The Company may enter into commodity derivative contracts to manage its exposure to oil and gas price volatility associated with its production. These derivatives are not entered into for trading or speculative purposes. While the use of these instruments limits the downside risk of adverse commodity price changes, their use may also limit future cash flows from favorable commodity price changes. Depending on acquisitions consummated, changes in oil and gas futures markets, and management’s view of underlying supply and demand trends, the Company may increase or decrease its derivative positions. The Company’s commodity derivative contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses on commodity derivatives are recognized in the Company’s condensed consolidated statements of income.

The Company may utilize fixed price swaps, basis swaps, and two- and three-way collars to manage commodity price risk. The Company may enter into these contracts when management believes that favorable future sales prices for the Company’s production can be secured and acquisitions consummated are accretive. Under fixed price swap agreements, when actual commodity prices upon settlement exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty. When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company receives the difference from the counterparty. The Company may also enter into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (“NYMEX”) index price and a local index price that is representative of the price received by many of our operators. Under collar agreements, the Company receives the difference between the published index price and a floor price if the index price is below the floor price or the Company pays the difference between the ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index is between the floor and the ceiling. By utilizing a collar, the Company has fixed the minimum and maximum prices received on the underlying production.

The Company’s oil and gas swap contracts as of March 31, 2023 are summarized below:


	Oil (NYMEX WTI)
Remaining Term	Bbl per Day		Weighted Average Price per Bbl
April 2023 - December 2023		3,050	$	93.71
January 2024 - December 2024		3,300	$	82.66
January 2025 - June 2025		1,100	$	74.65


	Gas (NYMEX Henry Hub)
Remaining Term	MMBtu per Day		Weighted Average Price per MMBtu
April 2023 - December 2023		500	$	3.83
January 2024 - December 2024		500	$	3.41

The Company’s oil and gas two-way commodity collar contracts as of March 31, 2023 are summarized below:


	Oil (NYMEX WTI)
Remaining Term	Bbl per Day		Weighted Average Floor Price per Bbl		Weighted Average Ceiling Price per Bbl
January 2025 – June 2025		2,000	$	60.00	$	93.20


	Gas (NYMEX Henry Hub)
Remaining Term	MMBtu per Day		Weighted Average Floor Price per MMBtu		Weighted Average Ceiling Price per MMBtu
April 2023 - December 2023		8,500	$	4.82	$	7.93
January 2024 - December 2024		11,400	$	4.00	$	7.24
January 2025 – June 2025		11,600	$	3.31	$	10.34

The Company was not party to any basis swaps or three-way collar contracts as of March 31, 2023 and December 31, 2022.

In November 2022, the Company entered into an interest rate swap agreement for an initial notional amount of $225.0 million. Such notional amount decreases by $5.625 million every 91 days. The interest rate swap manages exposure to changes in interest rates from variable rate obligations related to the 2026 Senior Notes. The interest rate swap term expires December 31, 2023. The Company’s interest rate derivative contract has not been designated a hedge for accounting purposes; therefore, all gains and losses on the interest rate swap are recognized in the Company’s condensed consolidated statements of income. The interest rate swap was not entered into for trading or speculative purposes.

The following table presents a summary of the Company’s derivative instruments and where such values are recorded on the condensed consolidated balance sheets as of March 31, 2023 and December 31, 2022 (in thousands):


	March 31, 2023			December 31, 2022
	Balance sheet location	Fair value		Balance sheet location	Fair value
Asset derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current assets	$	24,411	Current assets	$	18,555
Interest rate contracts	Current assets		199	Current assets		319
Commodity contracts	Long-term assets		16,353	Long-term assets		13,379

Total asset derivatives		$	40,963		$	32,253

Liability derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current liabilities	$	—	Current liabilities	$	—
Commodity contracts	Long-term liabilities		—	Long-term liabilities		—

Total liability derivatives		$	—		$	—

Net derivatives		$	40,963		$	32,253

The following table presents the gross fair values of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented on the condensed consolidated balance sheets (in thousands):


	March 31, 2023								December 31, 2022
	Gross Fair Value			Gross Amounts Offset			Net Fair Value		Gross Fair Value			Gross Amounts Offset			Net Fair Value
Commodity derivative assets	$	43,753		$	(2,989	)	$	40,764	$	36,813		$	(4,879	)	$	31,934
Interest rate derivative assets		199			—			199		319			—			319
Commodity derivative liabilities		(2,989	)		2,989			—		(4,879	)		4,879			—

The following table is a summary of derivative gains and losses, and where such values are recorded in the condensed consolidated statements of income for the three months ended March 31, 2023 and 2022 (in thousands):


		Three Months Ended
	Statement of income location	March 31, 2023			March 31, 2022
Commodity derivative gains (losses)	Other income	$	14,763		$	(1,114	)
Interest rate derivative losses	Other income		(160	)		—

The fair values of commodity derivative and interest rate derivative instruments were determined using Level 2 inputs.

The Company is exposed to credit risk to the extent of nonperformance by the counterparties in the derivative contracts discussed above. All commodity derivative and interest rate derivative counterparties are current lenders under the Sitio Revolving Credit Facility. Accordingly, the Company is not required to provide any credit support to its derivative counterparties other than cross collateralization with the properties securing the Sitio Revolving Credit Facility. The Company’s derivative contracts are documented with industry standard contracts known as a Schedule to the Master Agreement and International Swaps and Derivative Association, Inc. Master Agreement (“ISDA”). Typical terms for each ISDA include credit support requirements, cross default provisions, termination events, and set-off provisions. The Company has set-off provisions with its lenders that, in the event of counterparty default, allow the Company to set-off amounts owed under the Sitio Revolving Credit Facility or other general obligations against amounts owed to the Company for derivative contract assets.