Derivatives

12 Months Ended

Dec. 31, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

12. DERIVATIVES

The Company has entered into fixed swap contracts and costless collar contracts. These instruments are intended to reduce the Company’s exposure to fluctuations in the price of natural gas and oil. 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. 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. These contracts cover only a portion of the Company’s natural gas and oil production, provide only partial price protection against declines in natural gas and oil prices and may limit the benefit of future increases in prices.

On September 2, 2021, the Company settled all of its derivative contracts consisting of both swaps and costless collars with BOKF, NA dba Bank of Oklahoma (“BOKF”) by paying $8.8 million. On September 3, 2021, the Company entered into new derivative contracts with BP Energy Company (“BP”) that had similar terms to the contracts settled with BOKF and received a payment of $8.8 million from BP. The new derivative contracts consisted of all fixed swap contracts and are secured under the Company’s Credit Facility with Independent Bank. Management concluded that the financing element of the new derivative contracts with BP was other than insignificant due to the off-market terms of the fixed swap price. Due to the financing element, the Company is required to report all cash flows associated with these derivative contracts as “cash flows from financing activities” in the statement of cash flows. This requirement relates to all cash flows from these derivatives and not just the portion of the cash flows relating to the financing element of the derivative. The derivative instruments have settled or will settle based on the terms below.

Derivative contracts in place as of December 31, 2023


Fiscal period	Contract total volume	Index	Contract average price
Natural gas costless collars
2024	1,455,000 Mmbtu	NYMEX Henry Hub	$3.57floor/$5.58ceiling
2025	540,000 Mmbtu	NYMEX Henry Hub	$3.21floor/$5.15ceiling
Natural gas fixed price swaps
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	$64.11floor/$76.28ceiling
Oil fixed price swaps
Remaining 2023	5,500 Bbls	NYMEX WTI	$74.48
2024	16,350 Bbls	NYMEX WTI	$67.69
2025	7,800 Bbls	NYMEX WTI	$66.03

The Company’s fair value of derivative contracts was a net asset of $3,283,587 as of December 31, 2023, and a net liability of $8,561,191 as of September 30, 2022. Realized and unrealized gains and (losses) are recorded in gains (losses) on derivative contracts on the Company’s Statement of Income. Cash receipts 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.


	For the Year Ended			Three Months Ended			For the Year Ended
	December 31, 2023			December 31, 2022			September 30, 2022
Cash received (paid) on settled derivative contracts:
Natural gas costless collars	$	1,516,535		$	(455,040	)	$	(1,878,250	)
Natural gas fixed price swaps(1)		1,344,580			(1,896,872	)		(9,065,100	)
Oil costless collars		24,330			-			-
Oil fixed price swaps(1)		(328,387	)		(566,127	)		(3,590,210	)
Cash received (paid) on settled derivative contracts, net	$	2,557,058		$	(2,918,039	)	$	(14,533,560	)
Non-cash gain (loss) on derivative contracts:
Natural gas costless collars	$	857,675		$	1,779,405		$	(1,044,958	)
Natural gas fixed price swaps		3,119,388			4,557,865			(1,954,719	)
Oil costless collars		(702	)		(120,032	)		106,157
Oil fixed price swaps		326,170			47,803			594,002
Non-cash gain (loss) on derivative contracts, net	$	4,302,531		$	6,265,041		$	(2,299,518	)
Gains (losses) on derivative contracts, net	$	6,859,589		$	3,347,002		$	(16,833,078	)

(1) For the year ended December 31, 2023, three months ended December 31, 2022, and the year ended September 30, 2022, excludes $373,745, $903,461, and $7,522,794, respectively, of cash paid to settle off-market derivative contracts that are not reflected on the Statements of Income. Total cash paid related to off-market derivatives was $560,162, $3,010,661, and $19,260,104, respectively, for the year ended December 31, 2023, three months ended December 31, 2022, and the year ended September 30, 2022 and is reflected in the Financing Activities section of the Statements of Cash Flows. Cash (paid) or received not related to off-market derivatives is reflected in the Operating Activities section of the 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 to offset or not, 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 on the 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 December 31, 2023, and September 30, 2022. The Company has offset all amounts subject to master netting agreements on the Company's balance sheets at December 31, 2023 and September 30, 2022.


	12/31/2023												9/30/2022
	Fair Value												Fair Value
	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	$	3,318,046		$	197,439		$	344,614		$	181,634		$	924,258		$	8,798,237		$	124,983		$	812,195
Offsetting adjustments		(197,439	)		(197,439	)		(181,634	)		(181,634	)		(924,258	)		(924,258	)		(124,983	)		(124,983	)
Net presentation on Balance Sheets	$	3,120,607		$	-		$	162,980		$	-		$	-		$	7,873,979		$	-		$	687,212

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.