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Financial Instruments

9 Months Ended

Sep. 30, 2023

(9) Financial Instruments

Fair Value Measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Company’s interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis at September 30, 2023 and December 31, 2022:

September 30, 2023

Quoted Prices in
Active Markets
For Identical
Assets (Level 1)

Significant
Other
Observable
Inputs (Level 2)

Significant
Unobservable
Inputs (Level 3)

Balance at
September 30,
2023

(Thousands of dollars)

Assets

Commodity derivative contracts

—

Total assets

—

Liabilities

Commodity derivative contracts

—

Total liabilities

—


December 31, 2022	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance at December 31, 2022
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	210		$	210

Total assets	$	—	$	—	$	210		$	210

Liabilities
Commodity derivative contracts	$	—	$	—	$	(1,190	)	$	(1,190	)

Total liabilities	$	—	$	—	$	(1,190	)	$	(1,190	)

The derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.

The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as Level 3 in the fair value hierarchy for the nine months ended September 30, 2023.


(Thousands of dollars)
Net Liabilities – December 31, 2022	$	(980	)
Total realized and unrealized gains (losses):
Included in earnings (a)		414
Purchases, sales, issuances and settlements		566

Net Liabilities — September 30, 2023	$	—

(a)	Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments.

Derivative Instruments:

The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company’s exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company’s exposure to commodity price risk inherent in the Company’s oil and gas production operations. The Company does not apply hedge accounting to any of its commodity-based derivatives. Both realized and unrealized gains and losses associated with commodity derivative instruments are recognized in earnings.

The following table sets forth the effect of derivative instruments on the consolidated balance sheets at September 30, 2023 and December 31, 2022:


			Fair Value
(Thousands of dollars)	Balance Sheet Location		September 30, 2023		December 31, 2022
Asset Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contract		Derivative asset	$	—	$	162
Natural gas commodity contract		Derivative asset		—		48

Total			$	—	$	210

Liability Derivatives:
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts		Derivative liability	$	—	$	(931	)
Natural gas commodity contracts		Derivative liability		—		(259	)

Total			$	—	$	(1,190	)

Total derivative instruments			$	—	$	(980	)

The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2023 and 2022:


			Amount of gain (loss) recognized in in o me
(Thousands of dollars)	Location of gain/loss recognized in income		2023			2022
Derivatives not designated as cash-flow hedge instruments:
Natural gas commodity contracts		Unrealized gain (loss) on derivative instruments, net		211			(800	)
Crude oil commodity contracts		Unrealized gain on derivative instruments, net		769			2,718
Natural gas commodity contracts		Realized gain (loss) on derivative instruments, net		24			(3,603	)
Crude oil commodity contracts		Realized loss on derivative instruments, net		(590	)		(10,389	)

			$	414		$	(12,074	)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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