Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our exposure to market risk. The term market risk relates to our risk of loss arising from adverse changes in oil, natural gas, and NGL prices and interest rates. These disclosures are not meant to be precise indicators of expected future losses, but rather indicators of reasonably possible losses. The forward-looking information provides indicators of how we view and manage our ongoing market risk exposures.

Commodity Price Risk

Our results of operations and cash flows are impacted by changes in market prices for oil, natural gas and NGL, which have historically been volatile. To mitigate a portion of our exposure to adverse price changes, we enter into various derivative instruments. Our oil, natural gas and NGL derivative activities, when combined with our sales of oil, natural gas and NGL, allow us to predict with greater certainty the revenue we will receive. We believe our derivative instruments continue to be highly effective in achieving our risk management objectives.

We determine the fair value of our derivative instruments utilizing established index prices, volatility curves and discount factors. These estimates are compared to counterparty valuations for reasonableness. Derivative transactions are also subject to the risk that counterparties will be unable to meet their obligations. This non-performance risk is considered in the valuation of our derivative instruments, but to date has not had a material impact on the values of our derivatives. Future risk related to counterparties not being able to meet their obligations has been partially mitigated under our commodity hedging arrangements that require counterparties to post collateral if their obligations to us are in excess of defined thresholds. The values we report in our financial statements are as of a point in time and subsequently change as these estimates are revised to reflect actual results, changes in market conditions and other factors. See Note 14 of the notes to our consolidated financial statements included in Item 8 of this report for further discussion of the fair value measurements associated with our derivatives.

For the year ended December 31, 2020, oil, natural gas, and NGL revenue, excluding any effect of our derivative instruments, were $1.4 billion, $1.2 billion, and $130 million, respectively. Based on 2020 production, oil, natural gas, and NGL revenue for the year ended December 31, 2020 would have increased or decreased by approximately $140 million, $120 million, and $13 million, respectively, for each 10% increase or decrease in prices. As of December 31, 2020, the fair values of our oil and gas derivatives were net assets of $19 million and net liabilities of $137 million, respectively. A 10% increase in forward oil prices would decrease the valuation of oil derivatives by $187 million while a 10% decrease would increase the valuation by $185 million. A 10% increase in forward gas prices would decrease the valuation of gas derivatives by approximately $129 million while a 10% decrease would increase the valuation by $129 million. This fair value change assumes volatility based on prevailing market parameters at December 31, 2020. See Note 14 of the notes to our consolidated financial statements included in Item 8 of this report for further information on our open derivative positions.

Interest Rate Risk

Our exposure to interest rate changes relates primarily to borrowings under our pre-petition revolving credit facility and DIP Credit Facility. Interest was payable on borrowings under the pre-petition revolving credit facility and DIP Credit Facility based on a floating rate. See Note 5 of the notes to our consolidated financial statements included in Item 8 of this report for additional information. As of December 31, 2020, we had $1.929 billion in borrowings outstanding under our pre-petition revolving credit facility and no outstanding borrowings under our DIP Credit Facility. A 1.0% increase in interest rates based on the variable borrowings as of December 31, 2020 would result in an increase in our interest expense of approximately $19 million per year. Changes in interest rates do affect the fair value of our fixed-rate debt.

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