Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
General
This discussion provides information about the financial instruments we use to manage commodity prices. All contracts are settled in cash and do not require the actual delivery of a commodity at settlement. Additionally, our exposure to credit risk and interest rate risk is also discussed.
Commodity Price Risk. Our most significant market risk relates to the prices we receive for oil, natural gas and NGLs. Due to the historical price volatility of these commodities, from time to time, depending upon our view of opportunities under the then-prevailing market conditions, we enter into commodity pricing derivative contracts for a portion of our anticipated production volumes for the purpose of reducing the variability of oil and natural gas prices we receive.
We may use a variety of commodity-based derivative contracts, including fixed price swaps, basis swaps and collars. At December 31, 2021, the Company's open derivative contracts consisted of natural gas and NGL commodity derivative contracts under which we will receive a fixed price for the contract and pay a floating market price to the counterparty over a specified period for a contracted volume. These commodity derivative contracts consisted of the following:
Notional Units Weighted Average Fixed Price per Unit
NGL Price Swaps: January 2022 - February 2022 1,042,000 Gallons $ 1.20
Natural Gas Price Swaps: January 2022 - February 2022 720,000 MMBtu $ 4.07
Because we have not designated any of our derivative contracts as hedges for accounting purposes, changes in fair values of our derivative contracts are recognized as gains and losses in current period earnings. As a result, our current period earnings may be significantly affected by changes in the fair value of our commodity derivative contracts. Changes in fair value are principally measured based on a comparison of future prices to the contract price at the period-end.
The following table summarizes derivative activity for the years ended December 31, 2021 and 2020 (in thousands):
Year Ended December 31,
2021 2020
Loss (gain) on commodity derivative contracts $ 2,251 $ (5,765)
Cash paid (received) on settlements $ 2,230 $ (5,879)
See “Note 6—Derivatives” to the accompanying consolidated financial statements in Item 8 of this report for additional information regarding our commodity derivatives.
Credit Risk. We are exposed to credit risk related to counterparties to our derivative financial contracts. All of our derivative transactions have been carried out in the over-the-counter market. The use of derivative transactions in over-the-counter markets involves the risk that the counterparties may be unable to meet the financial terms of the transactions. The counterparties for all of our derivative transactions have an “investment grade” credit rating. We monitor the credit ratings of our derivative counterparties and consider our counterparties’ credit default risk ratings in determining the fair value of our derivative contracts. Historically, derivative contracts have been with multiple counterparties to minimize exposure to any individual counterparty, and in addition our counterparties have been large financial institutions.
We do not require collateral or other security from counterparties to support derivative instruments. We have master netting agreements with our derivative contract counterparties, which allow us to net our derivative assets and liabilities by commodity type with the same counterparty. As a result of the netting provisions, our maximum amount of loss under derivative transactions due to credit risk is limited to the net amounts due from the counterparties under the commodity derivative contracts. Therefore, we are not required to post additional collateral under our commodity derivative contracts.
We are also exposed to credit risk related to the collection of receivables from our joint interest partners for their proportionate share of expenditures made on projects we operate. Historically, our credit losses on joint interest receivables have been immaterial.
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Interest Rate Risk. We were exposed to interest rate risk under the 2020 Credit Facility. The variable interest rate on our 2020 Credit Facility fluctuated, and exposed us to short-term changes in market interest rates as our interest obligations on this instrument were periodically redetermined based on prevailing market interest rates, primarily LIBOR. The 2020 Credit Facility was terminated during the second half of 2021. See "Note — 11 Long-Term Debt" to the accompanying consolidated financial statements in Item 8 of this report for further discussion.
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