Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments

Derivative Financial Instruments

NOTE G. Derivative Financial Instruments

The Company utilizes commodity derivative contracts to (i) reduce the effect of price volatility on the commodities the Company produces and sells or consumes, (ii) support the Company's annual capital budgeting and expenditure plans and (iii) reduce commodity price risk associated with certain capital projects. The Company also, from time to time, utilizes interest rate contracts to reduce the effect of interest rate volatility on the Company's indebtedness and forward currency exchange rate agreements to reduce the effect of exchange rate volatility.

Oil prices. All material physical sales contracts governing the Company's oil production are tied directly or indirectly to NYMEX WTI oil prices. The following table sets forth the volumes in Bbls outstanding as of June 30, 2011 under the Company's oil derivative contracts and the weighted average oil prices per Bbl for those contracts:

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Outstanding Average
Average daily oil production associated with derivatives (Bbls):
2011 – Swap contracts
Volume						750		750		750
NYMEX price					$	77.25	$	77.25	$	77.25
2011 – Collar contracts
Volume						2,000		2,000		2,000
NYMEX price:
Ceiling					$	170.00	$	170.00	$	170.00
Floor					$	115.00	$	115.00	$	115.00
2011 – Collar contracts with short puts
Volume						32,000		32,000		32,000
NYMEX price:
Ceiling					$	99.33	$	99.33	$	99.33
Floor					$	73.75	$	73.75	$	73.75
Short put					$	59.31	$	59.31	$	59.31
2012 – Swap contracts
Volume		3,000		3,000		3,000		3,000		3,000
NYMEX price	$	79.32	$	79.32	$	79.32	$	79.32	$	79.32
2012 – Collar contracts
Volume		2,000		2,000		2,000		2,000		2,000
NYMEX price:
Ceiling	$	127.00	$	127.00	$	127.00	$	127.00	$	127.00
Floor	$	90.00	$	90.00	$	90.00	$	90.00	$	90.00
2012 – Collar contracts with short puts
Volume		36,000		36,000		36,000		36,000		36,000
NYMEX price:
Ceiling	$	117.99	$	117.99	$	117.99	$	117.99	$	117.99
Floor	$	80.42	$	80.42	$	80.42	$	80.42	$	80.42
Short put	$	65.00	$	65.00	$	65.00	$	65.00	$	65.00
2013 – Swap contracts
Volume		3,000		3,000		3,000		3,000		3,000
NYMEX price	$	81.02	$	81.02	$	81.02	$	81.02	$	81.02
2013 – Collar contracts with short puts (a)
Volume		21,250		21,250		21,250		21,250		21,250
NYMEX price:
Ceiling	$	117.38	$	117.38	$	117.38	$	117.38	$	117.38
Floor	$	80.18	$	80.18	$	80.18	$	80.18	$	80.18
Short put	$	65.18	$	65.18	$	65.18	$	65.18	$	65.18
2014 – Collar contracts with short puts (a)
Volume		12,000		12,000		12,000		12,000		12,000
NYMEX price:
Ceiling	$	128.16	$	128.16	$	128.16	$	128.16	$	128.16
Floor	$	87.92	$	87.92	$	87.92	$	87.92	$	87.92
Short put	$	72.92	$	72.92	$	72.92	$	72.92	$	72.92

(a) Subsequent to June 30, 2011, the Company entered into additional collar contracts with short puts for (i) 10,000 Bbls per day of the Company's 2013 production with a ceiling price of $127.51 per Bbl, a floor price of $90.00 per Bbl and a short put price of $67.00 per Bbl and (ii) 10,000 Bbls per day of the Company's 2014 production with a ceiling price of $131.68 per Bbl, a floor price of $90.00 per Bbl and a short put price of $67.00 per Bbl.

Natural gas liquids prices. All material physical sales contracts governing the Company's NGL production are tied directly or indirectly to either Mont Belvieu or Conway fractionation facilities' NGL product component prices. The following table sets forth the volumes in Bbls outstanding as of June 30, 2011 under the Company's NGL derivative contracts and the weighted average NGL prices per Bbl for those contracts:

	First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Outstanding Average
Average daily NGL production associated with derivatives (Bbls):
2011 – Swap contracts
Volume						1,150		1,150		1,150
Blended index price					$	51.50	$	51.50	$	51.50
2011 – Collar contracts
Volume						2,650		2,650		2,650
Index price:
Ceiling					$	64.23	$	64.23	$	64.23
Floor					$	53.29	$	53.29	$	53.29
2012 – Swap contracts
Volume		750		750		750		750		750
Index price	$	35.03	$	35.03	$	35.03	$	35.03	$	35.03

Gas prices. All material physical sales contracts governing the Company's gas production are tied directly or indirectly to regional index prices where the gas is sold. The Company uses derivative contracts to manage gas price volatility and reduce basis risk between NYMEX HH prices and actual index prices at which the gas is sold. The following table sets forth the volumes in MMBtus outstanding as of June 30, 2011 under the Company's gas derivative contracts and the weighted average gas prices per MMBtu for those contracts:

	First Quarter			Second Quarter			Third Quarter			Fourth Quarter			Outstanding Average
Average daily gas production associated with derivatives (MMBtus):
2011 – Swap contracts
Volume								117,500			117,500			117,500
NYMEX price							$	6.13		$	6.13		$	6.13
2011 – Collar contracts with short puts
Volume								200,000			200,000			200,000
NYMEX price:
Ceiling							$	8.55		$	8.55		$	8.55
Floor							$	6.32		$	6.32		$	6.32
Short put							$	4.88		$	4.88		$	4.88
2011 – Basis swap contracts
Volume								143,500			143,500			143,500
Price differential							$	(0.56	)	$	(0.56	)	$	(0.56	)
2012 – Swap contracts
Volume		105,000			105,000			105,000			105,000			105,000
NYMEX price	$	5.82		$	5.82		$	5.82		$	5.82		$	5.82
2012 – Collar contracts
Volume		65,000			65,000			65,000			65,000			65,000
NYMEX price:
Ceiling	$	6.60		$	6.60		$	6.60		$	6.60		$	6.60
Floor	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00
2012 – Collar contracts with short puts
Volume		190,000			190,000			190,000			190,000			190,000
NYMEX price:
Ceiling	$	7.96		$	7.96		$	7.96		$	7.96		$	7.96
Floor	$	6.12		$	6.12		$	6.12		$	6.12		$	6.12
Short put	$	4.55		$	4.55		$	4.55		$	4.55		$	4.55
2012 – Basis swap contracts
Volume		126,000			126,000			126,000			126,000			126,000
Price differential	$	(0.35	)	$	(0.35	)	$	(0.35	)	$	(0.35	)	$	(0.35	)
2013 – Swap contracts
Volume		67,500			67,500			67,500			67,500			67,500
NYMEX price	$	6.11		$	6.11		$	6.11		$	6.11		$	6.11
2013 – Collar contracts
Volume		150,000			150,000			150,000			150,000			150,000
NYMEX price:
Ceiling	$	6.25		$	6.25		$	6.25		$	6.25		$	6.25
Floor	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00
2013 – Collar contracts with short puts
Volume		45,000			45,000			45,000			45,000			45,000
NYMEX price:
Ceiling	$	7.49		$	7.49		$	7.49		$	7.49		$	7.49
Floor	$	6.00		$	6.00		$	6.00		$	6.00		$	6.00
Short put	$	4.50		$	4.50		$	4.50		$	4.50		$	4.50
2013 – Basis swap contracts
Volume		52,500			52,500			52,500			52,500			52,500
Price differential	$	(0.25	)	$	(0.25	)	$	(0.25	)	$	(0.25	)	$	(0.25	)
2014 – Swap contracts
Volume		50,000			50,000			50,000			50,000			50,000
NYMEX price	$	6.05		$	6.05		$	6.05		$	6.05		$	6.05
2014 – Collar contracts
Volume		140,000			140,000			140,000			140,000			140,000
NYMEX price:
Ceiling	$	6.44		$	6.44		$	6.44		$	6.44		$	6.44
Floor	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00
2014 – Collar contracts with short puts
Volume		50,000			50,000			50,000			50,000			50,000
NYMEX price:
Ceiling	$	8.08		$	8.08		$	8.08		$	8.08		$	8.08
Floor	$	6.00		$	6.00		$	6.00		$	6.00		$	6.00
Short put	$	4.50		$	4.50		$	4.50		$	4.50		$	4.50
2014 – Basis swap contracts
Volume		20,000			20,000			20,000			20,000			20,000
Price differential	$	(0.14	)	$	(0.14	)	$	(0.14	)	$	(0.14	)	$	(0.14	)
2015 – Collar contracts
Volume		50,000			50,000			50,000			50,000			50,000
NYMEX price:
Ceiling	$	7.92		$	7.92		$	7.92		$	7.92		$	7.92
Floor	$	5.00		$	5.00		$	5.00		$	5.00		$	5.00

Diesel prices. During the second quarter of 2011, the Company purchased diesel derivative swap contracts for 250 notional Bbls per day, for the period from July 2011 through December 2011, at an average per Bbl fixed price of $123.90. The diesel derivative swap contracts are priced at an index that is highly correlated to the prices that the Company incurs to fuel its drilling rigs and fracture stimulation fleet equipment. The Company purchases diesel derivative swap contracts to mitigate fuel price risk.

Interest rates. The following table sets forth as of June 30, 2011 the notional amount of the Company's debt under outstanding fixed-for-variable interest rate swap contracts, the weighted average fixed annual interest rate and termination date for those contracts:

Type	Notional Amount		Weighted Average Fixed Interest Rate		Termination Date
	(in thousands)
Fixed-for-variable	$	400,000		2.87 percent		July 2016
Fixed-for-variable	$	70,000		3.23 percent		March 2017

During July 2011, the Company terminated the $470 million notional amount of fixed-for-variable interest rate derivative contracts and received $26.1 million of proceeds.

Tabular disclosure of derivative financial instruments. All of the Company's derivatives are accounted for as non-hedge derivatives as of June 30, 2011 and December 31, 2010. The following tables provide disclosure of the Company's derivative instruments:

Fair Value of Derivative Instruments as of June 30, 2011
	Asset Derivatives (a)			Liability Derivatives (a)
Type	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(in thousands)			(in thousands)
Derivatives not designated as hedging instruments
Commodity price derivatives	Derivatives - current	$	153,812	Derivatives - current	$	87,944
Interest rate derivatives	Derivatives - current		12,253	Derivatives - current		—
Commodity price derivatives	Derivatives - noncurrent		135,927	Derivatives - noncurrent		114,334
Interest rate derivatives	Derivatives - noncurrent		17,870	Derivatives - noncurrent		5,177
		$	319,862		$	207,455
Fair Value of Derivative Instruments as of December 31, 2010
	Asset Derivatives (a)			Liability Derivatives (a)
Type	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
		(in thousands)			(in thousands)
Derivatives not designated as hedging instruments
Commodity price derivatives	Derivatives - current	$	167,406	Derivatives - current	$	87,741
Interest rate derivatives	Derivatives - current		11,903	Derivatives - current		886
Commodity price derivatives	Derivatives - noncurrent		152,731	Derivatives - noncurrent		64,829
Interest rate derivatives	Derivatives - noncurrent		15,762	Derivatives - noncurrent		9,227
Total derivatives		$	347,802		$	162,683

(a) Derivative assets and liabilities shown in the tables above are presented as gross assets and liabilities, without regard to master netting arrangements which are considered in the presentations of derivative assets and liabilities in the accompanying consolidated balance sheets.

Derivatives in Cash Flow Hedging Relationships	Location of Gain/(Loss) Reclassified from AOCI into Earnings	Amount of Gain/(Loss) Reclassified from AOCI into Earnings
		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
		in thousands
Interest rate derivatives	Interest expense	$	(69	)	$	(312	)	$	(137	)	$	(1,370	)
Interest rate derivatives	Derivative gains (losses), net		—			(1,523	)		—			(2,665	)
Commodity price derivatives	Oil and gas revenue		8,208			22,532			16,332			45,658
Total		$	8,139		$	20,697		$	16,195		$	41,623
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Earnings on Derivatives	Amount of Gain (Loss) Recognized in Earnings on Derivatives
		Three Months Ended June 30,						Six Months Ended June 30,
		2011			2010			2011			2010
		(in thousands)
Interest rate derivatives	Derivative gains (losses), net	$	14,575		$	26,517		$	12,423		$	37,916
Commodity price derivatives	Derivative gains (losses), net		214,903			152,534			(27,377	)		407,753
Total		$	229,478		$	179,051		$	(14,954	)	$	445,669

AOCI – Hedging. As of June 30, 2011 and December 31, 2010, AOCI – Hedging represented net deferred gains of $2.9 million and $7.4 million, respectively. The AOCI – Hedging balance as of June 30, 2011 was comprised of $13.4 million of net deferred gains on the effective portions of discontinued commodity hedges, $1.8 million of net deferred losses on the effective portions of discontinued interest rate hedges and $1.8 million of associated net deferred tax provisions, reduced by $6.9 million of AOCI – Hedging net deferred gains attributable to and classified as noncontrolling interests in consolidated subsidiaries.

During the twelve months ending June 30, 2012, the Company expects to reclassify $15.0 million of AOCI – Hedging net deferred gains to oil revenues (including $7.0 million related to noncontrolling interests) and $299 thousand of AOCI – Hedging net deferred losses to interest expense. The Company also expects to reclassify $2.8 million of net deferred income tax provisions associated with hedge derivatives during the twelve months ending June 30, 2012 from AOCI – Hedging to income tax expense. For the remaining six months of 2011, the Company expects to reclassify deferred gains on discontinued commodity hedges of $16.6 million to oil revenues. During 2012, the Company expects to reclassify deferred losses on commodity hedges of $3.2 million to oil revenues. The aforementioned $1.8 million of net deferred hedge losses on the effective portion of interest rate hedges will be transferred from AOCI-Hedging to interest expense ratably through April 2018.