Derivative Instruments and Hedging Activities |
Derivative Instruments and Hedging Activities Objectives and strategies for using derivative instruments
The Company is exposed to fluctuations in oil and natural gas prices received for its production. Consequently, the Company believes it is prudent to manage the variability in cash flows on a portion of its oil and natural gas production. The Company utilizes a mix of collars, swaps, and put and call options to manage fluctuations in cash flows resulting from changes in commodity prices. The Company does not use these instruments for speculative or trading purposes.
Counterparty risk and offsetting
The use of derivative instruments exposes the Company to the risk that a counterparty will be unable to meet its commitments. While the Company monitors counterparty creditworthiness on an ongoing basis, it cannot predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, the Company may be limited in its ability to mitigate an increase in counterparty credit risk. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices while continuing to be obligated under higher commodity price contracts subject to any right
of offset under the agreements. Counterparty credit risk is considered when determining the fair value of a derivative instrument. “See Note 9 - Fair Value Measurements” for further discussion.
The Company executes commodity derivative contracts under master agreements with netting provisions that provide for offsetting assets against liabilities. In general, if a party to a derivative transaction incurs an event of default, as defined in the applicable agreement, the other party will have the right to demand the posting of collateral, demand a cash payment transfer, or terminate the arrangement.
Financial statement presentation and settlements
Settlements of the Company’s commodity derivative instruments are based on the difference between the contract price or prices specified in the derivative instrument and a benchmark price, such as the NYMEX price. To determine the fair value of the Company’s derivative instruments, the Company utilizes present value methods that include assumptions about commodity prices based on those observed in underlying markets. See “Note 9 - Fair Value Measurements” for additional information regarding fair value.
Contingent consideration arrangements
Ranger Divestiture. The Company’s Ranger Divestiture provides for potential contingent consideration to be received by the Company if commodity prices exceed specified thresholds in each of the next several years. See “Note 4 - Acquisitions and Divestitures” and “Note 9 - Fair Value Measurements” for further discussion. This contingent consideration arrangement is summarized in the table below (in thousands except for per Bbl amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Threshold (1)
|
|
Contingent
Receipt -
Annual
|
|
Threshold (1)
|
|
Contingent
Receipt -
Annual
|
|
Period
Cash Flow
Occurs
|
|
Statement of
Cash Flows Presentation
|
|
Remaining Contingent
Receipt -
Aggregate Limit (3)
|
|
Divestiture
Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$8,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending Settlement |
|
2019 |
|
Greater than $60/Bbl, less than $65/Bbl |
|
$— |
|
Equal to or greater than $65/Bbl |
|
|
$— |
|
|
1Q20 |
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Potential Settlements |
|
2020-2021 |
|
Greater than $60/Bbl, less than $65/Bbl |
|
|
$9,000 |
|
|
Equal to or greater than $65/Bbl |
|
|
$20,833 |
|
|
(2) |
|
(2) |
|
|
$60,000 |
|
|
|
|
|
(1) |
The price used to determine whether the specified thresholds have been met is the average of the final monthly settlements for each month during each annual period end for NYMEX Light Sweet Crude Oil Futures, as reported by the CME Group Inc. |
|
|
(2) |
Cash received for settlements of contingent consideration arrangements are classified as cash flows from financing activities up to the divestiture date fair value with any excess classified as cash flows from operating activities. Therefore, if the commodity price threshold is reached, $8.5 million of the next contingent receipt will be presented in cash flows from financing activities with the remainder, as well as all subsequent contingent receipts, presented in cash flows from operating activities.
|
|
|
(3) |
The specified pricing threshold for 2019 was not met. As such, approximately $41.5 million remains for potential settlements in future years.
|
As a result of the Carrizo Acquisition, the Company assumed all contingent consideration arrangements previously entered into by Carrizo. These contingent consideration arrangements are summarized below:
Contingent ExL Consideration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year |
|
Threshold (1)
|
|
Period
Cash Flow
Occurs
|
|
Statement of
Cash Flows Presentation
|
|
Contingent
Payment -
Annual
|
|
Remaining Contingent
Payments -
Aggregate Limit
|
|
Acquisition
Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($69,171 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending Settlement |
|
2019 |
|
|
$50.00 |
|
|
1Q20 |
|
Investing |
|
|
($50,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Potential Settlements |
|
2020-2021 |
|
|
$50.00 |
|
|
(2) |
|
(2) |
|
|
($50,000 |
) |
|
|
($75,000 |
) |
(3) |
|
|
|
(1) |
The price used to determine whether the specified threshold for each year has been met is the average daily closing spot price per barrel of WTI crude oil as measured by the U.S. Energy Information Administration (“U.S. EIA”). |
|
|
(2) |
Cash paid for settlements of contingent consideration arrangements are classified as cash flows from financing activities up to the acquisition date fair value with any excess classified as cash flows from operating activities. Therefore, if the commodity price threshold is reached, all of the next contingent payment will be presented in cash flows from financing activities. |
|
|
(3) |
In January 2020, the Company paid $50.0 million as the specified pricing threshold was met. Only $25.0 million remains for potential settlements in future years.
|
Additionally, as part of the Carrizo Acquisition, the Company acquired contingent consideration arrangements where the Company could receive payments if certain pricing thresholds are met, which range between $53.00 - $60.00 per barrel of oil or $3.18 - $3.30 per MMBtu of natural gas. In January 2020, the Company received $10.0 million as the specified pricing thresholds were met for certain of the contingent consideration arrangements. As such, the aggregate limit of the remaining contingent receipts is $13.0 million and would be settled in January 2021 based on the specified pricing thresholds for 2020.
See “Note 18 - Subsequent Events” for further discussion of the Company’s actual settlements of its contingent consideration arrangements subsequent to December 31, 2019.
Derivatives not designated as hedging instruments
The Company records its derivative instruments at fair value in the consolidated balance sheets and records changes in fair value as “(Gain) loss on derivative contracts” in the consolidated statements of operations. Settlements are also recorded as a gain or loss on derivative contracts in the consolidated statements of operations.
As previously discussed, the Company’s commodity derivative contracts are subject to master netting arrangements. The Company’s policy is to present the fair value of derivative contracts on a net basis in the consolidated balance sheet. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019 |
|
Presented without |
|
|
|
As Presented with |
|
Effects of Netting |
|
Effects of Netting |
|
Effects of Netting |
|
(In thousands) |
Commodity derivative instruments |
|
$26,849 |
|
|
|
($17,511 |
) |
|
|
$9,338 |
|
Contingent consideration arrangements |
16,718 |
|
|
— |
|
|
16,718 |
|
Fair value of derivatives - current |
|
$43,567 |
|
|
|
($17,511 |
) |
|
|
$26,056 |
|
Commodity derivative instruments |
— |
|
|
— |
|
|
— |
|
Contingent consideration arrangements |
9,216 |
|
|
— |
|
|
9,216 |
|
Fair value of derivatives - non current |
|
$9,216 |
|
|
|
$— |
|
|
|
$9,216 |
|
|
|
|
|
|
|
Commodity derivative instruments |
|
($38,708 |
) |
|
|
$17,511 |
|
|
|
($21,197 |
) |
Contingent consideration arrangements |
(50,000 |
) |
|
— |
|
|
(50,000 |
) |
Fair value of derivatives - current |
|
($88,708 |
) |
|
|
$17,511 |
|
|
|
($71,197 |
) |
Commodity derivative instruments |
(12,935 |
) |
|
— |
|
|
(12,935 |
) |
Contingent consideration arrangements |
(19,760 |
) |
|
— |
|
|
(19,760 |
) |
Fair value of derivatives - non current |
|
($32,695 |
) |
|
|
$— |
|
|
|
($32,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2018 |
|
Presented without |
|
|
|
As Presented with |
|
Effects of Netting |
|
Effects of Netting |
|
Effects of Netting |
|
(In thousands) |
Fair value of derivatives - current |
|
$78,091 |
|
|
|
($12,977 |
) |
|
|
$65,114 |
|
|
|
|
|
|
|
Fair value of derivatives - current |
|
($23,457 |
) |
|
|
$12,977 |
|
|
|
($10,480 |
) |
Fair value of derivatives - non current |
(7,440 |
) |
|
— |
|
|
(7,440 |
) |
The components of “(Gain) loss on derivative contracts” are as follows for the respective periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31, |
|
2019 |
|
2018 |
|
2017 |
|
(In thousands) |
Oil derivatives |
|
|
|
|
|
Net gain (loss) on settlements |
|
($11,188 |
) |
|
|
($27,510 |
) |
|
|
($9,067 |
) |
Net gain (loss) on fair value adjustments |
(62,125 |
) |
|
72,973 |
|
|
(11,426 |
) |
Total gain (loss) on oil derivatives |
(73,313 |
) |
|
45,463 |
|
|
(20,493 |
) |
Natural gas derivatives |
|
|
|
|
|
Net gain (loss) on settlements |
7,399 |
|
|
238 |
|
|
594 |
|
Net gain (loss) on fair value adjustments |
1,490 |
|
|
2,843 |
|
|
998 |
|
Total gain (loss) on natural gas derivatives |
8,889 |
|
|
3,081 |
|
|
1,592 |
|
Contingent consideration arrangements |
|
|
|
|
|
Net gain (loss) on fair value adjustments |
2,315 |
|
|
— |
|
|
— |
|
Total gain (loss) on derivative contracts |
|
($62,109 |
) |
|
|
$48,544 |
|
|
|
($18,901 |
) |
Derivative positions
Listed in the tables below are the outstanding oil and natural gas derivative contracts as of December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
For the Full Year of |
|
For the Full Year of |
|
Oil contracts (WTI) |
2020 |
|
2021 |
|
Collar contracts with short puts (three-way collars) |
|
|
|
|
Total volume (Bbls) |
13,176,000 |
|
|
— |
|
|
Weighted average price per Bbl |
|
|
|
|
Ceiling (short call) |
|
$65.28 |
|
|
$ |
— |
|
|
Floor (long put) |
|
$55.38 |
|
|
$ |
— |
|
|
Floor (short put) |
|
$45.08 |
|
|
$ |
— |
|
|
Short call contracts |
|
|
|
|
Total volume (Bbls) |
1,674,450 |
|
(1 |
) |
4,825,300 |
|
(1) |
Weighted average price per Bbl |
|
$75.98 |
|
|
|
$63.62 |
|
|
Swap contracts |
|
|
|
|
Total volume (Bbls) |
1,303,900 |
|
|
— |
|
|
Weighted average price per Bbl |
|
$55.19 |
|
|
|
$— |
|
|
Swap contracts with short puts |
|
|
|
|
Total volume (Bbls) |
2,196,000 |
|
|
— |
|
|
Weighted average price per Bbl |
|
|
|
|
Swap |
|
$56.06 |
|
|
|
$— |
|
|
Floor (short put) |
|
$42.50 |
|
|
|
$— |
|
|
|
|
|
|
|
Oil contracts (Brent ICE) |
|
|
|
|
Collar contracts with short puts (three-way collars) |
|
|
|
|
Total volume (Bbls) |
837,500 |
|
|
— |
|
|
Weighted average price per Bbl |
|
|
|
|
Ceiling (short call) |
|
$70.00 |
|
|
|
$— |
|
|
Floor (long put) |
|
$58.24 |
|
|
|
$— |
|
|
Floor (short put) |
|
$50.00 |
|
|
|
$— |
|
|
|
|
|
|
|
Oil contracts (Midland basis differential) |
|
|
|
|
Swap contracts |
|
|
|
|
Total volume (Bbls) |
8,476,700 |
|
|
4,015,100 |
|
|
Weighted average price per Bbl |
|
($1.47 |
) |
|
|
$0.40 |
|
|
|
|
|
|
|
Oil contracts (Argus Houston MEH basis differential) |
|
|
|
|
Swap contracts |
|
|
|
|
Total volume (Bbls) |
1,439,205 |
|
|
— |
|
|
Weighted average price per Bbl |
|
$2.40 |
|
|
|
$— |
|
|
|
|
|
|
|
Oil contracts (Argus Houston MEH swaps) |
|
|
|
|
Swap contracts |
|
|
|
|
Total volume (Bbls) |
504,500 |
|
|
— |
|
|
Weighted average price per Bbl |
|
$58.22 |
|
|
|
$— |
|
|
|
|
|
|
|
Natural gas contracts (Henry Hub) |
|
|
|
|
Collar contracts (three-way collars) |
|
|
|
|
Total volume (MMBtu) |
3,660,000 |
|
|
— |
|
|
Weighted average price per MMBtu |
|
|
|
|
Ceiling (short call) |
|
$2.75 |
|
|
|
$— |
|
|
Floor (long put) |
|
$2.50 |
|
|
|
$— |
|
|
Floor (short put) |
|
$2.00 |
|
|
|
$— |
|
|
Swap contracts |
|
|
|
|
Total volume (MMBtu) |
3,660,000 |
|
|
— |
|
|
Weighted average price per MMBtu |
|
$2.48 |
|
|
|
$— |
|
|
Short call contracts |
|
|
|
|
Total volume (MMBtu) |
12,078,000 |
|
|
7,300,000 |
|
|
Weighted average price per MMBtu |
|
$3.50 |
|
|
|
$3.09 |
|
|
|
|
|
|
|
Natural gas contracts (Waha basis differential) |
|
|
|
|
Swap contracts |
|
|
|
|
Total volume (MMBtu) |
21,596,000 |
|
|
— |
|
|
Weighted average price per MMBtu |
|
($1.04 |
) |
|
|
$— |
|
|
(1)
Premiums from the sale of call options were used to increase the fixed price of certain simultaneously executed price swaps and three-way collars.
|