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 operations and capital investment program. These types of instruments may include fixed price swaps, costless collars, deferred premium puts 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 otherwise receive from increases in commodity prices above the fixed hedge prices.

Under the Revolving Credit Facility, the Company was subject to minimum hedging requirements through March 31, 2020. As of April 1, 2020, the Company is longer be subject to a minimum hedging requirement.

As a result of the Chapter 11 filing and while in bankruptcy, the terms of the DIP facility and the exit revolving credit facility commitment filed with the Plan limits the Company’s ability to enter into hedges for no more than 25% and 15% of its projected monthly proved developed oil and gas reserve projections in 2020 and 2021, respectively. Following the Company’s emergence from bankruptcy, the terms of the exit revolving credit facility will require the Company to have a rolling hedging requirement, based on the most recently delivered reserve report, of 33% of forecast natural gas production for the immediately succeeding twelve-month period, plus a minimum of 25% of forecast natural gas production for the immediate succeeding six-month period thereafter.

Fair Value of Commodity Derivatives: The Company follows FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”). The Company does not apply hedge accounting to any of its derivative instruments. Instead, in accordance with ASC 815 the derivative contracts are recorded at fair value as derivative assets and liabilities on the condensed consolidated balance sheets and the associated unrealized gains and losses are recorded as current income or expense on the condensed consolidated statements of operations. The Company does not offset the value of its derivative arrangements with the same counterparty. 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 condensed consolidated statements of cash flows.

Commodity Derivative Contracts: At March 31, 2020, the Company had open commodity derivative contracts to manage commodity price risks as presented in the table below. 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. For the collars, the Company pays the counterparty if the market price is above the ceiling price and the counterparty pays if the market price is below the floor price on a notional quantity. For deferred premium puts, the Company pays the deferred premium in the month of settlement. To the extent the market price is below the put price, the counterparty owes the Company the difference between the market price and put price in the period of settlement. The reference prices of these commodity derivative contracts are typically referenced to index prices as published by independent third parties. Refer to Note 10 – Fair Value Measurements for more information regarding the fair value of the Company’s derivative instruments.

The table below reflects the commodity derivative contracts that were outstanding as of March 31, 2020. Subsequent to March 31, 2020, the Company received $8.3 million and $6.5 million in April and May respectively, from the scheduled settlements of derivatives. Additionally, subsequent to March 31, 2020 and prior to its Chapter 11 filing, the Company monetized all of its remaining derivative contracts and received proceeds of approximately $12.8 million. The actual amounts realized differed from the fair values as of March 31, 2020, due to different commodity prices at the time of settlement.

Type/Year

Index

Total Volumes

Weighted Average Price per Unit

Fair Value -

March 31, 2020

(in millions)

Asset (Liability)

Crude oil fixed price swaps

(Bbl)

($/Bbl)

2020 (April through September)

NYMEX-WTI

0.2

59.79

7,960

Type/Year	Index	Total Volumes		Weighted Average Floor Price ($/MMBTU)			Weighted Average Ceiling Price ($/MMBTU)			Fair Value - March 31, 2020
		(in millions)								Asset (Liability)
Natural gas collars		(Mmbtu)
2020 (April through December)	NYMEX		57.4		$	2.39		$	2.87		$	26,255
2021	NYMEX		7.2		$	2.46		$	3.05		$	(180	)

Natural gas deferred premium put options (1)		(Mmbtu)
2020 (April through December)	NYMEX		13.4		$	2.42		N/A			$	5,360

(1)

The natural gas deferred premium put options include an average deferred premium cost of $0.13.

The following table summarizes the pre-tax realized and unrealized gain (loss) the Company recognized related to its derivative instruments in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019:

	For the Three Months
	Ended March 31,
Commodity Derivatives (in thousands):	2020		2019
Realized gain on commodity derivatives - natural gas (1)	$	11,452	$	(81,203	)
Realized gain on commodity derivatives - oil (1)		4,897		2,572
Unrealized gain on commodity derivatives (1)		27,945		14,292
Total gain (loss) on commodity derivatives	$	44,294	$	(64,339	)

(1)

Included in Gain (Loss) on commodity derivatives in the condensed consolidated statements of operations.