Derivatives

3 Months Ended

Mar. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We utilize derivatives, such as swaps, puts, calls and collars, to hedge a portion of our forecasted oil and gas production and gas purchases to reduce exposure to fluctuations in oil and natural gas prices, which addresses our market risk. In addition to the hedging requirements of the 2021 RBL Facility, we target covering our operating expenses and a majority of our fixed charges, which includes capital needed to sustain production levels, as well as interest and fixed dividends as applicable, with the oil and gas sales hedges for a period of up to three years out. Additionally, we target fixing the price for a large portion of our natural gas purchases used in our steam operations for up to three years. We have also entered into Utah gas transportation contracts to help reduce the price fluctuation exposure, however these do not qualify as hedges. We also, from time to time, have entered into agreements to purchase a portion of the natural gas we require for our operations, which we do not record at fair value as derivatives because they qualify for normal purchases and normal sales exclusions. We had no such transactions in the periods presented.

For fixed-price oil and gas sales swaps, we are the seller, so we make settlement payments for prices above the indicated weighted-average price per barrel and per mmbtu, respectively, and receive settlement payments for prices below the indicated weighted-average price per barrel and per mmbtu, respectively.

For our long put spreads, in addition to any deferred premium payments, we would receive settlement payments for prices below the indicated highest price of the long put with the maximum payment received per barrel equal to the difference between the indicated prices of the long and short put. No payment would be made or received for prices above the highest indicated price of the long put. The short put spreads offset the long put spreads.

For our purchased oil puts, we would receive settlement payments for prices below the indicated weighted-average price per barrel of Brent. For some of our options we paid or received a premium at the time the positions were created and for others, the premium payment or receipt is deferred until the time of settlement. As of March 31, 2022 we have net payable deferred premiums of approximately $14 million, which is reflected in the mark-to-market valuation and will be payable beginning in 2022 through 2024, in approximately the same amount each year.

For our sold oil calls, we would make settlement payments for prices above the indicated weighted-average price. No payment would be due for prices below the indicated weighted-average price.

For our purchased gas calls, we would receive settlement payments for prices above the indicated weighted-average price. No payment would be received for prices below the indicated weighted-average price.

For our sold oil and gas puts, we would make settlement payments for prices below the indicated weighted-average price. No payment would be due for prices above the indicated weighted-average price.

We use oil and gas production hedges to protect our sales against decreases in oil and gas prices. We also use natural gas purchase hedges to protect our natural gas purchases against increases in prices. We do not enter into derivative contracts for speculative trading purposes and have not accounted for our derivatives as cash-flow or fair-value hedges. The changes in fair value of these instruments are recorded in current earnings. Gains (losses) on oil and gas sales hedges are classified in the revenues and other section of the statement of operations, while natural gas purchase hedges are included in expenses and other section of the statement of operations.

As of March 31, 2022, we had the following hedges for our crude oil production and natural gas purchases.


	Q2 2022		Q3 2022		Q4 2022		FY 2023		FY 2024
Brent - Crude Oil production
Swaps
Hedged volume (bbls)	1,299,500		1,288,000		1,196,000		3,420,750		1,917,000
Weighted-average price ($/bbl)	$	75.92	$	75.97	$	74.05	$	72.98	$	75.52

Put Spreads
Long $50/$40 Put Spread hedged volume (bbls)	409,500		414,000		414,000		2,555,000		1,647,000
Short $50/$40 Put Spread hedged volume (bbls)	45,500		46,000		46,000		365,000		366,000

Producer Collars hedged volume (bbls)	—		—		—		1,460,000		1,098,000
Weighted-average price ($/bbl)	—		—		—		$40.00/$106.00		$40.00/$105.00



Henry Hub - Natural Gas purchases



Consumer Collars
Hedged volume (mmbtu)	2,730,000		2,760,000		2,760,000		10,950,000		9,150,000
Weighted-average price ($/mmbtu)	$4.00/$2.75		$4.00/$2.75		$4.00/$2.75		$4.00/$2.75		$4.00/$2.75

In April we added consumer collars (Henry Hub) of 300,000 mmbtu for the second quarter of 2022 and 1,840,000 mmbtu for the second half of 2022 at $4.00/$2.75. We terminated consumer collars (Henry Hub) of 5,520,000 mmbtu for 2023 and 9,150,000 mmbtu for 2024 at $4.00/$2.75, resulting in a net cash impact of less than $1 million.

We sold fixed price oil swaps (Brent) of 245,000 bbls at $102.36 for May 2022 through December 2022 and 12,778 bbls at $93.10 for 2023.

Our commodity derivatives are measured at fair value using industry-standard models with various inputs including publicly available underlying commodity prices and forward curves, and all are classified as Level 2 in the required fair value hierarchy for the periods presented. These commodity derivatives are subject to counterparty netting. The following tables present the fair values (gross and net) of our outstanding derivatives as of March 31, 2022 and December 31, 2021:


	March 31, 2022
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value		Gross Amounts Offset in the Balance Sheet		Net Fair Value Presented in the Balance Sheet
	(in thousands)
Assets:
Commodity Contracts	Current assets	$	23,513	$	(23,513)	$	—
Commodity Contracts	Non-current assets	43,081		(43,081)		—
Liabilities:
Commodity Contracts	Current liabilities	(115,985)		23,513		(92,472)
Commodity Contracts	Non-current liabilities	(99,289)		43,081		(56,208)
Total derivatives		$	(148,680)	$	—	$	(148,680)


	December 31, 2021
	Balance Sheet Classification	Gross Amounts Recognized at Fair Value		Gross Amounts Offset in the Balance Sheet		Net Fair Value Presented in the Balance Sheet
	(in thousands)
Assets:
Commodity Contracts	Current assets	$	5,360	$	(5,360)	$	—
Commodity Contracts	Non-current assets	29,828		(28,758)		1,070
Liabilities:
Commodity Contracts	Current liabilities	(34,985)		5,360		(29,625)
Commodity Contracts	Non-current liabilities	(47,335)		28,758		(18,577)
Total derivatives		$	(47,132)	$	—	$	(47,132)

By using derivative instruments to economically hedge exposure to changes in commodity prices, we expose ourselves to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk. We do not receive collateral from our counterparties.

We minimize the credit risk in derivative instruments by limiting our exposure to any single counterparty. In addition, our 2021 RBL Facility prevents us from entering into hedging arrangements that are secured, except with our lenders and their affiliates that have margin call requirements, that otherwise require us to provide collateral or with a non-lender counterparty that does not have an A or A2 credit rating or better from Standards & Poor’s or Moody’s, respectively. In accordance with our standard practice, our commodity derivatives are subject to counterparty netting under agreements governing such derivatives which partially mitigates the counterparty nonperformance risk.