Derivative Financial Instruments

12 Months Ended

Dec. 31, 2019

Derivative Instruments Not Designated as Hedging Instruments [Abstract]

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, 2019, 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 price 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 December 31, 2019, the Company had commodity derivative contracts outstanding through the fourth quarter of 2022, as summarized in the tables below.

Oil Swaps



Contract Period	NYMEX WTI Volumes	Weighted-Average Contract Price
	(MBbl)	(per Bbl)
First quarter 2020	2,486	$	59.65
Second quarter 2020	2,838	$	58.81
Third quarter 2020	3,361	$	56.43
Fourth quarter 2020	3,937	$	56.94
2021	667	$	56.00
Total	13,289

Oil Collars



Contract Period	NYMEX WTI Volumes	Weighted-Average Floor Price		Weighted-Average Ceiling Price
	(MBbl)	(per Bbl)		(per Bbl)
First quarter 2020	2,267	$	55.00	$	63.91
Second quarter 2020	1,881	$	55.00	$	62.17
Third quarter 2020	1,252	$	55.00	$	62.90
Fourth quarter 2020	610	$	55.00	$	61.90
2021	329	$	55.00	$	56.70
Total	6,339

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)
First quarter 2020	4,193	$	(0.68	)	—	$	—
Second quarter 2020	3,495	$	(0.68	)	910	$	(8.06	)
Third quarter 2020	3,325	$	(0.74	)	920	$	(8.01	)
Fourth quarter 2020	3,261	$	(0.73	)	920	$	(8.01	)
2021	5,954	$	0.59		3,650	$	(7.86	)
2022	—	$	—		3,650	$	(7.78	)
Total	20,228				10,050

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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	IF HSC Volumes	Weighted-Average Contract Price		WAHA Volumes	Weighted-Average Contract Price
	(BBtu)	(per MMBtu)		(BBtu)	(per MMBtu)
First quarter 2020	9,123	$	2.98	3,099	$	1.93
Second quarter 2020	4,160	$	2.20	3,196	$	0.56
Third quarter 2020	4,493	$	2.41	3,268	$	1.03
Fourth quarter 2020	3,722	$	2.36	3,419	$	1.17
2021	—	$	—	4,224	$	1.51
Total ⁽¹⁾	21,498			17,206

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⁽¹⁾	The Company has natural gas swaps in place that settle against Inside FERC Houston Ship Channel (“IF HSC”), Inside FERC West Texas (“IF WAHA”), and Platt’s Gas Daily West Texas (“GD WAHA”). As of December 31, 2019, WAHA volumes were comprised of 92 percent IF WAHA and eight percent GD WAHA.

NGL Swaps



	OPIS Ethane Purity Mont Belvieu			OPIS Propane Mont Belvieu Non-TET
Contract Period	Volumes	Weighted-Average Contract Price		Volumes	Weighted-Average Contract Price
	(MBbl)	(per Bbl)		(MBbl)	(per Bbl)
First quarter 2020	447	$	11.53	382	$	22.64
Second quarter 2020	264	$	11.13	382	$	22.34
Third quarter 2020	—	$	—	409	$	22.33
Fourth quarter 2020	—	$	—	466	$	22.29
Total	711			1,639

Commodity Derivative Contracts Entered Into Subsequent to December 31, 2019

Subsequent to December 31, 2019, the Company entered into the following commodity derivative contracts:


•	fixed price NYMEX WTI oil swap contracts for the fourth quarter of 2020 through January 2021 for a total of 0.6 MMBbl of oil production at a weighted-average contract price of $57.82 per Bbl; and


•	fixed price WTI Midland-NYMEX WTI oil basis swap contracts for the second quarter of 2020 through the fourth quarter of 2022 for a total of 16.3 MMBbl of oil production at a weighted-average contract price of $1.14 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, with the exception of derivative instruments that meet the “normal purchase normal sale” exclusion. The Company does not designate its derivative commodity contracts as hedging instruments. The fair value of the commodity derivative contracts at December 31, 2019, and 2018, was a net asset of $21.5 million and $158.3 million, respectively.

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



	As of December 31, 2019		As of December 31, 2018
	(in thousands)
Derivative assets:
Current assets	$	55,184	$	175,130
Noncurrent assets	20,624		58,499
Total derivative assets	$	75,808	$	233,629
Derivative liabilities:
Current liabilities	$	50,846	$	62,853
Noncurrent liabilities	3,444		12,496
Total derivative liabilities	$	54,290	$	75,349

Offsetting of Derivative Assets and Liabilities

As of December 31, 2019, and 2018, 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 December 31,						As of December 31,
	2019			2018			2019			2018
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	75,808		$	233,629		$	(54,290	)	$	(75,349	)
Amounts not offset in the accompanying balance sheets	(35,075		)	(56,041		)	35,075			56,041
Net amounts	$	40,733		$	177,588		$	(19,215	)	$	(19,308	)

The Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring such amounts in accumulated other comprehensive income (loss). The Company had no derivatives designated as hedging instruments for the years ended December 31, 2019, 2018, and 2017. 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 commodity components of the net derivative (gain) loss line item presented in the accompanying statements of operations:



	For the Years Ended December 31,
	2019			2018			2017
	(in thousands)
Derivative settlement (gain) loss:
Oil contracts	$	19,685		$	68,860		$	31,176
Gas contracts	(23,008		)	13,029			(87,857		)
NGL contracts	(35,899		)	53,914			35,447
Total derivative settlement (gain) loss	$	(39,222	)	$	135,803		$	(21,234	)

Net derivative (gain) loss:
Oil contracts	$	172,055		$	(192,002	)	$	71,502
Gas contracts	(41,205		)	35,411			(76,315		)
NGL contracts	(33,311		)	(5,241		)	31,227
Total net derivative (gain) loss	$	97,539		$	(161,832	)	$	26,414

Credit Related Contingent Features

As of December 31, 2019, 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, as defined in the Credit Agreement, 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.