NOTE 4. RISK MANAGEMENT

Our business activities expose us to risks associated with changes in the market price of oil, natural gas and natural gas liquids. In addition, our floating rate credit facility exposes us to risks associated with changes in interest rates. As such, future earnings are subject to fluctuation due to changes in the market prices of oil, natural gas and natural gas liquids and interest rates. We use derivatives to reduce our risk of volatility in the prices of oil, natural gas and natural gas liquids and interest rates. Our policies do not permit the use of derivatives for speculative purposes.

We have elected not to designate any of our derivatives as hedging instruments. Accordingly, changes in the fair value of our derivatives are recorded immediately to operations as “Unrealized (losses) gains on derivatives, net” in our unaudited condensed consolidated statements of operations.

As of March 31, 2013, we had entered into commodity contracts with the following terms:


Period Covered	Hedged Volume	Weighted Average Fixed Price
Oil (MBbls):
Swaps – April 2013 to December 2013	1,148.1	$ 89.03
Swaps – 2014	1,517.7	91.19
Swaps – 2015	730.0	90.09

Natural Gas (MmmBtus):
Swaps – April 2013 to December 2013	27,032.5	4.95
Swaps – 2014	26,134.0	4.99
Swaps – 2015	26,097.5	5.22

As of March 31, 2013, we had entered into interest rate swaps with the following terms:



	Notional	Floating	Fixed
Period Covered	Amount	Rate	Rate
April 2013 – July 2015	$ 110,000	1 Month LIBOR	3.315%

The following table sets forth the fair values and classification of our outstanding derivatives:


			Net Amounts Am
		Gross Amounts	of Assets
		Offset in the	Presented in the
	Gross	Unaudited	Unaudited
	Amounts of	Condensed	Condensed
	Recognized	Consolidated	Consolidated
	Assets	Balance Sheet	Balance Sheet
Derivatives:
As of March 31, 2013:
Derivative asset	$ 29,553	$ (15,421)	$ 14,132
Long–term derivative asset	44,952	(8,684)	36,268
Total	$ 74,505	$ (24,105)	$ 50,400

As of December 31, 2012:
Derivative asset	$ 44,173	$ (3,402)	$ 40,771
Long–term derivative asset	50,692	(4,853)	45,839
Total	$ 94,865	$ (8,255)	$ 86,610


			Net Amounts Am
		Gross Amounts	of Liabilities
		Offset in the	Presented in the
	Gross	Unaudited	Unaudited
	Amounts of	Condensed	Condensed
	Recognized	Consolidated	Consolidated
	Liabilities	Balance Sheet	Balance Sheet
Derivatives:
As of March 31, 2013:
Derivative liability	$ 16,975	$ (15,421)	$ 1,554
Long–term derivative liability	9,873	(8,684)	1,189
Total	$ 26,848	$ (24,105)	$ 2,743

As of December 31, 2012:
Derivative liability	$ 3,402	$ (3,402)	$ –
Long–term derivative liability	4,853	(4,853)	–
Total	$ 8,255	$ (8,255)	$ –

We have entered into master netting arrangements with our counterparties. The amounts above are presented on a net basis in our unaudited condensed consolidated balance sheets when such amounts are with the same counterparty. In addition, we have recorded accounts payable and receivable balances related to our settled derivatives that are subject to our master netting agreements. These amounts are not included in the above table; however, under our master netting agreements, we have the right to offset these positions against our forward exposure related to outstanding derivatives.

Should our credit facility become due and payable because of an event of default, our derivatives that are in a net liability position could also become due and payable. We could also be required to post cash collateral related to these derivatives under certain circumstances. As of March 31, 2013 and December 31, 2012, we were not required to post any collateral nor did we hold any collateral associated with our derivatives.

The following table presents the impact of derivatives and their location within the unaudited condensed consolidated statements of operations:


	Three Months Ended
	March 31,
	2013	2012
Realized gains on derivatives, net:
Commodity contracts	$ 12,304	$ 25,306
Interest rate swaps	(1,545)	(1,116)
Total	$ 10,759	$ 24,190

Unrealized (losses) gains on derivatives, net:
Commodity contracts	$ (39,720)	$ 11,154
Interest rate swaps	1,447	507
Total	$ (38,273)	$ 11,661