Risk Management and Derivative Instruments
|9 Months Ended|
Sep. 30, 2018
|Risk Management and Derivative Instruments|
|Risk Management and Derivative Instruments||
5. Risk Management and Derivative Instruments
The Company’s production is exposed to fluctuations in crude oil, NGLs and natural gas prices. The Company believes it is prudent to manage the variability in cash flows by, at times, entering into derivative financial instruments to economically hedge a portion of its crude and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and collars, to manage fluctuations in cash flows resulting from changes in commodity prices.
These derivative contracts are placed with major financial institutions that the Company believes are minimal credit risks. The crude oil and natural gas reference prices upon which the commodity derivative contracts are based reflect various market indices that management believes correlates with actual prices received by the Company for its crude oil and natural gas production.
Inherent in the Company’s portfolio of commodity derivative contracts are certain business risks, including market risk and credit risk. Market risk is the risk that the price of the commodity will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not require collateral from its counterparties but does attempt to minimize its credit risk associated with derivative instruments by entering into derivative instruments only with counterparties that are large financial institutions, which management believes present minimal credit risk. In addition, to mitigate its risk of loss due to default, the Company has entered into agreements with its counterparties on its derivative instruments that allow the Company to offset its asset position with its liability position in the event of default by the counterparty. Due to the netting arrangements, had the Company’s counterparties failed to perform under existing commodity derivative contracts at September 30, 2018, the Company would not have experienced a loss.
Commodity Derivative Contracts
The Company has various oil and natural gas derivative contracts that extend through December 31, 2020, summarized as follows:
Balance Sheet Presentation
The following table summarizes the net fair values of commodity derivative instruments by the appropriate balance sheet classification in the Company’s unaudited interim condensed consolidated balance sheets for the periods presented (in thousands):
The following table summarizes the location and fair value amounts of all commodity derivative as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited interim condensed consolidated balance sheets for the periods presented (in thousands):
Gains/Losses on Commodity Derivative Contracts
The Company does not designate its commodity derivative contracts as hedging instruments for financial reporting purposes. Accordingly, commodity derivative contracts are marked-to-market each quarter with the change in fair value during the periodic reporting period recognized currently in gains (losses) on commodity derivative contracts—net within revenues in the unaudited interim condensed consolidated statements of operations.
The following table presents net cash received or net cash paid for the settlement of commodity derivative contracts and unrealized net gains or unrealized net losses recorded by the Company related to the change in fair value of the derivative instruments in gains (losses) on commodity derivative contracts—net for the periods presented (in thousands):
Net cash received (paid) for commodity derivative contracts, as presented in the table above, represent realized gains (losses) related to the Company’s derivative instruments. In addition to these cash settlements, the Company also recognizes fair value changes on its derivative instruments in each reporting period. The changes in fair value result from new positions and cash settlements that may occur during each reporting period, as well as the relationships between contractual prices and the associated forward curves.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://www.xbrl.org/2003/role/presentationRef