Note 13 - Commodity 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. 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 consolidated financial statements.

Pursuant to the terms of our credit facilities with LegacyTexas Bank and Prudential, we have entered into swap and collar derivative agreements to hedge certain of our oil and natural gas production through 2021. As of December 31, 2018, these derivative agreements consisted of the following:

	Natural Gas Swaps				Natural Gas Collars (1)				Oil Swaps (1)
			Weighted				Weighted				Weighted				Weighted
			Average				Average Price		WTI		Average		Brent		Average
Year	MMBtu		Price (a)		MMBtu		Range (a)		Bbl		Price (b)		Bbl		Price (c)

2019		15,055,000	$	2.85		836,000	$	2.60 – $3.19		218,597	$	53.50		148,086	$	66.82
2020		12,433,000	$	2.73		1,018,000	$	2.50 – $2.70		121,147	$	55.37		151,982	$	66.03
2021		2,598,000	$	2.69		-	$	-		-	$	-		86,341	$	67.12

(1)	Includes 100% of Carbon California’s outstanding derivative hedges at December 31, 2018, and not our proportionate share.
(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 contracts for the respective period.

For our swap instruments, we receive a fixed price for the hedged commodity and pays 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 consolidated balance sheets (Note 11). These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	As of December 31,
	2018		2017
Commodity derivative contracts:
Commodity derivative asset	$	3,517	$	215
Commodity derivative asset – non-current	$	3,505	$	10

The table below summarizes the commodity settlements and unrealized gains and losses related to our derivative instruments for the years ended December 31, 2018 and 2017. These commodity settlements and unrealized gains and losses are recorded and included in commodity derivative gain or loss in the accompanying consolidated statements of operations.

(in thousands)	For the year ended December 31,
	2018			2017
Commodity derivative contracts:
Settlement (loss) gains	$	(3,848	)	$	770
Unrealized gains		8,742			2,158

Total settlement and unrealized gains, net	$	4,894		$	2,928

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

The counterparty in all our derivative instruments is BP Energy Company. We have entered into International Swaps and Derivatives Association (“ISDA”) Master Agreements with BP Energy Company that establishes standard terms for the derivative contracts and inter-creditor agreements with LegacyTexas Bank/Prudential and BP Energy Company 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 facilities.

We net our derivative instrument fair value amounts executed with BP Energy Company pursuant to ISDA master agreements, which provides 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 consolidated balance sheet, as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheet as of December 31, 2018.

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

Commodity derivative assets:	Commodity derivative	$	4,605		$	(1,088	)	$	3,517
	Other non-current assets		4,690			(1,185	)		3,505
Total derivative assets		$	9,295		$	(2,273	)	$	7,022

Commodity derivative liabilities:
	Commodity derivative	$	(1,088	)	$	1,088		$	-
	Commodity derivative: non-current		(1,185	)		1,185			-
Total derivative liabilities		$	(2,273	)	$	2,273		$	-

The following table summarizes the location and fair value amounts of all derivative instruments in the consolidated balance sheet, as well as the gross recognized derivative assets, liabilities and amounts offset in the consolidated balance sheet 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 non-current 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.