Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

v3.21.2
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
6 Months Ended
Jun. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
The Company utilizes commodity price swaps, basis swaps, swaptions and call options to (i) reduce the effects of volatility in price changes on the crude oil and natural gas commodities it produces and sells, (ii) reduce commodity price risk and (iii) provide a base level of cash flow in order to assure it can execute at least a portion of its capital spending. In addition, from time to time the Company utilizes interest rate swaps to mitigate exposure to changes in interest rates on the Company’s variable-rate indebtedness.

All derivative instruments are recorded in the Company’s balance sheet as either assets or liabilities measured at their fair value (see Note 10).  The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes.  If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in the fair value are recognized in the Company’s condensed statements of operations as a gain or loss on derivative instruments.  Mark-to-market gains and losses represent changes in fair values of derivatives that have not been settled.  The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in making or receiving a payment to or from the counterparty.  These cash settlements represent the cumulative gains and losses on the Company’s derivative instruments for the periods presented and do not include a recovery of costs that were paid to acquire or modify the derivative instruments that were settled.

The Company has master netting agreements on individual derivative instruments with certain counterparties and therefore the current asset and liability are netted in the balance sheet and the non-current asset and liability are netted in the balance sheet for contracts with these counterparties.
Commodity Derivative Instruments

The following table presents settlements on commodity derivative instruments and unsettled gains and losses on open commodity derivative instruments for the periods presented which is recorded in the revenue section of our condensed financial statements:

  Three Months Ended
June 30,
Six Months Ended
June 30,
(In thousands) 2021 2020 2021 2020
Cash Received (Paid) on Settled Derivatives $ (27,855) $ 77,439  $ (35,152) $ 108,944 
Non-Cash Mark-to-Market Gain (Loss) on Derivatives (173,057) (150,077) (301,695) 194,999 
Gain (Loss) on Commodity Derivatives, Net $ (200,912) $ (72,638) $ (336,847) $ 303,943 

The following table summarizes open commodity derivative positions as of June 30, 2021, for commodity derivatives that were entered into through June 30, 2021, for the settlement period presented:
2021 2022 2023 2024
Oil:
WTI NYMEX - Swaps:
Volume (Bbl) 4,397,966  6,359,355  677,250  — 
Weighted-Average Price ($/Bbl) $ 54.45  $ 54.89  $ 58.66  $ — 
WTI NYMEX - Swaptions(1):
Volume (Bbl) —  766,125  3,691,000  — 
Weighted-Average Price ($/Bbl) $ —  $ 55.15  $ 50.31  $ — 
Bakken Crude UHC to WTI NYMEX - Basis Swaps:
Volume (Bbl) 2,631,870  —  —  — 
Weighted-Average Price ($/Bbl) $ (2.47) $ —  $ —  $ — 
WTI NYMEX - Call Options(1):
Volume (Bbl) —  —  365,000  3,264,210 
Weighted-Average Price ($/Bbl) $ —  $ —  $ 55.00  $ 57.22 
Natural Gas:
Henry Hub NYMEX - Swaps:
Volume (MMBtu) 14,728,136  13,897,291  —  — 
Weighted-Average Price ($/MMBtu) $ 2.82  $ 2.94  $ —  $ — 
Waha Inside FERC to Henry Hub - Basis Swaps:
Volume (MMBtu) 191,000  365,000  —  — 
Weighted-Average Differential ($/MMBtu) $ (0.11) $ (0.26) $ —  $ — 
Columbia/TCO-POOL - Basis Swaps:
Volume (MMBtu) 1,137,845  1,067,187  —  — 
Weighted-Average Differential ($/MMBtu) $ (0.45) $ (0.43) $ —  $ — 
Dominion - App - Basis Swaps:
Volume (MMBtu) 379,281  355,729  —  — 
Weighted-Average Differential ($/MMBtu) $ (0.65) $ (0.64) $ —  $ — 
NE - TETCO M2 - Basis Swaps:
Volume (MMBtu) 4,505,901  5,639,374  1,350,000  — 
Weighted-Average Differential ($/MMBtu) $ (0.76) $ (0.78) $ (0.83) $ — 
NGL:
TET-OPIS - Swaps:
Volume (Bbl) 61,500  —  —  — 
Weighted-Average Price ($/Bbl) $ 34.34  $ —  $ —  $ — 
______________
(1)Swaptions are crude oil derivative contracts that give counterparties the option to extend certain derivative contracts for additional periods. Call Options are crude oil derivative contracts sold by the Company that give counterparties the option to exercise certain derivative contracts. The volumes and prices reflected as Swaptions and Call Options in this table will only be effective if the options are exercised by the applicable counterparties.

Interest Rate Derivative Instruments

The Company uses interest rate swaps to effectively convert a portion of its variable rate indebtedness to fixed rate indebtedness. As of June 30, 2021, the Company had interest rate swaps with a total notional amount of $200.0 million. The settlement of these derivative instruments is recognized as a component of interest expense in the condensed statements of operations. The mark-to-market component of these derivative instruments is recognized in gain (loss) on unsettled interest rate derivatives, net in the condensed statements of operations.
Other Information Regarding Derivative Instruments

The following table sets forth the amounts, on a gross basis, and classification of the Company’s outstanding derivative financial instruments at June 30, 2021 and December 31, 2020, respectively.  Certain amounts may be presented on a net basis on the condensed financial statements when such amounts are with the same counterparty and subject to a master netting arrangement.

Type of Commodity Balance Sheet Location June 30, 2021 Estimated Fair Value December 31, 2020 Estimated Fair Value
Derivative Assets:   (In thousands)
Commodity Price Swap Contracts Current Assets $ 24  $ 52,702 
Commodity Basis Swap Contracts Current Assets 1,977  37 
Commodity Price Swaptions Contracts Current Assets 1,110  — 
Commodity Price Swap Contracts Noncurrent Assets 57  3,479 
Commodity Basis Swap Contracts Noncurrent Assets 342  — 
Commodity Price Swaptions Contracts Noncurrent Assets 1,127  — 
Interest Rate Swap Contracts Noncurrent Assets — 
Total Derivative Assets   $ 4,642  $ 56,218 
Derivative Liabilities:      
Commodity Price Swap Contracts Current Liabilities $ (130,278) $ (3,434)
Commodity Basis Swap Contracts Current Liabilities (6,174) (519)
Commodity Price Swaptions Contracts Current Liabilities (6,278) — 
Interest Rate Swap Contracts Current Liabilities (558) (574)
Commodity Price Swap Contracts Noncurrent Liabilities (32,345) (399)
Interest Rate Swap Contracts Noncurrent Liabilities (105) (445)
Commodity Basis Swap Contracts Noncurrent Liabilities (342) — 
Commodity Price Call Option Contracts Noncurrent Liabilities (36,206) — 
Commodity Price Swaptions Contracts Noncurrent Liabilities (60,028) (17,184)
Total Derivative Liabilities   $ (272,312) $ (22,554)

The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions.  When the Company has netting arrangements with its counterparties that provide for offsetting payables against receivables from separate derivative instruments these assets and liabilities are netted in the balance sheet.  The tables presented below provide reconciliation between the gross assets and liabilities and the amounts reflected in the balance sheet.  The amounts presented exclude derivative settlement receivables and payables as of the balance sheet dates.
  Estimated Fair Value at June 30, 2021
(In thousands) Gross Amounts of
Recognized Assets (Liabilities)
Gross Amounts Offset
in the Balance Sheet
Net Amounts of Assets (Liabilities) Presented in the Balance Sheet
Offsetting of Derivative Assets:  
Current Assets $ 3,111  $ (2,593) $ 518 
Non-Current Assets 1,531  (1,499) 32 
Total Derivative Assets $ 4,642  $ (4,092) $ 550 
Offsetting of Derivative Liabilities:  
Current Liabilities $ (143,287) $ 2,593  $ (140,694)
Non-Current Liabilities (129,025) 1,499  (127,526)
Total Derivative Liabilities $ (272,312) $ 4,092  $ (268,220)
  Estimated Fair Value at December 31, 2020
 (In thousands) Gross Amounts of
Recognized Assets (Liabilities)
Gross Amounts Offset
on the Balance Sheet
Net Amounts of Assets (Liabilities) Presented in the Balance Sheet
Offsetting of Derivative Assets:  
Current Assets $ 52,739  $ (1,449) $ 51,290 
Non-Current Assets 3,479  $ (3,369) 111 
Total Derivative Assets $ 56,218  $ (4,817) $ 51,401 
Offsetting of Derivative Liabilities:  
Current Liabilities $ (4,527) $ 1,449  $ (3,078)
Non-Current Liabilities (18,028) $ 3,369  (14,659)
Total Derivative Liabilities $ (22,554) $ 4,817  $ (17,737)

All of the Company’s outstanding derivative instruments are covered by International Swap Dealers Association Master Agreements (“ISDAs”) entered into with parties that are also lenders under the Company’s Revolving Credit Facility.  The Company’s obligations under the derivative instruments are secured pursuant to the Revolving Credit Facility, and no additional collateral had been posted by the Company as of June 30, 2021.  The ISDAs may provide that as a result of certain circumstances, such as cross-defaults, a counterparty may require all outstanding derivative instruments under an ISDA to be settled immediately.  See Note 10 for the aggregate fair value of all derivative instruments that were in a net liability position at June 30, 2021 and December 31, 2020.