Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

Derivative Financial Instruments

Derivative Financial Instruments

7. Derivative Financial Instruments

We use financial derivative contracts to manage exposures to commodity price and interest rate fluctuations. We do not hold or issue derivative financial instruments for trading purposes. We manage market and counterparty credit risk in accordance with our policies and guidelines. In accordance with these policies and guidelines, our management determines the appropriate timing and extent of derivative transactions.

Oil Derivative Contracts

The following table sets forth the volumes in barrels underlying the Company’s outstanding oil derivative contracts and the weighted average Dated Brent prices per Bbl for those contracts as of June 30, 2013.

			Weighted Average Dated Brent Price per Bbl
Term	Type of Contract	MBbl	Deferred Premium		Floor		Ceiling		Call
2013:
July - December	Three-way collars	750	$	4.82	$	95.00	$	105.00	$	125.00
July - December	Three-way collars	506	—		87.50		115.00		135.00
July - December	Three-way collars	500	—		90.00		115.39		135.00
July - December	Three-way collars	500	—		90.08		115.00		135.00
2014:
January - December	Three-way collars	1,500	1.22		85.00		115.00		140.00
January - December	Three-way collars	1,000	—		85.00		115.01		140.00

Interest Rate Swaps Derivative Contracts

The following table summarizes our open interest rate swaps as of June 30, 2013, whereby we pay a fixed rate of interest and the counterparty pays a variable LIBOR-based rate:

Term	Weighted Average Notional Amount		Weighted Average Fixed Rate		Floating Rate
	(In thousands)
July 2013 — December 2013	$	200,617	1.99	%	6-month LIBOR
January 2014 — December 2014	133,434		1.99	%	6-month LIBOR
January 2015 — December 2015	45,319		2.03	%	6-month LIBOR
January 2016 — June 2016	12,500		2.27	%	6-month LIBOR

The following tables disclose the Company’s derivative instruments as of June 30, 2013 and December 31, 2012 and gain/(loss) from derivatives during the three and six months ended June 30, 2013 and 2012, respectively:

		Estimated Fair Value Asset (Liability)
		June 30,			December 31,
Type of Contract	Balance Sheet Location	2013			2012
		(In thousands)
Derivatives not designated as hedging instruments:
Derivative assets:
Commodity(1)	Derivatives assets—current	$	1,254		$	1,061
Commodity (2)	Derivatives assets—long-term	2,135			—
Derivative liabilities:
Commodity(3)	Derivatives liabilities—current	(4,330		)	(17,005		)
Interest rate	Derivatives liabilities—current	(2,670		)	(3,372		)
Commodity(4)	Derivatives liabilities—long-term	—			(659		)
Interest rate	Derivatives liabilities—long-term	(1,202		)	(2,567		)
Total derivatives not designated as hedging instruments		$	(4,813	)	$	(22,542	)

(1) The commodity derivative asset represents $1.3 million of our oil derivative contracts as of June 30, 2013 and $1.1 million of our provisional oil sales contract as of December 31, 2012.

(2) Includes deferred premiums of $1.1 million related to commodity derivative contracts as of June 30, 2013.

(3) Includes $0.6 million and $3.4 million, as of June 30, 2013 and December 31, 2012, respectively of cash settlements made on our commodity derivative contracts which were settled in the month subsequent to period end. Also, includes deferred premiums of $5.0 million and $7.6 million related to commodity derivative contracts as of June 30, 2013 and December 31, 2012, respectively.

(4) Includes deferred premiums of $2.4 million related to commodity derivative contracts as of December 31, 2012.

		Amount of Gain/(Loss)						Amount of Gain/(Loss)
		Three Months Ended June 30,						Six Months Ended June 30,
Type of Contract	Location of Gain/(Loss)	2013			2012			2013			2012
		(In thousands)
Derivatives in cash flow hedging relationships:
Interest rate(1)	Interest expense	$	358		$	(214	)	$	717		$	(428	)
Total derivatives in cash flow hedging relationships		$	358		$	(214	)	$	717		$	(428	)
Derivatives not designated as hedging instruments:
Commodity(2)	Oil and gas revenue	$	(9,252	)	$	987		$	(4,664	)	$	3,727
Commodity	Derivatives, net	12,707			1,982			7,199			(1,878		)
Interest rate	Interest expense	23			(725		)	50			(1,435		)
Total derivatives not designated as hedging instruments		$	3,478		$	2,244		$	2,585		$	414

(1) Amounts were reclassified from AOCI into earnings upon settlement.

(2) Amounts represent the mark-to-market portion of our provisional oil sales contracts.

In accordance with the mark-to-market method of accounting, the Company recognizes changes in fair values of its derivative contracts as gains or losses in earnings during the period in which they occur. The fair value of the effective portion of the interest rate derivative contracts on May 31, 2010, is reflected in AOCI and is being transferred to interest expense over the remaining term of the contracts. The Company expects to reclassify $1.6 million of gains from AOCI to interest expense within the next 12 months. See Note 8—Fair Value Measurements for additional information regarding the Company’s derivative instruments.

Offsetting of Derivative Assets and Derivative Liabilities

Our derivative instruments subject to master netting arrangements with our counterparties only have the right of offset when there is an event of default.  As of June 30, 2013 and December 31, 2012, there was not an event of default and, therefore, the associated gross asset or gross liability amounts related to these arrangements are presented on the consolidated balance sheets. Additionally, there were no material rights of offset available, if an event of default occurred, as of June 30, 2013 and December 31, 2012.