Derivative Instruments

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

We utilize derivative instruments, typically swaps, put options and call options 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 the beneficial impact of future product revenues and interest expense from favorable commodity price and interest rate movements. From time to time, we may enter into incremental derivative contracts in order to increase the notional volume of production we are hedging, restructure existing derivative contracts or enter into other derivative contracts resulting in modification to the terms of existing contracts. In accordance with our internal policies, we do not utilize derivative instruments for speculative purposes.

Commodity Derivatives

The following is a general description of the commodity derivative instruments we have employed:

Swaps. A swap contract is an agreement between two parties pursuant to which the parties exchange payments at specified dates on the basis of a specified notional amount, or the swap price, with the payments calculated by reference to specified commodities or indexes. The purchasing counterparty to a swap contract is required to make a payment to selling counterparty based on the amount of the swap price in excess of the settlement price multiplied by the notional volume 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 based on the amount of the settlement price in excess of the swap price multiplied by the notional volume if the settlement price for any settlement period is above the swap price for such contract.

Put Options. A put option has a defined strike, or floor price. We have entered into put option contracts in the roles of buyer and seller depending upon our particular hedging objective. The buyer of the put option pays the seller a premium to enter into the contract. When the settlement price is below the floor price, the seller pays the buyer an amount equal to the difference between the settlement price and the strike price multiplied by the notional volume. When the settlement price is above the floor price, the put option expires worthless. Certain of our purchased put options have deferred premiums. For the deferred premium puts, we agree to pay a premium to the counterparty at the time of settlement.

Call Options. A call option has a defined strike, or ceiling price. We have entered into call option contracts in the roles of buyer and seller depending upon our particular hedging objective. The buyer of the call option pays the seller a premium to enter into the call option. When the settlement price is above the ceiling price, the seller pays the buyer an amount equal to the difference between the settlement price and the strike price multiplied by the notional volume. When the settlement price is below the ceiling price, the call option expires worthless.

We typically combine swaps, purchased put options, purchased call options, sold put options and sold call options in order to achieve various hedging objectives. Certain of these objectives result in combinations that operate as collars which include purchased put options and sold call options, three-way collars which include purchased put options, sold put options and sold call options, and enhanced swaps, which include either sold put options or sold call options with the associated premiums rolled into an enhanced fixed price swap, among others.

We determine the fair values of our commodity derivative instruments using industry-standard models that consider various assumptions, including current market value and contractual prices for the underlying instruments, implied volatilities, time value and nonperformance risk. For the current market prices, we use third-party quoted forward prices, as applicable, for NYMEX West Texas Intermediate (“NYMEX WTI”), Magellan East Houston (“MEH”) crude oil and NYMEX Henry Hub (“NYMEX HH”) natural gas closing prices as of the end of the reporting period. Nonperformance risk is incorporated by utilizing 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.

The following table sets forth our commodity derivative contracts as of December 31, 2020:

	1Q2021		2Q2021		3Q2021		4Q2021		1Q2022		2Q2022		3Q2022		4Q2022		1Q2023		2Q2023
NYMEX WTI Crude Swaps
Average Volume Per Day (barrels)	3,889		3,297		815		815
Weighted Average Swap Price ($/barrel)	$	54.38	$	55.89	$	45.54	45.54
NYMEX WTI Crude Collars
Average Volume Per Day (barrels)	9,722		10,440		9,239		8,152		2,917		2,885		2,853		2,853		2,917		2,855
Weighted Average Purchased Put Price ($/barrel)	$	40.00	$	42.84	$	40.35	$	40.40	$	40.00	$	40.00	$	40.00	$	40.00	$	40.00	$	40.00
Weighted Average Sold Call ($/barrel)	$	45.78	$	51.70	$	51.85	$	52.10	$	50.00	$	50.00	$	50.00	$	50.00	$	50.00	$	50.00
NYMEX WTI Purchased Puts
Average Volume Per Day (barrels)	1,667
Weighted Average Purchased Put Price ($/barrel)	$	55.00
NYMEX WTI Sold Puts
Average Volume Per Day (barrels)	556		11,538		5,707		5,707
Weighted Average Sold Put ($/barrel)	$	26.50	$	36.93	$	35.14	35.14
MEH-NYMEX WTI Crude Basis Swaps
Average Volume Per Day (barrels)	8,889
Weighted Average Swap Price ($/barrel)	$	1.16
NYMEX WTI Crude CMA Roll Basis Swaps
Average Volume Per Day (barrels)	14,444		13,187		13,043		13,043
Weighted Average Swap Price ($/barrel)	$	(0.18)	$	0.07	$	0.07	$	0.07

NYMEX HH Collars
Average Volume Per Day (MMBtus)	10,000		9,890		9,783		9,783
Weighted Average Purchased Put Price ($/MMBtu)	$	2.607	$	2.607	$	2.607	$	2.607
Weighted Average Sold Call ($/MMBtu)	$	3.117	$	3.117	$	3.117	$	3.117
NYMEX HH Sold Puts
Average Volume Per Day (MMBtus)	6,667		6,593		6,522		6,522
Weighted Average Sold Put Strike ($/MMBtu)	$	2.000	$	2.000	$	2.000	$	2.000

As of December 31, 2020, we were unhedged with respect to NGL production.

Interest Rate Derivatives

We have entered into a series of interest rate swap contracts (the “Interest Rate Swaps”) to establish fixed interest rates on a portion of our variable interest rate indebtedness under the Credit Facility and the Second Lien Facility. The notional amount of the Interest Rate Swaps totals $300 million, with us paying a weighted average fixed rate of 1.36% on the notional amount, and the counterparties paying a variable rate equal to LIBOR through May 2022.

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 and premiums received (paid), net.”

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

	Year Ended December 31,
	2020		2019		2018
Interest rate swap losses recognized in the Consolidated Statements of Operations	$	(7,510)	$	—	$	—
Commodity gains (losses) recognized in the Consolidated Statements of Operations	95,932		(68,131)		37,427
	$	88,422	$	(68,131)	$	37,427
Interest rate cash settlements recognized in the Consolidated Statements of Cash Flows	$	(2,210)	$	—	$	—
Commodity cash settlements and premiums received (paid) recognized in the Consolidated Statements of Cash Flows	80,297		(4,136)		(48,291)
	$	78,087	$	(4,136)	$	(48,291)

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, 2020				December 31, 2019
		Derivative		Derivative		Derivative		Derivative
Type	Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
Interest rate contracts	Derivative assets/liabilities – current	$	—	$	3,655	$	—	$	—
Commodity contracts	Derivative assets/liabilities – current	78,793		81,772		4,131		23,450
Interest rate contracts	Derivative assets/liabilities – noncurrent	—		1,645		—		—
Commodity contracts	Derivative assets/liabilities – noncurrent	25,449		26,789		2,750		3,385
		$	104,242	$	113,861	$	6,881	$	26,835

As of December 31, 2020, we reported net commodity derivative liabilities of $4.3 million and net Interest Rate Swap liabilities of $5.3 million. The contracts associated with these position are with eight counterparties for commodity derivatives and four counterparties for Interest Rate Swaps, all of which are investment grade financial institutions and are participants in the Credit Facility. This concentration may impact our overall credit risk 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.