Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.21.2
Derivative Instruments
9 Months Ended
Sep. 30, 2021
Derivative Instruments.  
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:

Weighted

Average

Commodity / Settlement Period

 

Index

 

Contracted Volume

 

Price

   

Natural Gas

October-December 2021

Henry Hub

2,160,000

MMBtu/day

$

2.78

/MMBtu

January-December 2022

Henry Hub

1,155,486

MMBtu/day

2.50

/MMBtu

January-December 2023

Henry Hub

43,000

MMBtu/day

2.37

/MMBtu

Butane

October-December 2021

Mont Belvieu Butane-OPIS Non-TET

2,600

Bbl/day

$

33.77

/Bbl

October-December 2021

Mont Belvieu Butane-OPIS TET

1,500

Bbl/day

$

32.24

/Bbl

Natural Gasoline

October-December 2021

Mont Belvieu Natural Gasoline-OPIS Non-TET

8,300

Bbl/day

$

49.70

/Bbl

Isobutane

October-December 2021

Mont Belvieu Isobutane-OPIS Non-TET

2,800

Bbl/day

$

35.75

/Bbl

Oil

October-December 2021

West Texas Intermediate

3,000

Bbl/day

$

55.16

/Bbl

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:

Weighted Average

Commodity / Settlement Period

Index to Basis Differential

 

Contracted Volume

 

Hedged Differential

Natural Gas

October-December 2021

NYMEX to TCO

40,000

MMBtu/day

$

0.414

/MMBtu

January-December 2022

NYMEX to TCO

60,000

MMBtu/day

0.515

/MMBtu

January-December 2023

NYMEX to TCO

50,000

MMBtu/day

0.525

/MMBtu

January-December 2024

NYMEX to TCO

50,000

MMBtu/day

0.530

/MMBtu

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:

Weighted Average

Commodity / Settlement Period

 

Index to Basis Differential

 

Contracted Volume

 

Payout Ratio

Gas Liquids

October-December 2021

Mont Belvieu Natural Gasoline to WTI

9,325

Bbl/day

77

%

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:

Weighted

Average

Commodity / Settlement Period

 

Index

 

Contracted Volume

 

Price

Natural Gas

October-December 2021

Henry Hub

46,384

MMBtu/day

$

2.77

/MMBtu

   

January-December 2022

Henry Hub

38,356

MMBtu/day

2.39

/MMBtu

January-December 2023

Henry Hub

35,616

MMBtu/day

2.35

/MMBtu

January-December 2024

Henry Hub

23,885

MMBtu/day

2.33

/MMBtu

January-March 2025

Henry Hub

18,021

MMBtu/day

2.53

/MMBtu

Ethane

October-December 2021

Mont Belvieu Purity Ethane-OPIS

990

Bbl/day

$

7.01

/Bbl

January-March 2022

Mont Belvieu Purity Ethane-OPIS

521

Bbl/day

6.68

/Bbl

Propane

October-December 2021

Mont Belvieu Propane-OPIS Non-TET

1,069

Bbl/day

$

19.88

/Bbl

January-December 2022

Mont Belvieu Propane-OPIS Non-TET

934

Bbl/day

19.20

/Bbl

Natural Gasoline

October-December 2021

Mont Belvieu Natural Gasoline-OPIS Non-TET

339

Bbl/day

$

35.24

/Bbl

January-December 2022

Mont Belvieu Natural Gasoline-OPIS Non-TET

282

Bbl/day

34.37

/Bbl

January-December 2023

Mont Belvieu Natural Gasoline-OPIS Non-TET

247

Bbl/day

40.74

/Bbl

Oil

October-December 2021

West Texas Intermediate

111

Bbl/day

$

43.48

/Bbl

January-December 2022

West Texas Intermediate

112

Bbl/day

44.25

/Bbl

January-December 2023

West Texas Intermediate

99

Bbl/day

45.03

/Bbl

January-December 2024

West Texas Intermediate

43

Bbl/day

44.02

/Bbl

January-March 2025

West Texas Intermediate

39

Bbl/day

45.06

/Bbl

(b)

Embedded Derivatives

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.

(c)

Summary

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.

Balance Sheet

December 31,

September 30,

   

Location

   

2020

2021

Asset derivatives not designated as hedges for accounting purposes:

Commodity derivatives—current

Derivative instruments

$

97,144

Embedded derivatives—current

Derivative instruments

7,986

627

Commodity derivatives—noncurrent

Derivative instruments

14,689

Embedded derivatives—noncurrent

Derivative instruments

32,604

14,834

Total asset derivatives

152,423

15,461

Liability derivatives not designated as hedges for accounting purposes:

Commodity derivatives—current (1)

Derivative instruments

31,242

1,436,292

Commodity derivatives—noncurrent (1)

Derivative instruments

99,172

331,570

Total liability derivatives

130,414

1,767,862

Net derivatives assets (liabilities)

$

22,009

(1,752,401)

(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.

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):

December 31, 2020

September 30, 2021

Net Amounts of

Net Amounts of

Gross

Gross Amounts

Assets

Gross

Gross Amounts

Assets

Amounts on

Offset on

(Liabilities) on

Amounts on

Offset on

(Liabilities) on

   

Balance Sheet

   

Balance Sheet

   

Balance Sheet

   

Balance Sheet

   

Balance Sheet

   

Balance Sheet

 

Commodity derivative assets

$

181,375

(69,542)

111,833

$

18,246

(18,246)

Embedded derivative assets

$

40,590

40,590

$

15,461

15,461

Commodity derivative liabilities

$

(199,956)

69,542

(130,414)

$

(1,786,108)

18,246

(1,767,862)

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):

Statement of

Operations

Three Months Ended September 30,

Nine Months Ended September 30,

   

Location

2020

2021

2020

2021

Commodity derivative fair value losses (1)

Revenue

$

(558,979)

(1,238,384)

$

(161,161)

(2,228,076)

Embedded derivative fair value gains (losses) (1)

Revenue

$

44,228

(12,082)

$

44,228

(31,986)

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