DERIVATIVE FINANCIAL INSTRUMENTS
|9 Months Ended|
Sep. 30, 2022
|DERIVATIVE FINANCIAL INSTRUMENTS|
|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.
The components of “Gain (loss) on” are as follows for the respective periods:
The components of “Cash (paid) for derivative settlements, net” are as follows for the respective periods:
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.):
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef