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 March 31, 2018, 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 gas, and swap arrangements for 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 March 31, 2018, the Company had commodity derivative contracts outstanding as summarized in the tables below:

Oil Swaps



Contract Period	NYMEX WTI Volumes	Weighted-Average Contract Price
	(MBbl)	(per Bbl)
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	7,137

Oil Collars



Contract Period	NYMEX WTI Volumes	Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MBbl)	(per Bbl)		(per Bbl)
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	11,537

Oil Basis Swaps



Contract Period	Midland-Cushing Volumes	Weighted-Average Contract Price ⁽¹⁾
	(MBbl)	(per Bbl)
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	14,525

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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)
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⁾	115,384			(46,900	)			68,484

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⁽¹⁾	Total net volumes of gas swaps are comprised 100% of IF HSC.

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)
Second quarter 2018	915	$	10.87	554	$	24.94	84	$	35.69	66	$	35.07	175	$	50.99
Third quarter 2018	1,033	$	10.99	610	$	24.27	93	$	35.70	70	$	35.07	202	$	51.13
Fourth quarter 2018	1,146	$	11.18	671	$	24.39	102	$	35.70	76	$	35.07	208	$	50.99
2019	3,533	$	12.31	1,503	$	27.83	154	$	35.64	117	$	35.70	197	$	50.93
2020	539	$	11.13	—	$	—	—	$	—	—	$	—	—	$	—
Total	7,166			3,338			433			329			782

Commodity Derivative Contracts Entered Into After March 31, 2018

Subsequent to March 31, 2018, the Company entered into various derivative contracts, as summarized below:


•	NYMEX WTI costless collar contracts for 2019 for a total of 2.1 MMBbl of oil production with contract floor prices ranging from $50.00 per Bbl to $55.00 per Bbl and contract ceiling prices ranging from $66.60 per Bbl to $68.62 per Bbl;


•	fixed price Midland-Cushing basis swap contract for 2019 for a total of 0.5 MMBbl of oil production at a contract price of ($3.80) per Bbl;


•	fixed price Midland-Cushing basis swap contracts for 2020 for a total of 2.3 MMBbl of oil production at contract prices ranging from ($0.80) per Bbl to ($0.97) per Bbl; and


•	IF HSC costless collar contracts for 2019 for a total of 14,242 BBtu of gas production with contract floor prices of $2.50 per MMBtu and contract ceiling prices ranging from $2.83 per MMBtu to $2.84 per MMBtu.

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 fair value of the commodity derivative contracts was a net liability of $122.4 million as of March 31, 2018, and a net liability of $139.4 million as of December 31, 2017.

The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category:



	As of March 31, 2018		As of December 31, 2017
	(in thousands)
Derivative assets:
Current assets	$	77,296	$	64,266
Noncurrent assets	35,128		40,362
Total derivative assets	$	112,424	$	104,628
Derivative liabilities:
Current liabilities	$	181,068	$	172,582
Noncurrent liabilities	53,712		71,402
Total derivative liabilities	$	234,780	$	243,984

Offsetting of Derivative Assets and Liabilities

As of March 31, 2018, and December 31, 2017, 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						As of
	March 31, 2018			December 31, 2017			March 31, 2018			December 31, 2017
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	112,424		$	104,628		$	(234,780	)	$	(243,984	)
Amounts not offset in the accompanying balance sheets	(100,617		)	(100,035		)	100,617			100,035
Net amounts	$	11,807		$	4,593		$	(134,163	)	$	(143,949	)

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



		For the Three Months Ended March 31,
		2018			2017
	(in thousands)
Derivative settlement (gain) loss:
Oil contracts		$	20,748		$	9,084
Gas contracts		(6,410		)	(17,506		)
NGL contracts		10,190			8,415
Total derivative settlement (gain) loss		$	24,528		$	(7	)

Net derivative (gain) loss:
Oil contracts		$	13,966		$	(49,590	)
Gas contracts		9,990			(44,468		)
NGL contracts		(16,427		)	(20,716		)
Total net derivative (gain) loss		$	7,529		$	(114,774	)

Credit Related Contingent Features

As of March 31, 2018, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility lender group. Under the Credit Agreement and derivative contracts, the Company is required to secure 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.