Derivative Financial Instruments

3 Months Ended

Mar. 31, 2023

Derivative Instruments Not Designated as Hedging Instruments [Abstract]

Note 7 - Derivative Financial Instruments

Summary of Oil, Gas, and NGL Derivative Contracts in Place

The Company regularly enters into commodity derivative contracts to mitigate a portion of its exposure to oil, gas, and NGL price volatility and location differentials, and the associated impact on cash flows. As of March 31, 2023, and through the filing of this report, all contracts were entered into for other-than-trading purposes. The Company’s commodity derivative contracts consist of price swap and collar arrangements for oil and gas production, and price swap arrangements for NGL production. In a typical commodity swap agreement, if the agreed upon published third-party index price (“index price”) is lower than the swap price, the Company receives the difference between the index price and the agreed upon swap price. If the index price is higher than the swap price, the Company pays the difference. For collar arrangements, the Company receives the difference between an agreed upon index price and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.

The Company has entered into fixed price oil and gas basis swaps in order to mitigate exposure to adverse pricing differentials between certain industry benchmark prices and the actual physical pricing points where the Company’s production is sold. As of March 31, 2023, the Company had basis swap contracts with fixed price differentials between:

•NYMEX WTI and Argus WTI Midland for a portion of its Midland Basin oil production with sales contracts that settle at Argus WTI Midland prices;

•NYMEX WTI and Argus WTI Houston Magellan East Houston Terminal (“MEH”) for a portion of its South Texas oil production with sales contracts that settle at Argus WTI Houston MEH (“WTI Houston MEH”) prices;

•NYMEX HH and Inside FERC Houston Ship Channel (“IF HSC”) for a portion of its South Texas gas production with sales contracts that settle at IF HSC prices; and

•NYMEX HH and Inside FERC West Texas (“IF Waha”) for a portion of its Midland Basin gas production with sales contracts that settle at IF Waha prices.

The Company has also entered into oil swap contracts to fix the differential in pricing between the NYMEX calendar month average and the physical crude oil delivery month (“Roll Differential”) in which the Company pays the periodic variable Roll Differential and receives a weighted-average fixed price differential. The weighted-average fixed price differential represents the amount of net addition (reduction) to delivery month prices for the notional volumes covered by the swap contracts.

As of March 31, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2025 as summarized in the table below:


	Contract Period
	Second Quarter 2023		Third Quarter 2023		Fourth Quarter 2023		2024		2025
Oil Derivatives (volumes in MBbl and prices in $ per Bbl):
Swaps
NYMEX WTI Volumes	333		607		546		—		—
Weighted-Average Contract Price	$	45.18	$	59.77	$	60.00	$	—	$	—
ICE Brent Volumes	910		920		920		910		—
Weighted-Average Contract Price	$	86.50	$	86.50	$	86.50	$	85.50	$	—
Collars
NYMEX WTI Volumes	464		291		—		919		—
Weighted-Average Floor Price	$	67.85	$	75.00	$	—	$	75.00	$	—
Weighted-Average Ceiling Price	$	81.53	$	93.05	$	—	$	81.47	$	—
Basis Swaps
WTI Midland-NYMEX WTI Volumes	1,357		1,414		1,294		2,961		—
Weighted-Average Contract Price	$	0.99	$	0.88	$	0.88	$	1.17	$	—


WTI Houston MEH-NYMEX WTI Volumes	431		361		296		877		—
Weighted-Average Contract Price	$	1.68	$	1.59	$	1.53	$	1.85	$	—
Roll Differential Swaps
NYMEX WTI Volumes	1,243		1,304		1,201		2,188		—
Weighted-Average Contract Price	$	0.62	$	0.64	$	0.62	$	0.42	$	—

Gas Derivatives (volumes in BBtu and prices in $ per MMBtu):
Swaps
NYMEX HH Volumes	1,420		1,470		—		—		—
Weighted-Average Contract Price	$	5.05	$	5.11	$	—	$	—	$	—






Collars
NYMEX HH Volumes	5,181		6,194		8,362		19,457		—
Weighted-Average Floor Price	$	3.83	$	3.75	$	3.90	$	3.71	$	—
Weighted-Average Ceiling Price	$	4.68	$	4.62	$	5.70	$	5.89	$	—
IF HSC Volumes	1,345		1,389		1,451		—		—
Weighted-Average Floor Price	$	4.25	$	4.25	$	4.25	$	—	$	—
Weighted-Average Ceiling Price	$	5.00	$	4.95	$	5.55	$	—	$	—






Basis Swaps




IF Waha-NYMEX HH Volumes	2,462		2,442		2,337		20,958		20,501
Weighted-Average Contract Price	$	(1.93)	$	(1.05)	$	(1.01)	$	(0.86)	$	(0.66)
IF HSC-NYMEX HH Volumes	1,774		1,813		2,008		10,208		—
Weighted-Average Contract Price	$	(0.25)	$	(0.25)	$	(0.25)	$	(0.33)	$	—

NGL Derivatives (volumes in MBbl and prices in $ per Bbl):
Swaps
OPIS Propane Mont Belvieu Non-TET Volumes	182		181		187		—		—
Weighted-Average Contract Price	$	36.66	$	36.67	$	36.66	$	—	$	—

Commodity Derivative Contracts Entered Into Subsequent to March 31, 2023

Subsequent to March 31, 2023, the Company entered into NYMEX WTI price swap contracts for the fourth quarter of 2023 for a total of 0.3 MMBbl of oil production at a contract price of $77.00 per Bbl and NYMEX HH price swap contracts for 2025 for a total of 5,891 BBtu of gas production at a weighted-average contract price of $4.20 per MMBtu.

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities, with the exception of derivative instruments that meet the “normal purchase normal sale” exclusion. The Company does not designate its commodity derivative contracts as hedging instruments. The fair value of the commodity derivative contracts was a net asset of $62.1 million and $15.8 million as of March 31, 2023, and December 31, 2022, respectively.

The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets, by category:


	As of March 31, 2023		As of December 31, 2022

	(in thousands)
Derivative assets:
Current assets	$	81,062	$	48,677
Noncurrent assets	15,373		24,465
Total derivative assets	$	96,435	$	73,142
Derivative liabilities:
Current liabilities	$	30,723	$	56,181
Noncurrent liabilities	3,639		1,142
Total derivative liabilities	$	34,362	$	57,323

Offsetting of Derivative Assets and Liabilities

As of March 31, 2023, and December 31, 2022, all derivative instruments held by the Company were subject to master netting arrangements with various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that settle on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company’s accounting policy is to not offset these positions in its accompanying balance sheets.

The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company’s commodity derivative contracts:


	Derivative Assets as of				Derivative Liabilities as of
	March 31, 2023		December 31, 2022		March 31, 2023		December 31, 2022

	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	96,435	$	73,142	$	(34,362)	$	(57,323)
Amounts not offset in the accompanying balance sheets	(25,293)		(26,136)		25,293		26,136
Net amounts	$	71,142	$	47,006	$	(9,069)	$	(31,187)

The following table summarizes the commodity components of the derivative settlement (gain) loss, and the net derivative (gain) loss line items presented within the accompanying unaudited condensed consolidated statements of cash flows (“accompanying statements of cash flows”) and the accompanying statements of operations, respectively:


	For the Three Months Ended March 31,
		2023		2022

		(in thousands)
Derivative settlement (gain) loss:
Oil contracts		$	6,226	$	129,168
Gas contracts		(11,302)		27,051
NGL contracts		—		11,964
Total derivative settlement (gain) loss		$	(5,076)	$	168,183

Net derivative (gain) loss:
Oil contracts		$	(29,167)	$	315,050
Gas contracts		(20,778)		86,175
NGL contracts		(1,384)		17,296
Total net derivative (gain) loss		$	(51,329)	$	418,521

Credit Related Contingent Features

As of March 31, 2023, all of the Company’s derivative counterparties were members of the Credit Agreement lender group. The Company does not enter into derivative contracts with counterparties that are not part of the lender group. Under the Credit Agreement, the Company is required to provide mortgage liens on assets having a value equal to at least 85 percent of the total PV-9, as defined in the Credit Agreement, of the Company’s proved oil and gas properties evaluated in the most recent reserve report. Collateral securing indebtedness under the Credit Agreement also secures the Company’s derivative agreement obligations.