Derivatives

9 Months Ended

Sep. 30, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Commodity Derivatives

The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. The Company, on occasion, has sought to manage this risk through the use of commodity derivative contracts, which allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. The Company has not designated any of its derivative contracts as hedges for accounting purposes and records all derivative contracts at fair value with changes in derivative contract fair values recognized as gain or loss on derivative contracts in the unaudited condensed consolidated statements of operations. None of the Company’s commodity derivative contracts may be terminated prior to contractual maturity solely as a result of a downgrade in the credit rating of a party to the contract. Commodity derivative contracts are settled on a monthly basis. On a quarterly basis, the commodity derivative contract valuations are adjusted to the mark-to-market valuation. At September 30, 2018, the Company’s commodity derivative contracts consisted of fixed price swaps under which the Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.

The Company recorded losses on commodity derivative contracts of $11.3 million and $11.7 million for the three-month periods ended September 30, 2018, and 2017, respectively, which include net cash payments (receipts) upon settlement of $11.6 million and $(5.0) million, respectively. The Company recorded loss (gain) on commodity derivative contracts of $59.8 million and $(46.0) million for the nine-month periods ended September 30, 2018, and 2017, respectively, which include net cash payments (receipts) upon settlement of $29.0 million and $(7.7) million, respectively.

On June 26, 2018, the Board suspended the Company's ability to enter into new commodity derivative contracts pending review. In November 2018, the Board concluded this comprehensive evaluation of its commodity derivatives program and determined that no action should be taken with respect to outstanding derivatives contracts at this time. Future derivative transactions will require Board approval.

Master Netting Agreements and the Right of Offset. The Company has master netting agreements with all of its commodity derivative counterparties and has presented its derivative assets and liabilities with the same counterparty on a net basis in the unaudited condensed consolidated balance sheets. As a result of the netting provisions, the Company's maximum amount of loss under commodity derivative transactions due to credit risk is limited to the net amounts due from its counterparties. As of September 30, 2018, the counterparties to the Company’s open commodity derivative contracts consisted of five financial institutions, all of which are also lenders under the Company’s credit facility. The Company is not required to post additional collateral under its commodity derivative contracts as all of the counterparties to the Company’s commodity derivative contracts share in the collateral supporting the Company’s credit facility.

The following tables summarize (i) the Company's commodity derivative contracts on a gross basis, (ii) the effects of netting assets and liabilities for which the right of offset exists based on master netting arrangements and (iii) for the Company’s net derivative liability positions, the applicable portion of shared collateral under the credit facility as of September 30, 2018, and December 31, 2017 (in thousands):

September 30, 2018


	Gross Amounts		Gross Amounts Offset		Amounts Net of Offset		Financial Collateral		Net Amount
Assets
Derivative contracts - current	$	224	$	(151)	$	73	$	—	$	73
Derivative contracts - noncurrent	—		—		—		—		—
Total	$	224	$	(151)	$	73	$	—	$	73
Liabilities
Derivative contracts - current	$	37,056	$	(151)	$	36,905	$	(36,905)	$	—
Derivative contracts - noncurrent	6,791		—		6,791		(6,791)		—
Total	$	43,847	$	(151)	$	43,696	$	(43,696)	$	—

December 31, 2017


	Gross Amounts		Gross Amounts Offset		Amounts Net of Offset		Financial Collateral		Net Amount
Assets
Derivative contracts - current	$	5,582	$	(4,272)	$	1,310	$	—	$	1,310
Derivative contracts - noncurrent	—		—		—		—		—
Total	$	5,582	$	(4,272)	$	1,310	$	—	$	1,310
Liabilities
Derivative contracts - current	$	14,899	$	(4,272)	$	10,627	$	(10,627)	$	—
Derivative contracts - noncurrent	3,568		—		3,568		(3,568)		—
Total	$	18,467	$	(4,272)	$	14,195	$	(14,195)	$	—

At September 30, 2018, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps


	Notional (MBbls)	Weighted Average Fixed Price
October 2018 - December 2018	828	$	56.12
January 2019 - December 2019	1,825	$	54.29

Natural Gas Price Swaps


	Notional (MMcf)	Weighted Average Fixed Price
October 2018 - December 2018	3,680	$	3.11

Fair Value of Derivatives

The following table presents the fair value of the Company’s derivative contracts as of September 30, 2018, and December 31, 2017, on a gross basis without regard to same-counterparty netting (in thousands):


Type of Contract	Balance Sheet Classification	September 30, 2018		December 31, 2017
Derivative assets

Natural gas price swaps	Derivative contracts-current	$	224	$	5,582


Derivative liabilities
Oil price swaps	Derivative contracts-current	(37,056)		(14,899)

Oil price swaps	Derivative contracts-noncurrent	(6,791)		(3,568)

Total net derivative contracts				$	(43,623)	$	(12,885)

See Note 6 for additional discussion of the fair value measurement of the Company’s derivative contracts.