Physical Delivery Contracts and Gas Derivatives

6 Months Ended

Jun. 30, 2012

Physical Delivery Contracts and Gas Derivatives

Physical Delivery Contracts and Gas Derivatives

Note 12 — Physical Delivery Contracts and Gas Derivatives

The Company has historically used commodity-based derivative contracts to manage exposures to commodity price on certain of its gas production.  The Company does not hold or issue derivative financial instruments for speculative or trading purposes.  Nytis LLC also enters into gas physical delivery contracts to effectively provide gas price hedges.  Because these contracts are not expected to be net cash settled, they are considered to be normal sales contracts and not derivatives.  Therefore, these contracts are not recorded at fair value in the consolidated financial statements.

The Company has fixed price contracts requiring physical deliveries for July 2012 through October 2013 of approximately 37,500 MMBtu per month for an average sales price of $3.11 per MMBtu and for October and November 2013 of approximately 18,600 MMBtu per month for an average sales price of $3.24 per MMBtu.

At June 30, 2012, other than the above mentioned contracts, the Company’s other gas sales contracts approximate index prices.

The Company’s swap agreements as of June 30, 2012 are summarized in the table below:

Agreement	Remaining		Fixed Price	Floating Price Nytis LLC
Type	Term	Quantity	Counterparty Payer	Payer
Swap	7/12 - 12/12	10,000 MMBtu/month	$5.07/ MMBtu	(a)
Swap	7/12 - 3/13	40,000 MMBtu/month	$2.78/ MMBtu	(a)
Swap	7/12 - 12/12	1,000 Bbl/month	$106.25/ Bbl	(b)
Swap	1/13 - 12/13	500 Bbl/month	$87.70/Bbl	(b)

(a)NYMEX Henry Hub Natural Gas futures contract for the respective delivery month.

(b)NYMEX Light Sweet Crude West Texas Intermediate futures contract for the respective delivery month.

For its swap instruments, the Company receives a fixed price for the hedged commodity and pays a floating 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.

The following table summarizes the fair value of the derivatives recorded in the consolidated balance sheets.  These derivative instruments are not designated as cash flow hedging instruments for accounting purposes:

(in thousands)	June 30, 2012		December 31, 2011
Derivative contracts:
Current assets	$	131	$	308
Current liabilities	$	—	$	—

The table below summarizes the realized and unrealized gains and losses related to the Company’s derivative instruments for the three and six months ended June 30, 2012 and 2011.  These realized and unrealized gains and losses are recorded and included in commodity derivative gain in the accompanying consolidated statements of operations.

	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2012			2011			2012			2011
Commodity derivative contracts:
Realized gains (losses)	$	184		$	77		$	318		$	184
Unrealized (losses) gains	(154		)	(13		)	(177		)	(59		)
Total realized and unrealized gains, net	$	30		$	64		$	141		$	125

Realized gains are included in cash flows from operating activities in the Company’s consolidated statements of cash flows.

The counterparty in all of the Company’s derivative instruments is the lender in the Company’s bank credit facility; accordingly, the Company is not required to post collateral since the bank is secured by the Company’s oil and gas assets.

Due to the volatility of natural gas prices, the estimated fair values of the Company’s derivatives are subject to large fluctuations from period to period.