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DERIVATIVE AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2021

DERIVATIVE AND HEDGING ACTIVITIES

DERIVATIVE AND HEDGING ACTIVITIES

8. 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 and the requirements under the Term Loan Agreement, it generally hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. Derivatives are carried at fair value on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the 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 December 31, 2021, the Company did not post collateral under any of its derivative contracts as they are secured under the Company’s Term Loan Agreement.

The Company’s crude oil and natural gas 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 and are generally utilized less frequently by the Company than fixed-price swaps. 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 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 consolidated balance sheets as assets or liabilities. The following table summarizes the location and fair value amounts of all derivative contracts in the consolidated balance sheets as of December 31, 2021 and 2020 (in thousands):


Derivatives not designated
as hedging contracts under				Asset derivative contracts								Liability derivative contracts
ASC 815		Balance sheet location		December 31, 2021			December 31, 2020			Balance sheet location		December 31, 2021			December 31, 2020

Commodity contracts		Current assets - assets from derivative contracts		$	1,383		$	8,559		Current liabilities - liabilities from derivative contracts		$	(58,322)		$	(22,125)
Commodity contracts		Other noncurrent assets - assets from derivative contracts			2,515			4,009		Other noncurrent liabilities - liabilities from derivative contracts			(7,144)			(4,291)
Total derivatives not designated as hedging contracts under ASC 815				$	3,898		$	12,568				$	(65,466)		$	(26,416)

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 consolidated statements of operations (in thousands):


				Amount of gain or (loss) recognized in
				income on derivative contracts for the

Derivatives not designated		Location of gain or (loss)
as hedging contracts		recognized in income		Years Ended December 31,
under ASC 815		on derivative contracts		2021			2020
Commodity contracts:
Unrealized gain (loss) on commodity contracts		Other income (expenses) - net gain (loss) on derivative contracts		$	(47,721)		$	(6,143)
Realized gain (loss) on commodity contracts		Other income (expenses) - net gain (loss) on derivative contracts			(77,898)			44,902
Total net gain (loss) on derivative contracts				$	(125,619)		$	38,759

During the year ended December 31, 2020, the Company terminated certain derivative contracts in advance of their natural expiration dates and received net proceeds of approximately $22.9 million, which were recorded in “Net gain (loss) on derivative contracts” on the consolidated statements of operations.

At December 31, 2021, the Company had the following open crude oil and natural gas derivative contracts:


Instrument			2022			2023			2024			2025			2026
Crude oil fixed-price swap:
Total volumes (Bbls)			2,504,249			1,937,165			1,388,920			988,260			29,810
Weighted average price		$	50.19		$	65.35		$	60.67		$	59.59		$	59.61
Crude oil basis swap:
Total volumes (Bbls)			2,278,848			1,937,165			1,388,920			988,260			29,810
Weighted average price		$	0.47		$	0.25		$	0.23		$	0.16		$	0.10
Crude oil WTI NYMEX roll:
Total volumes (Bbls)			2,286,598			1,937,165			1,388,920			988,260			29,810
Weighted average price		$	0.01		$	0.50		$	0.27		$	0.10		$	-
Natural gas fixed-price swap:
Total volumes (MMBtu)			3,277,420			3,622,200			2,428,150			2,250,650
Weighted average price		$	3.60		$	3.34		$	3.05		$	2.95
Natural gas producer two-way collar:
Total volumes (MMBtu)			2,963,124			1,389,500			1,078,000			315,000
Weighted average price (call)		$	3.07		$	5.05		$	4.58		$	3.88
Weighted average price (put)		$	2.66		$	3.41		$	3.00		$	3.00
Natural gas basis swap:
Total volumes (MMBtu)			6,240,544			5,011,700			3,506,150			2,565,650
Weighted average price		$	(0.36)		$	(0.58)		$	(0.59)		$	(0.50)

The Company presents the fair value of its derivative contracts at the gross amounts in the 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 December 31, 2021 and 2020 (in thousands):


		Derivative Assets						Derivative Liabilities
Offsetting of Derivative Assets and Liabilities		December 31, 2021			December 31, 2020			December 31, 2021			December 31, 2020
Gross amounts presented in the consolidated balance sheet		$	3,898		$	12,568		$	(65,466)		$	(26,416)
Amounts not offset in the consolidated balance sheet			(3,898)			(8,968)			3,898			8,968
Net amount		$	—		$	3,600		$	(61,568)		$	(17,448)

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.