Derivative Instruments

The Company utilizes derivative financial instruments to manage risks related to changes in oil and natural gas prices. The Company’s crude oil contracts will settle monthly based on the average NYMEX West Texas Intermediate crude oil index price (“NYMEX WTI”) and the average Intercontinental Exchange, Inc. Brent crude oil index price (“ICE Brent”). The Company’s natural gas contracts will settle monthly based on the average NYMEX Henry Hub natural gas index price (“NYMEX HH”).

At June 30, 2018, the Company utilized fixed price swaps, basis swaps and two-way and three-way costless collars to reduce the price volatility associated with certain of its of oil and natural gas sales. The Company’s fixed price swaps are comprised of a sold call and a purchased put established at the same price (both ceiling and floor), which the Company will receive for the volumes under contract. A basis swap transaction has an established fixed basis differential corresponding to two floating index prices. Depending on the difference of the two floating index prices in relation to the fixed basis differential, the Company either receives an amount from its counterparty, or pays an amount to its counterparty, equal to the difference multiplied by the hedged contract volume. A two-way collar is a combination of options: a sold call and a purchased put. The purchased put establishes a minimum price (floor) and the sold call establishes a maximum price (ceiling) the Company will receive for the volumes under contract. A three-way collar is a combination of options: a sold call, a purchased put and a sold put. The purchased put establishes a minimum price (floor), unless the market price falls below the sold put (sub-floor), at which point the minimum price would be the NYMEX index price plus the difference between the purchased put and the sold put strike price. The sold call establishes a maximum price (ceiling) the Company will receive for the volumes under contract.

All derivative instruments are recorded on the Company’s Condensed Consolidated Balance Sheets as either assets or liabilities measured at fair value (see Note 6 – Fair Value Measurements). The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value are recognized in the other income (expense) section of the Company’s Condensed Consolidated Statements of Operations as a net gain or loss on derivative instruments. The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in making a payment to or receiving a payment from the counterparty. These cash settlements represent the cumulative gains and losses on the Company’s derivative instruments and do not include a recovery of costs that were paid to acquire or modify the derivative instruments that were settled. Cash settlements are reflected as investing activities in the Company’s Condensed Consolidated Statements of Cash Flows.

At June 30, 2018, the Company had the following outstanding commodity derivative instruments:



Commodity	Settlement Period	Derivative Instrument	Index	Volumes		Weighted Average Prices											Fair Value Asset (Liability)
Commodity	Settlement Period	Derivative Instrument	Index	Volumes		Fixed Price Swaps		Basis Swaps			Sub-Floor		Floor		Ceiling		Fair Value Asset (Liability)
																	(In thousands)
Crude oil	2018	Fixed price swaps	NYMEX WTI	7,745,000	Bbl	$	53.02										$	(133,352	)
Crude oil	2018	Basis swaps	NYMEX WTI-ICE BRENT	153,000	Bbl			$	(10.50	)							471
Crude oil	2018	Two-way collar	NYMEX WTI	549,000	Bbl								$	48.67	$	53.07	(9,479		)
Crude oil	2019	Fixed price swaps	NYMEX WTI	5,613,000	Bbl	$	53.33										(69,121		)
Crude oil	2019	Basis swaps	NYMEX WTI-ICE BRENT	212,000	Bbl			$	(10.50	)							353
Crude oil	2019	Two-way collar	NYMEX WTI	761,000	Bbl								$	52.03	$	69.03	(2,500		)
Crude oil	2019	Three-way collar	NYMEX WTI	3,368,000	Bbl						$	40.54	$	51.03	$	68.68	(12,060		)
Crude oil	2020	Fixed price swaps	NYMEX WTI	403,000	Bbl	$	53.47										(3,557		)
Crude oil	2020	Two-way collar	NYMEX WTI	62,000	Bbl								$	52.50	$	71.25	(30		)
Crude oil	2020	Three-way collar	NYMEX WTI	279,000	Bbl						$	40.00	$	50.56	$	67.80	(876		)
Natural gas	2018	Fixed price swaps	NYMEX HH	6,440,000	MMbtu	$	3.02										403
Natural gas	2019	Fixed price swaps	NYMEX HH	1,353,000	MMbtu	$	2.96										(44		)
																	$	(229,792	)

In July 2018, the Company entered into new natural gas basis swap contracts with weighted average differential prices, which represent a reduction of $0.06 per MMbtu. These basis swaps are settled based on the differential between Northern Natural Gas Ventura natural gas index price and NYMEX HH. The basis swap contracts include total notional amounts of 1,220,000 MMbtu and 1,810,000 MMbtu, which settle in 2018 and 2019, respectively. These derivative instruments do not qualify for and were not designated as hedging instruments for accounting purposes.

The following table summarizes the location and amounts of gains and losses from the Company’s commodity derivative instruments recorded in the Company’s Condensed Consolidated Statements of Operations for the periods presented:



	Three Months Ended June 30,					Six Months Ended June 30,
Statements of Operations Location	2018			2017		2018			2017
	(In thousands)
Net gain (loss) on derivative instruments	$	(120,285	)	$	50,532	$	(191,401	)	$	106,607

In accordance with the FASB’s authoritative guidance on disclosures about offsetting assets and liabilities, the Company is required to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting agreement. The Company’s derivative instruments are presented as assets and liabilities on a net basis by counterparty, as all counterparty contracts provide for net settlement. No margin or collateral balances are deposited with counterparties, and as such, gross amounts are offset to determine the net amounts presented in the Company’s Condensed Consolidated Balance Sheets.

The following table summarizes the location and fair value of all outstanding commodity derivative instruments recorded in the Company’s Condensed Consolidated Balance Sheets:



		June 30, 2018
Commodity	Balance Sheet Location	Gross Recognized Asset/Liabilities		Gross Amount Offset			Net Recognized Fair Value Asset/Liabilities
		(In thousands)
Derivatives assets:
Commodity contracts	Derivative instruments — non-current assets	$	25	$	—		$	25
Total derivatives assets		$	25	$	—		$	25
Derivatives liabilities:
Commodity contracts	Derivative instruments — current liabilities	$	198,306	$	(3,496	)	$	194,810
Commodity contracts	Derivative instruments — non-current liabilities	40,661		(5,654		)	35,007
Total derivatives liabilities		$	238,967	$	(9,150	)	$	229,817

		December 31, 2017
Commodity	Balance Sheet Location	Gross Recognized Assets/Liabilities		Gross Amount Offset			Net Recognized Fair Value Assets/Liabilities
		(In thousands)
Derivatives assets:
Commodity contracts	Derivative instruments — current assets	$	344	$	—		$	344
Commodity contracts	Derivative instruments — non-current assets	9		—			9
Total derivatives assets		$	353	$	—		$	353
Derivatives liabilities:
Commodity contracts	Derivative instruments — current liabilities	$	117,629	$	(1,913	)	$	115,716
Commodity contracts	Derivative instruments — non-current liabilities	20,035		(184		)	19,851
Total derivatives liabilities		$	137,664	$	(2,097	)	$	135,567