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Derivative Financial Instruments
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Dec. 31, 2011
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| 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. We do not enter into derivative instruments for speculative trading purposes. Our derivative instruments currently consist of commodity swap and option contracts. We are exposed to credit loss in the event of nonperformance by the counterparties (Natixis; ING Capital Markets, LLC-EDP; the Toronto Dominion Bank; and BNP Paribas Corporate and Investment Banking); however, we do not currently anticipate any of our counterparties being unable to fulfill their contractual obligations. In accordance with GAAP, each derivative is 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 do not attempt to qualify our derivatives for hedge accounting under GAAP; therefore, all changes in fair value are recognized in earnings. For additional information about fair value measurements, refer to Note 8. Commodity Derivatives During 2011 and 2010, we entered into commodity option contracts and swap contracts to manage a portion of our exposure to commodity price risk from sales of oil through December 31, 2014. While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements. As of December 31, 2011, our open commodity derivatives were as follows:
At December 31, 2011, $7.2 million was included in Accrued liabilities, $2.3 million was included in Prepaid and other assets and $1.8 million was included in Other assets related to the fair value of our commodity derivative contracts. At December 31, 2010, $9.5 million was included in Accrued liabilities and $5.4 million was included in Other long-term liabilities related to the fair value of our commodity derivative contracts. The zero cost collars are priced off the West Texas Intermediate crude oil price quoted on the New York Mercantile Exchange and the swaps are priced off the Brent crude oil price quoted on the IntercontinentalExchange, known as ICE. Changes in the fair value of our commodity derivative contracts are recognized currently in earnings. Our derivative gain for the year 2011 includes a realized loss of $9.9 million and an unrealized gain of $11.8 million, related to our commodity derivatives. Our derivative loss for the year 2010 includes a realized gain of $5.5 million and an unrealized loss of $9.5 million, related to our commodity derivatives. Our derivative loss for the year 2009 includes realized and unrealized losses of $0.2 million and $5.4 million, respectively, related to our commodity derivatives. Interest Rate Swap Changes in the fair value of our interest derivative contract are also 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. During 2009, we recognized an unrealized gain of $4.7 million and a realized loss of $6.5 million for this contract. |
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