Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

v3.19.3.a.u2
Derivative Instruments
12 Months Ended
Dec. 31, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
We utilize derivative instruments, typically swaps, two- and three-way collars and enhanced swaps which are placed with financial institutions that we believe are acceptable credit risks, to mitigate our financial exposure to commodity price volatility associated with anticipated sales of our future production and volatility in interest rates attributable to our variable rate debt instruments. Our derivative instruments are not formally designated as hedges in the context of GAAP. While the use of derivative instruments limits the risk of adverse commodity price and interest rate movements, such use may also limit future product revenues and interest expense from favorable price and rate movements. In addition, we do not utilize derivative instruments for speculative purposes. As of December 31, 2019, we were unhedged with respect to NGL and natural gas production and we had no interest rate hedges outstanding. The following is a general description of the derivative instruments we have employed:
Swaps. The counterparty to a swap contract is required to make a payment to us if the settlement price for any settlement period is below the 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 swap price for such contract.
Two-Way Collars. The counterparty to a two-way collar contract is required to make a payment to us if the settlement price for any settlement period is below the floor 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 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 collar contract.
Three-Way Collars. A three-way collar consists of (i) a purchased put option which establishes a floor price for the collar, (ii) a sold call option which establishes a ceiling price of the collar and (iii) a sold put option which establishes a sub-floor price. Three-way collars are settled based on differences between the floor or ceiling prices and the settlement price of a referenced index or the difference between the floor price and sub-floor price. If the settlement price of the referenced index is below the sub-floor price, the counterparty is required to make a payment to us for the difference between the floor price and sub-floor price. If the settlement price of the referenced index is between the floor price and sub-floor price, the counterparty is required to make a payment to us for the difference between the floor price and the settlement price of the referenced index. If the settlement price of the referenced index is between the floor price and ceiling price, no payments are due to or from either party. If the settlement price of the referenced index is above the ceiling price, we are required to make a payment to the counterparty for the difference.
Enhanced Swaps. An enhanced swap consists of a sold put option with the associated premiums rolled into an enhanced fixed price swap. The counterparty to an enhanced swap contract is required to make a payment to us if the settlement price for any settlement period is below the 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 swap price for such contract. Additionally, we are required to make a payment to the counterparty if the settlement price for any settlement period is below the sold-put strike price. Effectively, when the settlement price for any settlement period is below the sold-put strike price, we receive the swap price minus the sold put strike price.
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.
Subsequent Events
In January of 2020, we entered into additional commodity hedge contracts as well as certain interest rate swap transactions. We replaced a portion of two crude oil swaps with a costless collar for 2,000 BOPD for April through December 2020 with floor and ceiling prices of $48.00 and $57.10 per barrel. We entered into a costless collar for Henry Hub natural gas for 270,000 MMBTU per month with a term from February through December of 2020 with floor and ceiling prices of $2.00 and $2.18 per MMBTU, respectively. In January and February 2020, we entered into interest rate swaps contracts through May 2022 for a notional amount of $300 million, paying a weighted-average fixed rate of 1.36%.
The following table sets forth our commodity derivative contracts as of December 31, 2019:
 
 
1Q2020
 
2Q2020
 
3Q2020
 
4Q2020
 
1Q2021
 
2Q2021
 
3Q2021
 
4Q2021
NYMEX WTI Crude Swaps
 

 

 

 

 

 

 

 

Average Volume Per Day (barrels)
 
15,648

 
12,648

 
10,630

 
10,630

 
3,333

 
3,297

 
1,630

 
1,630

Weighted Average Swap Price ($/barrel)
 
$
55.34

 
$
54.96

 
$
54.77

 
$
54.77

 
$
55.89

 
$
55.89

 
$
55.50

 
$
55.50


 


 


 


 


 


 


 


 


NYMEX WTI Purchased Puts/Sold Calls
 


 


 


 


 


 


 


 


Average Volume Per Day (barrels)
 


 
3,297

 
4,891

 


 
1,667

 
1,648

 


 


Weighted Average Purchased Put Price ($/barrel)
 


 
$
55.00

 
$
55.00

 


 
$
55.00

 
$
55.00

 


 


Weighted Average Sold Call ($/barrel)
 


 
$
57.69

 
$
58.42

 


 
$
58.00

 
$
58.00

 


 



 


 


 


 


 


 


 


 


NYMEX WTI Sold Puts
 


 


 


 


 


 


 


 


Average Volume Per Day (barrels)
 


 


 


 


 
5,000

 
4,945

 
1,630

 
1,630

Weighted Average Sold Put Price ($/barrel)
 


 


 


 


 
$
44.00

 
$
44.00

 
$
44.00

 
$
44.00


 


 


 


 


 


 


 


 


MEH Crude Swaps
 


 


 


 


 


 


 


 


Average Volume Per Day (barrels)
 
2,000

 
2,000

 
2,000

 
2,000

 


 


 


 


Weighted Average Swap Price ($/barrel)
 
$
61.03

 
$
61.03

 
$
61.03

 
$
61.03

 


 


 


 



Financial Statement Impact of Derivatives
The impact of our derivatives activities on income is included in the “Derivatives” caption on our Consolidated Statements of Operations. 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 Consolidated Statements of Cash Flows under the “Net (gains) losses” and “Cash settlements, net.”
The following table summarizes the effects of our derivative activities for the periods presented:
 
Year Ended December 31,
 
2019
 
2018
 
2017
Derivative gains (losses) recognized in the Consolidated Statements of Operations
$
(68,131
)
 
$
37,427

 
$
(17,819
)
Cash settlements recognized in the Consolidated Statements of Cash Flows
$
(4,136
)
 
$
(48,291
)
 
$
(3,511
)

The following table summarizes the fair value of our derivative instruments, as well as the locations of these instruments, on our Consolidated Balance Sheets as of the dates presented:
 
 
 
 
Fair Values
 
 
 
 
December 31, 2019
 
December 31, 2018
 
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Commodity contracts
 
Derivative assets/liabilities – current
 
$
4,131

 
$
23,450

 
$
34,932

 
$
991

Commodity contracts
 
Derivative assets/liabilities – noncurrent
 
2,750

 
3,385

 
10,100

 

 
 
 
 
$
6,881

 
$
26,835

 
$
45,032

 
$
991


As of December 31, 2019, we reported net commodity derivative liabilities of $20.0 million. The contracts associated with this position are with nine counterparties, all of which are investment grade financial institutions and are participants in the Credit Facility. This concentration may impact our overall credit risk, either positively or negatively, 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.