Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.21.2
Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2021
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, 2021, 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. In the second quarter of 2019, the Company completed its divestiture of certain non-core assets in the southern Midland Basin (the “Ranger Divestiture”). The Company’s Ranger Divestiture provided for potential contingent consideration to be received by the Company if commodity prices exceed specified thresholds. See “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
Remaining Potential Settlement 2021
Greater than $60/Bbl, less than $65/Bbl
$9,000
Equal to or greater than $65/Bbl
$20,833
(2)
(2)
$20,833 
(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.
(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. If either of the commodity price thresholds is reached in 2021, $8.5 million of the contingent receipt will be presented in cash flows from financing activities with the remainder presented in cash flows from operating activities in the first quarter of 2022.
Contingent ExL Consideration. As a result of the acquisition of Carrizo Oil & Gas, Inc. (“Carrizo”) in late 2019 (the “Carrizo Acquisition”), the Company assumed all contingent consideration arrangements previously entered into by Carrizo. As of September 30, 2021, the Contingent ExL Consideration, as summarized below, is the only contingent consideration arrangement remaining from the Carrizo Acquisition.
Year
Threshold (1)
Period
Cash Flow
Occurs
Statement of
Cash Flows Presentation
Contingent
Payment -
Annual
Remaining Contingent
Payments -
Aggregate Limit
(In thousands)
Remaining Potential Settlement 2021 $50.00 
(2)
(2)
($25,000) ($25,000)
(1)    The price used to determine whether the specified threshold for the year has been met is the average daily settlement price of the front month NYMEX WTI futures contract as published by the CME Group.
(2)    Cash paid for settlements of contingent consideration arrangements are classified as cash flows from investing activities up to the acquisition date fair value with any excess classified as cash flows from operating activities. If the commodity price threshold is reached in 2021, $19.2 million of the contingent payment will be presented in cash flows from investing activities with the remainder presented in cash flows from operating activities in the first quarter of 2022.
Warrants
On September 30, 2020, the Company issued $300.0 million in aggregate principal amount of its Second Lien Notes and warrants for 7.3 million shares of the Company’s common stock exercisable only on a net share settlement basis (the “September 2020 Warrants”). The Company determined that the September 2020 Warrants were required to be accounted for as a derivative instrument. The Company recorded the September 2020 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 September 2020 Warrants recorded as “(Gain) loss on derivative contracts” in the consolidated statements of operations in the period in which the changes occur. See “Note 8 - Fair Value Measurements” for additional details.
In February 2021, holders of the September 2020 Warrants provided notice and exercised all of their outstanding warrants. As a result of this exercise, the Company issued 5.6 million shares of its common stock in exchange for all of the outstanding September 2020 Warrants. The exercise of the September 2020 Warrants resulted in settlement of the associated derivative liability, which was $134.8 million at the time of exercise, and the fair value of the September 2020 Warrants at exercise, less the par value of the shares of common stock issued in the exercise, was reclassified to “Capital in excess of par value” in the consolidated balance sheets.
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 “(Gain) 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, 2021
Presented without   As Presented with
Effects of Netting Effects of Netting Effects of Netting
(In thousands)
Assets
Commodity derivative instruments $64,151  ($64,113) $38 
Contingent consideration arrangements 18,567  —  18,567 
Fair value of derivatives - current $82,718  ($64,113) $18,605 
Commodity derivative instruments $7,278  ($7,278) $— 
Contingent consideration arrangements —  —  — 
Other assets, net $7,278  ($7,278) $— 
Liabilities      
Commodity derivative instruments (1)
($364,107) $64,113  ($299,994)
Contingent consideration arrangements (24,688) —  (24,688)
Fair value of derivatives - current ($388,795) $64,113  ($324,682)
Commodity derivative instruments ($22,528) $7,278  ($15,250)
Contingent consideration arrangements —  —  — 
Fair value of derivatives - non-current ($22,528) $7,278  ($15,250)
(1)    Includes approximately $6.6 million of deferred premiums, which the Company will pay as the applicable contracts settle.
As of December 31, 2020
Presented without   As Presented with
Effects of Netting Effects of Netting Effects of Netting
(In thousands)
Assets
Commodity derivative instruments $21,156  ($20,235) $921 
Contingent consideration arrangements —  —  — 
Fair value of derivatives - current $21,156  ($20,235) $921 
Commodity derivative instruments $—  $—  $— 
Contingent consideration arrangements 1,816  —  1,816 
Other assets, net $1,816  $—  $1,816 
Liabilities      
Commodity derivative instruments (1)
($117,295) $20,235  ($97,060)
Contingent consideration arrangements —  —  — 
Fair value of derivatives - current ($117,295) $20,235  ($97,060)
Commodity derivative instruments $—  $—  $— 
Contingent consideration arrangements (8,618) —  (8,618)
September 2020 Warrants liability (79,428) —  (79,428)
Fair value of derivatives - non-current ($88,046) $—  ($88,046)
(1)    Includes approximately $11.2 million of deferred premiums, which the Company will pay 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,
2021 2020 2021 2020
(In thousands)
(Gain) loss on oil derivatives $67,198  $16,606  $393,792  ($118,348)
(Gain) loss on natural gas derivatives 33,026  7,296  48,539  18,819 
(Gain) loss on NGL derivatives 10,242  2,421  15,114  2,418 
(Gain) loss on contingent consideration arrangements (3,297) 715  (680) (855)
(Gain) loss on September 2020 Warrants liability —  —  55,390  — 
(Gain) loss on derivative contracts $107,169  $27,038  $512,155  ($97,966)
The components of “Cash received (paid) for commodity derivative settlements, net” 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,
2021 2020 2021 2020
(In thousands)
Cash flows from operating activities        
Cash received (paid) on oil derivatives ($98,752) $2,130  ($221,112) $100,823 
Cash received (paid) on natural gas derivatives (9,592) (1,677) (12,867) 931 
Cash received (paid) on NGL derivatives (2,463) —  (4,399) — 
Cash received (paid) for commodity derivative settlements, net ($110,807) $453  ($238,378) $101,754 
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, 2021:
For the Remainder For the Full Year For the Full Year
Oil contracts (WTI) 2021 2022 2023
   Swap contracts
   Total volume (Bbls) 1,748,000  3,240,000  — 
   Weighted average price per Bbl $56.87  $64.00  $— 
   Collar contracts
   Total volume (Bbls) 2,290,450  7,097,500  — 
   Weighted average price per Bbl
   Ceiling (short call) $46.97  $67.70  $— 
   Floor (long put) $39.37  $56.15  $— 
Long put contracts
Total volume (Bbls) 414,000  —  — 
Weighted average price per Bbl $62.50  $—  $— 
   Short call contracts
   Total volume (Bbls) 1,216,240 
(1)
—  — 

   Weighted average price per Bbl $63.62  $—  $— 
Short call swaption contracts
   Total volume (Bbls) —  1,825,000 
(2)
1,825,000 
(2)
   Weighted average price per Bbl $—  $52.18  $72.00 
Oil contracts (Brent ICE) (3)
   
Collar contracts
Total volume (Bbls) 184,000  —  — 
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) 892,400  —  — 
   Weighted average price per Bbl $0.33  $—  $— 
Oil contracts (Argus Houston MEH)
   Collar contracts
   Total volume (Bbls) —  452,500  — 
   Weighted average price per Bbl
Ceiling (short call) $—  $63.15  $— 
Floor (long put) $—  $51.25  $— 
(1)    Premiums from the sale of call options were used to increase the fixed price of certain simultaneously executed price swaps and three-way collars.
(2)    The 2022 and 2023 short call swaption contracts have exercise expiration dates of December 31, 2021 and December 30, 2022, respectively.
(3)    In February 2021, the Company entered into certain offsetting ICE Brent swaps to reduce its exposure to rising oil prices. Those offsetting swaps resulted in a locked-in loss of approximately $2.9 million, of which $1.6 million settled in the third quarter of 2021 with the remaining $1.3 million to be settled in the fourth quarter of 2021.
For the Remainder For the Full Year
Natural gas contracts (Henry Hub) 2021 2022
   Swap contracts
      Total volume (MMBtu) 4,357,000  7,320,000 
      Weighted average price per MMBtu $2.96  $3.08 
Collar contracts
      Total volume (MMBtu) 1,840,000  5,740,000 
      Weighted average price per MMBtu
         Ceiling (short call) $2.80  $3.64 
         Floor (long put) $2.50  $2.83 
   Short call contracts
      Total volume (MMBtu) 1,840,000 
(1)
— 
      Weighted average price per MMBtu $3.09  $— 
Natural gas contracts (Waha basis differential)
   Swap contracts
      Total volume (MMBtu) 4,140,000  5,475,000 
      Weighted average price per MMBtu ($0.42) ($0.21)
(1)    Premiums from the sale of call options were used to increase the fixed price of certain simultaneously executed price swaps and three-way collars.
For the Remainder For the Full Year
NGL contracts (OPIS Mont Belvieu Purity Ethane) 2021 2022
   Swap contracts
      Total volume (Bbls) 460,000  378,000 
      Weighted average price per Bbl $7.62  $15.70 
NGL contracts (OPIS Mont Belvieu Propane)
Swap contracts
Total volume (Bbls) 266,800  252,000 
Weighted average price per Bbl $52.15  $48.43 
NGL contracts (OPIS Mont Belvieu Butane)
Swap contracts
Total volume (Bbls) 101,200  99,000 
Weighted average price per Bbl $59.43  $54.39 
NGL contracts (OPIS Mont Belvieu Isobutane)
Swap contracts
Total volume (Bbls) 55,200  54,000 
Weighted average price per Bbl $58.96  $54.29