7. DERIVATIVE AND HEDGING ACTIVITIES

The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk and interest rate risk. Derivative contracts are utilized to hedge the Company’s exposure to price fluctuations and reduce the variability in the Company’s cash flows associated with anticipated sales of future oil, natural gas and natural gas liquids production. When derivative contracts are available at terms (or prices) acceptable to the Company, it generally hedges a substantial, but varying, portion of anticipated oil, natural gas and natural gas liquids production for future periods. Derivatives are carried at fair value on the unaudited condensed consolidated balance sheets as assets or liabilities, with changes in the fair value included in the unaudited condensed consolidated statements of operations for the period in which the change occurs. The Company’s hedge policies and objectives may change significantly as its operational profile changes and/or commodities prices change. The Company does not enter into derivative contracts for speculative trading purposes.

It is the Company’s policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions determined by management as competent and competitive market makers. The Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Senior Credit Agreement or are uncollateralized trades.

The Company’s crude oil, natural gas and natural gas liquids derivative positions at any point in time generally consist of swaps, basis swaps and costless put/call “collars.” Swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. Basis swaps effectively lock in a price differential between regional prices (i.e. Midland) and the relevant price index at which the oil production is sold (i.e. Cushing). A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. The Company has elected not to designate any of its derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as payments and receipts on settled derivative contracts, in “Net gain (loss) on derivative contracts” on the unaudited condensed consolidated statements of operations.

At September 30, 2018, the Company had 85 open commodity derivative contracts summarized in the following tables: eight natural gas collar arrangements, seven natural gas basis swaps, eight natural gas liquids swaps, 25 crude oil basis swaps, 31 crude oil collar arrangements two crude oil puts, three crude oil calls, and one crude oil WTI NYMEX roll.

At December 31, 2017, the Company had 34 open commodity derivative contracts summarized in the following tables: three natural gas collar arrangements, 12 crude oil basis swaps and 19 crude oil collar arrangements.

All derivative contracts are recorded at fair market value in accordance with ASC 815, Derivatives and Hedging (ASC 815) and ASC 820 and included in the unaudited condensed consolidated balance sheets as assets or liabilities. The following table summarizes the location and fair value amounts of all derivative contracts in the unaudited condensed consolidated balance sheets (in thousands):


		Asset derivative contracts					Liability derivative contracts
		September 30,		December 31,			September 30,		December 31,
Derivatives not designated as hedging contracts under ASC 815	Balance sheet location	2018(1)		2017		Balance sheet location	2018(2)		2017

Commodity contracts	Current assets - receivables from derivative contracts	$	16,553	$	677	Current liabilities - liabilities from derivative contracts	$	(86,176)	$	(19,248)
Commodity contracts	Other noncurrent assets -receivables from derivative contracts		2,794		—	Other noncurrent liabilities - liabilities from derivative contracts		(37,459)		(7,751)
Total derivatives not designated as hedging contracts under ASC 815		$	19,347	$	677		$	(123,635)	$	(26,999)

(1)

Amount includes a $0.7 million deferred premium asset classified all as current as of September 30, 2018.

(2)

Amount includes a $4.7 million deferred premium obligation of which $0.3 million was classified as current as of September 30, 2018.

The following table summarizes the location and amounts of the Company’s realized and unrealized gains and losses on derivative contracts in the Company’s unaudited condensed consolidated statements of operations (in thousands):


		Amount of gain				Amount of gain
		or (loss)				or (loss)
		recognized in				recognized in
		income on				income on
		derivative				derivative
		contracts for the				contracts for the
		Three Months				Nine Months
		Ended				Ended
	Location of gain or (loss) recognized in	September 30,				September 30,
Derivatives not designated as hedging contracts under ASC 815	income on derivative contracts	2018		2017		2018		2017
Commodity contracts:
Unrealized gain (loss) on commodity contracts	Other income (expenses) - net gain (loss) on derivative contracts	$	(50,763)	$	(31,209)	$	(77,524)	$	11,010
Realized gain (loss) on commodity contracts	Other income (expenses) - net gain (loss) on derivative contracts		(9,643)		8,794		10,921		17,129
Total net gain (loss) on derivative contracts		$	(60,406)	$	(22,415)	$	(66,603)	$	28,139

At September 30, 2018 and December 31, 2017, the Company had the following open crude oil, natural gas and natural gas liquids derivative contracts:


			September 30, 2018
				Floors						Ceilings						Basis Differential
			Volume in					Weighted						Weighted							Weighted
			Mmbtu’s/	Price /				Average		Price /				Average		Price /					Average
Period	Instrument	Commodity	Bbl’s	Price Range				Price		Price Range				Price		Price Range					Price
October 2018 - December 2018	Basis Swap	Crude Oil	1,012,000	$	—		—	$	—	$	—		—	$	—	$	(6.90)	-	$	(12.50)	$	(10.64)
October 2018 - December 2018	Basis Swap	Natural Gas	1,380,000														(1.05)	-		(1.19)		(1.10)
October 2018 - December 2018	Collars	Crude Oil	1,196,000		45.00	-	55.80		50.08		50.00	-	63.00		56.87
October 2018 - December 2018	Collars	Natural Gas	690,000		3.00	-	3.03		3.01		3.22	-	3.38		3.30
October 2018 - December 2018	Calls	Crude Oil	1,196,000								59.00	-	63.00		59.92
October 2018 - December 2018	Calls	Crude Oil	(1,196,000)								50.00	-	63.00		56.87
October 2018 - December 2018	Swap	Natural Gas Liquids	92,000				32.50		32.50
October 2018 - December 2018	WTI NYMEX Roll	Crude Oil	460,000																	0.35		0.35
January 2019 - March 2019	Collars	Crude Oil	90,000				46.75		46.75				51.75		51.75
January 2019 - June 2019	Basis Swap	Crude Oil	543,000														(1.15)	-		(1.33)		(1.22)
January 2019 - September 2019	Basis Swap	Crude Oil	546,000														(6.20)	-		(7.60)		(6.90)
January 2019 - December 2019	Basis Swap	Crude Oil	2,365,000														(0.98)	-		(6.50)		(3.73)
January 2019 - December 2019	Basis Swap	Natural Gas	9,307,500														(1.05)	-		(1.40)		(1.18)
January 2019 - December 2019	Collars	Crude Oil	5,110,000		50.00	-	58.00		53.12		55.00	-	63.00		58.98
January 2019 - December 2019	Collars	Natural Gas	8,395,000		2.52	-	2.65		2.60		3.00	-	3.03		3.01
January 2019 - December 2019	Swap	Natural Gas Liquids	1,460,000		29.08	-	30.15		29.33
January 2019 - December 2019	WTI NYMEX Roll	Crude Oil	1,825,000																	0.35		0.35
April 2019 - December 2019	Collars	Crude Oil	275,000				55.00		55.00				62.85		62.85
July 2019 - December 2019	Collars	Crude Oil	184,000				55.00		55.00				69.00		69.00
October 2019 - December 2019	Basis Swap	Crude Oil	368,000														3.45	-		3.75		3.65
October 2019 - December 2019	Swap	Natural Gas Liquids	92,000				32.50		32.50
January 2020 - December 2020	Basis Swap	Crude Oil	2,928,000														2.00	-		3.75		2.82
January 2020 - December 2020	Collars	Crude Oil	549,000				50.00		50.00				70.00		70.00
January 2020 - December 2020	Calls	Crude Oil	1,464,000										70.00		70.00
January 2020 - December 2020	Puts	Crude Oil	915,000				55.00		55.00
January 2020 - December 2020	Swap	Natural Gas Liquids	732,000				31.00		31.00


			December 31, 2017
				Floors							Ceilings							Basis Differential
			Volume in						Weighted							Weighted							Weighted
			Mmbtu’s/	Price /					Average		Price /					Average		Price /					Average
Period	Instrument	Commodity	Bbl’s	Price Range					Price		Price Range					Price		Price Range					Price
January 2018 - December 2018	Basis Swap	Crude Oil	2,555,000	$			$	—	$	—	$	—		$	—	$	—	$	(1.05)	-	$	(1.50)	$	(1.29)
January 2018 - December 2018	Collars	Crude Oil	2,920,000		45.00	-		53.00		49.29		50.00	-		60.00		56.82
January 2018 - December 2018	Collars	Natural Gas	2,737,500		3.00	-		3.03		3.01		3.22	-		3.38		3.30
April 2018 - December 2018	Basis Swap	Crude Oil	275,000																			(1.15)		(1.15)
April 2018 - December 2018	Collars	Crude Oil	275,000					46.75		46.75					51.75		51.75
July 2018 - December 2018	Basis Swap	Crude Oil	1,012,000																(0.98)	-		(1.18)		(1.12)
July 2018 - December 2018	Collars	Crude Oil	184,000					48.50		48.50					53.50		53.50
October 2018 - December 2018	Collars	Crude Oil	92,000					50.65		50.65					55.65		55.65
January 2019 - March 2019	Collars	Crude Oil	90,000					46.75		46.75					51.75		51.75
January 2019 - December 2019	Basis Swap	Crude Oil	4,380,000																(0.50)	-		(1.33)		(1.02)
January 2019 - December 2019	Collars	Crude Oil	1,825,000		50.00	-		51.00		50.24		55.00	-		57.30		55.70

The Company presents the fair value of its derivative contracts at the gross amounts in the unaudited condensed consolidated balance sheets. The following table shows the potential effects of master netting arrangements on the fair value of the Company’s derivative contracts (in thousands):


	Derivative Assets				Derivative Liabilities
Offsetting of Derivative Assets and Liabilities	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017
Gross Amounts Presented in the Consolidated Balance Sheet	$	19,347	$	677	$	(123,635)	$	(26,999)
Amounts Not Offset in the Consolidated Balance Sheet		(18,040)		(231)		18,040		231
Net Amount	$	1,307	$	446	$	(105,595)	$	(26,768)

The Company enters into an International Swap Dealers Association Master Agreement (ISDA) with each counterparty prior to a derivative contract with such counterparty. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency.