Quarterly report pursuant to Section 13 or 15(d)

Note 8 - Derivatives and Fair Value

v3.23.2
Note 8 - Derivatives and Fair Value
6 Months Ended
Jun. 30, 2023
Notes to Financial Statements  
Derivatives and Fair Value [Text Block]

8. DERIVATIVES

 

The Company uses derivative financial instruments from time to time to achieve a more predictable cash flow from crude oil production by reducing the Company’s exposure to price fluctuations. See the table below for the list of outstanding contracts as of June 30, 2023:

 

Settlement Period

Type of Contract

Index

 

Average Monthly Volumes

   

Weighted Average Put Price

   

Weighted Average Call Price

 
       

(Bbls)

   

(per Bbl)

   

(per Bbl)

 

July 2023 - September 2023

Collars

Dated Brent

    95,000     $ 65.00     $ 96.00  

 

While these derivative instruments are intended to be an economic hedge to mitigate the impact of a decline in crude oil prices, the Company has not elected hedge accounting. The contracts are measured at fair value each period, with changes in fair value recognized in net income. The Company does not enter into derivative instruments for speculative or trading purposes. In connection with the RBL facility entered in May 2022, the Company is required to hedge a portion of its anticipated oil production at the time the Company draws down on the borrowing base. The Company has not yet drawn down on its available facility.

 

The derivative instruments are measured at fair value using the Income Method. Level 2 observable inputs used in the valuation model include market information as of the reporting date, such as prevailing Brent crude futures prices, Brent crude futures commodity price volatility and interest rates. The determination of the derivative instrument contracts’ fair value includes the impact of the counterparty’s non-performance risk.

 

To mitigate counterparty risk, the Company enters into such derivative contracts with creditworthy financial institutions deemed by management as competent and competitive market makers.

 

At times, the Company’s counterparties require that it post collateral for changes in the net fair value of the derivative contracts. This cash collateral is reported in the line item "Restricted cash" on the unaudited condensed consolidated balance sheets.

 

The following table sets forth the loss on derivative instruments on the Company’s unaudited condensed consolidated statements of operations and comprehensive income:

 

       

Three Months Ended June 30,

   

Six Months Ended June 30,

 

Derivative Item

 

Statements of Operations Line

 

2023

   

2022

   

2023

   

2022

 
        (in thousands)     (in thousands)  

Commodity derivatives

 

Cash settlements paid on matured derivative contracts, net

  $ (4 )   $ (21,059 )   $ (63 )   $ (33,559 )
   

Unrealized gain (loss)

    35       11,517       115       (7,741 )
   

Derivative instruments gain (loss), net

  $ 31     $ (9,542 )   $ 52     $ (41,300 )