Risk Management and Derivative Instruments

6 Months Ended

Jun. 30, 2013

Risk Management and Derivative Instruments

Risk Management and Derivative Instruments

4. Risk Management and Derivative Instruments

The Company is exposed to fluctuations in crude oil, NGL and natural gas prices on its production. The Company believes it is prudent to manage the variability in cash flows by entering into derivative financial instruments to economically hedge a portion of its crude oil, NGL and natural gas production. The Company utilizes various types of derivative financial instruments, including swaps and collars, to reduce fluctuations in cash flows resulting from changes in commodity prices. These derivative contracts are placed with major financial institutions that the Company believes are minimal credit risks. The oil, NGL and natural gas reference prices, upon which the commodity derivative contracts are based, reflect various market indices that management believes have a high degree of historical correlation with actual prices received by the Company for its crude oil, NGL and natural gas production.

Inherent in the Company’s portfolio of commodity derivative contracts are certain business risks, including market risk and credit risk. Market risk is the risk that the price of the commodity will change, either favorably or unfavorably, in response to changing market conditions. Credit risk is the risk of loss from nonperformance by the Company’s counterparty to a contract. The Company does not require collateral from its counterparties but does attempt to minimize its credit risk associated with derivative instruments by entering into derivative instruments only with counterparties that are large financial institutions, which management believes present minimal credit risk. In addition, to mitigate its risk of loss due to default, the Company has entered into agreements with its counterparties on its derivative instruments that allow the Company to offset its asset position with its liability position in the event of default by the counterparty. Due to the netting arrangements, had the Company’s counterparties failed to perform under existing commodity derivative contracts, the maximum loss at June 30, 2013 would have been approximately $13.6 million.

Commodity Derivative Contracts

As of June 30, 2013, the Company had the following open commodity derivative contract positions:

	Hedged Volume	Weighted-Average Fixed Price
Oil (Bbls):
WTI Swaps — 2013	2,172,214				$	94.12
WTI Swaps — 2014	4,344,450				$	88.76
WTI Swaps — 2015	1,820,000				$	86.55
WTI Collars — 2013	101,502	$	85.27	-	$	100.70
WTI Collars — 2014	164,400	$	88.49	-	$	97.94
WTI to LLS Basis Differential Swaps — 2013 (1)	743,794				$	5.78
WTI to LLS Basis Differential Swaps — 2014 (1)	501,000				$	5.35
Natural Gas (Mmbtu):
Swaps — 2013 (2)	7,360,000				$	4.09
Swaps — 2014	9,125,000				$	4.23
Collars — 2013	1,116,498	$	3.68	-	$	4.91
Collars — 2014	1,685,004	$	3.99	-	$	5.09
NGL (Bbls):
NGL Swaps — 2013	129,000				$	63.42
NGL Swaps — 2014	151,500				$	62.16

(1) The Company enters into swap arrangements intended to fix the positive differential between the Louisiana Light Sweet (“LLS”) pricing and West Texas Intermediate (“NYMEX WTI”) pricing.

(2) Includes 1,240,000 Mmbtu that priced in the second quarter of 2013, but have yet to be cash settled.

Balance Sheet Presentation

The following table summarizes the gross fair values of derivative instruments by the appropriate balance sheet classification, even when the derivative instruments are subject to netting arrangements and qualify for net presentation in the Company’s condensed consolidated balance sheets at June 30, 2013 and December 31, 2012, respectively (in thousands):

Type	Balance Sheet Location (1)	June 30, 2013			December 31, 2012
Oil Swaps	Derivative financial instruments — Current Assets	$	8,805		$	16,004
Oil Swaps	Derivative financial instruments — Non-Current Assets	2,623			129
Oil Swaps	Derivative financial instruments — Current Liabilities	(16,872		)	(11,485		)
Oil Swaps	Derivative financial instruments — Non-Current Liabilities	(558		)	(3,606		)
NGL Swaps	Derivative financial instruments — Current Assets	3,031			1,624
NGL Swaps	Derivative financial instruments — Non-Current Assets	430			729
NGL Swaps	Derivative financial instruments — Current Liabilities	—			(336		)
NGL Swaps	Derivative financial instruments — Non-Current Liabilities	—			(122		)
Gas Swaps	Derivative financial instruments — Current Assets	4,473			—
Gas Swaps	Derivative financial instruments — Non-Current Assets	1,197			—
Gas Swaps	Derivative financial instruments — Current Liabilities	—			—
Gas Swaps	Derivative financial instruments — Non-Current Liabilities	—			—
Oil Collars	Derivative financial instruments — Current Assets	206			221
Oil Collars	Derivative financial instruments — Non-Current Assets	282			207
Oil Collars	Derivative financial instruments — Current Liabilities	(118		)	(238		)
Oil Collars	Derivative financial instruments — Non-Current Liabilities	—			(49		)
Gas Collars	Derivative financial instruments — Current Assets	1,169			1,129
Gas Collars	Derivative financial instruments — Non-Current Assets	370			897
Gas Collars	Derivative financial instruments — Current Liabilities	(48		)	(112		)
Gas Collars	Derivative financial instruments — Non-Current Liabilities	—			(73		)
Basis Differential Swaps	Derivative financial instruments — Current Assets	147			2,625
Basis Differential Swaps	Derivative financial instruments — Non-Current Assets	—			36
Basis Differential Swaps	Derivative financial instruments — Current Liabilities	(670		)	(11,319		)
Basis Differential Swaps	Derivative financial instruments — Non-Current Liabilities	(208		)	(374		)
Total		$	4,259		$	(4,113	)

(1) The fair value of derivative instruments reported in the Company’s condensed consolidated balance sheets are subject to netting arrangements and qualify for net presentation. The following table summarizes the location and fair value amounts of all derivative instruments in the unaudited condensed consolidated balance sheets, as well as the gross recognized derivative assets, liabilities and amounts offset in the unaudited condensed consolidated balance sheets as of June 30, 2013 and December 31, 2012, respectively (in thousands):

		June 30, 2013
Not Designated as ASC 815 Hedges:	Balance Sheet Classification	Gross Recognized Assets/ Liabilities		Gross Amounts Offset		Net Recognized Fair Value Assets/ Liabilities
Derivative assets:
Commodity contracts	Derivative financial instruments - current	$	17,831	$	8,825	$	9,006
Commodity contracts	Derivative financial instruments - noncurrent	4,902		271		4,631
		$	22,733	$	9,096	$	13,637
Derivative liabilities:
Commodity contracts	Derivative financial instruments - current	$	17,708	$	8,825	$	8,883
Commodity contracts	Derivative financial instruments - noncurrent	766		271		495
		$	18,474	$	9,096	$	9,378

		December 31, 2012
Not Designated as ASC 815 Hedges:	Balance Sheet Classification	Gross Recognized Assets/ Liabilities		Gross Amounts Offset		Net Recognized Fair Value Assets/ Liabilities
Derivative assets:
Commodity contracts	Derivative financial instruments - current	$	21,603	$	15,908	$	5,695
Commodity contracts	Derivative financial instruments - noncurrent	1,998		281		1,717
		$	23,601	$	16,189	$	7,412
Derivative liabilities:
Commodity contracts	Derivative financial instruments - current	$	23,490	$	15,908	$	7,582
Commodity contracts	Derivative financial instruments - noncurrent	4,224		281		3,943
		$	27,714	$	16,189	$	11,525

Gains on Commodity Derivative Contracts

The Company does not designate its commodity derivative contracts as hedging instruments for financial reporting purposes. Accordingly, all gains and losses, including unrealized gains and losses from changes in the derivative instruments’ fair values, have been recorded in “Gains on commodity derivative contracts — net”, within revenues in the condensed consolidated statements of operations.

The following table presents realized net losses and unrealized net gains (losses) recorded by the Company related to the change in fair value of the derivative instruments in “Gains on commodity derivative contracts — net” for the periods presented (in thousands):

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
Realized net gains (losses)	$	(1,071	)	$	(5,180	)	$	(6,075	)	$	(11,679	)
Unrealized net gains (losses)	23,492			53,323			8,372			35,157