Derivatives and Fair Value
|3 Months Ended|
Mar. 31, 2021
|Derivatives and Fair Value [Abstract]|
|Derivatives and Fair Value||
8. DERIVATIVES AND FAIR VALUE
The Company uses derivative financial instruments from time to time to achieve a more predictable cash flow from crude oil production by reducing the Company’s exposure to price fluctuations.
Commodity swaps – 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. On January 22, 2021, the Company entered into commodity swaps at a Dated Brent weighted average of $53.10 per barrel for the period from and including February 2021 through January 2022 for a quantity of 709,262 barrels. On May 6, 2021, the Company entered into commodity swaps at a Dated Brent weighted average of $66.51 per barrel for the period from and including May 2021 through October 2021 for a quantity of 672,533 barrels.
While these commodity swaps 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 swap contracts 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 swap contracts’ fair value includes 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 Company’s condensed 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