In this lower commodity price environment, as discussed in Note 1—Organization and Nature of Operations—Recent Events, the Company has continued to proactively manage its hedge position. The Company has restructured portions of and added to its 2020 and 2021 hedge position. Additionally, during the three months ended March 31, 2020, as a result of hedge restructuring, the Company received $32.5 million of cash and accrued $9.3 million of cash receivables.

The Company utilizes derivative financial instruments, including swaps, put spread options, three-way collars and two-way collars to (i) reduce the effect of price volatility on the Company’s oil and natural gas revenues and (ii) support the Company’s annual capital budgeting and expenditure plans.

The Company’s material physical sales contracts governing its oil production are typically correlated with NYMEX WTI, including Cushing, Midland, Magellan East Houston (“MEH”) and Brent oil prices. The Company uses swaps, put spread options, three-way collars and two-way collars to manage oil price volatility. The Company also uses swap contracts to reduce risk between NYMEX WTI prices and the actual index prices at which the oil is sold.


Oil swaps	Nine Months Ending December 31, 2020				Twelve Months Ending December 31, 2021
	Volume (MBbls)	Fixed Price Swap (per Bbl)		Volume (MBbls)	Fixed Price Swap (per Bbl)
Oil swaps - Midland	4,248	$	30.47	1,825	$	40.50
Oil swaps - Houston	8,427	$	32.87	18,980	$	40.74
Oil swaps - WTI	3,025	$	57.87	—	$	—
Oil swaps - Brent	2,325	$	44.11	8,030	$	44.46


Three-way collars	Nine Months Ending December 31, 2020						Year Ending December 31, 2021
	Midland		MEH		Midland		MEH
Volume (MBbls)	1,692		4,828		—		2,850
Short call price (per Bbl)	$	36.74	$	38.73	$	—	$	51.05
Long put price (per Bbl)	$	26.74	$	28.73	$	—	$	41.05
Short put price (per Bbl)	$	52.48	$	53.26	$	—	$	62.89


(1)			Excludes 84,811 notional MBbls with a fair value of $1,075.7 million related to amounts recognized under master netting agreements with derivative counterparties. These amounts are predominately related to new positions entered during the first quarter of 2020 associated with restructuring the Company’s derivative portfolio. The restructuring resulted in additional protection against lower oil prices by converting certain hedge positions with limited downside protection into instruments that provide greater downside protection (such as swaps and two-way collars).
(2)			Represents swaps that fix the basis differentials between the index prices at which the Company sells its oil and the Cushing WTI price.

All material physical sales contracts governing the Company’s natural gas production are tied directly or indirectly to NYMEX Henry Hub (“Henry Hub”) natural gas prices or regional index prices where the natural gas is sold. The Company uses three-way collars and swaps to manage natural gas price volatility.

All of the Company’s derivatives are accounted for as non-hedge derivatives and therefore all changes in the fair values of its derivative contracts are recognized as gains or losses in the earnings of the periods in which they occur. The table below summarizes the Company’s gains (losses) on derivative instruments for the three months ended March 31, 2020 and 2019 (in thousands):


	Three Months Ended March 31,
	2020		2019
Changes in fair value of derivative instruments	498,147		(101,832)
Net derivative settlements⁽¹⁾	60,549		(8,339)
Net premiums on options that settled during the period⁽²⁾	(13,004)		(9,516)
Gain (loss) on derivatives	$	545,692	$	(119,687)


(1)			The net derivative settlements include gains of $3.7 million associated with restructuring the Company’s derivative portfolio as well as $56.9 million associated with positions that settled during the current period. These amounts are included in (Gain) loss on derivatives in the Company’s condensed consolidated statements of operations.
(2)			The net premiums on options that settled during the period represent the cumulative cost of premiums paid and received on positions purchased and sold, which expired during the current period. These amounts are included in (Gain) loss on derivatives in the Company’s condensed consolidated statements of operations.

The Company classifies the fair value amounts of derivative assets and liabilities as gross current or noncurrent derivative assets or gross current or noncurrent derivative liabilities, whichever the case may be, excluding those amounts netted under master netting agreements. The fair value of the derivative instruments is discussed in Note 16—Disclosures About Fair Value. The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts. During each of the three months ended March 31, 2020 and 2019, the Company did not receive or post any material margins in connection with collateralizing its derivative positions.


	Gross Amount		Netting Adjustments		Net Exposure
March 31, 2020
Derivative assets with right of offset or master netting agreements	$	1,700,481	$	(1,075,715)	$	624,766
Derivative liabilities with right of offset or master netting agreements	(1,285,802)		1,075,715		(210,087)

December 31, 2019
Derivative assets with right of offset or master netting agreements	$	136,627	$	(8,995)	$	127,632
Derivative liabilities with right of offset or master netting agreements	(167,517)		8,995		(158,522)

The Company believes that it has limited credit risk with respect to its exchange-traded contracts, as such contracts are subject to financial safeguards and transaction guarantees through NYMEX. Over-the-counter traded options expose the Company to counterparty credit risk. These over-the-counter options are entered into with large multinational financial institutions with investment grade credit ratings or through brokers that require all the transaction parties to collateralize their open option positions. The gross and net credit exposure from the Company’s commodity derivative contracts as of March 31, 2020 and December 31, 2019 is summarized in the preceding table.

The Company monitors the creditworthiness of its counterparties, establishes credit limits according to the Company’s credit policies and guidelines and assesses the impact on fair values of its counterparties’ creditworthiness. The Company enters into International Swap Dealers Association Master Agreements and associated schedules to such agreements (collectively, “ISDA Agreements”) with its derivative counterparties. The terms of the ISDA Agreements provide the Company and its counterparties and brokers with rights of net settlement of gross commodity derivative assets against gross commodity derivative liabilities. The Company routinely exercises its contractual right to offset realized gains against realized losses when settling with derivative counterparties. If the Company believes a counterparty’s creditworthiness has declined or is suspect, it may seek to novate the applicable ISDA Agreement to another financial institution that has an ISDA Agreement in place with the Company. The Company did not incur any losses due to counterparty nonperformance during the three months ended March 31, 2020 or the year ended December 31, 2019.

Certain commodity derivative instruments contain provisions that require the Company to either post additional collateral or collateral support (including letters of credit, security interests in an asset, or a performance bond or guarantee), or immediately settle any outstanding liability balances, upon the occurrence of a specified credit risk related event. These events, which are set forth in the Company’s existing commodity derivative contracts, include, among others, downgrades in the credit ratings of the Company and its affiliates, events of default under the Company’s revolving credit agreement (the “Revolving Credit Agreement”), and the release of collateral (other than as provided under the terms of the Revolving Credit Agreement). Although the Company could be required to post additional collateral or collateral support, or immediately settle any outstanding liability balances, under such conditions, the Company seeks to reduce its potential risk by entering into commodity derivative contracts with multiple counterparties.