Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2011
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments

5. 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. We do not enter into derivative instruments for speculative trading purposes. Our derivative instruments currently consist of commodity option contracts. We are exposed to credit loss in the event of nonperformance by the counterparties; however, we do not currently anticipate any of our counterparties being unable to fulfill their contractual obligations.

We account for derivative contracts in accordance with GAAP, which requires each derivative to be recorded on the balance sheet as an asset or a liability at its fair value. Changes in a derivative's fair value are required to be recognized currently in earnings unless specific hedge accounting criteria are met at the time we enter into a derivative contract. We have elected not to designate our commodity derivatives as hedging instruments. For additional information about fair value measurements, refer to Note 7.

Commodity Derivative: During 2010, we entered into commodity option contracts to manage a portion of our exposure to commodity price risk from sales of oil through December 31, 2012. While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements. As of September 30, 2011, our open commodity derivatives were as follows:

 

Zero Cost Collars – Oil

  

Effective

Date

    Termination
Date 		     Notional
Quantity  (Bbls) 		     Weighted Average
NYMEX Contract Price		      Fair Value
Asset
(in thousands) 		 
         Floor      Ceiling     
              

10/1/2011

      12/31/2011         392,100       $   75.00       $   95.58       $ 1,053   

1/1/2012

      3/31/2012         364,000         75.00         97.88         1,449   

4/1/2012

      6/30/2012         364,000         75.00         97.88         1,390   

7/1/2012

      9/30/2012         124,000         75.00         97.88         444   

10/1/2012

      12/31/2012         251,000         75.00         98.99         836   
     

 

 

     

 

 

     

 

 

     

 

 

  
        1,495,100       $   75.00       $   97.46       $ 5,172   
     

 

 

     

 

 

     

 

 

     

 

 

  

At September 30, 2011, $4.4 million and $0.8 million were included in current assets and other long-term assets, respectively, related to our commodity derivative contracts. At December 31, 2010, $9.5 million and $5.4 million were included in accrued liabilities and other long-term liabilities, respectively, related to our commodity derivative contracts. Our derivative gain for the three months ended September 30, 2011 includes realized losses of $0.9 million and unrealized gains of $18.2 million related to our commodity derivatives. Our derivative gain for the nine months ended September 30, 2011 includes realized losses of $9.2 million and unrealized gains of $20.0 million related to our commodity derivatives. Our derivative loss for the three months ended September 30, 2010 includes a realized gain of $1.1 million and an unrealized loss of $5.9 million related to our commodity derivatives. Our derivative gain for the nine months ended September 30, 2010 includes realized and unrealized gains of $4.3 million and $4.5 million, respectively, related to our commodity derivatives.

Interest Rate Swap: Our interest rate swap contract with a fixed interest rate of 5.21% expired in August 2010. During the three months ended September 30, 2010, we recognized an unrealized gain of $1.0 million and a realized loss of $1.0 million for this contract. During the nine months ended September 30, 2010, we recognized an unrealized gain of $4.4 million and a realized loss of $4.7 million for this contract.