FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2011

NOTE 4 - FAIR VALUE MEASUREMENTS

Our financial instruments, including cash and cash equivalents, accounts receivable and accounts payable, are carried at cost, which approximates fair value due to the short-term maturity of these instruments. Our financial and non-financial assets and liabilities that are being measured on a recurring basis are measured and reported at fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of fair value hierarchy are as follows:

Level 1 -

Defined as inputs such as unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2 -

Defined as inputs other than quoted prices in active markets that are either directly or indirectly observable for the asset or liability.

Level 3 -

Defined as unobservable inputs for use when little or no market data exists, therefore requiring an entity to develop its own assumptions for the asset or liability.

Commodity Derivative Instruments - The fair value of the commodity derivative instruments are estimated using a combined income and market valuation methodology based upon forward commodity price and volatility curves. The curves are obtained from independent pricing services reflecting broker market quotes.

Interest Rate Derivative Instruments - The fair value of the interest rate derivative instruments are estimated using a combined income and market valuation methodology based upon forward interest rates and volatility curves. The curves are obtained from independent pricing services reflecting broker market quotes.

As required by GAAP, we utilize the most observable inputs available for the valuation technique utilized. The financial assets and liabilities are classified in their entirety based on the lowest level of input that is of significance to the fair value measurement. The following table sets forth, by level within the hierarchy, the fair value of our financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2011 and 2010.

Partnership - As of December 31, 2011	Total		Level 1		Level 2		Level 3
Assets from commodity derivative instruments	$	103,233	$	-	$	103,233	$	-
Assets from interest rate derivative instruments		20		-		20		-
	$	103,253	$	-	$	103,253	$	-

Liabilities from commodity derivative instruments	$	2,502	$	-	$	2,502	$	-
Liabilities from interest rate derivative instruments		23,973		-		23,973		-
	$	26,475	$	-	$	26,475	$	-
Partnership - As of December 31, 2010
Assets from commodity derivative instruments	$	36,302	$	-	$	36,302	$	-
Assets from interest rate derivative instruments		-		-		-		-
	$	36,302	$	-	$	36,302	$	-

Liabilities from commodity derivative instruments	$	55,773	$	-	$	55,773	$	-
Liabilities from interest rate derivative instruments		1,914		-		1,914		-
	$	57,687	$	-	$	57,687	$	-

On December 22, 2010, the Predecessor novated certain derivative instruments to us. These derivative instruments were accounted for at fair value of a $1.4 million net liability position (See Note 5). These derivative instruments are classified as Level 2 fair value measurements.

On February 28, 2011, the Predecessor novated certain interest rate derivative instruments to us. These derivative instruments were accounted for at fair value of a $2.9 million net asset position (See Note 5). These derivative instruments are classified as Level 2 fair value measurements.

In June 2011, we entered into modifications of all our existing oil fixed price swap derivative contracts by increasing the strike price of our oil contracts, effectively settling those liability positions as of June 22, 2011 with a realized loss. The modified contracts were accounted for at fair value of $40.7 million (See Note 5) and are classified as Level 2 fair value measurements.

On July 1, 2011, the Predecessor novated certain basis swap derivative instruments to us. These derivative instruments were accounted for at fair value of a $0.3 million liability position (See Note 5). These derivative instruments are classified as Level 2 fair value measurements.

On September 30, 2011, the Predecessor novated certain interest rate derivative instruments to us. These derivative instruments were accounted for at fair value of an $8.5 million liability position (See Note 5). The Partnership's Statement of Financial Position has been revised to include these derivative instruments for the periods presented. These derivative instruments are classified as Level 2 fair value measurements.

On October 1, 2011, the Predecessor novated certain interest rate and commodity derivative instruments to us. These derivative instruments were accounted for at fair value of a $73.1 million net asset position (See Note 5). The Partnership's Statement of Financial Position has been revised to include these derivative instruments for the periods presented. These derivative instruments are classified as Level 2 fair value measurements.

All fair values reflected above and on the consolidated balance sheets have been adjusted for nonperformance risk. The following table sets forth a reconciliation of the changes in the fair value of the Predecessor's financial instruments classified as Level 3 in the fair value hierarchy:

	Predecessor
	January 1 to			Year Ended
	December 21,			December 31,
	2010			2009
Balance at beginning of period	$	(59,699	)	$	-
Total gains or losses (realized or unrealized):
Included in earnings		25,563			(63,530	)
Purchases, issuances and settlements		(2,325	)		(45,853	)
Transfers in and out of Level 3		36,461			49,684
Balance at end of perod	$	-		$	(59,699	)

Changes in unrealized gains relating to derivatives still held at the end of period	$	-		$	(108,164	)

As part of a broad review by management of our financial statement disclosures and those of our Predecessor, management has determined, effective October 1, 2010, the fair values of the derivative instruments of our Predecessor should be classified as Level 2. As part of management's review, the third-party valuation specialist used to value the Predecessor's derivative instruments was consulted regarding the prices used to determine fair value. Management has determined the prices used by the third-party valuation specialist are directly observable inputs widely used by valuation specialists and easily obtainable from independent third parties via a subscription to their published price curves. Therefore, on October 1, 2010, the Predecessor transferred all derivative instruments which are measured on a recurring basis from Level 3 into Level 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

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