Annual report pursuant to Section 13 and 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

v3.20.4
DERIVATIVE FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2020
DERIVATIVE FINANCIAL INSTRUMENTS  
DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 8 – DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to fluctuations in crude oil and natural gas prices on its production. We can utilize derivative strategies that consist of either a single derivative instrument or a combination of instruments to manage the variability in cash flows associated with the forecasted sale of our future domestic oil and natural gas production. While the use of derivative instruments may limit or partially reduce the downside risk of adverse commodity price movements, their use also may limit future income from favorable commodity price movements.

From time to time the Company enters into derivative contracts to protect the Company’s cash flow from price fluctuation and maintain its capital programs. The Company uses either costless collars or swaps for this purpose. Oil derivative contracts are based on WTI Crude Oil prices and natural gas contacts are based on Henry Hub. A “costless collar” is the combination of two options, a put option (floor) and call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. Similar to costless collars, there is no cost to enter into the swap contracts. On swap contracts, there is no spread and payments will be made or received based on the difference between WTI and the swap contract price.

The following table provides information as to derivative contracts for WTI that were in place during the years ended December 31, 2020, 2019 and 2018. The Company did not have any natural gas derivative contracts during these years.

    

    

Barrels per

    

    

    

Date entered into

Period covered

day

Put price

Call price

Swap price

2018 costless collars

 

  

 

  

 

  

 

  

 

  

09/25/17

 

Calendar year 2018

 

1,000

$

49.00

$

54.60

 

  

10/27/17

 

Calendar year 2018

 

1,000

 

51.00

 

54.80

 

  

2019 costless collars

 

  

 

  

 

  

 

  

 

  

8/27/2018 (1)

 

Calendar year 2019

 

2,000

 

60.00

 

70.05

 

  

2020 costless collars

 

  

 

  

 

  

 

  

 

  

04/01/19

 

Calendar year 2020 (2)

 

1,000

 

50.00

 

65.83

 

  

04/01/19

 

Calendar year 2020 (2)

 

1,000

 

50.00

 

65.40

 

  

11/05/19

 

Calendar year 2020 (2)

 

1,000

 

50.00

 

58.40

 

  

11/07/19

 

Calendar year 2020 (2)

 

1,000

 

50.00

 

58.25

 

  

11/11/19

 

Calendar year 2020 (2)

 

1,500

 

50.00

 

58.65

 

  

2020 swaps

 

  

 

  

 

  

 

  

 

  

05/29/20

 

June 2020 and July 2020 (2)

 

5,500

 

  

 

  

$

33.24

(1) On October 10, 2018, the Company terminated the costless collars for calendar year 2019 through the payment of $3,438,300.
(2) On May 29, 2020, the Company unwound the costless collars for June 2020 and July 2020, resulting in the receipt of a cash payment of $5,435,136. Concurrently, the Company entered into swap contracts at $33.24 for 5,500 barrels per day for June and July 2020, equal to the barrels for which the costless collars were unwound.

Throughout 2020, the Company entered into additional derivative contracts in the form of costless collars and swaps for 2021 and 2022 for both oil and natural gas. The following tables reflect the details of those contracts:

    

    

Barrels per

    

    

    

Date entered into

Period covered

day

Put price

Call price

Swap price

Oil derivative contracts

 

  

 

  

 

  

 

  

 

  

2021 costless collars

 

  

 

  

 

  

 

  

 

  

02/25/20

 

Calendar year 2021

 

1,000

$

45.00

$

54.75

 

  

02/25/20

 

Calendar year 2021

 

1,000

 

45.00

 

52.71

 

  

02/27/20

 

Calendar year 2021

 

1,000

 

40.00

 

55.08

 

  

03/02/20

 

Calendar year 2021

 

1,500

 

40.00

 

55.35

 

  

2021 swaps

 

  

 

  

 

  

 

  

 

  

11/25/20

 

Calendar year 2021

 

2,000

 

  

 

  

$

45.37

12/02/20

 

Calendar year 2021

 

500

 

  

 

  

 

45.38

12/03/20

 

Calendar year 2021

 

500

 

  

 

  

 

45.00

12/04/20

 

Calendar year 2021

 

500

 

  

 

  

 

45.40

12/04/20

 

Calendar year 2021

 

500

 

  

 

  

 

45.60

12/07/20

 

Calendar year 2021

 

500

 

  

 

  

 

45.96

2022 swaps

 

  

 

  

 

  

 

  

 

  

12/04/20

 

Calendar year 2022

 

500

 

  

 

  

 

44.22

12/07/20

 

Calendar year 2022

 

500

 

  

 

  

 

44.75

12/10/20

 

Calendar year 2022

 

500

 

  

 

  

 

44.97

12/17/20

 

Calendar year 2022

 

250

 

  

 

  

 

45.98

Date entered into

    

Period covered

    

MMBTU per day

    

Swap price

Natural gas derivative contracts

 

  

 

  

 

  

2021 swaps

 

  

 

  

 

  

11/04/20

 

Calendar year 2021

 

6,000

$

2.991

2022 swaps

 

  

 

  

 

  

11/04/20

 

Calendar year 2022

 

5,000

 

2.7255

Derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying balance sheets. Any gains or losses resulting from changes in fair value of outstanding derivative financial instruments and from the settlement of derivative financial instruments are recognized in earnings and included as a component of other income in the accompanying statements of operations.

The use of derivative transactions involves the risk that the counterparties, which generally are financial institutions, will be unable to meet the financial terms of such transactions. All previous derivative contracts have been with lenders under our credit facility.