DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

6 Months Ended

Jun. 30, 2013

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company periodically enters into commodity derivative instruments to hedge its exposure to price fluctuations related to its natural gas and crude oil production. The Company’s credit agreement restricts the ability of the Company to enter into commodity hedges other than to hedge or mitigate risks to which the Company has actual or projected exposure or as permitted under the Company’s risk management policies and where such derivatives do not subject the Company to material speculative risks. All of the Company’s derivatives are used for risk management purposes and are not held for trading purposes.

As of June 30, 2013, the Company had the following outstanding commodity derivatives:

				Collars
				Floor				Ceiling				Swaps
Type of Contract	Volume		Contract Period	Range (1)		Weighted Average (1)		Range (1)		Weighted Average (1)		(Weighted Average) (1)
Natural gas collars	8.9	Bcf	Jul. 2013 - Dec. 2013	$	—	$	5.15	$	6.18-$6.23	$	6.20
Natural gas collars	109.0	Bcf	Jul. 2013 - Dec. 2013	$	3.09-$4.37	$	3.63	$	3.98-$5.02	$	4.27
Natural gas collars	53.3	Bcf	Jul. 2013 - Dec. 2014	$	3.60-$3.96	$	3.78	$	4.55-$4.59	$	4.57
Natural gas collars	124.1	Bcf	Jan. 2014 - Dec. 2014	$	3.86-$4.37	$	4.19	$	4.63-$4.80	$	4.70
Crude oil swaps	552	Mbbl	Jul. 2013 - Dec. 2013									$	101.90

(1)    Natural gas prices are stated per Mcf and crude oil prices are stated per barrel.

The changes in the fair value of derivatives designated as hedges that are effective are recorded to accumulated other comprehensive income / (loss) in stockholders’ equity in the Condensed Consolidated Balance Sheet. The ineffective portion of the change in fair value of derivatives designated as hedges, if any, and the change in fair value of derivatives not designated as hedges are recorded currently in earnings as a component of natural gas revenue and crude oil and condensate revenue in the Condensed Consolidated Statement of Operations.

The following disclosures reflect the impact of derivative instruments on the Company’s condensed consolidated financial statements:

Effect of Derivative Instruments on the Condensed Consolidated Balance Sheet

		Fair Values of Derivative Instruments
		Derivative Assets				Derivative Liabilities
(In thousands)	Balance Sheet Location	June 30, 2013		December 31, 2012		June 30, 2013		December 31, 2012
Derivatives Designated as Hedging Instruments
Commodity contracts	Derivative instruments (current assets)	$	69,644	$	50,824	$	—	$	—
Commodity contracts	Derivative instruments (non-current assets)	17,963		—		—		—
Commodity contracts	Accrued liabilities	—		—		—		192
Commodity contracts	Derivative instruments (non-current liabilities)	—		—		—		—
		$	87,607	$	50,824	$	—	$	192

At June 30, 2013 and December 31, 2012, unrealized gains of $87.6 million ($53.1 million, net of tax) and unrealized gains of $50.6 million ($30.7 million, net of tax), respectively, were recorded in accumulated other comprehensive income / (loss) in stockholder’s equity in the Condensed Consolidated Balance Sheet. Based upon estimates at June 30, 2013, the Company expects to reclassify $42.3 million in after-tax income associated with its commodity hedges from accumulated other comprehensive income / (loss) to the Condensed Consolidated Statement of Operations over the next 12 months.

Offsetting of Derivative Assets and Liabilities in the Condensed Consolidated Balance Sheet

(In thousands)	June 30, 2013			December 31, 2012
Derivative Assets
Gross amounts of recognized assets	$	89,840		$	54,454
Gross amounts offset in the statement of financial position	(2,233		)	(3,630		)
Net amounts of assets presented in the statement of financial position	87,607			50,824
Gross amounts of financial instruments not offset in the statement of financial position	549			1,892
Net amount	$	88,156		$	52,716
Derivative Liabilities
Gross amounts of recognized liabilities	$	2,233		$	3,822
Gross amounts offset in the statement of financial position	(2,233		)	(3,630		)
Net amounts of liabilities presented in the statement of financial position	—			192
Gross amounts of financial instruments not offset in the statement of financial position	—			—
Net amount	$	—		$	192

Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations

Derivatives Designated as Hedging Instruments

	Amount of Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2013		2012		2013		2012
Commodity Contracts	$	115,113	$	18,376	$	54,167	$	89,104

Location of Gain (Loss)	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Reclassified from Accumulated OCI into	Three Months Ended June 30,					Six Months Ended June 30,
Income (In thousands)	2013			2012		2013		2012
Natural gas revenues	$	(272	)	$	69,732	$	13,056	$	126,728
Crude oil and condensate revenues	2,094			3,110		4,136		1,784
	$	1,822		$	72,842	$	17,192	$	128,512

For the three and six months ended June 30, 2013 and 2012, respectively, there was no ineffectiveness recorded in our Condensed Consolidated Statement of Operations related to our derivative instruments.

Derivatives Not Designated as Hedging Instruments

	Location of Gain (Loss) Recognized in Income on	Three Months Ended  June 30,					Six Months Ended  June 30,
(In thousands)	Derivatives	2013		2012			2013		2012
Commodity Contracts	Natural gas revenues	$	—	$	(342	)	$	—	$	(300	)

Additional Disclosures about Derivative Instruments and Hedging Activities

The use of derivative instruments involves the risk that the counterparties will be unable to meet their obligation under the agreement. The Company enters into derivative contracts with multiple counterparties in order to limit its exposure to individual counterparties. The Company also has netting arrangements with each of its counterparties that allow it to offset assets and liabilities from separate derivative contracts with that counterparty.

Certain counterparties to the Company’s derivative instruments are also lenders under its credit facility. The Company’s credit facility and derivative instruments contain certain cross default and acceleration provisions that may require immediate payment of its derivative liabilities in certain situations.