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 “(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 June 30, 2022, 100% of the Company’s volumes subject to derivative instruments are with lenders under its Credit Facility (as defined in Note 8). Non-performance risk is incorporated by utilizing discount rates adjusted for the credit risk of the Company’s counterparties. The Company is not subject to master netting agreements and classifies the fair value of 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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The components of “(Loss) on derivative contracts” are as follows for the respective periods:

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The components of “Cash (paid) for derivative settlements” are as follows for the respective periods:

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During 2020, 2021, and early 2022, the Company entered into additional derivative contracts in the form of swaps for the 2022 calendar period for oil. Additionally, on June 28 and 29, 2022, the Company entered into twelve new derivative contracts in the form of put options. The following tables reflect the details of current contracts as of June 30, 2022:

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