Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.20.2
Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
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, natural gas and NGL 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, natural gas and NGL 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 Company typically has numerous commodity derivative instruments outstanding with a counterparty that were executed at various dates, for various contract types, commodities and time periods. This often results in both commodity derivative asset and liability positions with that counterparty. The Company nets its commodity derivative instrument fair values executed with the same counterparty to a single asset or liability pursuant to International Swap Dealers Association Master Agreements (“ISDA Agreements”), which provide for net settlement over the term of the contract and in the event of default or termination of the contract. 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.
As of September 30, 2020, the Company has outstanding commodity derivative instruments with fifteen counterparties to minimize its credit exposure to any individual counterparty. All of the counterparties to the Company’s commodity derivative instruments are also lenders under the Company’s credit agreement. Therefore, each of the Company’s counterparties allow the Company to satisfy any need for margin obligations associated with commodity derivative instruments where the Company is in a net liability position with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting.
Because each of the Company’s counterparties has an investment grade credit rating, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its commodity derivative instruments. Although the Company does not currently anticipate nonperformance from its counterparties, it continually monitors the credit ratings of each counterparty.
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 8 - Fair Value Measurements” for further discussion.
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 8 - 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 3 - Acquisitions and Divestitures” and “Note 8 - 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 
Actual 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)
 $41,666 

(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 $41.7 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)
Actual Settlement(2)(3)
2019 $50.00  1Q20 Investing ($50,000)
Remaining Potential Settlements 2020-2021 $50.00 
(2)
(2)
 ($25,000) ($25,000)

(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 related to 2019 are classified as cash flows used in investing activities as the cash payment was made soon after the acquisition date. Due to the extended time frame over which the 2020 and 2021 contingent arrangements could settle, any future payments would be considered financing arrangements. As such, cash settlements of those contingent consideration arrangements would be 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 were reached, $19.2 million of the final contingent payment would be presented in cash flows used in financing activities with the remainder presented in operating cash flows.
(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 in 2020, 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.
Warrants
The Company determined that the Warrants issued with the Second Lien Notes are required to be accounted for as a derivative instrument. The Company records the Warrants as a liability on its consolidated balance sheet measured at fair value as a component of “Fair value of derivatives” with gains and losses as a result of changes in the fair value of the Warrants recorded as “(Gain) loss on derivative contracts” in the consolidated statements of operations in the period in which the changes occur.
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 sheets. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:
As of September 30, 2020
Presented without   As Presented with
Effects of Netting Effects of Netting Effects of Netting
ASSETS (In thousands)
Commodity derivative instruments $34,362  ($24,541) $9,821 
Contingent consideration arrangements —  —  — 
Fair value of derivatives - current $34,362  ($24,541) $9,821 
Commodity derivative instruments 5,689  (5,457) 232 
Contingent consideration arrangements 1,089  —  1,089 
Other assets, net $6,778  ($5,457) $1,321 
LIABILITIES      
Commodity derivative instruments ($59,488) $24,541  ($34,947)
Contingent consideration arrangements (3) —  (3)
Fair value of derivatives - current ($59,491) $24,541  ($34,950)
Commodity derivative instruments (13,195) 5,457  (7,738)
Contingent consideration arrangements (4,058) —  (4,058)
Warrant liability (23,909) —  (23,909)
Fair value of derivatives - non current ($41,162) $5,457  ($35,705)

As of December 31, 2019
Presented without   As Presented with
Effects of Netting Effects of Netting Effects of Netting
ASSETS (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 
Other assets, net $9,216  $—  $9,216 
LIABILITIES      
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)
The components of “(Gain) loss on derivative contracts” are as follows for the respective periods:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands)
(Gain) loss on oil derivatives $16,606  ($24,722) ($118,348) $34,798 
(Gain) loss on natural gas derivatives 7,296  (1,323) 18,819  (4,306)
(Gain) loss on NGL derivatives 2,421  —  2,418  — 
(Gain) loss on contingent consideration arrangements 715  4,236  (855) 923 
(Gain) loss on derivative contracts $27,038  ($21,809) ($97,966) $31,415 
The components of “Cash (paid) received for commodity derivative settlements” and “Cash paid for settlements of contingent consideration arrangements, net” are as follows for the respective periods:
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
(In thousands)
Cash flows from operating activities        
Cash (paid) received on oil derivatives $2,130  ($1,045) $100,823  ($7,048)
Cash (paid) received on natural gas derivatives (1,677) 2,056  931  6,612 
Cash (paid) received for commodity derivative settlements $453  $1,011  $101,754  ($436)
Cash flows from investing activities        
Cash paid for settlements of contingent consideration arrangements, net $—  $—  ($40,000) $— 
Derivative positions
Listed in the tables below are the outstanding oil, natural gas and NGL derivative contracts as of September 30, 2020:  
For the Remainder For the Full Year
Oil contracts (WTI) of 2020 of 2021
   Swap contracts
   Total volume (Bbls) 2,496,880  1,377,000 
   Weighted average price per Bbl $42.10  $42.00 
   Collar contracts
   Total volume (Bbls) 1,501,440  4,653,750 
   Weighted average price per Bbl
   Ceiling (short call) $45.00  $45.31 
   Floor (long put) $35.00  $40.00 
   Short put contracts
      Total volume (Bbls) 552,000  — 
      Weighted average price per Bbl $42.50  $— 
   Long call contracts
    Total volume (Bbls) 460,000  — 
    Weighted average price per Bbl $67.50  $— 
   Short call contracts
   Total volume (Bbls) 460,000 
(1)
 4,825,300 
(1)
   Weighted average price per Bbl $55.00  $63.62 
Short call swaption contracts
   Total volume (Bbls) —  730,000 
(2)
   Weighted average price per Bbl $—  $47.00 
Oil contracts (Brent ICE)    
   Swap contracts
   Total volume (Bbls) —  1,272,450 
   Weighted average price per Bbl $—  $38.24 
Collar contracts
Total volume (Bbls) —  730,000 
Weighted average price per Bbl
Ceiling (short call) $—  $50.00 
Floor (long put) $—  $45.00 
Oil contracts (Midland basis differential)
   Swap contracts
   Total volume (Bbls) 1,380,000  3,022,900 
   Weighted average price per Bbl ($1.89) $0.26 
Oil contracts (Argus Houston MEH basis differential)
   Swap contracts
   Total volume (Bbls) 1,435,202  — 
   Weighted average price per Bbl $0.03  $— 
Oil contracts (Argus Houston MEH swaps)
   Swap contracts
   Total volume (Bbls) —  2,969,050 
   Weighted average price per Bbl $—  $39.48 

(1)    Premiums from the sale of call options were used to increase the fixed price of certain simultaneously executed price swaps.
(2)    The short call swaption contract has an exercise expiration date of October 30, 2020.
For the Remainder For the Full Year
Natural gas contracts (Henry Hub) of 2020 of 2021
   Swap contracts
      Total volume (MMBtu) 1,633,000  11,123,000 
      Weighted average price per MMBtu $2.05  $2.60 
   Collar contracts (three-way collars)
      Total volume (MMBtu) 1,525,000  1,350,000 
      Weighted average price per MMBtu
         Ceiling (short call) $2.72  $2.70 
         Floor (long put) $2.45  $2.42 
         Floor (short put) $2.00  $2.00 
Collar contracts (two-way collars)
      Total volume (MMBtu) 1,525,000  9,550,000 
      Weighted average price per MMBtu
         Ceiling (short call) $3.25  $3.04 
         Floor (long put) $2.67  $2.59 
   Short call contracts
      Total volume (MMBtu) 2,013,000  7,300,000 
      Weighted average price per MMBtu $3.50  $3.09 
Natural gas contracts (Waha basis differential)
   Swap contracts
      Total volume (MMBtu) 4,421,000  12,775,000 
      Weighted average price per MMBtu ($0.91) ($0.47)

For the Remainder For the Full Year
NGL contracts (OPIS Mont Belvieu Purity Ethane) of 2020 of 2021
   Swap contracts
      Total volume (Bbls) —  1,825,000 
      Weighted average price per Bbl $—  $7.62