Annual report pursuant to Section 13 and 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

v3.20.4
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
12 Months Ended
Dec. 31, 2020
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 collars (purchased put options and written 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 11).  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 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 financial statements:

  Year ended December 31,
(In thousands) 2020 2019 2018
Gain (Loss) on Settled Commodity Derivatives $ 188,264  $ 44,377  $ (22,886)
Gain (Loss) on Unsettled Commodity Derivatives 39,878  (173,214) 207,892 
Gain (Loss) on Derivative Instruments, Net $ 228,141  $ (128,837) $ 185,006 

The following table summarizes open commodity derivative positions as of December 31, 2020, for commodity derivatives that were entered into through December 31, 2020, for the settlement period presented:
2021 2022 2023
Oil:
WTI NYMEX - Swaps:
Volume (Bbl) 7,545,124  816,250  — 
Weighted-Average Price ($/Bbl) $ 55.06  $ 50.49  $ — 
WTI NYMEX - Swaptions(1):
Volume (Bbl) —  3,131,125  1,455,000 
Weighted-Average Price ($/Bbl) $ —  $ 52.68  $ 47.98 
Bakken Crude UHC to WTI NYMEX - Basis Swaps:
Volume (Bbl) 1,523,750  —  — 
Weighted-Average Price ($/Bbl) $ (2.39) $ —  $ — 
Natural Gas:
Henry Hub NYMEX - Swaps:
Volume (MMBtu) 13,000,000  3,650,000  — 
Weighted-Average Price ($/MMBtu) $ 2.50  $ 2.61  $ — 
Waha Inside FERC to Henry Hub - Basis Swaps:
Volume (MMBtu) 69,000  —  — 
Weighted-Average Differential ($/MMBtu) $ (0.28) $ —  $ — 
______________
(1)Swaptions are crude oil derivative contracts that give counterparties the option to extend certain derivative contracts for additional periods. The volumes and prices reflected as Swaptions 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 December 31, 2020, 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 statements of operations. The mark-to-market component of these derivative instruments is recognized in loss on unsettled interest rate derivatives, net in the 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 December 31, 2020 and 2019, respectively.  Certain amounts may be presented on a net basis in the financial statements when such amounts are with the same counterparty and subject to a master netting arrangement:

December 31,
Estimated Fair Value
Type of Commodity Derivative Contract Balance Sheet Location 2020 2019
Derivative Assets: (In thousands)
Commodity Price Swap Contracts Current Assets $ 52,702  $ 20,164 
Commodity Basis Swap Contracts Current Assets 37  — 
Commodity Price Swap Contracts Noncurrent Assets 3,479  16,069 
Total Derivative Assets $ 56,218  $ 36,233 
Derivative Liabilities:
Commodity Price Swap Contracts Current Liabilities $ (3,434) $ (25,834)
Commodity Basis Swap Contracts Current Liabilities (519) — 
Interest Rate Swap Contracts Current Liabilities (574) — 
Commodity Price Swap Contracts Noncurrent Liabilities (399) (5,273)
Interest Rate Swap Contracts Noncurrent Liabilities (445) — 
Commodity Price Swaptions Contracts Noncurrent Liabilities (17,184) (10,321)
Total Derivative Liabilities $ (22,554) $ (41,428)

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 December 31, 2020
(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 $ 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)
  Estimated Fair Value at December 31, 2019
(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 $ 20,164  $ (14,536) $ 5,628 
Non-Current Assets 16,069  (7,515) 8,554 
Total Derivative Assets $ 36,233  $ (22,051) $ 14,182 
Offsetting of Derivative Liabilities:  
Current Liabilities $ (25,834) $ 14,536  $ (11,298)
Non-Current Liabilities (15,594) 7,515  (8,079)
Total Derivative Liabilities $ (41,428) $ 22,051  $ (19,377)

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 December 31, 2020.  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 11 for the aggregate fair value of all derivative instruments that were in a net liability position at December 31, 2020 and 2019.