Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

v3.19.2
Derivative Instruments
6 Months Ended
Jun. 30, 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 six months ended June 30, 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 June 30, 2019, the Company’s fixed price natural gas and NGL swap positions from July 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; NYMEX-WTI=West Texas Intermediate; Argus Butane ARA=European Butane CIF ARA Argus; Argus Butane FEI=Argus Butane Far East Index; Argus Propane ARA=European Propane CIF ARA Argus; Argus Propane FEI=Argus Propane Far East Index):

Natural gas

MMBtu/day

Oil
Bbls/day

Natural Gas
Liquids
MT/day

Weighted
average index
price

Three months ending September 30, 2019:

NYMEX ($/MMBtu)

755,000

$

3.32

NYMEX-WTI($/Bbl)

5,000

61.83

Argus Butane ARA ($/MT)

242

330.25

Argus Butane FEI ($/MT)

24

370.00

Argus Propane ARA ($/MT)

484

328.17

Argus Propane FEI ($/MT)

274

383.41

Total

755,000

5,000

1,024

Three months ending December 31, 2019:

NYMEX ($/MMBtu)

755,000

$

3.45

NYMEX-WTI($/Bbl)

5,000

61.83

Total

755,000

5,000

Year ending December 31, 2020:

NYMEX ($/MMBtu)

2,227,500

$

2.87

NYMEX-WTI($/Bbl)

5,000

59.03

Total

2,227,500

5,000

Year ending December 31, 2021:

NYMEX ($/MMBtu)

1,010,000

$

2.88

Year ending December 31, 2022:

NYMEX ($/MMBtu)

850,000

$

3.00

Year ending December 31, 2023:

NYMEX ($/MMBtu)

90,000

$

2.91

As of June 30, 2019, the Company’s natural gas basis swap positions, which settle on the pricing index to basis differential of TCO to the NYMEX Henry Hub natural gas price were as follows:

Natural gas

Hedged

MMBtu/day

differential

Year ending December 31, 2020:

60,000

$

0.353

Year ending December 31, 2021:

40,000

$

0.414

Year ending December 31, 2022:

60,000

$

0.515

Year ending December 31, 2023:

50,000

$

0.525

Year ending December 31, 2024:

50,000

$

0.530

As of June 30, 2019, the Company had NGL contracts totaling 500 Bbls/day of propane for July 1, 2019 through March 31, 2020 that fix the Mont Belvieu Propane index price at 50% of WTI.

As of June 30, 2019, the Company’s fixed price natural gas collar positions from July 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 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. As of June 30, 2019, the unamortized portion of the premium was $9 million.

(b)

Marketing Derivatives

In 2017, due to delay of the in-service date for a pipeline on which the Company is 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 and six months ended June 30, 2018, the Company recognized a fair value loss of less than $1 million and a gain of $94 million, respectively. There were no marketing derivative fair value gains or losses during the three or six months ended June 30, 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 June 30, 2019. None of the Company’s derivative instruments are designated as hedges for accounting purposes.

December 31, 2018

June 30, 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

$

346,894

Commodity derivatives - noncurrent

Derivative instruments

362,169

Derivative instruments

369,548

Total asset derivatives

607,432

716,442

Liability derivatives not designated as hedges for accounting purposes:

Commodity derivatives - current

Derivative instruments

532

Derivative instruments

274

Commodity derivatives - noncurrent

Derivative instruments

Derivative instruments

Total liability derivatives

532

274

Net derivatives

$

606,900

$

716,168

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

June 30, 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

$

729,664

 

(13,222)

 

716,442

Commodity derivative liabilities

$

(51,930)

 

51,398

 

(532)

$

(13,496)

 

13,222

 

(274)

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 June 30,

Six months ended June 30,

location

2018

2019

2018

2019

Commodity derivative fair value gains

Revenue

$

55,336

328,427

77,773

251,059

Marketing derivative fair value gains (losses)

Revenue

$

(110)

94,124

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