Fair Value Measurements

3 Months Ended

Mar. 31, 2012

Note 15 — Fair Value Measurements

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair values of our derivative contracts are classified as Level 3 based on the significant unobservable inputs into our expected present value models. The following table sets forth a reconciliation of changes in the fair value of these financial assets (liabilities) during the three months ended March 31, 2012 (in thousands):


	U.S. Gas Fixed- Price Physicals			U.S. Gas Calls			U.S. Oil Swaps⁽¹⁾			U.S. Oil Swaptions⁽²⁾			U.K. Gas Swaps			Total
Balance at beginning of period	$	2,194		$	(64	)	$	(69,061	)	$	—		$	(213	)	$	(67,144	)
Derivative gains (losses) included in earnings		281			52			(53,186	)		(4,135	)		(1,983	)		(58,971	)
Sales		—			—			(30,702	)		(10,829	)		—			(41,531	)
Settlements and terminations		(2,475	)		—			40,803			10,696			17			49,041

Balance at end of period	$	—		$	(12	)	$	(112,146	)	$	(4,268	)	$	(2,179	)	$	(118,605	)

Changes in unrealized gain (loss) included in derivative income (expense) relating to derivatives still held at March 31, 2012	$	—		$	52		$	(41,124	)	$	(1,083	)	$	(1,588	)	$	(43,743	)

(1)	In 2011 and 212, we entered into certain off-market oil swap derivative contracts which provide us with $117.4 million of cash advances from the counterparty and obligate us to pay market prices at the time of settlement. Also included here is activity for oil price basis swaps.

(2)	In January 2012, we entered into certain commodity price derivate contracts which give the counterparty the right, for a period of time, to bind us in agreed-upon oil price swap contracts in exchange for a premium paid to us. See Note 12, "Derivative Instruments and Risk Management Activities."

The following table sets forth a reconciliation of changes in the fair value of these financial assets (liabilities) during the three months ended March 31, 2011 (in thousands):


	U.S Gas Fixed-Price Physicals			U.S Gas Calls			U.S. Oil Swaps			U.S Oil Swaps⁽¹⁾			U.S Gas Price Collars			U.K. Gas Swaps			Total
Balance at beginning of period	$	289		$	—		$	(27,519	)	$	(12,027	)	$	658		$	(4,031	)	$	(42,630	)
Derivative income (expense)		576			(3	)		(52,081	)		4,849			171			(3,774	)		(50,262	)
Premium received		—			(2,133	)		—			—			—			—			(2,133	)
Settlements		(1,128	)		—			5,089			2,923			(829	)		1,351			7,406

Balance at end of period	$	(263	)	$	(2,136	)	$	(74,511	)	$	(4,255	)	$	—		$	(6,454	)	$	(87,619	)

Changes in unrealized gain (loss) included in derivative income (expense) relating to derivatives still held at March 31, 2011	$	410		$	(3	)	$	(51,276	)	$	3,343		$	—		$	(4,099	)	$	(51,625	)

(1)	These swaps include those which have been matched with call options to allow us to reparticipate in price increases above certain levels.

Qualitative Disclosures about Fair Value Measurements

Commodity Derivatives - The fair values of our derivative contracts are classified as Level 3 because they are measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e., supported by little or no market activity). Our option pricing models are industry-standard and consider various inputs including forward commodity price estimates, volatility and time value of money. The pricing variables are sensitive to market volatility as well as changes in future price forecasts and regional price differences. Significant changes in the quoted forward prices for commodities generally lead to corresponding changes in the fair value measurement of our oil and gas derivative contracts. Significant changes in the volatility factors utilized in our option-pricing model can cause significant changes in the fair value measurements of our oil and gas derivative contracts.

Fair Value of Debt – The estimated fair value of our long-term debt is $1.8 billion at March 31, 2012. These estimated fair values are classified as Level 2 because in our calculation the unadjusted quoted prices for recent sales of our debt are from markets which are not active.

Quantitative Disclosures about Unobservable Inputs for Level 3 Fair Value Measurements at March 31, 2012


Instrument Type	Estimated Fair Value of Liability (in thousands)		Valuation Technique	Significant Unobservable Input	Oil - $/Bbl Gas - $/MMbtu
Oil swaps/prepaid swaps	$	108,073	Discounted cash flow	NYMEX oil price forward curve	101.57 – 105.33
				Argus oil price forward curve	107.93 – 125.58
Oil basis swaps		4,075	Discounted cash flow	NYMEX oil price forward curve	101.57 – 105.33
				WTI vs Argus differential	6.35 – 20.26
Oil swaption		4,268	Option model	NYMEX oil price forward curve	101.57 – 105.33
				Oil price volatility curve	28%
Natural gas swaps		2,178	Discounted cash flow	NBP natural gas price forward curve	9.60 – 12.80
Natural gas calls		11	Option model	NBP natural gas price forward curve	2.13 – 3.88
				Natural gas price volatility curve	0% – 53%

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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