DERIVATIVES AND FINANCIAL INSTRUMENTS

The Partnership’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Partnership uses oil and natural gas derivative instruments. From time to time, such instruments may include fixed-price-swap contracts, fixed price contracts, costless collars, and other contractual arrangements. The Partnership enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty. The Partnership does not enter into derivative instruments for speculative purposes.

As of June 30, 2017, the Partnership’s open derivative contracts consisted of only fixed-price-swap contracts. A fixed-price-swap contract between the Partnership and the counterparty specifies a fixed commodity price and a future settlement date. The Partnership has not designated any of its contracts as fair value or cash flow hedges. Accordingly, any changes in the fair value of the contracts are included in the consolidated statement of operations in the period of the change. All derivative gains and losses from the Partnership’s derivative contracts have been recognized in “Revenue” in the Partnership's accompanying consolidated statements of operations. Derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Partnership’s accompanying consolidated balance sheets as of June 30, 2017 and December 31, 2016. See Note 6 – Fair Value Measurement for further discussion.

The Partnership's derivative contracts expose it to credit risk in the event of nonperformance by counterparties. While the Partnership does not require its derivative contract counterparties to post collateral, the Partnership does evaluate the credit standing of such counterparties as deemed appropriate. This evaluation includes reviewing a counterparty’s credit rating and latest financial information. As of June 30, 2017, the Partnership had nine counterparties, all of which are rated Baa1 or better by Moody’s. Seven of the Partnership's counterparties are lenders under the Partnership's credit facility. The Partnership would have been at risk of losing a fair value amount of $21.8 million had the Partnership's counterparties as a group been unable to fulfill their obligations as of June 30, 2017.

The table below summarizes the fair value and classification of the Partnership’s derivative instruments:



As of June 30, 2017
Classification	Balance Sheet Location	Gross Fair Value		Effect of Counterparty Netting			Net Carrying Value on Balance Sheet
				(In thousands)
Assets:
Current asset	Commodity derivative assets	$	14,434	$	(1,105	)	$	13,329
Long-term asset	Deferred charges and other long-term assets	7,321		—			7,321
Total assets		$	21,755	$	(1,105	)	$	20,650
Liabilities:
Current liability	Commodity derivative liabilities	$	1,105	$	(1,105	)	$	—
Long-term liability	Commodity derivative liabilities	—		—			—
Total liabilities		$	1,105	$	(1,105	)	$	—



As of December 31, 2016
Classification	Balance Sheet Location	Gross Fair Value		Effect of Counterparty Netting			Net Carrying Value on Balance Sheet
				(In thousands)
Assets:
Current asset	Commodity derivative assets	$	3,879	$	(3,879	)	$	—
Long-term asset	Deferred charges and other long-term assets	—		—			—
Total assets		$	3,879	$	(3,879	)	$	—
Liabilities:
Current liability	Commodity derivative liabilities	$	20,116	$	(3,879	)	$	16,237
Long-term liability	Commodity derivative liabilities	482		—			482
Total liabilities		$	20,598	$	(3,879	)	$	16,719

Changes in the fair values of the Partnership’s derivative instruments (both assets and liabilities) are presented on a net basis in the accompanying consolidated statements of operations. Changes in the fair value of the Partnership’s commodity derivative instruments (both assets and liabilities) are as follows:



	For the Six Months Ended June 30,
Derivatives not designated as hedging instruments	2017			2016
	(In thousands)
Beginning fair value of commodity derivative instruments	$	(16,719	)	$	64,534
Gain (loss) on oil derivative instruments	27,799			(12,615		)
Gain (loss) on natural gas derivative instruments	16,929			(7,492		)
Net cash received on settlements of oil derivative instruments	(6,656		)	(18,766		)
Net cash received on settlements of natural gas derivative instruments	(703		)	(15,152		)
Net change in fair value of commodity derivative instruments	37,369			(54,025		)
Ending fair value of commodity derivative instruments	$	20,650		$	10,509

The Partnership had the following open derivative contracts for oil as of June 30, 2017:



				Range (Per Bbl)
Period and Type of Contract	Volume (Bbl)	Weighted Average (Per Bbl)		Low		High
Oil Swap Contracts:
2017
Second Quarter	195,000	$	54.19	$	51.86	$	55.23
Third Quarter	556,000	53.29		52.04		55.23
Fourth Quarter	516,000	53.56		52.57		55.23
2018
First Quarter	475,000	$	54.74	$	54.50	$	55.05
Second Quarter	445,000	54.73		54.50		54.90
Third Quarter	425,000	54.72		54.50		54.90
Fourth Quarter	405,000	54.72		54.50		54.90

The Partnership had the following open derivative contracts for natural gas as of June 30, 2017:



				Range (Per MMBtu)
Period and Type of Contract	Volume (MMBtu)	Weighted Average (Per MMBtu)		Low		High
Natural Gas Swap Contracts:
2017
Third Quarter	12,490,000	$	3.08	$	2.90	$	3.45
Fourth Quarter	11,280,000	3.14		2.92		3.57
2018
First Quarter	9,870,000	$	3.05	$	2.96	$	3.45
Second Quarter	8,840,000	3.01		2.86		3.23
Third Quarter	7,730,000	3.00		2.90		3.23
Fourth Quarter	6,860,000	3.00		2.90		3.23

The Partnership has not entered into any additional derivative contracts for oil or natural gas subsequent to June 30, 2017.