Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

v3.19.3.a.u2
Derivative Instruments
12 Months Ended
Dec. 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 years ended December 31, 2017, 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 derivative 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 historically also 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 December 31, 2019, the Company’s fixed price natural gas, oil and NGL swap positions from January 1, 2020 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; ARA Propane = European Propane CIF ARA; FEI Propane = Propane Far East Asia Index; Mont Belvieu Butane Non-TET = Mont Belvieu Butane; Mont Belvieu Propane Non-TET = Mont Belvieu Propane; NYMEX-WTI = West Texas Intermediate):

Natural

Weighted

Natural gas

Gas Liquids

Oil

average index

MMBtu/day

Bbls/day

Bbls/day

price

Three months ending March 31, 2020:

FEI Propane ($/Gal)

9,883

$

0.81

Mont Belvieu Butane Non-TET ($/Gal)

6,000

0.50

Mont Belvieu Propane Non-TET ($/Gal)

1,500

0.58

Total

17,383

Year ending December 31, 2020:

NYMEX ($/MMBtu)

2,227,500

$

2.87

ARA Propane ($/Gal)

10,371

0.65

NYMEX-WTI ($/Bbl)

26,000

55.63

Total

2,227,500

10,371

26,000

Year ending December 31, 2021:

NYMEX ($/MMBtu)

2,400,000

$

2.80

Year ending December 31, 2023:

NYMEX ($/MMBtu)

90,000

$

2.91

As of December 31, 2019, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of the Columbia Gas Transmission pipeline (“TCO”) to the NYMEX Henry Hub natural gas price, and NGL basis swap positions, which settle on the pricing index to basis differential of Mont Belvieu Butane to the European Butane CIF ARA natural gas liquids price, were as follows:

Natural Gas

Weighted

Natural Gas

Liquids

average hedged

MMBtu/day

Bbls/day

differential

Three months ending March 31, 2020:

ARA to Mont Belvieu Non-TET ($/Gal)

2,670

$

0.24

Three months ending June 30, 2020:

ARA to Mont Belvieu Non-TET ($/Gal)

1,602

$

0.22

Year ending December 31, 2020:

NYMEX to TCO ($/MMBtu)

60,000

$

0.35

Year ending December 31, 2021:

NYMEX to TCO ($/MMBtu)

40,000

$

0.41

Year ending December 31, 2022:

NYMEX to TCO ($/MMBtu)

60,000

$

0.52

Year ending December 31, 2023:

NYMEX to TCO ($/MMBtu)

50,000

$

0.53

Year ending December 31, 2024:

NYMEX to TCO ($/MMBtu)

50,000

$

0.53

As of December 31, 2019, the Company had natural gas and NGL contracts for January 1, 2020 through December 31, 2021 that fix the Mont Belvieu index price to percentages of WTI as follows:

Natural Gas

Weighted

Liquids

average payout

Bbls/day

ratio

Three months ending March 31, 2020:

Mont Belvieu Propane to NYMEX-WTI

500

50%

Year ending December 31, 2020:

Mont Belvieu Natural Gasoline to NYMEX-WTI

18,800

80%

Year ending December 31, 2021:

Mont Belvieu Natural Gasoline to NYMEX-WTI

18,650

78%

(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 2018.

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. The Company recognized a fair value loss for the year ended December 31, 2017 of $21 million. For the year ended December 31, 2018, the Company recognized a fair value gain of $94 million and realized proceeds of $73 million. There were no marketing derivative fair value gains or losses for the year ended December 31, 2019.

(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 2019. None of the Company’s derivative instruments are designated as hedges for accounting purposes.

December 31, 2018

December 31, 2019

Balance sheet

Balance sheet

location

Fair value

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

$

422,849

Commodity derivatives - noncurrent

Derivative instruments

362,169

Derivative instruments

333,174

Total asset derivatives

607,432

756,023

Liability derivatives not designated as hedges for accounting purposes:

Commodity derivatives - current

Derivative instruments

532

Derivative instruments

6,721

Commodity derivatives - noncurrent

Derivative instruments

Derivative instruments

3,519

Total liability derivatives

532

10,240

Net derivatives

$

606,900

$

745,783

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

December 31, 2019

Net amounts

Net amounts

 

Gross

Gross

of assets

Gross

Gross

of assets

amounts on

amounts offset on

(liabilities) on

amounts on

amounts offset on

(liabilities) on

balance sheet

balance sheet

balance sheet

balance sheet

balance sheet

balance sheet

 

Commodity derivative assets

$

658,830

 

(51,398)

 

607,432

$

882,817

 

(126,794)

 

756,023

Commodity derivative liabilities

$

(51,930)

 

51,398

 

(532)

$

(137,034)

 

126,794

 

(10,240)

The following is a summary of derivative fair value gains and losses and where such values are recorded in the consolidated statements of operations for the years ended December 31, 2017, 2018 and 2019 (in thousands):

Statement of

operations

Year ended December 31,

location

2017

2018

2019

Commodity derivative fair value gains (losses)

Revenue

$

658,283

(87,594)

463,972

Marketing derivative fair value gains (losses)

Revenue

$

(21,394)

94,081

Commodity derivative fair value gains (losses) for the years ended December 31, 2017 and 2018, include gains of $750 million and $370 million, respectively, related to certain natural gas derivatives that were monetized prior to their contractual settlement dates. Proceeds received from the monetizations are classified as operating cash flows on the Company’s consolidated statement of cash flows for the years ended December 31, 2017 and 2018. There were no commodity derivatives monetizations in the year ended December 31, 2019.

The 2017 monetizations were effected by reducing the average fixed index prices on certain natural gas swap contracts maturing from 2018 through 2022 while maintaining the total volumes hedged. The 2018 monetizations were affected by the early

settlement of April through December 2019 swaps and reducing the average fixed index prices on certain natural gas swap contracts maturing in 2020 while maintaining the total volumes hedged. The April through December 2019 swaps were replaced with collar agreements for which the Company paid a $13 million premium. The Company’s commodity derivative position presented in Note 11(a) reflects the volume and adjusted fixed price indices after the monetization.

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