Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2013
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. 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 currently anticipate that each of our derivative counterparties will be able 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. All of our current 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. If we were required to settle all of our open derivative instruments, we would be able to net payments and receipts per counterparty pursuant to the derivative agreements.

We account for our 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. Although our derivative agreements allow for netting, which would allow for recording assets and liabilities per counterparty on a net basis, we account for our derivative contracts on a gross basis per contract as either an asset or liability. We have elected not to designate our commodity derivatives as hedging instruments; therefore, all changes in the fair value of derivative contracts are recognized currently in earnings. For additional information about fair value measurements, refer to Note 7.

Commodity Derivatives: We have entered into commodity swap 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 the three months ended March 31, 2013 and 2012, our derivative contracts consisted entirely of crude oil contracts. The crude oil swap contracts are comprised of a portion based on West Texas Intermediate (“WTI”) crude oil prices and a portion based on Brent crude oil prices. The WTI based swaps are priced off the New York Mercantile Exchange, known as NYMEX. The Brent based 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, a portion of the swap oil contracts are 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 March 31, 2013, our open commodity derivatives were as follows:

 

     Swaps – Oil  
     Priced off Brent (ICE)      Priced off WTI (NYMEX)  

Termination Period

    Notional
Quantity (Bbls)		      Weighted
Average
Contract  Price 		     Notional
Quantity (Bbls)		      Weighted
Average
Contract  Price 		 

2013:     2nd quarter

      668,700       $ 106.48         244,000       $ 97.25   

              3rd quarter

      405,800         103.85         185,000         97.13   

              4th quarter

      294,400         101.98         520,000         97.38   

2014:     1st quarter

      180,000         97.38         59,000         97.02   

              2nd quarter

      172,900         97.38         —           —     

              3rd quarter

      165,600         97.38         —           —     

              4th quarter

      156,400         97.37         —           —     
  

 

 

        

 

 

     
     2,043,800       $ 102.30         1,008,000       $ 97.28   
  

 

 

        

 

 

     

Bbls = barrels

 

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):

 

     March 31,
2013		      December 31,
2012		  

Prepaid and other assets

    $ 867       $ —     

Accrued liabilities

      6,938         6,355   

Other liabilities (noncurrent)

      2,427         3,046   

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

 

     Three Months Ended
March 31,		  
     2013     2012  

Derivative (gain) loss:

     

Realized

    $ 4,271      $ 5,800   

Unrealized

      (903 )      33,834   
  

 

 

    

 

 

  

Total

    $ 3,368      $ 39,634