Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.20.1
Derivative Instruments
3 Months Ended
Mar. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
We utilize derivative instruments, typically swaps, put options and call options 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 the beneficial impact of future product revenues and interest expense from favorable commodity price and interest rate movements. From time to time, we may enter into incremental derivative contracts in order to increase the notional volume of production we are hedging, restructure existing derivative contracts or enter into other derivative contracts resulting in modification to the terms of existing contracts. In accordance with our internal policies, we do not utilize derivative instruments for speculative purposes.
Commodity Derivatives
The following is a general description of the commodity derivative instruments we have employed:
Swaps. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, or the swap price, with the payments calculated by reference to specified commodities or indexes. The counterparty to a swap contract is required to make a payment to us based on the amount of the swap price in excess of the settlement price multiplied by the notional volume 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 based on the amount of the settlement price in excess of the swap price multiplied by the notional volume if the settlement price for any settlement period is above the swap price for such contract.
Put Options. A put option has a defined strike, or floor price. We have entered into put option contracts in the roles of buyer and seller depending upon our particular hedging objective. The buyer of the put option pays the seller a premium to enter into the contract. When the settlement price is below the floor price, the seller pays the buyer an amount equal to the difference between the settlement price and the strike price multiplied by the notional volume. When the settlement price is above the floor price, the put option expires worthless. Certain of our purchased put options have deferred premiums. For the deferred premium puts, we agree to pay a premium to the counterparty at the time of settlement.
Call Options. A call option has a defined strike, or ceiling price. We have entered into call option contracts in the roles of buyer and seller depending upon our particular hedging objective. The buyer of the call option pays the seller a premium to enter into the call option. When the settlement price is above the ceiling price, the seller pays the buyer an amount equal to the difference between the settlement price and the strike price multiplied by the notional volume. When the settlement price is below the ceiling price, the call option expires worthless.
We typically combine swaps, purchased put options, purchased call options, sold put options and sold call options in order to achieve various hedging objectives. Certain of these objectives result in combinations that operate as collars which include purchased put options and sold call options, three-way collars which include purchased put options, sold put options and sold call options, and enhanced swaps, which include either sold put options or sold call options with the associated premiums rolled into an enhanced fixed price swap, among others.
We determine the fair values of our commodity derivative instruments using industry-standard models that consider various assumptions, including current market value and contractual prices for the underlying instruments, implied volatilities, time value and nonperformance risk. For the current market prices, we use third-party quoted forward prices, as applicable, for NYMEX West Texas Intermediate (“NYMEX WTI”), Magellan East Houston (“MEH”) crude oil and NYMEX Henry Hub (“NYMEX HH”) natural gas closing prices as of the end of the reporting period. Nonperformance risk is incorporated by utilizing 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.
The following table sets forth our commodity derivative positions, presented on a net basis by period of maturity, as of March 31, 2020:


2Q2020

3Q2020

4Q2020

1Q2021

2Q2021
NYMEX WTI Crude Swaps










Average Volume Per Day (barrels)

13,209


8,630


9,804


5,000


4,945

Weighted Average Swap Price ($/barrel)

$
52.06


$
55.20


$
55.18


$
51.60


$
51.60

















NYMEX WTI Purchased Puts/Sold Calls















Average Volume Per Day (barrels)

5,297


6,891


2,000


4,167


4,121

Weighted Average Purchased Put Price ($/barrel)

$
52.36


$
52.97


$
48.00


$
43.60


$
43.60

Weighted Average Sold Call ($/barrel)

$
57.60


$
58.03


$
57.10


$
46.84


$
46.84

















NYMEX WTI Purchased Puts















Average Volume Per Day (barrels)

3,297













Weighted Average Purchased Put ($/barrel)

$
23.00













Weighted Average Purchased Put Deferred Premium ($/barrel)

$
2.11





























NYMEX WTI Purchased Puts















Average Volume Per Day (barrels)

8,242













Weighted Average Purchased Put ($/barrel)

$
30.00













Weighted Average Purchased Put Deferred Premium ($/barrel)

$
3.19





























NYMEX WTI Put Spread















Average Volume Per Day (barrels)




5,435










Weighted Average Put Spread Purchased Put ($/barrel)




$
30.00










Weighted Average Put Spread Sold Put ($/barrel)




$
20.00










Weighted Average Put Spread Deferred Premium ($/barrel)




$
1.84


























NYMEX WTI Cap Offset















Average Volume Per Day (barrels)

3,297













Weighted Average Cap Offset Purchased Call ($/barrel)

$
57.90













Weighted Average Cap Offset Deferred Premium ($/barrel)

$
0.10





























NYMEX WTI Sold Puts















Average Volume Per Day (barrels)

912





5,087


9,167


9,066

Weighted Average Sold Put Price ($/barrel)

$
44.00





$
43.50


$
37.36


$
37.36












MEH Crude Swaps










Average Volume Per Day (barrels)

2,000


2,000


2,000







Weighted Average Swap Price ($/barrel)

$
61.03


$
61.03


$
61.03








 














HH Purchased Puts/Sold Calls
 














Average Volume Per Day (MMBtus)
 
12,901


12,804


12,804







Weighted Average Floor ($/MMBtu)
 
$
2.00


$
2.00


$
2.00







Weighted Average Cap ($/MMBtu)
 
$
2.21


$
2.21


$
2.21








As of March 31, 2020, we were unhedged with respect to NGL production.
Interest Rate Derivatives
We have entered into a series of interest rate swap contracts (the “Interest Rate Swaps”) to establish fixed interest rates on a portion of our variable interest rate indebtedness under the Credit Facility and Second Lien Credit Agreement dated as of September 29, 2017 (the “Second Lien Facility”). The notional amount of the Interest Rate Swaps totals $300 million, with us paying a weighted average fixed rate of 1.36% on the notional amount, and the counterparties paying a variable rate equal to a customary London interbank offered rate (“LIBOR”) through May 2022.
Financial Statement Impact of Derivatives
The impact of our derivative activities on income is included in the “Derivatives” caption on our Condensed Consolidated Statements of Operations. The effects of derivative gains and (losses) and cash settlements are reported as adjustments to reconcile net income 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 effects of our derivative activities for the periods presented:
 
 
Three Months Ended March 31,
 
 
2020
 
2019
Interest rate swap gains (losses) recognized in the Consolidated Statements of Operations
 
$
(6,683
)
 
$

Commodity gains (losses) recognized in the Consolidated Statements of Operations
 
157,802

 
(68,017
)
 
 
$
151,119

 
$
(68,017
)
 
 
 
 
 
Interest rate cash settlements recognized in the Consolidated Statements of Cash Flows
 
$
68

 
$

Commodity cash settlements recognized in the Consolidated Statements of Cash Flows
 
(337
)
 
4,394

 
 
$
(269
)
 
$
4,394


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, 2020
 
December 31, 2019
 
 
 
 
Derivative
 
Derivative
 
Derivative
 
Derivative
Type
 
Balance Sheet Location
 
Assets
 
Liabilities
 
Assets
 
Liabilities
Interest rate contracts
 
Derivative assets/liabilities - current
 
$
40

 
$
2,890

 
$

 
$

Commodity contracts
 
Derivative assets/liabilities – current
 
233,402

 
100,202

 
4,131

 
23,450

Interest rate contracts
 
Derivative assets/liabilities - noncurrent
 

 
3,900

 

 

Commodity contracts
 
Derivative assets/liabilities – noncurrent
 
10,963

 
6,789

 
2,750

 
3,385

 
 
 
 
$
244,405

 
$
113,781

 
$
6,881

 
$
26,835


As of March 31, 2020, we reported net commodity derivative assets of $137.4 million and net Interest Rate Swap liabilities of $6.8 million. The contracts associated with these positions are with nine counterparties for commodity derivatives and four counterparties for Interest Rate Swaps, all of which are investment grade financial institutions and are participants in the Credit Facility. This concentration may impact our overall credit risk in that these counterparties may be similarly affected by changes in economic or other conditions.
The agreements underlying our derivative instruments include provisions for the netting of settlements with the counterparties for contracts of similar type. 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.