Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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 natural gas, NGLs
and oil prices, as well as interest rates. These 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.
Commodity Price Risk
Our revenues are primarily derived from the sale of natural gas, NGLs, and oil production, subjecting us to commodity price risk.
Commodity prices for natural gas, NGLs and oil can be volatile and may fluctuate due to relatively small changes in supply, weather
conditions, economic conditions, and government actions. For the year ended December 31, 2025 , our natural gas, NGLs, and oil
revenue was $830 million , $208 million , and $501 million , respectively. Based on production, natural gas, NGLs and oil revenue for
the year ended December 31, 2025 would have increased or decreased by approximately $83 million , $21 million , and $50 million ,
respectively, for each 10% increase or decrease in prices.
To mitigate the risk of fluctuations in commodity prices, we enter into derivatives. The total volumes hedged through the use of these
instruments vary from period to period. Generally our objective is to hedge approximately 60% to 80% of anticipated production
volumes for the next 12 months, at least 50% for months 13 to 24 , and a minimum of 30% for months 25 to 36 . For additional
information regarding derivatives, refer to Note 8 in the Notes to the Consolidated Financial Statements .
By removing price volatility from a significant portion of our expected production through 2028 , we have mitigated, but not
eliminated, the potential effects of changing prices on operating cash flow for those periods. While these derivative contracts help
mitigate the negative effects of falling commodity prices, they also limit the benefits we would receive from increases in commodity
prices.
As of December 31, 2025 , the fair value of our natural gas derivatives was a net liability of $494 million , NGLs derivatives were in a
net asset position of $34 million , and our oil derivatives were in a net asset position of $99 million . For the year ended December 31,
2025 , a 10% fluctuation in commodity prices would have a corresponding impact of approximately $49 million , $3 million , and $10
million on natural gas, NGLs and oil derivatives, respectively.
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates. Our borrowings primarily consist of fixed-rate amortizing
notes and a variable rate Credit Facility as illustrated below.
As of December 31, 2025
(in thousands)
Borrowings
Interest Rate (a)
ABS Notes, Nordic Bonds, & other (b)
$ 2,193,566
7.72 %
Credit Facility
$ 485,400
7.04 %
(a) The interest rate on the ABS Notes, Nordic Bonds, and other notes payable represents the weighted average fixed rate of the
notes, while the interest rate presented for the Credit Facility represents the floating rate as of December 31, 2025 .
(b) Includes $23 million in notes payable issued by a third party financial institution in November 2024 collateralized by two natural
gas processing plants and various natural gas compressors and related support equipment in the Central Region, as of
December 31, 2025 .
For additional information regarding the ABS notes, Nordic Bonds, and Credit Facility, refer to Note 15 in the Notes to the
Consolidated Financial Statements .
For the year ended December 31, 2025 , a 100 basis point adjustment in the borrowing rate for the Credit Facility would result in a
corresponding effect on interest expense of approximately $5 million . This represents a reasonably possible change in interest rate
risk.
We strive to maintain a prudent balance of floating and fixed-rate borrowing exposure, particularly during uncertain market
conditions. As part of our risk mitigation strategy, we occasionally enter into swap arrangements to adjust our exposure to floating or
fixed interest rates, depending on changes in the composition of borrowings in our portfolio. Consequently, the total principal hedged
through the use of derivatives varies from period to period.
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Diversified Energy Company
As of December 31, 2025 , the fair value of our interest rate swaps represents a liability of $0.1 million . For additional information
regarding derivatives, refer to Note 8 in the Notes to the Consolidated Financial Statements .
Counterparty & Customer Credit Risk
We are exposed to counterparty and customer credit risk from the hedging and sale of our natural gas, NGLs and oil.
Our derivative instruments expose us to our counterparties’ credit risk. To mitigate this risk, we only enter into commodity contracts
with counterparties that are highly rated or deemed by us to have acceptable credit strength and competence. Counterparty non-
performance risk is considered in the valuation of our derivative instruments, but has not had an impact on the value of our derivatives.
We also attempt to limit our exposure to non-performance by any single counterparty. As of December 31, 2025 , our commodity
contracts derivative instruments were spread among 13 counterparties.
For additional information regarding derivatives, refer to Note 8 in the Notes to the Consolidated Financial Statements
Accounts receivable from customers represent amounts due for the purchase of these commodities, and their collectability depends on
the financial condition of each customer. We review the financial condition of customers before extending credit and generally do not
require collateral to support their accounts receivable. As of December 31, 2025 , we had no customers that comprised over 10% of our
total accounts receivable from customers. Net of the applicable allowance for credit losses, our accounts receivable from customers
were $347 million as of December 31, 2025 .
The Company is also exposed to credit risk from joint interest owners, which are entities that own a working interest in the properties
operated by the Company. Joint interest receivables are classified under accounts receivable, net, in the Consolidated Statement of
Financial Position. The Company has the ability to withhold future revenue payments to recover any non-payment of joint interest
receivables. As of December 31, 2025 , our joint interest receivables, net of the applicable allowance for credit losses, were $61
million .
Accounts receivable are current, and the Company believes these net receivables are collectible . For additional information regarding
accounts receivable, refer to Note 9 in the Notes to the Consolidated Financial Statements .
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Form 10-K
Diversified Energy Company