10. 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. In accordance with the Company’s policy, 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. 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, 2020 (Successor), the Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Senior Credit Agreement.

The Company’s crude oil, natural gas and natural gas liquids derivative positions at any point in time may consist of fixed-price swaps, costless put/call collars, basis swaps and WTI NYMEX rolls. 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. 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. Basis swaps effectively lock in a price differential between regional prices (i.e. Midland) where the product is sold and the relevant pricing index under which the oil production is hedged (i.e. Cushing). WTI NYMEX roll agreements account for pricing adjustments to the trade month versus the delivery month for contract pricing. 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 all 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 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 as of September 30, 2020 and December 31, 2019 (Successor) (in thousands):


		Successor					Successor
Derivatives not designated as		Asset derivative contracts					Liability derivative contracts
hedging contracts under ASC 815	Balance sheet location	September 30, 2020		December 31, 2019		Balance sheet location	September 30, 2020		December 31, 2019
Commodity contracts	Current assets - assets from derivative contracts	$	18,996	$	4,995	Current liabilities - liabilities from derivative contracts	$	(9,055)	$	(8,069)
Commodity contracts	Other noncurrent assets - assets from derivative contracts		9,675		224	Other noncurrent liabilities - liabilities from derivative contracts		(3,292)		(4,854)
Total derivatives not designated as hedging contracts under ASC 815		$	28,671	$	5,219		$	(12,347)	$	(12,923)

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 income on derivative contracts for the				Amount of gain or (loss) recognized in income on derivative contracts for the
		Successor		Predecessor		Successor		Predecessor
Derivatives not designated	Location of gain or	Three Months		Three Months		Nine Months		Nine Months
as hedging contracts	(loss) recognized in income	Ended		Ended		Ended		Ended
under ASC 815	on derivative contracts	September 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019
Commodity contracts:
Unrealized gain (loss) on commodity contracts	Other income (expenses) - net gain (loss) on derivative contracts	$	(21,128)	$	11,571	$	24,029	$	(45,834)
Realized gain (loss) on commodity contracts	Other income (expenses) - net gain (loss) on derivative contracts		5,285		1,886		43,666		11,502
Total net gain (loss) on derivative contracts		$	(15,843)	$	13,457	$	67,695	$	(34,332)

During the three and nine months ended September 30, 2020 (Successor), the Company terminated certain derivative contracts in advance of their natural expiration dates and received net proceeds of approximately $6.6 million and $22.9 million, respectively, which were recorded in “Net gain (loss) on derivative contracts” on the unaudited condensed consolidated statements of operations.

At September 30, 2020 (Successor), the Company had the following open crude oil and natural gas derivative contracts:


			Volume in	Weighted
			Mmbtu's/	Average
Period	Instrument	Commodity	Bbl's	Price
2020	Fixed-Price Swap	Natural Gas	736,000	$	2.56
2020	Call	Crude Oil	726,800		70.00
2020	Put	Crude Oil	368,000		42.10
2020	Producer Collar (Ceiling)	Crude Oil	414,000		49.02
2020	Producer Collar (Floor)	Crude Oil	414,000		42.10
2020	Basis Swap	Crude Oil	782,000		0.26
2020	WTI NYMEX Roll	Crude Oil	518,500		0.17
2021	Fixed-Price Swap	Natural Gas	2,190,000		2.47
2021	Fixed-Price Swap	Crude Oil	2,554,000		45.98
2021	Basis Swap	Crude Oil	2,554,000		(0.11)
2021	WTI NYMEX Roll	Crude Oil	2,554,000		(0.29)
2022	Fixed-Price Swap	Crude Oil	724,000		51.50
2022	Basis Swap	Crude Oil	724,000		0.88
2022	WTI NYMEX Roll	Crude Oil	1,276,000		0.00

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, 2020 and December 31, 2019 (Successor) (in thousands):


	Successor				Successor
	Derivative Assets				Derivative Liabilities
Offsetting of Derivative Assets and Liabilities	September 30, 2020		December 31, 2019		September 30, 2020		December 31, 2019

Gross Amounts Presented in the Consolidated Balance Sheet	$	28,671	$	5,219	$	(12,347)	$	(12,923)
Amounts Not Offset in the Consolidated Balance Sheet		(6,928)		(4,557)		6,928		4,557
Net Amount	$	21,743	$	662	$	(5,419)	$	(8,366)

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.