NOTE 9 – 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 March 31, 2012, our derivative transactions consisted only of swaps. Swaps are where 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.

Oil and Natural Gas Segment:

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


Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Apr'12 – Dec'12	Crude oil – swap	6,250 Bbl/day	$97.72	WTI – NYMEX
Jan'13 – Dec'13	Crude oil – swap	4,000 Bbl/day	$102.68	WTI – NYMEX

Apr'12 – Dec'12	Natural gas – swap	30,000 MMBtu/day	$5.05	IF – NYMEX (HH)
Apr'12 – Dec'12	Natural gas – swap	15,000 MMBtu/day	$5.62	IF – PEPL
Jul'12 – Sep'12	Natural gas – swap	20,000 MMBtu/day	$2.98	IF – NYMEX (HH)

Apr'12 – Dec'12	Liquids – swap (1)	180,006 Gal/mo	$2.11	OPIS – Conway
Apr'12 – Jun'12	Liquids – swap (2)	1,000,028 Gal/mo	$0.78	OPIS – Mont Belvieu
Jul'12 – Dec'12	Liquids – swap (3)	310,000 Gal/mo	$0.69	OPIS – Mont Belvieu

(1) Types of liquids involved are natural gasoline.

(2) Types of liquids involved are natural gasoline and ethane.

(3) Types of liquids involved are ethane.

Subsequent to March 31, 2012, the following cash flow hedges were entered into:


Term	Commodity	Hedged Volume	Price	Hedged Market
Jan'13 – Dec'13	Natural gas – collar	20,000 MMBtu/day	$3.25 -$3.72	IF – NYMEX (HH)
Jan'13 – Dec'13	Natural gas – swap	10,000 MMBtu/day	$3.21	IF – NYMEX (HH)

The following tables present the fair values and locations of the derivative transactions recorded in our unaudited condensed consolidated balance sheets:


		Derivative Assets
		Fair Value
	Balance Sheet Location	March 31, 2012		December 31, 2011
		(In thousands)
Derivatives designated as hedging instruments

Commodity derivatives:
Current	Current derivative asset	$	26,592	$	31,938
Long-term	Non-current derivative asset		384		4,514

Total derivatives designated as hedging instruments			26,976		36,452


Total derivative assets		$	26,976	$	36,452


		Derivative Liabilities
		Fair Value
	Balance Sheet Location	March 31, 2012		December 31, 2011
		(In thousands)
Derivatives designated as hedging instruments

Commodity derivatives:
Current	Current portion of derivative liabilities	$	2,775	$	2,657
Long-term	Non-current derivative liabilities		1,359		0

Total derivatives designated as hedging instruments			4,134		2,657


Total derivative liabilities		$	4,134	$	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 unaudited condensed consolidated 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 revenue and the purchases to expense as the underlying transactions are settled. As of March 31, 2012 and 2011, we had a gain of $13.5 million and a loss of $20.7 million, net of tax, respectively, in accumulated OCI.

Based on market prices at March 31, 2012, we expect to transfer a gain of approximately $14.6 million, net of tax, included in accumulated OCI during the next 12 months in the related month of settlement. The commodity derivative instruments existing as of March 31, 2012 are expected to mature by December 2013.

Certain derivatives do not qualify as cash flow hedges. Currently, all of our derivatives qualify for cash flow treatment; however, during 2011, we had three basis swaps that did not qualify as cash flow hedges. For those types of derivatives, any changes in the fair value that occurred before their maturity (i.e., temporary fluctuations in value) were reported in the unaudited condensed consolidated statements of income within our oil and natural gas revenues. Changes in the fair value of derivative instruments 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. Any change in fair value resulting from ineffectiveness is recognized in our oil and natural gas revenues.

Effect of Derivative Instruments on the Unaudited Condensed Consolidated Statement of Income (cash flow hedges) for the three months ended March 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)
Interest rate swaps	$	0		$	(840	)
Commodity derivatives		(13,503	)		(19,864	)

Total	$	(13,503	)	$	(20,704	)

(1) Net of taxes.

Effect of Derivative Instruments on the Unaudited Condensed Consolidated Statement of Income (cash flow hedges) for the three months ended March 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	$	8,176	$	635		$	(1,993	)	$	(1,909	)
Interest rate swaps	Interest, net		0		(303	)		0			0

Total		$	8,176	$	332		$	(1,993	)	$	(1,909	)

(1)

Effective portion of gain (loss).

(2)

Ineffective portion of gain (loss).

Effect of Derivative Instruments on the Condensed Consolidated Statement of Income (derivatives not designated as hedging instruments) for the three months ended March 31:

	0000		0000		0000
Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
		2012		2011
		(In thousands)
Commodity derivatives (basis swaps)	Oil and natural gas revenue	$	0	$	(601	)

Total		$	0	$	(601	)