Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.19.1
Derivative Instruments
3 Months Ended
Mar. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
We utilize derivative instruments to mitigate our financial exposure to commodity price volatility. Our derivative instruments are not formally designated as hedges in the context of GAAP.
We typically utilize collars and swaps, which are placed with financial institutions that we believe to be acceptable credit risks, to hedge against the variability in cash flows associated with anticipated sales of our future production. While the use of derivative instruments limits the risk of adverse price movements, such use may also limit future revenues from favorable price movements.
The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such contract.
We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for West Texas Intermediate (“WTI”), Louisiana Light Sweet (“LLS”) and Magellan East Houston (“MEH”) crude oil closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position. We are currently unhedged with respect to NGL and natural gas production.
The following table sets forth our commodity derivative positions, presented on a net basis by period of maturity, as of March 31, 2019:
 
 
 
Average
 
Weighted
 
 
 
 
 
 
 
Volume Per
 
Average
 
Fair Value
 
Instrument
 
Day
 
Price
 
Asset
 
Liability
Crude Oil:
 
 
(barrels)
 
($/barrel)
 
 
 
 
Second quarter 2019
Swaps-WTI
 
6,421

 
$
54.48

 
$

 
$
3,361

Second quarter 2019
Swaps-LLS
 
5,000

 
$
59.17

 

 
3,109

Second quarter 2019
Swaps-MEH
 
1,000

 
$
64.00

 

 
183

Third quarter 2019
Swaps-WTI
 
6,397

 
$
54.50

 

 
3,430

Third quarter 2019
Swaps-LLS
 
5,000

 
$
59.17

 

 
2,592

Third quarter 2019
Swaps-MEH
 
1,000

 
$
64.00

 

 
34

Fourth quarter 2019
Swaps-WTI
 
6,398

 
$
54.50

 

 
3,130

Fourth quarter 2019
Swaps-LLS
 
5,000

 
$
59.17

 

 
1,995

Fourth quarter 2019
Swaps-MEH
 
1,000

 
$
64.00

 
68

 

First quarter 2020
Swaps-WTI
 
6,000

 
$
54.09

 

 
2,904

First quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
58

Second quarter 2020
Swaps-WTI
 
6,000

 
$
54.09

 

 
2,369

Second quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
57

Third quarter 2020
Swaps-WTI
 
6,000

 
$
54.09

 

 
1,898

Third quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
40

Fourth quarter 2020
Swaps-WTI
 
6,000

 
$
54.09

 

 
1,518

Fourth quarter 2020
Swaps-MEH
 
2,000

 
$
61.03

 

 
39

Settlements to be paid in subsequent period
 
 
 
 

 


 
1,721


Financial Statement Impact of Derivatives
The impact of our derivative activities on income is included in “Derivatives” in our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:
 
Three Months Ended March 31,
 
2019
 
2018
Derivative losses
$
(68,017
)
 
$
(18,795
)

The effects of derivative gains and (losses) and cash settlements are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in the “Derivative contracts” section of our Condensed Consolidated Statements of Cash Flows under “Net (gains) losses” and “Cash settlements, net.”
The following table summarizes the fair values of our derivative instruments presented on a gross basis, as well as the locations of these instruments on our Condensed Consolidated Balance Sheets as of the dates presented:
 
 
 
 
March 31, 2019
 
December 31, 2018
 
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
 
Derivative assets/liabilities – current
 
$
2,658

 
$
25,107

 
$
34,932

 
$
991

Commodity contracts
 
Derivative assets/liabilities – noncurrent
 
229

 
6,150

 
10,100

 

 
 
 
 
$
2,887

 
$
31,257

 
$
45,032

 
$
991


As of March 31, 2019, we reported net commodity derivative liabilities of $28.4 million. The contracts associated with this position are with seven counterparties, all of which are investment grade financial institutions. This concentration may impact our overall credit risk in that these counterparties may be similarly affected by changes in economic or other conditions. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. Furthermore, our derivative contracts are not subject to margin calls or similar accelerations. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.