Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS

v3.23.1
DERIVATIVE FINANCIAL INSTRUMENTS
 3 Months Ended
Mar. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS
NOTE 5 — 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 either costless collars, deferred premium puts, or swaps for this purpose. Oil derivative contracts are based on WTI Crude Oil prices and natural gas contacts are based on Henry Hub or Waha 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 derivative contracts have been 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.
As of
March 31, 2023 December 31, 2022
Commodity derivative instruments, marked to market:
Derivative assets, current 15,546,579  16,193,327 
Discounted deferred premiums (9,191,038) (11,524,165)
Derivatives assets, current, net of premiums $ 6,355,541  $ 4,669,162 
Derivative assets, noncurrent 7,426,584  7,606,258 
Discounted deferred premiums (751,229) (1,476,848)
Derivative assets, noncurrent, net of premiums $ 6,675,355  $ 6,129,410 
Derivative liabilities, current $ 8,523,681  $ 13,345,619 
Derivative liabilities, noncurrent $ 7,406,483  $ 10,485,650 
The components of “Gain (loss) on derivative contracts” are as follows for the respective periods:
For the Three Months Ended
March 31, 2023 March 31, 2022
Oil derivatives:
Realized loss on oil derivatives $ (663,762) $ (14,115,501)
Unrealized gain (loss) on oil derivatives 8,107,021  (13,480,640)
Gain (loss) on oil derivatives $ 7,443,259  $ (27,596,141)
Natural gas derivatives:
Realized gain on natural gas derivatives 5,237  — 
Unrealized gain on natural gas derivatives 2,026,409  — 
Gain on natural gas derivatives $ 2,031,646  $ — 
Gain (loss) on derivative contracts $ 9,474,905  $ (27,596,141)
The components of “Cash (paid) for derivative settlements, net” are as follows for the respective periods:
For the Three Months Ended
March 31, 2023 March 31, 2022
Cash flows from operating activities
Cash paid for oil derivatives $ (663,762) $ (14,115,501)
Cash received from natural gas derivatives 5,237  — 
Cash paid for derivative settlements, net $ (658,525) $ (14,115,501)
The following tables reflect the details of current derivative contracts as of March 31, 2023 (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 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024 Q1 2025
Swaps:
Hedged volume (Bbl) 68,250  138,000  138,000  170,625  156,975  282,900  368,000  — 
Weighted average swap price $ 81.73  $ 76.19  $ 74.52  $ 67.40  $ 66.40  $ 65.49  $ 68.43  $ — 
Deferred premium puts:
Hedged volume (Bbl) 288,925  186,300  165,600  45,500  45,500  —  —  — 
Weighted average strike price $ 85.30  $ 83.43  $ 83.78  $ 84.70  $ 82.80  $ —  $ —  $ — 
Weighted average deferred premium price $ 12.99  $ 13.09  $ 14.61  $ 17.15  $ 17.49  $ —  $ —  $ — 
Two-way collars:
Hedged volume (Bbl) 124,450  119,163  113,285  194,003  189,347  92,000  —  348,750 
Weighted average put price $ 52.18  $ 52.12  $ 52.07  $ 67.35  $ 67.40  $ 70.00  $ —  $ 56.00 
Weighted average call price $ 63.01  $ 62.80  $ 62.60  $ 84.42  $ 83.21  $ 81.20  $ —  $ 76.75 
Three-way collars:
Hedged volume (Bbl) 16,800  16,242  15,598  —  —  —  —  — 
Weighted average first put price $ 45.00  $ 45.00  $ 45.00  $ —  $ —  $ —  $ —  $ — 
Weighted average second put price $ 55.00  $ 55.00  $ 55.00  $ —  $ —  $ —  $ —  $ — 
Weighted average call price $ 80.05  $ 80.05  $ 80.05  $ —  $ —  $ —  $ —  $ — 
Gas Hedges (Henry Hub)
Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024 Q1 2025
NYMEX Swaps:
Hedged volume (MMBtu) 87,490  117,137  116,623  75,075  63,700  50,600  577,300  553,500 
Weighted average swap price $ 3.34  $ 3.29  $ 3.29  $ 3.82  $ 3.82  $ 3.82  $ 4.57  $ 3.82 
Two-way collars:
Hedged volume (MMBtu) 425,043  611,318  579,998  591,500  568,750  552,000  —  — 
Weighted average put price $ 3.19  $ 3.17  $ 3.15  $ 4.00  $ 4.00  $ 4.00  $ —  $ — 
Call hedged volume (MMBtu) 425,043  611,318  579,998  591,500  568,750  552,000  —  — 
Weighted average call price $ 4.59  $ 4.54  $ 4.50  $ 6.29  $ 6.29  $ 6.29  $ —  $ — 
Gas Hedges (basis differential)
Q2 2023 Q3 2023 Q4 2023 Q1 2024 Q2 2024 Q3 2024 Q4 2024 Q1 2025
Waha basis swaps:
Hedged volume (MMBtu) 338,461  332,855  324,021  —  —  —  —  — 
Weighted average swap price
(1)
(1)
(1)
 $ —  $ —  $ —  $ —  $ — 

(1) 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).