Derivatives

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

NOTE 9: Derivatives

The Company has entered into commodity price derivative agreements, including fixed swap contracts and costless collar contracts. These instruments are intended to reduce the Company’s exposure to short-term fluctuations in the price of natural gas and oil. Fixed swap contracts set a fixed price and provide payments to the Company if the index price is below the fixed price, or require payments by the Company if the index price is above the fixed price. Collar contracts set a fixed floor price and a fixed ceiling price and provide payments to the Company if the index price falls below the floor or require payments by the Company if the index price rises above the ceiling. These contracts cover only a portion of the Company’s natural gas and oil production and provide only partial price protection against declines in natural gas and oil prices. The Company’s derivative contracts are currently with BP Energy Company (“BP”). The derivative contracts with BP are secured under the Credit Facility with Independent Bank (see Note 5: Long-Term Debt). The derivative instruments have settled or will settle based on the prices below:

Derivative Contracts in Place as of September 30, 2023

Calendar Period	Contract total volume	Index	Contract average price
Natural gas costless collars
2023	225,000 Mmbtu	NYMEX Henry Hub	$3.23 floor / $5.47 ceiling
2024	1,455,000 Mmbtu	NYMEX Henry Hub	$3.57 floor / $5.58 ceiling
2025	540,000 Mmbtu	NYMEX Henry Hub	$3.21 floor / $5.15 ceiling
Natural gas fixed price swaps
2023	565,000 Mmbtu	NYMEX Henry Hub	$3.39
2024	2,172,500 Mmbtu	NYMEX Henry Hub	$3.40
2025	180,000 Mmbtu	NYMEX Henry Hub	$4.16
Oil costless collars
2024	23,450 Bbls	NYMEX WTI	$64.11 floor / $76.28 ceiling
Oil fixed price swaps
2023	19,750 Bbls	NYMEX WTI	$74.79
2024	16,350 Bbls	NYMEX WTI	$67.69
2025	7,800 Bbls	NYMEX WTI	$66.03

Derivative Settlements during the Three Months Ended September 30, 2023

				Settlement
Contract period (1)	Production volume	Index	Contract price	(paid) received
Natural gas costless collars
July - September 2023	20,000 Mmbtu	NYMEX Henry Hub	$3.00 floor / $4.70 ceiling	$	26,980
July - September 2023	75,000 Mmbtu	NYMEX Henry Hub	$3.50 floor / $7.00 ceiling	$	213,675
Natural gas fixed price swaps
July - September 2023	100,000 Mmbtu	NYMEX Henry Hub	$3.37	$	245,900
July - September 2023	20,000 Mmbtu	NYMEX Henry Hub	$3.57	$	61,180
July - September 2023	20,000 Mmbtu	NYMEX Henry Hub	$3.58	$	61,780
July - September 2023	50,000 Mmbtu	NYMEX Henry Hub	$2.52	$	(4,550	)
Oil costless collars
June 2023	2,500 Bbls	NYMEX WTI	$75.00 floor / $96.00 ceiling	$	11,815
Oil fixed price swaps
June -August 2023	1,500 Bbls	NYMEX WTI	$67.55	$	(37,470	)
June -August 2023	750 Bbls	NYMEX WTI	$70.05	$	(13,110	)
June -August 2023	1,500 Bbls	NYMEX WTI	$80.80	$	22,155
June -August 2023	1,000 Bbls	NYMEX WTI	$80.74	$	14,590
			Total (paid) received	$	602,945

(1) Natural gas derivatives settle at first of the month pricing and oil derivatives settle at a monthly daily average.

The Company has elected not to complete all of the documentation requirements necessary to permit these derivative contracts to be accounted for as cash flow hedges. The Company’s fair value of derivative contracts was a net asset of $346,928 as of September 30, 2023, and a net liability of $1,392,689 as of December 31, 2022. Cash receipts or payments in the following table reflect the gain or loss on derivative contracts which settled during the respective periods, and the non-cash gain or loss reflect the change in fair value of derivative contracts as of the end of the respective periods.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2023			2022			2023			2022
Cash received (paid) on derivative contracts:
Natural gas costless collars	$	240,655		$	(1,072,565	)	$	1,431,565		$	(1,878,250	)
Natural gas fixed price swaps(1)		364,310			(3,675,012	)		1,023,900			(7,712,908	)
Oil costless collars		11,815			-			24,330			-
Oil fixed price swaps(1)		(13,835	)		(1,190,739	)		(197,488	)		(3,228,071	)
Cash received (paid) on derivative contracts, net	$	602,945		$	(5,938,316	)	$	2,282,307		$	(12,819,229	)
Non-cash gain (loss) on derivative contracts:
Natural gas costless collars	$	(146,476	)	$	(586,104	)	$	(51,630	)	$	(1,124,929	)
Natural gas fixed price swaps		76,754			(599,261	)		1,729,053			(6,432,653	)
Oil costless collars		(225,028	)		145,067			(173,634	)		106,157
Oil fixed price swaps		(645,842	)		2,680,000			(137,917	)		601,408
Non-cash gain (loss) on derivative contracts, net	$	(940,592	)	$	1,639,702		$	1,365,872		$	(6,850,017	)
Gains (losses) on derivative contracts, net	$	(337,647	)	$	(4,298,614	)	$	3,648,179		$	(19,669,246	)

(1) For the nine months ended September 30, 2023, excludes $373,745 of cash paid to settle off-market derivative contracts that are not reflected on the Condensed Statements of Operations. For the three and nine months ended September 30, 2022, excludes $1,057,198 and $4,834,703, respectively, of cash paid to settle off-market derivative contracts that are not reflected on the Condensed Statements of Operations. Total cash paid related to off-market derivatives was $560,162 and $14,857,682, respectively, for the nine months ended September 30, 2023 and 2022 and is reflected in the Financing Activities section of the Condensed Statements of Cash Flows.

The fair value amounts recognized for the Company’s derivative contracts executed with the same counterparty under a master netting arrangement may be offset. The Company has the choice of whether or not to offset, but that choice must be applied consistently. A master netting arrangement exists if the reporting entity has multiple contracts with a single counterparty that are subject to a contractual agreement that provides for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract. Offsetting the fair values recognized for the derivative contracts outstanding with a single counterparty results in the net fair value of the transactions being reported as an asset or a liability in the Company’s balance sheets.

The following table summarizes and reconciles the Company’s derivative contracts’ fair values at a gross level back to net fair value presentation on the Company’s balance sheets at September 30, 2023 and December 31, 2022. The Company has offset all amounts subject to master netting agreements in the Company's balance sheets at September 30, 2023 and December 31, 2022.

	September 30, 2023												December 31, 2022
	Fair Value (a)												Fair Value (a)
	Commodity Contracts												Commodity Contracts
	Current Assets			Current Liabilities			Non-Current Assets			Non-Current Liabilities			Current Assets			Current Liabilities			Non-Current Assets			Non-Current Liabilities
Gross amounts recognized	$	1,439,519		$	862,138		$	391,646		$	622,099		$	908,001		$	2,442,035		$	627,664		$	486,319
Offsetting adjustments		(862,138	)		(862,138	)		(391,646	)		(391,646	)		(908,001	)		(908,001	)		(486,319	)		(486,319	)
Net presentation on condensed balance sheets	$	577,381		$	-		$	-		$	230,453		$	-		$	1,534,034		$	141,345		$	-

(a) See Note 10: Fair Value Measurements for further disclosures regarding fair value of financial instruments.

The fair value of derivative assets and derivative liabilities is adjusted for credit risk. The impact of credit risk was immaterial for all periods presented.