NOTE 13 – DERIVATIVES

Commodity Derivatives

We have entered into various types of derivative transactions covering some of our projected natural gas, NGLs, and oil production. These transactions are intended to reduce our exposure to market price volatility by setting the price(s) we will receive for that production. Our decisions on the price(s), type, and quantity of our production hedged is based, in part, on our view of current and future market conditions. As of December 31, 2012, our derivative transactions consisted of the following types of hedges:


•	Swaps. We receive or pay a fixed price for the hedged commodity and pay or receive a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.


•	Collars. A collar contains a fixed floor price (put) and a ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party.

We have documented policies and procedures to monitor and control the use of derivative instruments. We do not engage in derivative transactions for speculative purposes. In August 2012, we determined on a prospective basis, to enter into economic hedges without electing cash flow hedge accounting. Therefore, the change in fair value, on all commodity derivatives entered into after that determination, will be reflected in the income statement and not in accumulated other comprehensive income (OCI).

At December 31, 2012, the following designated cash flow hedges were outstanding:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Jan’13 – Dec’13	Natural gas – swap	60,000 MMBtu/day	$3.56	IF – NYMEX (HH)
Jan’13 – Dec’13	Crude oil – swap	5,500 Bbl/day	$99.71	WTI – NYMEX
Jan’13 – Dec’13	Natural gas – collar	20,000 MMBtu/day	$3.25-3.72	IF – NYMEX (HH)

At December 31, 2012, the following non-designated hedges were outstanding:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Jan’13 – Dec’13	Natural gas – swap	20,000 MMBtu/day	$3.94	IF – NYMEX (HH)
Jan’13 – Dec’13	Crude oil – swap	1,000 Bbl/day	$90.63	WTI – NYMEX
Jan’14 – Dec’14	Crude oil – swap	1,000 Bbl/day	$90.60	WTI – NYMEX

Subsequent to December 31, 2012, the following non-designated hedges were entered into:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Feb'13 – Dec’13	Crude oil – swap	2,000 Bbl/day	$96.58	WTI – NYMEX
Jan’14 – Dec’14	Crude oil – swap	1,000 Bbl/day	$92.20	WTI – NYMEX
Jan’14 – Dec’14	Crude oil – collar	2,000 Bbl/day	$90.00-95.00	WTI – NYMEX

The following tables present the fair values of our derivative transactions and the location within our balance sheets where those values are recorded:



		Derivative Assets Fair Value
	Balance Sheet Location	December 31, 2012		December 31, 2011
		(In thousands)
Derivatives designated as hedging instruments
Commodity derivatives:
Current	Current derivative assets	$	13,674	$	31,938
Long-term	Non-current derivative assets	—		4,514
Total derivatives designated as hedging instruments		13,674		36,452
Derivatives not designated as hedging instruments
Commodity derivatives:
Current	Current derivative assets	2,878		—
Long-term	Non-current derivative assets	—		—
Total derivatives not designated as hedging instruments		2,878		—
Total derivative assets		$	16,552	$	36,452



		Derivative Liabilities Fair Value
	Balance Sheet Location	December 31, 2012		December 31, 2011
		(In thousands)
Derivatives designated as hedging instruments
Commodity derivatives:
Current	Current derivative liabilities	$	1,005	$	2,657
Long-term	Non-current derivative liabilities	—		—
Total derivatives designated as hedging instruments		1,005		2,657
Derivatives not designated as hedging instruments
Commodity derivatives:
Current	Current derivative liabilities	943		—
Long-term	Non-current derivative liabilities	562		—
Total derivatives not designated as hedging instruments		1,505		—
Total derivative liabilities		$	2,510	$	2,657

If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty in our balance sheets.

We recognize in accumulated other comprehensive income (OCI) the effective portion of any changes in fair value and reclassify the recognized gains (losses) on the sales to oil and natural gas revenue as the underlying transactions are settled. As of December 31, 2012 and 2011, we had a gain of $7.6 million and $19.0 million, net of tax, respectively, in accumulated OCI.

Based on market prices at December 31, 2012, we expect to transfer a gain of approximately $7.6 million, net of tax, included in accumulated OCI during the next 12 months in the related month of settlement. The cash flow derivative instruments existing as of December 31, 2012 are expected to mature by December 31, 2013.

For our economic hedges that we elected not to apply cash flow accounting to, any changes in their fair value occurring before their maturity (i.e., temporary fluctuations in value) are reported in gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net in our consolidated statements of income. Changes in the fair value of derivatives designated as cash flow hedges, to the extent they are effective in offsetting cash flows attributable to the hedged risk, are recorded in OCI until the hedged item is recognized into earnings. When the hedged item is recognized into earnings, it is reported in oil and natural gas revenues. Any change in fair value resulting from ineffectiveness is recognized in gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net. Previously, we reported all realized and unrealized gains (losses) in oil and natural gas revenues and now we reflect gains (losses) on non-designated hedges and ineffectiveness from cash flow hedges along with other revenue items in other income (expense) below income from operations. Prior year amounts have been reclassified to conform to current year presentation.

Effect of Derivative Instruments on the Consolidated Balance Sheets (cash flow hedges) for the year ended December 31:



Derivatives in Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion) ⁽¹⁾
	2012		2011
	(In thousands)
Commodity derivatives	$	7,587	$	19,026

_________________________


(1)	Net of taxes.

Effect of derivative instruments on the Consolidated Statements of Income (cash flow hedges) for the year ended December 31:



Derivative Instrument	Location of Gain or (Loss) Reclassified from Accumulated OCI into Income & Location of Gain or (Loss) Recognized in Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income ⁽¹⁾					Amount of Gain or (Loss) Recognized in Income ⁽²⁾
		2012		2011			2012			2011
		(In thousands)
Commodity derivatives	Oil and natural gas revenue ⁽¹⁾	51,853		4,699			—			—
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net⁽²⁾	—		—			(2,616		)	2,749
Interest rate swaps	Interest, net	—		(1,734		)	—			—
	Total	$	51,853	$	2,965		$	(2,616	)	$	2,749

_________________________


(1)	Effective portion of gain (loss).


(2)	Ineffective portion of gain (loss).

Effect of Derivative Instruments on the Consolidated Statements of Income (derivatives not designated as hedging instruments) for the year ended December 31:



	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Derivatives Not Designated as Hedging Instruments		2012		2011
		(In thousands)
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net	$	1,373	$	(1,047	)
Total		$	1,373	$	(1,047	)