Item 3. Quantitative and Qualitative Disclosures About Market Risk
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company’s major market risk exposure is in the pricing that it receives for production of oil, natural gas and NGLs. Pricing for oil, natural gas and NGLs has been volatile and unpredictable for several years, and HighPeak Energy expects this volatility to continue in the future.
During the period from January 1, 2018 through September 30, 2020, the NYMEX WTI crude oil price per Bbl ranged from a low of $16.55 to a high of $70.98, and the NYMEX natural gas price per MMBtu ranged from a low of $1.74 to a high of $4.09. The high, low and average prices for NYMEX WTI and NYMEX Henry Hub are monthly contract prices. During April 2020, NYMEX WTI crude oil and NYMEX natural gas prices averaged $16.55 per Bbl and $1.74 per MMBtu, respectively. A $1.00 per barrel increase (decrease) in the weighted average oil price for the nine months ended September 30, 2020 would have increased (decreased) the Company’s revenues by approximately $476,000 on an annualized basis and a $0.10 per Mcf increase (decrease) in the weighted average natural gas price for the nine months ended September 30, 2020 would have increased (decreased) the Company’s revenues by approximately $13,000 on an annualized basis.
Due to this volatility, the Company may begin to use, commodity derivative instruments, such as collars, puts and swaps, to hedge price risk associated with a portion of anticipated production. These hedging instruments allow the Company to reduce, but not eliminate, the potential effects of the variability in cash flow from operations due to fluctuations in oil and natural gas prices and provide increased certainty of cash flows for its drilling program. These instruments provide only partial price protection against declines in oil and natural gas prices and may partially limit the Company’s potential gains from future increases in prices. The Company may enter into hedging arrangements to protect its capital expenditure budget and to protect a Credit Facility borrowing base. The Company does not enter into any financial instruments, including derivatives, for speculative or trading purposes.
Counterparty and Customer Credit Risk. The Company’s derivative contracts, if any, expose it to credit risk in the event of nonperformance by counterparties. It is anticipated that if the Company enters into any commodity contracts, the collateral for the outstanding borrowings under any debt facility the Company may enter into may be used as collateral for the Company’s commodity derivatives. The Company evaluates the credit standing of its counterparties as it deems appropriate. It is anticipated that any counterparties to HighPeak Energy’s derivative contracts would have investment grade ratings.
The Company’s principal exposures to credit risk are through receivables from the sale of oil and natural gas production due to the concentration of its oil and natural gas receivables with a few significant customers. The inability or failure of the Company’s significant customers to meet their obligations to the Company or their insolvency or liquidation may adversely affect the Company’s financial results. However, the Company believes the credit quality of its customers is high.
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HIGHPEAK ENERGY, INC.
The average forward prices based on September 30, 2020 market quotes were as follows:
Fourth
Quarter
2020
Year Ending
December 31,
2021
Average forward NYMEX oil price per Bbl
$
40.73
$
42.46
Average forward NYMEX gas price per MMBtu
$
2.82
$
2.92
The average forward purchase prices based on November 10, 2020 market quotes were as follows:
Fourth
Quarter
2020
Year Ending
December 31,
2021
Average forward NYMEX oil price per Bbl
$
41.78
$
42.92
Average forward NYMEX gas price per MMBtu
$
2.95
$
2.96
Credit risk. The Company's primary concentration of credit risks are associated with (i) the collection of receivables resulting from the sale of oil and natural gas production and (ii) the risk of a counterparty's failure to meet its obligations under derivative contracts with the Company.
The Company monitors exposure to counterparties primarily by reviewing credit ratings, financial criteria and payment history. Where appropriate, the Company obtains assurances of payment, such as a guarantee by the parent company of the counterparty or other credit support. The Company's oil and gas is sold to various purchasers who must be prequalified under the Company's credit risk policies and procedures. Historically, the Company's credit losses on oil and gas receivables have not been material.
The Company uses credit and other financial criteria to evaluate the credit standing of, and to select, counterparties to its derivative instruments. Although the Company does not obtain collateral or otherwise secure the fair value of its derivative instruments, associated credit risk is mitigated by the Company's credit risk policies and procedures.
The Company will enter into International Swap Dealers Association Master Agreements ("ISDA Agreements") with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with right of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative contract, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party.
39
HIGHPEAK ENERGY, INC.
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