Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The term “market risk” as it applies to our business refers to the risk of loss arising from adverse changes in oil and natural gas prices and interest rates, and we are exposed to market risk as described below. The primary objective of the following information is to provide quantitative and qualitative information about our potential exposure to market risks. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. All of our market risk sensitive instruments were entered into for purposes other than speculative trading.
Commodity Price Risk
Our primary market risk exposure is in the pricing that we receive for our oil, natural gas and NGL production. Pricing for oil, natural gas and NGLs has been volatile and unpredictable for several years, and we expect this volatility to continue for the foreseeable future. Based on our production for the first half of 2020 , our oil and gas sales for the six months ended June 30, 2020 would have moved up or down $24.4 million for each 10% change in oil prices per Bbl, $2.3 million for each 10% change in NGL prices per Bbl, and $1.7 million for each 10% change in natural gas prices per Mcf.
Due to this volatility, we have historically used, and we may elect to continue to selectively use, commodity derivative instruments (such as collars, swaps and basis swaps) to mitigate price risk associated with a portion of our anticipated production. Our derivative instruments allow us to reduce, but not eliminate, the potential effects of the variability in cash flows from operations due to fluctuations in oil and natural gas prices and thereby provide increased certainty of cash flows for our drilling program and debt service requirements. These instruments provide only partial price protection against declines in oil and natural gas prices, but alternatively they may partially limit our potential gains from future increases in prices. Our credit agreement limits our ability to enter into commodity hedges covering greater than 85% of our reasonably anticipated projected production from proved properties.
The following table summarizes the terms of the swap contracts we had in place as of June 30, 2020 and additional contracts entered into through July 31, 2020 . Refer to Note 7—Derivative Instruments in Item 1 of Part I of this Quarterly Report for open derivative positions as of June 30, 2020 :
Period
Volume (Bbls)
Volume
(Bbls/d)
Weighted Average
Fixed Price ($/Bbl) (1)
Crude oil swaps
NYMEX WTI
July 2020 - September 2020
2,300,000
25,000
$
26.83
October 2020 - December 2020
1,196,000
13,000
38.89
ICE Brent
January 2021 - March 2021
90,000
1,000
45.56
Period
Volume (Bbls)
Volume
(Bbls/d)
Weighted Average Differential ($/Bbl) (2)
Crude oil basis swaps
July 2020 - September 2020
1,472,000
16,000
$
0.52
October 2020 - December 2020
1,196,000
13,000
0.51
Period
Volume (Bbls)
Volume
(Bbls/d)
Weighted Average Collar Price Ranges (3)
Crude oil collars
October 2020 - December 2020
184,000
2,000
$39.00 - $44.50
(1)
These crude oil swap transactions are settled based on the NYMEX WTI or ICE Brent oil price on each trading day within the specified monthly settlement period.
(2)
These oil basis swap transactions are settled based on the difference between the arithmetic average of ARGUS MIDLAND WTI and ARGUS WTI CUSHING indices, during each applicable settlement period.
(3)
These crude oil collars are settled based on the NYMEX WTI price on each trading day within the specified monthly settlement period and establish floor and ceiling prices for the contractual volumes.
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Period
Volume (MMBtu)
Volume (MMBtu/d)
Weighted Average Fixed Price ($/MMBtu) (1)
Natural gas swaps
July 2020 - September 2020
2,760,000
30,000
$
2.03
October 2020 - December 2020
2,150,000
23,370
2.40
January 2021 - March 2021
1,800,000
20,000
2.68
Period
Volume (MMBtu)
Volume (MMBtu/d)
Weighted Average Differential ($/MMBtu) (2)
Natural gas basis swaps
July 2020 - September 2020
2,760,000
30,000
$
(1.62
)
October 2020 - December 2020
930,000
10,109
(1.62
)
(1)
These natural gas swap contracts are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period.
(2)
These natural gas basis swap contracts are settled based on the difference between the Inside FERC’s West Texas WAHA price and the NYMEX price of natural gas, during each applicable settlement period.
Changes in the fair value of derivative contracts from December 31, 2019 to June 30, 2020 , are presented below:
(in thousands)
Commodity derivative asset (liability)
Net fair value of oil and gas derivative contracts outstanding as of December 31, 2019
$
(325
)
Contract settlements
6,947
Change in the futures curve of forecasted commodity prices (1)
(38,362
)
Net fair value of oil and gas derivative contracts outstanding as of June 30, 2020
$
(31,740
)
(1)
At inception, new derivative contracts entered into by us have no intrinsic value.
A hypothetical upward or downward shift of 10% per Bbl in the NYMEX forward curve for crude oil as of June 30, 2020 would cause a $13.8 million increase or decrease, respectively, in this fair value liability, and a hypothetical upward or downward shift of 10% per Mcf in the NYMEX forward curve for natural gas as of June 30, 2020 would cause a $1.3 million increase or decrease, respectively, in this same fair value liability.
Interest Rate Risk
Our ability to borrow and the rates offered by lenders can be adversely affected by deteriorations in the credit markets and/or downgrades in our credit rating. The uncertainties regarding the impact of COVID-19 as well as the significant decline in global oil and gas prices in March and April of 2020 has impacted the credit markets, resulting in increases in market interest rates for new debt issuances. CRP’s credit facility interest rate, on the other hand, is based on a LIBOR spread, which exposes us to interest rate risk on our borrowings outstanding to the extent LIBOR increases.
As of June 30, 2020 , we had $370.0 million of debt outstanding under our credit agreement, with a weighted average interest rate of 3.5% . Assuming no change in the amount outstanding, the impact on interest expense of a 1.0% increase or decrease in the assumed weighted average interest rate would be approximately $3.7 million per year. We do not currently have or intend to enter into any derivative arrangements to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
The remaining long-term debt balance of $736.0 million consists of our Senior Notes, which have fixed interest rates. Therefore, this balance is not affected by interest rate movements. For additional information regarding our debt instruments, see Note 4—Long-Term Debt , in Item 1 of Part I of this Quarterly Report.
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