Derivative Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Magnolia currently utilizes natural gas costless collars to reduce its exposure to price volatility for a portion of its natural gas production volumes. The Company’s policies do not permit the use of derivative instruments for speculative purposes. The Company’s natural gas costless collar derivative contracts are indexed to the Houston Ship Channel. Under the Company’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 Company and when the settlement price is above the ceiling price, the Company 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 Company has elected not to designate any of its derivative instruments as hedging instruments. Accordingly, changes in the fair value of the Company’s derivative instruments are recorded immediately to earnings as “Loss on derivatives, net” on the Company’s consolidated statement of operations. For the three and nine months ended September 30, 2020, the Company recognized a $2.2 million unrealized loss related to its derivative instrument. There were no cash settlements or realized gains or losses on the Company’s derivative instruments during the three and nine months ended September 30, 2020 and 2019.

The Company had the following outstanding derivative contracts in place as of September 30, 2020:


	2020		2021
Natural gas costless collars:
Notional volume (MMBtu)	4,600,000		12,150,000
Weighted average floor price ($/MMBtu)	$	2.31	$	2.31
Weighted average ceiling price ($/MMBtu)	$	3.00	$	3.00

See Note 6—F air Value Measurem ent for the fair value hierarchy of the Company’s derivative contracts.