| DERIVATIVE FINANCIAL INSTRUMENTS |
NOTE 6 – DERIVATIVE FINANCIAL INSTRUMENTS
The Company is exposed to fluctuations in crude oil and natural gas prices on its production. It utilizes 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 its 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, the use also may limit future income from favorable commodity price movements.
The Company’s derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying Balance Sheets. The Company has not designated its derivative financial instruments as hedges for accounting purposes, and, as a result, 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 (Expense)” under the heading “Gain (loss) on derivative contracts” 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. At September 30, 2022, 100% of the Company’s derivative instruments are with lenders under its Credit Facility (as defined in Note 8). Non-performance risk is incorporated in the discount rate by adding the quoted bank (counterparty) credit default swap (CDS) rates to the risk free rate. Beginning September 1, the Company assumed the derivative liabilities (novated hedges) associated with its acquisition of the Stronghold assets (see Note 5), which are subject to master netting agreements. Additional derivative contracts with the same counterparty are also subject to netting. Still, in accordance with ASC 815-10-50-4B, the Company continues to classify the fair value of all its derivative positions on a gross basis in its corresponding Balance Sheets. The following presents the impact of the Company’s contracts on its Balance Sheets for the periods indicated.
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As of |
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September 30, 2022 |
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December 31, 2021 |
Commodity derivative instruments, marked to market: |
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Derivative assets, current |
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$ |
24,206,887 |
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$ |
— |
Discounted deferred premiums |
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(10,884,874) |
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— |
Derivative assets, current, net of premiums |
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$ |
13,322,013 |
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$ |
— |
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Derivative assets, noncurrent |
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15,204,782 |
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— |
Discounted deferred premiums |
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(3,658,800) |
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— |
Derivative assets, noncurrent, net of premiums |
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$ |
11,545,982 |
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$ |
— |
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Derivative liabilities, current |
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$ |
23,767,689 |
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$ |
29,241,588 |
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Derivative liabilities, noncurrent |
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$ |
8,734,388 |
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$ |
— |
The components of “Gain (loss) on derivative contracts” are as follows for the respective periods:
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
Oil derivatives: |
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Realized gain (loss) on oil derivatives |
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(13,958,195) |
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(14,921,008) |
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(47,690,961) |
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(34,021,310) |
Unrealized gain (loss) on oil derivatives |
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49,680,492 |
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8,200,688 |
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48,360,099 |
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(39,366,200) |
Gain (loss) on oil derivatives |
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$ |
35,722,297 |
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$ |
(6,720,320) |
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$ |
669,138 |
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$ |
(73,387,510) |
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Natural gas derivatives: |
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Realized gain (loss) on natural gas derivatives |
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(902,921) |
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— |
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(902,921) |
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743,178 |
Unrealized gain (loss) on natural gas derivatives |
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(1,968,187) |
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— |
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(1,968,187) |
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(941,867) |
Gain (loss) on natural gas derivatives |
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$ |
(2,871,108) |
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$ |
— |
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$ |
(2,871,108) |
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$ |
(198,689) |
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Gain (loss) on derivative contracts |
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$ |
32,851,189 |
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$ |
(6,720,320) |
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$ |
(2,201,970) |
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$ |
(73,586,199) |
The components of “Cash (paid) for derivative settlements, net” are as follows for the respective periods:
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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2022 |
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2021 |
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2022 |
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2021 |
Cash flows from operating activities: |
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Cash (paid) on oil derivatives |
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$ |
(13,958,195) |
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$ |
(14,921,008) |
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$ |
(47,690,961) |
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$ |
(34,030,310) |
Cash received (paid) on natural gas derivatives |
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(902,921) |
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— |
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(902,921) |
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743,178 |
Cash (paid) for derivative settlements, net |
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$ |
(14,861,116) |
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$ |
(14,921,008) |
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$ |
(48,593,882) |
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$ |
(33,287,132) |
The following tables reflect the details of current derivative contracts as of September 30, 2022(Quantities are in barrels for the oil derivative contracts and in million British thermal units (MMBtu) for the natural gas derivative contracts.):
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Oil Hedges (WTI) |
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2022 |
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2023 |
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2024 |
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Swaps: |
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Hedged volume (BBL) |
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379,250 |
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389,250 |
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526,000 |
Weighted average swap price |
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$ |
54.89 |
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$ |
77.55 |
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$ |
65.90 |
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Deferred premium puts: |
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Hedged volume (BBL) |
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138,000 |
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773,500 |
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91,000 |
Weighted average strike price |
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$ |
97.93 |
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$ |
90.64 |
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$ |
83.75 |
Weighted average deferred premium price |
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$ |
11.81 |
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$ |
15.25 |
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$ |
17.32 |
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Two-way collars: |
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Hedged volume (BBL) |
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97,201 |
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487,622 |
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475,350 |
Weighted average put price |
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$ |
53.93 |
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$ |
52.16 |
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$ |
67.88 |
Weighted average call price |
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$ |
67.68 |
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$ |
62.94 |
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$ |
83.32 |
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Three-way collars: |
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Hedged volume (BBL) |
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89,985 |
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66,061 |
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— |
Weighted average first put price |
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$ |
40.00 |
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$ |
45.00 |
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$ |
— |
Weighted average second put price |
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$ |
50.00 |
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$ |
55.00 |
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$ |
— |
Weighted average call price |
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$ |
62.03 |
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$ |
80.05 |
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$ |
— |
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Gas Hedges (Henry Hub) |
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2022 |
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2023 |
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2024 |
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NYMEX Swaps: |
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Hedged volume (MMBtu) |
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46,313 |
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175,421 |
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— |
Weighted average swap price |
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$ |
2.51 |
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$ |
2.40 |
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$ |
— |
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Two-way collars: (1) |
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Put hedged volume (MMBtu) |
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715,661 |
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2,486,514 |
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1,712,250 |
Weighted average put price |
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$ |
3.76 |
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$ |
3.18 |
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$ |
4.00 |
Call hedged volume (MMBtu) |
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435,061 |
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2,306,514 |
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1,712,250 |
Weighted average call price |
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$ |
10.22 |
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$ |
5.03 |
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$ |
6.29 |
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Three-way collar: |
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Hedged volume (MMBtu) |
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304,250 |
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— |
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— |
Weighted average first put price |
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$ |
2.20 |
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$ |
— |
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$ |
— |
Weighted average second put price |
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$ |
2.50 |
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$ |
— |
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$ |
— |
Weighted average call price |
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$ |
3.25 |
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$ |
— |
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$ |
— |
Weighted average deferred premium price |
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$ |
0.19 |
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$ |
— |
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$ |
— |
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Gas Hedges (basis differential) |
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2022 |
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2023 |
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2024 |
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Waha basis swaps: |
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Hedged volume (MMBtu) |
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505,024 |
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1,339,685 |
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— |
Weighted average swap price |
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(2) |
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(3) |
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$ |
— |
| (1) |
The two-way collars for the fourth quarter of 2022 and first quarter of 2023 include 2x1 collars where the put volumes of 561,200 and 360,000 are two times the call volumes of 280,600 and 180,000, respectively.
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| (2) |
The WAHA basis swaps in place for the remainder of 2022 consist of five derivative contracts, each with a fixed price of the Henry Hub natural gas price less a fixed amount (weighted average of $0.57 per MMBtu).
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| (3) |
The WAHA basis swaps in place for the calendar year of 2023 consist of two derivative contracts, each with a fixed price of the Henry Hub natural gas price less a fixed amount (weighted average of $0.55 per MMBtu).
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