8.  Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and, from time to time, we use various derivative instruments to manage our exposure to this commodity price risk from sales of our oil and natural gas.  All of the derivative counterparties are also lenders or affiliates of lenders participating in our revolving bank credit facility.  We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we currently anticipate that each of our derivative counterparties will be able to fulfill their contractual obligations.  Additional collateral is not required by us due to the derivative counterparties’ collateral rights as lenders, and we do not require collateral from our derivative counterparties.

Each derivative contract is recorded on the balance sheet as an asset or liability at fair value as of the respective period.  We have elected not to designate our commodity derivative contracts as hedging instruments; therefore, all changes in the fair value of derivative contracts were recognized currently in earnings during the periods presented.  While these contracts are intended to reduce the effects of price volatility, they may have limited incremental income from favorable price movements.

Commodity Derivatives

As of December 31, 2017 and 2016, we did not have any open derivative contracts.  During 2017, we entered into crude oil and natural gas derivative contracts for a portion of our anticipated future production.  Some of the commodity derivative contracts are known as “three-way collars” consisting of a purchased put option, a sold call option and a purchased call option, each at varying strike prices.  The strike prices of the contracts were set so that the contracts were premium neutral (“costless”), which means no net premium was paid to or received from a counterparty.  The three-way collar contracts are structured to provide price risk protection if the commodity price falls below the strike price of the put option and provides us the opportunity to benefit if the commodity price rises above the strike price of the purchased call option.  In addition, we entered into oil derivative contracts known as “two-way”, “costless” collars, which consist of a purchased put option and a sold call option.  These two-way collars provide price risk protection if crude oil prices fall below certain levels, but have the potential to limit incremental income from favorable price movements above certain limits.  The oil contracts are based on West Texas Intermediate (“WTI”) crude oil prices as quoted off the NYMEX.  The natural gas contracts are based on Henry Hub natural gas prices as quoted off the NYMEX.  

Changes in the fair value and settlements of our commodity derivative contracts were as follows (in thousands):

Cash receipts (payments), net, on commodity derivative contract settlements are included within Net cash provided by operating activities on the Consolidated Statements of Cash Flows and were as follows (in thousands):