Commodity Derivative Financial Instruments

3 Months Ended

Mar. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Commodity Derivatives And Financial Instruments

COMMODITY DERIVATIVE FINANCIAL INSTRUMENTS

The Partnership’s ongoing operations expose it to changes in the market price for oil and natural gas. To mitigate the inherent commodity price risk associated with its operations, the Partnership uses oil and natural gas commodity derivative financial instruments. From time to time, such instruments may include variable-to-fixed-price swaps, costless collars, fixed-price contracts and other contractual arrangements. The Partnership enters into oil and natural gas derivative contracts that contain netting arrangements with each counterparty. The Partnership does not enter into derivative instruments for speculative purposes.

As of March 31, 2019, the Partnership’s open derivative contracts consisted of fixed-price swap contracts and costless collar contracts. A fixed-price swap contract between the Partnership and the counterparty specifies a fixed commodity price and a future settlement date. A costless collar contract between the Partnership and the counterparty specifies a floor and a ceiling commodity price and a future settlement date. The Partnership has not designated any of its contracts as fair value or cash flow hedges. Accordingly, the changes in the fair value of the contracts are included in the consolidated statement of operations in the period of the change. All derivative gains and losses from the Partnership’s derivative contracts have been recognized in revenue in the Partnership's accompanying consolidated statements of operations. Derivative instruments that have not yet been settled in cash are reflected as either derivative assets or liabilities in the Partnership’s accompanying consolidated balance sheets as of March 31, 2019 and December 31, 2018. See Note 6 – Fair Value Measurements for further discussion.    

The Partnership's derivative contracts expose it to credit risk in the event of nonperformance by counterparties that may adversely impact the fair value of the Partnership's commodity derivative assets. While the Partnership does not require its derivative contract counterparties to post collateral, the Partnership does evaluate the credit standing of such counterparties as deemed appropriate. This evaluation includes reviewing a counterparty’s credit rating and latest financial information. As of March 31, 2019, the Partnership had nine counterparties, all of which are rated Baa1 or better by Moody’s and are lenders under the Credit Facility.

The tables below summarize the fair values and classifications of the Partnership’s derivative instruments, as well as the gross recognized derivative assets, liabilities, and amounts offset in the consolidated balance sheets as of each date:

		March 31, 2019
Classification	Balance Sheet Location	Gross Fair Value		Effect of Counterparty Netting			Net Carrying Value on Balance Sheet
		(in thousands)
Assets:
Current asset	Commodity derivative assets	$	11,221	$	(7,209	)	$	4,012
Long-term asset	Deferred charges and other long-term assets	5,438		(2,348		)	3,090
Total assets		$	16,659	$	(9,557	)	$	7,102
Liabilities:
Current liability	Commodity derivative liabilities	$	9,176	$	(7,209	)	$	1,967
Long-term liability	Commodity derivative liabilities	2,371		(2,348		)	23
Total liabilities		$	11,547	$	(9,557	)	$	1,990

		December 31, 2018
Classification	Balance Sheet Location	Gross Fair Value		Effect of Counterparty Netting			Net Carrying Value on Balance Sheet
		(in thousands)
Assets:
Current asset	Commodity derivative assets	$	38,746	$	(776	)	$	37,970
Long-term asset	Deferred charges and other long-term assets	11,518		(1,450		)	10,068
Total assets		$	50,264	$	(2,226	)	$	48,038
Liabilities:
Current liability	Commodity derivative liabilities	$	776	$	(776	)	$	—
Long-term liability	Commodity derivative liabilities	1,450		(1,450		)	—
Total liabilities		$	2,226	$	(2,226	)	$	—

Changes in the fair values of the Partnership’s derivative instruments (both assets and liabilities) are presented on a net basis in the accompanying consolidated statements of operations and consolidated statements of cash flows and consist of the following for the periods presented:

	Three Months Ended March 31,
Derivatives not designated as hedging instruments	2019			2018
	(in thousands)
Beginning fair value of commodity derivative instruments	$	48,038		$	(5,028	)
Gain (loss) on oil derivative instruments	(39,261		)	(14,476		)
Gain (loss) on natural gas derivative instruments	(1,922		)	(1,857		)
Net cash paid (received) on settlements of oil derivative instruments	(4,555		)	5,148
Net cash paid (received) on settlements of natural gas derivative instruments	2,812			(773		)
Net change in fair value of commodity derivative instruments	(42,926		)	(11,958		)
Ending fair value of commodity derivative instruments	$	5,112		$	(16,986	)

The Partnership had the following open derivative contracts for oil as of March 31, 2019:

		Weighted Average Price (Per Bbl)		Range (Per Bbl)
Period and Type of Contract	Volume (Bbl)			Low		High
Oil Swap Contracts:
2019
First Quarter	255,000	$	58.54	$	52.82	$	65.58
Second Quarter	855,000	58.72		52.82		65.58
Third Quarter	855,000	58.37		52.82		63.75
Fourth Quarter	855,000	58.37		52.82		63.75
2020
First Quarter	270,000	$	57.87	$	57.46	$	58.65
Second Quarter	270,000	57.87		57.46		58.65
Third Quarter	270,000	57.87		57.46		58.65
Fourth Quarter	270,000	57.87		57.46		58.65

		Weighted Average Floor Price (Per Bbl)		Weighted Average Ceiling Price (Per Bbl)
Period and Type of Contract	Volume (Bbl)
Oil Collar Contracts:
2019
First Quarter	20,000	$	65.00	$	74.00
Second Quarter	60,000	65.00		74.00
Third Quarter	60,000	65.00		74.00
Fourth Quarter	60,000	65.00		74.00
2020
First Quarter	210,000	$	56.43	$	67.14
Second Quarter	210,000	56.43		67.14
Third Quarter	210,000	56.43		67.14
Fourth Quarter	210,000	56.43		67.14

The Partnership had the following open derivative contracts for natural gas as of March 31, 2019:

		Weighted Average Price (Per MMBtu)		Range (Per MMBtu)
Period and Type of Contract	Volume (MMBtu)			Low		High
Natural Gas Swap Contracts:
2019
Second Quarter	14,520,000	$	2.96	$	2.81	$	3.20
Third Quarter	14,640,000	2.96		2.81		3.20
Fourth Quarter	14,640,000	2.96		2.81		3.20
2020
First Quarter	6,370,000	$	2.72	$	2.72	$	2.73
Second Quarter	6,370,000	2.72		2.72		2.73
Third Quarter	6,440,000	2.72		2.72		2.73
Fourth Quarter	6,440,000	2.72		2.72		2.73