Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.19.1
Derivative Instruments and Hedging Activities
3 Months Ended
Mar. 31, 2019
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 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 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.

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
 
3/31/2019
 
12/31/2018
 
3/31/2019
 
12/31/2018
 
3/31/2019
 
12/31/2018
Oil
 
Current
 
Fair value of derivatives
 
$
7,473

 
$
60,097

 
$
(24,550
)
 
$
(10,480
)
 
$
(17,077
)
 
$
49,617

Oil
 
Non-current
 
Fair value of derivatives
 
385

 

 
(6,190
)
 
(5,672
)
 
(5,805
)
 
(5,672
)
Natural gas
 
Current
 
Fair value of derivatives
 
3,899

 
5,017

 

 

 
3,899

 
5,017

Natural gas
 
Non-current
 
Fair value of derivatives
 

 

 
(793
)
 
(1,768
)
 
(793
)
 
(1,768
)
   Totals
 
 
 
 
 
$
11,757

 
$
65,114

 
$
(31,533
)
 
$
(17,920
)
 
$
(19,776
)
 
$
47,194



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:
 
As of March 31, 2019
 
Presented without
 
 
 
As Presented with
 
Effects of Netting
 
Effects of Netting
 
Effects of Netting
Current assets: Fair value of derivatives
$
20,540

 
$
(9,168
)
 
$
11,372

Long-term assets: Fair value of derivatives
829

 
(444
)
 
385

 
 
 
 
 
 
Current liabilities: Fair value of derivatives
$
(33,718
)
 
$
9,168

 
$
(24,550
)
Long-term liabilities: Fair value of derivatives
(7,427
)
 
444

 
(6,983
)
 
As of 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 periods indicated, the Company recorded the following in the consolidated statements of operations as a gain or loss on derivative contracts:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Oil derivatives
 
 
 
 
Net loss on settlements
 
$
(1,542
)
 
$
(8,916
)
Net gain (loss) on fair value adjustments
 
(66,827
)
 
4,067

Total loss on oil derivatives
 
(68,369
)
 
(4,849
)
Natural gas derivatives
 
 
 
 
Net gain on settlements
 
1,252

 
457

Net loss on fair value adjustments
 
(143
)
 
(89
)
Total gain on natural gas derivatives
 
1,109

 
368

Total loss on oil & natural gas derivatives
 
$
(67,260
)
 
$
(4,481
)

Derivative positions

Listed in the tables below are the outstanding oil and natural gas derivative contracts as of March 31, 2019:  
 
For the Remainder
 
For the Full Year
Oil contracts (WTI)
of 2019
 
of 2020
Puts
 
 
 
   Total volume (Bbls)
687,500

 

   Weighted average price per Bbl
$
65.00

 
$

Put spreads
 
 
 
Total volume (Bbls)
687,500

 

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)
3,484,000

 
915,000

Weighted average price per Bbl
 
 
 
Ceiling (short call)
$
67.56

 
$
65.02

Floor (long put)
$
56.58

 
$
55.00

Floor (short put)
$
43.62

 
$
45.00

Collar contracts (two-way collars)
 
 
 
Total volume (Bbls)

 
732,000

Weighted average price per Bbl
 
 
 
Ceiling (short call)
$

 
$
64.63

Floor (long put)
$

 
$
55.00

 
 
 
 
Oil contracts (Midland basis differential)
 
 
 
Swap contracts
 
 
 
Total volume (Bbls)
5,102,000

 
4,576,000

Weighted average price per Bbl
$
(3.95
)
 
$
(1.29
)
 
 
 
 
Natural gas contracts (Henry Hub)
 
 
 
Collar contracts (two-way collars)
 
 
 
   Total volume (MMBtu)
2,697,500

 

   Weighted average price per MMBtu
 
 
 
      Ceiling (short call)
$
3.68

 
$

      Floor (long put)
$
3.09

 
$

Swap contracts
 
 
 
   Total volume (MMBtu)
1,852,000

 

   Weighted average price per MMBtu
$
2.88

 

 
 
 
 
Natural gas contracts (Waha basis differential)
 
 
 
Swap contracts
 
 
 
   Total volume (MMBtu)
5,961,000

 
4,758,000

   Weighted average price per MMBtu
$
(1.19
)
 
$
(1.12
)