Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

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DERIVATIVE FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
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. A 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 the Company's 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.
As of
March 31, 2024 December 31, 2023
Commodity derivative instruments, marked to market:
Derivative assets, current $ 4,493,001  $ 7,768,697 
Discounted deferred premiums (788,555) (1,553,323)
Derivatives assets, current, net of premiums $ 3,704,446  $ 6,215,374 
Derivative assets, noncurrent $ 5,092,176  $ 11,634,714 
Discounted deferred premiums —  — 
Derivative assets, noncurrent, net of premiums $ 5,092,176  $ 11,634,714 
Derivative liabilities, current $ 17,517,656  $ 7,520,336 
Derivative liabilities, noncurrent $ 10,012,561  $ 11,510,368 
The components of “Gain (loss) on derivative contracts” from the Condensed Statements of Operations are as follows for the respective periods:
For the Three Months Ended
March 31, 2024 March 31, 2023
Oil derivatives:
Realized loss on oil derivatives $ (2,738,970) $ (663,762)
Unrealized gain (loss) on oil derivatives (16,994,322) 8,107,021 
Gain (loss) on oil derivatives $ (19,733,292) $ 7,443,259 
Natural gas derivatives:
Realized gain on natural gas derivatives $ 1,277,455  $ 5,237 
Unrealized gain (loss) on natural gas derivatives (558,658) 2,026,409 
Gain on natural gas derivatives $ 718,797  $ 2,031,646 
Gain (loss) on derivative contracts $ (19,014,495) $ 9,474,905 
The components of “Cash received (paid) for derivative settlements, net” within the Condensed Statements of Cash Flows are as follows for the respective periods:
For the Three Months Ended
March 31, 2024 March 31, 2023
Cash flows from operating activities
Cash paid for oil derivatives $ (2,738,970) $ (663,762)
Cash received from natural gas derivatives 1,277,455  5,237 
Cash received (paid) for derivative settlements, net $ (1,461,515) $ (658,525)
The following tables reflect the details of current derivative contracts as of March 31, 2024 (Quantities are in barrels (Bbl) for the oil derivative contracts and in million British thermal units (MMBtu) for the natural gas derivative contracts):
Oil Hedges (WTI)
Q2 2024 Q3 2024 Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025 Q1 2026
Swaps:
Hedged volume (Bbl) 156,975  282,900  368,000  —  —  184,000  —  387,000 
Weighted average swap price $ 66.40  $ 65.49  $ 68.43  $ —  $ —  $ 73.35  $ —  $ 70.11 
Deferred premium puts:
Hedged volume (Bbl) 45,500  —  —  —  —  —  —  — 
Weighted average strike price $ 82.80  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Weighted average deferred premium price $ 17.49  $ —  $ —  $ —  $ —  $ —  $ —  $ — 
Two-way collars:
Hedged volume (Bbl) 334,947  230,000  128,800  474,750  464,100  225,400  404,800  — 
Weighted average put price $ 64.32  $ 64.00  $ 60.00  $ 57.06  $ 60.00  $ 65.00  $ 60.00  $ — 
Weighted average call price $ 79.16  $ 76.50  $ 73.24  $ 75.82  $ 69.85  $ 78.91  $ 75.68  $ — 
Gas Hedges (Henry Hub)
Q2 2024 Q3 2024 Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025 Q1 2026
NYMEX Swaps:
Hedged volume (MMBtu) 86,059  121,587  644,946  616,199  591,725  285,200  —  — 
Weighted average swap price $ 3.62  $ 3.59  $ 4.45  $ 3.78  $ 3.43  $ 3.73  $ —  $ — 
Two-way collars:
Hedged volume (MMBtu) 405,650  584,200  27,600  27,000  27,300  308,200  598,000  553,500 
Weighted average put price $ 3.94  $ 3.94  $ 3.00  $ 3.00  $ 3.00  $ 3.00  $ 3.00  $ 3.50 
Weighted average call price $ 6.16  $ 6.17  $ 4.15  $ 4.15  $ 4.15  $ 4.75  $ 4.15  $ 5.03 
Oil Hedges (basis differential)
Q2 2024 Q3 2024 Q4 2024 Q1 2025 Q2 2025 Q3 2025 Q4 2025 Q1 2026
Argus basis swaps:
Hedged volume (Bbl)
 244,000  368,000  368,000  270,000  273,000  276,000  276,000  — 
Weighted average spread price (1)
$ 1.15  $ 1.15  $ 1.15  $ 1.00  $ 1.00  $ 1.00  $ 1.00  $ — 
(1) The oil basis swap hedges are calculated as the fixed price (weighted average spread price above) less the difference between WTI Midland and WTI Cushing, in the issue of Argus Americas Crude.