10. Derivative Instruments

Commodity Derivative Instruments

The Company uses commodity derivative instruments to reduce its exposure to commodity price volatility for a portion of its forecasted production and thereby achieve a more predictable level of cash flows to support the Company’s capital expenditure program and fixed costs.

The Company does not enter into derivative instruments for speculative or trading purposes. The Company’s commodity derivative instruments consist of price swaps, three-way collars, basis swaps, and purchased and sold call options, which are described below.

Price Swaps: The Company receives a fixed price and pays an index price to the counterparty over specified periods for contracted volumes.

Three-Way Collars: A three-way collar is a combination of options including a purchased put option (fixed floor price), a sold call option (fixed ceiling price) and a sold put option (fixed sub-floor price). These contracts offer a higher fixed ceiling price relative to a costless collar but limit the Company’s protection from decreases in commodity prices below the fixed floor price. At settlement, if the published index price is between the fixed floor price and the fixed sub-floor price or is above the fixed ceiling price, the Company receives the fixed floor price or pays the index price, respectively. If the index price is below the fixed sub-floor price, the Company receives the index price plus the difference between the fixed floor price and the fixed sub-floor price. If the index price is between the fixed floor price and fixed ceiling price, no payments are due from either party. The Company has incurred premiums on certain of these contracts in order to obtain a higher floor price and/or ceiling price.

Basis Swaps: Basis swaps fix the price differential between a published index price and the applicable local index price under which our production is sold. For the Company’s Permian oil production, the basis swaps fix the price differential between the Midland WTI price and the Cushing WTI price and for the Company’s Eagle Ford oil production, the basis swaps fix the price differential between the LLS price and the Cushing WTI price.

Sold Call Options: These contracts give the counterparty the right, but not the obligation, to buy contracted volumes from the Company over specified periods and prices in the future. At settlement, if the index price exceeds the fixed price of the call option, the Company pays the counterparty the excess. If the index price settles below the fixed price of the call option, no payment is due from either party. These contracts require the counterparty to pay premiums to the Company that represent the fair value of the call option as of the date of sale. All of the Company’s natural gas sold call options were executed contemporaneously with certain crude oil price swaps to increase the fixed price on those crude oil price swaps. Those certain crude oil price swaps settled prior to 2018.

Purchased Call Options: These contracts give the Company the right, but not the obligation, to buy contracted volumes from the counterparty over specified periods and prices in the future. At settlement, if the index price exceeds the fixed price of the call option, the counterparty pays the Company the excess. If the index price settles below the fixed price of the call option, no payment is due from either party. These contracts require the Company to pay premiums to the counterparty that represent the fair value of the call option as of the date of purchase. All of the Company’s purchased crude oil call options were executed contemporaneously with sold crude oil call options to increase the fixed price on a portion of the existing sold crude oil call options and therefore are presented on a net basis as “Net Sold Call Options” in the table below.

Premiums: In order to increase the fixed price on a portion of the Company’s existing sold call options, the Company incurred premiums on its purchased call options. Additionally, in order to obtain a higher floor price and/or ceiling price, the Company incurred premiums on certain of its three-way collars. Payment of these premiums are deferred until the applicable contracts settle on a monthly basis throughout the term of the contract or, in some cases, during the final 12 months of the contract and are referred to as deferred premium obligations.

The following table sets forth a summary of the Company’s outstanding crude oil derivative positions as of June 30, 2018 at weighted average contract prices:



Period	Type of Contract	Index	Volumes (Bbls/d)	Fixed Price ($/Bbl)			Sub-Floor Price ($/Bbl)		Floor Price ($/Bbl)		Ceiling Price ($/Bbl)
2018
Q3-Q4	Price Swaps	NYMEX WTI	6,000		$49.55			$—		$—		$—
Q3-Q4	Three-Way Collars	NYMEX WTI	24,000	—			39.38		49.06		60.14
Q3-Q4	Basis Swaps	LLS-Cushing WTI ⁽¹⁾	18,000	5.11			—		—		—
Q3-Q4	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	6,000	(0.10		)	—		—		—
Q3-Q4	Net Sold Call Options	NYMEX WTI	3,388	—			—		—		71.33
2019
Q1-Q4	Three-Way Collars	NYMEX WTI	15,000	—			41.00		49.72		62.48
Q1-Q2	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	3,000	(3.83		)	—		—		—
Q3	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	3,500	(4.18		)	—		—		—
Q4	Basis Swaps	Midland WTI-Cushing WTI ⁽²⁾	6,000	(3.71		)	—		—		—
Q1-Q4	Net Sold Call Options	NYMEX WTI	3,875	—			—		—		73.66
2020
Q1-Q4	Net Sold Call Options	NYMEX WTI	4,575	—			—		—		75.98


(1)	The index price paid under these basis swaps is LLS and the index price received is Cushing WTI plus the fixed price differential.


(2)	The index price paid under these basis swaps is Midland WTI and the index price received is Cushing WTI less the fixed price differential.

The following table sets forth a summary of the Company’s outstanding NGL derivative positions as of June 30, 2018 at weighted average contract prices:



Period	Type of Contract	Index	Volumes (Bbls/d)	Fixed Price ($/Bbl)
2018
Q3-Q4	Price Swaps	Ethane - OPIS Mont Belvieu Non-TET	2,200		$12.01
Q3-Q4	Price Swaps	Propane - OPIS Mont Belvieu Non-TET	1,500	34.23
Q3-Q4	Price Swaps	Butane - OPIS Mont Belvieu Non-TET	200	38.85
Q3-Q4	Price Swaps	Isobutane - OPIS Mont Belvieu Non-TET	600	38.98
Q3-Q4	Price Swaps	Natural Gasoline - OPIS Mont Belvieu Non-TET	600	55.23

The following table sets forth a summary of the Company’s outstanding natural gas derivative positions as of June 30, 2018 at weighted average contract prices:



Period	Type of Contract	Index	Volumes (MMBtu/d)	Fixed Price ($/MMBtu)		Ceiling Price ($/MMBtu)
2018
Q3-Q4	Price Swaps	NYMEX HH	25,000		$3.01		$—
Q3-Q4	Sold Call Options	NYMEX HH	33,000	—		3.25
2019
Q1-Q4	Sold Call Options	NYMEX HH	33,000	—		3.25
2020
Q1-Q4	Sold Call Options	NYMEX HH	33,000	—		3.50

The Company typically has numerous hedge positions that span several time periods and often result in both commodity derivative asset and liability positions held with that counterparty. The Company nets its commodity derivative instrument fair values executed with the same counterparty, along with deferred premium obligations, to a single asset or liability pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract.

Counterparties to the Company’s commodity derivative instruments who are also lenders under the Company’s credit agreement (“Lender Counterparty”) allow the Company to satisfy any need for margin obligations associated with commodity derivative instruments where the Company is in a net liability position with the Lender Counterparty with the collateral securing the credit agreement, thus eliminating the need for independent collateral posting. Counterparties to the Company’s commodity derivative instruments who are not lenders under the Company’s credit agreement (“Non-Lender Counterparty”) can require commodity derivative instruments where the Company’s net liability position exceeds the Company’s unsecured credit limit with the Non-Lender Counterparty to be novated to a Lender Counterparty and therefore do not require the posting of cash collateral.

Because each Lender Counterparty has an investment grade credit rating and the Company has obtained a guaranty from each Non-Lender Counterparty’s parent company which has an investment grade credit rating, the Company believes it does not have significant credit risk and accordingly does not currently require its counterparties to post collateral to support the net asset positions of its commodity derivative instruments. Although the Company does not currently anticipate nonperformance from its counterparties, it continually monitors the credit ratings of each Lender Counterparty and each Non-Lender Counterparty’s parent company.

Contingent Consideration Arrangements

In connection with the ExL Acquisition and in each of the divestitures of the Company’s assets in the Niobrara in the first quarter of 2018 and the Marcellus and Utica in the fourth quarter of 2017, the Company agreed to contingent consideration arrangements that could allow the Company to receive or be required to pay certain amounts if commodity prices are above specific thresholds, which are summarized in the table below. See “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” included in this Quarterly Report on Form 10-Q as well as “Note 3. Acquisitions and Divestitures of Oil and Gas Properties” included in the 2017 Annual Report for details of the ExL Acquisition and each of the divestitures discussed above.



			Contingent Receipt (Payment) - Annual			Contingent Receipt (Payment) - Aggregate Limit
Contingent Consideration Arrangements	Years	Threshold ⁽¹⁾	(In thousands)
Contingent ExL Consideration	2018	$50.00		($50,000	)
	2019	50.00	(50,000		)
	2020	50.00	(50,000		)
	2021	50.00	(50,000		)		($125,000	)

Contingent Niobrara Consideration	2018	$55.00		$5,000
	2019	55.00	5,000
	2020	60.00	5,000			—

Contingent Marcellus Consideration	2018	$3.13		$3,000
	2019	3.18	3,000
	2020	3.30	3,000				$7,500

Contingent Utica Consideration	2018	$50.00		$5,000
	2019	53.00	5,000
	2020	56.00	5,000			—

(1)

The price used to determine whether the specific threshold for each year has been met is the average daily closing spot price of a barrel of West Texas Intermediate crude oil as measured by the U.S. Energy Information Administration for the Contingent ExL Consideration, Contingent Niobrara Consideration, and Contingent Utica Consideration and the average settlement price of a MMBtu of Henry Hub natural gas for the next calendar month, as determined on the last business day preceding each calendar month as measured by the CME Group Inc. for the Contingent Marcellus Consideration.

Derivative Assets and Liabilities

All commodity derivative instruments are recorded in the consolidated balance sheets as either an asset or liability measured at fair value. The deferred premium obligations associated with the Company’s commodity derivative instruments are recorded in the period in which they are incurred and are netted with the commodity derivative instrument fair value asset or liability pursuant to the netting arrangements described above. Each of the contingent consideration arrangements discussed above were determined to be embedded derivatives and are recorded in the consolidated balance sheets as either an asset or liability measured at fair value at the acquisition or divestiture date, as well as each subsequent balance sheet date.

The combined derivative instrument fair value assets and liabilities, including deferred premium obligations, recorded in the consolidated balance sheets as of June 30, 2018 and December 31, 2017 are summarized below:



	June 30, 2018
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Commodity derivative instruments		$32,422			($31,259	)		$1,163
Contingent Niobrara Consideration	4,820			—			4,820
Contingent Marcellus Consideration	130			—			130
Contingent Utica Consideration	4,815			—			4,815
Derivative assets		$42,187			($31,259	)		$10,928
Commodity derivative instruments	13,418			(13,418		)	—
Contingent Niobrara Consideration	5,150			—			5,150
Contingent Marcellus Consideration	1,400			—			1,400
Contingent Utica Consideration	5,730			—			5,730
Other assets		$25,698			($13,418	)		$12,280

Commodity derivative instruments		($118,953	)		$21,813			($97,140	)
Deferred premium obligations	(9,446		)	9,446			—
Contingent ExL Consideration	(48,380		)	—			(48,380		)
Derivative liabilities-current		($176,779	)		$31,259			($145,520	)
Commodity derivative instruments	(40,006		)	5,748			(34,258		)
Deferred premium obligations	(7,670		)	7,670			—
Contingent ExL Consideration	(53,675		)	—			(53,675		)
Derivative liabilities-non current		($101,351	)		$13,418			($87,933	)



	December 31, 2017
	Gross Amounts Recognized			Gross Amounts Offset in the Consolidated Balance Sheets			Net Amounts Presented in the Consolidated Balance Sheets
	(In thousands)
Commodity derivative instruments		$4,869			($4,869	)		$—
Derivative assets		$4,869			($4,869	)		$—
Commodity derivative instruments	9,505			(9,505		)	—
Contingent Niobrara Consideration	—			—			—
Contingent Marcellus Consideration	2,205			—			2,205
Contingent Utica Consideration	7,985			—			7,985
Other assets		$19,695			($9,505	)		$10,190

Commodity derivative instruments		($52,671	)		($4,450	)		($57,121	)
Deferred premium obligations	(9,319		)	9,319			—
Derivative liabilities-current		($61,990	)		$4,869			($57,121	)
Commodity derivative instruments	(24,609		)	(2,098		)	(26,707		)
Deferred premium obligations	(11,603		)	11,603			—
Contingent ExL Consideration	(85,625		)	—			(85,625		)
Derivative liabilities-non current		($121,837	)		$9,505			($112,332	)

See “Note 11. Fair Value Measurements” for additional information regarding the fair value of the Company’s derivative instruments.

(Gain) Loss on Derivatives, Net

The Company has elected not to meet the criteria to qualify its commodity derivative instruments for hedge accounting treatment. Therefore, all gains and losses as a result of changes in the fair value of the Company’s commodity derivative instruments, as well as its contingent consideration arrangements, are recognized as “(Gain) loss on derivatives, net” in the consolidated statements of income in the period in which the changes occur. All deferred premium obligations associated with the Company’s commodity derivative instruments are recognized in “(Gain) loss on derivatives, net” in the consolidated statements of income in the period in which the deferred premium obligations are incurred. The effects of commodity derivative instruments, deferred premium obligations and contingent consideration arrangements in the consolidated statements of income for the three and six months ended June 30, 2018 and 2017 are summarized below:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
	(In thousands)
(Gain) Loss on Derivatives, Net
Crude oil derivatives		$53,437			($29,736	)		$82,948			($48,163	)
NGL derivatives	6,564			—			4,799			—
Natural gas derivatives	153			(3,883		)	(2,892		)	(10,719		)
Deferred premium obligations	—			7,554			—			7,501
Contingent ExL Consideration	10,600			—			16,430			—
Contingent Niobrara Consideration	(1,705		)	—			(2,090		)	—
Contingent Marcellus Consideration	205			—			675			—
Contingent Utica Consideration	(1,540		)	—			(2,560		)	—
(Gain) Loss on Derivatives, Net		$67,714			($26,065	)		$97,310			($51,381	)

Cash Received (Paid) for Derivative Settlements, Net

Cash flows are impacted to the extent that settlements of commodity derivatives, including deferred premium obligations, and settlements of contingent consideration arrangements result in cash receipts or payments during the period and are presented as “Cash received (paid) for derivative settlements, net” in the consolidated statements of cash flows. Cash payments made to settle contingent consideration liabilities are classified as cash flows from financing activities up to the divestiture or acquisition date fair value with any excess classified as cash flows from operating activities. For the three and six months ended June 30, 2018 and 2017, the Company did not receive or pay cash for the contingent consideration arrangements. The net cash received (paid) for settlements of commodity derivatives and deferred premium obligations in the consolidated statements of cash flows for the three and six months ended June 30, 2018 and 2017 are summarized below:



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Cash Flows from Operating Activities	(In thousands)
Cash Received (Paid) for Derivative Settlements, Net
Crude oil derivatives		($21,210	)		$409			($33,333	)		$3,441
NGL derivatives	(756		)	—			(1,188		)	—
Natural gas derivatives	488			(104		)	540			(1,253		)
Deferred premium obligations	(2,605		)	(566		)	(4,467		)	(930		)
Cash Received (Paid) for Derivative Settlements, Net		($24,083	)		($261	)		($38,448	)		$1,258