Note 13 - Physical Delivery Contracts and Gas Derivatives

We historically have used commodity-based derivative contracts to manage exposures to commodity price on certain of our oil and natural gas production. We do not hold or issue derivative financial instruments for speculative or trading purposes. We also have entered into fixed price delivery contracts to effectively provide commodity price hedges. Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives. Therefore, these contracts are not recorded at fair value in the unaudited condensed consolidated financial statements.

Pursuant to the terms of our credit facility, the Note Purchase Agreements and the Securities Purchase Agreement, we have entered into swap and collar derivative agreements to hedge certain of our oil and natural gas production through 2021. As of September 30, 2018, these derivative agreements consisted of the following:

Our Physical Delivery Contracts and Oil and Gas Derivatives

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted
			Average				Average Price				Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)

2018		870,000	$	3.00		-		-		23,000	$	55.09
2019		2,596,000	$	2.86		204,000		$2.60-$2.80		61,900	$	56.05
2020						1,018,000		$2.50-$2.70		21,000	$	60.72

(a)	NYMEX Henry Hub Natural Gas futures contract for the respective period.

(b)	NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective period.

Carbon California Physical Delivery Contracts and Oil and Gas Derivatives

	Natural Gas Swaps				Natural Gas Collars				Oil Swaps
			Weighted				Weighted				Weighted				Weighted
			Average				Average Price		WTI		Average		Brent		Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)		Bbl		Price (c)

2018		90,000	$	3.03		-		-		48,628	$	53.06		62,792	$	66.46
2019		-	$	-		360,000		$2.60-$3.03		139,797	$	51.96		141,786	$	66.58
2020		-	$	-		-		-		73,147	$	50.12		139,682	$	65.71
2021		-	$	-		-		-			$	-		86,341	$	67.12

(a)	NYMEX Henry Hub Natural Gas futures contract for the respective period.

(b)	NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective period.

(c)	Brent future and NYMEX contracts for the respective period.

For our swap instruments, we receive a fixed price for the hedged commodity and pay a floating price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

Costless collars are designed to establish floor and ceiling prices on anticipated future oil and gas production. The ceiling establishes a maximum price that we will receive for the volumes under contract, while the floor establishes a minimum price.

The following table summarizes the fair value of the derivatives recorded in the unaudited consolidated balance sheets (see note 12). These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	September 30, 2018		December 31, 2017
Commodity derivative contracts:
Commodity derivative asset	$	-	$	215
Other long-term assets	$	-	$	10

Commodity derivative liabilities	$	6,502	$	-
Commodity derivative liabilities, non-current	$	4,299	$	-

The table below summarizes the commodity settlements and unrealized gains and losses related to our derivative instruments. These commodity settlements and unrealized gains and losses are recorded and included in commodity derivative gain or loss in the accompanying unaudited consolidated statements of operations.

	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2018			2017			2018			2017
Commodity derivative contracts:
Settlement (loss) gain	$	(1,108	)	$	345		$	(2,169	)	$	463
Unrealized (loss) gain		(2,794	)		(844	)		(8,381	)		2,179
Total settlement and unrealized (loss) gain, net	$	(3,902	)	$	(499	)	$	(10,550	)	$	2,642

Commodity derivative settlement gains and losses are included in cash flows from operating activities in our unaudited consolidated statements of cash flows.

The counterparty in all our derivative instruments is BP Energy Company. We and Carbon California have entered into International Swaps and Derivatives Association (“ISDA”) Master Agreements with BP Energy Company that establish standard terms for the derivative contracts and inter-creditor agreements whereby any credit exposure related to the derivative contracts entered into by us and BP Energy Company is secured by the collateral and backed by the guarantees supporting the credit facility.

We and Carbon California net our derivative instrument fair value amounts executed with BP Energy Company pursuant to ISDA master agreements, which provide for the net settlement over the term of the contracts and in the event of default or termination of the contracts. The following table summarizes the location and fair value amounts of all derivative instruments in the unaudited consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited consolidated balance sheets as of September 30, 2018.

								Net
		Gross						Recognized
		Recognized			Gross			Fair Value
		Assets/			Amounts			Assets/
	Balance Sheet Classification	Liabilities			Offset			Liabilities

Commodity derivative assets:	Commodity derivative	$	334		$	(334	)	$	-
	Other long-term assets		248			(248	)		-
Total derivative assets		$	582		$	(582	)	$	-

Commodity derivative liabilities:
	Commodity derivative	$	(6,836	)	$	334		$	(6,502	)
	Commodity derivative: non-current		(4,547	)		248			(4,299	)
Total derivative liabilities		$	(11,383	)	$	582		$	(10,801	)

The following table summarizes the location and fair value amounts of all derivative instruments in the consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheets as of December 31, 2017.

								Net
		Gross						Recognized
		Recognized			Gross			Fair Value
		Assets/			Amounts			Assets/
	Balance Sheet Classification	Liabilities			Offset			Liabilities

Commodity derivative assets:	Commodity derivative	$	624		$	(409	)	$	215
	Other long-term assets		250			(240	)		10
Total derivative assets		$	874		$	(649	)	$	225

Commodity derivative liabilities:
	Commodity derivative	$	(409	)	$	409		$	-
	Commodity derivative: non-current		(240	)		240			-
Total derivative liabilities		$	(649	)	$	649		$	-

Due to the volatility of oil and natural gas prices, the estimated fair values of our derivatives are subject to large fluctuations from period to period.