Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.19.3
Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Derivative Instruments and Hedging Activities

Objectives and strategies for using commodity 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 7 for additional information regarding fair value.

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 7 for additional information regarding fair value.

Contingent consideration arrangement

Our Ranger Asset Divestiture in June of 2019 provides for potential contingent consideration to be received by the Company if commodity prices exceed specific thresholds in each of the next several years. On the disposition date, we recognized a derivative asset of $8,512 based on the initial fair value measurement. See Note 7 for additional information regarding fair value measurement. These contingent payments are summarized in the tables below (in thousands):
Year of Potential Settlement
 
Threshold (a)
 
Contingent Payment Amount
 
Threshold (a)
 
Contingent Payment Amount
 
Fair Value as of September 30, 2019 (b)
 
Aggregate Settlements Limit(c)
 
 
 
 
 
 
 
 
 
 
 
 
$
60,000

2019
 
Greater than $60/bbl, less than $65/bbl
 
$9,000
 
Equal to or greater than $65/bbl
 
$20,833
 
$116
 
 
2020
 
Greater than $60/bbl, less than $65/bbl
 
$9,000
 
Equal to or greater than $65/bbl
 
$20,833
 
$3,977
 
 
2021
 
Greater than $60/bbl, less than $65/bbl
 
$9,000
 
Equal to or greater than $65/bbl
 
$20,833
(c) 
$3,496
 
 

(a)
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.
(b)
Contingent consideration to be received will be classified as cash flows from financing activities up to the initial recognition fair value of $8,512; amounts in excess of the initial recognition fair value will be classified as cash flows from operating activities.
(c)
In the event that the 2019 and 2020 prices exceed the $65/bbl threshold, the aggregate amount of contingent consideration is limited to $60,000, resulting in the potential reduction in settlement for 2021 to $18,334.

Derivatives not designated as hedging instruments

The Company records its derivative contracts at fair value in the consolidated balance sheets and records changes in fair value as a gain or 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.

The following table reflects the fair value of the Company’s derivative instruments for the periods presented:
As of September 30, 2019
Derivative Instrument
 
Balance Sheet Presentation
 
Asset
 
Liability
 
Net Asset (Liability)
Commodity - Oil
 
Fair value of derivatives - Current
 
$
23,487

 
$
(8,795
)
 
$
14,692

Commodity - Natural gas
 
Fair value of derivatives - Current
 
1,429

 
(146
)
 
1,283

Contingent consideration arrangement
 
Fair value of derivatives - Current
 
116

 

 
116

Commodity - Oil
 
Fair value of derivatives - Non-current
 
3,736

 
(2,233
)
 
1,503

Commodity - Natural gas
 
Fair value of derivatives - Non-current
 

 
(340
)
 
(340
)
Contingent consideration arrangement
 
Fair value of derivatives - Non-current
 
7,473

 

 
7,473

   Totals
 
 
 
$
36,241

 
$
(11,514
)
 
$
24,727

 
 
 
 
 
 
 
 
 
As of December 31, 2018
Derivative Instrument
 
Balance Sheet Presentation
 
Asset
 
Liability
 
Net Asset (Liability)
Commodity - Oil
 
Fair value of derivatives - Current
 
$
60,097

 
$
(10,480
)
 
$
49,617

Commodity - Natural gas
 
Fair value of derivatives - Current
 
5,017

 

 
5,017

Commodity - Oil
 
Fair value of derivatives - Non-current
 

 
(5,672
)
 
(5,672
)
Commodity - Natural gas
 
Fair value of derivatives - Non-current
 

 
(1,768
)
 
(1,768
)
   Totals
 
 
 
$
65,114

 
$
(17,920
)
 
$
47,194



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 commodity 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 September 30, 2019
 
Presented without
 
 
 
As Presented with
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of commodity derivatives
$
35,936

 
$
(11,020
)
 
$
24,916

Long-term assets: Fair value of commodity derivatives
7,464

 
(3,728
)
 
3,736

 
 
 
 
 
 
Current liabilities: Fair value of commodity derivatives
$
(19,961
)
 
$
11,020

 
$
(8,941
)
Long-term liabilities: Fair value of commodity derivatives
(6,301
)
 
3,728

 
(2,573
)
 
As of December 31, 2018
 
Presented without
 
 
 
As Presented with
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of commodity derivatives
$
78,091

 
$
(12,977
)
 
$
65,114

 
 
 
 
 
 
Current liabilities: Fair value of commodity derivatives
$
(23,457
)
 
$
12,977

 
$
(10,480
)
Long-term liabilities: Fair value of commodity derivatives
(7,440
)
 

 
(7,440
)


For the periods indicated, the Company recorded the following in the consolidated statements of operations as a gain or loss on derivative contracts:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
Oil derivatives
 
 
 
 
 
 
 
Net gain (loss) on settlements
$
(1,045
)
 
$
(9,306
)
 
$
(7,048
)
 
$
(26,353
)
Net gain (loss) on fair value adjustments
25,767

 
(24,476
)
 
(27,750
)
 
(28,720
)
Total gain (loss) on oil derivatives
24,722

 
(33,782
)
 
(34,798
)
 
(55,073
)
Natural gas derivatives
 
 
 
 
 
 
 
Net gain (loss) on settlements
2,056

 
67

 
6,612

 
675

Net gain (loss) on fair value adjustments
(733
)
 
(624
)
 
(2,306
)
 
(976
)
Total gain (loss) on natural gas derivatives
1,323

 
(557
)
 
4,306

 
(301
)
Contingent consideration arrangement
 
 
 
 
 
 
 
Net gain (loss) on fair value adjustments
(4,236
)
 

 
(923
)
 

   Total gain (loss) on derivatives
$
21,809

 
$
(34,339
)
 
$
(31,415
)
 
$
(55,374
)

Derivative positions

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of September 30, 2019:  
 
For the Remainder
 
For the Full Year
 
For the Full Year
 
Oil contracts (WTI)
of 2019
 
of 2020
 
of 2021
 
   Puts
 
 
 
 
 
 
      Total volume (Bbls)
230,000

 

 

 
      Weighted average price per Bbl
$
65.00

 
$

 
$

 
   Put spreads
 
 
 
 
 
 
   Total volume (Bbls)
230,000

 

 

 
   Weighted average price per Bbl
 
 
 
 
 
 
   Floor (long put)
$
65.00

 
$

 
$

 
   Floor (short put)
$
42.50

 
$

 
$

 
   Collar contracts with short puts (three-way collars)
 
 
 
 
 
 
   Total volume (Bbls)
1,196,000

 
5,124,000

 

 
   Weighted average price per Bbl
 
 
 
 
 
 
   Ceiling (short call)
$
67.46

 
$
65.46

 
$

 
   Floor (long put)
$
56.54

 
$
55.45

 
$

 
   Floor (short put)
$
43.65

 
$
44.66

 
$

 
   Collar contracts (two-way collars)
 
 
 
 
 
 
   Total volume (Bbls)
276,000

 

 

 
   Weighted average price per Bbl
 
 
 
 
 
 
   Ceiling (short call)
$
60.00

 
$

 
$

 
   Floor (long put)
$
55.00

 
$

 
$

 
   Short call
 
 
 
 
 
 
   Total volume (Bbls)

 

 
1,825,000

(a) 
   Weighted average price per Bbl
$

 
$

 
$
63.00

 
   Swap contracts
 
 
 
 
 
 
   Total volume (Bbls)
276,000

 
1,098,000

 

 
   Weighted average price per Bbl
$
60.17

 
$
56.17

 
$

 
 
 
 
 
 
 
 
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)
2,176,000

 
4,576,000

 
1,095,000

 
   Weighted average price per Bbl
$
(2.50
)
 
$
(1.29
)
 
$
1.00

 
 
 
 
 
 
 
 
Oil contracts (Argus Houston MEH basis differential)
 
 
 
 
 
 
   Swap contracts
 
 
 
 
 
 
   Total volume (Bbls)

 
1,439,205

 

 
   Weighted average price per Bbl
$

 
$
2.40

 
$

 
 
 
 
 
 
 
 
Natural gas contracts (Henry Hub)
 
 
 
 
 
 
   Collar contracts (two-way collars)
 
 
 
 
 
 
      Total volume (MMBtu)
598,000

 

 

 
      Weighted average price per MMBtu
 
 
 
 
 
 
         Ceiling (short call)
$
3.50

 
$

 
$

 
         Floor (long put)
$
3.13

 
$

 
$

 
   Swap contracts
 
 
 
 
 
 
      Total volume (MMBtu)
155,000

 

 

 
      Weighted average price per MMBtu
$
2.87

 
$

 
$

 
 
 
 
 
 
 
 
Natural gas contracts (Waha basis differential)
 
 
 
 
 
 
   Swap contracts
 
 
 
 
 
 
      Total volume (MMBtu)
2,116,000

 
4,758,000

 

 
      Weighted average price per MMBtu
$
(1.18
)
 
$
(1.12
)
 
$

 
(a) Premiums from the sale of call options were used to increase the fixed price of certain simultaneously executed price swaps.