EARTHSTONE ENERGY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) anticipated production of proved reserves, appropriate risk-adjusted discount rates and other relevant data. The Company’s acquisitions are discussed in  Note 3. Acquisitions and Divestitures . The asset retirement obligation estimates are derived from historical costs and management’s expectation of future cost environments; and therefore, the Company has designated these liabilities as Level 3. The significant inputs to this fair value measurement include estimates of plugging, abandonment and remediation costs, well life, inflation and credit-adjusted risk-free rate. See  Note 14. Asset Retirement Obligations  for a reconciliation of the beginning and ending balances of the liability for the Company’s asset retirement obligations. The Company’s hedging activities consist of derivative instruments entered into in order to hedge against changes in oil and natural gas prices through the use of fixed price swaps and basis swaps agreements. Swaps exchange floating price risk in the future for a fixed price at the time of the hedge. Consistent with its hedging policy, the Company has entered into a series of derivative instruments to hedge a significant portion of its expected oil and natural gas production through December 31, 2020. Typically, these derivative instruments require payments to (receipts from) counterparties based on specific indices as required by the derivative agreements. Although not risk free, the Company believes these instruments reduce its exposure to oil and natural gas price fluctuations and, thereby, allow the Company to achieve a more predictable cash flow. The Company’s derivative instruments are cash flow hedge transactions in which it is hedging the variability of cash flow related to a forecasted transaction. The Company does not enter into derivative instruments for trading or other speculative purposes. These transactions are recorded in the Consolidated Financial Statements in accordance with FASB ASC Topic 815. The Company has accounted for these transactions using the mark-to-market accounting method. Generally, the Company incurs accounting losses on derivatives during periods where prices are rising and gains during periods where prices are falling which may cause significant fluctuations in the Consolidated Balance Sheets and Consolidated Statements of Operations. The Company nets its derivative instrument fair value amounts executed with each counterparty pursuant to an International Swap Dealers Association Master Agreement (“ISDA”), which provides for net settlement over the term of the contract. The ISDA is a standard contract that governs all derivative contracts entered into between the Company and the respective counterparty. The ISDA allows for offsetting of amounts payable or receivable between the Company and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency. The following table sets forth the Company’s outstanding derivative contracts at December 31, 2018. When aggregating multiple contracts, the weighted average contract price is disclosed. (2) The basis differential price is between WTI Midland Argus Crude and the WTI NYMEX. (3) The basis differential price is between W. Texas (WAHA) and the Henry Hub NYMEX. F-18 Note 6. Derivative Financial Instruments Asset Retirement Obligations Period Commodity Volume (Bbls / MMBtu) Price ($/Bbl / $/MMBtu) 2019 Crude Oil Swap 3,022,100 $63.09 2019 Crude Oil Basis Swap (1) 365,000 $4.50 2019 Crude Oil Basis Swap (2) 2,675,500 $(5.81) 2019 Natural Gas Swap 3,832,500 $2.86 2019 Natural Gas Basis Swap (3) 3,832,500 $(1.14) 2020 Crude Oil Swap 1,464,000 $65.87 2020 Crude Oil Basis Swap (2) 1,464,000 $(2.74) 2020 Natural Gas Swap 2,562,000 $2.85 2020 Natural Gas Basis Swap (3) 2,562,000 $(1.07) (1) The basis differential price is between LLS Argus Crude and the WTI NYMEX.