FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2011

FAIR VALUE OF FINANCIAL INSTRUMENTS

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of financial instruments recognized in the Consolidated Balance Sheets or disclosed within these Notes to Consolidated Financial Statements have been determined using available market information, information from unrelated third party financial institutions and appropriate valuation methodologies, primarily discounted projected cash flows. However, considerable judgment is required when interpreting market information and other data to develop estimates of fair value.

Short-term Assets and Liabilities.The fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

U.S. Treasury Bonds - Trading and Available-For-Sale Securities.  The fair values are based upon quoted market prices for those or similar investments and are reported on the Consolidated Balance Sheets at fair value.

Collateral Security Agreement Account (included in other non-current assets). The balance sheet carrying amount approximates fair value, as it earns a market rate.

Convertible Debentures: Fair values of fixed rate convertible debentures were calculated using interest rates in effect as of period end for similar instruments with the other terms unchanged.

Other Long-Term Liabilities.  The carrying amount approximates fair value due the current rates offered to the Company for long-term liabilities of the same remaining maturities.

Line of Credit. The carrying amount approximates fair value due the current rates offered to the Company for lines of credit.

Derivatives. The fair values are based upon observable inputs based on market data obtained from independent sources and are considered Level 2 inputs (quoted prices for similar assets, liabilities (adjusted) and market-corroborated inputs) and are reported on the Consolidated Balance Sheets at fair value.

	June 30, 2011				December 31, 2010
	Fair		Carrying		Fair		Carrying
	value		amount		value		amount
	(in thousands)
Financial assets
Collateral security account	$	3,162	$	3,162	$	3,160	$	3,160
Financial liabilities
Fixed rate debentures	$	1,932	$	1,651	$	1,901	$	1,651
Other long-term liabilities	176		176		245		245
Line of credit	69,500		69,500		69,500		69,500
Drilling rig obligation	1,167		1,167		2,567		2,567

FAIR VALUE MEASUREMENTS:

Fair value as defined by authoritative literature is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and establishes a three level hierarchy for measuring fair value. The literature requires fair value measurements be classified and disclosed in one of the following categories:

Level 1:   Quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access at the measurement date.

Level 2:  Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived from observable market data by correlation or other means. Instruments categorized in Level 2 include non-exchange traded derivatives such as over-the-counter forwards and swaps.

Level 3:  Unobservable inputs for the asset or liability, including situations where there is little, if any, market activity for the asset or liability.

The following tables present for each hierarchy level our assets and liabilities, including both current and non-current portions, measured at fair value on a recurring basis.

June 30, 2011

	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Restricted investments in US Treasury Bonds – available for sale, at fair value	$	1,141	$	—	$	—	$	1,141
Commodity derivatives	$	—	$	243	$	—	$	243

	Level 1		Level 2		Level 3		Total
	(in thousands)
Liabilities
Commodity derivatives	$	—	$	6,717	$	—	$	6,717

December 31, 2010

	Level 1		Level 2		Level 3		Total
	(in thousands)
Assets
Restricted investments in US Treasury Bonds – available for sale, at fair value	$	1,097	$	—	$	—	$	1,097
Commodity derivatives	$	—	$	392	$	—	$	392

	Level 1		Level 2		Level 3		Total
	(in thousands)
Liabilities
Commodity derivatives	$	—	$	10,228	$	—	$	10,228