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Commodity Risk Management Activities | 6 Months Ended
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Jun. 30, 2021
Commodity Risk Management Activities |
Commodity Risk Management Activities | 12. Commodity Risk Management Activities Commodity Price Risks Epsilon engages in price risk management activities from time to time. These activities are intended to manage Epsilon’s exposure to fluctuations in commodity prices for natural gas by securing fixed price contracts for a portion of expected sales volumes. Inherent in the Company’s fixed price contracts, are certain business risks, including market risk and credit risk. Market risk is the risk that the price of natural gas and oil will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not currently require collateral from any of its counterparties nor does its counterparties require collateral from the Company. The Company enters into certain commodity derivative instruments to mitigate commodity price risk associated with a portion of its future natural gas production and related cash flows. The natural gas revenues and cash flows are affected by changes in commodity product prices, which are volatile and cannot be accurately predicted. The objective for holding these commodity derivatives is to protect the operating revenues and cash flows related to a portion of the future natural gas sales from the risk of significant declines in commodity prices, which helps ensure the Company’s ability to fund the capital budget. Epsilon has historically elected not to designate any of its financial commodity derivative contracts as accounting hedges and, accordingly, accounts for these financial commodity derivative contracts using the mark-to-market accounting method. Under this accounting method, changes in the fair value of outstanding financial instruments are recognized as gains or losses in the period of change and are recorded as gain on derivative contracts on the condensed consolidated statements of operations and comprehensive income. The related cash flow impact is reflected in cash flows from operating activities. During the three and six months ended June 30, 2021, Epsilon recognized losses on commodity derivative contracts of $1,827,334 and $1,361,993, respectively. This amount included cash paid on settlements of these contracts of $91,660 and $27,460, respectively. For the three and six months ended June 30, 2020, Epsilon recognized gains (losses) on commodity derivative contracts of ($85,348) and $1,635,669, respectively. This amount included cash received on settlements of these contracts of $1,031,828 and $2,377,769, respectively. Commodity Derivative Contracts Presented below is a summary of Epsilon’s natural gas price and basis swap contracts as of June 30, 2021. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | Fair Value
​ | ​ | Volume | ​ | Ceiling | ​ | Floor | ​ | Basis | ​ | June 30,
Derivative Type |  | (MMbtu) |  | Price |  | Price |  | Differential |  | 2021
2021 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Basis swap |  | 305,000 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | $ | (1.10) |  | ​ | 70,575
Two-way costless collar |  | 1,835,000 | ​ | $ | 3.24 | ​ | $ | 2.78 | ​ | ​ | ​ |  | ​ | (910,639)
2022 | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
Two-way costless collar |  | 900,000 | ​ | $ | 3.34 | ​ | $ | 2.80 | ​ | ​ | ​ |  | ​ | (494,469)
​ |  | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | $ | (1,334,533)
​ As of June 30, 2021, all of the Company’s economic derivative hedge positions were with large financial institutions, which are not known to the Company to be in default on their derivative positions. The Company is exposed to credit risk to the extent of non-performance by the counterparties in the derivative contracts discussed above; however, the Company does not anticipate non-performance by such counterparties. None of the Company’s derivative instruments contains credit-risk related contingent features. Derivatives are net on the balance sheet as they are subject to the right to offset the liabilities with the assets. The following tables summarize the gross fair values of our derivative instruments, presenting the impact of offsetting the derivative assets and liabilities on our condensed consolidated balance sheets as of the dates indicated below: ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Fair Value of Derivative Assets
​ |  | June 30, |  | December 31,
​ | ​ | 2021 | ​ | 2020
Current |  | ​ |  |  | ​ |
Basis swap |  | $ | 70,575 | ​ | $ | —
Two-way costless collar |  |  | 117,647 | ​ |  | —
​ |  | $ | 188,222 | ​ | $ | —
​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Fair Value of Derivative Liabilities
​ |  | June 30, |  | December 31,
​ | ​ | 2021 | ​ | 2020
Current |  | ​ |  |  | ​ |
Basis swap |  | $ | — | ​ | $ | —
Two-way costless collar |  | ​ | (1,522,755) | ​ |  | —
​ |  | $ | (1,522,755) | ​ | $ | —
​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | ​ | ​ | ​ | ​ | ​
Net Fair Value of Derivatives |  | $ | (1,334,533) | ​ | $ | —
​ The following table presents the changes in the fair value of Epsilon’s commodity derivatives for the periods indicated: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | ​ | Three months ended June 30, | ​ | Six months ended June 30,
​ |  | 2021 |  | 2020 |  | 2021 |  | 2020
Fair value of asset (liability), beginning of the period | ​ | $ | 401,141 | ​ | $ | 2,374,878 | ​ | $ | — | ​ | $ | 1,999,802
Gains (losses) on derivative contracts included in earnings | ​ |  | (1,827,334) | ​ |  | (85,348) | ​ |  | (1,361,993) | ​ |  | 1,635,669
Settlement of commodity derivative contracts | ​ |  | 91,660 | ​ |  | (1,031,828) | ​ |  | 27,460 | ​ |  | (2,377,769)
Fair value of asset, end of the period | ​ | $ | (1,334,533) | ​ | $ | 1,257,702 | ​ | $ | (1,334,533) | ​ | $ | 1,257,702
​

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 40 -Section 50 -Paragraph 5 -Subparagraph (f) -URI http://asc.fasb.org/extlink&oid=123477628&loc=d3e90205-114008 + Details
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