Derivatives

9 Months Ended

Sep. 30, 2011

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivatives

Note 7 - Derivatives

Commodity Derivatives

The Company utilizes derivative instruments to minimize the variability in cash flow due to commodity price movements.  The Company enters into derivative instruments such as swap contracts, put options and collars to economically hedge its forecasted oil, natural gas and NGL sales.  The Company did not designate any of these contracts as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings.  See Note 8 for fair value disclosures about oil and natural gas commodity derivatives.

The following table summarizes open positions as of September 30, 2011, and represents, as of such date, derivatives in place through December 31, 2015, on annual production volumes:

	October 1 - December 31, 2011			2012			2013			2014			2015
Natural gas positions:
Fixed price swaps:
Hedged volume (MMMBtu)		7,975			49,410			57,067			66,156			75,190
Average price ($/MMBtu)	$	9.50		$	6.10		$	5.88		$	5.86		$	5.90
Puts:
Hedged volume (MMMBtu)		4,850			25,364			25,295			23,178			23,178
Average price ($/MMBtu)	$	5.97		$	6.25		$	6.25		$	5.00		$	5.00
PEPL puts: (1)
Hedged volume (MMMBtu)		3,315			-			-			-			-
Average price ($/MMBtu)	$	8.50		$	-		$	-		$	-		$	-
Total:
Hedged volume (MMMBtu)		16,140			74,774			82,362			89,334			98,368
Average price ($/MMBtu)	$	8.24		$	6.15		$	6.00		$	5.64		$	5.69
Oil positions:
Fixed price swaps: (2)
Hedged volume (MBbls)		1,466			7,741			8,413			9,034			9,581
Average price ($/Bbl)	$	91.82		$	97.34		$	98.27		$	95.39		$	98.25
Puts:
Hedged volume (MBbls)		588			2,196			2,190			-			-
Average price ($/Bbl)	$	75.00		$	90.00		$	90.00		$	-		$	-
Collars:
Hedged volume (MBbls)		69			-			-			-			-
Average floor price ($/Bbl)	$	90.00		$	-		$	-		$	-		$	-
Average ceiling price ($/Bbl)	$	112.25		$	-		$	-		$	-		$	-
Total:
Hedged volume (MBbls)		2,123			9,937			10,603			9,034			9,581
Average price ($/Bbl)	$	87.10		$	95.72		$	96.56		$	95.39		$	98.25
Natural gas basis differential positions:
PEPL basis swaps: (1)
Hedged volume (MMMBtu)		8,885			37,735			38,854			42,194			42,194
Hedged differential ($/MMBtu)	$	(0.96	)	$	(0.89	)	$	(0.89	)	$	(0.39	)	$	(0.39	)
Oil timing differential positions:
Trade month roll swaps: (3)
Hedged volume (MBbls)		1,380			5,490			5,475			5,475			-
Hedged differential ($/Bbl)	$	0.22		$	0.22		$	0.22		$	0.22		$	-

(1) Settle on the Panhandle Eastern Pipeline ("PEPL") spot price of natural gas to hedge basis differential associated with natural gas production in the Mid-Continent Deep and Mid-Continent Shallow regions.

(2) As presented in the table above, the Company has certain outstanding fixed price oil swaps on 14,750 Bbls of daily production which may be extended annually at a price of $100.00 per Bbl for each of the years ending December 31, 2016, December 31, 2017, and December 31, 2018, if the counterparties determine that the strike prices are in-the-money on a designated date in each respective preceding year.  The extension for each year is exercisable without respect to the other years.

(3) The Company hedges the timing risk associated with the sales price of oil in the Mid-Continent Deep, Mid-Continent Shallow and Permian Basin regions.  In these regions, the Company generally sells oil for the delivery month at a sales price based on the average NYMEX price of light oil during that month, plus an adjustment calculated as a spread between the weighted average prices of the delivery month, the next month and the following month during the period when the delivery month is prompt (the "trade month roll").

During the nine months ended September 30, 2011, the Company entered into commodity derivative contracts consisting of oil and natural gas swaps for certain years through 2016 and oil trade month roll swaps for October 2011 through December 2014.  In September 2011, the Company canceled its oil and natural gas swaps for the year 2016 and used the realized gains of approximately $27 million to increase prices on its existing oil and natural gas swaps for the year 2012.  In addition, in September 2011, the Company paid premiums of approximately $33 million to increase prices on its existing oil puts for the years 2012 and 2013.

Settled derivatives on natural gas production for the three months and nine months ended September 30, 2011, included volumes of 16,140 MMMBtu and 48,317 MMMBtu, respectively, at an average contract price of $8.24 per MMBtu.  Settled derivatives on oil production for the three months and nine months ended September 30, 2011, included volumes of 2,123 MBbls and 5,794 MBbls, respectively, at average contract prices of $87.10 per Bbl and $85.19 per Bbl.  The natural gas derivatives are settled based on the closing NYMEX future price of natural gas or the published PEPL spot price of natural gas on the settlement date, which occurs on the third day preceding the production month.  The oil derivatives are settled based on the month's average daily NYMEX price of light oil and settlement occurs on the final day of the production month.

Interest Rate Swaps

The Company may from time to time enter into interest rate swap agreements based on LIBOR to minimize the effect of fluctuations in interest rates.  If LIBOR is lower than the fixed rate in the contract, the Company is required to pay the counterparty the difference, and conversely, the counterparty is required to pay the Company if LIBOR is higher than the fixed rate in the contract.  The Company does not designate interest rate swap agreements as cash flow hedges; therefore, the changes in fair value of these instruments are recorded in current earnings.  At September 30, 2011, the Company had no outstanding interest rate swap agreements.

Balance Sheet Presentation

The Company's commodity derivatives and, when applicable, its interest rate swap derivatives are presented on a net basis in "derivative instruments" on the condensed consolidated balance sheets.  The following summarizes the fair value of derivatives outstanding on a gross basis:

	September 30, 2011		December 31, 2010
	(in thousands)
Assets:
Commodity derivatives	$	980,187	$	637,836
Liabilities:
Commodity derivatives	$	210,654	$	398,902

By using derivative instruments to economically hedge exposures to changes in commodity prices and interest rates, when applicable, the Company exposes itself to credit risk and market risk.  Credit risk is the failure of the counterparty to perform under the terms of the derivative contract.  When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk.  The Company's counterparties are current participants or affiliates of participants in its Credit Facility or were participants or affiliates of participants in its Credit Facility at the time it originally entered into the derivatives.  The Credit Facility is secured by the Company's oil and natural gas reserves; therefore, the Company is not required to post any collateral.  The Company does not receive collateral from its counterparties.  The maximum amount of loss due to credit risk that the Company would incur if its counterparties failed completely to perform according to the terms of the contracts, based on the gross fair value of financial instruments, was approximately $980 million at September 30, 2011.  The Company minimizes the credit risk in derivative instruments by: (i) limiting its exposure to any single counterparty; (ii) entering into derivative instruments only with counterparties that meet the Company's minimum credit quality standard, or have a guarantee from an affiliate that meets the Company's minimum credit quality standard; and (iii) monitoring the creditworthiness of the Company's counterparties on an ongoing basis.  In accordance with the Company's standard practice, its commodity derivatives and, when applicable, its interest rate derivatives are subject to counterparty netting under agreements governing such derivatives and therefore the risk of loss is somewhat mitigated.

Gains (Losses) on Derivatives

Gains and losses on derivatives, including realized and unrealized gains and losses, are reported on the condensed consolidated statements of operations in "gains on oil and natural gas derivatives" and "losses on interest rate swaps."  Realized gains (losses), excluding canceled derivatives, represent amounts related to the settlement of derivative instruments, and for commodity derivatives, are aligned with the underlying production.  Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

The following presents the Company's reported gains and losses on derivative instruments:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2011		2010			2011		2010
	(in thousands)
Realized gains (losses):
Commodity derivatives	$	65,036	$	82,910		$	162,926	$	228,573
Interest rate swaps		-		-			-		(8,021	)
Canceled derivatives		26,752		(49,590	)		26,752		(123,865	)
	$	91,788	$	33,320		$	189,678	$	96,687
Unrealized gains (losses):
Commodity derivatives	$	732,452	$	(39,405	)	$	470,601	$	34,726
Interest rate swaps		-		38,089			-		63,978
	$	732,452	$	(1,316	)	$	470,601	$	98,704
Total gains (losses):
Commodity derivatives	$	824,240	$	43,505		$	660,279	$	263,299
Interest rate swaps		-		(11,501	)		-		(67,908	)
	$	824,240	$	32,004		$	660,279	$	195,391

In September 2011, the Company canceled (before the contract settlement date) its oil and natural gas swaps for the year 2016 and used the realized gains of approximately $27 million to increase prices on its existing oil and natural gas swaps for the year 2012.  During the three months and nine months ended September 30, 2010, the Company canceled (before the contract settlement date) all of its interest rate swap agreements resulting in realized losses of approximately $50 million and $124 million, respectively.