Derivative Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company utilizes derivative financial instruments to manage risks related to changes in crude 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 its natural gas contracts will settle monthly based on the average NYMEX Henry Hub natural gas index price (“NYMEX HH”).

At September 30, 2020, the Company utilized fixed price swaps to reduce the volatility of crude oil prices on a portion of its future expected crude oil production. 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.

All derivative instruments are recorded on the Company’s Condensed Consolidated Balance Sheets as either assets or liabilities measured at their fair value (see Note 7 — 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 cash settlements on matured or liquidated derivative contracts result in making a payment to or receiving a payment from a 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.

In June 2020, following a decrease in crude oil commodity prices and the related increase in the fair value of derivative assets, the Company liquidated a portion of its crude oil three-way costless collar contracts prior to the expiration of their contractual maturities, resulting in cash proceeds of $25.3 million, which are reflected as investing activities in the Company’s Condensed Consolidated Statements of Cash Flows during the nine months ended September 30, 2020.

On September 15, 2020, the Company entered into a Direction Letter and Specified Swap Liquidation Agreement (the “Letter Agreement”), which, among other things, amended its Pre-Petition Credit Facility. Pursuant to the Letter Agreement, beginning on September 15, 2020 and ending on the earlier of (1) October 15, 2020 and (2) the occurrence of an event of default under the Pre-Petition Credit Facility, the Company was required to use commercially reasonable efforts with respect to each of its swap agreements, to either (x) terminate such swap agreement or (y) reset such swap agreement to current market terms in existence at the time of such reset in exchange for a lump-sum cash payment substantially similar to the payment it would have received in respect of a termination of such swap agreement (each a “Specified Swap Liquidation”). The Letter Agreement also contained an agreement by the Company to apply the proceeds of any such Specified Swap Liquidation to prepayment of its loans under the Pre-Petition Credit Facility. Each Specified Swap Liquidation reduced the borrowing base and the aggregate

elected commitment amounts under the Pre-Petition Credit Facility by an amount equal to any prepayment of the loans using the proceeds of such Specified Swap Liquidation (see Note 11 — Long-Term Debt). During the period from September 15, 2020 through the Petition Date of the Chapter 11 Cases, which constituted an event of default under the Pre-Petition Credit Facility, the Company liquidated its outstanding swap agreements and received cash proceeds of $37.4 million for Specified Swap Liquidations, which are reflected as investing activities in the Company’s Condensed Consolidated Statements of Cash Flows during the three and nine months ended September 30, 2020.

As a result of the Specified Swap Liquidations, the Company’s outstanding derivative contracts are concentrated with one counterparty as of September 30, 2020. The counterparty is a lender under the Pre-Petition Credit Facility and has an investment-grade rating.

At September 30, 2020, the Company had the following outstanding commodity derivative instruments:


Commodity	Settlement Period	Derivative Instrument	Volumes					Fair Value Assets
					Weighted Average Prices
								(In thousands)
Crude oil	2020	Fixed price swaps	182,000	Bbl		$	41.17		$	183
Crude oil	2021	Fixed price swaps	62,000	Bbl		$	41.17		17
									$	200

Subsequent to September 30, 2020, the Company entered into additional fixed price swaps. As of November 4, 2020, the Company had the following outstanding commodity derivative contracts:


Commodity	Settlement Period	Derivative Instrument	Volumes
					Weighted Average Prices
Crude oil	2020	Fixed price swaps	182,000	Bbl		$	41.17





Crude oil	2021	Fixed price swaps	9,414,000	Bbl		$	42.07


Crude oil	2022	Fixed price swaps	6,880,000	Bbl		$	42.64


Crude oil	2023	Fixed price swaps	4,566,000	Bbl		$	43.61
Crude oil	2024	Fixed price swaps	372,000	Bbl		$	43.74
Natural gas	2020	Fixed price swaps	1,240,000	MMBtu		$	2.84
Natural gas	2021	Fixed price swaps	14,600,000	MMBtu		$	2.84
Natural gas	2022	Fixed price swaps	5,430,000	MMBtu		$	2.82

The Exit Facility associated with the Chapter 11 Cases (see Note 2 — Voluntary Reorganization under Chapter 11 of the Bankruptcy Code) includes certain conditions that must be satisfied before closing, including minimum hedge volumes and prices. As set forth in the Exit Facility Term Sheet, OPNA, as borrower, is required to enter into hedges covering minimum hedge volumes of (i) 10,303 MBbl for the first year after the closing date, (ii) 6,761 MBbl for the second year after the closing date and (iii) 4,945 MBbl for the third year after the closing date; provided that, two-thirds of such hedging shall be entered into on the closing date of the Exit Facility, with the remainder to be entered into 30 days after the closing date. The target pricing for the hedges shall not be less than (i) $43.04 per barrel for the first year after the closing date, (ii) $43.94 per barrel for the second year after the closing date and (iii) $44.79 per barrel for the third year after the closing date. As of November 4, 2020, the Company had entered into approximately 97% of the required volumes at approximately 97% of the target prices, based on a volume weighted average calculation. In the event the actual hedge prices are less than the target hedge prices, the borrowing base will be subject to an availability block, which shall be set based on the shortfall. The application of the availability block may be waived by required lenders.

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 September 30,				Nine Months Ended September 30,
Statements of Operations Location	2020		2019		2020		2019

	(In thousands)
Net gain (loss) on derivative instruments	$	(5,071)	$	47,922	$	243,064	$	(34,940)

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:


		September 30, 2020
	Balance Sheet Location	Gross Recognized Assets		Gross Amount Offset		Net Recognized Fair Value Assets

		(In thousands)
Derivatives assets
Commodity contracts	Derivative instruments — current assets	$	200	$	—	$	200

Total derivatives assets		$	200	$	—	$	200





		December 31, 2019
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	$	633	$	(98)	$	535
Commodity contracts	Derivative instruments — non-current assets	3,295		(2,656)		639
Total derivatives assets		$	3,928	$	(2,754)	$	1,174
Derivatives liabilities
Commodity contracts	Derivative instruments — current liabilities	$	33,812	$	(14,117)	$	19,695
Commodity contracts	Derivative instruments — non-current liabilities	686		(566)		120
Total derivatives liabilities		$	34,498	$	(14,683)	$	19,815