Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

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Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2023
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 nine counterparties as of December 31, 2023. All of the counterparties to the Company’s commodity derivative instruments are also lenders under the Company’s Credit Facility. 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 10 – Fair Value Measurements” for further discussion.
Contingent Consideration Arrangements
Percussion Earn-Out Obligation. As a result of the Percussion Acquisition, the Company assumed an earn-out obligation from Percussion Operating, where the Company could be required to pay up to $62.5 million in the aggregate if the average daily settlement price of WTI crude oil exceeds $60.00 per barrel for each of the 2023, 2024, and 2025 calendar years. The specified threshold for 2023 was met and the Company paid $12.5 million in January 2024, which will be classified as cash flows from investing activities in the consolidated statements of cash flows in 2024.
Contingent Eagle Ford Consideration. As a result of the Eagle Ford Divestiture, the Company received a contingent consideration arrangement from Ridgemar. The Company could receive up to $45.0 million if the average daily settlement price of WTI crude oil for 2024 is at least $80.00 per barrel. If the average daily settlement price of WTI crude oil for 2024 is less than $80.00 per barrel but at least $75.00 per barrel, then the Company would receive $20.0 million.
The Company determined that the Percussion Earn-Out Obligation and Contingent Eagle Ford Consideration receipt were not clearly and closely related to the Percussion Acquisition and Eagle Ford Divestiture membership interest purchase agreements, and therefore bifurcated these embedded features and recorded these derivatives at their acquisition date fair value and divestiture date fair value of $34.9 million and $10.9 million, respectively, in the consolidated financial statements. As of December 31, 2023, the estimated fair values of the Percussion Earn-Out Obligation and Contingent Eagle Ford Consideration were $42.4 million and $12.6 million, respectively, and are presented in “Fair value of derivatives” in the consolidated balance sheets.
Ranger Divestiture and Carrizo Acquisition Contingent Consideration. 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:
As of December 31, 2023
Presented without As Presented with
Effects of Netting Effects of Netting Effects of Netting
(In thousands)
Derivative Assets
Commodity derivative instruments $25,813  ($13,956) $11,857 
Fair value of derivatives - current $25,813  ($13,956) $11,857 
Commodity derivative instruments $—  $—  $— 
Contingent consideration arrangements 12,580  —  12,580 
Other assets, net
 $12,580  $—  $12,580 
Derivative Liabilities
Commodity derivative instruments (1)
($25,603) $13,956  ($11,647)
Contingent consideration arrangements (12,500) —  (12,500)
Fair value of derivatives - current ($38,103) $13,956  ($24,147)
Commodity derivative instruments $—  $—  $— 
Contingent consideration arrangements (29,880) —  (29,880)
Fair value of derivatives - non-current
 ($29,880) $—  ($29,880)
(1)    Includes approximately $4.1 million of deferred premiums, which will be paid as the applicable contracts settled.
As of December 31, 2022
Presented without As Presented with
Effects of Netting Effects of Netting Effects of Netting
(In thousands)
Derivative Assets
Fair value of derivatives - current $51,984  ($30,652) $21,332 
Other assets, net
 $1,343  ($889) $454 
Derivative Liabilities
Fair value of derivatives - current ($46,849) $30,652  ($16,197)
Fair value of derivatives - non-current
 ($14,304) $889  ($13,415)
The components of “(Gain) loss on derivative contracts” are as follows for the respective periods:
Years Ended December 31,
2023 2022 2021
(In thousands)
(Gain) loss on oil derivatives ($22,371) $287,379  $429,156 
(Gain) loss on natural gas derivatives
 (4,990) 38,803  33,621 
Loss on NGL derivatives 2,663  4,771  6,768 
(Gain) loss on contingent consideration arrangements 5,800  —  (2,635)
Loss on September 2020 Warrants liability (1)
—  —  55,390 
(Gain) loss on derivative contracts ($18,898) $330,953  $522,300 
(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:
Years Ended December 31,
2023 2022 2021
(In thousands)
Cash flows from operating activities
Cash paid on oil derivatives ($14,626) ($429,017) ($350,340)
Cash received (paid) on natural gas derivatives 18,109  (60,914) (34,576)
Cash paid on NGL derivatives (561) (3,783) (10,181)
Cash received (paid) for commodity derivative settlements, net $2,922  ($493,714) ($395,097)
Cash received for settlements of contingent consideration arrangements, net (1) $—  $6,492  $— 
Cash flows from investing activities
Cash paid for settlement of contingent consideration arrangement $—  ($19,171) $— 
Cash flows from financing activities
Cash received for settlement of contingent consideration arrangement $—  $8,512  $— 

Derivative Positions
Listed in the tables below are the outstanding oil, natural gas, and NGL derivative contracts as of December 31, 2023:
For the Full Year
Oil Contracts (WTI) 2024
Deferred Premium Put Contracts (1)(2)
Total volume (Bbls) 1,076,300 
Weighted average price per Bbl $81.66 
Three-Way Collar Contracts  
Total volume (Bbls) 3,963,025 
Weighted average price per Bbl  
Ceiling (short call) $78.86 
Floor (long put) $58.16 
Floor (short put) $48.16 
(1)    Deferred premium put contracts are a combination of a short fixed price swap and a long call option which then performs as a long put position.
(2)    Premiums associated with the Company’s deferred premium puts were approximately $4.1 million, which will be paid as the applicable contracts settle.
For the Full Year
Natural Gas Contracts (Henry Hub) 2024
Collar Contracts
Total volume (MMBtu) 8,598,557 
Weighted average price per MMBtu
Ceiling (short call) $3.89 
Floor (long put) $3.00 
Natural Gas Contracts (Waha Basis Differential)
Swap Contracts
Total volume (MMBtu) 7,320,000 
Weighted average price per MMBtu ($1.06)
Natural Gas Contracts (HSC Basis Differential)
Swap Contracts
Total volume (MMBtu) 14,640,000 
Weighted average price per MMBtu ($0.42)
For the Full Year
NGL Contracts (Mont Belvieu Normal Butane)
 2024
Swap Contracts
Total volume (Bbls) 72,105 
Weighted average price per Bbl $33.18 
NGL Contracts (Mont Belvieu Isobutane)
Swap Contracts
Total volume (Bbls) 23,462 
Weighted average price per Bbl $33.18