Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.22.2.2
Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2022
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, 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, 2022, the Company has outstanding commodity derivative instruments with nine 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 facility. 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.
Contingent Consideration Arrangements
The Company met certain oil pricing thresholds for 2021 associated with certain contingent consideration arrangements described in “Note 8 - Derivative Instruments and Hedging Activities” of the Notes to Consolidated Financial Statements in its 2021 Annual Report. Cash received or paid for settlements of contingent consideration arrangements are classified as cash flows from financing activities or cash flows from investing activities, respectively, up to the divestiture or acquisition date fair value, respectively, with any excess classified as cash flows from operating activities. As a result, the Company received $20.8 million, of which $8.5 million is presented in cash flows from financing activities with the remaining $12.3 million presented in cash flows from operating activities, and paid $25.0 million, of which $19.2 million is presented in cash flows from investing activities with the remaining $5.8 million presented in cash flows from operating activities, in the first quarter of 2022. Both of these contingent consideration arrangements expired at the end of 2021.
Financial Statement Presentation and Settlements
The Company records its derivative instruments at fair value in the consolidated balance sheets and records changes in fair value, as well as settlements during the period, as “(Gain) loss on derivative contracts” in the consolidated statements of operations. The Company presents the fair value of derivative contracts on a net basis in the consolidated balance sheets as they are subject to master netting arrangements. The following presents the impact of this presentation to the Company’s recognized assets and liabilities for the periods indicated:
As of September 30, 2022
Presented without   As Presented with
Effects of Netting Effects of Netting Effects of Netting
(In thousands)
Derivative Assets
Fair value of derivatives - current $74,016  ($59,272) $14,744 
Other assets, net $13,520  ($12,131) $1,389 
Derivative Liabilities      
Fair value of derivatives - current ($107,969) $59,272  ($48,697)
Fair value of derivatives - non-current ($21,735) $12,131  ($9,604)

As of December 31, 2021
Presented without   As Presented with
Effects of Netting Effects of Netting Effects of Netting
(In thousands)
Assets
Commodity derivative instruments $25,469  ($23,921) $1,548 
Contingent consideration arrangements 20,833  —  20,833 
Fair value of derivatives - current $46,302  ($23,921) $22,381 
Commodity derivative instruments $1,119  ($869) $250 
Contingent consideration arrangements —  —  — 
Other assets, net $1,119  ($869) $250 
Liabilities      
Commodity derivative instruments (1)
($184,898) $23,921  ($160,977)
Contingent consideration arrangements (25,000) —  (25,000)
Fair value of derivatives - current ($209,898) $23,921  ($185,977)
Commodity derivative instruments ($12,278) $869  ($11,409)
Contingent consideration arrangements —  —  — 
Fair value of derivatives - non-current ($12,278) $869  ($11,409)
(1)    Includes approximately $2.9 million of deferred premiums, which will be paid as the applicable contracts settle.
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,
2022 2021 2022 2021
(In thousands)
(Gain) loss on oil derivatives ($157,731) $67,198  $243,527  $393,792 
Loss on natural gas derivatives 22,881  33,026  56,800  48,539 
Loss on NGL derivatives —  10,242  4,771  15,114 
Gain on contingent consideration arrangements —  (3,297) —  (680)
Loss on September 2020 Warrants liability (1)
—  —  —  55,390 
(Gain) loss on derivative contracts ($134,850) $107,169  $305,098  $512,155 
(1)    Further details of the Company’s September 2020 Warrants and the loss on the associated September 2020 Warrants liability are described in “Note 7 - Borrowings”, “Note 8 - Derivative Instruments and Hedging Activities” and “Note 9 - Fair Value Measurements” of the Notes to Consolidated Financial Statements in its 2021 Annual Report.
The components of “Cash paid for commodity derivative settlements, net” and “Cash received (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,
2022 2021 2022 2021
(In thousands)
Cash flows from operating activities        
Cash paid on oil derivatives ($117,024) ($98,752) ($374,711) ($221,112)
Cash paid on natural gas derivatives (28,572) (9,592) (55,024) (12,867)
Cash paid on NGL derivatives —  (2,463) (3,783) (4,399)
Cash paid for commodity derivative settlements, net ($145,596) ($110,807) ($433,518) ($238,378)
Cash received for settlements of contingent consideration arrangements, net $—  $—  $6,492  $— 
Cash flows from investing activities        
Cash paid for settlement of contingent consideration arrangement $—  $—  ($19,171) $— 
Cash flows from financing activities
Cash received for settlement of contingent consideration arrangement $—  $—  $8,512  $— 
Derivative Positions
Listed in the tables below are the outstanding oil and natural gas derivative contracts as of September 30, 2022:
For the Remainder For the Full Year For the Full Year
Oil Contracts (WTI) 2022 2023 2024
Swap Contracts
Total volume (Bbls) 1,978,000  1,722,500  — 
Weighted average price per Bbl $67.29  $81.46  $— 
Collar Contracts (Three-Way Collars)
Total volume (Bbls) —  1,825,000  — 
Weighted average price per Bbl
Ceiling (short call) $—  $90.00  $— 
Floor (long put) $—  $70.00  $— 
Floor (short put) $—  $50.00  $— 
Collar Contracts (Two-Way Collars)
Total volume (Bbls) 1,196,000  2,730,000  — 
Weighted average price per Bbl
Ceiling (short call) $70.12  $87.15  $— 
Floor (long put) $60.00  $71.92  $— 
Short Call Swaption Contracts (1)
Total volume (Bbls) —  —  1,830,000 
Weighted average price per Bbl $—  $—  $80.30 
Oil Contracts (Midland Basis Differential)
Swap Contracts
Total volume (Bbls) 598,000  —  — 
Weighted average price per Bbl $0.50  $—  $— 
(1)    The 2024 short call swaption contracts have exercise expiration dates of December 29, 2023.
For the Remainder For the Full Year
Natural Gas Contracts (Henry Hub) 2022 2023
Swap Contracts
Total volume (MMBtu) 1,550,000  — 
Weighted average price per MMBtu $3.62  $— 
Collar Contracts
Total volume (MMBtu) 3,670,000  6,640,000 
Weighted average price per MMBtu
Ceiling (short call) $6.91  $6.60 
Floor (long put) $4.67  $4.48 
Natural Gas Contracts (Waha Basis Differential)
Swap Contracts
Total volume (MMBtu) 1,220,000  6,080,000 
Weighted average price per MMBtu ($0.75) ($0.75)