Derivative Activities And Financial Instruments

3 Months Ended

Mar. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Activities And Financial Instruments

Derivative instruments

Overview

Our results of operations, financial condition and capital resources are highly dependent upon the prevailing market prices of, and demand for, oil and natural gas. These commodity prices are subject to wide fluctuations and market uncertainties. To mitigate a portion of this exposure, we enter into commodity price swaps, costless collars, and basis protection swaps.

For commodity price swaps, we receive a fixed price for the hedged commodity and pay a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.

Collars contain a fixed floor price (put) and ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party. A three-way collar contract consists of a standard collar contract plus a put option contract sold by us with a price below the floor price of the collar. This additional put option requires us to make a payment to the counterparty if the market price is below the additional put option price. If the market price is greater than the additional put option price, the result is the same as it would have been with a standard collar contract only. By combining the collar contract with the additional put option, we are entitled to a net payment equal to the difference between the floor price of the standard collar and the additional put option price if the market price falls below the additional put option price. This strategy enables us to increase the floor and the ceiling price of the collar beyond the range of a traditional costless collar while defraying the associated cost with the sale of the additional put option.

We use basis protection swaps to reduce basis risk. Basis is the difference between 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 primarily due to the geographic price differentials between cash market locations and futures contract delivery locations. Natural gas basis protection swaps are arrangements that guarantee a price differential for natural gas from a specified pricing point. We receive a payment from the counterparty if the price differential is greater than the stated terms of the contract and pay the counterparty if the price differential is less than the stated terms of the contract.

In December 2011, we amended our senior secured revolving credit facility to provide greater flexibility when hedging anticipated production. The terms of the amendment allow us to protect a portion of our natural gas liquids production from price volatility using crude oil derivatives. Our outstanding derivative instruments as of March 31, 2012 are summarized below:

	Oil derivatives
	Swaps			Three-way collars
	Volume MBbls	Weighted average fixed price per Bbl		Volume MBbls	Weighted average fixed price per Bbl
					Additional put option		Put		Call
2012	1,532	$	94.52	1,514	$	73.55	$	96.01	$	108.78
2013	540	102.45		3,240	77.78		100.07		115.45
	2,072			4,754

	Natural gas swaps			Natural gas basis protection swaps
	Volume BBtu	Weighted average fixed price per Btu		Volume BBtu	Weighted average fixed price per Btu
2012	10,800	$	4.73	6,300	$	0.30
2013	7,200	5.24		—	—
	18,000			6,300

Our derivative contracts have been executed with the institutions that are parties to our senior secured revolving credit facility, and we believe the credit risks associated with all of these institutions are acceptable. We did not post collateral under any of these contracts as they are secured under our senior secured revolving credit facility. As of March 31, 2012, we had $40,000 outstanding under our senior secured revolving credit facility, and we had significant commodity derivative net asset balances with the following counterparties:

	Percentage of
	future hedged
Counterparty	production
JP Morgan Chase Bank, N.A.	37	%
Societe Generale	24	%
Crédit Agricole CIB	10	%
	71	%

Payment on our derivative contracts would be accelerated in the event of a default on our senior secured revolving credit facility. The aggregate fair value of our derivative liabilities was $24,071 at March 31, 2012.

Effect of derivative instruments on the consolidated balance sheets

All derivative financial instruments are recorded on the balance sheet at fair value. See Note 5 for additional information regarding fair value measurements. The estimated fair values of derivative instruments are provided below. The carrying amounts of these instruments are equal to the estimated fair values.

	As of March 31, 2012								As of December 31, 2011
	Assets		Liabilities			Net value			Assets		Liabilities			Net value
Natural gas swaps	$	35,883	$	—		$	35,883		$	30,124	$	—		$	30,124
Oil swaps	337		(15,993		)	(15,656		)	3,832		(9,744		)	(5,912		)
Oil collars	3,124		(7,183		)	(4,059		)	6,296		(1,247		)	5,049
Natural gas basis differential swaps	—		(895		)	(895		)	—		(1,268		)	(1,268		)
Total derivative instruments	39,344		(24,071		)	15,273			40,252		(12,259		)	27,993
Less:
Netting adjustments (1)	19,705		(19,705		)	—			10,627		(10,627		)	—
Current portion asset (liability)	10,844		(2,973		)	7,871			12,840		(1,505		)	11,335
	$	8,795	$	(1,393	)	$	7,402		$	16,785	$	(127	)	$	16,658

___________

(1) Amounts represent the impact of master netting agreements that allow us to net settle positive and negative positions with the same counterparty.

We discontinued hedge accounting effective April 1, 2010. Net derivative gains (losses) attributable to derivatives previously subject to hedge accounting were deferred through accumulated other comprehensive income (“AOCI”). As of March 31, 2012 and December 31, 2011, respectively, AOCI consists of deferred gains of $71,458 ($44,167 net of tax) and $83,880 ($51,846 net of tax) that will be recognized as gains from oil hedging activities through December 2013 as the hedged production is sold. We expect to reclassify deferred gains of $44,326 ($27,398 net of tax) from AOCI to income during the next 12 months.

Derivative settlements outstanding at March 31, 2012 and December 31, 2011 were as follows:

	March 31, 2012		December 31, 2011
Derivative settlements receivable included in accounts receivable	$	963	$	449
Derivative settlements payable included in accounts payable and accrued liabilities	$	1,741	$	5,042

Effect of derivative instruments on the consolidated statements of operations

We do not apply hedge accounting to any of our derivative instruments. As a result, all gains and losses associated with our derivative contracts are recognized immediately as non-hedge derivative gains (losses) in the consolidated statements of operations.

Gain (loss) from oil hedging activities, which is a component of total revenues in the consolidated statements of operations, consists of the reclassification of hedge gains (losses) on discontinued oil hedges into net income.

Non-hedge derivative losses in the consolidated statements of operations are comprised of the following:

	Three months ended
	March 31,
	2012			2011
Change in fair value of commodity price swaps	$	(3,985	)	$	(50,168	)
Change in fair value of collars	(9,108		)	(6,605		)
Change in fair value of natural gas basis differential contracts	373			1,141
Receipts from (payments on) settlement of commodity price swaps	2,701			(3,282		)
Receipts from settlement of collars	33			334
Payments on settlement of natural gas basis differential contracts	(477		)	(2,346		)
	$	(10,463	)	$	(60,926	)