Derivative Financial Instruments

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 10 – Derivative Financial Instruments

Oil, Natural Gas, and NGL Commodity Hedges

To mitigate a portion of the exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows, the Company has entered into various commodity derivative contracts. The Company’s derivative contracts in place include swap and collar arrangements for oil, natural gas, and NGLs. As of December 31, 2011, the Company has commodity derivative contracts in place through the second quarter of 2014 for a total of 7.5 million Bbls of oil, 56.7 million MMBtu of gas, and 1.3 million Bbls of NGLs. As of February 16, 2012, the Company had commodity derivative contracts in place through the fourth quarter of 2014 for a total of 11.0 million Bbls of oil, 77.9 million MMBtu of gas, and 1.5 million Bbls of NGLs.

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The Company derives internal valuation estimates that take into consideration the counterparties’ credit ratings, the Company’s credit rating, and the time value of money. These valuations are then compared to the respective counterparties’ mark-to-market statements. The pertinent factors result in an estimated exit-price that management believes provides a reasonable and consistent methodology for valuing derivative instruments. The derivative instruments utilized by the Company are not considered by management to be complex, structured, or illiquid. The commodity derivative markets are highly active. The fair value of the commodity derivative contracts was a net asset of $31.2 million and a net liability of $52.3 million at December 31, 2011, and December 31, 2010, respectively.

Discontinuance of Cash Flow Hedge Accounting

Prior to January 1, 2011, the Company designated its commodity derivative contracts as cash flow hedges, for which unrealized changes in fair value were recorded to accumulated other comprehensive income (loss) (“AOCIL”), to the extent the hedges were effective.  As of January 1, 2011, the Company elected to de-designate all of its commodity derivative contracts that had been previously designated as cash flow hedges at December 31, 2010. As a result, subsequent to December 31, 2010, the Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in AOCIL. The Company decided to discontinue the use of hedge accounting prospectively.

At December 31, 2010, accumulated other comprehensive loss (“AOCL”) included $11.8 million of unrealized losses net of income tax, representing the change in fair value of the Company’s open commodity derivative contracts designated as cash flow hedges as of that balance sheet date, less any ineffectiveness recognized. As a result of discontinuing hedge accounting on January 1, 2011, such fair values at December 31, 2010, were frozen in AOCL as of the de-designation date and are reclassified into earnings as the original derivative transactions settle.  During the year ended December 31, 2011, $13.0 million of, net of income tax, derivative losses relating to de-designated commodity hedges were reclassified from AOCL into earnings.  As of December 31, 2011, AOCL included $1.1 million of, net of income tax, unrealized gains on commodity derivative contracts that had been previously designated as cash flow hedges.  The Company expects to reclassify into earnings from AOCL a $2.4 million gain, net of income tax, related to de-designated commodity derivative contracts during the next twelve months.

Please refer to Note 11 – Fair Value Measurements for more information regarding the Company’s derivative instruments. The following table details the fair value of derivatives recorded in the accompanying balance sheets, by category:

	As of December 31, 2011
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity Contracts	Current Assets	$	55,813	Current Liabilities	$	42,806
Commodity Contracts	Noncurrent Assets	31,062		Noncurrent liabilities	12,875
Derivatives not designated as hedging instruments		$	86,875		$	55,681

	As of December 31, 2010
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity Contracts	Current Assets	$	43,491	Current Liabilities	$	82,044
Commodity Contracts	Noncurrent Assets	18,841		Noncurrent Liabilities	32,557
Derivatives designated as hedging instruments		$	62,332		$	114,601

The following table summarizes the unrealized and realized gains and losses on derivative cash settlements and changes in fair value of derivative contracts not designated as hedging instruments as presented in the accompanying statements of operations.

	For the year ended December 31, 2011
	(in thousands)
Cash settlement (gain) loss:
Oil contracts	$	22,633
Natural gas contracts	(10,711		)
NGL contracts	13,749
Total cash settlement loss	$	25,671
Unrealized (gain) loss on changes in fair value:
Oil contracts	$	(3,391	)
Natural gas contracts	(64,310		)
NGL contracts	4,944
Total net unrealized (gain) on change in fair value	$	(62,757	)
Total unrealized and realized derivative (gain) loss	$	(37,086	)

The following table details the effect of derivative instruments on AOCIL and the accompanying statements of operations (net of income tax):

		Location on Accompanying Statements of Operations	For the Years Ended December 31,
	Derivatives		2011		2010		2009
			(in thousands)
Amount reclassified from AOCIL to realized hedge (loss) gain	Commodity Contracts	Realized hedge (loss) gain	$	12,997	$	6,641	$	(67,344	)

The realized net hedge loss for the year ended December 31, 2011, is comprised of realized cash settlements on commodity derivative contracts that were previously designated as cash flow hedges, whereas the realized net hedge gain for the years ended December 31, 2010 and 2009, is comprised of realized cash settlements on all commodity derivative contracts.  Realized hedge gains or losses from the settlement of commodity derivatives previously designated as cash flow hedges are reported in the total operating revenues and other income section of the accompanying statements of operations.  The Company realized a net loss of $20.7 million, a net gain of $23.5 million, and a net gain of $140.6 million from its commodity derivative contracts for the years ended December 31, 2011, 2010, and 2009, respectively.

As noted above, effective January 1, 2011, the Company elected to de-designate all of its commodity derivative contracts that had been previously designated as cash flow hedges, and as such no new gains or losses are deferred in AOCIL at December 31, 2011. The following table details the effect of derivative instruments on AOCIL and the accompanying balance sheets (net of income tax):

	Derivatives	Location on Accompanying Balance Sheets	For the years ended December 31,
			2010		2009
			(in thousands)
Amount of gain (loss) on derivatives recognized in AOCIL during the period (effective portion)	Commodity Contracts	AOCIL	$	16,811	$	(35,977	)

The Company has no derivatives designated as cash flow hedges at December 31, 2011. The following table details the ineffective portion of derivative instruments classified as cash flow hedges on the accompanying statements of operations for the years ended December 31, 2010 and 2009.

		Loss Recognized in Earnings (Ineffective Portion)
	Location on Accompanying  Statements of  Operations
Derivatives Qualifying as Cash Flow Hedges
		For the Years Ended December 31,
		2010		2009
		(in thousands)
Commodity Contracts	Unrealized and realized derivative (gain) loss	$	8,899	$	20,469

Credit Related Contingent Features

As of December 31, 2011, and through the filing date of this report, all of the Company’s derivative counterparties were members of the Company’s credit facility syndicate. The Company’s credit facility is secured by liens on substantially all of the Company’s proved oil and gas properties.

Convertible Note Derivative Instrument

The contingent interest provision of the 3.50% Senior Convertible Notes is an embedded derivative instrument. As of December 31, 2011 and 2010, the value of this derivative was determined to be immaterial.