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DERIVATIVE INSTRUMENTS | 9 Months Ended
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Sep. 30, 2020
General Discussion of Derivative Instruments and Hedging Activities [Abstract] |
DERIVATIVE INSTRUMENTS | DERIVATIVE INSTRUMENTS Natural Gas, Oil and Natural Gas Liquids Derivative Instruments The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and natural gas liquids ("NGL") prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, costless collars and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective natural gas, oil and NGL prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production. Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas, the NYMEX West Texas Intermediate for oil and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company’s open fixed price swap positions as of September 30, 2020.
| Location | Daily Volume (MMBtu/day) |  | Weighted Average Price
Remaining 2020 | NYMEX Henry Hub | 500,000 |  |  | $ | 2.69 |
| Location | Daily Volume (Bbls/day) |  | Weighted Average Price
Remaining 2020 | NYMEX WTI | 3,000 |  |  | $ | 35.49 |
| Location | Daily Volume (Bbls/day) |  | Weighted Average Price
Remaining 2020 | Mont Belvieu C3 | 1,500 |  |  | $ | 20.27 |
The Company sold call options in exchange for a premium, and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020 listed above. Each call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes.
| Location | Daily Volume (MMBtu/day) |  | Weighted Average Price
2022 | NYMEX Henry Hub | 628,000 |  |  | $ | 2.90 |
2023 | NYMEX Henry Hub | 628,000 |  |  | $ | 2.90 |
The Company entered into costless collars based off the NYMEX Henry Hub natural gas index. Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty.
| Location | Daily Volume (MMBtu/day) |  | Weighted Average Floor Price |  | Weighted Average Ceiling Price
2021 | NYMEX Henry Hub | 250,000 |  |  | $ | 2.46 |  |  | $ | 2.81 |
In addition, the Company entered into natural gas basis swap positions. As of September 30, 2020, the Company had the following natural gas basis swap positions open:
| Gulfport Pays | Gulfport Receives | Daily Volume (MMBtu/day) |  | Weighted Average Fixed Spread
Remaining 2020 | Transco Zone 4 | NYMEX Plus Fixed Spread | 60,000 |  |  | $ | (0.05) |
Remaining 2020 | Fixed Spread | ONEOK Minus NYMEX | 10,000 |  |  | $ | (0.54) |
Subsequent Event In October 2020, the Company early terminated natural gas basis swaps which represented approximately 40,000 MMBtu of natural gas per day for the remainder of 2020. The early termination resulted in the Company receiving a cash settlement of $0.2 million. Additionally, in late October 2020 and early November 2020, the Company early terminated 475,000 MMBtu/day of 2022 sold calls with a strike price of $2.90. The early termination resulted in the Company incurring approximately $60.2 million of additional indebtedness on its revolving credit facility. Contingent Consideration Arrangement The Company sold its non-core assets located in the West Cote Blanche Bay and Hackberry fields of Louisiana in July 2019. The sale price included the potential for the Company to receive contingent payments based on commodity prices exceeding specified thresholds over the two years following the closing date. This contingent consideration arrangement was determined to be an embedded derivative. See below for threshold and potential payment amounts.
Period | Threshold(1) | Payment to be received(2)
July 2020 - June 2021 | Greater than or equal to $60.65 | $ | 150,000 |
| Between $52.62 - $60.65 | Calculated Value(3)
| Less than or equal to $52.62 | $ | — |
(1) | Based on the "WTI NYMEX + Argus LLS Differential," as published by Argus Media.
(2) | Payment will be assessed monthly from July 2020 through June 2021. If threshold is met, payment shall be received within five business days after the end of each calendar month.
(3) | If average daily price, as defined in (1), is greater than $52.62 but less than $60.65, payment received will be $150,000 multiplied by a fraction, the numerator of which is the amount determined by subtracting $52.62 from such average daily price, and the denominator of which is $8.03.
Balance Sheet Presentation The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company’s derivative instruments on a gross basis at September 30, 2020 and December 31, 2019:
| September 30, 2020 |  | December 31, 2019
| (In thousands)
Commodity Contracts: |  |  |
Short-term derivative asset | $ | 6,245 |  |  | $ | 125,383 |
Long-term derivative asset | 1,098 |  |  | — |
Short-term derivative liability | (24,164) |  |  | (303) |
Long-term derivative liability | (63,803) |  |  | (53,135) |
Total commodity derivative position | $ | (80,624) |  |  | $ | 71,945 |
Contingent consideration arrangement: |  |  |
Short-term derivative asset | $ | — |  |  | $ | 818 |
Long-term derivative asset | — |  |  | 563 |
Total contingent consideration derivative position | $ | — |  |  | $ | 1,381 |
Total net (liability) asset derivative position | $ | (80,624) |  |  | $ | 73,326 |
Gains and Losses The following table presents the gain and loss recognized in net gain on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2020 and 2019.
| Net (loss) gain on derivative instruments
| Three months ended September 30, |  | Nine months ended September 30,
| 2020 |  | 2019 |  | 2020 |  | 2019
| (In thousands)
Natural gas derivatives | $ | (52,648) |  |  | $ | 11,731 |  |  | $ | 28,894 |  |  | $ | 147,774 |
Oil derivatives | (782) |  |  | 12,736 |  |  | 44,155 |  |  | 24,153 |
NGL derivatives | (393) |  |  | 3,641 |  |  | (254) |  |  | 7,276 |
Contingent consideration arrangement | — |  |  | (1,034) |  |  | (1,381) |  |  | (1,034) |
Total | $ | (53,823) |  |  | $ | 27,074 |  |  | $ | 71,414 |  |  | $ | 178,169 |
Offsetting of Derivative Assets and Liabilities As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value.
| As of September 30, 2020
| Gross Assets (Liabilities) |  | Gross Amounts |  |
| Presented in the |  | Subject to Master |  | Net
| Consolidated Balance Sheets |  | Netting Agreements |  | Amount
| (In thousands)
Derivative assets | $ | 7,343 |  |  | $ | (6,948) |  |  | $ | 395 |
Derivative liabilities | $ | (87,967) |  |  | $ | 6,948 |  |  | $ | (81,019) |
| As of December 31, 2019
| Gross Assets (Liabilities) |  | Gross Amounts |  |
| Presented in the |  | Subject to Master |  | Net
| Consolidated Balance Sheets |  | Netting Agreements |  | Amount
| (In thousands)
Derivative assets | $ | 126,764 |  |  | $ | (53,438) |  |  | $ | 73,326 |
Derivative liabilities | $ | (53,438) |  |  | $ | 53,438 |  |  | $ | — |
Concentration of Credit Risk By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company’s derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company’s counterparties is subject to periodic review. None of the Company’s derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company’s revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.

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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 + Details
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