Gulfport Energy Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

6 Months Ended

Jun. 30, 2022

General Discussion of Derivative Instruments and Hedging Activities [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 a 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 Credit Facility. 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 June 30, 2022.


	Index	Daily Volume	Weighted Average Price
Natural Gas		(MMBtu/d)	($/MMBtu)
Remaining 2022	NYMEX Henry Hub	210,000	$	2.92
2023	NYMEX Henry Hub	165,014	$	3.64
2024	NYMEX Henry Hub	54,973	$	3.98

Oil		(Bbl/d)	($/Bbl)
Remaining 2022	NYMEX WTI	2,500	$	66.12
2023	NYMEX WTI	3,000	$	74.47

NGL		(Bbl/d)	($/Bbl)
Remaining 2022	Mont Belvieu C3	3,750	$	36.59
2023	Mont Belvieu C3	3,000	$	38.07

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 hedge counterparty. Below is a summary of the Company's costless collar positions as of June 30, 2022.


	Index	Daily Volume	Weighted Average Floor Price		Weighted Average Ceiling Price
Natural Gas		(MMBtu/d)	($/MMBtu)		($/MMBtu)
Remaining 2022	NYMEX Henry Hub	416,500	$	2.56	$	3.05
2023	NYMEX Henry Hub	285,000	$	2.93	$	4.78
2024	NYMEX Henry Hub	60,000	$	3.50	$	7.49

Oil		(Bbl/d)	($/Bbl)		($/Bbl)
Remaining 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 option positions as of June 30, 2022.


	Index	Daily Volume	Weighted Average Price
Natural Gas		(MMBtu/d)	($/MMBtu)
Remaining 2022	NYMEX Henry Hub	152,675	$	2.90
2023	NYMEX Henry Hub	407,925	$	2.90
2024	NYMEX Henry Hub	202,000	$	3.33
2025	NYMEX Henry Hub	33,315	$	4.65

In addition, the Company entered into natural gas basis swap positions. As of June 30, 2022, the Company had the following natural gas swap positions open:

Gulfport Pays

Gulfport Receives

Daily Volume

Weighted Average Fixed Spread

Natural Gas

(MMBtu/d)

($/MMBtu)

2023

Rex Zone 3

NYMEX Plus Fixed Spread

40,000

(0.21)

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 June 30, 2022 and December 31, 2021 (in thousands):


	Successor
	June 30, 2022		December 31, 2021

Short-term derivative asset	$	24,487	$	4,695
Long-term derivative asset	26,394		18,664
Short-term derivative liability	(674,404)		(240,735)
Long-term derivative liability	(306,389)		(184,580)
Total commodity derivative position	$	(929,912)	$	(401,956)

Gains and Losses

The following tables present the gain and loss recognized in net loss on natural gas, oil and NGL derivatives in the accompanying consolidated statements of operations for the Current Successor Quarter, Current Successor YTD Period, Prior Successor Period, Prior Predecessor Quarter, and Prior Predecessor YTD Period (in thousands):


	Net loss on derivative instruments
	Successor				Predecessor
	Three Months Ended June 30, 2022		Period from May 18, 2021 through June 30, 2021		Period from April 1, 2021 through May 17, 2021
Natural gas derivatives - fair value gains (losses)	$	121,659	$	(120,264)	$	(97,543)
Natural gas derivatives - settlement losses	(288,936)		(6,689)		(3,486)
Total losses on natural gas derivatives	(167,277)		(126,953)		(101,029)

Oil derivatives - fair value gains (losses)	4,383		(5,357)		(4,395)
Oil derivatives - settlement losses	(14,281)		—		—
Total losses on oil and condensate derivatives	(9,898)		(5,357)		(4,395)

NGL derivatives - fair value gains (losses)	9,506		(7,348)		(1,837)
NGL derivatives - settlement losses	(5,202)		—		—
Total gains (losses) on NGL derivatives	4,304		(7,348)		(1,837)

Total losses on natural gas, oil and NGL derivatives	$	(172,871)	$	(139,658)	$	(107,261)


	Net loss on derivative instruments
	Successor				Predecessor
	Six Months Ended June 30, 2022		Period from May 18, 2021 through June 30, 2021		Period from January 1, 2021 through May 17, 2021
Natural gas derivatives - fair value losses	$	(497,660)	$	(120,264)	$	(123,080)
Natural gas derivatives - settlement losses	(400,093)		(6,689)		(3,362)
Total losses on natural gas derivatives	(897,753)		(126,953)		(126,442)

Oil derivatives - fair value losses	(25,470)		(5,357)		(6,126)
Oil derivatives - settlement losses	(22,425)		—		—
Total losses on oil and condensate derivatives	(47,895)		(5,357)		(6,126)

NGL derivatives - fair value losses	(4,827)		(7,348)		(4,671)
NGL derivatives - settlement losses	(10,947)		—		—
Total losses on NGL derivatives	(15,774)		(7,348)		(4,671)

Total losses on natural gas, oil and NGL derivatives	$	(961,422)	$	(139,658)	$	(137,239)

Offsetting of Derivative Assets and Liabilities

As noted above, the Company records the fair value of derivative instruments on a gross basis. The following tables present 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 (in thousands):


	Successor
	As of June 30, 2022
	Gross Assets (Liabilities)		Gross Amounts
	Presented in the		Subject to Master		Net
	Consolidated Balance Sheets		Netting Agreements		Amount
Derivative assets	$	50,881	$	(50,479)	$	402
Derivative liabilities	$	(980,793)	$	50,479	$	(930,314)


	Successor
	As of December 31, 2021
	Gross Assets (Liabilities)		Gross Amounts
	Presented in the		Subject to Master		Net
	Consolidated Balance Sheets		Netting Agreements		Amount
Derivative assets	$	23,359	$	(20,265)	$	3,094
Derivative liabilities	$	(425,315)	$	20,265	$	(405,050)

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 spread between 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.