Chord Energy Corp 10-K

Item 7A. Quantitative and Qualitative Disclosures about Market Risk We are exposed to a variety of market risks including commodity price risk, interest rate risk and counterparty and customer risk. We address these risks through a program of risk management, including the use of derivative instruments. The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risk. The term “market risk” refers to the risk of loss arising from adverse changes in crude oil, natural gas and NGL prices, and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk sensitive instruments were entered into for hedging purposes, rather than for speculative trading. Commodity price exposure risk. We are exposed to market risk as the prices of crude oil, natural gas and NGLs fluctuate as a result of a variety of factors, including changes in supply and demand and the macroeconomic environment, all of which are typically beyond our control. The markets for crude oil, natural gas and NGLs have been volatile, especially over the last several months and years. During 2020, crude oil and NGL prices have weakened to historic lows as a result of the impacts of the actions of Saudi Arabia and Russia and the global COVID-19 pandemic. These prices will likely continue to be volatile in the future. To partially reduce price risk caused by these market fluctuations, we have entered into derivative instruments in the past and expect to enter into derivative instruments in the future to cover a significant portion of our future production. We recognize all derivative instruments at fair value. The credit standing of our counterparties is analyzed and factored into the fair value amounts recognized on our Consolidated Balance Sheets. Derivative assets and liabilities arising from our derivative contracts with the same counterparty are also reported on a net basis, as all counterparty contracts provide for net settlement. See “Item 8. Financial Statements and Supplementary Data—Note 10 — Derivative Instruments” and “—Note 9—Fair Value Measurements” for additional information regarding our commodity derivative contracts. The fair value of our derivative instruments was a net liability of $94.1 million at December 31, 2020. A 10% increase in crude oil prices would decrease the fair value of our derivative position by approximately $111.4 million, while a 10% decrease in crude oil prices would increase the fair value by approximately $111.4 million, prior to credit risk adjustments. As further described in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Developments” and “—Commodity Prices,” the commodity price environment has been recently depressed due to oversupply and decreasing demand, and we cannot predict future impacts to crude oil production and global economic activity. Please see “Part I, Item 1A. Risk Factors” for more information regarding commodity price risks. Interest rate risk. At December 31, 2020, we had $260.0 million of borrowings and $6.8 million of outstanding letters of credit issued under the Oasis Credit Facility, which were subject to varying rates of interest based on (i) the total outstanding borrowings (including the value of all outstanding letters of credit) in relation to the borrowing base and (ii) whether the loan is a London interbank offered rate (“LIBOR”) loan (defined in the Oasis Credit Facility as a Eurodollar loan) or a domestic bank prime interest rate loan (defined in the Oasis Credit Facility as an Alternate Based Rate or “ABR” loan). At December 31, 2020, the outstanding borrowings under the Oasis Credit Facility bore interest at LIBOR (including a 1% LIBOR floor) plus a 3.25% margin. The unused borrowing base capacity is subject to a commitment fee of 0.500%. At December 31, 2020, OMP had $450.0 million of borrowings and a de minimis outstanding letter of credit issued under the OMP Credit Facility, which were subject to varying rates of interest based on (i) OMP’s most recently calculated consolidated total leverage ratio and (ii) whether the loan is a LIBOR loan (defined in the OMP Credit Facility as a Eurodollar loan) or a domestic bank prime interest rate loan (defined in the OMP Credit Facility as an ABR loan). At December 31, 2020, the outstanding borrowings under the OMP Credit Facility bore interest at LIBOR plus a 2.00% margin. The unused portion of the OMP Credit Facility is subject to a commitment fee ranging from 0.375% to 0.500%. We do not currently, but may in the future, utilize interest rate derivatives to mitigate interest rate exposure in an attempt to reduce interest rate expense related to debt issued under the Oasis Credit Facility or the OMP Credit Facility. Interest rate derivatives would be used solely to modify interest rate exposure and not to modify the overall leverage of the debt portfolio. Counterparty and customer credit risk. Joint interest receivables arise from billing entities which own partial interest in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we choose to drill. We have limited ability to control participation in our wells. Our credit losses on joint interest receivables were immaterial in 2020. We are also subject to credit risk due to concentration of our crude oil and natural gas receivables with several significant customers. The inability or failure of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. We monitor our exposure to counterparties on crude oil and natural gas sales primarily by reviewing credit ratings, financial statements and payment history. We extend credit terms based on our evaluation of each counterparty’s credit worthiness. We have not generally required our counterparties to provide collateral to secure crude 79 T able of Contents oil and natural gas sales receivables owed to us. Historically, our credit losses on crude oil and natural gas sales receivables have been immaterial. In addition, our crude oil and natural gas derivative arrangements expose us to credit risk in the event of nonperformance by counterparties. However, in order to mitigate the risk of nonperformance, we only enter into derivative contracts with counterparties that are high credit-quality financial institutions. All of the counterparties on our derivative instruments currently in place are lenders under the Oasis Credit Facility with investment grade ratings. We are likely to enter into any future derivative instruments with these or other lenders under the Oasis Credit Facility, which also carry investment grade ratings. This risk is also managed by spreading our derivative exposure across several institutions and limiting the volumes placed under individual contracts. Furthermore, the agreements with each of the counterparties on our derivative instruments contain netting provisions. As a result of these netting provisions, our maximum amount of loss due to credit risk is limited to the net amounts due to and from the counterparties under the derivative contracts. 80 T able of Contents