7. DERIVATIVE FINANCIAL INSTRUMENTS:

Objectives and Strategy: The Company’s major market risk exposure is in the pricing applicable to its natural gas and oil production. Realized pricing is currently driven primarily by the prevailing price for the Company’s natural gas production. Historically, prices received for natural gas production have been volatile and unpredictable. Pricing volatility is expected to continue. The prices we receive for our production depend on many factors outside of our control, including volatility in the differences between product prices at sales points and the applicable index price.

The Company relies on various types of derivative instruments to manage its exposure to commodity price risk and to provide a level of certainty in the Company’s forward cash flows supporting the Company’s capital investment program. These types of instruments may include fixed price swaps, costless collars, or basis differential swaps. These contracts are financial instruments, and do not require or allow for physical delivery of the hedged commodity. While mitigating the effects of fluctuating commodity prices, these derivative contracts may limit the benefits we would receive from increases in commodity prices above the fixed hedge prices.

The Company’s hedging policy limits the volumes hedged to not be greater than 50% of its forecasted production volumes without Board approval. During the quarter ended March 31, 2018, the Board approved all commodity derivative hedge contracts for volumes exceeding 50% of forecasted production volumes.

Fair Value of Commodity Derivatives: FASB ASC 815 requires that all derivatives be recognized on the Consolidated Balance Sheets as either an asset or liability and be measured at fair value. Changes in the derivative’s fair value are recognized currently in earnings unless specific hedge accounting criteria are met. The Company does not apply hedge accounting to any of its derivative instruments.

Derivative contracts that do not qualify for hedge accounting treatment are recorded as derivative assets and liabilities at fair value on the Consolidated Balance Sheets and the associated unrealized gains and losses are recorded as current income or expense in the Consolidated Statements of Operations. Unrealized gains or losses on commodity derivatives represent the non-cash change in the fair value of these derivative instruments and do not impact operating cash flows on the cash flow statement.

Commodity Derivative Contracts: At March 31, 2018, the Company had the following open commodity derivative contracts to manage commodity price risks. For the fixed price swaps, the Company receives the fixed price for the contract and pays the variable price to the counterparty. For the basis swaps, the Company receives a fixed price for the difference between two sales points for a specified commodity volume over a specified time period. The reference prices of these commodity derivative contracts are typically referenced to index prices as published by independent third parties.

Type	Commodity Reference Price	Remaining Contract Period	Volume - MMBTU/Day		Average Price /MMBTU			Fair Value - March 31, 2018
Natural Gas								Asset (Liability)
Fixed price swaps
	NYMEX-Henry Hub	Apr - Oct 2018		770,000	$	2.88		$	13,951
	NYMEX-Henry Hub	Nov - Dec 2018		290,000	$	2.87			(1,485	)
	NYMEX-Henry Hub	Nov 2018 - Mar 2019		350,000	$	2.95			(2,734	)
	NYMEX-Henry Hub	Jan - Mar 2019		250,000	$	3.02			(441	)
	NYMEX-Henry Hub	Jan - Dec 2019		100,000	$	2.79			(217	)
	NYMEX-Henry Hub	Nov 2018 - Dec 2019		70,000	$	2.80			(377	)

Type	Commodity Reference Price	Remaining Contract Period	Volume - MMBTU/Day		Average Differential /MMBTU			Fair Value - March 31, 2018
Natural Gas								Asset (Liability)
Basis swap contracts (1)
	NW Rockies Basis Swap	Apr - Oct 2018		140,000	$	(0.62	)	$	4,640
	NW Rockies Basis Swap	Apr - Dec 2018		50,000	$	(0.65	)		1,506
	NW Rockies Basis Swap	Apr 2018- Dec 2019		70,000	$	(0.78	)		(112	)
	NW Rockies Basis Swap	Jan-Dec 2019		50,000	$	(0.76	)		488

Type	Commodity Reference Price	Remaining Contract Period	Volume - Bbls/Day		Average Price /Bbls			Fair Value - March 31, 2018
Crude Oil								Asset (Liability)
Fixed price swaps
	NYMEX-WTI	Apr - Dec 2018		5,000	$	60.25		$	(4,075	)
	NYMEX-WTI	Jan - Mar 2019		3,000	$	58.76			(422	)
	NYMEX-WTI	Jan - June 2019		1,000	$	57.70			(365	)
	NYMEX-WTI	Jan - Dec 2019		1,000	$	56.75			(701	)
	NYMEX-WTI	Apr - June 2019		2,000	$	58.21			(173	)
	NYMEX-WTI	July - Sep 2019		1,000	$	57.75			(34	)
	NYMEX-WTI	Apr 2018-Mar 2020		1,000	$	60.05			(88	)

⁽¹⁾	Represents swap contracts that fix the basis differentials for gas sold at or near Opal, Wyoming and the value of natural gas established on the last trading day of the month by the NYMEX for natural gas swaps for the respective period.

Subsequent to March 31, 2018 and through April 25, 2018, the Company has entered into the following open commodity derivative contracts to manage commodity price risk.

Type	Commodity Reference Price	Remaining Contract Period	Volume - MMBTU/Day		Average Price /MMBTU
Natural Gas
Fixed price swaps
	NYMEX-Henry Hub	Nov 2018-Mar 2019		50,000	$	2.98
	NYMEX-Henry Hub	Apr 2019-Mar 2020		50,000	$	2.77
Type	Commodity Reference Price	Remaining Contract Period	Volume - MMBTU/Day		Average Differential /MMBTU
Natural Gas
Basis swap contracts (1)
	NW Rockies Basis Swap	May-Oct 2018		70,000	$	(0.77	)
	NW Rockies Basis Swap	May-Dec 2018		70,000	$	(0.78	)
	NW Rockies Basis Swap	Dec 2018-Mar 2019		90,000	$	(0.69	)
	NW Rockies Basis Swap	Jan - Mar 2019		40,000	$	(0.71	)
Type	Commodity Reference Price	Remaining Contract Period	Volume - Bbls/Day		Average Price /Bbls
Crude Oil
Fixed price swaps
	NYMEX-WTI	May-June 2018		500	$	64.88
	NYMEX-WTI	June 2018		400	$	66.40
	NYMEX-WTI	July-Sep 2018		500	$	65.23
	NYMEX-WTI	Oct-Dec 2018		500	$	63.25
	NYMEX-WTI	July-Sep 2019		1,000	$	59.80

⁽¹⁾	Represents swap contracts that fix the basis differentials for gas sold at or near Opal, Wyoming and the value of natural gas established on the last trading day of the month by the NYMEX for natural gas swaps for the respective period.

The following table summarizes the pre-tax realized and unrealized gain (loss) the Company recognized related to its derivative instruments in the Consolidated Statements of Operations for the quarters ended March 31, 2018 and 2017:

	For the Quarter Ended
	Ended March 31,
Commodity Derivatives:	2018			2017
Realized gain on commodity derivatives - natural gas (1)	$	1,446		$	—
Realized loss on commodity derivatives - oil (1)		(370	)		—
Unrealized loss on commodity derivatives (1)		(7,606	)		(13,218	)
Total loss on commodity derivatives	$	(6,530	)	$	(13,218	)

⁽¹⁾	Included in Loss on commodity derivatives in the Consolidated Statements of Operations.

The realized gain or loss on commodity derivatives relates to actual amounts received or paid or to be received or paid under the Company’s derivative contracts and the unrealized gain or loss on commodity derivatives represents the change in the fair value of these derivative instruments over the remaining term of the contract.