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Derivative Instruments

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

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 settle monthly based on the average NYMEX WTI, and its natural gas contracts settle monthly based on the average NYMEX Henry Hub natural gas index price (“NYMEX HH”).

The Company primarily utilizes fixed price swaps and collars to reduce the volatility of crude oil and natural gas prices on future expected production. Swaps are designed to establish a fixed price for the volumes under contract, while collars are designed to establish a minimum price (floor) and a maximum price (ceiling) for the volumes under contract. The Company may, from time to time, restructure existing derivative contracts or enter into new transactions to effectively modify the terms of current contracts in order to improve the pricing parameters in existing contracts.

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 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. Derivative settlements, which are reflected as investing activities on the Company’s Condensed Consolidated Statements of Cash Flows, represent net cash payments to or receipts from counterparties upon the maturity or liquidation of a derivative contract.

On March 22, 2021, the Company entered into the Second Amendment to the Oasis Credit Facility (as defined in Note 11 –Long-Term Debt) to, among other things, reduce the rolling hedging requirement and add incremental flexibility to allow for restructuring of existing hedge positions (see Note 11 – Long-Term Debt).

On May 17, 2021, the Company entered into a series of transactions with derivative counterparties to modify the swap price of certain commodity hedge contracts to $50.00 per Bbl based on NYMEX WTI from weighted average prices of $40.72 per Bbl, $43.57 per Bbl and $43.68 per Bbl for 2022, 2023 and 2024, respectively. The commodity contracts modified included total notional volumes of 6,346,000 Bbls, 5,265,000 Bbls and 434,000 Bbls which settle in 2022, 2023 and 2024, respectively. The Company paid $82.4 million for the modification of these commodity derivative contracts, which is reflected as a cash outflow from investing activities in the Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021.

At June 30, 2021 (Successor), the Company had the following outstanding commodity derivative instruments:

Commodity						Settlement Period						Derivative Instrument												Volumes									Weighted Average Prices																		Fair Value Assets (Liabilities)
																														Fixed Price Swaps												Floor						Ceiling
																																																			(In thousands)
Crude oil						2021						Fixed price swaps												5,307,000			Bbl						$	42.09																							$	(154,623)
Crude oil						2021						Two-way collar												1,224,000			Bbl																		$	51.25					$	68.24					(6,846)
Crude oil						2022						Fixed price swaps												7,245,000			Bbl						$	49.02																							(120,533)
Crude oil						2022						Two-way collar												4,799,000			Bbl																		$	49.50					$	66.62					(21,819)
Crude oil						2023						Fixed price swaps												5,265,000			Bbl						$	50.00																							(53,619)
Crude oil						2023						Two-way collar												4,380,000			Bbl																		$	45.42					$	65.05					(11,769)
Crude oil						2024						Fixed price swaps												434,000			Bbl						$	50.00																							(3,434)
Crude oil						2024						Two-way collar												372,000			Bbl																		$	45.00					$	64.88					(521)
Natural gas						2021						Fixed price swaps												7,360,000			MMBtu						$	2.84																							(5,889)
Natural gas						2022						Fixed price swaps												5,430,000			MMBtu						$	2.82																							(2,596)
																																																									$	(381,649)

Permian Basin Sale Contingent Consideration. Pursuant to the Primary Permian Basin Sale PSA (defined in Note 10 – Divestitures), the Company is entitled to receive up to three earn-out payments of $25.0 million per year for each of 2023, 2024 and 2025 if the average daily settlement price of NYMEX WTI crude oil exceeds $60 per barrel for such year (the “Permian Basin Sale Contingent Consideration”). If the NYMEX WTI crude oil price for calendar year 2023 or 2024 is less than $45 per barrel, then each calendar year thereafter the buyer’s obligation to make any remaining earn-out payments is terminated. The Company determined that the Permian Basin Sale Contingent Consideration was an embedded derivative in accordance with the FASB Accounting Standards Codification 815, Derivatives and Hedging. The Company bifurcated the Permian Basin Sale Contingent Consideration from the host contract and accounted for it separately at fair value. The fair value of the Permian Basin Sale Contingent Consideration was estimated to be $32.9 million as of the close date on June 29, 2021. The Permian Basin Sale Contingent Consideration is classified as a noncurrent derivative asset on the Condensed Consolidated Balance Sheet, with an offsetting amount recorded to gain on sale of properties on the Condensed Consolidated Statements of Operations. The Permian Basin Sale Contingent Consideration is marked-to-market each reporting period, with changes in fair value recognized as a net gain or loss on derivative instruments in other income (expense) on the Condensed Consolidated Statements of Operations. See Note 6 – Fair Value Measurements and Note 10 – Divestitures for additional information.

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

												Successor									Predecessor						Successor									Predecessor
												Three Months Ended June 30, 2021									Three Months Ended June 30, 2020						Six Months Ended June 30, 2021									Six Months Ended June 30, 2020
Derivative Instrument						Statements of Operations Location
Commodity derivative instruments						Net gain (loss) on derivative instruments						$	(267,037)								$	(37,187)					$	(448,552)								$	248,135
Contingent consideration						Gain (loss) on sale of properties						32,860									—						32,860									—

The change in fair value was not material from the close date of the Primary Permian Basin Sale on June 29, 2021 to June 30, 2021.

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 derivative instruments recorded in the Company’s Condensed Consolidated Balance Sheets:

 

												Successor
												June 30, 2021
Derivative Instrument						Balance Sheet Location						Gross Amount						Gross Amount Offset						Net Amount
												(In thousands)
Derivatives assets:
Contingent consideration						Derivative instruments — non-current assets						$	32,860					$	—					$	32,860
Derivatives liabilities:
Commodity contracts						Derivative instruments — current liabilities						$	260,314					$	(4,259)					$	256,055
Commodity contracts						Derivative instruments — non-current liabilities						149,289						(23,695)						125,594
Total derivatives liabilities												$	409,603					$	(27,954)					$	381,649
												Successor
												December 31, 2020
Derivative Instrument						Balance Sheet Location						Gross Amount						Gross Amount Offset						Net Amount
												(In thousands)
Derivatives assets:
Commodity contracts						Derivative instruments — current assets						$	467					$	—					$	467
Derivatives liabilities:
Commodity contracts						Derivative instruments — current liabilities						$	59,262					$	(2,318)					$	56,944
Commodity contracts						Derivative instruments — non-current liabilities						38,426						(812)						37,614
Total derivatives liabilities												$	97,688					$	(3,130)					$	94,558

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- References

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- Definition

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.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-URI http://asc.fasb.org/topic&trid=2229140

Reference 2: http://www.xbrl.org/2003/role/disclosureRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 40
-Section 50
-Paragraph 5
-Subparagraph (f)
-URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008

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