DERIVATIVES

9 Months Ended

Sep. 30, 2022

DERIVATIVES

DERIVATIVES

NOTE 4—DERIVATIVES

Commodity Derivatives

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 commodity derivative financial instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts and other contractual arrangements. The Partnership enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty.

As of September 30, 2022, the Partnership’s commodity derivative contracts consisted of fixed price swaps, under which the Partnership receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume. The Partnership hedges its production based on the amount of debt and/or preferred equity as a percent of its enterprise value. As of September 30, 2022, these economic hedges constituted approximately 25% of daily oil and natural gas production.

The Partnership’s oil fixed price swap transactions are settled based upon the average daily prices for the calendar month of the contract period, and its natural gas fixed price swap transactions are settled based upon the last scheduled trading day for the first nearby month futures contract corresponding to the relevant contract period. Settlement for oil derivative contracts occurs in the succeeding month and natural gas derivative contracts are settled in the production month. Changes in the fair values of the Partnership’s commodity derivative instruments are recognized as gains or losses in the current period and are presented on a net basis within revenue in the accompanying unaudited interim consolidated statements of operations.

Interest Rate Swaps

On January 27, 2021, the Partnership entered into an interest rate swap with Citibank, N.A., New York (“Citibank”), which fixed the interest rate on $150.0 million of the notional balance on our secured revolving credit facility. On May 17, 2022, the Partnership entered into a partial termination agreement with Citibank to unwind 50% of the interest rate swap. On August 8, 2022, the Partnership entered into a termination agreement with Citibank to unwind the remaining 50% of the interest rate swap. The terminations resulted in a $3.4 million gain and $6.4 million gain for the three and nine months ended September 30, 2022, respectively, which is included in other income (expense) in the accompanying unaudited interim consolidated statements of operations. The Partnership used an interest rate swap for the management of interest rate risk exposure, as the interest rate swap effectively converted a portion of the Partnership’s secured revolving credit facility from a floating to a fixed rate. Changes in the fair values of the Partnership’s interest rate swaps were recognized as gains or losses in the current period and were presented on a net basis within other income in the accompanying unaudited interim consolidated statements of operations.

The Partnership has not designated any of its derivative contracts as hedges for accounting purposes. Changes in fair value consisted of the following:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Beginning fair value of derivative instruments	$	(38,741,643)	$	(29,998,417)	$	(26,624,646)	$	(6,280,863)
Loss on derivative instruments		(1,022,399)		(17,676,825)		(35,456,734)		(45,615,784)
Net cash paid on settlements of derivative instruments		14,410,499		6,425,055		36,727,837		10,646,460
Ending fair value of derivative instruments	$	(25,353,543)	$	(41,250,187)	$	(25,353,543)	$	(41,250,187)

The following table presents the fair value of the Partnership’s derivative contracts for the periods indicated:

		September 30,		December 31,
Classification	Balance Sheet Location	2022		2021
Assets:
Current assets	Derivative assets	$	—	$	166,307
Long-term assets	Derivative assets		—		1,590,501
Liabilities:
Current liabilities	Derivative liabilities		(23,477,833)		(24,190,678)
Long-term liabilities	Derivative liabilities		(1,875,710)		(4,190,776)
		$	(25,353,543)	$	(26,624,646)

As of September 30, 2022, the Partnership’s open commodity derivative contracts consisted of the following:

Oil Price Swaps

	Notional	Weighted Average		Range (per Bbl)
	Volumes (Bbl)	Fixed Price (per Bbl)		Low		High
October 2022 - December 2022	109,388	$	46.00	$	46.00	$	46.00
January 2023 - December 2023	303,411	$	59.35	$	53.38	$	63.00
January 2024 - September 2024	159,596	$	76.34	$	69.30	$	82.40

Natural Gas Price Swaps

	Notional	Weighted Average		Range (per MMBtu)
	Volumes (MMBtu)	Fixed Price (per MMBtu)		Low		High
October 2022 - December 2022	1,383,496	$	2.58	$	2.58	$	2.58
January 2023 - December 2023	4,245,899	$	2.90	$	2.52	$	3.28
January 2024 - September 2024	2,418,128	$	4.30	$	4.15	$	4.45