Derivatives

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives

We utilize derivatives, such as swaps, puts and calls, to hedge a portion of our forecasted oil production and gas purchases to reduce exposure to fluctuations in oil and natural gas prices, which addresses our market risk. We target covering our operating expenses and a majority of our fixed charges, including capital for sustained production levels, interest and dividends, with the oil hedges for a period of up to two years out. Additionally, we target fixing the price for a large portion of our natural gas purchases used in our steam operations for up to two years. We also, from time to time, have entered into agreements to purchase a portion of the natural gas we require for our operations, which we do not record at fair value as derivatives because they qualify for normal purchases and normal sales exclusions.

For fixed-price oil swaps, we make settlement payments for prices above the indicated weighted-average price per barrel of Brent and receive settlement payments for prices below the indicated weighted-average price per barrel of Brent.

For our purchased oil calls, we would receive settlement payments for prices above the indicated weighted-average price per barrel of Brent.

For fixed-price gas purchase swaps, we are the buyer so we make settlement payments for prices below the weighted-average price per MMBtu and receive settlement payments for prices above the weighted-average price per MMBtu.

We use oil swaps and puts to protect against decreases in the oil price and natural gas swaps to protect against increases in natural gas prices. We do not enter into derivative contracts for speculative trading purposes and have not accounted for our derivatives as cash-flow or fair-value hedges. The changes in fair value of these instruments are recorded in current earnings. (Gains) losses on oil hedges are classified in the revenues and other section of the statement.

As of June 30, 2020, we had the following crude oil production and gas purchases hedges.

	Q3 2020		Q4 2020		FY 2021
Fixed Price Oil Swaps (Brent):
Hedged volume (MBbls)	2,208		2,208		4,678
Weighted-average price ($/Bbl)	$	59.85	$	59.85	$	45.99
Purchased Oil Calls Options (Brent):
Hedged volume (MBbls)	276		276		—
Weighted-average price ($/Bbl)	$	65.00	$	65.00	$	—
Fixed Price Gas Purchase Swaps (Kern, Delivered):
Hedged volume (MMBtu)	5,060,000		5,060,000		14,580,000
Weighted-average price ($/MMBtu)	$	2.89	$	2.76	$	2.72
Fixed Price Gas Purchase Swaps (SoCal Citygate):
Hedged volume (MMBtu)	460,000		155,000		—
Weighted-average price ($/MMBtu)	$	3.80	$	3.80	$	—

In July 2020, we added fixed price oil swaps (Brent) of 4,663 Bbls/d at nearly $46 beginning January through June 2021.

Our commodity derivatives are measured at fair value using industry-standard models with various inputs including publicly available underlying commodity prices and forward curves, and all are classified as Level 2 in the required fair value hierarchy for the periods presented. These commodity derivatives are subject to counterparty netting. The following tables present the fair values (gross and net) of our outstanding derivatives as of June 30, 2020 and December 31, 2019:

	June 30, 2020
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value		Gross Amounts Offset in the Balance Sheet		Net Fair Value Presented  on the Balance Sheet
	(in thousands)
Assets:
Commodity Contracts	Current assets	$	92,943	$	(8,262)	$	84,681
Commodity Contracts	Non-current assets	6,341		(1,073)		5,268
Liabilities:
Commodity Contracts	Current liabilities	(8,262)		8,262		—
Commodity Contracts	Non-current liabilities	(1,439)		1,073		(366)
Total derivatives		$	89,583	$	—	$	89,583

	December 31, 2019
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value		Gross Amounts Offset in the Balance Sheet		Net Fair Value Presented  on the Balance Sheet
	(in thousands)
Assets:
Commodity Contracts	Current assets	$	17,799	$	(8,633)	$	9,166
Commodity Contracts	Non-current assets	773		(248)		525
Liabilities:
Commodity Contracts	Current liabilities	(13,450)		8,633		(4,817)
Commodity Contracts	Non-current liabilities	(389)		248		(141)
Total derivatives		$	4,733	$	—	$	4,733

By using derivative instruments to economically hedge exposure to changes in commodity prices, we expose ourselves to credit 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 us, which creates credit risk. We do not receive collateral from our counterparties.

We minimize the credit risk in derivative instruments by limiting our exposure to any single counterparty. In addition, our RBL Facility prevents us from entering into hedging arrangements that are secured, except with our lenders and their affiliates that have margin call requirements, that otherwise require us to provide collateral or with a non-lender counterparty that does not have an A- or A3 credit rating or better from Standards & Poor’s or Moody’s, respectively. In accordance with our standard practice, our commodity derivatives are subject to counterparty netting under agreements governing such derivatives which partially mitigates the counterparty nonperformance risk.