Commodity Derivative Instruments

6 Months Ended

Jun. 30, 2011

Commodity Derivative Instruments [Abstract]

Commodity Derivative Instruments

(8) Commodity Derivative Instruments

The Company periodically enters into commodity price risk transactions to manage its exposure to oil, gas, and natural gas liquids price volatility. These transactions may take the form of futures contracts, collar agreements, swaps or options. The purpose of the transactions is to provide a measure of stability to the Company’s cash flows in an environment of volatile oil and gas prices. The Company has not elected hedge accounting and recognizes mark-to-market gains and losses in earnings currently.

The Company is exposed to the fluctuations in natural gas, natural gas liquids, or crude oil prices due to the nature of business in which the Company is primarily involved. In order to mitigate the risks associated with uncertain cash flows from volatile commodity prices and to provide stability and predictability in the Company’s future revenues, the Company periodically enters into commodity price risk management transactions to manage its exposure to gas and oil price volatility.

On June 28, 2011, as required by the amendment to the MBL Credit Agreement completed in conjunction with the 2011 Wapiti Transaction, the Company paid $3.3 million cash to settle a portion of its oil derivative contracts outstanding from July 2011 to December 2013. The table below reflects the remaining open derivative contracts after consideration of this early termination.

At June 30, 2011, all of the Company’s outstanding derivative contracts were fixed price swaps. Under the swap agreements, the Company receives the fixed price and pays the floating index price. The Company’s swaps are settled in cash on a monthly basis. By entering into swaps, the Company effectively fixes the price that it will receive for a portion of its production.

The following table summarizes the Company’s open derivative contracts at June 30, 2011:

						Net Fair Value
				Remaining		Asset (Liability) at
Commodity	Volume	Fixed Price		Term	Index Price	June 30, 2011
						(In thousands)
Crude oil	192 Bbls / Day	$	57.70	Jul ’11 - Dec ’11	NYMEX – WTI	$	(1,307	)
Crude oil	79 Bbls / Day	$	91.05	Jul ’11 - Dec ’11	NYMEX – WTI		(68	)
Crude oil	230 Bbls / Day	$	91.05	Jan ’12 - Dec ’12	NYMEX – WTI		(632	)
Crude oil	162 Bbls / Day	$	91.05	Jan ’13 - Dec ’13	NYMEX – WTI		(444	)
Natural gas	12,000 MMBtu / Day	$	5.150	Jul ’11 - Dec ’11	CIG		2,064
Natural gas	3,253 MMBtu / Day	$	5.040	Jul ’11 - Dec ’11	CIG		494
Natural gas	12,052 MMBtu / Day	$	4.440	Jan ’12 - Dec ’12	CIG		(66	)
Natural gas	10,301 MMBtu / Day	$	4.440	Jan ’13 - Dec ’13	CIG		(890	)
Natural gas liquids(1)	35,406 Gallons / Day	$	0.913	Jul ’11 - Dec ’11	MT. BELVIEU		(1,698	)
Natural gas liquids(1)	30,617 Gallons / Day	$	0.832	Jan ’12 - Dec ’12	MT. BELVIEU		(2,317	)
Natural gas liquids(1)	12,286 Gallons / Day	$	0.767	Jan ’13 - Dec ’13	MT. BELVIEU		(741	)
						$	(5,605	)

⁽¹⁾ Natural gas liquids includes purity ethane, propane, natural gasoline, normal butane and isobutene derivatives and the weighted average price is used.

The pre-credit risk adjusted fair value of the Company’s net derivative liabilities as of June 30, 2011 was $6.9 million. A credit risk adjustment of $1.3 million to the fair value of the derivatives increased the reported amount of the net derivative liabilities on the Company’s consolidated balance sheet to $5.6 million.

The Company classifies the fair value amounts of derivative assets and liabilities executed under master netting arrangements as net derivative assets or net derivative liabilities, whichever the case may be, by commodity and master netting counterparty. The following table summarizes the fair values and location in the Company’s consolidated balance sheet of all derivatives held by the Company as of June 30, 2011 and December 31, 2010 (in thousands):

Derivatives Not Designated as		June 30, 2011			Dec. 31, 2010
Hedging Instruments	Balance Sheet Classification	Fair Value			Fair Value
Liabilities
Commodity Swaps	Derivative Instruments – Current Liabilities, net	$	(2,123	)	$	(574	)
Commodity Swaps	Derivative Instruments – Long-Term Liabilities, net		(3,482	)		(2,419	)
Total		$	(5,605	)	$	(2,993	)

The following table summarizes the realized and unrealized gains and losses and the classification in the consolidated statement of operations of derivatives not designated as hedging instruments for the six months ended June 30, 2011 and 2010 (in thousands):

		June 30, 2011			June 30, 2010
		Amount of			Amount of Gain
		Loss Recognized			(Loss) Recognized
Derivatives Not Designated as	Location of Gain (Loss) Recognized in	in Income			in Income
Hedging Instruments	Income on Derivatives	on Derivatives			on Derivatives
Commodity Swaps	Realized Loss on Derivative Instruments, net – Other Income and (Expense)	$	(5,450	)	$	(4,714	)
Commodity Swaps	Unrealized Gain (Loss) on Derivative Instruments, net – Other Income and (Expense)		(2,612	)		20,948
		$	(8,062	)	$	16,234