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 2022, our oil and gas sales for the six months ended June 30, 2022 would have moved up or down $61.2 million for each 10% change in oil prices per Bbl, $10.1 million for each 10% change in NGL prices per Bbl, and $10.7 million for each 10% change in natural gas prices per Mcf.
Due to this volatility, we have historically used, and we may elect to continue to selectively use, commodity derivative instruments (such as collars, swaps and basis swaps) to mitigate price risk associated with a portion of our anticipated production. Our derivative instruments allow us to reduce, but not eliminate, the potential effects of the variability in cash flows that can emanate from fluctuations in oil and natural gas prices, and thereby provide increased certainty of cash flows for our drilling program and debt service requirements. These instruments provide only partial price protection against declines in oil and natural gas prices, but alternatively they partially limit our potential gains from future increases in prices. Our Credit Agreement limits our ability to enter into commodity hedges covering greater than 85% of our reasonably anticipated projected production from proved properties.
The table below summarizes the terms of the derivative contracts we had in place as of June 30, 2022 and additional contracts entered into through July 31, 2022. Refer to Note 7—Derivative Instruments in Item 1 of Part I of this Quarterly Report for open derivative positions as of June 30, 2022.
Period Volume (Bbls) Volume
(Bbls/d) Wtd. Avg. Crude Price
($/Bbl) (1)
Crude oil swaps
July 2022 - September 2022 782,000 8,500 $65.46
October 2022 - December 2022 690,000 7,500 65.63
January 2023 - March 2023 225,000 2,500 73.51
April 2023 - June 2023 227,500 2,500 73.25
July 2023 - September 2023 92,000 1,000 72.98
October 2023 - December 2023 92,000 1,000 72.98
Period Volume (Bbls) Volume
(Bbls/d) Wtd. Avg. Collar Price Ranges
($/Bbl) (2)
Crude oil collars July 2022 - September 2022 460,000 5,000 $78.00 - $107.13
October 2022 - December 2022 644,000 7,000 80.00 - 104.17
January 2023 - March 2023 810,000 9,000 75.56 - 91.15
April 2023 - June 2023 819,000 9,000 75.56 - 91.15
July 2023 - September 2023 644,000 7,000 76.43 - 92.70
October 2023 - December 2023 644,000 7,000 76.43 - 92.70
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Period Volume (Bbls) Volume
(Bbls/d) Wtd. Avg. Differential
($/Bbl) (3)
Crude oil basis differential swaps July 2022 - September 2022 552,000 6,000 $0.29
October 2022 - December 2022 552,000 6,000 0.29
Period Volume (Bbls) Volume
(Bbls/d) Wtd. Avg. Differential
($/Bbl) (4)
Crude oil roll differential swaps July 2022 - September 2022 920,000 10,000 $0.71
October 2022 - December 2022 920,000 10,000 0.71
(1) These crude oil swap transactions are settled based on the NYMEX WTI index price on each trading day within the specified monthly settlement period versus the contractual swap price for the volumes stipulated.
(2) These crude oil collars are settled based on the NYMEX WTI index price, on each trading day within the specified monthly settlement period versus the contractual floor and ceiling prices for the volumes stipulated.
(3) These crude oil basis swap transactions are settled based on the difference between the arithmetic average of ARGUS MIDLAND WTI and ARGUS WTI CUSHING indices, during each applicable monthly settlement period.
(4) These crude oil roll swap transactions are settled based on the difference between the arithmetic average of NYMEX WTI calendar month prices and the physical crude oil delivery month price.
Period Volume (MMBtu) Volume (MMBtu/d) Wtd. Avg. Gas Price
($/MMBtu) (1)
Natural gas swaps
July 2022 - September 2022 2,760,000 30,000 $3.24
October 2022 - December 2022 1,540,000 16,739 3.15
Period Volume (MMBtu) Volume (MMBtu/d) Wtd. Avg. Differential
($/MMBtu) (2)
Natural gas basis differential swaps
July 2022 - September 2022 1,840,000 20,000 $(0.45)
October 2022 - December 2022 1,840,000 20,000 (0.45)
January 2023 - March 2023 2,250,000 25,000 (1.11)
April 2023 - June 2023 2,275,000 25,000 (1.11)
July 2023 - September 2023 2,300,000 25,000 (1.11)
October 2023 - December 2023 2,300,000 25,000 (1.11)
Period Volume (MMBtu) Volume (MMBtu/d) Wtd. Avg. Collar Price Ranges
($/MMBtu) (3)
Natural gas collars
July 2022 - September 2022 1,840,000 20,000 $3.50 - $3.97
October 2022 - December 2022 2,450,000 26,630 3.87 - 5.06
January 2023 - March 2023 4,950,000 55,000 4.09 - 7.47
April 2023 - June 2023 4,095,000 45,000 3.72 - 7.32
July 2023 - September 2023 4,140,000 45,000 3.72 - 7.32
October 2023 - December 2023 4,140,000 45,000 3.76 - 7.69
January 2024 - March 2024 1,820,000 20,000 3.25 - 5.31
(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 versus the contractual swap price for the volumes stipulated.
(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 monthly settlement period.
(3) These natural gas collars are settled based on the NYMEX Henry Hub price on each trading day within the specified monthly settlement period versus the contractual floor and ceiling prices for the volumes stipulated.
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Changes in the fair value of derivative contracts from December 31, 2021 to June 30, 2022, are presented below:
(in thousands) Commodity derivative asset (liability)
Net fair value of oil and gas derivative contracts outstanding as of December 31, 2021 $ (34,910)
Commodity hedge contract settlement payments, net of any receipts 116,526
Cash and non-cash mark-to-market losses on commodity hedge contracts (1)
(163,656)
Net fair value of oil and gas derivative contracts outstanding as of June 30, 2022 $ (82,040)
c
(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, 2022 would cause a $48.1 million increase or $47.1 million decrease, respectively, in this fair value position, and a hypothetical upward or downward shift of 10% per Mcf in the NYMEX forward curve for natural gas as of June 30, 2022 would cause a $7.2 million increase or decrease in this same fair value position.
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. CRP’s Credit Agreement interest rate is based on a SOFR spread, which exposes us to interest rate risk to the extent we have borrowings outstanding under this credit facility. As of June 30, 2022, we had no borrowings outstanding under the Credit Agreement. We do not currently have or intend to enter into any derivative hedge contracts to protect against fluctuations in interest rates applicable to our outstanding indebtedness.
The long-term debt balance of $801.8 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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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.