Derivatives

9 Months Ended

Sep. 30, 2019

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. All derivative contracts are recorded 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, and the commodity derivative contract valuations are adjusted to the mark-to-market valuation on a quarterly basis.

The Company entered into two oil swap contracts in July 2019 which 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 Board and management of the Company are continuing to evaluate the futures market for oil and natural gas to mitigate exposure to adverse oil and natural gas price changes.

The following table summarizes derivative activity for the three and nine-month periods ended September 30, 2019, and 2018 (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2019		2018		2019		2018
(Gain) loss on commodity derivative contracts	$	(1,756)	$	11,329	$	(1,547)	$	59,763
Cash (received) paid on settlements	$	(622)	$	11,631	$	(5,700)	$	29,025

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, 2019, the counterparties to the Company's open commodity derivative contracts consisted of two financial institutions, both 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 table summarizes (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, 2019 and December 31, 2018 (in thousands):

September 30, 2019


	Gross Amounts		Gross Amounts Offset		Amounts Net of Offset		Financial Collateral		Net Amount
Assets
Derivative contracts - current	$	1,133	$	—	$	1,133	$	—	$	1,133
Total	$	1,133	$	—	$	1,133	$	—	$	1,133

December 31, 2018


	Gross Amounts		Gross Amounts Offset		Amounts Net of Offset		Financial Collateral		Net Amount
Assets
Derivative contracts - current	$	5,286	$	—	$	5,286	$	—	$	5,286

Total	$	5,286	$	—	$	5,286	$	—	$	5,286

At September 30, 2019, the Company's open derivative contracts consisted of the following:

Oil Price Swaps


	Notional (MBbls)	Weighted Average Fixed Price
October 2019 - December 2019	184	$	60.04

Fair Value of Derivatives

The following table presents the fair value of the Company’s derivative contracts as of September 30, 2019 and December 31, 2018, on a gross basis without regard to same-counterparty netting (in thousands):


Type of Contract	Balance Sheet Classification	September 30, 2019		December 31, 2018
Derivative assets
Oil price swaps	Derivative contracts-current	$	1,133	$	—
Natural gas price swaps	Derivative contracts-current	—		5,286







Total net derivative contracts				$	1,133	$	5,286

See Note 3 for additional discussion of the fair value measurement of the Company’s derivative contracts.