Derivative Activities

9 Months Ended

Sep. 30, 2012

Derivative Activities [Abstract]

Derivative Activities

NOTE 5 – DERIVATIVE ACTIVITIES

We have elected not to designate any of our derivatives as hedging instruments. As a result, these derivative instruments are marked to market at the end of each reporting period, and changes in the fair value of the derivatives are recorded as gains or losses in the consolidated statements of operations.

Although we have the ability to elect to enter into netting agreements under our derivative instruments with certain of our counterparties, we have presented all asset and liability positions without netting. It is our policy to enter into derivative contracts, including interest rate swaps, only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers.  We do not post collateral under any of these contracts as they are secured under our credit facility.

Commodity Derivatives

Our business activities expose us to risks associated with changes in the market price of oil, natural gas and natural gas liquids. As such, future earnings are subject to fluctuations due to changes in the market price of oil and natural gas. We use derivatives to reduce our exposure to changes in the prices of oil and natural gas. Our policies do not permit the use of derivatives for speculative purposes.

During the nine months ended September 30, 2012, we entered into new oil swap contracts with settlement dates ranging from 2012 through 2017, natural gas put contracts, with deferred premiums, and swap contracts with settlement dates ranging from 2015 through 2017.  All of the new contracts were entered into with the same counterparties as our existing contracts.

The deferred premiums associated with certain of our oil and natural gas derivative instruments are  $4.9 million and are classified as other non-current liabilities on the consolidated balance sheet as ofSeptember 30, 2012.  There were no deferredderivative contract premiums at December 31, 2011. These deferred premiums will be paid to the counterparty with each monthly settlement (January 2015 – December 2017)  and recognized as an adjustment of realized gain (loss) on derivative instruments.

We hold commodity derivative contracts to manage our exposure to changes in the price of oil and natural gas related to our oil and natural gas production.  As of September 30, 2012, the notional volumes of our commodity derivative contracts were:

Commodity	Index		Oct 1 - Dec 31, 2012		2013		2014		2015		2016		2017
Oil positions:
Swaps
Hedged Volume (Bbls/d)	WTI		5,872		6,543		5,661		4,540		2,480		3,730
Average price ($/Bbls)		$	100.34	$	99.75	$	97.91	$	96.87	$	92.07	$	87.57
Collars
Hedged Volume (Bbls/d)	WTI						425		1,025		1,500
Average floor price ($/Bbls)						$	90.00	$	90.00	$	80.00
Average ceiling price ($/Bbls)						$	106.50	$	110.00	$	102.00
Natural gas positions:
Swaps
Hedged Volume (MMBtu/d)	Henry Hub		30,213		29,674		25,907		6,520		11,350		10,445
Average price ($/MMBtu)		$	5.89	$	6.07	$	6.23	$	5.43	$	4.27	$	4.47
Basis Swaps
Hedged Volume (MMBtu/d)	Henry Hub		20,709		18,466		17,066		14,400
Average price ($/MMBtu)		$	(0.15)	$	(0.17)	$	(0.19)	$	(0.19)
Collars
Hedged Volume (MMBtu/d)	Henry Hub		2,609		2,466		4,966		18,000
Average floor price ($/MMBtu)		$	6.50	$	6.50	$	5.74	$	5.00
Average ceiling price ($/MMBtu)		$	8.60	$	8.65	$	7.51	$	7.48
Puts
Hedged Volume (MMBtu/d)	Henry Hub								420		11,350		10,445
Average price ($/MMBtu)								$	4.00	$	4.00	$	4.00

Interest Rate Derivatives

In an effort to mitigate exposure to changes in market interest rates, we have entered into interest rate swaps that effectively fix the LIBOR component on our outstanding variable rate debt.  The changes in the fair value of these instruments are recorded in current earnings.

On July 31, 2012, we terminated certain interest rate derivative contracts which were scheduled to expire at various times through the fourth quarter 2015 and recorded a $15 million realized loss for the early termination.

The fair value of our derivatives as recorded on our balance sheet was as follows as of the dates indicated:

		September 30, 2012				December 31, 2011
		Asset		Liability		Asset		Liability
		Derivatives		Derivatives		Derivatives		Derivatives
Commodity contracts	$	123,932	$	6,062	$	103,233	$	2,502
Interest rate contracts		-		13,270		20		23,973
	$	123,932	$	19,332	$	103,253	$	26,475
Commodity
Current	$	42,482	$	565	$	32,683	$	1,284
Noncurrent		81,450		5,497		70,550		1,218
	$	123,932	$	6,062	$	103,233	$	2,502
Interest
Current	$	-	$	4,611	$	-	$	8,285
Noncurrent		-		8,659		20		15,688
	$	-	$	13,270	$	20	$	23,973
Total Derivatives
Current	$	42,482	$	5,176	$	32,683	$	9,569
Noncurrent		81,450		14,156		70,570		16,906
	$	123,932	$	19,332	$	103,253	$	26,475

The following table presents the impact of derivatives and their location within our unaudited consolidated statements of operations for the three andninemonths ended September 30, 2012 and September 30, 2011:

		Three Months Ended				Nine Months Ended
		September 30, 2012		September 30, 2011		September 30, 2012		September 30, 2011
Realized gains (losses):
Commodity contracts (1)	$	13,375	$	(39,072)	$	35,668	$	(79,924)
Interest rate swaps (2)		(16,145)		(969)		(20,775)		(2,231)
Total	$	(2,770)	$	(40,041)	$	14,893	$	(82,155)
Unrealized gains (losses):
Commodity contracts (1)	$	(55,585)	$	153,378	$	12,328	$	160,233
Interest rate swaps (2)		12,973		(14,596)		10,683		(24,643)
Total	$	(42,612)	$	138,782	$	23,011	$	135,590
Total gains (losses):
Commodity contracts (1)	$	(42,210)	$	114,306	$	47,996	$	80,309
Interest rate swaps (2)		(3,172)		(15,565)		(10,092)		(26,874)
Total	$	(45,382)	$	98,741	$	37,904	$	53,435

⁽¹⁾Gain (loss) on commodity derivative contracts is located in other income (expense) in the consolidated statements of operations.

⁽²⁾Gain (loss) on interest rate derivatives contracts is recorded as part of interest expense and is located in other income (expense) in the consolidated statements of operations.