Gulfport Energy Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Natural Gas, Oil and NGL 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 of favorable price movements.

The volume of production subject to commodity derivative instruments and the mix of the instruments are frequently evaluated and adjusted by management in response to changing market conditions. Gulfport may enter into commodity derivative contracts up to limitations set forth in its New Credit Facility, 90% of its forecasted annual production for 2022 and 2023. The Company generally enters into commodity derivative contracts for approximately 50% to 75% of its forecasted annual production by the end of the first quarter of each fiscal year. The Company typically enters into commodity derivative contracts for the next 12 to 24 months. Gulfport does not enter into commodity derivative contracts for speculative purposes.

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 WTI for oil and Mont Belvieu for propane.

The Company does not currently have any commodity derivative transactions that have margin requirements or collateral provisions that would require payments prior to the scheduled settlement dates. The Company's commodity derivative contract counterparties are typically financial institutions and energy trading firms with investment-grade credit ratings. Gulfport routinely monitors and manages its exposure to counterparty risk by requiring specific minimum credit standards for all counterparties, actively monitoring counterparties' public credit ratings and avoiding the concentration of credit exposure by transacting with multiple counterparties. The Company has master netting agreements with some counterparties that allow the offsetting of receivables and payables in a default situation.

Below is a summary of the Company's open fixed price swap positions as of December 31, 2021.


	Index	Daily Volume	Weighted Average Price
Natural Gas		(MMBtu/d)	($/MMBtu)
2022	NYMEX Henry Hub	140,740	$	2.88
2023	NYMEX Henry Hub	94,932	$	3.41

Oil		(Bbl/d)	($/Bbl)
2022	NYMEX WTI	2,104	$	66.23
2023	NYMEX WTI	1,000	$	66.00

NGL		(Bbl/d)	($/Bbl)
2022	Mont Belvieu C3	3,378	$	35.09
2023	Mont Belvieu C3	1,000	$	33.77

The Company entered into costless collars based off the NYMEX WTI and Henry Hub oil and natural gas indices. 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. Below is a summary of the Company's open collars as of December 31, 2021.


	Index	Daily Volume	Weighted Average Floor Price		Weighted Average Ceiling Price
Natural Gas		(MMBtu/d)	($/MMBtu)		($/MMBtu)
2022	NYMEX Henry Hub	476,664	$	2.64	$	3.22
2023	NYMEX Henry Hub	85,000	$	2.75	$	4.25

Oil		(Bbl/d)	($/Bbl)		($/Bbl)
2022	NYMEX WTI	1,500	$	55.00	$	60.00

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. No payment is due from either party if the referenced settlement price is below the price ceiling. Below is a summary of the Company's open sold call options as of December 31, 2021.


	Index	Daily Volume	Weighted Average Ceiling Price
Natural Gas		(MMBtu/d)	($/MMBtu)
2022	NYMEX Henry Hub	152,675	$	2.90
2023	NYMEX Henry Hub	507,925	$	2.90
2024	NYMEX Henry Hub	162,000	$	3.00

In addition, the Company entered into natural gas basis swap positions. As of December 31, 2021, the Company had the following natural gas basis swap positions open:


	Gulfport Pays	Gulfport Receives	Daily Volume	Weighted Average Fixed Spread
Natural Gas			(MMBtu/d)	($/MMBtu)
2022	Rex Zone 3	NYMEX Plus Fixed Spread	24,658	$	(0.10)
2022	ONG	NYMEX Plus Fixed Spread	7,397	$	0.50
2023	Rex Zone 3	NYMEX Plus Fixed Spread	10,000	$	(0.22)

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, 2021 and 2020 (in thousands):


	Successor		Predecessor
	December 31, 2021		December 31, 2020


Total short-term derivative instruments – asset	$	4,695	$	27,146



Total long-term derivative instruments – asset	$	18,664	$	322

Total short-term derivative instruments – liability	$	240,735	$	11,641

Total long-term derivative instruments – liability	$	184,580	$	36,604

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 Successor Period, Predecessor Period, and the years ended December 31, 2020, and 2019 (in thousands):


	Successor		Predecessor
	Period from May 18, 2021 through December 31, 2021		Period from January 1, 2021 through May 17, 2021		Year Ended December 31, 2020		Year Ended December 31, 2019
Natural gas derivatives - fair value losses	$	(223,512)	$	(123,080)	$	(89,310)	$	89,576
Natural gas derivatives - settlement (losses) gains	(300,172)		(3,362)		113,075		104,874
Total (losses) gains on natural gas derivatives	(523,684)		(126,442)		23,765		194,450

Oil and condensate derivatives - fair value losses	(5,128)		(6,126)		(2,952)		2,952
Oil and condensate derivatives - settlement (losses) gains	(9,720)		—		46,462		4,083
Total (losses) gains on oil and condensate derivatives	(14,848)		(6,126)		43,510		7,035

NGL derivatives - fair value losses	(5,322)		(4,671)		(461)		(7,541)
NGL derivatives - settlement (losses) gains	(12,965)		—		(142)		14,173
Total losses on NGL derivatives	(18,287)		(4,671)		(603)		6,632

Contingent consideration arrangement - fair value losses	—		—		(1,381)		243
Total (losses) gains on natural gas, oil and NGL derivatives	$	(556,819)	$	(137,239)	$	65,291	$	208,360

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.


	Successor
	As of December 31, 2021
	Derivative instruments, gross		Netting adjustments		Derivative instruments, net
	(In thousands)
Derivative assets	$	23,359	$	(20,265)	$	3,094
Derivative liabilities	$	(425,315)	$	20,265	$	(405,050)


	Predecessor
	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)

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.