Note 10 – Derivative Financial Instruments

Summary of Oil, Gas, and NGL Derivative Contracts in Place

The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. As of December 31, 2017, all derivative counterparties were members of the Company’s credit facility lender group and all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of swap and collar arrangements for oil, and swap arrangements for gas and NGLs. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For collar arrangements, the Company receives the difference between an agreed upon index and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.

As of December 31, 2017, the Company had commodity derivative contracts outstanding through the second quarter of 2020, as summarized in the tables below.

Oil Swaps



Contract Period	NYMEX WTI Volumes	Weighted-Average Contract Price
	(MBbl)	(per Bbl)
First quarter 2018	1,075	$	50.16
Second quarter 2018	1,534	$	49.57
Third quarter 2018	1,769	$	49.77
Fourth quarter 2018	1,894	$	49.87
2019	1,940	$	50.70
Total	8,212

Oil Collars



Contract Period	NYMEX WTI Volumes	Weighted-Average Floor Price		Weighted-Average Ceiling Price
	(MBbl)	(per Bbl)		(per Bbl)
First quarter 2018	1,445	$	50.00	$	59.07
Second quarter 2018	1,459	$	50.00	$	59.03
Third quarter 2018	1,948	$	50.00	$	58.61
Fourth quarter 2018	2,222	$	50.00	$	58.44
2019	5,908	$	47.65	$	59.19
Total	12,982

Oil Basis Swaps



Contract Period	Midland-Cushing Volumes	Weighted-Average Contract Price⁽¹⁾
	(MBbl)	(per Bbl)
First quarter 2018	2,113	$	(1.15	)
Second quarter 2018	2,392	$	(1.03	)
Third quarter 2018	3,018	$	(1.06	)
Fourth quarter 2018	3,327	$	(1.08	)
2019	5,788	$	(1.09	)
Total	16,638

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⁽¹⁾	Represents the price differential between WTI prices at Midland, Texas and WTI prices at Cushing, Oklahoma.

Gas Swaps



Contract Period	Sold Volumes	Weighted-Average Contract Price		Purchased Volumes		Weighted-Average Contract Price		Net Volumes
	(BBtu)	(per MMBtu)		(BBtu)		(per MMBtu)		(BBtu)
First quarter 2018	28,910	$	3.55	(8,121	)	$	4.34	20,789
Second quarter 2018	23,507	$	3.31	(7,795	)	$	4.24	15,712
Third quarter 2018	24,627	$	3.29	(7,480	)	$	4.23	17,147
Fourth quarter 2018	25,856	$	3.29	(7,210	)	$	4.27	18,646
2019	41,394	$	3.76	(24,415	)	$	4.34	16,979
Total ⁽¹⁾	144,294			(55,021	)			89,273

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⁽¹⁾	Total net volumes of gas swaps are comprised of IF HSC (99%) and IF El Paso Permian (1%).

NGL Swaps



	OPIS Purity Ethane Mont Belvieu			OPIS Propane Mont Belvieu Non-TET			OPIS Normal Butane Mont Belvieu Non-TET			OPIS Isobutane Mont Belvieu Non-TET			OPIS Natural Gasoline Mont Belvieu Non-TET
Contract Period	Volumes	Weighted-Average Contract Price		Volumes	Weighted-Average Contract Price		Volumes	Weighted-Average Contract Price		Volumes	Weighted-Average Contract Price		Volumes	Weighted-Average Contract Price
	(MBbl)	(per Bbl)		(MBbl)	(per Bbl)		(MBbl)	(per Bbl)		(MBbl)	(per Bbl)		(MBbl)	(per Bbl)
First quarter 2018	923	$	10.90	629	$	25.39	206	$	35.83	167	$	35.76	188	$	49.40
Second quarter 2018	915	$	10.87	554	$	24.94	84	$	35.69	66	$	35.07	109	$	49.57
Third quarter 2018	1,033	$	10.99	610	$	24.27	93	$	35.70	70	$	35.07	118	$	49.56
Fourth quarter 2018	1,146	$	11.18	671	$	24.39	102	$	35.70	76	$	35.07	129	$	49.57
2019	3,533	$	12.31	1,503	$	27.83	154	$	35.64	117	$	35.70	197	$	50.93
2020	539	$	11.13	—	$	—	—	$	—	—	$	—	—	$	—
Total	8,089			3,967			639			496			741

Commodity Derivative Contracts Entered Into After December 31, 2017

Subsequent to December 31, 2017, the Company entered into NGL Swap contracts for 2018 for approximately 228 MBbl of OPIS Natural Gasoline Mont Belvieu Non-TET NGL production at a contract price of $53.34 per Bbl.

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The Company does not designate its derivative commodity contracts as hedging instruments. The fair value of the derivative commodity contracts was a net liability of $139.4 million at December 31, 2017, and net liability of $91.7 million at December 31, 2016.

The following tables detail the fair value of derivatives recorded in the accompanying balance sheets, by category:



	As of December 31, 2017
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	64,266	Current liabilities	$	172,582
Commodity contracts	Noncurrent assets	40,362		Noncurrent liabilities	71,402
Total commodity contracts		$	104,628		$	243,984



	As of December 31, 2016
	Derivative Assets			Derivative Liabilities
	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	54,521	Current liabilities	$	115,464
Commodity contracts	Noncurrent assets	67,575		Noncurrent liabilities	98,340
Total commodity contracts		$	122,096		$	213,804

Offsetting of Derivative Assets and Liabilities

As of December 31, 2017, and 2016, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.

The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts:



	Derivative Assets						Derivative Liabilities
	As of December 31,						As of December 31,
Offsetting of Derivative Assets and Liabilities	2017			2016			2017			2016
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	104,628		$	122,096		$	(243,984	)	$	(213,804	)
Amounts not offset in the accompanying balance sheets	(100,035		)	(118,080		)	100,035			118,080
Net amounts	$	4,593		$	4,016		$	(143,949	)	$	(95,724	)

The Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in accumulated other comprehensive income (loss). The Company had no derivatives designated as hedging instruments for the years ended December 31, 2017, 2016, and 2015. Please refer to Note 11 – Fair Value Measurements for more information regarding the Company’s derivative instruments, including its valuation techniques.

The following table summarizes the components of net derivative (gain) loss presented in the accompanying statements of operations:



	For the Years Ended December 31,
	2017			2016			2015
	(in thousands)
Derivative settlement (gain) loss:
Oil contracts	$	31,176		$	(243,102	)	$	(362,219	)
Gas contracts ⁽¹⁾	(87,857		)	(94,936		)	(123,180		)
NGL contracts	35,447			8,560			(27,167		)
Total derivative settlement gain	$	(21,234	)	$	(329,478	)	$	(512,566	)

Net derivative (gain) loss:
Oil contracts	$	71,502		$	85,370		$	(191,165	)
Gas contracts	(76,315		)	81,060			(189,734		)
NGL contracts	31,227			84,203			(27,932		)
Total net derivative (gain) loss	$	26,414		$	250,633		$	(408,831	)

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⁽¹⁾	Gas derivative settlements for the year ended December 31, 2015, include $15.3 million of early settlements of futures contracts as a result of divesting assets in the Company’s Mid-Continent region.

Credit Related Contingent Features

As of December 31, 2017, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. The Company’s obligations under its Credit Agreement and derivative contracts are secured by mortgages on assets having a value equal to at least 90 percent of the total PV-9 of the Company’s proved oil and gas properties evaluated in the most recent reserve report.