Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk, including the effects of adverse changes in commodity prices and interest rates as described below. The primary objective of the following information is to provide quantitative and qualitative information about the Company's potential exposure to market risks. The term “market risk” refers to the risk of loss arising from adverse changes in oil, natural gas and NGL prices and interest rates. The disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. All of the Company’s market risk sensitive instruments were entered into for purposes other than speculative trading.
Commodity Price Risk
The Company’s major market risk exposure is in the pricing that we receive for our oil, natural gas and NGL production with oil production being the majority of our total production. Pricing for oil, natural gas and NGLs have been volatile and unpredictable for several years, and this volatility is expected to continue in the future. The prices we receive for our oil, natural gas and NGLs depend on many factors outside of our control, such as the strength of the global economy and global supply and demand for the commodities we produce.
The Company’s minimum hedging requirement was 50% of PDP volumes as of September 30, 2021. At September 30, 2021 and 2020, we had a net liability derivative position of $51.0 million and a net asset derivative position of $21.9 million, respectively, related to our price swaps, basis swaps and collars, to reduce price volatility associated with certain of our oil and natural gas sales. These instruments provide only partial price protection against declines in oil and natural gas prices and may partially limit our potential gains from future increases in prices. With respect to these fixed price swap contracts, the counterparty is required to make payment to the Company if the settlement price for any settlement period is less than the swap price, and we are required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap price. Our derivative contracts are based upon reported settlement prices on commodity exchanges, with crude oil derivative settlements based on NYMEX West Texas Intermediate pricing and Crude Oil – Brent and with natural gas derivative settlements based on NYMEX Henry Hub and Waha Hub pricing.
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Due to the volatility in oil and gas prices, we have historically used, and we expect to continue to use, commodity derivative instruments, such as swaps and collars, to hedge price risk associated with a portion of our anticipated production. Our hedging instruments reduce, but do not eliminate, the potential effects of the variability in cash flow from operations due to fluctuations in oil and natural gas prices and provide increased certainty of cash flows for our drilling program and debt service requirements.
Counterparty and Customer Credit Risk
Our cash and cash equivalents are exposed to concentrations of credit risk. We manage and control this risk by investing these funds with major financial institutions. We often have balances in excess of the federally insured limits.
Our derivative contracts expose us to credit risk in the event of nonperformance by counterparties. While we do not require counterparties to our derivative contracts to post collateral, we do evaluate the credit standing of such counterparties as it deems appropriate. Certain counterparties are financial institutions that participate as lenders in our revolving credit facility. The counterparties to our derivative contracts currently in place have investment grade ratings.
Our principal exposures to credit risk are through receivables resulting from joint interest receivables and receivables from the sale of our oil and natural gas production due to the concentration of our oil and natural gas receivables. F or the years ended September 30, 2021 and 2020, one purchaser accounted for 87% and 86% , respectively, of our revenue purchased, with three end customers each accounting for more than 10% of the purchased revenue. During such periods, no other purchaser accounted for 10% or more of our revenues. The inability or failure of this purchaser to meet their obligations to us or their insolvency or liquidation may adversely affect our financial results. However, the end customers include companies with lower credit risk. Further, based on the current demand for oil and natural gas and the availability of other purchasers, we believe that the loss of any of our purchasers would not have a long-term material adverse effect on our financial condition and results of operations because oil and natural gas are fungible products with well-established markets.
Joint operations receivables arise from billings to entities that own partial interests in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we intend to drill. We have little ability to control whether these entities will participate in our wells.
Interest Rate Risk
As of September 30, 2021, we had $60 million of outstanding borrowings and an additional $75 million available under our revolving credit facility. The interest rate on the revolving credit facility was based off of LIBOR plus a specified margin during the year ended September 30, 2021. We have entered into floating-to-fixed interest rate swaps to manage interest rate exposure related to our revolving credit facility.
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Item 8. Financial Statements and Supplementary Data
The information required by this item appears beginning on page F-1 of this report.
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Table of Contents
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
None.
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