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 2021 ranged from a monthly average low of $52.52 per barrel to a monthly average high of $80.41 per barrel. Natural gas prices we received during 2021 ranged from a monthly average low of $3.74 per Mcf to a monthly average high of $11.19 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, 2021, the Company had in place derivative contracts covering 3,129 barrels of oil per day for the calendar year 2022. All of the 3,129 barrels of oil in 2022 are in the form of swaps of WTI Crude Oil prices. The oil swap prices for 2022 range from $44.22 to $50.05, with a weighted average swap price of $46.60. 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 $24.0 million as of December 31, 2021). 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 2021, sales to three customers, Phillips 66, NGL Crude and BP Energy represented 76%, 7% and 6%, respectively, of oil and natural gas revenues. As of December 31, 2021, Phillips 66 represented 75% of our accounts receivable, NGL Crude represented 8% of our accounts receivable and BP Energy represented 4% 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.
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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, 2021, we had $290 million outstanding on our Credit Facility with a weighted average interest rate of 4.4%. A 1% change in the interest rate on our Credit Facility would result in an estimated $2,900,000 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.