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DERIVATIVE AND HEDGING ACTIVITIES | 9 Months Ended
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Sep. 30, 2019
DERIVATIVE AND HEDGING ACTIVITIES |
DERIVATIVE AND HEDGING ACTIVITIES | 9. 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 the 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 or commodity hedging institutions deemed by management as competent and competitive market makers. As of September 30, 2019, 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 may consist of fixed-price swaps, basis swaps and costless put/call “collars.” Fixed-price 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) where the product is sold and the relevant price index under which the production is hedged (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. 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):
Derivatives not designated as |  |  |  | Asset derivative contracts |  |  |  | Liability derivative contracts
hedging contracts under ASC 815 |  | Balance sheet location |  | September 30, 2019 |  | December 31, 2018 |  | Balance sheet location |  | September 30, 2019 |  | December 31, 2018
Commodity contracts |  | Current assets—receivables from derivative contracts |  | $ | 15,310 |  | $ | 57,280 |  | Current liabilities—liabilities from derivative contracts |  | $ | (6,829) |  | $ | (3,768)
Commodity contracts |  | Other noncurrent assets—receivables from derivative contracts |  |  | 4,120 |  |  | 12,437 |  | Other noncurrent liabilities—liabilities from derivative contracts |  |  | (1,625) |  |  | (9,139)
Total derivatives not designated as hedging contracts under ASC 815 |  |  |  | $ | 19,430 |  | $ | 69,717 |  |  |  | $ | (8,454) |  | $ | (12,907)
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 or (loss) recognized in |  | Amount of gain or (loss) recognized in
|  |  |  | income on derivative contracts for the |  | income on derivative contracts for the
Derivatives not designated as hedging |  | Location of gain or (loss) recognized in |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
contracts under ASC 815 |  | income on derivative contracts |  | 2019 |  | 2018 |  | 2019 |  | 2018
Commodity contracts: |  |  |  |  |  |  |  |  |  |  |  |  |  |
Unrealized gain (loss) on commodity contracts |  | Other income (expenses)—net gain (loss) on derivative contracts |  | $ | 11,571 |  | $ | (50,763) |  | $ | (45,834) |  | $ | (77,524)
Realized gain (loss) on commodity contracts |  | Other income (expenses)—net gain (loss) on derivative contracts |  |  | 1,886 |  |  | (9,643) |  |  | 11,502 |  |  | 10,921
Total net gain (loss) on derivative contracts |  |  |  | $ | 13,457 |  | $ | (60,406) |  | $ | (34,332) |  | $ | (66,603)
At September 30, 2019 and December 31, 2018, the Company had the following open crude oil, natural gas liquids and natural gas derivative contracts:
|  |  |  |  |  | September 30, 2019
|  |  |  |  |  |  |  | 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 2019 - December 2019 |  | Basis Swap |  | Crude Oil |  | 828,000 |  | $ |  |  | — |  | $ | — |  | $ |  |  | — |  | $ | — |  | $ | (6.50) | - | $ | 4.00 |  | $ | 0.31
October 2019 - December 2019 |  | Collars |  | Crude Oil |  | 736,000 |  |  | 50.00 | - | 55.85 |  |  | 52.61 |  |  | 55.00 | - | 60.85 |  |  | 57.89 |  |  |  |  |  |  |  |  |
October 2019 - December 2019 |  | Basis Swap |  | Natural Gas |  | 2,346,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (1.05) | - |  | (1.40) |  |  | (1.18)
October 2019 - December 2019 |  | Collars |  | Natural Gas |  | 1,978,000 |  |  | 2.52 | - | 2.70 |  |  | 2.60 |  |  | 3.00 | - | 3.10 |  |  | 3.01 |  |  |  |  |  |  |  |  |
October 2019 - December 2019 |  | Swap |  | Natural Gas Liquids |  | 322,000 |  |  | 29.08 | - | 29.50 |  |  | 29.21 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
October 2019 - December 2019 |  | WTI NYMEX ROLL |  | Crude Oil |  | 460,000 |  |  |  |  | 0.35 |  |  | 0.35 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
January 2020 - December 2020 |  | Swap |  | Crude Oil |  | 366,000 |  |  |  |  | 60.00 |  |  | 60.00 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
January 2020 - December 2020 |  | Basis Swap |  | Crude Oil |  | 3,294,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2.00 | - |  | 4.00 |  |  | 2.95
January 2020 - December 2020 |  | Collars |  | Crude Oil |  | 549,000 |  |  |  |  | 50.00 |  |  | 50.00 |  |  |  |  | 70.00 |  |  | 70.00 |  |  |  |  |  |  |  |  |
January 2020 - December 2020 |  | Calls |  | Crude Oil |  | 2,342,400 |  |  |  |  |  |  |  |  |  |  |  |  | 70.00 |  |  | 70.00 |  |  |  |  |  |  |  |  |
January 2020 - December 2020 |  | Puts |  | Crude Oil |  | 915,000 |  |  |  |  | 55.00 |  |  | 55.00 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | December 31, 2018
|  |  |  |  |  |  |  | Floors |  | Ceilings |  | Basis Differential
|  |  |  |  |  | Volume in |  | Price / |  | Weighted |  | Price / |  | Weighted |  |  |  |  |  |  | Weighted
|  |  |  |  |  | Mmbtu’s/ |  | Price |  | Average |  | Price |  | Average |  | Price / |  | Average
Period |  | Instrument |  | Commodity |  | Bbl’s |  | Range |  | Price |  | Range |  | Price |  | Price Range |  | Price
January 2019 - March 2019 |  | Calls |  | Crude Oil |  | 1,350,000 |  | $ |  |  | — |  | $ | — |  | $ |  |  | 62.64 |  | $ | 62.64 |  | $ |  |  | — |  | $ | —
January 2019 - March 2019 |  | Calls |  | Crude Oil |  | (1,350,000) |  |  |  |  |  |  |  |  |  |  |  |  | 58.64 |  |  | 58.64 |  |  |  |  |  |  |  |
January 2019 - March 2019 |  | Collars |  | Crude Oil |  | 90,000 |  |  |  |  | 46.75 |  |  | 46.75 |  |  |  |  | 51.75 |  |  | 51.75 |  |  |  |  |  |  |  |
January 2019 - June 2019 |  | Collars |  | Crude Oil |  | 181,000 |  |  |  |  | 51.00 |  |  | 51.00 |  |  |  |  | 56.00 |  |  | 56.00 |  |  |  |  |  |  |  |
January 2019 - September 2019 |  | Basis Swap |  | Crude Oil |  | 546,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (6.20) | - | (7.60) |  |  | (6.90)
January 2019 - December 2019 |  | Basis Swap |  | Crude Oil |  | 2,448,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (0.98) | - | (6.50) |  |  | (2.80)
January 2019 - December 2019 |  | Basis Swap |  | Natural Gas |  | 9,307,500 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (1.05) | - | (1.40) |  |  | (1.18)
January 2019 - December 2019 |  | Collars |  | Crude Oil |  | 3,650,000 |  |  | 50.00 | - | 58.00 |  |  | 53.87 |  |  | 55.20 | - | 63.00 |  |  | 60.07 |  |  |  |  |  |  |  |
January 2019 - December 2019 |  | Collars |  | Natural Gas |  | 8,760,000 |  |  | 2.52 | - | 2.70 |  |  | 2.60 |  |  | 3.00 | - | 3.10 |  |  | 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 - June 2019 |  | Collars |  | Crude Oil |  | 91,000 |  |  |  |  | 50.00 |  |  | 50.00 |  |  |  |  | 55.00 |  |  | 55.00 |  |  |  |  |  |  |  |
April 2019 - December 2019 |  | Collars |  | Crude Oil |  | 275,000 |  |  |  |  | 55.00 |  |  | 55.00 |  |  |  |  | 62.85 |  |  | 62.85 |  |  |  |  |  |  |  |
July 2019 - December 2019 |  | Basis Swap |  | Crude Oil |  | 460,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | (2.40) | - | (6.50) |  |  | (5.68)
July 2019 - December 2019 |  | Collars |  | Crude Oil |  | 552,000 |  |  | 50.00 | - | 55.00 |  |  | 53.00 |  |  | 55.00 | - | 69.00 |  |  | 61.00 |  |  |  |  |  |  |  |
October 2019 - December 2019 |  | Basis Swap |  | Crude Oil |  | 460,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 3.45 | - | 4.00 |  |  | 3.72
October 2019 - December 2019 |  | Collars |  | Crude Oil |  | 92,000 |  |  |  |  | 51.00 |  |  | 51.00 |  |  |  |  | 56.00 |  |  | 56.00 |  |  |  |  |  |  |  |
October 2019 - December 2019 |  | Swap |  | Natural Gas Liquids |  | 92,000 |  |  |  |  | 32.50 |  |  | 32.50 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
January 2020 - December 2020 |  | Basis Swap |  | Crude Oil |  | 3,294,000 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 2.00 | - | 4.00 |  |  | 2.95
January 2020 - December 2020 |  | Collars |  | Crude Oil |  | 549,000 |  |  |  |  | 50.00 |  |  | 50.00 |  |  |  |  | 70.00 |  |  | 70.00 |  |  |  |  |  |  |  |
January 2020 - December 2020 |  | Calls |  | Crude Oil |  | 2,342,400 |  |  |  |  |  |  |  |  |  |  |  |  | 70.00 |  |  | 70.00 |  |  |  |  |  |  |  |
January 2020 - December 2020 |  | Puts |  | Crude Oil |  | 915,000 |  |  |  |  | 55.00 |  |  | 55.00 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
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 at September 30, 2019 and December 31, 2018 (in thousands):
|  | Derivative Assets |  | Derivative Liabilities
Offsetting of Derivative Assets and Liabilities |  | September 30, 2019 |  | December 31, 2018 |  | September 30, 2019 |  | December 31, 2018
Gross Amounts Presented in the Consolidated Balance Sheet |  | $ | 19,430 |  | $ | 69,717 |  | $ | (8,454) |  | $ | (12,907)
Amounts Not Offset in the Consolidated Balance Sheet |  |  | (8,454) |  |  | (10,263) |  |  | 8,454 |  |  | 10,263
Net Amount |  | $ | 10,976 |  | $ | 59,454 |  | $ | — |  | $ | (2,644)
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. The filing of the voluntary petitions for relief under chapter 11 of the Bankruptcy Code described in Note 2, “Reorganization,” constituted an event of default under the Company’s derivatives contracts that gave the counterparties the option to terminate such contracts. Certain parties elected to terminate their contracts in August 2019 and the Company received approximately $0.1 million to settle a portion of the outstanding positions while other positions were novated for fees totaling $0.5 million. The remaining derivative contracts, including the novated positions, were secured on a super-priority pari passu basis with the Company’s Senior Credit Agreement during the bankruptcy process and remain in place following the Company’s chapter 11 proceedings.

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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 + Details
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