Derivative Instruments |
(11) Derivative Instruments
The Company is exposed to certain risks relating to its ongoing business operations, and it uses derivative instruments to manage its commodity price risk. In addition, the Company periodically enters into contracts that contain embedded features that are required to be bifurcated and accounted for separately as derivatives.
(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 and nine months ended September 30, 2020 and 2021. 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’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 September 30, 2021, the Company’s fixed price natural gas, oil and NGL swap positions excluding Martica, the Company’s consolidated VIE, were as follows:
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Weighted |
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Average |
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Commodity / Settlement Period |
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Index |
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Contracted Volume |
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Price |
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Natural Gas |
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October-December 2021 |
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Henry Hub |
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2,160,000 |
MMBtu/day |
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$ |
2.78 |
/MMBtu |
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January-December 2022 |
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Henry Hub |
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1,155,486 |
MMBtu/day |
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2.50 |
/MMBtu |
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January-December 2023 |
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Henry Hub |
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43,000 |
MMBtu/day |
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2.37 |
/MMBtu |
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Butane |
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October-December 2021 |
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Mont Belvieu Butane-OPIS Non-TET |
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2,600 |
Bbl/day |
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$ |
33.77 |
/Bbl |
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October-December 2021 |
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Mont Belvieu Butane-OPIS TET |
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1,500 |
Bbl/day |
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$ |
32.24 |
/Bbl |
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Natural Gasoline |
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October-December 2021 |
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Mont Belvieu Natural Gasoline-OPIS Non-TET |
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8,300 |
Bbl/day |
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$ |
49.70 |
/Bbl |
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Isobutane |
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October-December 2021 |
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Mont Belvieu Isobutane-OPIS Non-TET |
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2,800 |
Bbl/day |
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$ |
35.75 |
/Bbl |
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Oil |
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October-December 2021 |
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West Texas Intermediate |
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3,000 |
Bbl/day |
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$ |
55.16 |
/Bbl |
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In addition, the Company has a call option agreement, which entitles the holder the right, but not the obligation, to enter into a fixed price swap agreement on December 21, 2023 to purchase 427,500 MMBtu per day at a price of $2.77 per MMBtu for the year ending December 31, 2024.
As of September 30, 2021, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of the Columbia Gas Transmission pipeline (“TCO”) to the NYMEX Henry Hub natural gas price were as follows:
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Weighted Average |
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Commodity / Settlement Period |
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Index to Basis Differential |
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Contracted Volume |
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Hedged Differential |
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Natural Gas |
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October-December 2021 |
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NYMEX to TCO |
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40,000 |
MMBtu/day |
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$ |
0.414 |
/MMBtu |
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January-December 2022 |
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NYMEX to TCO |
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60,000 |
MMBtu/day |
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0.515 |
/MMBtu |
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January-December 2023 |
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NYMEX to TCO |
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50,000 |
MMBtu/day |
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0.525 |
/MMBtu |
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January-December 2024 |
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NYMEX to TCO |
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50,000 |
MMBtu/day |
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0.530 |
/MMBtu |
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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. As of September 30, 2021, the Company had natural gas and NGL contracts that fix the Mont Belvieu index price for natural gasoline to percentages of WTI as follows:
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Weighted Average |
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Commodity / Settlement Period |
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Index to Basis Differential |
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Contracted Volume |
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Payout Ratio |
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Gas Liquids |
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October-December 2021 |
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Mont Belvieu Natural Gasoline to WTI |
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9,325 |
Bbl/day |
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77 |
% |
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As of September 30, 2021, the Company’s fixed price natural gas, oil and NGL swap positions for Martica, the Company’s consolidated VIE, were as follows:
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Weighted |
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Average |
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Commodity / Settlement Period |
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Index |
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Contracted Volume |
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Price |
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Natural Gas |
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October-December 2021 |
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Henry Hub |
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46,384 |
MMBtu/day |
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$ |
2.77 |
/MMBtu |
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January-December 2022 |
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Henry Hub |
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38,356 |
MMBtu/day |
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2.39 |
/MMBtu |
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January-December 2023 |
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Henry Hub |
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35,616 |
MMBtu/day |
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2.35 |
/MMBtu |
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January-December 2024 |
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Henry Hub |
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23,885 |
MMBtu/day |
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2.33 |
/MMBtu |
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January-March 2025 |
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Henry Hub |
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18,021 |
MMBtu/day |
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2.53 |
/MMBtu |
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Ethane |
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October-December 2021 |
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Mont Belvieu Purity Ethane-OPIS |
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990 |
Bbl/day |
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$ |
7.01 |
/Bbl |
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January-March 2022 |
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Mont Belvieu Purity Ethane-OPIS |
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521 |
Bbl/day |
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6.68 |
/Bbl |
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Propane |
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October-December 2021 |
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Mont Belvieu Propane-OPIS Non-TET |
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1,069 |
Bbl/day |
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$ |
19.88 |
/Bbl |
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January-December 2022 |
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Mont Belvieu Propane-OPIS Non-TET |
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934 |
Bbl/day |
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19.20 |
/Bbl |
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Natural Gasoline |
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October-December 2021 |
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Mont Belvieu Natural Gasoline-OPIS Non-TET |
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339 |
Bbl/day |
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$ |
35.24 |
/Bbl |
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January-December 2022 |
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Mont Belvieu Natural Gasoline-OPIS Non-TET |
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282 |
Bbl/day |
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34.37 |
/Bbl |
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January-December 2023 |
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Mont Belvieu Natural Gasoline-OPIS Non-TET |
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247 |
Bbl/day |
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40.74 |
/Bbl |
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Oil |
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October-December 2021 |
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West Texas Intermediate |
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111 |
Bbl/day |
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$ |
43.48 |
/Bbl |
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January-December 2022 |
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West Texas Intermediate |
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112 |
Bbl/day |
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44.25 |
/Bbl |
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January-December 2023 |
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West Texas Intermediate |
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99 |
Bbl/day |
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45.03 |
/Bbl |
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January-December 2024 |
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West Texas Intermediate |
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43 |
Bbl/day |
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44.02 |
/Bbl |
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January-March 2025 |
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West Texas Intermediate |
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39 |
Bbl/day |
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45.06 |
/Bbl |
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The VPP includes an embedded put option tied to NYMEX pricing for the production volumes associated with the Company’s retained interest in the VPP properties of 94,544,000 MMBtu remaining through December 31, 2026 at a weighted average strike price of $2.57 per MMBtu. The embedded put option is not clearly and closely related to the host contract, and therefore, the Company bifurcated this derivative instrument and reflected it at fair value in the unaudited condensed consolidated financial statements.
The table below presents a summary of the fair values of the Company’s derivative instruments and where such values are recorded in the condensed consolidated balance sheets as of December 31, 2020 and September 30, 2021 (in thousands). None of the Company’s derivative instruments are designated as hedges for accounting purposes.
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Balance Sheet |
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December 31, |
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September 30, |
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Location |
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2020 |
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2021 |
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Asset derivatives not designated as hedges for accounting purposes: |
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Commodity derivatives—current |
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Derivative instruments |
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$ |
97,144 |
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— |
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Embedded derivatives—current |
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Derivative instruments |
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7,986 |
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627 |
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Commodity derivatives—noncurrent |
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Derivative instruments |
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14,689 |
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— |
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Embedded derivatives—noncurrent |
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Derivative instruments |
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32,604 |
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14,834 |
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Total asset derivatives |
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152,423 |
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15,461 |
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Liability derivatives not designated as hedges for accounting purposes: |
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Commodity derivatives—current (1) |
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Derivative instruments |
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31,242 |
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1,436,292 |
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Commodity derivatives—noncurrent (1) |
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Derivative instruments |
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99,172 |
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331,570 |
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Total liability derivatives |
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130,414 |
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1,767,862 |
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Net derivatives assets (liabilities) |
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$ |
22,009 |
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(1,752,401) |
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(1) |
As of September 30, 2021, approximately $87 million of commodity derivative liabilities, including $53 million of current commodity derivatives and $34 million of noncurrent commodity derivatives, are attributable to the Company’s consolidated VIE, Martica. As of December 31, 2020, approximately $14 million of commodity derivative liabilities, including $7 million of current commodity derivatives and $7 million of noncurrent commodity derivatives, are attributable to the Company’s consolidated VIE, Martica.
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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 condensed consolidated balance sheets as of the dates presented, all at fair value (in thousands):
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December 31, 2020 |
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September 30, 2021 |
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Net Amounts of |
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Net Amounts of |
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Gross |
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Gross Amounts |
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Assets |
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Gross |
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Gross Amounts |
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Assets |
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Amounts on |
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Offset on |
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(Liabilities) on |
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Amounts on |
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Offset on |
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(Liabilities) on |
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Balance Sheet |
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Balance Sheet |
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Balance Sheet |
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Balance Sheet |
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Balance Sheet |
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Balance Sheet |
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Commodity derivative assets |
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$ |
181,375 |
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(69,542) |
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111,833 |
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$ |
18,246 |
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(18,246) |
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— |
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Embedded derivative assets |
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$ |
40,590 |
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— |
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40,590 |
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$ |
15,461 |
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— |
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15,461 |
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Commodity derivative liabilities |
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$ |
(199,956) |
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69,542 |
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(130,414) |
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$ |
(1,786,108) |
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18,246 |
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(1,767,862) |
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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 for the three and nine months ended September 30, 2020 and 2021 (in thousands):
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Statement of |
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Operations |
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Three Months Ended September 30, |
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Nine Months Ended September 30, |
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Location |
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2020 |
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2021 |
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2020 |
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2021 |
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Commodity derivative fair value losses (1) |
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Revenue |
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$ |
(558,979) |
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(1,238,384) |
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$ |
(161,161) |
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(2,228,076) |
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Embedded derivative fair value gains (losses) (1) |
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Revenue |
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$ |
44,228 |
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(12,082) |
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$ |
44,228 |
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(31,986) |
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(1) |
The fair value of derivative instruments was determined using Level 2 inputs.
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