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.