Note 7—Derivative Instruments

The Company is exposed to certain risks relating to its ongoing business operations and uses derivative instruments to manage its exposure to commodity price risk.

Commodity Derivative Contracts

Historically, prices received for crude oil and natural gas production have been volatile because of supply and demand factors, worldwide political factors, general economic conditions and seasonal weather patterns. The Company periodically uses derivative instruments, such as swaps, costless collars and basis swaps, to mitigate its exposure to declines in commodity prices and to the corresponding negative impacts such declines can have on its cash flow from operations, returns on capital and other financial results. While the use of these instruments limits the downside risk of adverse price changes, their use may also limit future revenues from favorable price changes. The Company does not enter into derivative contracts for speculative or trading purposes.

Commodity Swap Contracts. The Company opportunistically uses commodity derivative instruments known as fixed price swaps to realize a known price for a specific volume of production. All transactions are settled in cash with one party paying the other for the net difference in the agreed upon published third-party index price (“index price”) and the swap fixed price, multiplied by the contract volume. The Company also utilizes basis swaps contracts to hedge the difference between the index price and a local index price.

The following table summarizes the approximate volumes and average contract prices of swap contracts the Company had in place as of September 30, 2017:



	Period	Volume (Bbl)	Weighted Average Fixed Price/Differential ($/Bbl) ⁽¹⁾
Crude oil swaps	October 2017 - December 2017	170,200	$	50.41
	January 2018 - December 2018	36,500	$	55.95
Crude oil basis swaps	October 2017 - November 2017	21,350	$	(0.20	)


⁽¹⁾	The oil swap contracts are settled based on the month’s average daily NYMEX price of West Texas Intermediate Light Sweet Crude. The oil basis swap contracts are settled based on the difference between the arithmetic average of WTI MIDLAND ARGUS and WTI ARGUS during the relevant calculation period.



	Period	Volume (MMBtu)	Weighted Average Fixed Price/Differential ($/MMBtu) ⁽¹⁾
Natural gas swaps	October 2017 - December 2017	368,000	$	2.94
Natural gas basis swaps	January 2018 - December 2018	1,825,000	$	(0.43	)
	January 2019 - December 2019	1,825,000	$	(0.43	)


⁽¹⁾	The natural gas swap contracts are settled based on the month’s average daily NYMEX price of Henry Hub Natural Gas. The natural gas basis swap contracts are settled based on the difference between Inside FERC’s West Texas WAHA price of natural gas and the NYMEX price of Natural Gas during the relevant calculation period.

Derivative Instrument Reporting. The Company’s oil and natural gas derivative instruments have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in the Company’s condensed consolidated statements of operations. All derivative instruments are recorded at fair value in the condensed consolidated balance sheets, other than derivative instruments that meet the “normal purchase normal sale” exclusion, and any gains and losses are recognized in current period earnings.

The following table presents gains and losses for derivative instruments not designated as hedges for accounting purposes for the periods presented:



	Successor			Predecessor		Successor		Predecessor
(in thousands)	For the Three Months Ended September 30, 2017			For the Three Months Ended September 30, 2016		For the Nine Months Ended September 30, 2017		For the Nine Months Ended September 30, 2016
Net gain (loss) on derivative instruments	$	(896	)	$	1,741	$	5,392	$	(4,184	)

Offsetting of Derivative Assets and Liabilities. The Company’s commodity derivatives are measured at fair value and are included in the accompanying condensed consolidated balance sheets as derivative assets and liabilities. The Company nets its financial derivative instrument fair value amounts executed with the same counterparty pursuant to ISDA master netting agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. The following tables summarize the location and fair value amounts of all the Company’s derivative instruments in the consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the condensed consolidated balance sheets:



	September 30, 2017
(in thousands)	Balance Sheet Classification	Gross Asset/Liability Amounts		Gross Amounts Offset ⁽¹⁾			Net Recognized Fair Value Assets/Liabilities
Derivative Assets
Derivative instruments	Current assets	$	562	$	(179	)	$	383
Derivative instruments	Noncurrent assets	246		(4		)	242
Total derivative assets		$	808	$	(183	)	$	625
Derivative Liabilities
Derivative instruments	Current liabilities	$	629	$	(179	)	$	450
Derivative instruments	Noncurrent Liabilities	$	4	$	(4	)	$	—
Total derivative liabilities		$	633	$	(183	)	$	450


⁽¹⁾	The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements or contract termination.



	December 31, 2016
(in thousands)	Balance Sheet Classification	Gross Asset/Liability Amounts		Gross Amounts Offset⁽¹⁾			Net Recognized Fair Value Assets/Liabilities
Derivative Assets
Derivative instruments	Current assets	$	739	$	(308	)	$	431
Total derivative assets		$	739	$	(308	)	$	431
Derivative Liabilities
Derivative instruments	Current liabilities	$	5,669	$	(308	)	$	5,361
Derivative instruments	Noncurrent Liabilities	20		—			20
Total derivative liabilities		$	5,689	$	(308	)	$	5,381


⁽¹⁾	The Company has agreements in place with all of its counterparties that allow for the financial right of offset for derivative assets and derivative liabilities at settlement or in the event of a default under the agreements or contract termination.

Contingent Features in Financial Derivative Instruments. None of the Company’s derivative instruments contain credit-risk-related contingent features. Counterparties to the Company’s financial derivative contracts are high credit-quality financial institutions that are lenders under CRP’s credit agreement. The Company uses only credit agreement participants to hedge with, since these institutions are secured equally with the holders of any CRP bank debt, which eliminates the potential need to post collateral when Centennial is in a derivative liability position. As a result, the Company is not required to post letters of credit or corporate guarantees for its derivative counterparties in order to secure contract performance obligations.

In addition, the Company is exposed to credit risk associated with its derivative contracts from non-performance by its counterparties. The Company mitigates its exposure to any single counterparty by contracting with a number of financial institutions, each of which has a high credit rating and is a member of CRP’s credit facility as referenced above.