Derivative Activities

12 Months Ended

Dec. 31, 2012

Derivative Activities [Abstract]

Derivative Activities

NOTE 6—  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. All of our derivative contracts reflected in the consolidated balance sheet have been adjusted for nonperformance.

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 year ended December 31, 2012, we entered into new oil swap contracts with settlement dates ranging from 2013 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.

During the year ended December 31, 2012, we terminated certain oil derivative contracts that were novated to us in connection with the December 2012 Transferred Properties which were scheduled to expire at various times in 2013 and recorded $5.3 million as an adjustment to the purchase price.

The deferred premiums associated with certain of our oil and natural gas derivative instruments are $4.9million and are classified as other non-current liabilities on the consolidated balance sheet as of December 31, 2012.  There were no deferred derivative 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 December 31, 2012, the notional volumes of our commodity derivative contracts were:

Commodity	Index	2013		2014		2015		2016		2017
Oil positions:
Swaps
Hedged Volume (Bbls/d)	WTI		7,170		6,661		6,721		5,698		4,997
Average price ($/Bbls)		$	98.74	$	96.35	$	94.52	$	90.81	$	86.88
Hedged Volume (Bbls/d)	LLS		1,400		1,900		-		-		-
Average price ($/Bbls)		$	99.51	$	98.77		-		-		-
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		30,441		26,622		7,191		11,350		10,445
Average price ($/MMBtu)		$	6.01	$	6.18	$	5.34	$	4.27	$	4.47
Basis Swaps
Hedged Volume (MMBtu/d)	Henry Hub		18,466		17,066		14,400		-		-
Average price ($/MMBtu)		$	(0.17)	$	(0.19)	$	(0.19)		-		-
Collars
Hedged Volume (MMBtu/d)	Henry Hub		2,466		4,966		18,000		630		595
Average floor price ($/MMBtu)		$	6.50	$	5.74	$	5.00	$	4.00	$	4.00
Average ceiling price ($/MMBtu)		$	8.65	$	7.51	$	7.48	$	5.55	$	6.15
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.

Credit Risk

By using derivative instruments to hedge exposures to changes in commodity prices and interest rates, when applicable, we are exposed to credit risk. Credit risk is the failure of a counterparty to perform under the terms of the derivative contract. When the fair value of a derivative is in an asset position, the counterparty owes the Partnership, which creates credit risk. We do not receive collateral from our counterparties. The maximum amount of loss to credit risk, based on the gross fair value of our derivative contracts, is $123.4 million as of December 31, 2012.

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

	Partnership
	December 31, 2012				December 31, 2011
	Asset		Liability		Asset		Liability
	Derivatives		Derivatives		Derivatives		Derivatives
Commodity contracts	$	122,143	$	13,484	$	105,477	$	10,085
Interest rate contracts		-		12,236		20		23,973
	$	122,143	$	25,720	$	105,497	$	34,058
Commodity
Current	$	45,522	$	4,130	$	32,683	$	1,284
Noncurrent		76,621		9,354		72,794		8,801
	$	122,143	$	13,484	$	105,477	$	10,085
Interest
Current	$	-	$	4,597	$	-	$	8,285
Noncurrent		-		7,639		20		15,688
	$	-	$	12,236	$	20	$	23,973
Total Derivatives
Current	$	45,522	$	8,727	$	32,683	$	9,569
Noncurrent		76,621		16,993		72,814		24,489
	$	122,143	$	25,720	$	105,497	$	34,058

The following table presents the impact of derivatives and their location within the consolidated statements of operations for the indicated periods:

	Partnership						Predecessor
	Year Ended		Year Ended		December 22 to		January 1 to
	December 31,		December 31,		December 31,		December 21,
	2012		2011		2010		2010
Realized gains (losses):
Commodity contracts (1)	$	49,800	$	(72,053)	$	(289)	$	5,373
Interest rate swaps (2)		(21,937)		(4,512)		-		(4,808)
Total	$	27,863	$	(76,565)	$	(289)	$	565
Unrealized gains (losses):
Commodity contracts (1)	$	3,271	$	119,913	$	(12,393)	$	8,204
Interest rate swaps (2)		11,716		(24,914)		(594)		(2,606)
Total	$	14,987	$	94,999	$	(12,987)	$	5,598
Total gains (losses):
Commodity contracts (1)	$	53,071	$	47,860	$	(12,682)	$	13,577
Interest rate swaps (2)		(10,221)		(29,426)		(594)		(7,414)
Total	$	42,850	$	18,434	$	(13,276)	$	6,163

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

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