Derivatives

6 Months Ended

Mar. 31, 2022

Derivative Instruments And Hedging Activities Disclosure [Abstract]

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 March 31, 2022


Fiscal Period	Contract total volume	Index	Contract average price
Natural gas costless collars
Remaining 2022	480,000 Mmbtu	NYMEX Henry Hub	$3.50 floor / $4.23 ceiling
2023	500,000 Mmbtu	NYMEX Henry Hub	$3.32 floor / $4.54 ceiling
2024	60,000 Mmbtu	NYMEX Henry Hub	$3.00 floor / $4.70 ceiling
Natural gas fixed price swaps
Remaining 2022	1,785,000 Mmbtu	NYMEX Henry Hub	$2.98
2023	2,100,000 Mmbtu	NYMEX Henry Hub	$3.24
2024	380,000 Mmbtu	NYMEX Henry Hub	$3.41
Oil fixed price swaps
Remaining 2022	76,500 Bbls	NYMEX WTI	$44.91
2023	66,750 Bbls	NYMEX WTI	$62.11
2024	11,250 Bbls	NYMEX WTI	$73.35

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 liability of $15,825,035 as of March 31, 2022, and a net liability of $13,784,467 as of September 30, 2021. 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						Six Months Ended
	March 31,						March 31,
	2022			2021			2022			2021
Cash received (paid) on derivative contracts:
Natural gas costless collars	$	(152,190	)	$	(122	)	$	(152,190	)	$	(9,089	)
Natural gas fixed price swaps⁽¹⁾		(474,935	)		3,105			(1,827,127	)		1,242
Oil costless collars		-			(112,590	)		-			(23,646	)
Oil fixed price swaps⁽¹⁾		(583,641	)		(187,824	)		(945,781	)		347,376
Cash received (paid) on derivative contracts, net	$	(1,210,766	)	$	(297,431	)	$	(2,925,098	)	$	315,883
Non-cash gain (loss) on derivative contracts:
Natural gas costless collars	$	(1,465,603	)	$	(81,881	)	$	(1,385,632	)	$	597,080
Natural gas fixed price swaps		(7,686,898	)		(6,291	)		(3,208,963	)		282,596
Oil costless collars		-			(696,360	)		-			(1,107,246	)
Oil fixed price swaps		(2,620,139	)		(1,266,180	)		(2,627,545	)		(2,690,492	)
Non-cash gain (loss) on derivative contracts, net	$	(11,772,640	)	$	(2,050,712	)	$	(7,222,140	)	$	(2,918,062	)
Gains (losses) on derivative contracts, net	$	(12,983,406	)	$	(2,348,143	)	$	(10,147,238	)	$	(2,602,179	)

(1) For the three and six months ended March 31, 2022, excludes $2,493,481 and $5,181,572, 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 $7,930,160 for the six months ended March 31, 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 March 31, 2022 and September 30, 2021. The Company has offset all amounts subject to master netting agreements in the Company's balance sheets at March 31, 2022 and September 30, 2021.

	March 31, 2022												September 30, 2021
	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 Liabilities
Gross amounts recognized	$	60,347		$	14,853,743		$	31,174		$	1,062,813		$	17,395		$	12,105,383		$	1,696,479
Offsetting adjustments		(60,347	)		(60,347	)		(31,174	)		(31,174	)		(17,395	)		(17,395	)		-
Net presentation on condensed balance sheets	$	-		$	14,793,396		$	-		$	1,031,639		$	-		$	12,087,988		$	1,696,479

(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.