Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are primarily exposed to market risk in two areas: commodity prices and, to a lesser extent, interest rate risk. Our risk management activities involve the use of derivative financial instruments to mitigate the impact of market price risk exposures primarily related to our oil and natural gas production.
We are subject to a minimum hedging requirement under our A&R Credit Agreement for each calendar month on a six-full fiscal quarter rolling basis. For any quarter occurring during the first four forward fiscal quarters, we are required to hedge a minimum of 50% of our reasonably anticipated projected production from proved developed producing reserves from the semi-annual reserves report delivered to the administrative agent of our A&R Credit Agreement, adjusted to 45% in July and November and 25% in August, September and October. For the fifth and sixth forward fiscal quarters, if the Consolidated Total Debt to EBITDAX Ratio (as defined in the A&R Credit Agreement) is greater than or equal to 1.00 to 1.00, then we are required to hedge a minimum of 25%, adjusted to 20% in August, September and October.
All derivatives are recorded on the Consolidated Balance Sheets at fair value with settlements of such contracts and changes in the unrealized fair value recorded as “Price risk management activities income (expense)” on the Consolidated Statements of Operations in each period.
Commodity Price Risks
Oil and natural gas prices can fluctuate significantly and have a direct impact on our revenues, earnings and cash flow. During year ended December 31, 2025, our average oil price realizations after the effect of derivatives decreased 9% to $68.18 per Bbl from $75.07 per Bbl in the comparable 2024 period. Our average natural gas price realizations after the effect of derivatives increased 40% during the year ended December 31, 2025 to $3.70 per Mcf from $2.65 per Mcf in the comparable 2024 period.
Price Risk Management Activities
Historically, we have attempted to mitigate commodity price risk and stabilize cash flows associated with our forecasted sales of oil and natural gas production primarily through the use of oil and natural gas swaps and costless collars. These contracts will impact our earnings as the fair value of these derivatives changes. Our derivatives will not mitigate all of the commodity price risks of our forecasted sales of oil and natural gas production and, as a result, we will be subject to commodity price risks on our remaining forecasted production.
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We had commodity derivative instruments in place to reduce the price risk associated with future production of 7,371 MBbls of crude oil and 10,465 MMBtu of natural gas at December 31, 2025, with a net derivative asset position of $47.7 million. For additional information regarding our commodity derivative instruments, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 6 — Financial Instruments , included elsewhere in this Annual Report. The table below presents the hypothetical sensitivity of our commodity price risk management activities to changes in fair values arising from immediate selected potential changes in oil and natural gas prices at December 31, 2025 (in thousands):
Oil and Natural Gas Derivatives
Ten Percent Increase
Ten Percent Decrease
Fair Value
Fair Value
Change
Fair Value
Change
Price impact (1)
$
47,712
$
9,629
$
(38,083
)
$
88,273
$
40,561
(1) Presents the hypothetical sensitivity of our commodity price risk management activities to changes in fair values arising from changes in oil and natural gas prices.
Variable Interest Rate Risks
We had total debt outstanding of $1,250.0 million at December 31, 2025, before unamortized original issue discount and deferred financing costs from our 9.000% Notes and 9.375% Notes, which bears interest at a fixed rate. There were no outstanding borrowings under our Bank Credit Facility with variable interest rates. We manage our interest rate exposure by maintaining a combination of fixed and variable rate debt and monitoring the effect of market changes in interest rates. As of December 31, 2025, our interest rate risk exposure is mitigated as a result of fixed interest rates on 100% of our debt. For additional information regarding the borrowing base utilization percentage associated with our Bank Credit Facility, see Part IV, Item 15. Exhibits and Financial Statement Schedules — Note 8 — Debt , included elsewhere in this Annual Report.
We are subject to the risk of changes in interest rates under our bank credit facility. In addition, the terms of our A&R Credit Agreement require us to pay higher interest rates as we utilize a larger percentage of our available borrowing base.