| 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 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 has historically used costless collars, deferred premium puts, or swaps for this purpose. Oil derivative contracts are based on WTI (West Texas Intermediate) crude oil prices and natural gas contacts are based on the 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 deferred premium put contract has the premium established upon entering the contract, and due upon settlement of the contract.
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 of our derivative contracts are with lenders under our credit facility. 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. Although the counterparties hold the right to offset (i.e. netting) the settlement amounts with the Company, in accordance with ASC 815-10-50-4B, the Company classifies the fair value of all its derivative positions on a gross basis in its corresponding Condensed Balance Sheets.
The Company’s derivative financial instruments are recorded at fair value and included as either assets or liabilities in the accompanying Condensed Balance Sheets. The Company has not designated its derivative 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 Condensed Statements of Operations.
The following presents the impact of the Company’s contracts on its Condensed Balance Sheets for the periods indicated.
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As of |
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June 30, 2023 |
|
December 31, 2022 |
| Commodity derivative instruments, marked to market: |
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| Derivative assets, current |
$ |
14,604,030 |
|
|
$ |
16,193,327 |
|
| Discounted deferred premiums |
(6,296,493) |
|
|
(11,524,165) |
|
| Derivatives assets, current, net of premiums |
$ |
8,307,537
|
|
|
$ |
4,669,162
|
|
|
|
|
|
| Derivative assets, noncurrent |
$ |
10,555,937 |
|
|
$ |
7,606,258 |
|
| Discounted deferred premiums |
— |
|
|
(1,476,848) |
|
| Derivative assets, noncurrent, net of premiums |
$ |
10,555,937
|
|
|
$ |
6,129,410
|
|
|
|
|
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| Derivative liabilities, current |
$ |
7,848,580
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|
$ |
13,345,619
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|
|
|
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| Derivative liabilities, noncurrent |
$ |
10,829,096
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|
$ |
10,485,650
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The components of “Gain (loss) on derivative contracts” from the Condensed Statements of Operations are as follows for the respective periods:
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For the Three Months Ended |
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For the Six Months Ended |
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June 30, 2023 |
|
June 30, 2022 |
|
June 30, 2023 |
|
June 30, 2022 |
| Oil derivatives: |
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| Realized gain (loss) on oil derivatives |
$ |
(833,841) |
|
|
$ |
(19,617,265) |
|
|
$ |
(1,497,603) |
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|
$ |
(33,732,766) |
|
| Unrealized gain (loss) on oil derivatives |
4,545,136 |
|
|
12,160,247 |
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|
12,652,157 |
|
|
(1,320,393) |
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| Gain (loss) on oil derivatives |
$ |
3,711,295 |
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|
$ |
(7,457,018) |
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|
$ |
11,154,554 |
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$ |
(35,053,159) |
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| Natural gas derivatives: |
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| Realized gain (loss) on natural gas derivatives |
1,013,436 |
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|
— |
|
|
1,018,673 |
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|
— |
|
| Unrealized gain (loss) on natural gas derivatives |
(1,460,071) |
|
|
— |
|
|
566,338 |
|
|
— |
|
| Gain (loss) on natural gas derivatives |
$ |
(446,635) |
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|
$ |
— |
|
|
$ |
1,585,011 |
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|
$ |
— |
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| Gain (loss) on derivative contracts |
$ |
3,264,660 |
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|
$ |
(7,457,018) |
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|
$ |
12,739,565 |
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|
$ |
(35,053,159) |
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The components of “Cash paid for derivative settlements, net” within the Condensed Statements of Cash Flows are as follows for the respective periods:
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For the Three Months Ended |
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For the Six Months Ended |
|
June 30, 2023 |
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June 30, 2022 |
|
June 30, 2023 |
|
June 30, 2022 |
| Cash flows from operating activities |
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| Cash received (paid) for oil derivatives |
$ |
(833,841) |
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|
$ |
(19,617,265) |
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|
$ |
(1,497,603) |
|
|
$ |
(33,732,766) |
|
| Cash received (paid) from natural gas derivatives |
1,013,436 |
|
|
— |
|
|
1,018,673 |
|
|
— |
|
| Cash received (paid) for derivative settlements, net |
$ |
179,595 |
|
|
$ |
(19,617,265) |
|
|
$ |
(478,930) |
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|
$ |
(33,732,766) |
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The following tables reflect the details of current derivative contracts as of June 30, 2023 (Quantities are in barrels (Bbl) 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) |
|
Q3 2023 |
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Q4 2023 |
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Q1 2024 |
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Q2 2024 |
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Q3 2024 |
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Q4 2024 |
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Q1 2025 |
|
Q2 2025 |
|
Q3 2025 |
|
Q4 2025 |
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| Swaps: |
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| Hedged volume (Bbl) |
181,700 |
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|
138,000 |
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|
170,625 |
|
|
156,975 |
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|
282,900 |
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|
368,000 |
|
|
— |
|
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— |
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— |
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— |
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| Weighted average swap price |
$ |
74.19 |
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|
$ |
74.52 |
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|
$ |
67.40 |
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|
$ |
66.40 |
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|
$ |
65.49 |
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|
$ |
68.43 |
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|
$ |
— |
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$ |
— |
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$ |
— |
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$ |
— |
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| Deferred premium puts: |
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| Hedged volume (Bbl) |
230,000 |
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|
165,600 |
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|
45,500 |
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|
45,500 |
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|
— |
|
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— |
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|
— |
|
|
— |
|
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— |
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— |
|
| Weighted average strike price |
$ |
80.47 |
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|
$ |
83.78 |
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|
$ |
84.70 |
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|
$ |
82.80 |
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|
$ |
— |
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|
$ |
— |
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$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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| Weighted average deferred premium price |
$ |
10.60 |
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|
$ |
14.61 |
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|
$ |
17.15 |
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|
$ |
17.49 |
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|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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| Two-way collars: |
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| Hedged volume (Bbl) |
211,163 |
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|
274,285 |
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|
339,603 |
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|
325,847 |
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|
230,000 |
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|
128,800 |
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|
474,750 |
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|
464,100 |
|
|
— |
|
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— |
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| Weighted average put price |
$ |
55.56 |
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|
$ |
56.73 |
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|
$ |
64.20 |
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|
$ |
64.30 |
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|
$ |
64.00 |
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|
$ |
60.00 |
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|
$ |
57.06 |
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|
$ |
60.00 |
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|
$ |
— |
|
|
$ |
— |
|
| Weighted average call price |
$ |
69.25 |
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|
$ |
70.77 |
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|
$ |
79.73 |
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|
$ |
79.09 |
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|
$ |
76.50 |
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|
$ |
73.24 |
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|
$ |
75.82 |
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|
$ |
69.85 |
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|
$ |
— |
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$ |
— |
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| Three-way collars: |
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| Hedged volume (Bbl) |
16,242 |
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|
15,598 |
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|
— |
|
|
— |
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|
— |
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|
— |
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|
— |
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|
— |
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|
— |
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|
— |
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| Weighted average first put price |
$ |
45.00 |
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|
$ |
45.00 |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
|
| Weighted average second put price |
$ |
55.00 |
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|
$ |
55.00 |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
|
|
$ |
— |
|
| Weighted average call price |
$ |
80.05 |
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|
$ |
80.05 |
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|
$ |
— |
|
|
$ |
— |
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|
$ |
— |
|
|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
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Gas Hedges (Henry Hub) |
|
Q3 2023 |
|
Q4 2023 |
|
Q1 2024 |
|
Q2 2024 |
|
Q3 2024 |
|
Q4 2024 |
|
Q1 2025 |
|
Q2 2025 |
|
Q3 2025 |
|
Q4 2025 |
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| NYMEX Swaps: |
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| Hedged volume (MMBtu) |
144,781 |
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|
203,706 |
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|
152,113 |
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|
138,053 |
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|
121,587 |
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|
644,946 |
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|
616,199 |
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|
591,725 |
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— |
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— |
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| Weighted average swap price |
$ |
3.36 |
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$ |
3.35 |
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$ |
3.62 |
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$ |
3.61 |
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$ |
3.59 |
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$ |
4.45 |
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$ |
3.78 |
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$ |
3.43 |
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|
$ |
— |
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$ |
— |
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| Two-way collars: |
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| Hedged volume (MMBtu) |
404,421 |
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|
579,998 |
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|
591,500 |
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|
568,750 |
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|
552,000 |
|
|
— |
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— |
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— |
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|
— |
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|
— |
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| Weighted average put price |
$ |
3.17 |
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|
$ |
3.15 |
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$ |
4.00 |
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|
$ |
4.00 |
|
|
$ |
4.00 |
|
|
$ |
— |
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|
$ |
— |
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|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| Call hedged volume (MMBtu) |
404,421 |
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|
579,998 |
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|
591,500 |
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|
568,750 |
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|
552,000 |
|
|
— |
|
|
— |
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|
— |
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|
— |
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|
— |
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| Weighted average call price |
$ |
4.55 |
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|
$ |
4.50 |
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$ |
6.29 |
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$ |
6.29 |
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|
$ |
6.29 |
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|
$ |
— |
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|
$ |
— |
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|
$ |
— |
|
|
$ |
— |
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|
$ |
— |
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Oil Hedges (basis differential) |
|
Q3 2023 |
|
Q4 2023 |
|
Q1 2024 |
|
Q2 2024 |
|
Q3 2024 |
|
Q4 2024 |
|
Q1 2025 |
|
Q2 2025 |
|
Q3 2025 |
|
Q4 2025 |
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| Argus basis swaps: |
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| Hedged volume (MMBtu) |
305,000 |
|
|
460,000 |
|
|
364,000 |
|
|
364,000 |
|
|
368,000 |
|
|
368,000 |
|
|
270,000 |
|
|
273,000 |
|
|
276,000 |
|
|
276,000 |
|
Weighted average spread price (1)
|
$ |
1.10 |
|
|
$ |
1.10 |
|
|
$ |
1.15 |
|
|
$ |
1.15 |
|
|
$ |
1.15 |
|
|
$ |
1.15 |
|
|
$ |
1.00 |
|
|
$ |
1.00 |
|
|
$ |
1.00 |
|
|
$ |
1.00 |
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Gas Hedges (basis differential) |
|
Q3 2023 |
|
Q4 2023 |
|
Q1 2024 |
|
Q2 2024 |
|
Q3 2024 |
|
Q4 2024 |
|
Q1 2025 |
|
Q2 2025 |
|
Q3 2025 |
|
Q4 2025 |
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| Waha basis swaps: |
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|
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| Hedged volume (MMBtu) |
332,855 |
|
|
324,021 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Weighted average spread price (1)
|
$ |
0.55 |
|
|
$ |
0.55 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
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| El Paso Permian Basin basis swaps: |
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|
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|
|
|
|
|
|
|
| Hedged volume (MMBtu) |
329,529 |
|
|
459,683 |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Weighted average spread price (1)
|
$ |
0.63 |
|
|
$ |
0.63 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|