivative contracts that are indexed to NYMEX Henry Hub. The Company also enters into oil derivative contracts indexed to either NYMEX WTI or Inter-Continental Exchange (“ICE”) Brent. Its NGL derivative contracts are indexed to Oil Price Information Service Mont Belvieu.

At December 31, 2022, the Company had the following open commodity positions:

	2023
Natural Gas Derivative Contracts:
Collar contracts:
Two-way collars
Average monthly volume (MMBtu)		1,160,000
Weighted-average floor price	$	3.49
Weighted-average ceiling price	$	5.92
Crude Oil Derivative Contracts:
Fixed price swap contracts:
Average monthly volume (Bbls)		55,000
Weighted-average fixed price	$	57.30
Collar contracts:
Three-way collars
Average monthly volume (Bbls)		30,000
Weighted-average ceiling price	$	67.15
Weighted-average floor price	$	55.00
Weighted-average sub-floor price	$	40.00

Balance Sheet Presentation

The following table summarizes both: (i) the gross fair value of derivative instruments by the appropriate balance sheet classification even when the derivative instruments are subject to netting arrangements and qualify for net presentation in the balance sheet and (ii) the net recorded fair value as reflected on the balance sheet at December 31, 2022 and 2021. There was no cash collateral received or pledged associated with its derivative instruments since most of the counterparties, or certain of their affiliates, to its derivative contracts are lenders under the Company’s Credit Agreement (as defined below).

		Asset		Liability		Asset		Liability
		Derivatives		Derivatives		Derivatives		Derivatives
		December 31,		December 31,		December 31,		December 31,
Type	Balance Sheet Location	2022		2022		2021		2021
		(In thousands)
Commodity contracts	Short-term derivative instruments	$	6,257	$	27,141	$	4,804	$	57,325
Interest rate swaps	Short-term derivative instruments		—		—		—		623
Gross fair value			6,257		27,141		4,804		57,948
Netting arrangements			(6,257)		(6,257)		(4,804)		(4,804)
Net recorded fair value	Short-term derivative instruments	$	—	$	20,884	$	—	$	53,144
Commodity contracts	Long-term derivative instruments	$	—	$	—	$	3,163	$	12,827
Interest rate swaps	Long-term derivative instruments		—		—		—		—
Gross fair value			—		—		3,163		12,827
Netting arrangements			—		—		(3,163)		(3,163)
Net recorded fair value	Long-term derivative instruments	$	—	$	—	$	—	$	9,664

(Gains) Losses on Derivatives

The Company does not designate derivative instruments as hedging instruments for accounting and financial reporting purposes. Accordingly, all gains and losses, including changes in the derivative instruments’ fair values, have been recorded in the accompanying statements of operations. The following table details the gains and losses related to derivative instruments for the periods indicated (in thousands):

		For the Year Ended
	Statements of	December 31,
	Operations Location	2022		2021
Commodity derivative contracts	Loss (gain) on commodity derivatives	$	106,937	$	142,439
(Gain) loss on interest rate derivatives	Interest expense, net		(935)		(217)