Derivative Instruments

Commodity derivatives. The Company enters into various derivative instruments primarily to mitigate a portion of the exposure to potentially adverse market changes in oil and natural gas commodity prices and the associated impact on cash flows. All contracts are entered into for other-than-trading purposes. Oil and natural gas commodity derivative instruments are recorded on the consolidated balance sheets at fair value as either an asset or a liability with changes in fair value recognized in earnings. While commodity derivative instruments are utilized to manage the price risk attributable to expected oil and natural gas production, the Company’s commodity derivative instruments are not designated as accounting hedges under the accounting guidance. The related cash flow impact of the commodity derivative activities is reflected as cash flows from operating activities unless they are determined to have a significant financing element at inception, in which case they are classified within financing activities. A description of the Company’s derivative financial instruments is provided below:

Fixed price swaps - The Company receives a fixed price for the contract and pays a floating market price to the counterparty.

Purchased put options - The Company purchases put options based on an index price from the counterparty by payment of a cash premium. If the index price is lower than the put’s strike price at the time of settlement, the Company receives from the counterparty such difference between the index price and the purchased put strike price. If the market price settles above the put’s strike price, no payment is due from either party.

Two-way costless collars - Arrangements that contain a fixed floor price (purchased put option) and a fixed ceiling price (sold call option) based on an index price which, in aggregate, have no net cost. At the contract settlement date, (1) if the index price is higher than the ceiling price, the Company pays the counterparty the difference between the index price and ceiling price, (2) if the index price is between the floor and ceiling prices, no payments are due from either party and (3) if the index price is below the floor price, the Company will receive the difference between the floor price and the index price.

Three-way costless collars - Arrangements that contain a purchased put option, a sold call option and a sold put option based on an index price which, in aggregate, have no net cost. At the contract settlement date,


(1)	if the index price is higher than the sold call strike price, the Company pays the counterparty the difference between the index price and sold call strike price,


(2)	if the index price is between the purchased put strike price and the sold call strike price, no payments are due from either party,


(3)	if the index price is between the sold put strike price and the purchased put strike price, the Company will receive the difference between the purchased put strike price and the index price and

(4) if the index price is below the sold put strike price, the Company will receive the difference between the purchased put strike price and the sold put strike price

Basis swaps - Arrangements that guarantee a price differential for natural gas from a specified delivery point. The Company receives a payment from the counterparty if the price differential is greater than the stated terms of the contract and pays the counterparty if the price differential is less than the stated terms of the contract.

Interest rate swaps - Interest rate swaps are used to fix or float interest rates on existing or anticipated indebtedness. The purpose of these instruments is to manage the Company’s existing or anticipated exposure to unfavorable interest rate changes. Entering into interest rate swaps allows the Company to mitigate, but not eliminate, the negative effects of increases in interest rates, but reduces the Company’s ability to benefit from any decreases in interest rates.

Series B Preferred Stock bifurcated derivative. In the event of a change of control, the Company shall redeem in cash all of the outstanding shares of Series B Preferred Stock out of funds legally available therefor, excluding Series B PIK Shares, each as defined in Note 12 - 10% Series B Redeemable Preferred Stock, for a price per share equal to the Base Return Amount as defined in Note 12 - 10% Series B Redeemable Preferred Stock. The Company assessed the change of control feature and determined that the redemption of the outstanding shares of Series B Preferred Stock, excluding Series B PIK Shares, for a price per share equal to the Base Return Amount was a bifurcated derivative. See Note 12 - 10% Series B Redeemable Preferred Stock for defined terms and more detail.

The following tables summarize the location and fair value amounts of all the Company’s derivative instruments in the Consolidated Balance Sheets, as well as the gross recognized derivative assets, liabilities and offset amounts in the Consolidated Balance Sheets:



	December 31, 2019
	Gross Fair Value			Gross Amounts Offset (1)			Net Recognized Fair Value
	(In thousands)
Assets
Commodity derivatives - current	$	28,512		$	(18,172	)	$	10,340
Commodity derivatives - non-current	61,241			(28,136		)	33,105
Interest rate derivatives - current	10			(10		)	—
Total assets	$	89,763		$	(46,318	)	$	43,445

Liabilities
Commodity derivatives - current	$	(22,014	)	$	18,172		$	(3,842	)
Commodity derivatives - non-current	(28,528		)	28,136			(392		)
Interest rate derivatives - current	(184		)	10			(174		)
Interest rate derivatives - non-current	(492		)	—			(492		)
Series B Preferred Stock bifurcated derivative - non-current	(416		)	—			(416		)
Total liabilities	$	(51,634	)	$	46,318		$	(5,316	)


(1)	The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities.



	December 31, 2018
	Gross Fair Value			Gross Amounts Offset (1)			Net Recognized Fair Value
	(In thousands)
Assets
Commodity derivatives - current	$	46,972		$	(16,153	)	$	30,819
Commodity derivatives - non-current	88,008			(29,694		)	58,314
Total assets	$	134,980		$	(45,847	)	$	89,133

Liabilities
Commodity derivatives - current	$	(16,153	)	$	16,153		$	—
Commodity derivatives - non-current	(29,694		)	29,694			—
Series B Preferred Stock bifurcated derivative - non-current	(696		)	—			(696		)
Total liabilities	$	(46,543	)	$	45,847		$	(696	)


(1)	The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and liabilities.

As of December 31, 2019, the open derivative positions with respect to future production and interest rates were as follows:



		2020			2021			2022
Commodity derivative swaps
Oil:
	Notional volume (Bbls) (1)(2)	1,000,000			—			—
	Weighted average fixed price ($/Bbl)	$	67.69		$	—		$	—
Natural gas:
	Notional volume (MMBtu)	1,970,368			1,615,792			1,276,142
	Weighted average fixed price ($/MMbtu)	$	2.75		$	2.79		$	2.85

Commodity derivative three-way collars
Oil:
	Notional volume (Bbls)	3,294,000			4,200,000			2,000,000
	Weighted average ceiling price ($/Bbl)	$	70.29		$	60.40		$	61.45
	Weighted average floor price ($/Bbl)	$	57.50		$	54.49		$	55.00
	Weighted average sold put option price ($/Bbl)	$	47.50		$	45.51		$	45.00

Crude oil basis swaps
Midland / Cushing:
	Notional volume (Bbls)	5,254,000			4,200,000			2,100,000
	Weighted average fixed price ($/Bbl)	$	(0.83	)	$	0.49		$	0.54

Argus WTI roll:
	Notional volume (Bbls)	665,650			—			—
	Weighted average fixed price ($/Bbl)	$	0.40		$	—		$	—

NYMEX WTI roll:
	Notional volume (Bbls)	2,791,102			—			—
	Weighted average fixed price ($/Bbl)	$	0.42		$	—		$	—

Natural gas basis swaps
EP Permian:
	Notional volume (MMBtu)	2,096,160			—			—
	Weighted average fixed price ($/MMBtu)	$	(1.03	)	$	—		$	—

Interest rate swaps:
	Notional principal (3)	$150,000,000			$150,000,000			$	150,000,000
	Average fixed rate	1.721		%	1.721		%	1.721		%


(1)	During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 2,160,000 barrels of crude oil at a weighted average fixed price of $50.48 per barrel to offset commodity derivative swaps for the year ended December 31, 2021, it previously sold 2,160,000 barrels of crude oil at a weighted average fixed price of $61.21 per barrel.


(2)	During the second quarter of 2019, the Company entered into commodity derivative swaps where it bought 1,100,000 barrels of crude oil at a weighted average fixed price of $50.55 per barrel to offset commodity derivative swaps for the year ended December 31, 2022, it previously sold 1,100,000 barrels of crude oil at a weighted average fixed price of $58.42 per barrel.


(3)	Interest rate swaps expire in August 2022.

The effect of derivative activity on the Company’s Consolidated Statements of Operations for the following periods was as follows:



	Year Ended December 31,
	2019			2018			2017
	(In thousands)
Realized gain (loss) on derivatives
Commodity derivative options	$	5,571		$	(83	)	$	172
Commodity derivative swaps	(20,245		)	(15,399		)	45
Interest rate swaps	178			—			(143		)
Total realized gain (loss) on derivatives	$	(14,496	)	$	(15,482	)	$	74

Unrealized gain (loss) on derivatives
Commodity derivative options	$	(19,611	)	$	28,965		$	313
Commodity derivative swaps	(31,053		)	79,121			(16,866		)
Interest rate swaps	(666		)	—			(226		)
Series B Preferred Stock bifurcated derivative	280			(71		)	—
Total unrealized gain (loss) on derivatives	$	(51,050	)	$	108,015		$	(16,779	)

The gains and losses resulting from the cash settlement and mark-to-market of the commodity derivatives are included within “Gain (loss) on commodity derivative instruments, net” in the Consolidated Statements of Operations. The gains and losses resulting from mark-to-market of the Series B Preferred Stock bifurcated derivative are included within “Other income (expense), net” in the Consolidated Statements of Operations. The gains and losses resulting from the cash settlement and mark-to-market of the interest rate swaps are included within “Interest expense, net” in the Consolidated Statements of Operations.