Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

v3.10.0.1
Derivative Instruments
 12 Months Ended
Dec. 31, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
DERIVATIVE INSTRUMENTS
Natural Gas, Oil and Natural Gas Liquids Derivative Instruments
The Company seeks to reduce its exposure to unfavorable changes in natural gas, oil and NGLs prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps and various types of option contracts. These contracts allow the Company to predict with greater certainty the effective oil, natural gas and NGLs prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production.
Fixed price swaps are settled monthly based on differences between the fixed price specified in the contract and the referenced settlement price. When the referenced settlement price is less than the price specified in the contract, the Company receives an amount from the counterparty based on the price difference multiplied by the volume. Similarly, when the referenced settlement price exceeds the price specified in the contract, the Company pays the counterparty an amount based on the price difference multiplied by the volume. The prices contained in these fixed price swaps are based on the NYMEX Henry Hub for natural gas and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company's open fixed price swap positions as of December 31, 2018.
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
2019
NYMEX Henry Hub
1,254,000

 
$
2.83

2020
NYMEX Henry Hub
204,000

 
$
2.77

 
Location
Daily Volume (Bbls/day)
 
Weighted
Average Price
2019
Mont Belvieu C2
1,000

 
$
18.48

2019
Mont Belvieu C3
4,000

 
$
28.87

2019
Mont Belvieu C5
500

 
$
54.08


During the fourth quarter of 2018, the Company early terminated all of its fixed price swaps for oil based on both Argus Louisiana Light Sweet Crude and NYMEX West Texas Intermediate scheduled to settle during 2019 covering 5,000 Bbls/day. These early terminations resulted in approximately $0.4 million of settlement losses which are included in net (loss) gain on natural gas, oil, and NGL derivatives in the accompanying consolidated statement of operations.
The Company sold call options and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps listed above. Each short call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these short call options, the Company pays its counterparty an amount equal to the difference between the referenced settlement price and the price ceiling multiplied by the hedged contract volumes.
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
January 2019 - March 2019
NYMEX Henry Hub
50,000

 
$
3.13

April 2019 - December 2019
NYMEX Henry Hub
30,000

 
$
3.10


For a portion of the natural gas fixed price swaps listed above, the counterparties had the option to extend the original terms an additional twelve months for the period January 2019 through December 2019. In December 2018, the counterparties chose to exercise all natural gas fixed price swaps, resulting in an additional 100,000 MMBtu per day at a weighted average price of $3.05 per MMBtu, which is included in the natural gas fixed price swaps listed above.
In addition, the Company has entered into natural gas basis swap positions, which settle on the pricing index to basis differential of Transco Zone 4 to NYMEX Henry Hub. As of December 31, 2018, the Company had the following natural gas basis swap positions for Transco Zone 4.
 
Location
Daily Volume (MMBtu/day)
 
Hedged Differential
2019
Transco Zone 4
60,000

 
$
(0.05
)
2020
Transco Zone 4
60,000

 
$
(0.05
)

Balance sheet presentation
The Company reports the fair value of derivative instruments on the consolidated balance sheets as derivative instruments under current assets, noncurrent assets, current liabilities, and noncurrent liabilities on a gross basis. The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades. The following table presents the fair value of the Company's derivative instruments on a gross basis at December 31, 2018 and 2017:
 
December 31,
 
2018
 
2017
 
(In thousands)
Short-term derivative instruments - asset
$
21,352

 
$
78,847

Long-term derivative instruments - asset
$
—

 
$
8,685

Short-term derivative instruments - liability
$
20,401

 
$
32,534

Long-term derivative instruments - liability
$
13,992

 
$
2,989

Gains and losses
The following table presents the gain and loss recognized in net (loss) gain on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the years ended December 31, 2018, 2017, and 2016.
 
Net (loss) gain on derivative instruments
 
For the Year Ended December 31,
 
2018
 
2017
 
2016
 
(In thousands)
Natural gas derivatives
$
(116,130
)
 
$
232,143

 
$
(165,933
)
Oil derivatives
(13,084
)
 
(3,350
)
 
(5,387
)
Natural gas liquids derivatives
5,735

 
(15,114
)
 
(3,186
)
Total
$
(123,479
)
 
$
213,679

 
$
(174,506
)

The Company delivered approximately 78% of its 2018 production under fixed price swaps.
Offsetting of derivative assets and liabilities
As noted above, the Company records the fair value of derivative instruments on a gross basis. The following table presents the gross amounts of recognized derivative assets and liabilities in the consolidated balance sheets and the amounts that are subject to offsetting under master netting arrangements with counterparties, all at fair value.
 
As of December 31, 2018
 
Derivative instruments, gross
 
Netting adjustments
 
Derivative instruments, net
 
(In thousands)
Derivative assets
$
21,352

 
$
(19,289
)
 
$
2,063

Derivative liabilities
$
(34,393
)
 
$
19,289

 
$
(15,104
)
 
As of December 31, 2017
 
Derivative instruments, gross
 
Netting adjustments
 
Derivative instruments, net
 
(In thousands)
Derivative assets
$
87,532

 
$
(22,199
)
 
$
65,333

Derivative liabilities
$
(35,523
)
 
$
22,199

 
$
(13,324
)

Concentration of Credit Risk
By using derivative instruments that are not traded on an exchange, the Company is exposed to the credit risk of its counterparties. Credit risk is the risk of loss from counterparties not performing under the terms of the derivative instrument. When the fair value of a derivative instrument is positive, the counterparty is expected to owe the Company, which creates credit risk. To minimize the credit risk in derivative instruments, it is the Company's policy to enter into derivative contracts only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The Company's derivative contracts are with multiple counterparties to lessen its exposure to any individual counterparty. Additionally, the Company uses master netting agreements to minimize credit risk exposure. The creditworthiness of the Company's counterparties is subject to periodic review. None of the Company's derivative instrument contracts contain credit-risk related contingent features. Other than as provided by the Company's revolving credit facility, the Company is not required to provide credit support or collateral to any of its counterparties under its derivative instruments, nor are the counterparties required to provide credit support to the Company.