Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Commodity Price Risk
The price we receive for our oil and natural gas production heavily influences our revenue, profitability, access to capital and future rate of growth. Oil and natural gas are commodities and, therefore, their prices are subject to wide fluctuations in response to relatively minor changes in supply and demand and other factors. Historically, the markets for oil and natural gas have been volatile, and we believe these markets will likely continue to be volatile in the future. The prices we receive for our production depend on numerous factors beyond our control. Our revenue generally would have increased or decreased along with any increases or decreases in oil or natural gas prices, but the exact impact on our income is indeterminable given the variety of expenses associated with producing and selling oil that also increase and decrease along with oil prices.
We enter into derivative contracts to achieve a more predictable cash flow by reducing our exposure to commodity price volatility. All derivative positions are carried at their fair value in the balance sheet and are marked-to-market at the end of each period. Any realized gains and losses on settled derivatives, as well as mark-to-market gains or losses, are aggregated and recorded to gain (loss) on derivative instruments, net on the statements of operations rather than as a component of other comprehensive income or other income (expense).
We generally use derivatives to economically hedge a significant, but varying portion of our anticipated future production. Any payments due to counterparties under our derivative contracts are funded by proceeds received from the sale of our production. Production receipts, however, lag payments to the counterparties. Any interim cash needs are funded by cash from operations or borrowings under our Revolving Credit Facility.
The following table summarizes our open oil swap contracts as of December 31, 2020, by fiscal quarter.
Settlement Period Oil (Barrels) Weighted Average Price ($)
Swaps-Crude Oil
2021:
Q1 2,190,000 55.66
Q2 1,929,208 56.38
Q3 1,694,410 54.07
Q4 1,731,506 53.80
2022 (1) :
Q1 472,500 51.47
Q2 113,750 49.14
Q3 115,000 49.14
Q4 115,000 49.14
2023 (2) :
Q1 — —
Q2 — —
Q3 — —
Q4 — —
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(1) We have entered into crude oil derivative contracts that give counterparties the option to extend certain current derivative contracts for additional periods. Options covering a notional volume of 3.1 million barrels for 2022 are exercisable on or about December 31, 2021. If the counterparties exercise all such options, the notional volume of our existing crude oil derivative contracts will increase as follows for 2022: (i) for the first quarter of 2022, by 1,010,250 barrels at a weighted average price of $53.20 per barrel, (ii) for the second quarter of 2022, by 1,021,475 barrels at a weighted average price of $53.20 per barrel, (iii) for the third quarter of 2022, by 549,700 barrels at a weighted average price of $51.71 per barrel, and (iv) for the fourth quarter of 2022, by 549,700 barrels at a weighted average price of $51.71 per barrel.
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(2) We have entered into crude oil derivative contracts that give counterparties the option to extend certain current derivative contracts for additional periods. Options covering a notional volume of 1.5 million barrels for 2023 are exercisable on or about December 31, 2022. If the counterparties exercise all such options, the notional volume of our existing crude oil derivative contracts will increase as follows for 2023: (i) for the first quarter of 2023, by 630,000 barrels at a weighted average price of $49.80 per barrel, (ii) for the second quarter of 2023, by 273,000 barrels at a weighted average price of $46.59 per barrel, (iii) for the third quarter of 2023, by 276,000 barrels at a weighted average price of $46.59 per barrel, and (iv) for the fourth quarter of 2023, by 276,000 barrels at a weighted average price of $46.59 per barrel.
From time to time, we also hedge our oil basis differential to mitigate price risk associated with fluctuations in takeaway capacity. As of December 31, 2020, we have hedged approximately 1.5 million barrels for 2021 at a weighted average price of $(2.39) per barrel. See Note 12 to our financial statements.
The following table summarizes our open natural gas swap contracts as of December 31, 2020, by fiscal quarter.
Contract Period Gas (MMBTU) Weighted Average Price ($)
Swaps-Natural Gas
2021:
Q1 3,375,000 $ 2.47
Q2 3,185,000 2.51
Q3 3,220,000 2.51
Q4 3,220,000 2.51
2022:
Q1 900,000 $ 2.61
Q2 910,000 2.61
Q3 920,000 2.61
Q4 920,000 2.61
Interest Rate Risk
Our long-term debt as of December 31, 2020 is comprised of borrowings that contain fixed and floating interest rates. The Second Lien Notes and our Unsecured VEN Bakken Note bear cash interest at fixed rates. Our Revolving Credit Facility interest rate is a floating rate option that is designated by us within the parameters established by the underlying agreement. At our option, borrowings under the Revolving Credit Facility bear interest at the base rate or LIBOR, plus an applicable margin. The base rate is a rate per annum equal to the greatest of: (i) the agent bank’s prime rate; (ii) the federal funds effective rate plus 50 basis points; and (iii) the adjusted LIBOR rate for a one-month interest period plus 100 basis points. The applicable margin for base rate loans ranges from 100 to 200 basis points, and the applicable margin for LIBOR loans ranges from 200 to 300 basis points, in each case depending on the percentage of the borrowing base utilized. Interest payments are due under the Revolving Credit Facility in arrears, in the case of a loan based on LIBOR on the last day of the specified interest period and in the case of all other loans on the last day of each March, June, September and December. All outstanding principal is due and payable upon termination of the Revolving Credit Facility.
The Company uses interest rate swaps to effectively convert a portion of its variable rate indebtedness to fixed rate indebtedness. As of December 31, 2020, we had interest rate swaps with a total notional amount of $200.0 million.
As a result, changes in interest rates can impact results of operations and cash flows. A 1% increase in short-term interest rates on our floating-rate debt outstanding at December 31, 2020 would cost us approximately $3.3 million in additional annual interest expense.