Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.19.1
Derivative Instruments
3 Months Ended
Mar. 31, 2019
Derivative Instruments.  
Derivative Instruments

(11)   Derivative Instruments

(a)Commodity Derivative Positions

The Company periodically enters into natural gas, NGLs, and oil derivative contracts with counterparties to hedge the price risk associated with its production.  These derivatives are not entered into for trading purposes.  To the extent that changes occur in the market prices of natural gas, NGLs, and oil, the Company is exposed to market risk on these open contracts.  This market risk exposure is generally offset by the change in market prices of natural gas, NGLs, and oil recognized upon the ultimate sale of the Company’s production.

The Company was party to various fixed price commodity swap contracts that settled during the three months ended March 31, 2018 and 2019.  The Company enters into these swap contracts when management believes that favorable future sales prices for the Company’s production can be secured.  Under these swap agreements, when actual commodity prices upon settlement exceed the fixed price provided by the swap contracts, the Company pays the difference to the counterparty.  When actual commodity prices upon settlement are less than the contractually provided fixed price, the Company receives the difference from the counterparty.    In addition, the Company has entered into basis swap contracts in order to hedge the difference between the New York Mercantile Exchange (“NYMEX”) index price and a local index price.

The Company also entered into NGL contracts, which establish a contractual price for the settlement month as a fixed percentage of the West Texas Intermediate Crude Oil index (“WTI”) price for the settlement month.  When the percentage of the contractual price is above the contracted percentage, the Company pays the difference to the counterparty.  When it is below the contracted percentage, the Company receives the difference from the counterparty.

 

In addition, the Company has entered into natural gas collar contracts, which establish ceiling and floor prices for the sale of notional volumes of natural gas as specified in the collar contracts.  Under these contracts, the Company pays the difference between the ceiling price and the published index price in the event the published index price is above the ceiling price.  When the published index price is below the floor price, the Company receives the difference between the floor price and the published index price.  No amounts are paid or received if the index price is between the floor and the ceiling prices.  The index prices in our collars are consistent with the index prices used to sell our production. 

The Company’s derivative contracts have not been designated as hedges for accounting purposes; therefore, all gains and losses are recognized in the Company’s statements of operations.

As of March 31, 2019, the Company’s fixed price natural gas and NGL swap positions from April 1, 2019 through December 31, 2023 were as follows (abbreviations in the table refer to the index to which the swap position is tied, as follows: NYMEX=Henry Hub; Argus Propane ARA=European Propane CIF ARA Argus; Argus Propane FEI=Argus Propane Far East Index):

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas
MMbtu/day

 

 

Natural Gas
Liquids
MT/day

 

Weighted
average index
price

 

Three months ending June 30, 2019:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

755,000

 

 

 —

 

$

3.26

 

Propane Argus ARA ($/MT)

 

 —

 

 

1,033

 

 

415.03

 

Propane Argus FEI ($/MT)

 

 —

 

 

1,033

 

 

456.55

 

Total

 

755,000

 

 

2,066

 

 

 

 

Three months ending September 30, 2019:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

755,000

 

 

 —

 

$

3.32

 

Total

 

755,000

 

 

 —

 

 

 

 

Three months ending December 31, 2019:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

755,000

 

 

 —

 

$

3.45

 

Total

 

755,000

 

 

 —

 

 

 

 

Year ending December 31, 2020:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

1,417,500

 

 

 —

 

$

3.00

 

Year ending December 31, 2021:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

710,000

 

 

 —

 

$

3.00

 

Year ending December 31, 2022:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

850,000

 

 

 —

 

$

3.00

 

Year ending December 31, 2023:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

90,000

 

 

 —

 

$

2.91

 

 

As of March 31, 2019, the Company had entered into NGL contracts totaling 500 Bbls/day of propane for April 1, 2019 through March 31, 2020 that fix the Mont Belvieu Propane index price at 50% of WTI.

As of March 31, 2019, the Company’s fixed price natural gas collar positions from April 1, 2019 through December 31, 2019 were as follows (abbreviations in the table refer to the index to which the collar position is tied, as follows (NYMEX=Henry Hub):

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas

 

Weighted average index price

 

 

 

MMbtu/day

 

Ceiling price

 

Floor price

 

Three months ending June 30, 2019:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

1,575,000

 

$

3.30

 

$

2.50

 

Three months ending September 30, 2019:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

1,575,000

 

$

3.30

 

$

2.50

 

Three months ending December 31, 2019:

 

 

 

 

 

 

 

 

 

NYMEX ($/MMBtu)

 

1,575,000

 

$

3.52

 

$

2.50

 

 

An initial premium of $13 million was paid at the inception of natural gas collar contracts with one counterparty, and is recorded as a derivative asset measured at fair value.

 

(b)Marketing Derivatives

In 2017, due to delay of the in-service date for a pipeline on which the Company is to be an anchor shipper, the Company realized it would not be able to fulfill its delivery obligations under a 2018 natural gas sales contract.  In order to acquire gas to fulfill its delivery obligations, the Company entered into several natural gas purchase agreements with index-based pricing to purchase gas for resale under this sales contract.  Subsequently, the Company and the counterparty to the sales contract came to an agreement that the Company’s delivery obligations under the contract would not begin until the earlier of (1) the in-service date of the pipeline and (2) January 1, 2019.  Consequently, in December 2017, the Company entered into natural gas sales agreements with index-based pricing to resell the purchased gas for delivery during the period from February to October 2018.  The natural gas that it had purchased for January was sold on the spot market during January. 

The Company determined that these gas purchase and sales agreements should be accounted for as derivatives and measured at fair value at the end of each period.  For the three months ended March 31, 2018, the Company recognized a fair value gain of $94 million. 

(c)Summary

The following table presents a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the consolidated balance sheets as of December 31, 2018 and March 31, 2019.  None of the Company’s derivative instruments are designated as hedges for accounting purposes.

 

 

 

 

 

 

 

 

 

 

 

 

 

  

December 31, 2018

  

March 31, 2019

 

 

  

Balance sheet
location

  

Fair value

  

Balance sheet
location

  

Fair value

 

 

 

 

 

(In thousands)

 

 

 

(In thousands)

 

Asset derivatives not designated as hedges for accounting purposes:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives - current

 

Derivative instruments

 

$

245,263

  

Derivative instruments

 

$

122,425

 

Commodity derivatives - noncurrent

 

Derivative instruments

 

 

362,169

  

Derivative instruments

 

 

313,909

 

 

 

 

 

 

 

 

 

 

 

 

 

Total asset derivatives

 

 

 

 

607,432

 

 

 

 

436,334

 

 

 

 

 

 

 

 

 

 

 

 

 

Liability derivatives not designated as hedges for accounting purposes:

 

 

 

 

 

 

 

 

 

 

 

Commodity derivatives - current

 

Derivative instruments

 

 

532

  

Derivative instruments

 

 

3,894

 

Commodity derivatives - noncurrent

 

Derivative instruments

 

 

 —

  

Derivative instruments

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liability derivatives

 

 

 

 

532

 

 

 

 

3,894

 

 

 

 

 

 

 

 

 

 

 

 

 

Net derivatives

 

 

 

$

606,900

 

 

 

$

432,440

 

 

The following table presents the gross values of recognized derivative assets and liabilities, the amounts offset under master netting arrangements with counterparties, and the resulting net amounts presented in the consolidated balance sheets as of the dates presented, all at fair value (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

March 31, 2019

 

 

 

Gross
amounts on
balance sheet

 

Gross amounts
offset on
balance sheet

 

Net amounts
of assets (liabilities) on
balance sheet

 

Gross
amounts on
balance sheet

 

Gross amounts
offset on
balance sheet

 

Net amounts
of assets (liabilities) on
balance sheet

 

Commodity derivative assets

 

$

658,830

 

 

(51,398)

 

 

607,432

 

$

459,928

 

 

(23,594)

 

 

436,334

 

Commodity derivative liabilities

 

$

(51,930)

 

 

51,398

 

 

(532)

 

$

(27,488)

 

 

23,594

 

 

(3,894)

 

 

The following is a summary of derivative fair value gains and losses and where such values are recorded in the unaudited condensed consolidated statements of operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

Statement of
operations

 

Three months ended March 31,

 

 

 

location

 

2018

 

2019

 

Commodity derivative fair value gains (losses)

 

Revenue

 

 

22,437

 

 

(77,368)

 

Marketing derivative fair value gains

 

Revenue

 

 

94,234

 

 

 —

 

 

The fair value of derivative instruments was determined using Level 2 inputs.