Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

v3.10.0.1
Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2018
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 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, put and call options and similar derivative financial instruments 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 8 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 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 for additional information regarding fair value.

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:
໿
 
 
Balance Sheet Presentation
 
Asset Fair Value
 
Liability Fair Value
 
Net Derivative Fair Value
Commodity
 
Classification
 
Line Description
 
12/31/2018
 
12/31/2017
 
12/31/2018
 
12/31/2017
 
12/31/2018
 
12/31/2017
Oil
 
Current
 
Fair value of derivatives
 
$
60,097

 
$
—

 
$
(10,480
)
 
$
(27,744
)
 
$
49,617

 
$
(27,744
)
Oil
 
Non-current
 
Fair value of derivatives
 
—

 
—

 
(5,672
)
 
(1,284
)
 
(5,672
)
 
(1,284
)
Natural gas
 
Current
 
Fair value of derivatives
 
5,017

 
406

 
—

 
—

 
5,017

 
406

Natural gas
 
Non-current
 
Fair value of derivatives
 
—

 
—

 
(1,768
)
 
—

 
(1,768
)
 
—

Totals
 
 
 
 
 
$
65,114

 
$
406

 
$
(17,920
)
 
$
(29,028
)
 
$
47,194

 
$
(28,622
)


As previously discussed, the Company’s 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:
໿

For the Year Ended December 31, 2018

Presented without
 
 
 
As Presented with

Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of derivatives
78,091

 
(12,977
)
 
65,114


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

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

 
(7,440
)
໿

For the Year Ended December 31, 2017

Presented without
 
 
 
As Presented with

Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of derivatives
406

 
—

 
406

 
 
 
 
 
 
Current liabilities: Fair value of derivatives
(27,744
)
 
—

 
(27,744
)
Long-term liabilities: Fair value of derivatives
(1,284
)
 
—

 
(1,284
)


For the periods indicated, the Company recorded the following related to its derivatives in the consolidated statement of operations as gain or loss on derivative contracts:
໿

 
For the Year Ended December 31,

 
2018
 
2017
 
2016
Oil derivatives
 
 
 
 
 
 
Net gain (loss) on settlements
 
$
(27,510
)
 
$
(9,067
)
 
$
17,801

Net gain (loss) on fair value adjustments
 
72,973

 
(11,426
)
 
(37,543
)
Total gain (loss) on oil derivatives
 
$
45,463

 
$
(20,493
)
 
$
(19,742
)
Natural gas derivatives
 
 
 
 
 
 
Net gain on settlements
 
$
238

 
$
594

 
$
102

Net gain (loss) on fair value adjustments
 
2,843

 
998

 
(593
)
Total gain (loss) on natural gas derivatives
 
$
3,081

 
$
1,592

 
$
(491
)

 
 
 
 
 
 
Total gain (loss) on oil & natural gas derivatives
 
$
48,544

 
$
(18,901
)
 
$
(20,233
)

Derivative positions

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of December 31, 2018:
໿
 
 
For the Full Year of
 
For the Full Year of
Oil contracts (WTI)
 
2019
 
2020
Puts
 
 
 
 
Total volume (Bbls)
 
912,500

 
—

Weighted average price per Bbl
 
$
65.00

 
$
—

Put spreads
 
 
 
 
Total volume (Bbls)
 
912,500

 
—

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

 
$
—

  Floor (short put)
 
$
42.50

 
$
—

Collar contracts combined with short puts (three-way collars)
 
 
 
 
Total volume (Bbls)
 
4,564,000

 
—

Weighted average price per Bbl
 
 
 
 
Ceiling (short call)
 
$
67.62

 
$
—

Floor (long put)
 
$
56.60

 
$
—

Floor (short put)
 
$
43.60

 
$
—

 
 
 
 
 
Oil contracts (Midland basis differential)
 
 
 
 
Swap contracts
 
 
 
 
Total volume (Bbls)
 
4,746,500

 
4,024,000

Weighted average price per Bbl
 
$
(4.72
)
 
$
(1.51
)
 
 
 
 
 
Natural gas contracts (Henry Hub)
 
 
 
 
Collar contracts (two-way collars)
 
 
 
 
Total volume (MMBtu)
 
8,282,500

 
—

Weighted average price per MMBtu
 
 
 
 
Ceiling (short call)
 
$
3.46

 
$
—

Floor (long put)
 
$
2.91

 
$
—

 
 
 
 
 
Natural gas contracts (Waha basis differential)
 
 
 
 
Swap contracts
 
 
 
 
   Total volume (MMBtu)
 
11,321,000

 
4,758,000

   Weighted average price per MMBtu
 
$
(1.23
)
 
$
(1.12
)