Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

4. Derivative Financial Instruments:

Commodity Derivative Instruments

We utilize swap, floor, collar and three-way collar derivative contracts to hedge against the variability in cash flows associated with the forecasted sale of our future oil and gas production.While the use of these derivative instruments limits the downside risk of adverse price movements, their use also may limit future income from favorable price movements.

With respect to a swap contract, the counterparty is required to make a payment to us if the settlement price for any settlement period is less than the swap price, and we are required to make a payment to the counterparty if the settlement price for any settlement period is greater than the swap price. For a floor contract, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the floor price.We are not required to make any payment in connection with the settlement of a floor contract. For a collar contract, the counterparty is required to make a payment to us if the settlement price for any settlement period is below the floor price, we are required to make payment to the counterparty if the settlement price for any settlement period is above the ceiling price and neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price. A three-way collar contract consists of a standard collar contract plus a put sold by us with a price belowthe floor price of the collar. This additional put requires us to make a payment to the counterparty if the settlement price for any settlement period is below the put price. Combining the collar contract with the additional put results in us being entitled to a net payment equal to the difference between the floor price of the standard collar and the additional put price if the settlement price is equal to or less than the additional put price. If the settlement price is greater than the additional put price, the result is the same as it would have been with a standard collar contract only. This strategy enables us to increase the floor and the ceiling price of the collar beyond the range of a traditional no cost collar while defraying the associated cost with the sale of the additional put.

All of our derivative contracts are carried at their fair value on our consolidated balance sheet under the captions “Derivative assets” and “Derivative liabilities.”Substantially all of our oil and gas derivative contracts are settled based upon reported prices on the NYMEX.The estimated fair value of these contracts is based upon various factors, including closing exchange prices on the NYMEX, over-the-counter quotations, volatility and, in the case of collars and floors, the time value of options. The calculation of the fair value of collars and floors requires the use of an option-pricing model.Please see Note 7, “Fair Value Measurements.” We recognize all realized and unrealized gains and losses related to these contracts on a mark-to-market basis in our consolidated statement of net income under the caption “Commodity derivative income (expense).” Settlements of derivative contracts are included in operating cash flows on our consolidated statement of cash flows.

At June 30, 2012, we had outstanding contracts with respect to our future production that were not designated for hedge accounting as set forth in the tables below.

Natural Gas

				NYMEX Contract Price Per MMBtu
															Collars																Estimated
					Swaps		Additional Put								Floors								Ceilings								Fair Value
		Volume in			(Weighted							Weighted								Weighted								Weighted			Asset
	Period and Type of Contract		MMMBtus		Average)		Range						Average		Range						Average		Range						Average		(Liability)
																															(In millions)
	July 2012 – September 2012
	Price swap contracts		10,120		$	4.17					—			—					—			—					—			—	$	13
	Price swap contracts		(A)			2.67					—			—					—			—					—			—		(2)
	3-Way collar contracts		23,000			—	$	3.50	-	$	4.50		$	4.30	$	5.00	-	$	5.75		$	5.44	$	5.20	-	$	7.00		$	6.26		26
	October 2012 – December 2012
	Price swap contracts		11,340			3.19					—			—					—			—					—			—		2
	Price swap contracts		(A)			2.72					—			—					—			—					—			—		(6)
	3-Way collar contracts		15,070			—		3.50	-		4.50			4.19		5.00	-		6.00			5.51		5.20	-		7.55			6.41		18
	January 2013 – December 2013
	Price swap contracts		54,750			4.08					—			—					—			—					—			—		28
	Price swap contracts		(A)			3.45					—			—					—			—					—			—		(5)
	3-Way collar contracts		39,530			—		3.50	-		4.50			4.04		5.00	-		6.00			5.44		6.00	-		7.55			6.48		43
	January 2014 – December 2014
	Price swap contracts		54,750			3.85					—			—					—			—					—			—		(5)
																															$	112
(A)	During the first quarter of 2012, natural gas spot market prices were below the puts we sold on our three-way collars for April through December 2012 and the full-year 2013, exposing us further to the softening natural gas spot market. As a result, during the first quarter of 2012 we entered into additional fixed-price swap contracts in the over-the-counter market that effectively prevented any further erosion in the value of our natural gas three-way collars. The new swap contracts added during the first quarter of 2012 were for the same volumes as our July through December 2012 and the full-year 2013 three-way collar contracts. The economics from the combination of these additional fixed-price swap contracts and our natural gas three-way collar contracts will result in effective average fixed prices of $3.81, $4.04, and $4.85 per MMBtu for the third and fourth quarters of 2012 and the full-year 2013, respectively, as long as natural gas spot prices for the respective time periods settle below the puts we sold on our three-way collar contracts.

Oil

			NYMEX Contract Price Per Bbl
											Collars																Estimated
			Additional Put								Floors								Ceilings								Fair Value
	Volume in							Weighted								Weighted								Weighted			Asset
Period and Type of Contract		MBbls	Range						Average		Range						Average		Range						Average		(Liability)
																											(In millions)
July 2012 – September 2012
3-Way collar contracts		3,220	$	55.00	-	$	90.00		$	66.86	$	75.00	-	$	100.00		$	82.96	$	88.20	-	$	137.80		$	111.14	$	8
October 2012 – December 2012
3-Way collar contracts		3,220		55.00	-		90.00			66.86		75.00	-		100.00			82.96		88.20	-		137.80			111.14		10
January 2013 – December 2013
3-Way collar contracts		12,115		80.00						80.00		95.00						95.00		106.50	-		130.40			118.05		62
January 2014 – December 2014
3-Way collar contracts		5,110		80.00						80.00		95.00						95.00		117.50	-		120.75			119.16		24
																											$	104

Basis Contracts

At June 30, 2012, we had natural gas basis contracts that were not designated for hedge accounting to lock in the differential between the NYMEX Henry Hub posted prices and those of our physical pricing points in the Rocky Mountains and Mid-Continent, as set forth in the table below.

	Rocky Mountains			Mid-Continent
	Volume in MMMbtus	Weighted- Average Differential MMMBtus		Volume in MMMbtus	Weighted- Average Differential MMMBtus		Estimated Fair Value Asset (Liability)
							(In millions)
July 2012 – September 2012	1,230	$	(0.91)	4,600	$	(0.55)	$	(3)
October 2012 – December 2012	1,230		(0.91)	4,600		(0.55)		(3)
							$	(6)

Additional Disclosures about Derivative Instruments and Hedging Activities

We had derivative financial instruments recorded in our consolidated balance sheet as assets (liabilities) at their respective estimated fair value, as set forth below.

				June 30,		December 31,
Type of Contract			Balance Sheet Location	2012		2011
				(In millions)
Derivatives not designated as hedging instruments:
	Natural gas contracts		Derivative assets – current	$	95	$	133
	Oil contracts		Derivative assets – current		50		1
	Basis contracts		Derivative assets – current		(3)		(5)
	Natural gas contracts		Derivative assets – noncurrent		27		61
	Oil contracts		Derivative assets – noncurrent		54		—
	Natural gas contracts		Derivative liabilities – current		(4)		—
	Oil contracts		Derivative liabilities – current		—		(45)
	Basis contracts		Derivative liabilities – current		(3)		(5)
	Natural gas contracts		Derivative liabilities – noncurrent		(6)		—
	Oil contracts		Derivative liabilities – noncurrent		—		(3)
		Total		$	210	$	137

The amount of gain (loss) recognized in income related to our derivative financial instruments was as follows:

			Location of Gain (Loss)	Three Months Ended June 30,				Six Months Ended June 30,
Type of Contract			Recognized in Income	2012		2011		2012		2011
				(In millions)
Derivatives not designated as hedging instruments:
	Realized gain on natural gas contracts		Commodity derivative income (expense)	$	54	$	62	$	98	$	130
	Realized loss on oil contracts		Commodity derivative income (expense)		—		(20)		(7)		(32)
	Realized loss on basis contracts		Commodity derivative income (expense)		(2)		(2)		(5)		(3)
		Total realized gain			52		40		86		95
	Unrealized loss on natural gas contracts		Commodity derivative income (expense)		(88)		(19)		(83)		(73)
	Unrealized gain (loss) on oil contracts		Commodity derivative income (expense)		169		148		151		(35)
	Unrealized gain on basis contracts		Commodity derivative income (expense)		2		—		5		—
		Total unrealized gain (loss)			83		129		73		(108)
		Total		$	135	$	169	$	159	$	(13)

The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. Our derivative contracts are with multiple counterparties to minimize our exposure to any individual counterparty, and we have netting arrangements with all of our counterparties that provide for offsetting payables against receivables from separate derivative instruments with that counterparty. At June 30, 2012, Bank of Montreal, Barclays Bank PLC, J Aron & Company, JPMorgan Chase Bank, N.A., Macquarie Bank Limited, and Morgan Stanley Capital Group Inc. were the counterparties with respect to approximately 85% of our estimated future hedged production, the largest of which was J Aron & Company, which accounted for 25% of our estimated future hedged production.

The counterparties to the majority of our derivative instruments also are lenders under our credit facility. Our credit facility, senior notes, senior subordinated notes and substantially all of our derivative instruments contain provisions that provide for cross defaults and acceleration of those debt and derivative instruments in certain situations.