7. COMMODITY DERIVATIVES

The Company’s results of operations and cash flows are affected by changes in market prices for crude oil and natural gas. To manage a portion of its exposure to price volatility from producing crude oil and natural gas, the Company may enter into commodity derivative contracts to protect against price declines in future periods. The Company does not enter into derivative contracts for speculative purposes. The Company does not apply hedge accounting. Accordingly, changes in the fair value of the derivative contracts are recorded in the Consolidated Statements of Operations and are included as a non-cash adjustment to net income in the operating activities section in the Consolidated Statement of Cash Flows.

There were no derivative contracts outstanding as of December 31, 2025 and 2024.  During 2024, the Company settled all of its outstanding commodity derivative contracts for 2024 and 2025 production, receiving $1.8 million in settlement proceeds.   

All commodity derivative contracts held by the Company were subject to master netting arrangements with its counterparty. The terms of the Company’s derivative agreements provide for offsetting of amounts payable or receivable between it and the counterparty for contracts that settle on the same date. The Company’s agreements also provide that in the event of an early termination, the counterparty has the right to offset amounts owed or owing under that and any other agreement. The Company’s accounting policy is to offset positions when we have a right of offset or master netting arrangement.

The following table summarizes the components of the commodity derivative settlement gain (loss) as well as the components of the net derivative loss line-item presentation in the accompanying Consolidated Statements of Operations: