Derivatives

We utilize derivatives, such as swaps, puts and calls, to hedge a portion of our forecasted oil production and gas purchases to reduce exposure to fluctuations in oil and natural gas prices. We target covering our operating expenses and a majority of our fixed charges, including capital for sustained production levels, interest and dividends, with the oil hedges for a period of up to two years out. We have hedged a portion of our exposure to differentials between ICE Brent oil (“Brent”) and NYMEX West Texas Intermediate oil (“WTI”). Additionally, we target fixing the price for a large portion of our natural gas purchases used in our steam operations for up to two years. We also, from time to time, have entered into agreements to purchase a portion of the natural gas we require for our operations, which we do not record at fair value as derivatives because they qualify for normal purchases and normal sales exclusions.

For fixed-price oil swaps, we make settlement payments for prices above the indicated weighted-average price per barrel of Brent or WTI and receive settlement payments for prices below the indicated weighted‑average price per barrel of Brent or WTI.

For oil basis swaps, we make settlement payments if the difference between Brent and WTI is greater than the indicated weighted-average price per barrel of our contracts and receive settlement payments if the difference between Brent and WTI is below the indicated weighted-average price per barrel.

For our purchased oil puts, we would receive settlement payments for prices below the indicated weighted-average price per barrel of Brent. For some of our purchased puts we paid a premium at the time the positions were created and for others, the premium payment is deferred until the time of settlement. We have mitigated the exposure to a substantial portion of the deferred premium payments by entering into offsetting put positions. We paid approximately $17 million of the net deferred premiums during the year ended December 31, 2019, which included premiums we received during these periods. As of December 31, 2019 we have offsetting put positions with an outstanding net deferred premium of approximately $55,000, which is reflected in the mark-to-market valuation and will be payable through the first quarter of 2020.

For our sold oil calls, we would make settlement payments for prices above the indicated weighted-average price per barrel of Brent.

For fixed-price gas purchase swaps, we are the buyer so we make settlement payments for prices below the weighted-average price per MMBtu and receive settlement payments for prices above the weighted-average price per MMBtu.

We use oil swaps and puts to protect against decreases in the oil price and natural gas swaps to protect against increases in natural gas prices. We do not enter into derivative contracts for speculative trading purposes and have not accounted for our derivatives as cash-flow or fair-value hedges. The changes in fair value of these instruments are recorded in current earnings. (Gains) losses on oil hedges are classified in the revenues and other section of the statement of operations and (gains) losses on natural gas hedges are presented in the expenses and other section of the statement of operations.

As of December 31, 2019, we had the following crude oil production and gas purchases hedges.



	Q1 2020		Q2 2020		Q3 2020		Q4 2020		FY 2021
Fixed Price Oil Swaps (Brent):
Hedged volume (MBbls)	1,729		1,456		1,472		1,472		730
Weighted-average price ($/Bbl)	$	63.92	$	64.30	$	64.21	$	64.21	$	58.50
Fixed Price Oil Swaps (WTI):
Hedged volume (MBbls)	91		30		—		—		—
Weighted-average price ($/Bbl)	$	61.75	$	61.75	$	—	$	—	$	—
Fixed Price Gas Purchase Swaps (Kern, Delivered):
Hedged volume (MMBtu)	5,005,000		5,005,000		5,060,000		2,315,000		900,000
Weighted-average price ($/MMBtu)	$	2.89	$	2.89	$	2.89	$	2.79	$	2.50
Fixed Price Gas Purchase Swaps (SoCal Citygate):
Hedged volume (MMBtu)	455,000		455,000		460,000		155,000		—
Weighted-average price ($/MMBtu)	$	3.80	$	3.80	$	3.80	$	3.80	$	—

Our commodity derivatives are measured at fair value using industry-standard models with various inputs including publicly available underlying commodity prices and forward curves, and all are classified as Level 2 in the required fair value hierarchy for the periods presented. These commodity derivatives are subject to counterparty netting. The following tables present the fair values (gross and net) of our outstanding derivatives as of December 31, 2019 and December 31, 2018:



	Berry Corp. (Successor)
	December 31, 2019
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value			Gross Amounts Offset on Balance Sheet			Net Fair Value Presented on Balance Sheet
	(in thousands)
Assets:
Commodity Contracts	Current assets	$	17,799		$	(8,633	)	$	9,166
Commodity Contracts	Non-current assets	773			(248		)	525
Liabilities:
Commodity Contracts	Current liabilities	(13,450		)	8,633			(4,817		)
Commodity Contracts	Non-current liabilities	(389		)	248			(141		)
Total derivatives		$	4,733		$	—		$	4,733



	Berry Corp. (Successor)
	December 31, 2018
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value			Gross Amounts Offset in the Balance Sheet			Net Fair Value Presented in the Balance Sheet
	(in thousands)
Assets:
Commodity Contracts	Current assets	$	89,981		$	(1,385	)	$	88,596
Commodity Contracts	Non-current assets	3,289			—			3,289
Liabilities:
Commodity Contracts	Current liabilities	(1,385		)	1,385			—
Total derivatives		$	91,885		$	—		$	91,885

In May 2018, we elected to terminate outstanding commodity derivative contracts for all WTI oil swaps and certain WTI/Brent basis swaps for July 2018 through December 2019 and all WTI oil sold call options for July 2018 through June 2020. Termination costs totaled approximately $127 million and were calculated in accordance with a bilateral agreement on the cost of elective termination included in these derivative contracts; the present value of the contracts using the forward price curve as of the date termination was elected. No penalties were charged as a result of the elective termination. Concurrently, Berry Corp. entered into commodity derivative contracts consisting of Brent oil swaps for July 2018 through March 2019.

By using derivative instruments to economically hedge exposure to changes in commodity prices, we expose ourselves to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk. We do not receive collateral from our counterparties.

We minimize the credit risk in derivative instruments by limiting our exposure to any single counterparty. In addition, our RBL Facility prevents us from entering into hedging arrangements that are secured, except with our lenders and their affiliates that have margin call requirements, that otherwise require us to provide collateral or with a non-lender counterparty that does not have an A- or A3 credit rating or better from Standards & Poor’s or Moody’s, respectively. In accordance with our standard practice, our commodity derivatives are subject to counterparty netting under agreements governing such derivatives which mitigates the counterparty nonperformance risk somewhat.

(Losses) Gains on Derivatives

A summary of losses and gains on the derivatives included on the statements of operations is presented below:



	Berry Corp. (Successor)									Berry LLC (Predecessor)
	Year Ended December 31, 2019			Year Ended December 31, 2018			Ten Months Ended December 31, 2017			Two Months Ended February 28, 2017
	(in thousands)
(Losses) gains on oil derivatives	$	(37,998	)	$	(4,621	)	$	(66,900	)	$	12,886
(Losses) gains on natural gas derivatives	(6,957		)	6,357			—			—
Total (losses) gains on oil and natural gas derivatives	$	(44,955	)	$	1,735		$	(66,900	)	$	12,886

For the year ended December 31, 2019, we received net cash scheduled settlements of approximately $42 million. For the year ended December 31, 2018, we paid net cash scheduled settlements of approximately $38 million, excluding the payments for the early terminated derivatives. For the ten months ended December 31, 2017, and the two months ended February 28, 2017, we received net cash settlements of approximately $3 million, and $0.5 million, respectively.