DERIVATIVES

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

All derivative financial instruments are recorded at fair value. The Partnership has not designated its derivative instruments as hedges for accounting purposes and, as a result, marks its derivative instruments to fair value and recognizes the cash and non-cash changes in fair value in the combined consolidated statements of operations under the caption “Loss on derivative instruments, net.”

Commodity Contracts

The Partnership uses fixed price swap contracts, fixed price basis swap contracts and costless collars with corresponding put and call options to reduce price volatility associated with certain of its royalty income. With respect to the Partnership’s fixed price swap contracts and fixed price basis swap contracts, the counterparty is required to make a payment to the Partnership if the settlement price for any settlement period is less than the swap or basis price, and the Partnership is required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap or basis price. The Partnership has fixed price basis swaps for the spread between the Cushing crude oil price and the Midland crude oil price as well as the spread between the Henry Hub natural gas price and the Waha Hub natural gas price.

Under the Partnership’s costless collar contracts, each collar has an established floor price and ceiling price. When the settlement price is below the floor price, the counterparty is required to make a payment to the Partnership and when the settlement price is above the ceiling price, the Partnership is required to make a payment to the counterparty. When the settlement price is between the floor and the ceiling, there is no payment required.

The Partnership’s derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on New York Mercantile Exchange West Texas Intermediate pricing (Cushing and Midland-Cushing) and with natural gas derivative settlements based on the New York Mercantile Exchange Henry Hub and Waha Hub pricing.

By using derivative instruments to economically hedge exposure to changes in commodity prices, the Partnership exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Partnership, which creates credit risk. The Partnership’s counterparties are participants in the secured second amended and restated credit agreement, which is secured by substantially all of the assets of the guarantor subsidiaries; therefore, the Partnership is not required to post any collateral. The Partnership does not require collateral from its counterparties. The Partnership has entered into derivative instruments only with counterparties that are also lenders in our credit facility and have been deemed an acceptable credit risk.

As of March 31, 2020, the Partnership had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.



	2020
Swaps	Volume (Bbls/MMBtu)	Fixed Price Swap (per Bbl/MMBtu)
Oil Swaps - WTI Cushing	275,000	$	27.45
Oil Basis Swaps - WTI (Midland-Cushing)	1,100,000	$	(2.60	)
Natural Gas Basis Swaps - Waha Hub	6,875,000	$	(2.07	)



Collars - WTI (Cushing)	2020		2021
Volume (Bbls)	3,850,000		3,650,000
Floor price (per Bbl)	$	28.86	$	30.00
Ceiling price (per Bbl)	$	32.33	$	43.05

Balance sheet offsetting of derivative assets and liabilities

The fair value of swaps is generally determined using established index prices and other sources which are based upon, among other things, futures prices and time to maturity. These fair values are recorded by netting asset and liability positions that are with the same counterparty and are subject to contractual terms which provide for net settlement.

The following tables present the gross amounts of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties and the resulting net amounts presented in the Partnership’s consolidated balance sheets as of March 31, 2020 and December 31, 2019.



	March 31, 2020			December 31, 2019
	(in thousands)
Gross amounts of assets presented in the Consolidated Balance Sheet	$	25,105		$	—
Amounts netted in the Consolidated Balance Sheet	(24,267		)	—
Net amounts of assets presented in the Consolidated Balance Sheet	$	838		$	—

Gross amounts of liabilities presented in the Consolidated Balance Sheet	$	32,594		$	—
Amounts netted in the Consolidated Balance Sheet	(24,267		)	—
Net amounts of liabilities presented in the Consolidated Balance Sheet	$	8,327		$	—

The net amounts are classified as current or noncurrent based on their anticipated settlement dates. The net fair value of the Partnership’s derivative assets and liabilities and their locations on the consolidated balance sheet are as follows:



	March 31, 2020		December 31, 2019
	(in thousands)
Current assets: derivative instruments	$	776	$	—
Noncurrent assets: derivative instruments	62		—
Total assets	$	838	$	—
Current liabilities: derivative instruments	$	7,362	$	—
Noncurrent liabilities: derivative instruments	965		—
Total liabilities	$	8,327	$	—

None of the Partnership’s derivatives have been designated as hedges. As such, all changes in fair value are immediately recognized in earnings. The following table summarizes the gains and losses on derivative instruments included in the consolidated statements of operations:



	Three Months Ended March 31,
	2020			2019
	(in thousands)

Change in fair value of open non-hedge derivative instruments	$	(7,489	)	$	—
Loss on settlement of non-hedge derivative instruments	(453		)	—
Loss on derivative instruments	$	(7,942	)	$	—