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Risk Management and Derivative Instruments
9 Months Ended
Sep. 30, 2019
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Risk Management and Derivative Instruments

Note 6. 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 and borrowing related activities. These instruments 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 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 agreements 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. We have also entered into International Swaps and Derivatives Association Master Agreements (“ISDA Agreements”) with each of our counterparties. The terms of the ISDA Agreements provide us and each of our counterparties with rights of set-off upon the occurrence of defined acts of default by either us or our 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. Had all counterparties failed completely to perform according to the terms of the existing contracts, we would have had the right to offset $36.6 million against amounts outstanding under our New Revolving Credit Facility (as defined below) at September 30, 2019, reducing our maximum credit exposure to approximately $1.4 million, of which approximately $1.2 million was with one counterparty. See Note 8 for additional information regarding our Emergence Credit Facility (as defined below) and our New Revolving Credit Facility (as defined below).

Commodity Derivatives

We may use a combination of commodity derivatives (e.g., floating-for-fixed swaps, put options, costless collars and three-way collars) to manage exposure to commodity price volatility. We recognize all derivative instruments at fair value.

We enter into natural gas derivative contracts that are indexed to NYMEX-Henry Hub. We also enter into oil derivative contracts indexed to either NYMEX-WTI or ICE Brent. Our NGL derivative contracts are primarily indexed to OPIS Mont Belvieu.

At September 30, 2019, we had the following open commodity positions:

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

Natural Gas Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (MMBtu)

 

1,643,333

 

 

 

150,000

 

 

 

187,500

 

 

 

 

Weighted-average fixed price

$

2.84

 

 

$

2.65

 

 

$

2.56

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collar contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Two-way collars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (MMBtu)

 

 

 

 

520,000

 

 

 

162,500

 

 

 

 

Weighted-average floor price

$

 

 

$

2.64

 

 

$

2.58

 

 

$

 

Weighted-average ceiling price

$

 

 

$

2.96

 

 

$

2.84

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-way collars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (MMBtu)

 

202,667

 

 

 

76,000

 

 

 

 

 

 

 

Weighted-average ceiling price

$

3.45

 

 

$

3.45

 

 

$

 

 

$

 

Weighted-average floor price

$

2.65

 

 

$

2.65

 

 

$

 

 

$

 

Weighted-average sub-floor price

$

2.15

 

 

$

2.15

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural Gas Basis Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PEPL basis swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (Bbls)

 

 

 

 

600,000

 

 

 

500,000

 

 

 

 

Weighted-average fixed price

$

 

 

$

(0.46

)

 

$

(0.40

)

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude Oil Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (Bbls)

 

180,333

 

 

 

153,050

 

 

 

116,250

 

 

 

30,000

 

Weighted-average fixed price

$

55.25

 

 

$

57.54

 

 

$

56.05

 

 

$

55.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collar contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Two-way collars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (Bbls)

 

76,000

 

 

 

14,300

 

 

 

 

 

 

 

Weighted-average floor price

$

55.00

 

 

$

55.00

 

 

$

 

 

$

 

Weighted-average ceiling price

$

63.85

 

 

$

62.10

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three-way collars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (MMBtu)

 

61,200

 

 

 

30,500

 

 

 

 

 

 

 

Weighted-average ceiling price

$

63.14

 

 

$

65.75

 

 

$

 

 

$

 

Weighted-average floor price

$

53.75

 

 

$

50.00

 

 

$

 

 

$

 

Weighted-average sub-floor price

$

43.75

 

 

$

40.00

 

 

$

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NGL Derivative Contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed price swap contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average monthly volume (Bbls)

 

72,000

 

 

 

65,425

 

 

 

22,800

 

 

 

 

Weighted-average fixed price

$

29.96

 

 

$

25.20

 

 

$

24.25

 

 

$

 

 

Interest Rate Swaps

Periodically, we enter into interest rate swaps to mitigate exposure to market rate fluctuations by converting variable interest rates such as those in our credit agreement to fixed interest rates. At September 30, 2019, we had the following interest rate swap open positions:

 

 

Remaining

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

Average Monthly Notional (in thousands)

$

125,000

 

 

$

125,000

 

 

$

125,000

 

 

$

75,000

 

Weighted-average fixed rate

 

1.612

%

 

 

1.612

%

 

 

1.612

%

 

 

1.281

%

Floating rate

1 Month LIBOR

 

 

1 Month LIBOR

 

 

1 Month LIBOR

 

 

1 Month LIBOR

 

 

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 September 30, 2019 and December 31, 2018. There was no cash collateral received or pledged associated with our derivative instruments since most of the counterparties, or certain of their affiliates, to our derivative contracts are lenders under our credit agreement.

 

 

 

 

 

Asset Derivatives

 

 

Liability

Derivatives

 

 

Asset Derivatives

 

 

Liability

Derivatives

 

 

 

 

 

September 30,

 

 

September 30,

 

 

December 31,

 

 

December 31,

 

Type

 

Balance Sheet Location

 

2019

 

 

2019

 

 

2018

 

 

2018

 

 

 

 

 

(In thousands)

 

Commodity contracts

 

Short-term derivative instruments

 

$

23,043

 

 

$

2,584

 

 

$

21,217

 

 

$

2,543

 

Interest rate swaps

 

Short-term derivative instruments

 

 

275

 

 

 

234

 

 

 

 

 

 

 

Gross fair value

 

 

 

 

23,318

 

 

 

2,818

 

 

 

21,217

 

 

 

2,543

 

Netting arrangements

 

 

 

 

(2,609

)

 

 

(2,609

)

 

 

(2,404

)

 

 

(2,404

)

Net recorded fair value

 

Short-term derivative instruments

 

$

20,709

 

 

$

209

 

 

$

18,813

 

 

$

139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts

 

Long-term derivative instruments

 

$

18,715

 

 

$

1,000

 

 

$

4,298

 

 

$

1,829

 

Interest rate swaps

 

Long-term derivative instruments

 

 

32

 

 

 

521

 

 

 

 

 

 

 

Gross fair value

 

 

 

 

18,747

 

 

 

1,521

 

 

 

4,298

 

 

 

1,829

 

Netting arrangements

 

 

 

 

(1,032

)

 

 

(1,032

)

 

 

(1,829

)

 

 

(1,829

)

Net recorded fair value

 

Long-term derivative instruments

 

$

17,715

 

 

$

489

 

 

$

2,469

 

 

$

 

 

(Gains) Losses on Derivatives

We do 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 Unaudited Condensed Statements of Consolidated Operations. The following table details the gains and losses related to derivative instruments for the periods indicated (in thousands):

 

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

Statements of

 

September 30,

 

 

September 30,

 

 

 

Operations Location

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Commodity derivative contracts

 

(Gain) loss on commodity derivatives

 

$

(28,725

)

 

$

21,110

 

 

$

(19,231

)

 

$

67,218

 

Interest rate derivatives

 

Interest expense, net

 

 

(199

)

 

 

 

 

 

334