Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 3 — Derivative Instruments and Hedging Activities

     Our hedging strategy is designed to protect our near and intermediate term cash flow from future declines in oil and natural gas prices. This protection is essential to capital budget planning, which is sensitive to expenditures that must be committed to in advance such as rig contracts and the purchase of tubular goods. We enter into hedging transactions to secure a commodity price for a portion of future production that is acceptable at the time of the transaction. These hedges are designated as cash flow hedges upon entering into the contract. We do not enter into hedging transactions for trading purposes. We have no fair value hedges.

     The nature of a derivative instrument must be evaluated to determine if it qualifies for hedge accounting treatment. If the instrument qualifies for hedge accounting treatment, it is recorded as either an asset or liability measured at fair value and subsequent changes in the derivative’s fair value are recognized in equity through other comprehensive income (loss), net of related taxes, to the extent the hedge is considered effective. Additionally, monthly settlements of effective hedges are reflected in revenue from oil and gas production and cash flows from operations. Instruments not qualifying for hedge accounting are recorded in the balance sheet at fair value and changes in fair value are recognized in earnings through derivative expense (income). Typically, a small portion of our derivative contracts are determined to be ineffective. This is because oil and natural gas price changes in the markets in which we sell our products are not 100% correlative to changes in the underlying price basis indicative in the derivative contracts. Monthly settlements of ineffective hedges are recognized in earnings through derivative expense (income) and cash flows from operations.

     We have entered into fixed-price swaps with various counterparties for a portion of our expected 2011, 2012 and 2013 oil and natural gas production from the Gulf Coast Basin. The fixed-price oil swap settlements are based upon an average of the New York Mercantile Exchange (“NYMEX”) closing price for West Texas Intermediate (“WTI”) during the entire calendar month. Some of our fixed-price gas swap settlements are based on an average of NYMEX prices for the last three days of a respective month and some are based on the NYMEX price for the last day of a respective month. Swaps typically provide for monthly payments by us if prices rise above the swap price or to us if prices fall below the swap price. Our fixed-price swap contracts for 2011, 2012 and 2013 are with J.P. Morgan Chase Bank, N.A., The Toronto-Dominion Bank, Barclays Bank PLC, BNP Paribas, The Bank of Nova Scotia, Bank of America and Natixis.

     During the six-month periods ended June 30, 2011 and 2010, certain of our derivative contracts were determined to be partially ineffective because of differences in the relationship between the fixed price in the derivative contract and actual prices realized. All of our derivative instruments at June 30, 2011 and December 31, 2010 were designated as effective cash flow hedges. The following tables disclose the location and fair value amounts of derivative instruments reported in our balance sheet at June 30, 2011 and December 31, 2010.

Fair Value of Derivative Instruments at June 30, 2011
(in millions)
	Asset Derivatives			Liability Derivatives
		Fair			Fair
Description	Balance Sheet Location	Value		Balance Sheet Location	Value
Commodity contracts	Current assets: Fair value of hedging contracts	$	11.5	Current liabilities: Fair value of hedging contracts	$	(25.4	)
	Long-term assets: Fair value of hedging contracts		4.7	Long-term liabilities: Fair value of hedging contracts		(7.9	)
		$	16.2		$	(33.3	)

Fair Value of Derivative Instruments at December 31, 2010
(in millions)
	Asset Derivatives			Liability Derivatives
		Fair			Fair
Description	Balance Sheet Location	Value		Balance Sheet Location	Value
Commodity contracts	Current assets: Fair value of hedging contracts	$	13.0	Current liabilities: Fair value of hedging contracts	$	(32.1	)
	Long-term assets: Fair value of hedging contracts		—	Long-term liabilities: Fair value of hedging contracts		(3.6	)
		$	13.0		$	(35.7	)

     The following tables disclose the effect of derivative instruments in the statement of operations for the three and six-month periods ended June 30, 2011 and 2010.

The Effect of Derivative Instruments on the Statement of Operations for the Three Months Ended June 30, 2011 and 2010
(in millions)
Derivatives in Cash	Amount of Gain				Gain (Loss) Reclassified from						Gain Recognized in Income
Flow Hedging	Recognized in OCI				Accumulated OCI into Income						on Derivative
Relationships	on Derivative (a)				(Effective Portion) (b)						(Ineffective Portion)
	2011		2010		Location	2011			2010		Location	2011		2010
Commodity contracts	$	36.1	$	15.0	Operating revenue - oil/gas production	$	(10.5	)	$	4.8	Derivative income, net	$	1.4	$	2.2
Total	$	36.1	$	15.0		$	(10.5	)	$	4.8		$	1.4	$	2.2

(a)	Net of related tax effect.
(b)	For the three months ended June 30, 2011, effective hedging contracts decreased oil revenue by $14.3 million and increased gas revenue by $3.8 million. For the three months ended June 30, 2010, effective hedging contracts decreased oil revenue by $5.8 million and increased gas revenue by $10.6 million.

The Effect of Derivative Instruments on the Statement of Operations for the Six Months Ended June 30, 2011 and 2010
(in millions)
Derivatives in Cash	Amount of Gain				Gain (Loss) Reclassified from						Gain (Loss) Recognized in Income
Flow Hedging	Recognized in OCI				Accumulated OCI into Income						on Derivative
Relationships	on Derivative (a)				(Effective Portion) (b)						(Ineffective Portion)
	2011		2010		Location	2011			2010		Location	2011			2010
Commodity contracts	$	3.6	$	28.1	Operating revenue - oil/gas production	$	(14.4	)	$	2.2	Derivative income (expense), net	$	(0.8	)	$	3.4
Total	$	3.6	$	28.1		$	(14.4	)	$	2.2		$	(0.8	)	$	3.4

(a)	Net of related tax effect.
(b)	For the six months ended June 30, 2011, effective hedging contracts decreased oil revenue by $22.8 million and increased gas revenue by $8.4 million. For the six months ended June 30, 2010, effective hedging contracts decreased oil revenue by $14.1 million and increased gas revenue by $16.3 million.

     At June 30, 2011, we had an accumulated other comprehensive loss of $10.6 million, net of tax, which related to the fair value of our 2011, 2012 and 2013 swap contracts that were outstanding as of June 30, 2011. We believe that approximately $8.6 million of the accumulated other comprehensive loss will be reclassified into earnings in the next twelve months.

     The following table illustrates our hedging positions for calendar years 2011, 2012 and 2013 as of August 2, 2011:

	Fixed-Price Swaps
	Natural Gas					Oil
	Daily Volume			Swap		Daily Volume			Swap
	(MMBtus/d)			Price		(Bbls/d)			Price
2011		10,000	(a)	$	4.565		1,000		$	70.05
2011		20,000			5.200		1,000			78.20
2011		10,000			6.830		1,000			80.20
2011							1,000			83.00
2011							1,000			83.05
2011							1,000	(b)		85.20
2011							1,000			85.25
2011							1,000			89.00
2011							1,000	(c)		97.75
2011							1,000	(c)		104.30
2012		10,000			5.035		1,000			90.30
2012		10,000			5.040		1,000			90.41
2012		10,000			5.050		1,000			90.45
2012							1,000			95.50
2012							1,000			97.60
2012							1,000			100.00
2012							1,000			101.55
2012							1,000			104.25
2013		10,000			5.270		1,000			97.15
2013		10,000			5.320		1,000			101.53
2013							1,000			103.00
2013							1,000			104.50

(a)	February — December
(b)	January — June
(c)	July — December