Quarterly report pursuant to Section 13 or 15(d)

Risk Management and Derivative Instruments

v3.10.0.1
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.

·

Swaps: The Company receives or pays a fixed price for the commodity and pays or receives a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

 

·

Three-way collars: A three-way collar contains a fixed floor price (long put), fixed sub-floor price (short put), and a fixed ceiling price (short call). If the market price exceeds the ceiling strike price, the Company receives the ceiling strike price and pays the market price. If the market price is between the ceiling and the floor strike price, no payments are due from either party. If the market price is below the floor price but above the sub-floor price, the Company receives the floor strike price and pays the market price. If the market price is below the sub-floor price, the Company receives the market price plus the difference between the floor and the sub-floor strike prices and pays the market price.

 

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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NYMEX WTI

 

 

Fixed Swaps

 

Three-Way Collars

 

 

 

 

Weighted

 

 

 

Weighted

 

 

 

 

Weighted

 

 

Hedge

 

Avg

 

Hedge

 

Avg

 

Weighted

 

Avg

 

 

Position

 

Strike

 

Position

 

Ceiling

 

Avg Floor

 

Sub-Floor

 

    

(Bbls)

    

Price

    

(Bbls)

    

Price

    

Price

    

Price

Quarter Ended:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

175,720

 

$

57.23

 

184,000

 

$

59.93

 

$

50.00

 

$

40.00

December 31, 2018(1)

 

313,720

 

$

58.59

 

46,000

 

$

56.70

 

$

50.00

 

$

40.00

March 31, 2019(1)

 

171,000

 

$

66.48

 

180,000

 

$

63.14

 

$

53.75

 

$

43.75

June 30, 2019(1)

 

133,900

 

$

64.86

 

182,000

 

$

63.14

 

$

53.75

 

$

43.75

September 30, 2019(1)

 

46,000

 

$

62.96

 

184,000

 

$

63.14

 

$

53.75

 

$

43.75

December 31, 2019(1)

 

46,000

 

$

61.43

 

184,000

 

$

63.14

 

$

53.75

 

$

43.75

March 31, 2020(1)

 

 

$

 

91,000

 

$

65.75

 

$

50.00

 

$

40.00

June 30, 2020(1)

 

 

$

 

91,000

 

$

65.75

 

$

50.00

 

$

40.00

September 30, 2020(1)

 

 

$

 

92,000

 

$

65.75

 

$

50.00

 

$

40.00

December 31, 2020(1)

 

 

$

 

92,000

 

$

65.75

 

$

50.00

 

$

40.00

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NYMEX HENRY HUB

 

 

Fixed Swaps

 

Three-Way Collars

 

 

 

 

 

 

 

 

 

Weighted

 

Weighted

 

Weighted

 

 

Hedge

 

Weighted

 

Hedge

 

Avg

 

Avg

 

Avg

 

 

Position

 

Avg Strike

 

Position

 

Ceiling

 

Floor

 

Sub-Floor

 

 

(MMBtu)

 

Price

 

(MMBtu)

 

Price

 

Price

 

Price

Quarter Ended:

 

  

 

 

  

 

  

 

 

 

 

 

 

 

 

 

September 30, 2018

 

2,116,000

 

$

2.84

 

1,380,000

 

$

3.40

 

$

3.00

 

$

2.50

December 31, 2018(1)

 

2,055,000

 

$

2.95

 

1,380,000

 

$

3.40

 

$

3.00

 

$

2.50

March 31, 2019(1)

 

1,980,000

 

$

3.01

 

1,350,000

 

$

3.40

 

$

3.00

 

$

2.50


(1)

Positions shown represent open commodity derivative contract positions as of  September 30, 2018.

 

 

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):

 

 

 

 

 

 

 

 

 

Type

    

Balance Sheet Location (1)

    

September 30, 2018

    

December 31, 2017

Gas swaps

 

Derivative financial instruments - current assets

 

$

 —

 

$

821

Oil collars

 

Derivative financial instruments - current assets

 

 

 —

 

 

(760)

Gas collars

 

Derivative financial instruments - current assets

 

 

 —

 

 

701

Total derivative financial instruments —  current assets

 

 

 

$

 —

 

$

762

Oil swaps

 

Derivative financial instruments — current liabilities

 

$

(6,753)

 

$

(3,679)

Gas swaps

 

Derivative financial instruments - current liabilities

 

 

(292)

 

 

 —

Oil collars

 

Derivative financial instruments - current liabilities

 

 

(6,241)

 

 

(370)

Gas collars

 

Derivative financial instruments - current liabilities

 

 

76

 

 

616

Total derivative financial instruments —  current liabilities

 

 

 

$

(13,210)

 

$

(3,433)

Oil swaps

 

Derivative financial instruments — noncurrent liabilities

 

$

(357)

 

$

(523)

Oil collars

 

Derivative financial instruments — noncurrent liabilities

 

 

(4,004)

 

 

(39)

Total derivative financial instruments —  noncurrent liabilities

 

 

 

$

(4,361)

 

$

(562)

Total derivative fair value at period end

 

  

 

$

(17,571)

 

$

(3,233)


(1)

The fair values of commodity derivative instruments reported in the Company’s unaudited interim condensed consolidated balance sheets are subject to netting arrangements and qualify for net presentation.

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

 

 

 

 

 

 

Net Recognized

Not Designated as

 

 

 

Gross Recognized

 

Gross Amounts

 

 

Fair Value

ASC 815 Hedges

    

Balance Sheet Location Classification

    

Assets/Liabilities

    

Offset

    

 

Assets/Liabilities

Derivative Assets:

 

  

 

 

  

  

 

 

  

 

 

Commodity contracts

 

Derivative financial instruments — current

 

$

901

 

$

(901)

 

$

 —

Commodity contracts

 

Derivative financial instruments — noncurrent

 

 

1,076

 

 

(1,076)

 

 

 —

 

 

  

 

$

1,977

 

$

(1,977)

 

$

 —

Derivative Liabilities:

 

  

 

 

  

  

 

 

  

 

 

Commodity contracts

 

Derivative financial instruments — current

 

$

(14,111)

 

$

901

 

$

(13,210)

Commodity contracts

 

Derivative financial instruments — noncurrent

 

 

(5,437)

  

 

1,076

 

 

(4,361)

 

 

  

 

$

(19,548)

 

$

1,977

 

$

(17,571)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

Net Recognized

Not Designated as

 

 

 

Gross Recognized

 

Gross Amounts

 

Fair Value

ASC 815 Hedges

    

Balance Sheet Location Classification

    

Assets/Liabilities

    

Offset

    

Assets/Liabilities

Derivative Assets:

 

  

 

 

  

 

 

  

 

 

  

Commodity contracts

 

Derivative financial instruments - current

 

$

3,479

 

$

(2,717)

 

$

762

Commodity contracts

 

Derivative financial instruments - noncurrent

 

 

905

 

 

(905)

 

 

 —

 

 

  

 

$

4,384

 

$

(3,622)

 

$

762

Derivative Liabilities:

 

  

 

 

  

 

 

  

 

 

  

Commodity contracts

 

Derivative financial instruments - current

 

$

(6,150)

 

$

2,717

 

$

(3,433)

Commodity contracts

 

Derivative financial instruments - noncurrent

 

 

(1,467)

 

 

905

 

 

(562)

 

 

  

 

$

(7,617)

 

$

3,622

 

$

(3,995)

 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months

 

For the Nine Months

 

 

Ended September 30,

 

Ended September 30,

 

    

2018

    

2017

    

2018

    

2017

Net cash received (paid) for commodity derivative contracts

 

$

(3,854)

 

$

2,909

 

$

(7,532)

 

$

6,149

Unrealized net gains (losses)

 

 

(2,729)

 

 

(6,500)

 

 

(14,338)

 

 

2,618

Gains (losses) on commodity derivative contracts—net

 

$

(6,583)

 

$

(3,591)

 

$

(21,870)

 

$

8,767

 

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.