Derivative Contracts

9 Months Ended

Sep. 30, 2011

Derivative Contracts [Abstract]

DERIVATIVE CONTRACTS

G – DERIVATIVE CONTRACTS

          The Company periodically utilizes various hedging strategies to achieve a more predictable cash flow. Various derivative instruments are used to manage the price received for a portion of the Company’s future oil and natural gas production and interest rate swaps are used to manage the interest rate paid for a portion of the Company’s outstanding debt.

          During 2011 and 2010, the Company entered into numerous derivative contracts to manage the impact of oil and natural gas price fluctuations and as required by the terms of its credit facilities. During the first quarter of 2011, the Company also entered into interest rate swaps to manage the impact of interest rate fluctuations. The Company did not designate these transactions as hedges. Accordingly, all gains and losses on the derivative instruments during 2011 and 2010 have been recorded in the statements of operations.

          The Company’s oil and natural gas derivative positions at September 30, 2011, consisting of put/call “collars,” sold put options, which limit the effectiveness of purchased put options at the low end of the put/call collars to market prices in excess of the strike price of the put option sold, and bare purchased put options, also called “bare floors” as they provide a floor price without a corresponding ceiling, are shown in the following table:

	Crude Oil (Bbls)							Natural Gas (Mmbtu)
	Collars							Collars
	Floors		Ceilings		Put Options Sold			Floors		Ceilings		Bare Floors
Year	Per Day	Price	Per Day	Price	Per Day	Price	Year	Per Day	Price	Per Day	Price	Per Day	Price
Q4’11	2,150	$80.00	2,150	$105.00	-	-	Q4’11	-	-	-	-	6,973	$4.17
Q1’12	2,000	$80.00	2,000	$105.00	1,000	$70.00	Q1’12	-	-	-	-	6,700	$4.35
Q2’12	2,000	$80.00	2,000	$105.00	1,000	$70.00	Q2’12	5,000	$4.00	5,000	$6.00	-	-
Q3’12	1,900	$92.63	1,900	$105.66	1,238	$70.00	Q3’12	5,000	$4.00	5,000	$6.00	-	-
Q4’12	1,750	$92.14	1,750	$104.83	1,138	$70.00	Q4’12	-	-	-	-	-	-
Q1’13	1,800	$95.28	1,800	$101.39	1,450	$70.00	Q1’13	-	-	-	-	-	-
Q2’13	1,650	$95.00	1,650	$99.93	1,325	$70.00	Q2’13	-	-	-	-	-	-
Q3’13	1,600	$95.00	1,600	$99.94	-	-	Q3’13	-	-	-	-	-	-
Q4’13	1,550	$95.00	1,550	$99.71	-	-	Q4’13	-	-	-	-	-	-
Q1’14	1,600	$95.00	1,600	$100.03	1,600	$70.00	Q1’14	-	-	-	-	-	-
Q2’14	1,500	$95.00	1,500	$99.13	1,500	$70.00	Q2’14	-	-	-	-	-	-

          The Company’s interest rate derivative positions at September 30, 2011, consisting of interest rate swaps, are shown in the following table:

Interest Rate Swaps (1)
	Notional
	Amount		Counterparty
Year	(in millions)	Fixed Rate	Floating Rate (2)	Months Covered
2011	$50	2.51%	3-Month LIBOR	October - December
2012	$50	2.51%	3-Month LIBOR	January - December
2013	$50	2.51%	3-Month LIBOR	January - December
2014	$50	2.51%	3-Month LIBOR	January - March

⁽¹⁾    Settlement is paid to the Company if the counterparty floating rate exceeds the fixed rate and settlement is paid by the Company if the counterparty floating rate is below the fixed rate. Settlement is calculated as the difference in the fixed rate and the counterparty rate.

⁽²⁾    Subject to a minimum rate of 2%.

          The Company estimates the fair value of its derivative instruments based on published forward commodity price curves as of the date of the estimate, less discounts to recognize present values. The Company estimates the fair value of its derivatives using a pricing model which also considers market volatility, counterparty credit risk and additional criteria in determining discount rates. See Note F.

          To determine the fair value of the Company’s oil and natural gas derivative instruments, the discount rate used in the discounted cash flow projections was based on published LIBOR rates, Eurodollar futures rates and interest swap rates. The counterparty credit risk was determined by calculating the difference between the derivative counterparty’s bond rate and published bond rates. The Company incorporates its credit risk when the derivative position is a liability by using its LIBOR spread rate.

          Gross fair values of the Company’s derivative instruments, prior to netting of assets and liabilities subject to a master netting arrangement, as of September 30, 2011 and December 31, 2010 and the consolidated statements of operations for the three and nine months ended September 30, 2011 and 2010 are as follows (in thousands):

CONSOLIDATED BALANCE SHEETS

		Fair Value			Fair Value
		As of September			As of
		30,			December 31,
Gross Assets and Liabilities	Balance Sheet Location	2011			2010
		(unaudited)
Current Assets - Oil and natural gas derivative assets	Current Assets - Derivative assets	$	6,997		$	1,904
Other Assets - Oil and natural gas derivative assets	Long-Term Assets - Derivative assets		13,001			-
Other Assets - Oil and natural gas derivative assets	Long-Term Liabilities - Derivative liabilities		-			207
Current Liabilities - Oil and natural gas derivative liabilities	Current Assets - Derivative assets		(1,927	)		(564	)
Current Liabilities - Interest rate swaps derivative liabilities	Current Liabilities - Derivative liabilities		(264	)		-
Long-Term Liabilities - Oil and natural gas derivative liabilities	Long-Term Assets - Derivative assets		(4,876	)		-
Long-Term Liabilities - Oil and natural gas derivative liabilities	Long-Term Liabilities - Derivative liabilities		-			(410	)
Long-Term Liabilities - Interest rate swaps derivative liabilities	Long-Term Liabilities - Derivative liabilities		(303	)		-
Total Derivatives Not Designated as Hedging Instruments		$	12,628		$	1,137

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
Income Statement Location	2011			2010			2011			2010			Type of Derivative
Revenue - Unrealized gains on derivatives	$	22,744		$	1,782		$	18,519		$	6,136		Oil and natural gas derivatives - unrealized
Revenue - Realized gains (losses) on derivatives	$	76		$	(1,213	)	$	(1,186	)	$	(2,818	)	Oil and natural gas derivatives - realized
Other Income (Expense) - Loss on interest rate derivatives	$	(138	)	$	-		$	(556	)	$	-		Interest rate derivatives - unrealized
Other Income (Expense) - Loss on interest rate derivatives	$	(65	)	$	-		$	(142	)	$	-		Interest rate derivatives - realized

          During April 2011, pursuant to the Company’s new credit facilities entered into in March 2011, the Company was required to reduce the volume of its existing crude oil and natural gas derivatives so it would not exceed the maximum allowable volumes for future production periods and to novate derivative contracts to counterparties that are lenders within the new credit facilities. During the second quarter of 2011, the Company recognized $0.9 million in realized losses on the unwinding of the excess crude oil and natural gas derivatives and the $0.5 million in fees paid to complete the novation, both of which are included in realized gains and losses on derivatives in the income statement.