Derivatives and Fair Value
|12 Months Ended|
Dec. 31, 2019
|Derivatives and Fair Value [Abstract]|
|Derivatives and Fair Value||
10. DERIVATIVES AND FAIR VALUE
The Company uses derivative financial instruments to achieve a more predictable cash flow from crude oil production by reducing the exposure to price fluctuations. See Note 2 for further information.
Commodity swaps - In June 2018, the Company entered into commodity swaps at a Dated Brent weighted average of $74.00 per barrel for the period from and including June 2018 through June 2019 for a quantity of approximately 400,000 barrels. On May 6, 2019, the Company entered into commodity swaps at a Dated Brent weighted average of $66.70 per barrel for the period from and including July 2019 through June 2020 for an approximate quantity of 500,000 barrels. If a liability position exceeds $10.0 million, the Company would be required to provide a bank letter of credit or deposit cash into an escrow account for the amount by which the liability exceeds $10.0 million. These swaps settle on a monthly basis. At December 31, 2019, the unexpired commodity swaps were
for an underlying quantity of 274,870 barrels and had a fair value asset position of $0.6 million reflected in “Prepayments and other” line of the consolidated balance sheet.
Put options - During 2016, the Company executed crude oil put contracts as market conditions allowed in order to economically hedge anticipated 2016 and 2017 cash flows from crude oil producing activities. At December 31, 2017, the crude oil put contracts expired.
While these commodity swaps and crude oil puts are intended to be an economic hedge to mitigate the impact of a decline in crude oil prices, the Company has not elected hedge accounting. The contracts are being measured at fair value each period, with changes in fair value recognized in net income. The Company does not enter into derivative instruments for speculative or trading proposes.
The crude oil swaps are measured at fair value using the Income Method. Level 2 observable inputs used in the valuation model include market information as of the reporting date, such as prevailing Brent crude futures prices, Brent crude futures commodity price volatility and interest rates. The determination of the swaps’ fair value includes the impact of the counterparty’s non-performance risk. The crude oil put contracts were measured at fair value using the Black’s option pricing model. Level 2 observable inputs used in the valuation model included market information as of the reporting date, such as prevailing Brent crude futures prices, Brent crude futures commodity price volatility and interest rates. The determination of the put contract fair value included the impact of the counterparty’s non-performance risk.
To mitigate counterparty risk, the Company enters into such derivative contracts with creditworthy financial institutions deemed by management as competent and competitive market makers.
The following table sets forth the gain (loss) on derivative instruments on the consolidated statements of operations:
The entire disclosure for derivatives and fair value of assets and liabilities.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef