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Derivative Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

Commodity derivative contracts. The Company utilizes derivative financial instruments to manage risks related to changes in commodity prices. The Company’s crude oil contracts settle monthly based on the average NYMEX WTI. Natural gas contracts settle monthly based on the average Henry Hub natural gas index price (“NYMEX HH”), while natural gas basis swaps settle monthly based on the average fixed differential between NYMEX HH and the Northern Natural Gas Ventura (“NNG Ventura”) index price.

The Company utilizes fixed-price swaps and collars to manage risks related to changes in commodity prices. 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. In addition, the Company utilizes basis swaps to manage commodity price locational risk. The Company’s basis swaps are designed to establish a fixed differential between NYMEX and the index price referenced in the 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.

At March 31, 2023, the Company had the following outstanding commodity derivative contracts:

Commodity						Settlement Period						Derivative Instrument												Volumes									Weighted Average Prices
																														Fixed-Price Swaps												Floor						Ceiling
Crude oil						2023						Two-way collar												4,583,500			Bbl																		$	45.79					$	64.46
Crude oil						2023						Fixed-price swaps												4,032,000			Bbl						$	51.33
Natural gas						2023						Two-way collar												4,299,000			MMBtu																		$	2.31					$	2.86
Natural gas basis(1)						2023						Fixed-price swaps												1,365,000			MMbtu						$	(0.22)

__________________ 

(1)    The weighted average price associated with the natural gas basis swaps shown in the tables above represents the average fixed differential to NYMEX HH as stated in the related contracts, which is compared to the NNG Ventura index price for each period. If NYMEX HH combined with the fixed differential as stated in each contract is higher than the NNG Ventura index price at any settlement date, the Company receives the difference. Conversely, if the NNG Ventura index price is higher than NYMEX HH combined with the fixed differential, the Company pays the difference.

Subsequent to March 31, 2023, the Company entered into the following commodity derivative contracts:

																														Weighted Average Prices
Commodity						Settlement Period						Derivative Instrument						Volumes												Floor						Ceiling
Crude oil						2023						Two-way collar						736,000						Bbl						$	65.00					$	88.51
Crude oil						2024						Two-way collar						640,000						Bbl						$	65.00					$	80.13

Transportation derivative contracts. The Company is a party to two contracts that provide for the transportation of crude oil through a buy/sell structure from North Dakota to either Cushing, Oklahoma or Guernsey, Wyoming. The contracts require the purchase and sale of fixed volumes of crude oil through July 2024 as specified in the agreements. The Company determined that these contracts qualified as derivatives and did not elect the “normal purchase normal sale” exclusion. As of March 31, 2023, the estimated fair value of these contracts was $3.5 million, of which $3.3 million was classified as a current derivative liability and $0.3 million was classified as a non-current derivative liability on the Company’s Condensed Consolidated Balance Sheet. As of December 31, 2022, the estimated fair value of these contracts was $14.7 million, of which $11.9 million was classified as a current derivative liability and $2.8 million was classified as a non-current derivative liability on the Company’s Condensed Consolidated Balance Sheet. The Company records the changes in fair value of these contracts to gathering, processing and transportation expenses on the Company’s Condensed Consolidated Statement of Operations. Settlements on these contracts are reflected as operating activities on the Company’s Consolidated Statements of Cash Flows and represent cash payments to the counterparties for transportation of crude oil or the net settlement of contract liabilities if the transportation was not utilized, as applicable. See Note 6—Fair Value Measurements for additional information.

Contingent consideration. The Company bifurcated the Permian Basin Sale Contingent Consideration from the host contract and accounted for it separately at fair value. The Permian Basin Sale Contingent Consideration is marked-to-market each reporting period, with changes in fair value recorded in the other income (expense) section of the Company’s Condensed Consolidated Statements of Operations as a net gain or loss on derivative instruments. As of March 31, 2023, the estimated fair value of the Permian Basin Sale Contingent Consideration was $62.0 million, of which $23.8 million was classified as a current derivative asset and $38.2 million was classified as a non-current derivative asset on the Condensed Consolidated Balance Sheet. As of December 31, 2022, the estimated fair value of the Permian Basin Sale Contingent Consideration was $60.9 million, of which $23.0 million was classified as a current derivative asset and $38.0 million was classified as a non-current derivative asset on the Condensed Consolidated Balance Sheet. See Note 6—Fair Value Measurements 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:

												Three Months Ended March 31,
Derivative Instrument						Statements of Operations Location						2023						2022
												(In thousands)
Commodity derivatives						Net gain (loss) on derivative instruments						$	65,840					$	(384,872)
Commodity derivatives (buy/sell transportation contracts)(1)						Gathering, processing and transportation expenses						11,157						—
Contingent consideration						Net gain (loss) on derivative instruments						1,094						16,950

__________________ 

(1)    The change in the fair value of the transportation derivative contracts was recorded as a gain in gathering, processing and transportation expenses for the three months ended March 31, 2023.

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:

												March 31, 2023
Derivative Instrument						Balance Sheet Location						Gross Amount						Gross Amount Offset						Net Amount
												(In thousands)
Derivatives assets:
Commodity derivatives						Derivative instruments — current assets						$	4,573					$	(3,628)					$	945
Contingent consideration						Derivative instruments — current assets						23,783						—						23,783
Contingent consideration						Derivative instruments — non-current assets						38,231						—						38,231
Total derivatives assets												$	66,587					$	(3,628)					$	62,959
Derivatives liabilities:
Commodity derivatives						Derivative instruments — current liabilities						$	175,973					$	(3,628)					$	172,345
Commodity derivatives (buy/sell transportation contracts)						Derivative instruments — current liabilities						3,277						—						3,277
Commodity derivatives (buy/sell transportation contracts)						Derivative instruments — non-current liabilities						260						—						260
Total derivatives liabilities												$	179,510					$	(3,628)					$	175,882
												December 31, 2022
Derivative Instrument						Balance Sheet Location						Gross Amount						Gross Amount Offset						Net Amount
												(In thousands)
Derivatives assets:
Commodity derivatives						Derivative instruments — current assets						$	10,194					$	(9,414)					$	780
Contingent consideration						Derivative instruments — current assets						22,955						—						22,955
Contingent consideration						Derivative instruments — non-current assets						37,965						—						37,965
Total derivatives assets												$	71,114					$	(9,414)					$	61,700
Derivatives liabilities:
Commodity derivatives						Derivative instruments — current liabilities						$	339,090					$	(9,414)					$	329,676
Commodity derivatives (buy/sell transportation contracts)						Derivative instruments — current liabilities						11,865						—						11,865
Commodity derivatives (buy/sell transportation contracts)						Derivative instruments — non-current liabilities						2,829						—						2,829
Total derivatives liabilities												$	353,784					$	(9,414)					$	344,370

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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 https://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 https://asc.fasb.org/extlink&oid=126731327&loc=d3e90205-114008

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