The Company is exposed to certain risks relating to its ongoing business operations, and it uses derivative instruments to manage its commodity price risk. In addition, the Company periodically enters into contracts that contain embedded features that are required to be bifurcated and accounted for separately as derivatives.

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 three months ended March 31, 2021 and 2022. 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’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 March 31, 2022, the Company’s fixed price swap positions excluding Martica, the Company’s consolidated VIE, were as follows:


				Weighted
				Average
Commodity / Settlement Period	Index	Contracted Volume		Price
Natural Gas
April-December 2022	Henry Hub	1,138,988	MMBtu/day	$	2.49	/MMBtu
January-December 2023	Henry Hub	43,000	MMBtu/day		2.37	/MMBtu

In addition, the Company has a swaption agreement, which entitles the counterparty 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 March 31, 2022, 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 Average
Commodity / Settlement Period	Index to Basis Differential	Contracted Volume		Hedged Differential
Natural Gas
April-December 2022	NYMEX to TCO	60,000	MMBtu/day	$	0.515	/MMBtu
January-December 2023	NYMEX to TCO	50,000	MMBtu/day		0.525	/MMBtu
January-December 2024	NYMEX to TCO	50,000	MMBtu/day		0.530	/MMBtu

As of March 31, 2022, the Company’s fixed price swap positions for Martica, the Company’s consolidated VIE, were as follows:


				Weighted
				Average
Commodity / Settlement Period	Index	Contracted Volume		Price
Natural Gas
April-December 2022	Henry Hub	40,651	MMBtu/day	$	2.39	/MMBtu
January-December 2023	Henry Hub	35,616	MMBtu/day		2.35	/MMBtu
January-December 2024	Henry Hub	23,885	MMBtu/day		2.33	/MMBtu
January-March 2025	Henry Hub	18,021	MMBtu/day		2.53	/MMBtu

Propane
April-December 2022	Mont Belvieu Propane-OPIS Non-TET	974	Bbl/day	$	19.32	/Bbl

Natural Gasoline
April-December 2022	Mont Belvieu Natural Gasoline-OPIS Non-TET	294	Bbl/day	$	34.86	/Bbl
January-December 2023	Mont Belvieu Natural Gasoline-OPIS Non-TET	247	Bbl/day		40.74	/Bbl

Oil
April-December 2022	West Texas Intermediate	113	Bbl/day	$	43.44	/Bbl
January-December 2023	West Texas Intermediate	99	Bbl/day		44.88	/Bbl
January-December 2024	West Texas Intermediate	43	Bbl/day		44.02	/Bbl
January-March 2025	West Texas Intermediate	39	Bbl/day		45.06	/Bbl

(b)	Embedded Derivatives

The VPP includes an embedded put option tied to NYMEX pricing for the production volumes associated with the Company’s retained interest in the VPP properties of 83,438,000 MMBtu remaining through December 31, 2026 at a weighted average strike price of $2.54 per MMBtu. The embedded put option is not clearly and closely related to the host contract, and therefore, the Company bifurcated this derivative instrument and reflected it at fair value in the unaudited condensed consolidated financial statements.

(c)

Summary

The table below presents a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the condensed consolidated balance sheets (in thousands).


				(Unaudited)
	Balance Sheet	December 31,		March 31,
	Location	2021		2022
Asset derivatives not designated as hedges for accounting purposes:
Commodity derivatives—current	Derivative instruments	$	—		—
Embedded derivatives—current	Derivative instruments		757		263
Commodity derivatives—noncurrent	Derivative instruments		—		—
Embedded derivatives—noncurrent	Derivative instruments		14,369		10,516

Total asset derivatives ⁽¹⁾			15,126		10,779

Liability derivatives not designated as hedges for accounting purposes:
Commodity derivatives—current ⁽²⁾	Derivative instruments		559,851		1,152,299
Commodity derivatives—noncurrent ⁽²⁾	Derivative instruments		181,806		311,005

Total liability derivatives ⁽¹⁾			741,657		1,463,304

Net derivatives liability ⁽¹⁾		$	(726,531)		(1,452,525)

(1)	The fair value of derivative instruments was determined using Level 2 inputs.

(2)

As of December 31, 2021, approximately $55 million of commodity derivative liabilities, including $31 million of current commodity derivatives and $24 million of noncurrent commodity derivatives, are attributable to the Company’s consolidated VIE, Martica. As of March 31, 2022, approximately $100 million of commodity derivative liabilities, including $66 million of current commodity derivatives and $34 million of noncurrent commodity derivatives, are attributable to the Company’s consolidated VIE, Martica.

The following table sets forth 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 condensed consolidated balance sheets as of the dates presented, all at fair value (in thousands):


							(Unaudited)
	December 31, 2021						March 31, 2022
					Net Amounts of						Net Amounts of
	Gross		Gross		Assets		Gross		Gross		Assets
	Amounts		Amounts Offset		(Liabilities) on		Amounts		Amounts Offset		(Liabilities) on
	Recognized		Recognized		Balance Sheet		Recognized		Recognized		Balance Sheet
Commodity derivative assets	$	2,177		(2,177)		—		320		(320)		—
Embedded derivative assets	$	15,126		—		15,126		10,779		—		10,779
Commodity derivative liabilities	$	(743,834)		2,177		(741,657)		(1,463,624)		320		(1,463,304)

The following table sets forth a summary of derivative fair value gains and losses and where such values are recorded in the unaudited condensed consolidated statements of operations (in thousands):


	Statement of
	Operations	Three Months Ended March 31,
	Location	2021		2022
Commodity derivative fair value losses ⁽¹⁾	Revenue	$	(169,967)		(994,483)
Embedded derivative fair value losses ⁽¹⁾	Revenue	$	(7,789)		(16,897)

(1)	The fair value of derivative instruments was determined using Level 2 inputs.