Annual report pursuant to Section 13 and 15(d)

Derivative Financial Instruments

Derivative Financial Instruments
12 Months Ended
Dec. 31, 2012
Derivative Financial Instruments

6. Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and interest rates. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. Our derivative instruments currently consist of crude oil swap and option contracts. All of the derivative counterparties are also lenders or affiliates of lenders participating in our revolving bank credit facility. We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we do not currently anticipate that any of our derivative counterparties will be unable to fulfill their contractual obligations. Additional collateral is not required by us due to the derivative counterparties’ collateral rights as lenders and we do not require collateral from our derivative counterparties. Our derivative agreements allow for netting of derivative gains and losses upon settlement. If an event of default were to occur causing an acceleration of payment under our revolving bank credit facility, that event may also trigger an acceleration of settlement of our derivative instruments.


For information about fair value measurements, refer to Note 8.

Commodity Derivatives. We have entered into commodity option contracts to manage a portion of our exposure to commodity price risk from sales of oil through December 2014. While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements. During 2012 and 2011, our commodity derivative contracts consisted entirely of crude oil contracts. During 2010, our commodity derivative contracts consisted of oil and natural gas contracts. The swaps are priced off the Brent crude oil price quoted on the IntercontinentalExchange, known as ICE. Although our Gulf of Mexico crude oil is based off the WTI crude oil price plus a premium, the realized prices received for the types of crude oil have been closer to the Brent crude oil price because of competition with foreign supplied crude oil, which is based off the Brent crude oil price. Therefore, we entered into swap oil contracts priced off the Brent crude oil price to mitigate a portion of the price risk associated with our Gulf of Mexico crude oil production.

As of December 31, 2012, our open commodity derivative contracts were as follows:


Swaps – Oil (ICE)  
Termination Period    Notional
Quantity  (Bbls)
Contract Price
     Fair Value
(in thousands)
2013:   1st quarter      351,000       $ 101.97       $ 2,566   
  2nd quarter      336,700         101.97         1,843   
  3rd quarter      312,800         101.98         1,205   
  4th quarter      294,400         101.98         741   
2014:   1st quarter      180,000         97.38         1,085   
  2nd quarter      172,900         97.38         863   
  3rd quarter      165,600         97.38         647   
  4th quarter      156,400         97.37         451   






       1,969,800       $ 100.40       $ 9,401   







The following balance sheet line items included amounts related to the estimated fair value of our open derivative contracts as indicated in the following table (in thousands):


     December 31,  
     2012      2011  

Prepaid and other assets

   $       $ 2,341   

Other assets


Accrued liabilities

     6,355         7,199   

Other liabilities


Changes in the fair value of our commodity derivative contracts are recognized currently in earnings and were as follows (in thousands):


     Year Ended December 31,  
     2012      2011     2010  

Derivative (gain) loss:



   $ 7,665       $ 9,873      $ (5,539


     6,289         (11,769     9,511   











   $ 13,954       $ (1,896   $ 3,972   











Interest Rate Swap

Changes in the fair value of our interest derivative contract are recognized currently in earnings. Our interest rate swap contract with a fixed interest rate of 5.21% expired in August 2010. During 2010, we recognized an unrealized gain of $4.4 million and a realized loss of $4.7 million for this contract.