Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

Note 4 — Derivative Financial Instruments

The Company is exposed to commodity price risk and management believes it prudent to periodically reduce exposure to cash-flow variability resulting from this volatility. Accordingly, the Company enters into certain derivative financial instruments in order to manage exposure to commodity price risk inherent in its oil and gas production. Derivative financial instruments are also used to manage commodity price risk inherent in customer pricing requirements and to fix margins on the future sale of natural gas. Specifically, the Company may utilize futures, swaps and options.

Derivative instruments expose the Company to counterparty credit risk. The Company’s commodity derivative instruments are currently with several counterparties. The Company generally executes commodity derivative instruments under master agreements which allow it, in the event of default, to elect early termination of all contracts with the defaulting counterparty. If the Company chooses to elect early termination, all asset and liability positions with the defaulting counterparty would be net cash settled at the time of election.

The Company monitors the creditworthiness of its counterparties; however, it is not able to predict sudden changes in counterparties’ creditworthiness. In addition, even if such changes are not sudden, it may be limited in its ability to mitigate an increase in counterparty credit risk. Possible actions would be to transfer its position to another counterparty or request a voluntary termination of the derivative contracts resulting in a cash settlement. Should one of these counterparties not perform, the Company may not realize the benefit of some of its derivative instruments under lower commodity prices as well as incur a loss. The Company includes a measure of counterparty credit risk in its estimates of the fair values of derivative instruments in an asset position.

The Company does not designate its derivative financial instruments as hedging instruments for financial accounting purposes and, as a result, it recognizes the change in the respective instruments’ fair value currently in earnings. The table below outlines the classification of derivative financial instruments on the condensed consolidated balance sheet and their financial impact on the condensed consolidated statements of operations at and for the periods indicated (in thousands):

Derivative Financial Instruments	Balance Sheet location	December 31, 2011			June 30, 2012
Commodity contracts	Current derivative financial instrument asset	$	42,803		$	34,234
Commodity contracts	Long-term derivative financial instrument asset		29,516			17,360
Commodity contracts	Current derivative financial instrument liability		(5,223	)		(5,424	)
Commodity contracts	Long-term derivative financial instrument liability		(4,611	)		(2,999	)
		$	62,485		$	43,171

Gains and losses associated with derivative financial instruments related to oil and gas production were as follows for the periods indicated (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2012			2011			2012
Realized gains (losses)	$	6,671		$	18,618		$	15,907		$	30,703
Unrealized gains (losses)		(1,103	)		(18,777	)		(11,160	)		(18,837	)
Total	$	5,568		$	(159	)	$	4,747		$	11,866

The following table summarizes the estimated volumes, fixed prices and fair values attributable to all of the Company’s oil and gas derivative contracts at June 30, 2012.

	Remainder  of 2012			Year Ending December 31,								Total
				2013			2014		2015-2016
	($ in thousands, except per unit data)
Natural Gas Swaps
Contract volumes (Mmbtu)		5,524,592			9,000,003			—		1,047,000			15,571,595
Weighted-average fixed price per Mmbtu	$	5.71		$	7.28		$	—	$	4.00		$	6.51
Fair value, net	$	15,359		$	32,981		$	—	$	(458	)	$	47,882
Natural Gas Basis Swaps
Contract volumes (Mmbtu)		4,524,590			9,000,003			—		—			13,524,593
Weighted-average fixed price per Mmbtu	$	(0.72	)	$	(0.71	)	$	—	$	—		$	(0.71	)
Fair value, net	$	(2,356	)	$	(4,620	)	$	—	$	—		$	(6,976	)
Crude Oil Swaps
Contract volumes (Bbl)		33,342			65,892			61,680		112,056			272,970
Weighted-average fixed price per Bbl	$	93.86		$	101.70		$	97.00	$	92.29		$	95.82
Fair value, net	$	256		$	865		$	557	$	587		$	2,265
Total fair value, net	$	13,259		$	29,226		$	557	$	129		$	43,171

In April 2012, the Company repriced the portion of its natural gas swap contracts expected to settle in June, July and August of 2012 to market prices and received proceeds of $10.8 million. In May 2012, the Company settled the repriced June 2012 contract by entering into new contracts to be settled in 2016. The settlement transaction resulted in a realized loss on derivative instruments of $476,000.

The following table summarizes the estimated volumes, fixed prices and fair values attributable to all of the Company’s oil and gas derivative contracts at December 31, 2011:

	Year Ending December 31,
	2012			2013			Total
	($ in thousands, except per unit data)
Natural Gas Swaps
Contract volumes (Mmbtu)		11,000,004			9,000,003			20,000,007
Weighted-average fixed price per Mmbtu	$	7.13		$	7.28		$	7.20
Fair value, net	$	42,803		$	29,516		$	72,319
Natural Gas Basis Swaps
Contract volumes (Mmbtu)		9,000,000			9,000,003			18,000,003
Weighted-average fixed price per Mmbtu	$	(0.70	)	$	(0.71	)	$	(0.71	)
Fair value, net	$	(4,767	)	$	(4,611	)	$	(9,378	)
Crude Oil Swaps
Contract volumes (Bbl)		42,000			—			42,000
Weighted-average fixed price per Bbl	$	87.90		$	—		$	87.90
Fair value, net	$	(456	)	$	—		$	(456	)
Total fair value, net	$	37,580		$	24,905		$	62,485