Derivative Instruments

6 Months Ended

Jun. 30, 2011

Derivative Instruments

Derivative Instruments

9. DERIVATIVE INSTRUMENTS

The Company relies on various types of derivative instruments to manage its exposure to commodity price risk and to provide a level of certainty in its forward cash flows supporting its capital expenditure program. The derivative instruments typically used are fixed-rate swaps, costless collars, puts, calls and basis differential swaps. Under these derivative instruments, payments are received or made based on the differential between a fixed and a variable product price. These agreements are settled in cash at termination, expiration or exchanged for physical delivery contracts. The Company's current long-term strategy is to manage exposure for a substantial, but varying, portion of forecasted production up to 36 months. The derivative instruments are carried at fair value in the consolidated balance sheets, with changes in fair value recognized as gain (loss) on derivative instruments, net in the consolidated statements of operations for the period in which the changes occur or as required by the terms of our credit facilities.

The fair value of derivative instruments at June 30, 2011, and December 31, 2010 was a net asset of $22.4 million and $24.1 million, respectively. At June 30, 2011, approximately 63% of the fair value of the Company's derivative instruments were with Credit Suisse, 18% were with BNP Paribas, 12% were with Shell Energy North America (US) LP, 6% were with Credit Agricole, and the remaining less than 1% were with Societe Generale and master netting agreements are in place with these counterparties. Because the counterparties are either investment grade financial institutions or an investment grade international oil and gas company, the Company believes it has minimal credit risk and accordingly does not currently require its counterparties to post collateral to support the asset positions of its derivative instruments. As such, the Company is exposed to credit risk to the extent of nonperformance by the counterparties to its derivative instruments. Although the Company does not currently anticipate such nonperformance, it continues to monitor the financial viability of its counterparties. Because Credit Suisse, BNP Paribas, Credit Agricole, and Societe Generale are lenders in the Company's Revolving Credit Facility, and BNP Paribas and Societe Generale are lenders in the Company's Huntington Facility, the Company is not required to post collateral with respect to derivatives instruments in a net liability position with these counterparties as the contracts are secured by the Revolving Credit Facility or the Huntington Facility.

The following sets forth a summary of the Company's natural gas derivative positions at average delivery location (Waha and Houston Ship Channel) prices as of June 30, 2011. Our crude oil derivative positions at June 30, 2011 were not significant.

Period	Volume (in MMbtu)		Weighted Average Floor  Price ($/MMbtu)		Weighted Average Ceiling  Price ($/MMbtu)
2011		15,180,000	$	5.54	$	5.61
2012		18,943,000	$	5.50	$	5.60
2013		7,300,000	$	5.21	$	5.21

In connection with the derivative instruments above, the Company has entered into protective put spreads. When the market price declines below the short put price as reflected below, the Company will effectively receive the market price plus a put spread. For example, for the remainder of 2011, if market prices fall below the short put price of $4.92, the floor price becomes the market price plus the put spread of $1.15 on 5,849,000 of the 15,180,000 MMBtus and the remaining 9,331,000 MMBtus would have a floor price of $5.54.

Period	Volume (in MMbtu)		Weighted Average Short Put Price ($/MMbtu)		Weighted Average Put Spread ($/MMbtu)
2011		5,849,000	$	4.92	$	1.15
2012		6,404,000	$	5.05	$	1.22

For the three and six months ended June 30, 2011 and 2010, the Company recorded the following related to its derivative instruments:

		0000000		0000000		0000000		0000000
	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
	(In thousands)
Realized gain	$	4,904	$	8,792	$	14,910	$	13,747
Unrealized gain (loss)		7,161		(5,578)		(3,032)		12,269
Gain (loss) on derivative instruments, net	$	12,065	$	3,214	$	11,878	$	26,016

The Company deferred the payment of premiums associated with certain of its oil and gas derivative instruments totaling $3.2 million and $3.9 million at June 30, 2011 and December 31, 2010, respectively. The Company classified $2.1 million and $3.9 million as other current liabilities at June 30, 2011 and December 31, 2010, respectively, and $1.1 million as other non-current liabilities at June 30, 2011. These deferred premiums will be paid to the counterparty with each monthly settlement (July 2011 – March 2014) and recognized as a reduction of realized gain on derivative instruments.