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Derivative Instruments

6 Months Ended

Jun. 30, 2020

(12) Derivative Instruments

(a)Commodity Derivative Positions

The Company periodically enters into natural gas, NGLs, and oil derivative contracts with counterparties to hedge the price risk associated with its production. These derivatives are not entered into for trading purposes. To the extent that changes occur in the market prices of natural gas, NGLs, and oil, the Company is exposed to market risk on these open contracts. This market risk exposure is generally offset by the change in market prices of natural gas, NGLs, and oil recognized upon the ultimate sale of the Company’s production.

The Company was party to various fixed price commodity swap contracts that settled during the six months ended June 30, 2019 and 2020. The Company enters into these swap contracts when management believes that favorable future sales prices for the Company’s production can be secured. Under these swap agreements, when actual commodity prices upon settlement exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty. When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company receives the difference from the counterparty. In addition, the Company has entered into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (“NYMEX”) index price and a local index price.

The Company also entered into NGL derivative contracts, which establish a contractual price for the settlement month as a fixed percentage of the West Texas Intermediate Crude Oil index (“WTI”) price for the settlement month. When the percentage of the contractual price is above the contracted percentage, the Company pays the difference to the counterparty. When it is below the contracted percentage, the Company receives the difference from the counterparty.

In addition, the Company has also entered into a call option agreement that gives the counterparty the right, but not the obligation, to enter into a fixed price swap agreement on a specified future date for a specific amount of production for a specified future period.

The Company’s derivative contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in the Company’s statements of operations.

As of June 30, 2020, the Company’s fixed price natural gas, oil and NGL swap positions from July 1, 2020 through December 31, 2023 were as follows (abbreviations in the table refer to the index to which the swap position is tied, as follows: NYMEX=Henry Hub; NYMEX-WTI=West Texas Intermediate; ARA Propane =European Propane CIF ARA; OPIS Ethane Mt Belv=Mont Belvieu Purity Ethane-OPIS):


		Natural Gas		Weighted
	Natural gas	Liquids	Oil	average index
	MMBtu/day	Bbls/day	Bbls/day	price
Six months ending December 31, 2020:
NYMEX ($/MMBtu)	2,227,500	—	—	$	2.87
ARA Propane ($/Gal)	—	10,315	—		0.65
OPIS Ethane Mt Belv ($/Gal)	—	24,500	—		0.20
NYMEX-WTI ($/Bbl)	—	—	26,000		55.63
Total	2,227,500	34,815	26,000
Three months ending March 31, 2021
OPIS Ethane Mt Belv ($/Gal)		18,791		$	0.20
Year ending December 31, 2021:
NYMEX ($/MMBtu)	2,400,000		—	$	2.80
NYMEX-WTI ($/Bbl)	—		3,000		55.16
Total	2,400,000		3,000
Year ending December 31, 2022:
NYMEX ($/MMBtu)	1,307,500			$	2.44
Year ending December 31, 2023:
NYMEX ($/MMBtu)	150,000			$	2.38

A portion of the NYMEX-WTI ($/Bbl) in 2020 combined with the Mont Belvieu Natural Gasoline to NYMEX-WTI are intended to fix the price of Natural Gasoline.

In addition, we have a call option agreement, which entitles the holder the right, but not the obligation, to enter into a fixed price swap agreement on December 21, 2023 to purchase 427,500 MMBtu per day at a price of $2.77 per MMBtu for the year ending December 31, 2024.

As of June 30, 2020, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of the Columbia Gas Transmission pipeline (“TCO”) to the NYMEX Henry Hub natural gas price were as follows:


		Weighted
	Natural gas	average hedged
	MMBtu/day	differential
Six months ending December 31, 2020:
NYMEX to TCO ($/MMBtu)	60,000	$	0.353
Year ending December 31, 2021:
NYMEX to TCO ($/MMBtu)	40,000	$	0.414
Year ending December 31, 2022:
NYMEX to TCO ($/MMBtu)	60,000	$	0.515
Year ending December 31, 2023:
NYMEX to TCO ($/MMBtu)	50,000	$	0.525
Year ending December 31, 2024:
NYMEX to TCO ($/MMBtu)	50,000	$	0.530

As of June 30, 2020, the Company had NGL contracts for July 1, 2020 through December 31, 2021 that fix the Mont Belvieu index price for natural gasoline to percentages of WTI as follows:


		Weighted
	Gas	average
	Liquids	Payout
	Bbls/day	Ratio
Six months ending December 31, 2020:
Mont Belvieu Natural Gasoline to NYMEX-WTI	11,800	80	%
Year ending December 31, 2021:
Mont Belvieu Natural Gasoline to NYMEX-WTI	18,650	78	%

A portion of the Mont Belvieu Natural Gasoline to NYMEX-WTI combined with the NYMEX-WTI ($/Bbl) in 2020 are intended to fix the price of Natural Gasoline.

As of June 30, 2020, the Company’s consolidated subsidiary Martica’s fixed price natural gas, oil and NGL swap positions from July 1, 2020 through March 31, 2025 were as follows (abbreviations in the table refer to the index to which the swap position is tied, as follows: NYMEX=Henry Hub; NYMEX-WTI=West Texas Intermediate; OPIS Propane Mt Belv Non-TET = Mont Belvieu Propane-OPIS; OPIS Ethane Mt Belv=Mont Belvieu Purity Ethane-OPIS; OPIS Natural Gasoline Mt Belv Non-TET = Mont Belvieu Natural Gasoline-OPIS):


		Natural Gas		Weighted
	Natural gas	Liquids	Oil	average index
	MMBtu/day	Bbls/day	Bbls/day	price
Six months ending December 31, 2020:
NYMEX ($/MMBtu)	40,217	—	—	$	2.02
OPIS Propane Mt Belv Non-TET	—	951	—		0.49
OPIS Natural Gasoline Mt Belv Non-TET	—	288	—		0.67
OPIS Ethane Mt Belv ($/Gal)	—	617	—		0.20
NYMEX-WTI ($/Bbl)	—	—	118		37.15
Total	40,217	1,856	118
Year ending December 31, 2021:
NYMEX ($/MMBtu)	41,096	—	—	$	2.58
OPIS Propane Mt Belv Non-TET	—	932	—		0.43
OPIS Natural Gasoline Mt Belv Non-TET	—	282	—		0.71
OPIS Ethane Mt Belv ($/Gal)	—	987	—		0.17
NYMEX-WTI ($/Bbl)	—	—	94		38.99
Total	41,096	2,201	94
Three months ending March 31, 2022
OPIS Propane Mt Belv Non-TET	—	379	—		0.43
OPIS Natural Gasoline Mt Belv Non-TET	—	115	—		0.72
OPIS Ethane Mt Belv ($/Gal)	—	521	—		0.16
Total	—	1,015	—
Year ending December 31, 2022:
NYMEX ($/MMBtu)	38,356		—	$	2.39
NYMEX-WTI ($/Bbl)	—		66		40.92
Total	38,356		66
Year ending December 31, 2023:
NYMEX ($/MMBtu)	35,616		—	$	2.35
NYMEX-WTI ($/Bbl)	—		52		42.45
Total	35,616		52
Year ending December 31, 2024:
NYMEX ($/MMBtu)	23,885		—	$	2.33
NYMEX-WTI ($/Bbl)	—		43		44.02
Total	23,885		43
Three months ending March 31, 2025:
NYMEX ($/MMBtu)	18,021		—	$	2.53
NYMEX-WTI ($/Bbl)	—		39		45.06
Total	18,021		39

(b)

Summary

The following table presents a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the consolidated balance sheets as of December 31, 2019 and June 30, 2020. None of the Company’s derivative instruments are designated as hedges for accounting purposes and the fair value of derivative instruments was determined using Level 2 inputs.


	December 31, 2019			June 30, 2020
	Balance sheet	Fair value		Balance sheet	Fair value
	location	(In thousands)		location	(In thousands)
Asset derivatives not designated as hedges for accounting purposes:
Commodity derivatives—current	Derivative instruments	$	422,849	Derivative instruments	$	521,459
Commodity derivatives—noncurrent	Derivative instruments		333,174	Derivative instruments		103,514

Total asset derivatives			756,023			624,973

Liability derivatives not designated as hedges for accounting purposes ⁽¹⁾:
Commodity derivatives—current	Derivative instruments		6,721	Derivative instruments		3,652
Commodity derivatives—noncurrent	Derivative instruments		3,519	Derivative instruments		2,558

Total liability derivatives			10,240			6,210

Net derivatives		$	745,783		$	618,763

(1)	Approximately $2 million of commodity derivative liabilities are attributable to our consolidated VIE, Martica.

The following table presents the gross values of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets as of the dates presented, all at fair value (in thousands):


	December 31, 2019						June 30, 2020
	Gross		Gross amounts		Net amounts of		Gross		Gross amounts		Net amounts of
	amounts on		offset on		assets (liabilities)		amounts on		offset on		assets (liabilities)
	balance sheet		balance sheet		on balance sheet		balance sheet		balance sheet		on balance sheet
Commodity derivative assets	$	882,817		(126,794)		756,023	$	782,629		(157,656)		624,973
Commodity derivative liabilities	$	(137,034)		126,794		(10,240)	$	(163,866)		157,656		(6,210)

The following is a summary of derivative fair value gains and losses and where such values are recorded in the unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2019 and 2020 (in thousands):

Statement of

operations

Three months ended June 30,

Six months ended June 30,

location

2019

2020

2019

2020

Commodity derivative fair value gains (losses)

Revenue

328,427

(168,015)

251,059

397,818

In July 2020, the Company monetized certain natural gas derivatives, prior to their contractual settlement dates, for proceeds of approximately $29 million. The monetization reduced the fixed volumes hedged on certain natural gas swap contracts maturing in 2021.