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 September 30, 2018, all derivative counterparties were members of the Company’s Credit Agreement 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 September 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)
Fourth quarter 2018	1,894	$	49.87
2019	3,733	$	59.80
2020	2,491	$	65.68
Total	8,118

Oil Collars



Contract Period	NYMEX WTI Volumes	Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MBbl)	(per Bbl)		(per Bbl)
Fourth quarter 2018	2,222	$	50.00	$	58.44
2019	10,055	$	50.59	$	63.62
2020	1,165	$	55.00	$	66.47
Total	13,442

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)
Fourth quarter 2018	3,327	$	(1.08	)	—	$	—
2019	11,217	$	(3.36	)	—	$	—
2020	10,960	$	(1.05	)	1,840	$	(8.01	)
2021	—	$	—		3,650	$	(7.86	)
2022	—	$	—		3,650	$	(7.78	)
Total	25,504				9,140

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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)
Fourth quarter 2018	28,204	$	3.27	(7,210	)	$	4.27	20,994	$	2.92
2019	50,021	$	3.58	(24,415	)	$	4.34	25,606	$	2.85
2020	2,942	$	2.82	—		$	—	2,942	$	2.82
Total	81,167			(31,625	)			49,542

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

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)
Fourth quarter 2018	1,146	$	11.18	671	$	24.39	102	$	35.70	76	$	35.07	208	$	50.99
2019	3,533	$	12.31	1,980	$	28.89	154	$	35.64	117	$	35.70	197	$	50.93
2020	539	$	11.13	—	$	—	—	$	—	—	$	—	—	$	—
Total	5,218			2,651			256			193			405

Commodity Derivative Contracts Entered Into Subsequent to September 30, 2018

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


•	fixed price NYMEX WTI-ICE Brent basis swap contracts for 2020 for a total of 0.9 MMBbl of oil production at contract prices ranging from ($8.05) per Bbl to ($8.10) per Bbl;


•	IF HSC swap contracts for 2019 for a total of 15,769 BBtu of natural gas production at contract prices ranging from $2.80 per MMBtu to $3.42 per MMBtu;


•	fixed price OPIS Propane Mont Belvieu Non-TET swap contract for the fourth quarter of 2018 for a total of 0.1 MMBbl of propane production at a contract price of $45.59 per Bbl; and


•	fixed price OPIS Propane Mont Belvieu Non-TET swap contracts for 2019 for a total of 0.4 MMBbl of propane production at a contract price of $40.11 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 $286.7 million and $139.4 million as of September 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 September 30, 2018		As of December 31, 2017
	(in thousands)
Derivative assets:
Current assets	$	81,163	$	64,266
Noncurrent assets	8,853		40,362
Total derivative assets	$	90,016	$	104,628
Derivative liabilities:
Current liabilities	$	304,159	$	172,582
Noncurrent liabilities	72,605		71,402
Total derivative liabilities	$	376,764	$	243,984

Offsetting of Derivative Assets and Liabilities

As of September 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
	September 30, 2018			December 31, 2017			September 30, 2018			December 31, 2017
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	90,016		$	104,628		$	(376,764	)	$	(243,984	)
Amounts not offset in the accompanying balance sheets	(90,016		)	(100,035		)	90,016			100,035
Net amounts	$	—		$	4,593		$	(286,748	)	$	(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 September 30,					For the Nine Months Ended September 30,
	2018		2017			2018			2017
	(in thousands)
Derivative settlement (gain) loss:
Oil contracts	$	16,798	$	2,472		$	61,976		$	14,310
Gas contracts	802		(24,088		)	(4,851		)	(63,345		)
NGL contracts	23,118		8,524			44,786			19,633
Total derivative settlement (gain) loss	$	40,718	$	(13,092	)	$	101,911		$	(29,402	)

Net derivative (gain) loss:
Oil contracts	$	110,413	$	45,874		$	146,781		$	(41,910	)
Gas contracts	4,309		(6,068		)	21,299			(56,574		)
NGL contracts	63,304		40,793			81,224			9,120
Total net derivative (gain) loss	$	178,026	$	80,599		$	249,304		$	(89,364	)

Credit Related Contingent Features

As of September 30, 2018, and through the filing of this report, all of the Company’s derivative counterparties were members of the Company’s Credit Agreement lender group. Under the Credit Agreement, the Company is required to provide mortgage liens on assets having a value equal to at least 85 percent of the total PV-9 of the Company’s proved oil and gas properties evaluated in the most recent reserve report. Collateral securing indebtedness under the Credit Agreement also secures the Company’s derivative agreement obligations.