Derivative Activities

9 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

DERIVATIVE ACTIVITIES

The Company is subject to price fluctuations for natural gas and crude oil. Prices received for natural gas and crude oil sold on the spot market are volatile due to factors beyond the Company’s control. Reductions in crude oil and natural gas prices could have a material adverse effect on the Company’s financial position, results of operations, capital expenditures and quantities of reserves recoverable on an economic basis. Any reduction in reserves, including reductions due to lower prices, can reduce the Company’s borrowing base under the revolving bank credit facility and adversely affect the Company’s liquidity and ability to obtain capital for acquisition and development activities.

To mitigate a portion of its exposure to fluctuations in commodity prices, the Company enters into financial price risk management activities with respect to a portion of projected crude oil and natural gas production through financial price swaps, collars and put spreads (collectively, “derivatives”). Additionally, the Company uses basis protection swaps to reduce basis risk. Basis is the difference between the price of the physical commodity being hedged and the price of the futures contract used for hedging. Basis risk is the risk that an adverse change in the futures market will not be completely offset by an equal and opposite change in the cash price of the commodity being hedged. Basis risk exists in natural gas due to the geographic price differentials between a given cash market location and the futures contract delivery locations. Settlement or expiration of the hedges is designed to coincide as closely as possible with the physical sale of the commodity being hedged—daily for oil and monthly for natural gas—to obtain reasonable assurance that a gain in the cash sale will offset the loss on the hedge and vice versa.

The Company’s revolving bank credit facility requires the Company to maintain a hedging program on mutually acceptable terms whenever the loan amount outstanding exceeds 75% of the borrowing base. The Company utilizes counterparties for our derivative instruments that are members of our lending bank group and that the Company believes are credit-worthy entities at the time the transactions are entered into. The Company closely monitors the credit ratings of these counterparties. Additionally, the Company performs both quantitative and qualitative assessments of these counterparties based on their credit ratings and credit default swap rates where applicable. However, the recent events in the financial markets demonstrate there can be no assurance that a counterparty financial institution will be able to meet its obligations to the Company. Additionally, none of the Company’s derivative instruments contain credit-risk-related contingent features. However, the Company has not incurred any credit-related losses associated with derivative activities and believes that its counterparties will continue to be able to meet their obligations under these transactions.

On June 27, 2011, GMX management made a decision to temporarily suspend our Haynesville/Bossier ("H/B") horizontal ("Hz") drilling program. This decision was made to focus our efforts and resources to the drilling of oil in the newly acquired acreage. As a result of this decision, our projected future production hedged with various counterparties was less than the production that was contractually hedged. Therefore, the production amounts in certain hedging contracts no longer qualified for hedge accounting and the accumulated changes in fair value of $5.1 million were reclassed from other comprehensive income into earnings for the nine months ended September 30, 2011. In order to reduce the amount of hedged volumes, the Company monetized 84,887 Mcf of 2011 hedges and 4.3 Bcfe of 2012 hedges in July 2011. Net of deferred premiums payable related to these volumes, the Company received $2.7 million in proceeds.

The following is a summary of the asset and liability fair values of our derivative contracts:

		Asset Fair Value				Liability Fair Value				Net Derivative Fair Value
	Balance Sheet Location	September 30, 2011		December 31, 2010		September 30, 2011		December 31, 2010		September 30, 2011			December 31, 2010
		(in thousands)				(in thousands)				(in thousands)
Derivatives designated as Hedging Instruments under ASC 815
Natural gas	Current derivative asset	$	26,303	$	23,187	$	4,345	$	2,963	$	21,958		$	20,224
Natural gas basis	Current derivative asset	—		—		284		566		(284		)	(566		)
Natural gas	Derivative instruments – non-current asset	6,885		20,503		609		2,897		6,276			17,606
Natural gas basis	Derivative instruments – non-current asset	—		—		—		122		—			(122		)
		$	33,188	$	43,690	$	5,238	$	6,548	$	27,950		$	37,142
Derivatives not designated as Hedging Instruments under ASC 815
Natural gas	Current derivative asset	$	—	$	—	$	—	$	—	$	—		$	—
Crude oil	Current derivative asset	—		—		26		172		(26		)	(172		)
Natural gas	Derivative instruments – non-current asset	—		—		—		—		—			—
Crude oil	Derivative instruments – non-current asset	—		—		91		—		(91		)	—
		$	—	$	—	$	117	$	172	$	(117	)	$	(172	)
Net derivative fair value										$	27,833		$	36,970

The following table summarizes the outstanding natural gas and crude oil derivative contracts the Company had in place as of September 30, 2011:

Effective Date	Maturity Date	Notional Amount Per Month	Remaining Notional Amount as of September 30, 2011	Additional Put Options		Floor		Ceiling		Designation under ASC 815
Natural Gas (MMBtu):
10/1/2011	12/31/2012	155,720	2,335,800					$	7.00	Cash flow hedge
10/1/2011	12/31/2011	188,783	566,349					$	8.00	Cash flow hedge
11/1/2011	3/31/2012	180,000	900,000					$	6.25	Cash flow hedge
10/1/2011	10/31/2011	200,000	200,000	$	5.00	$	6.50	$	8.30	Cash flow hedge
10/1/2011	10/31/2011	122,286	122,286	$	4.00	$	4.50	$	5.40	Cash flow hedge
11/1/2011	1/31/2012	119,898	359,694	$	5.50	$	7.00			Cash flow hedge
10/1/2011	12/31/2012	857,694	12,865,416	$	4.00	$	6.00			Cash flow hedge
11/1/2011	3/31/2012	153,580	767,902			$	4.50			Cash flow hedge
11/1/2011	3/31/2012	115,657	578,283	$	4.00					Cash flow hedge
1/1/2013	12/31/2013	91,250	1,095,000	$	3.75	$	5.25	$	6.25	Cash flow hedge
1/1/2013	12/31/2013	304,167	3,650,000			$	5.45	$	5.45	Cash flow hedge
10/1/2011	12/31/2012	199,388	2,990,826	$	4.50					Cash flow hedge
10/1/2011	12/31/2011	186,747	2,801,207			$	6.25			Cash flow hedge
Crude Oil (Bbls):
10/1/2011	12/31/2011	3,067	9,200					$	100.00	Not designated
1/1/2012	12/31/2013	1,523	36,550					$	120.00	Not designated

All of the above natural gas contracts are settled against NYMEX, and all oil contracts are settled against NYMEX Light Sweet Crude. The NYMEX and NYMEX Light Sweet Crude have historically had a high degree of correlation with the actual prices received by the Company.

Effects of derivative instruments on the Consolidated Statement of Operations

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings.

There were no oil derivatives that qualified for hedges for the three and nine months ended September 30, 2011 and 2010. A summary of the effect of the natural gas derivatives qualifying for hedges is as follows:

Description		Natural Gas Derivatives Qualifying as Hedges
		Three Months Ended September 30,
	Location of Amounts	2011		2010
		(in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)	OCI	11,689		14,423
Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Oil and Gas Sales	4,671		5,800
Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Oil and Gas Sales	(2,072	)	(116	)

Description		Natural Gas Derivatives Qualifying as Hedges
		Nine Months Ended September 30,
	Location of Amounts	2011		2010
		(in thousands)
Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)	OCI	11,694		32,989
Amount of Gain Reclassified from Accumulated OCI into Income (Effective Portion)	Oil and Gas Sales	13,107		16,764
Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)	Oil and Gas Sales	(1,349	)	(1,373	)

Assuming that the market prices of oil and natural gas futures as of September 30, 2011 remain unchanged, the Company would expect to transfer a gain of approximately $10.1 million from accumulated other comprehensive income to earnings during the next 12 months. The actual reclassification into earnings will be based on market prices at the contract settlement date.

For derivative instruments that do not qualify as hedges pursuant to ASC 815, changes in the fair value of these derivatives that occur prior to their maturity (i.e., temporary fluctuations in value) are recognized in current earnings. A summary of the effect of the derivatives not qualifying for hedges is as follows:

	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		Three Months Ended September 30,
		2011			2010
		(in thousands)
Realized
Crude oil	Oil and gas sales	$	—		$	—
Unrealized
Natural gas	Unrealized gain or (loss)on derivatives	(1,511		)	—
Crude oil	Unrealized gain or (loss)on derivatives	173			10
		$	(1,338	)	$	10

	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative
		Nine Months Ended September 30,
		2011			2010
		(in thousands)
Realized
Natural gas	Oil and gas sales	$	—		$	(23	)
Crude oil	Oil and gas sales	(44		)	—
		(44		)	(23		)
Unrealized
Natural gas	Unrealized gain or (loss)on derivatives	3,599			(221		)
Crude oil	Unrealized gain or (loss)on derivatives	55			118
		$	3,654		$	(103	)

The valuation of our derivative instruments are based on industry standard models that primarily rely on market observable inputs. Substantially all of the assumptions for industry standard models are observable in active markets throughout the full term of the instrument. The Company categorizes these measurements as Level 2. The following table sets forth by level within the fair value hierarchy our derivative instruments, which are our only financial assets and liabilities that were accounted for at fair value on a recurring basis, as of September 30, 2011 and December 31, 2010:

	As of September 30, 2011							As of December 31, 2010
	Quoted Prices  in Active Markets (Level  1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Quoted Prices  in Active Markets (Level  1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
	(in thousands)
Financial assets:
Natural gas derivative instruments	$	—	$	27,950		$	—	$	—	$	37,142		$	—
Crude oil derivative instruments	$	—	$	(117	)	$	—	$	—	$	(172	)	$	—