Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

v3.20.4
Derivative Instruments
 12 Months Ended
Dec. 31, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments DERIVATIVE INSTRUMENTS
Natural Gas, Oil and Natural Gas Liquids Derivative Instruments
The Company seeks to mitigate risks related to unfavorable changes in natural gas, oil and NGL prices, which are subject to significant and often volatile fluctuation, by entering into over-the-counter fixed price swaps, basis swaps, collars and various types of option contracts. These contracts allow the Company to mitigate the impact of declines in future natural gas, oil and NGL prices by effectively locking in floor price for a certain level of the Company’s production. However, these hedge contracts also limit the benefit to the Company in periods when the future market prices of natural gas, oil and NGL that are higher than the hedged prices.
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. Below is a summary of the Company's open fixed price swap positions as of December 31, 2020.
Index Daily Volume (MMBtu/day) Weighted
Average Price
2021 NYMEX Henry Hub 410,000  $ 2.75 
The Company entered into costless collars based off the NYMEX Henry Hub natural gas index. Each two-way price collar has a set floor and ceiling price for the hedged production. If the applicable monthly price indices are outside of the ranges set by the floor and ceiling prices in the various collars, the Company will cash-settle the difference with the counterparty.
Index Daily Volume (MMBtu/day) Weighted Average Floor/Ceiling Price
2021 NYMEX Henry Hub 250,000 
$2.46/$2.81
2022 NYMEX Henry Hub 20,000 
$2.80/$3.40
In the third quarter of 2019, the Company sold call options in exchange for a premium, and used the associated premiums received to enhance the fixed price for a portion of the fixed price natural gas swaps primarily for 2020. 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.
Index Daily Volume (MMBtu/day) Weighted
Average Price
2022 NYMEX Henry Hub 153,000  $ 2.90 
2023 NYMEX Henry Hub 628,000  $ 2.90 
In addition, the Company entered into natural gas basis swap positions. As of December 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
2021 Rex Zone 3 NYMEX Plus Fixed Spread 35,000  $ (0.21)
2021 Tetco M2 NYMEX Plus Fixed Spread 60,000  $ (0.67)
Contingent Consideration Arrangement
The purchase and sale agreement for the sale of the Company's non-core assets located in the WCBB and Hackberry fields of Louisiana included a contingent consideration arrangement that entitles the Company to receive bonus payments if commodity prices exceed specified thresholds. The calculated fair value of this contingent payment arrangement was approximately $1.1 million as of the closing date of the divestiture. See below for threshold and potential payment amounts.
Period
Threshold(1)
Payment to be received(2)
January 2021 - 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 December 31, 2020 and 2019:
December 31,
2020 2019
(In thousands)
Commodity derivative instruments $ 27,146  $ 125,383 
Contingent consideration arrangement —  818 
Total short-term derivative instruments – asset $ 27,146  $ 126,201 
Commodity derivative instruments 322  — 
Contingent consideration arrangement —  563 
Total long-term derivative instruments – asset $ 322  $ 563 
Total short-term derivative instruments – liability $ 11,641  $ 303 
Total long-term derivative instruments – liability $ 36,604  $ 53,135 
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 years ended December 31, 2020, 2019, and 2018.
Net gain (loss) on derivative instruments
For the Year Ended December 31,
2020 2019 2018
(In thousands)
Natural gas derivatives $ 23,765  $ 194,450  $ (116,130)
Oil derivatives 43,510  7,035  (13,084)
NGL derivatives (603) 6,632  5,735 
Contingent consideration arrangement (1,381) 243  — 
Total $ 65,291  $ 208,360  $ (123,479)
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, 2020
Derivative instruments, gross Netting adjustments Derivative instruments, net
(In thousands)
Derivative assets $ 27,468  $ (25,730) $ 1,738 
Derivative liabilities $ (48,245) $ 25,730  $ (22,515)
As of December 31, 2019
Derivative instruments, gross Netting adjustments Derivative instruments, net
(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.