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DERIVATIVES
 6 Months Ended
Jun. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVES DERIVATIVES
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 all 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’s counterparties have been determined to have an acceptable credit risk; therefore, the Partnership does not require collateral from its counterparties.
As of June 30, 2020, the Partnership had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.
2020
SwapsVolumeFixed Price Swap (per Bbl/MMBtu)
Oil swaps - WTI Cushing (Bbls)184,000  $27.45  
Oil basis swaps - WTI Midland-Cushing (Bbls)736,000  $(2.60) 
Natural gas basis swaps - Waha Hub (MMBtu)4,600,000  $(2.07) 

Collars - WTI Cushing20202021
Volume (Bbls)2,576,0003,650,000
Floor price (per Bbl)$28.86  $30.00  
Ceiling price (per Bbl)$32.33  $43.05  

Deferred premium call options - WTI Cushing2020
Volume (Bbls)736,000
Premium$1.89  
Strike price (per Bbl)$45.00  

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, including any deferred premiums, that are with the same counterparty and are subject to contractual terms which provide for net settlement. See Note 11—Fair Value Measurements for further details.

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 June 30, 2020.
June 30, 2020
(In thousands)
Gross derivative assets $13,084  
Amounts netted (13,084) 
Net derivative assets $—  
Gross derivative liabilities$52,915  
Amounts netted (13,084) 
Net derivative liabilities $39,831  

The Partnership did not have any derivatives prior to February 2020.
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:
June 30, 2020
(In thousands)
Current assets: derivative instruments$—  
Noncurrent assets: derivative instruments—  
Total assets$—  
Current liabilities: derivative instruments$33,956  
Noncurrent liabilities: derivative instruments5,875  
Total liabilities$39,831  

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 June 30, 2020Six Months Ended June 30,
2020201920202019
(In thousands)
Loss on derivative instruments$(34,443) $—  $(42,385) $—  
Net cash payments on derivatives$(2,101) $—  $(2,554) $—