Commodity Derivative Instruments

9 Months Ended

Sep. 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 September 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 September 30, 2011:

								Net Fair Value
						Remaining		Asset (Liability) at
Commodity	Volume			Fixed Price		Term	Index Price	September 30, 2011
								(In thousands)
Crude oil		203	Bbls / Day	$	57.70	Oct ’11 - Dec ’11	NYMEX – WTI	$	(425	)
Crude oil		62	Bbls / Day	$	91.05	Oct ’11 - Dec ’11	NYMEX – WTI		56
Crude oil		230	Bbls / Day	$	91.05	Jan ’12 - Dec ’12	NYMEX – WTI		843
Crude oil		162	Bbls / Day	$	91.05	Jan ’13 - Dec ’13	NYMEX – WTI		446
Natural gas		12,000	MMBtu / Day	$	5.150	Oct ’11 - Dec ’11	CIG		1,637
Natural gas		3,253	MMBtu / Day	$	5.040	Oct ’11 - Dec ’11	CIG		411
Natural gas		12,052	MMBtu / Day	$	4.440	Jan ’12 - Dec ’12	CIG		1,993
Natural gas		10,301	MMBtu / Day	$	4.440	Jan ’13 - Dec ’13	CIG		(208	)
Natural gas liquids(1)		34,367	Gallons / Day	$	0.913	Oct ’11 - Dec ’11	MT. BELVIEU		(921	)
Natural gas liquids(1)		30,617	Gallons / Day	$	0.832	Jan ’12 - Dec ’12	MT. BELVIEU		(2,114	)
Natural gas liquids(1)		12,286	Gallons / Day	$	0.767	Jan ’13 - Dec ’13	MT. BELVIEU		(574	)
								$	1,144

⁽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 asset as of September 30, 2011 was $684,000. A credit risk adjustment of $460,000 to the fair value of the derivatives increased the reported amount of the net derivative assets on the Company’s consolidated balance sheet to $1.1 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 September 30, 2011 and December 31, 2010 (in thousands):

Derivatives Not Designated as			September 30, 2011		Dec. 31, 2010
Hedging Instruments	Balance Sheet Classification	Fair Value			Fair Value
Assets (Liabilities)
Commodity Swaps	Derivative Instruments – Current Assets (Liabilities), net	$	1,463		$	(574	)
Commodity Swaps	Derivative Instruments – Long-Term Liabilities, net		(319	)		(2,419	)
Total		$	1,144		$	(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 nine months ended September 30, 2011 and 2010 (in thousands):

		September 30, 2011			September 30, 2010
		Amount of Gain			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)	$	(5,371	)	$	(5,132	)
Commodity Swaps	Unrealized Gain on Derivative Instruments, net – Other Income and (Expense)		4,137			28,072
		$	(1,234	)	$	22,940