Derivative Instruments

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We utilize derivative instruments, typically swaps, two- and three-way collars and enhanced swaps which are placed with financial institutions that we believe are acceptable credit risks, to mitigate our financial exposure to commodity price volatility associated with anticipated sales of our future production and volatility in interest rates attributable to our variable rate debt instruments. Our derivative instruments are not formally designated as hedges in the context of GAAP. While the use of derivative instruments limits the risk of adverse commodity price and interest rate movements, such use may also limit future product revenues and interest expense from favorable price and rate movements. In addition, we do not utilize derivative instruments for speculative purposes. As of December 31, 2019, we were unhedged with respect to NGL and natural gas production and we had no interest rate hedges outstanding. The following is a general description of the derivative instruments we have employed:

Swaps. The counterparty to a swap contract is required to make a payment to us if the settlement price for any settlement period is below the swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the swap price for such contract.

Two-Way Collars. The counterparty to a two-way collar contract is required to make a payment to us if the settlement price for any settlement period is below the floor price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling price for such contract. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such collar contract.

Three-Way Collars. A three-way collar consists of (i) a purchased put option which establishes a floor price for the collar, (ii) a sold call option which establishes a ceiling price of the collar and (iii) a sold put option which establishes a sub-floor price. Three-way collars are settled based on differences between the floor or ceiling prices and the settlement price of a referenced index or the difference between the floor price and sub-floor price. If the settlement price of the referenced index is below the sub-floor price, the counterparty is required to make a payment to us for the difference between the floor price and sub-floor price. If the settlement price of the referenced index is between the floor price and sub-floor price, the counterparty is required to make a payment to us for the difference between the floor price and the settlement price of the referenced index. If the settlement price of the referenced index is between the floor price and ceiling price, no payments are due to or from either party. If the settlement price of the referenced index is above the ceiling price, we are required to make a payment to the counterparty for the difference.

Enhanced Swaps. An enhanced swap consists of a sold put option with the associated premiums rolled into an enhanced fixed price swap. The counterparty to an enhanced swap contract is required to make a payment to us if the settlement price for any settlement period is below the swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the swap price for such contract. Additionally, we are required to make a payment to the counterparty if the settlement price for any settlement period is below the sold-put strike price. Effectively, when the settlement price for any settlement period is below the sold-put strike price, we receive the swap price minus the sold put strike price.

We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for West Texas Intermediate (“WTI”), Louisiana Light Sweet (“LLS”) and Magellan East Houston (“MEH”) crude oil closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position.

Subsequent Events

In January of 2020, we entered into additional commodity hedge contracts as well as certain interest rate swap transactions. We replaced a portion of two crude oil swaps with a costless collar for 2,000 BOPD for April through December 2020 with floor and ceiling prices of $48.00 and $57.10 per barrel. We entered into a costless collar for Henry Hub natural gas for 270,000 MMBTU per month with a term from February through December of 2020 with floor and ceiling prices of $2.00 and $2.18 per MMBTU, respectively. In January and February 2020, we entered into interest rate swaps contracts through May 2022 for a notional amount of $300 million, paying a weighted-average fixed rate of 1.36%.

The following table sets forth our commodity derivative contracts as of December 31, 2019:



	1Q2020		2Q2020		3Q2020		4Q2020		1Q2021		2Q2021		3Q2021		4Q2021
NYMEX WTI Crude Swaps
Average Volume Per Day (barrels)	15,648		12,648		10,630		10,630		3,333		3,297		1,630		1,630
Weighted Average Swap Price ($/barrel)	$	55.34	$	54.96	$	54.77	$	54.77	$	55.89	$	55.89	$	55.50	$	55.50

NYMEX WTI Purchased Puts/Sold Calls
Average Volume Per Day (barrels)			3,297		4,891				1,667		1,648
Weighted Average Purchased Put Price ($/barrel)			$	55.00	$	55.00			$	55.00	$	55.00
Weighted Average Sold Call ($/barrel)			$	57.69	$	58.42			$	58.00	$	58.00

NYMEX WTI Sold Puts
Average Volume Per Day (barrels)									5,000		4,945		1,630		1,630
Weighted Average Sold Put Price ($/barrel)									$	44.00	$	44.00	$	44.00	$	44.00

MEH Crude Swaps
Average Volume Per Day (barrels)	2,000		2,000		2,000		2,000
Weighted Average Swap Price ($/barrel)	$	61.03	$	61.03	$	61.03	$	61.03

Financial Statement Impact of Derivatives

The impact of our derivatives activities on income is included in the “Derivatives” caption on our Consolidated Statements of Operations. The effects of derivative gains and (losses) and cash settlements are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in the “Derivative contracts” section of our Consolidated Statements of Cash Flows under the “Net (gains) losses” and “Cash settlements, net.”

The following table summarizes the effects of our derivative activities for the periods presented:



	Year Ended December 31,
	2019			2018			2017
Derivative gains (losses) recognized in the Consolidated Statements of Operations	$	(68,131	)	$	37,427		$	(17,819	)
Cash settlements recognized in the Consolidated Statements of Cash Flows	$	(4,136	)	$	(48,291	)	$	(3,511	)

The following table summarizes the fair value of our derivative instruments, as well as the locations of these instruments, on our Consolidated Balance Sheets as of the dates presented:



		Fair Values
		December 31, 2019				December 31, 2018
		Derivative		Derivative		Derivative		Derivative
Type	Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
Commodity contracts	Derivative assets/liabilities – current	$	4,131	$	23,450	$	34,932	$	991
Commodity contracts	Derivative assets/liabilities – noncurrent	2,750		3,385		10,100		—
		$	6,881	$	26,835	$	45,032	$	991

As of December 31, 2019, we reported net commodity derivative liabilities of $20.0 million. The contracts associated with this position are with nine counterparties, all of which are investment grade financial institutions and are participants in the Credit Facility. This concentration may impact our overall credit risk, either positively or negatively, in that these counterparties may be similarly affected by changes in economic or other conditions. We have neither paid to, nor received from, our counterparties any cash collateral in connection with our derivative positions. Furthermore, our derivative contracts are not subject to margin calls or similar accelerations. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.