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 June 30, 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 production, and swap arrangements for NGL production. 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.

The Company has also entered into fixed price oil basis swaps in order to mitigate exposure to adverse pricing differentials between certain industry benchmark prices and the actual physical pricing points where the Company’s production volumes are sold. Currently, the Company has basis swap contracts with fixed price differentials between NYMEX WTI and WTI Midland for a portion of its Midland Basin production with sales contracts that settle at WTI Midland prices. The Company also has basis swaps with fixed price differentials between NYMEX WTI and Intercontinental Exchange Brent Crude (“ICE Brent”) for a portion of its Midland Basin oil production with sales contracts that settle at ICE Brent prices.

As of June 30, 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)
Third quarter 2018	1,769	$	49.77
Fourth quarter 2018	1,894	$	49.87
2019	1,940	$	50.70
Total	5,603

Oil Collars



Contract Period	NYMEX WTI Volumes	Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MBbl)	(per Bbl)		(per Bbl)
Third quarter 2018	1,948	$	50.00	$	58.61
Fourth quarter 2018	2,222	$	50.00	$	58.44
2019	10,055	$	50.59	$	63.62
2020	366	$	55.00	$	67.01
Total	14,591

Oil Basis Swaps



Contract Period	WTI Midland-NYMEX WTI Volumes	Weighted-Average Contract Price ⁽¹⁾			NYMEX WTI-ICE Brent Volumes	Weighted-Average Contract Price ⁽²⁾
	(MBbl)	(per Bbl)			(MBbl)	(per Bbl)
Third quarter 2018	3,018	$	(1.06	)	—	$	—
Fourth quarter 2018	3,327	$	(1.08	)	—	$	—
2019	11,217	$	(3.36	)	—	$	—
2020	7,250	$	(1.13	)	1,288	$	(7.97	)
2021	—	$	—		1,460	$	(7.80	)
2022	—	$	—		274	$	(7.67	)
Total	24,812				3,022

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


⁽²⁾	Represents the price differential between NYMEX WTI (Cushing, Oklahoma) and ICE Brent (North Sea).

Gas Swaps



Contract Period	Sold IF HSC Volumes	Weighted-Average Contract Price		Purchased IF HSC Volumes		Weighted-Average Contract Price		Net IF HSC Volumes	Weighted-Average Contract Price
	(BBtu)	(per MMBtu)		(BBtu)		(per MMBtu)		(BBtu)	(per MMBtu)
Third quarter 2018	28,218	$	3.25	(7,480	)	$	4.23	20,738	$	2.90
Fourth quarter 2018	28,204	$	3.27	(7,210	)	$	4.27	20,994	$	2.92
2019	41,394	$	3.87	(24,415	)	$	4.34	16,979	$	2.92
Total	97,816			(39,105	)			58,711

Gas Collars



Contract Period	IF HSC Volumes	Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(BBtu)	(per MMBtu)		(per MMBtu)
2019	14,242	$	2.50	$	2.83
Total	14,242

NGL Swaps



	OPIS Ethane Purity 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)
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	6,251			2,784			349			263			607

Commodity Derivative Contracts Entered Into Subsequent to June 30, 2018

Subsequent to June 30, 2018, the Company entered into various commodity derivative contracts, as summarized below:


•	NYMEX WTI costless collar contracts for 2020 for a total of 0.8 MMBbl of oil production with contract floor prices of $55.00 per Bbl and contract ceiling prices ranging from $64.50 per Bbl to $67.67 per Bbl;


•	fixed price NYMEX WTI-ICE Brent basis swap contracts for 2020 for a total of 0.6 MMBbl of oil production at contract prices ranging from ($8.06) per Bbl to ($8.15) per Bbl;


•	fixed price NYMEX WTI-ICE Brent basis swap contracts for 2021 for a total of 1.8 MMBbl of oil production at contract prices ranging from ($7.75) per Bbl to ($8.00) per Bbl;


•	fixed price NYMEX WTI-ICE Brent basis swap contracts for 2022 for a total of 2.6 MMBbl of oil production at contract prices ranging from ($7.60) per Bbl to ($7.90) per Bbl; and


•	fixed price OPIS Propane Mont Belvieu Non-TET swap contracts for 2019 for a total of 0.5 MMBbl of NGL production at contract prices ranging from $32.21 per Bbl to $32.26 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 fair value of the commodity derivative contracts was a net liability of $149.4 million and $139.4 million as of June 30, 2018 and December 31, 2017, respectively.

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



	As of June 30, 2018		As of December 31, 2017
	(in thousands)
Derivative assets:
Current assets	$	146,329	$	64,266
Noncurrent assets	31,151		40,362
Total derivative assets	$	177,480	$	104,628
Derivative liabilities:
Current liabilities	$	259,338	$	172,582
Noncurrent liabilities	67,583		71,402
Total derivative liabilities	$	326,921	$	243,984

Offsetting of Derivative Assets and Liabilities

As of June 30, 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 commodity derivative contracts:



	Derivative Assets						Derivative Liabilities
	As of						As of
	June 30, 2018			December 31, 2017			June 30, 2018			December 31, 2017
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	177,480		$	104,628		$	(326,921	)	$	(243,984	)
Amounts not offset in the accompanying balance sheets	(147,009		)	(100,035		)	147,009			100,035
Net amounts	$	30,471		$	4,593		$	(179,912	)	$	(143,949	)

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



	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2018		2017			2018			2017
	(in thousands)
Derivative settlement (gain) loss:
Oil contracts	$	24,430	$	2,754		$	45,178		$	11,838
Gas contracts	757		(21,751		)	(5,653		)	(39,257		)
NGL contracts	11,478		2,694			21,668			11,109
Total derivative settlement (gain) loss	$	36,665	$	(16,303	)	$	61,193		$	(16,310	)

Net derivative (gain) loss:
Oil contracts	$	22,402	$	(38,194	)	$	36,368		$	(87,784	)
Gas contracts	7,000		(6,038		)	16,990			(50,506		)
NGL contracts	34,347		(10,957		)	17,920			(31,673		)
Total net derivative (gain) loss	$	63,749	$	(55,189	)	$	71,278		$	(169,963	)

Credit Related Contingent Features

As of June 30, 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.