Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

v3.20.1
DERIVATIVE INSTRUMENTS
 3 Months Ended
Mar. 31, 2020
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
DERIVATIVE INSTRUMENTS ERIVATIVE 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 natural gas liquids ("NGL") 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 natural gas, oil and NGL 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, the NYMEX West Texas Intermediate for oil and Mont Belvieu for propane, pentane and ethane. Below is a summary of the Company’s open fixed price swap positions as of March 31, 2020. 
 
Location
Daily Volume (MMBtu/day)
 
Weighted
Average Price
Remaining 2020
NYMEX Henry Hub
432,000

 
$
2.92


 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
Remaining 2020
NYMEX WTI
6,000

 
$
59.83

 
Location
Daily Volume
(Bbls/day)
 
Weighted
Average Price
Remaining 2020
Mont Belvieu C3
500

 
$
21.63


The Company sold call options in exchange for a premium, and used the associated premiums to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020 listed above. Each call option has an established ceiling price. When the referenced settlement price is above the price ceiling established by these 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
2022
NYMEX Henry Hub
628,000

 
$
2.90

2023
NYMEX Henry Hub
628,000

 
$
2.90


In addition, the Company entered into natural gas basis swap positions. As of March 31, 2020, the Company had the following natural gas basis swap positions open:
 
Gulfport Pays
Gulfport Receives
Daily Volume (MMBtu/day)
 
Weighted Average Fixed Spread
Remaining 2020
Transco Zone 4
NYMEX Plus Fixed Spread
60,000

 
$
(0.05
)
Remaining 2020
Fixed Spread
ONEOK Minus NYMEX
10,000

 
$
(0.54
)
Contingent Consideration Arrangement
The Company sold its non-core assets located in the West Cote Blanche Bay and Hackberry fields of Louisiana in July 2019. The sale price included the potential for the Company to receive contingent payments based on commodity prices exceeding specified thresholds over the two years following the closing date. This contingent consideration arrangement was determined to be an embedded derivative. See below for threshold and potential payment amounts.
Period
Threshold(1)
Payment to be received(2)
July 2020 - June 2021
Greater than or equal to $60.65
$
150,000

 
Between $52.62 - $60.65
Calculated Value(3)

 
Less than or equal to $52.62
$
—

(1)
Based on the "WTI NYMEX + Argus LLS Differential," as published by Argus Media.
(2)
Payment will be assessed monthly from July 2020 through June 2021. If threshold is met, payment shall be received within five business days after the end of each calendar month.
(3)
If average daily price, as defined in (1), is greater than $52.62 but less than $60.65, payment received will be $150,000 multiplied by a fraction, the numerator of which is the amount determined by subtracting $52.62 from such average daily price, and the denominator of which is $8.03.
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 March 31, 2020 and December 31, 2019:
 
March 31, 2020
 
December 31, 2019
 
(In thousands)
Commodity derivative instruments
$
171,755

 
$
125,383

Contingent consideration arrangement
—

 
818

Total short-term derivative instruments - asset
$
171,755

 
$
126,201

 
 
 
 
Contingent consideration arrangement
—

 
563

Total long-term derivative instruments - asset
$
—

 
$
563

 
 
 
 
Total short-term derivative instruments - liability
$
67

 
$
303

 
 
 
 
Total long-term derivative instruments - liability
$
70,829

 
$
53,135

Total net asset derivative position
$
100,859

 
$
73,326


Gains and Losses
The following table presents the gain and loss recognized in net gain (loss) on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the three months ended March 31, 2020 and 2019.
 
Net gain (loss) on derivative instruments
 
Three months ended March 31,
 
2020
 
2019
 
(In thousands)
Natural gas derivatives
$
45,853

 
$
(16,431
)
Oil derivatives
52,874

 
(454
)
NGL derivatives
920

 
(3,160
)
Contingent consideration arrangement
(1,381
)
 
—

Total
$
98,266

 
$
(20,045
)

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 March 31, 2020
 
Gross Assets (Liabilities)
 
Gross Amounts
 
 
 
Presented in the
 
Subject to Master
 
Net
 
Consolidated Balance Sheets
 
Netting Agreements
 
Amount
 
(In thousands)
Derivative assets
$
171,755

 
$
(70,896
)
 
$
100,859

Derivative liabilities
$
(70,896
)
 
$
70,896

 
$
—

 
As of December 31, 2019
 
Gross Assets (Liabilities)
 
Gross Amounts
 
 
 
Presented in the
 
Subject to Master
 
Net
 
Consolidated Balance Sheets
 
Netting Agreements
 
Amount
 
(In thousands)
Derivative assets
$
126,764

 
$
(53,438
)
 
$
73,326

Derivative liabilities
$
(53,438
)
 
$
53,438

 
$
—


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.