Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Commodity Price Risk

Our major market risk exposure in our exploration and production business is in the pricing applicable to our oil and natural gas production. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot market prices applicable to our natural gas production. Pricing for oil and natural gas production has been volatile and unpredictable for several years, and we expect this volatility to continue in the future. The prices we receive for production depend on many factors outside of our control.

We use derivatives, including swaps, basis swaps, swaptions, roll hedges and costless collars, to reduce price volatility associated with certain of our oil and natural gas sales.

At December 31, 2020, we had a net liability derivative position of $255 million related to our commodity price risk derivatives. Utilizing actual derivative contractual volumes under our commodity price derivatives as of December 31, 2020, a 10% increase in forward curves associated with the underlying commodity would have increased the net liability position to $284 million, an increase of $29 million, while a 10% decrease in forward curves associated with the underlying commodity would have decreased the net liability derivative position to $226 million, a decrease of $29 million. However, any cash derivative gain or loss would be substantially offset by a decrease or increase, respectively, in the actual sales value of production covered by the derivative instrument.

In our midstream operations business, we have indirect exposure to commodity price risk in that persistent low commodity prices may cause us or Rattler’s other customers to delay drilling or shut in production, which would reduce the volumes available for gathering and processing by our infrastructure assets. If we or Rattler’s other customers delay drilling or temporarily shut in production due to persistently low commodity prices or for any other reason, our revenue in the midstream operations segment could decrease, as Rattler’s commercial agreements do not contain minimum volume commitments.

For additional information on our open commodity derivative instruments at December 31, 2020, see Note 15—Derivatives.

Counterparty and Customer Credit Risk

Our principal exposures to credit risk are due to the concentration of receivables from the sale of our oil and natural gas production (approximately $281 million at December 31, 2020), and to a lesser extent, receivables resulting from joint interest receivables (approximately $56 million at December 31, 2020).

We do not require our customers to post collateral, and the inability of our significant customers to meet their obligations to us due to their liquidity issues, bankruptcy, insolvency or liquidation may adversely affect our financial results. For the year ended December 31, 2020, four purchasers each accounted for more than 10% of our revenue. For each of the years ended December 31, 2019 and 2018, three purchasers each accounted for more than 10% of our revenue. No other customer accounted for more than 10% of our revenue during these periods. Our allowances for credit losses were insignificant at December 31, 2020.

Joint operations receivables arise from billings to entities that own partial interests in the wells we operate. These entities participate in our wells primarily based on their ownership in leases on which we intend to drill. We have little ability to control whether these entities will participate in our wells.

The ongoing COVID-19 pandemic, depressed commodity pricing environment and adverse macroeconomic conditions may enhance our customer credit risk.

Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates on our indebtedness under our revolving credit facility. The terms of our revolving credit facility provide for interest on borrowings at a floating rate equal to an alternative base rate (which is equal to the greatest of the prime rate, the Federal Funds effective rate plus 0.5% and 3-month LIBOR plus 1.0%) or LIBOR, in each case plus the applicable margin. The applicable margin ranges from 0.125% to 1.0% per annum in the case of the alternative base rate and from 1.125% to 2.0% per annum in the case of LIBOR, in each case depending on the amount of the loan outstanding in relation to the borrowing base. Historically, we have used interest rate swaps and treasury locks to reduce our exposure to variable rate interest payments associated with our revolving credit facility.

The following table summarizes the Company’s interest rate swaps as of December 31, 2020:

For additional information on our variable interest rate debt at December 31, 2020, see Note 11—Debt. See Note 18—Subsequent Events for discussion of derivative transactions which occurred subsequent to December 31, 2020.