Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
Our major market risk exposure is in the pricing applicable to our oil and natural gas production. Market risk refers to the risk of loss from adverse changes in oil and natural gas prices. Realized pricing is primarily driven by the prevailing domestic price for crude oil and spot prices applicable to the region in which we produce natural gas. Historically, prices received for oil and natural gas production have been volatile and unpredictable. We expect pricing volatility to continue.
The prices we receive depend on many factors outside of our control. Oil prices we received during 2020 ranged from a low of $13.23 per barrel to a high of $57.36 per barrel. Natural gas prices we received during 2020 ranged from a low of negative $0.93 per Mcf to a high of $3.38 per Mcf. A significant decline in the prices of oil or natural gas could have a material adverse effect on our financial condition and results of operations. In order to reduce commodity price uncertainty and increase cash flow predictability relating to the marketing of our crude oil and natural gas, we may enter into crude oil and natural gas price hedging arrangements with respect to a portion of our expected production. As of December 31, 2020, the Company has in place derivative contracts covering 9,000 and 1,750 barrels of oil per day for the calendar years 2021 and 2022, respectively, and covering 6,000 and 5,000 MMBTU of natural gas per day for the calendar years 2021 and 2022, respectively. For 2021, contracts covering 4,500 of the 9,000 barrels of oil are in the form of costless collars of WTI Crude Oil prices. “Costless collars” are the combination of two options, a put option (floor) and a call option (ceiling) with the options structured so that the premium paid for the put option will be offset by the premium received from selling the call option. These collars have floors ranging from $40.00 to $45.00, with an averaged floor of $42.22 and have ceilings ranging between $52.71 and $55.35 per barrel, with an average ceiling of $54.57. The remaining 4,500 barrels of oil in 2021 and all of
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the 1,750 barrels of oil in 2022 are in the form of swaps of WTI Crude Oil prices. The oil swap prices for 2021 range from $45.00 to $45.96, with an average of $45.42. The oil swap prices for 2022 range from $44.22 to $45.98, with an average of $44.84. All of the contracts for natural gas for both 2021 and 2022 are in the form of swaps of Henry Hub. The swap prices for 2021 and 2022 are $2.991 and $2.7255, respectively. See Note 8 to our Financial Statements for further information.
Customer Credit Risk
Our principal exposure to credit risk is through receivables from the sale of our oil and natural gas production (approximately $15.0 million as of December 31, 2020). We are subject to credit risk due to the concentration of our oil and natural gas receivables with our most significant customers. We do not require our customers to post collateral, and the inability of our significant customers to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. For the fiscal year 2020, sales to three customers, Phillips 66, Oxy and NGL Crude represented 68%, 10% and 8%, respectively, of oil and natural gas revenues. As of December 31, 2020, Phillips 66 represented 80% of our accounts receivable, Oxy represented 0% of our accounts receivable and NGL Crude represented 5% of our accounts receivable. Due to availability of other purchasers, we do not believe the loss of any single oil or natural gas customer would have a material adverse effect on our results of operations.
Interest Rate Risk
We are subject to market risk exposure related to changes in interest rates on our indebtedness under our Credit Facility, which bears variable interest based upon a prime rate and is therefore susceptible to interest rate fluctuations. Changes in interest rates affect the interest earned on the Company’s cash and cash equivalents and the interest rate paid on borrowings under the Credit Facility.
As of December 31, 2020, we had $313 million outstanding on our Credit Facility with a weighted average interest rate of 4.5%. A 1% change in the interest rate on our Credit Facility would result in an estimated $3,130,000 change in our annual interest expense. See note 10 in the Footnotes to the Financial Statements for more information on the Company’s interest rates on our Credit Facility.
Currently, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes.
Please also see Item 1A “Risk Factors” above for a discussion of other risks and uncertainties we face in our business.
Item 8: Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are included beginning at page F-1 of this Annual Report.
Item 9: Changes in and Disagreements with Accountants and Accounting and Financial Disclosure
None.