DERIVATIVES

3 Months Ended

Mar. 31, 2023

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 condensed consolidated statements of operations under the caption “Gain (loss) on derivative instruments, net.”

Commodity Contracts

The Partnership historically has used 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. At March 31, 2023, the Partnership has put options and fixed price basis swaps outstanding.

The Partnership’s derivative contracts are based upon reported settlement prices on commodity exchanges, with put contracts for oil based on New York Mercantile Exchange West Texas Intermediate pricing (“Cushing WTI”) and fixed price basis swaps for oil based on the spread between the Cushing WTI crude oil price and the Midland WTI crude oil price. The Partnership’s fixed price basis swaps for natural gas are for the spread between the Waha Hub natural gas price and the New York Mercantile Exchange Henry Hub natural gas price. The weighted average differential represents the amount of reduction to the Cushing WTI oil price and the Waha Hub natural gas price for the notional volumes covered by the basis swap contracts.

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 amended and restated credit agreement, which is secured by substantially all of the assets of the Operating Company; 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 March 31, 2023, the Partnership had the following outstanding derivative contracts. When aggregating multiple contracts, the weighted average contract price is disclosed.


					Swaps	Puts
Settlement Month	Settlement Year	Type of Contract	Bbls/Mcf Per Day	Index	Weighted Average Differential		Strike Price	Deferred Premium
OIL
Apr. - Jun.	2023	Puts	12,000	WTI Cushing	$—		$55.00	$1.82
Jul. - Sep.	2023	Puts	12,000	WTI Cushing	$—		$55.00	$1.80
Oct. - Dec.	2023	Puts	4,000	WTI Cushing	$—		$55.00	$1.86
Apr. - Dec.	2023	Basis Swaps	4,000	Argus WTI Midland	$1.05		$—	$—
NATURAL GAS
Apr. - Dec.	2023	Basis Swaps	30,000	Waha Hub	$(1.33)		$—	$—
Jan. - Dec.	2024	Basis Swaps	30,000	Waha Hub	$(1.20)		$—	$—

Balance Sheet Offsetting of Derivative Assets and Liabilities

The fair value of derivative instruments 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.

Gains and Losses on Derivative Instruments

The following table summarizes the gains and losses on derivative instruments included in the condensed consolidated statements of operations and the net cash receipts (payments) on derivatives for the periods presented:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Gain (loss) on derivative instruments	$	(15,103)	$	(18,359)
Net cash receipts (payments) on derivatives(1)	$	(2,215)	$	(10,264)

(1)The three months ended March 31, 2022 includes cash paid on commodity contracts terminated prior to their contractual maturity of $4.2 million.