Derivative Instruments and Hedging Activities
|12 Months Ended
Dec. 31, 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, put and call options, and basis differential swaps 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.
The Company strives to minimize its credit exposure to any individual counterparty and, as such, the Company had outstanding commodity derivative instruments with eight counterparties as of December 31, 2022. 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
In the second quarter of 2019, the Company completed its divestiture of certain non-core assets in the southern Midland Basin. Additionally, on December 20, 2019, the Company completed the Carrizo Acquisition. Both of these transactions included potential additional contingent consideration if certain specified pricing thresholds were met through the end of 2021. Those pricing thresholds were met for 2021, resulting in a cash receipt and cash payment, respectively, during the first quarter of 2022. 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. Both of these contingent consideration arrangements were completed as of 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:
(1) Includes approximately $2.9 million of deferred premiums, which were paid as the applicable contracts settled.
The components of “Loss on derivative contracts” are as follows for the respective periods:
(1) A detailed discussion of the Company’s September 2020 Warrants can be found in “Part II, Item 8. Financial Statements and Supplementary Data, Note 7 – Borrowings” of its Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 24, 2022.
The components of “Cash received (paid) for commodity derivative settlements, net” and “Cash received (paid) for settlements of contingent consideration arrangements, net” are as follows for the respective periods:
Listed in the tables below are the outstanding oil and natural gas derivative contracts as of December 31, 2022:
(1) The 2024 short call swaption contracts have exercise expiration dates of December 29, 2023.