Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Note 10 - Derivative Financial Instruments

Summary of Oil, Gas, and NGL Derivative Contracts in Place

The Company has entered into various commodity derivative contracts to mitigate a portion of its exposure to potentially adverse market changes in commodity prices and the associated impact on cash flows. All contracts are entered into for other-than-trading purposes. The Company’s derivative contracts include swap and costless collar arrangements for oil, gas, and NGLs.

As of June 30, 2013, and through the filing date of this report, the Company has commodity derivative contracts outstanding through the first quarter of 2016 for a total of 12.6 million Bbls of oil production, 167.2 million MMBtu of gas production, and 1.5 million Bbls of NGL production.

In a typical commodity swap agreement, if the agreed upon published third-party index price is lower than the swap fixed price, the Company receives the difference between the index price and the agreed upon swap fixed price. If the index price is higher than the swap fixed price, the Company pays the difference. For collar agreements, the Company receives the difference between an agreed upon index and the floor price if the index price is below the floor price. The Company pays the difference between the agreed upon ceiling price and the index price if the index price is above the ceiling price. No amounts are paid or received if the index price is between the floor and ceiling prices.

The following tables summarize the approximate volumes and average contract prices of contracts the Company had in place as of June 30, 2013:

Oil Contracts

Oil Swaps

Contract Period	Volumes	Weighted-Average  Contract Price
	(Bbls)	(per Bbl)
Remainder of 2013	2,383,000	$	97.51
2014	2,024,000	$	93.85
2015	356,000	$	88.40
All oil swaps*	4,763,000

*Oil swaps are comprised of NYMEX WTI (71%) and Argus LLS (29%).

Oil Collars

Contract Period	NYMEX WTI  Volumes	Weighted- Average Floor  Price		Weighted- Average Ceiling  Price
	(Bbls)	(per Bbl)		(per Bbl)
Remainder of 2013	1,491,000	$	77.88	$	111.93
2014	3,022,000	$	84.07	$	105.46
2015	3,366,000	$	85.00	$	94.25
All oil collars	7,879,000

Gas Contracts

Gas Swaps

Contract Period	Volumes	Weighted-Average  Contract Price
	(MMBtu)	(per MMBtu)
Remainder of 2013	40,335,000	$	4.00
2014	59,384,000	$	4.08
2015	33,528,000	$	4.07
2016	10,331,000	$	4.38
All gas swaps*	143,578,000

*Gas swaps are comprised of IF El Paso Permian (3%), IF HSC (58%), IF NGPL TXOK (5%), IF NNG Ventura (3%), IF PEPL (13%), IF Reliant N/S (15%), IF TETCO STX (1%), and IF NGPL MidCont (2%).

Gas Collars

Contract Period	Volumes	Weighted- Average Floor Price		Weighted- Average Ceiling Price
	(MMBtu)	(per MMBtu)		(per MMBtu)
Remainder of 2013	3,410,000	$	4.39	$	5.31
2014	5,734,000	$	4.38	$	5.36
2015	14,480,000	$	3.96	$	4.30
All gas collars*	23,624,000

*Gas collars are comprised of IF El Paso Permian (2%), IF HSC (51%), IF NGPL TXOK (6%), IF NNG Ventura (4%), IF PEPL (6%), IF Reliant N/S (17%), and IF TETCO STX (14%).

NGL Contracts

NGL Swaps

Contract Period	Volumes	Weighted-Average  Contract Price
	(Bbls)	(per Bbl)
Remainder of 2013	1,077,000	$	53.26
2014	404,000	$	58.42
All NGL swaps*	1,481,000

*NGL swaps are comprised of OPIS Mont. Belvieu Purity Ethane (9%), OPIS Mont. Belvieu LDH Propane (44%), OPIS Mont. Belvieu NON-LDH Isobutane (12%), OPIS Mont. Belvieu NON-LDH Normal Butane (16%), and OPIS Mont. Belvieu NON-LDH Natural Gasoline (19%).

Derivative Assets and Liabilities Fair Value

The Company’s commodity derivatives are measured at fair value and are included in the accompanying balance sheets as derivative assets and liabilities. The fair value of the commodity derivative contracts was a net asset of $80.6 million and $38.7 million at June 30, 2013, and December 31, 2012, respectively.

The following tables detail the fair value of derivatives recorded in the accompanying balance sheets, by category:

	As of June 30, 2013
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	58,071	Current liabilities	$	4,748
Commodity contracts	Noncurrent assets	28,798		Noncurrent liabilities	1,525
Derivatives not designated as hedging instruments		$	86,869		$	6,273

	As of December 31, 2012
	Derivative Assets			Derivative Liabilities
	Balance Sheet  Classification	Fair Value		Balance Sheet  Classification	Fair Value
	(in thousands)
Commodity contracts	Current assets	$	37,873	Current liabilities	$	8,999
Commodity contracts	Noncurrent assets	16,466		Noncurrent liabilities	6,645
Derivatives not designated as hedging instruments		$	54,339		$	15,644

Offsetting of Derivative Assets and Liabilities

As of June 30, 2013, and December 31, 2012, all derivative instruments held by the Company were subject to enforceable master netting arrangements held by various financial institutions. In general, the terms of the Company’s agreements provide for offsetting of amounts payable or receivable between it and the counterparty, at the election of both parties, for transactions that occur on the same date and in the same currency. The Company’s agreements also provide that in the event of an early termination, the counterparties have the right to offset amounts owed or owing under that and any other agreement with the same counterparty. The Company's accounting policy is to not offset these positions in its accompanying balance sheets.

The following table provides a reconciliation between the gross assets and liabilities reflected on the accompanying balance sheets and the potential effects of master netting arrangements on the fair value of the Company's derivative contracts:

	Derivative Assets						Derivative Liabilities
	As of						As of
Offsetting of Derivative Assets and Liabilities	June 30, 2013			December 31, 2012			June 30, 2013			December 31, 2012
	(in thousands)
Gross amounts presented in the accompanying balance sheets	$	86,869		$	54,339		$	(6,273	)	$	(15,644	)
Amounts not offset in the accompanying balance sheets	(6,273		)	(13,400		)	6,273			13,400
Net amounts	$	80,596		$	40,939		$	—		$	(2,244	)

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 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 had no derivatives designated as cash flow hedges for the three-month and six-month periods ended June 30, 2013, and 2012.

As a result of discontinuing hedge accounting on January 1, 2011, fair values at December 31, 2010, were frozen in AOCIL as of the de-designation date and are reclassified into earnings as the original derivative transactions settle. As of June 30, 2013, AOCIL included $308,000 of net unrealized loss, net of income tax, on commodity derivative contracts that had been previously designated as cash flow hedges, all of which will be reclassified into earnings from AOCIL during the next twelve months. Please refer to Note 11 - Fair Value Measurements for more information regarding the Company’s derivative instruments, including its valuation techniques.

The following table summarizes the components of unrealized and realized derivative gain presented in the accompanying statements of operations:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2013			2012			2013			2012
	(in thousands)
Cash settlement (gain) loss:
Oil contracts	$	(29	)	$	2,371		$	248		$	10,670
Gas contracts	2,091			(16,252		)	(7,733		)	(31,464		)
NGL contracts	(4,273		)	(2,565		)	(6,518		)	(1,088		)
Total cash settlement gain	$	(2,211	)	$	(16,446	)	$	(14,003	)	$	(21,882	)
Unrealized (gain) loss on change in fair value:
Oil contracts	$	(26,044	)	$	(92,774	)	$	(22,255	)	$	(63,283	)
Gas contracts	(50,267		)	29,867			(10,198		)	12,233
NGL contracts	(6,668		)	(18,759		)	(8,162		)	(22,964		)
Total net unrealized gain on change in fair value	(82,979		)	(81,666		)	(40,615		)	(74,014		)
Total unrealized and realized derivative gain	$	(85,190	)	$	(98,112	)	$	(54,618	)	$	(95,896	)

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

		Location in Statements of Operations	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	Derivatives		2013		2012			2013		2012
			(in thousands)
Amount reclassified from AOCIL	Commodity contracts	Realized hedge gain (loss)	$	746	$	(116	)	$	807	$	(1,150	)

The Company realized a net hedge loss of $1.2 million and a net hedge gain of $185,000 from its commodity derivative contracts for the three months ended June 30, 2013, and 2012, respectively, and a net hedge loss of $1.3 million and a net hedge gain of $1.8 million for the six months ended June 30, 2013, and 2012, respectively, shown net of income tax in the table above. Realized hedge gains and losses are comprised of settlements on commodity derivative contracts that were previously designated as cash flow hedges and are reported in total operating revenues in the accompanying statements of operations. 

Credit Related Contingent Features

As of June 30, 2013, 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 obligations under its credit facility and derivative contracts are secured by liens on substantially all of the Company’s proved oil and gas properties.