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COMMODITY DERIVATIVES | 9 Months Ended
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Sep. 30, 2022
Commodity Derivatives |
COMMODITY DERIVATIVES | 7. COMMODITY DERIVATIVES The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil and natural gas the Company enters into commodity derivative contracts to protect against price declines in future periods. The Company does not enter into derivative contracts for speculative purposes. The Company has not elected to designate the derivative contracts as cash flow hedges; therefore, the instruments do not qualify for hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the unaudited condensed consolidated statements of operations and are included in cash flows from operating activities in the condensed consolidated statement of cash flows. On January 5, 2022, the Company and NextEra Energy Marketing LLC (“NextEra”) entered into an International Swap Dealers Association, Inc. Master Agreement and Schedule (the “Master Agreement”), facilitating the Company to enter into derivative contracts to manage the risk associated with its business relating to commodity prices. The Company’s obligations to NextEra under the Master Agreement are secured by the collateral which secures the loans under the Credit Agreement on a pari passu and pro rata basis with the principal of such loans. The structure of the derivative contacts may include swaps, caps, floors, collars, locks, forwards and options. The Company’s entry into and the obligations of the Company under the Master Agreement were required conditions to the Closing of the Banner Purchase Agreement, pursuant to which the Company was required to assume and novate certain hedges of Banner which had a mark to market loss of approximately $3.1 million as of the Closing Date. In addition, on January 12, 2022, the Company entered into additional NYMEX WTI crude oil commodity derivative contracts with NextEra for 2022 and 2023 production. As of September 30, 2022, the Company had commodity derivative contracts outstanding through the fourth quarter of 2023 as summarized in the tables below: SCHEDULE OF COMMODITY DERIVATIVE CONTRACTS
|  | Collars |  |  | Fixed Price Swaps |
|  | Quantity |  |  |  |  |  |  |  |  | Quantity |  |  |  |
Commodity/ Index/ |  | Crude Oil-(Bbls)(1) Natural |  |  | Weighted Average Prices |  |  | Crude Oil- (Bbls) Natural |  |  | Weighted Average |
Maturity Period |  | Gas-(Mmbtu)(2) |  |  | Floors |  |  | Ceilings |  |  | Gas-(Mmbtu) |  |  | Price |
NYMEX WTI |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Crude Oil 2022 Contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fourth quarter 2022 |  |  | 71,800 |  |  | $ | 59.86 |  |  | $ | 80.34 |  |  |  | 9,000 |  |  | $ | 49.99 |
Total Remaining 2022 |  |  | 71,800 |  |  | $ | 59.86 |  |  | $ | 80.44 |  |  |  | 9,000 |  |  | $ | 49.99 |
Crude Oil 2023 Contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First quarter 2023 |  |  | 66,200 |  |  | $ | 57.73 |  |  | $ | 76.00 |  |  |  | 6,000 |  |  | $ | 59.20 |
Second quarter 2023 |  |  | 53,500 |  |  | $ | 60.00 |  |  | $ | 81.04 |  |  |  | 6,000 |  |  | $ | 59.20 |
Third quarter 2023 |  |  | 52,600 |  |  | $ | 60.00 |  |  | $ | 81.04 |  |  |  | - |  |  | $ | - |
Fourth quarter 2023 |  |  | 51,200 |  |  | $ | 60.00 |  |  | $ | 81.04 |  |  |  | - |  |  | $ | - |
Total 2023 |  |  | 223,500 |  |  | $ | 59.33 |  |  | $ | 79.55 |  |  |  | 12,000 |  |  | $ | 59.20 |
NYMEX Henry Hub |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Natural Gas 2022 Contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fourth quarter 2022 |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 60,000 |  |  | $ | 2.96 |
Total remaining 2022 |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 60,000 |  |  | $ | 2.96 |
Natural Gas 2023 Contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First quarter 2023 |  |  | - |  |  | $ | - |  |  | $ | - |  |  |  | 60,000 |  |  | $ | 2.96 |
(1) | “Bbl” refers to one stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to crude oil or other liquid hydrocarbons.
(2) | “Mmbtu” means 1 million BTUs (British Thermal Units).
The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets by category: SCHEDULE OF FAIR VALUE OF COMMODITY DERIVATIVE CONTRACTS
|  | September 30, 2022 |  |  | December 31, 2021 |
|  | (in thousands) |
Derivative liabilities: |  |  |  |  |  |  |  |
Current liabilities |  | $ | 1,991 |  |  | $ | - |
Non-current liabilities |  |  | 6 |  |  |  | - |
Total derivative liabilities |  | $ | 1,997 |  |  | $ | - |
As of September 30, 2022, all commodity derivative contracts held by the Company were subject to master netting arrangements with its counterparty. The terms of the Company’s derivative agreements provide for offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions that settle on the same date with the same counterparty. The following table summarizes the commodity components of the derivative settlement gain (loss) as well as the components of the net derivative loss line-item presentation in the accompanying condensed consolidated statement of operations: SCHEDULE OF DERIVATIVE SETTLEMENT GAIN LOSS
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2022 |  |  | 2021 |  |  | 2022 |  |  | 2021 |
|  | (in thousands) |
Derivative settlement losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil contracts |  | $ | (1,291 | ) |  | $ | (80 | ) |  | $ | (5,428 | ) |  | $ | (119 | )
Gas contracts |  |  | (321 | ) |  |  | - |  |  |  | (671 | ) |  |  | - |
Total derivative settlement losses |  | $ | (1,612 | ) |  | $ | (80 | ) |  | $ | (6,099 | ) |  | $ | (119 | )
Total net derivative loss: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil contracts |  | $ | 4,338 |  |  |  | (25 | ) |  | $ | (4,026 | ) |  |  | (235 | )
Gas contracts |  |  | (313 | ) |  |  | - |  |  |  | (918 | ) |  |  | - |
Total net derivative loss |  | $ | 4,025 |  |  |  | (25 | ) |  | $ | (4,944 | ) |  | $ | (235 | )

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