8. Derivative Instruments and Fair Value Measurements
We enter commodity derivative contracts to reduce our exposure to fluctuations in commodity prices related to our oil, NGLs and gas production. We record our open derivative instruments at fair value on our consolidated balance sheets as either current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of our commodity derivative contracts, not designated as cash-flow hedges, and cash settlements are recorded in earnings as they occur on our consolidated statements of operations under the caption entitled “commodity derivative (loss) gain.”
In April 2018, we entered into swaps for the NYMEX Calendar Monthly Average Roll (the “CMA Roll”) covering 2,000 Bbls of oil per day for May 2018 through December 2018 at $0.66/bbl. Swaps for the CMA Roll are pricing adjustments to the trade month versus the delivery month for contract pricing. These derivative contracts were designated as cash-flow hedges. The changes in fair value of the derivative contracts designated as cash-flow hedges, to the extent the hedge is effective, will be recognized in other comprehensive income until the hedged item is recognized in revenue.
The following table provides our outstanding commodity derivative positions at September 30, 2018.
|
Commodity and Period |
|
Contract
Type |
|
Volume Transacted |
|
Contract Price |
|
Crude Oil |
|
|
|
|
|
|
|
October 2018 – December 2018 |
|
Swap |
|
300 Bbls/day |
|
$50.00/Bbl |
|
October 2018 – December 2019 |
|
Collar |
|
500 Bbls/day |
|
$65.00/Bbl - $71.00/Bbl |
|
|
|
|
|
|
|
|
|
CMA Roll |
|
|
|
|
|
|
|
October 2018 – December 2018 (1) |
|
Swap |
|
2,000 Bbls/day |
|
$0.66/Bbl |
|
|
|
|
|
|
|
|
|
Natural Gas |
|
|
|
|
|
|
|
October 2018 – December 2018 |
|
Swap |
|
200,000 MMBtu/month |
|
$3.085/MMBtu |
|
October 2018 – December 2018 |
|
Swap |
|
250,000 MMBtu/month |
|
$3.084/MMBtu |
|
|
|
|
|
|
|
|
|
NGLs (C2 - Ethane) |
|
|
|
|
|
|
|
October 2018 – December 2018 |
|
Swap |
|
1,000 Bbls/day |
|
$11.424/Bbl |
|
October 2018 – December 2018 |
|
Swap |
|
400 Bbls/day |
|
$14.70/Bbl |
|
NGLs (C3 - Propane) |
|
|
|
|
|
|
|
October 2018 – December 2018 |
|
Swap |
|
600 Bbls/day |
|
$32.991/Bbl |
|
October 2018 – December 2018 |
|
Swap |
|
400 Bbls/day |
|
$40.74/Bbl |
|
October 2018 – June 2019 |
|
Swap |
|
75 Bbls/day |
|
$42.00/Bbl |
|
NGLs (IC4 - Isobutane) |
|
|
|
|
|
|
|
October 2018 – December 2018 |
|
Swap |
|
50 Bbls/day |
|
$38.262/Bbl |
|
NGLs (NC4 - Butane) |
|
|
|
|
|
|
|
October 2018 – December 2018 |
|
Swap |
|
200 Bbls/day |
|
$38.22/Bbl |
|
NGLs (C5 - Pentane) |
|
|
|
|
|
|
|
October 2018 – December 2018 |
|
Swap |
|
200 Bbls/day |
|
$56.364/Bbl |
|
January 2019 – December 2019 |
|
Swap |
|
100 Bbls/day |
|
$65.10/Bbl |
|
January 2019 – December 2019 |
|
Swap |
|
100 Bbls/day |
|
$65.31/Bbl |
|
(1) |
Designated as a cash flow hedge |
After September 30, 2018, we entered into the following commodity derivative positions:
|
Commodity and Period |
|
Contract
Type |
|
Volume Transacted |
|
Contract Price |
|
NGLs (C2 - Ethane) |
|
|
|
|
|
|
|
January 2019 – March 2019 |
|
Swap |
|
900 Bbls/day |
|
$14.123/Bbl |
|
NGLs (C3 - Propane) |
|
|
|
|
|
|
|
January 2019 – March 2019 |
|
Swap |
|
600 Bbls/day |
|
$35.165/Bbl |
|
NGLs (NC4 - Butane) |
|
|
|
|
|
|
|
January 2019 – March 2019 |
|
Swap |
|
200 Bbls/day |
|
$38.63/Bbl |
The following table summarizes the fair value of our open commodity derivatives as of September 30, 2018, and December 31, 2017 (in thousands).
|
|
|
Balance Sheet Location |
|
Fair Value |
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
|
|
|
2018 |
|
|
2017 |
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives |
|
Derivative assets |
|
$ |
31 |
|
|
$ |
1,398 |
|
|
Commodity derivatives |
|
Derivative liabilities |
|
|
(4,197 |
) |
|
|
(2,181 |
) |
|
Total derivatives not designated as hedging instruments |
|
|
|
|
(4,166 |
) |
|
|
(783 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
Commodity derivatives |
|
Derivative assets |
|
$ |
59 |
|
|
|
— |
|
The following table summarizes the commodity derivatives (loss) gain (in thousands).
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
Income Statement Location |
|
September 30, |
|
|
September 30, |
|
|
|
|
|
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
|
Derivatives not designated as hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash payment on derivative settlements |
|
$ |
(3,172 |
) |
|
$ |
(523 |
) |
|
$ |
(6,685 |
) |
|
$ |
(1,481 |
) |
|
Non-cash fair value (loss) gain on derivatives |
|
|
(84 |
) |
|
|
(3,037 |
) |
|
|
(3,383 |
) |
|
|
2,596 |
|
|
|
Commodity derivative (loss) gain |
$ |
(3,256 |
) |
|
$ |
(3,560 |
) |
|
$ |
(10,068 |
) |
|
$ |
1,115 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil, NGLs and gas sales |
$ |
(85 |
) |
|
$ |
— |
|
|
$ |
(23 |
) |
|
$ |
— |
|
The following table summarizes the changes in accumulated other comprehensive income (“AOCI”) for the three months ended September 30, 2018 (in thousands).
|
|
|
Pre-Tax |
|
|
Tax Effect |
|
|
Net-of Tax |
|
|
Balance at June 30, 2018 |
|
$ |
(197 |
) |
|
$ |
41 |
|
|
$ |
(156 |
) |
|
Other comprehensive income before reclassifications |
|
|
171 |
|
|
|
(36 |
) |
|
|
135 |
|
|
Amounts reclassified from AOCI |
|
|
85 |
|
|
|
(18 |
) |
|
|
67 |
|
|
Net other comprehensive income |
|
|
256 |
|
|
|
(54 |
) |
|
|
202 |
|
|
Balance at September 30, 2018 |
|
$ |
59 |
|
|
$ |
(13 |
) |
|
$ |
46 |
|
The following table summarizes the changes in AOCI for the nine months ended September 30, 2018 (in thousands).
|
|
|
Pre-Tax |
|
|
Tax Effect |
|
|
Net-of Tax |
|
|
Balance at December 31, 2017 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Other comprehensive income before reclassifications |
|
|
36 |
|
|
|
(8 |
) |
|
|
28 |
|
|
Amounts reclassified from AOCI |
|
|
23 |
|
|
|
(5 |
) |
|
|
18 |
|
|
Net other comprehensive income |
|
|
59 |
|
|
|
(13 |
) |
|
|
46 |
|
|
Balance at September 30, 2018 |
|
$ |
59 |
|
|
$ |
(13 |
) |
|
$ |
46 |
|
We estimate the fair values of swap contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets.
We are exposed to credit losses in the event of nonperformance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.
To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:
|
|
• |
Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The shares of our common stock issued in the Exchange Transactions were valued as a Level 1 measurement. At September 30, 2018, we had no Level 1 measurements. |
|
|
• |
Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data, which is derived by combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. At September 30, 2018, all of our commodity derivatives were valued using Level 2 measurements. |
|
|
• |
Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At September 30, 2018, we had no recurring Level 3 measurements. |
Financial Instruments Not Recorded at Fair Value
The following table sets forth the fair values of financial instruments that are not recorded at fair value on our financial statements (in thousands).
|
|
|
September 30, 2018 |
|
|
|
|
Carrying
Amount |
|
|
Fair Value |
|
|
Senior Notes |
|
$ |
84,411 |
|
|
$ |
82,855 |
|
The fair value of the Senior Notes is based on quoted market prices, but the Senior Notes are not actively traded in the public market. Accordingly, the fair value of the Senior Notes would be classified as Level 2 in the fair value hierarchy.