Derivatives and Risk Management

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVES AND RISK MANAGEMENT

The Company is exposed to volatility in market prices and basis differentials for natural gas, oil and NGLs which impacts the predictability of its cash flows related to the sale of those commodities. These risks are managed by the Company’s use of certain derivative financial instruments. As of June 30, 2019, the Company’s derivative financial instruments consisted of fixed price swaps, two-way costless collars, three-way costless collars, basis swaps, call options and interest rate swaps. A description of the Company’s derivative financial instruments is provided below:



Fixed price swaps	If the Company sells a fixed price swap, the Company receives a fixed price for the contract and pays a floating market price to the counterparty. If the Company purchases a fixed price swap, the Company receives a floating market price for the contract and pays a fixed price to the counterparty.



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. If the Company sells a basis swap, 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. If the Company purchases a basis swap, the Company pays the counterparty if the price differential is greater than the stated terms of the contract and receives a payment from the counterparty if the price differential is less than the stated terms of the contract.

Call options	The Company purchases and sells call options in exchange for a premium. If the Company purchases a call option, the Company receives from the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party. If the Company sells a call option, the Company pays the counterparty the excess (if any) of the market price over the strike price of the call option at the time of settlement, but if the market price is below the call’s strike price, no payment is due from either party.

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.

The Company chooses counterparties for its derivative instruments that it believes are creditworthy at the time the transactions are entered into, and the Company actively monitors the credit ratings and credit default swap rates of these counterparties where applicable. However, there can be no assurance that a counterparty will be able to meet its obligations to the Company. The Company presents its derivative positions on a gross basis and does not net the asset and liability positions.

As part of the Fayetteville Shale sale, the Company entered into certain natural gas derivative positions that were subsequently novated to the buyer in conjunction with finalization of the sale. The derivatives that were novated to the buyer are not included in the tables below.

The following tables provide information about the Company’s financial instruments that are sensitive to changes in commodity prices and that are used to protect the Company’s exposure. None of the financial instruments below are designated for hedge accounting treatment. The tables present the notional amount, the weighted average contract prices and the fair value by expected maturity dates as of June 30, 2019:



Financial Protection on Production
		Weighted Average Price per MMBtu
	Volume (Bcf)	Swaps		Sold Puts		Purchased Puts		Sold Calls		Basis Differential			Fair Value at June 30, 2019 (in millions)
Natural Gas
2019
Fixed price swaps	131	$	2.92	$	—	$	—	$	—	$	—		$	75
Two-way costless collars	25	—		—		2.78		2.92		—			13
Three-way costless collars	67	—		2.47		2.88		3.22		—			22
Total	223												$	110
2020
Fixed price swaps	24	$	2.88	$	—	$	—	$	—	$	—		$	8
Three-way costless collars	148	—		2.36		2.67		2.97		—			10
Total	172												$	18
2021
Three-way costless collars	37	$	—	$	2.35	$	2.60	$	2.93	$	—		$	(1	)

Basis Swaps
2019	80	$	—	$	—	$	—	$	—	$	(0.45	)	$	(6	)
2020	132	—		—		—		—		(0.34		)	(10		)
2021	28	—		—		—		—		(0.51		)	(1		)
Total	240												$	(17	)



	Volume (MBbls)	Weighted Average Strike Price per Bbl								Fair Value at June 30, 2019 (in millions)
	Volume (MBbls)	Swaps		Sold Puts		Purchased Puts		Sold Calls		Fair Value at June 30, 2019 (in millions)
Oil
2019
Fixed price swaps⁽¹⁾	1,003	$	60.89	$	—	$	—	$	—	$	4
Two-way costless collars	764	—		—		61.45		67.16		4
Three-way costless collars	276	—		45.00		55.00		63.67		—
Total	2,043									$	8
2020
Fixed price swaps	1,556	$	60.18	$	—	$	—	$	—	$	7
Two-way costless collars	366	—		—		60.00		69.80		3
Three-way costless collars	641	—		45.00		55.00		63.36		1
Total	2,563									$	11

Propane
2019
Fixed price swaps	1,955	$	30.18	$	—	$	—	$	—	$	14
Two-way costless collars	276	—		—		25.62		28.77		1
Total	2,231									$	15
2020
Fixed price swaps	2,196	$	26.97	$	—	$	—	$	—	$	6
Two-way costless collars	366	—		—		25.20		$	29.40	1
Total	2,562									$	7

Ethane
2019
Fixed price swaps	1,858	$	13.90	$	—	$	—	$	—	$	10
2020
Fixed price swaps	732	$	13.49	$	—	$	—	$	—	$	2


(1)	Includes 138 MBbls of purchased fixed price oil swaps hedged at $69.10 per barrel with a fair value of ($1) million and 1,141 MBbls of sold fixed price oil swaps hedged at $61.88 with a fair value of $5 million.



Other Derivative Contracts
	Volume (Bcf)	Weighted Average Strike Price per MMBtu		Fair Value at June 30, 2019 (in millions)
Purchased Call Options – Natural Gas
2019	17	$	3.50	$	—
2020	68	3.63		2
2021	57	3.52		2
Total	142			$	4

Sold Call Options – Natural Gas
2019	26	$	3.50	$	—
2020	137	3.39		(8		)
2021	114	3.33		(8		)
Total	277			$	(16	)

໿



	Volume (Bcf)	Weighted Average Strike Price per MMBtu		Basis Differential per MMBtu			Fair Value at June 30, 2019 ($ in millions)
Storage ⁽¹⁾
2019
Purchased fixed price swaps	1	$	2.87	$	—		$	(1	)
Purchased basis swaps	1	—		(0.53		)	—
Total	2						$	(1	)

2020
Fixed price swap	1	$	3.14	$	—		$	—


(1)	The Company has entered into certain derivatives to protect the value of volumes of natural gas injected into a storage facility that will be withdrawn at a later date.

At June 30, 2019, the net fair value of the Company’s financial instruments related to commodities was a $150 million asset. The net fair value of the Company’s interest rate swaps was a $1 million liability as of June 30, 2019.

As of June 30, 2019, the Company had no positions designated for hedge accounting treatment. Gains and losses on derivatives that are not designated for hedge accounting treatment, or do not meet hedge accounting requirements, are recorded as a component of gain (loss) on derivatives on the consolidated statements of operations. Accordingly, the gain (loss) on derivatives component of the statement of operations reflects the gain and losses on both settled and unsettled derivatives. The Company calculates gains and losses on settled derivatives as the summation of gains and losses on positions which have settled within the reporting period. Only the settled gains and losses are included in the Company’s realized commodity price calculations.

The Company is a party to interest rate swaps that were entered into to mitigate the Company’s exposure to volatility in interest rates. The interest rate swaps have a notional amount of $170 million and expire in June 2020. The Company did not designate the interest rate swaps for hedge accounting treatment. Changes in the fair value of the interest rate swaps are included in gain (loss) on derivatives on the consolidated statements of operations.

The balance sheet classification of the assets and liabilities related to derivative financial instruments (none of which are designated for hedge accounting treatment) is summarized below as of June 30, 2019 and December 31, 2018:



Derivative Assets
		Fair Value
(in millions)	Balance Sheet Classification	June 30, 2019			December 31, 2018
Derivatives not designated as hedging instruments:
Fixed price swaps – natural gas	Derivative assets	$	79		$	32
Fixed price swaps – oil	Derivative assets	7			13
Fixed price swaps – propane	Derivative assets	18			11
Fixed price swaps – ethane	Derivative assets	11			7
Two-way costless collars – natural gas	Derivative assets	13			11
Two-way costless collars – oil	Derivative assets	6			6
Two-way costless collars – propane	Derivative assets	2			—
Three-way costless collars – natural gas	Derivative assets	65			41
Three-way costless collars – oil	Derivative assets	2			—
Basis swaps – natural gas	Derivative assets	5			8
Purchased call options – natural gas	Derivative assets	1		⁽¹⁾	—
Interest rate swaps	Derivative assets	—			1
Fixed price swaps – natural gas	Other long-term assets	4			6
Fixed price swaps – oil	Other long-term assets	4			6
Fixed price swaps – propane	Other long-term assets	2			—
Fixed price swaps – ethane	Other long-term assets	1			1
Two-way costless collars – oil	Other long-term assets	2			5
Three-way costless collars – natural gas	Other long-term assets	31			34
Three-way costless collars – oil	Other long-term assets	2			—
Basis swaps – natural gas	Other long-term assets	2			3
Purchased call options – natural gas	Other long-term assets	4			6
Total derivative assets		$	261		$	191



Derivative Liabilities
		Fair Value
(in millions)	Balance Sheet Classification	June 30, 2019		December 31, 2018
Derivatives not designated as hedging instruments:
Purchased fixed price swap – oil	Derivative liabilities	$	1	$	6
Fixed price swaps – natural gas	Derivative liabilities	—		9
Fixed price swaps – ethane	Derivative liabilities	—		3
Two-way costless collars – natural gas	Derivative liabilities	—		7
Two-way costless collars – oil	Derivative liabilities	1		—
Three-way costless collars – natural gas	Derivative liabilities	37		33
Three-way costless collars – oil	Derivative liabilities	2		—
Basis swaps – natural gas	Derivative liabilities	19		18
Sold call options – natural gas	Derivative liabilities	5		3
Storage – fixed price swap	Derivative liabilities	1		—
Interest rate swaps	Derivative liabilities	1		—
Fixed price swaps – natural gas	Other long-term liabilities	—		1
Two-way costless collars – oil	Other long-term liabilities	—		1
Three-way costless collars – natural gas	Other long-term liabilities	28		35
Three-way costless collars – oil	Other long-term liabilities	1		—
Basis swap – natural gas	Other long-term liabilities	5		4
Sold call options – natural gas	Other long-term liabilities	11		19
Total derivative liabilities		$	112	$	139

(1) Includes $1 million in premiums paid related to certain natural gas purchased call options recognized as a component of derivative assets within current assets on the consolidated balance sheet at June 30, 2019. As certain natural gas purchased call options settle, the premium will be amortized and recognized as a component of gain (loss) on derivatives on the consolidated statements of operations.

The following tables summarize the before-tax effect of the Company’s derivative instruments on the consolidated statements of operations for the three and six months ended June 30, 2019 and 2018:



Unsettled Gain (Loss) on Derivatives Recognized in Earnings

Derivative Instrument	Consolidated Statement of Operations Classification of Gain (Loss) on Derivatives, Unsettled	For the three months ended June 30,						For the six months ended June 30,
Derivative Instrument		2019			2018			2019			2018

		(in millions)
Purchased fixed price swaps – oil	Gain (Loss) on Derivatives	$	1		$	—		$	5		$	—
Fixed price swaps – natural gas	Gain (Loss) on Derivatives	57			(26		)	55			(29		)
Fixed price swaps – oil	Gain (Loss) on Derivatives	5			—			(8		)	—
Fixed price swaps – propane	Gain (Loss) on Derivatives	13			(12		)	9			(9		)
Fixed price swaps – ethane	Gain (Loss) on Derivatives	—			(2		)	7			(2		)
Two-way costless collars – natural gas	Gain (Loss) on Derivatives	10			(1		)	9			2
Two-way costless collars – oil	Gain (Loss) on Derivatives	4			—			(3		)	—
Two-way costless collars – propane	Gain (Loss) on Derivatives	2			—			2			—
Three-way costless collars – natural gas	Gain (Loss) on Derivatives	22			(24		)	24			(29		)
Three-way costless collars – oil	Gain (Loss) on Derivatives	1			—			1			—
Basis swaps – natural gas	Gain (Loss) on Derivatives	4			(4		)	(6		)	16
Purchased call options – natural gas	Gain (Loss) on Derivatives	(2		)	(12		)	(2		)	4
Sold call options – natural gas	Gain (Loss) on Derivatives	4			31			6			(3		)
Sold call options – oil	Gain (Loss) on Derivatives	—			(6		)	—			(6		)
Storage – fixed price swap	Gain (Loss) on Derivatives	(1		)	—			(1		)	—
Interest rate swaps	Gain (Loss) on Derivatives	(2		)	—			(2		)	2
Total gain (loss) on unsettled derivatives		$	118		$	(56	)	$	96		$	(54	)

Settled Gain (Loss) on Derivatives Recognized in Earnings ⁽¹⁾

Derivative Instrument	Consolidated Statement of Operations Classification of Gain (Loss) on Derivatives, Settled	For the three months ended June 30,						For the six months ended June 30,
Derivative Instrument		2019			2018			2019			2018

		(in millions)
Purchased fixed price swaps – oil	Gain (Loss) on Derivatives	$	(1	)	$	—		$	(2	)	$	—
Sold fixed price swaps – natural gas	Gain (Loss) on Derivatives	14			13			8			13
Sold fixed price swaps – oil	Gain (Loss) on Derivatives	2			—			4			—
Sold fixed price swaps – propane	Gain (Loss) on Derivatives	7			(1		)	9			(1		)
Sold fixed price swaps – ethane	Gain (Loss) on Derivatives	5			—			6			—
Two-way costless collars – natural gas	Gain (Loss) on Derivatives	3			—			2			4
Two-way costless collars – oil	Gain (Loss) on Derivatives	1			—			2			—
Three-way costless collars – natural gas	Gain (Loss) on Derivatives	8			12			4			19
Sold basis swaps – natural gas	Gain (Loss) on Derivatives	(4		)	(3		)	(8		)	(24		)
Purchased call options – natural gas	Gain (Loss) on Derivatives	—			—			—			2			⁽²⁾
Sold call options – natural gas	Gain (Loss) on Derivatives	(1		)	—			(1		)	(1		)
Sold call options – oil	Gain (Loss) on Derivatives	—			(1		)	—			(1		)
Total gain on settled derivatives		$	34		$	20		$	24		$	11

Total gain (loss) on derivatives		$	152		$	(36	)	$	120		$	(43	)


(1)	The Company calculates gain (loss) on derivatives, settled, as the summation of gains and losses on positions that settled within the period.

(2)

Includes $1 million amortization of premiums paid related to certain natural gas call options for the six months ended June 30, 2018, which is included in gain (loss) on derivatives on the consolidated statements of operations.