Derivative Instruments and Hedging Activities
|12 Months Ended|
Dec. 31, 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 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 December 31, 2021, the Company has outstanding commodity derivative instruments with ten 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 9 - Fair Value Measurements” for further discussion.
Contingent Consideration Arrangements
Ranger Divestiture. The Company’s Ranger Divestiture provided for potential contingent consideration to be received by the Company if the average of the final monthly settlements for each month of 2021 for NYMEX Light Sweet Crude Oil Futures exceeded the pricing threshold of $60.00 for the year 2021. See “Note 4 - Acquisitions and Divestitures” and “Note 9 - Fair Value Measurements” for further discussion. As the specified pricing threshold for 2021 was met, in March 2022, the Company will receive $20.8 million, of which $8.5 million will be presented in cash flows from financing activities with the remaining $12.3 million presented in cash flows from operating activities. The Ranger Divestiture contingent consideration expired at the end of 2021.
Carrizo Acquisition Contingent Consideration. As a result of the Carrizo Acquisition, the Company acquired the Contingent ExL Consideration where the Company could be required to remit payments if the average daily closing spot price of WTI crude oil exceeded the pricing threshold of $50.00 for each of the years 2019, 2020 and 2021. The specified pricing threshold for 2020 was not met, therefore there was no payment made for the Contingent ExL Consideration in January 2021. In January 2020, the Company paid $50.0 million as the specified pricing threshold for 2019 was met. This cash payment is classified as cash flows from investing activities in the consolidated statements of cash flows. Additionally, as the specified pricing threshold for 2021 was met, in January 2022, the Company paid $25.0 million, of which $19.2 million will be presented in cash flows from investing activities with the remaining $5.8 million presented in cash flows from operating activities. The Contingent ExL Consideration expired at the end of 2021.
Additionally, as part of the Carrizo Acquisition, the Company acquired other contingent consideration arrangements where the Company could receive payments if certain pricing thresholds were met in 2019 and 2020, which ranged between $53.00 - $60.00 per barrel of oil or $3.18 - $3.30 per MMBtu of natural gas. The specified pricing thresholds for each of these other contingent consideration arrangements for 2020 were not met, therefore there were no payments from the contingent consideration arrangements acquired in the Carrizo Acquisition in January 2021. In January 2020, the Company received $10.0 million as the specified pricing thresholds for 2019 were met for certain of the contingent consideration arrangements. These cash receipts are classified as cash flows
from investing activities in the consolidated statements of cash flows. Each of these other contingent consideration arrangements acquired in the Carrizo Acquisition expired at the end of 2020.
The Company determined that the September 2020 Warrants, as defined above in “Note 7 - Borrowings”, 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 7 - Borrowings” and “Note 9 - 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.
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 “(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. The Company presents the fair value of derivative contracts on a net basis in the consolidated balance sheet 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:
(1) Includes approximately $2.9 million of deferred premiums, which will be paid as the applicable contracts settle.
(1) Includes approximately $11.2 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:
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:
Listed in the tables below are the outstanding oil, natural gas and NGL derivative contracts as of December 31, 2021:
(1) The 2023 short call swaption contracts have exercise expiration dates of December 30, 2022.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef