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Note 7 - Commodity Derivatices | 9 Months Ended
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Sep. 30, 2023
Notes to Financial Statements |
Derivatives and Fair Value [Text Block] | 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 may enter 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 does not currently apply hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the condensed consolidated statements of operations and are included as a non-cash adjustment to net income in the operating activities section 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 liens and security interests which also secure 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 January 2022 acquisition closing, pursuant to which the Company was required to assume and novate certain hedges 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. On September, 12, 2023, the Company entered into crude oil swap agreements with EDF Trading, agreeing to pay fixed prices and receive the monthly average NYMEX WTI prices for the month of settlement. As of September 30, 2023, the Company had commodity derivative contracts outstanding through the fourth quarter of 2024 as summarized in the tables below:
|  |  |  |  |  | Collars |  |  | Fixed Price Swaps |
|  | Quantity |  |  | Weighted |  |  | Quantity |  |  | Weighted |
|  | Crude oil |  |  | Average Prices |  |  | Crude oil |  |  | Average |
Commodity/ Index/ Maturity Period |  | (Bbls)(1) |  |  | Floors |  |  | Ceilings |  |  | (Bbls)(1) |  |  | Price |
NYMEX WTI |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Crude Oil 2023 Contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fourth quarter 2023 |  |  | 51,200 |  |  | $ | 60.00 |  |  | $ | 81.04 |  |  |  | 18,000 |  |  | $ | 86.64 |
Total 2023 |  |  | 51,200 |  |  | $ | 60.00 |  |  | $ | 81.04 |  |  |  | 18,000 |  |  | $ | 86.64 |
Crude Oil 2024 Contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
First quarter 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 53,300 |  |  | $ | 84.07 |
Second quarter 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 48,600 |  |  | $ | 81.76 |
Third quarter 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 45,000 |  |  | $ | 79.80 |
Fourth quarter 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 40,720 |  |  | $ | 78.15 |
Total 2024 |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 187,620 |  |  | $ | 81.16 |
(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.
The following table details the fair value of commodity derivative contracts recorded in the accompanying balance sheets by category:
|  | September 30, 2023 |  |  | December 31, 2022 |
|  | (in thousands) |
Derivative assets: |  |  |  |  |  |  |  |
Current assets |  | $ | 58 |  |  | $ | - |
Non-current assets |  |  | 16 |  |  |  | - |
Total derivative assets |  | $ | 74 |  |  | $ | - |
Derivative liabilities: |  |  |  |  |  |  |  |
Current liabilities |  | $ | 422 |  |  | $ | 1,694 |
Total derivative liabilities |  | $ | 422 |  |  | $ | 1,694 |
As of September 30, 2023, 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 the 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 when we have a right of offset or master netting arrangement. See Note 13-Fair Value Measurements for disclosure of the fair value of derivative assets and liabilities on a gross and net basis. The following table summarizes the commodity components of the derivative settlement gain (loss) as well as the components of the net derivative (gain) loss line-item presentation in the accompanying condensed consolidated statement of operations:
|  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
|  | (in thousands) |
Derivative settlement gains (losses): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil contracts |  | $ | (148 | ) |  | $ | (1,291 | ) |  | $ | (614 | ) |  | $ | (5,428 | )
Gas contracts |  |  | - |  |  |  | (321 | ) |  |  | (28 | ) |  |  | (671 | )
Total derivative settlement gains (losses) |  | $ | (148 | ) |  | $ | (1,612 | ) |  | $ | (642 | ) |  | $ | (6,099 | )
Total net derivative gains (losses): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil contracts |  | $ | (504 | ) |  | $ | 4,338 |  |  | $ | 644 |  |  | $ | (4,026 | )
Gas contracts |  |  | - |  |  |  | (313 | ) |  |  | 60 |  |  |  | (918 | )
Total net derivative gains (losses) |  | $ | (504 | ) |  | $ | 4,025 |  |  | $ | 704 |  |  | $ | (4,944 | )

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