DERIVATIVE AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2012

DERIVATIVE AND HEDGING ACTIVITIES

DERIVATIVE AND HEDGING ACTIVITIES

9. DERIVATIVE AND HEDGING ACTIVITIES

        The Company is exposed to certain risks relating to its ongoing business operations, such as commodity price risk and interest rate risk. Derivative contracts are utilized to economically hedge the Company's exposure to price fluctuations and reduce the variability in the Company's cash flows associated with anticipated sales of future oil and natural gas production. The Company generally hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. Derivatives are carried at fair value on the consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the consolidated statements of operations for the period in which the change occurs. Historically, the Company has also entered into interest rate swaps to mitigate exposure to market rate fluctuations.

        It is the Company's policy to enter into derivative contracts, including interest rate swaps, only with counterparties that are creditworthy financial institutions deemed by management as competent and competitive market makers. The counterparties to the Company's current derivative contracts are lenders or affiliates of lenders in its Senior Credit Agreement. The Company did not post collateral under any of these contracts as they are secured under the Company's Senior Credit Agreement.

        At December 31, 2012 and 2011, the Company's crude oil and natural gas derivative positions consisted of swaps, costless put/call "collars" and sold put options. Swaps are designed so that the Company receives or makes payments based on a differential between fixed and variable prices for crude oil and natural gas. A costless collar consists of a sold call, which establishes a maximum price the Company will receive for the volumes under contract and a purchased put that establishes a minimum price. A sold put option limits the exposure of the counterparty's risk should the price fall below the strike price. Sold put options limit the effectiveness of purchased put options at the low end of the put/call collars to market prices in excess of the strike price of the put option sold. The Company has elected to not designate any of its derivative contracts for hedge accounting. Accordingly, the Company records the net change in the mark-to-market valuation of these derivative contracts, as well as all payments and receipts on settled derivative contracts, in "Net gain (loss) on derivative contracts" on the consolidated statements of operations.

        In February 2012, pursuant to the Senior Credit Agreement, the Company novated its oil and natural gas derivative instruments to counterparties that are lenders within the Senior Credit Agreement resulting in a realized loss of $0.4 million for novation fees and terminated the interest rate derivatives resulting in a $0.6 million realized loss.

        In April 2011, pursuant to the Company's March 2011 Credit Facilities, the Company was required to reduce the volume of its existing oil and natural gas derivative contracts so it would not exceed the maximum allowable volumes for future production periods and to novate derivative contracts to counterparties that are lenders within the March 2011 Credit Facilities. During the second quarter of 2011, the Company recognized a $0.9 million realized loss on the unwinding of the excess oil and natural gas derivative contracts and paid $0.5 million in fees to complete the novation, both of which were included in "Net gain (loss) on derivative contracts" on the consolidated statements of operations.

        At December 31, 2012, the Company had 47 open commodity derivative contracts summarized in the tables below: two natural gas collar arrangements, two natural gas swaps, one natural gas basis swap, 28 oil collar arrangements, 10 oil three-way collars, and four oil swaps.

        All derivative contracts are recorded at fair market value in accordance with ASC 815 and ASC 820 and included in the consolidated balance sheets as assets or liabilities. The following table summarizes the location and fair value amounts of all derivative contracts in the consolidated balance sheets as of December 31, 2012 and 2011:

		Asset derivative contracts					Liability derivative contracts
		December 31,					December 31,
Derivatives not designated as hedging contracts under ASC 815						Balance sheet location
	Balance sheet location	2012		2011			2012			2011
		(In thousands)					(In thousands)
Commodity contracts	Current assets—receivables from derivative contracts	$	7,428	$	1,850	Current liabilities—liabilities from derivative contracts	$	(10,429	)	$	(1,590	)
Commodity contracts	Other noncurrent assets—receivables from derivative contracts		371		2,050	Noncurrent liabilities—liabilities from derivative contracts		(2,461	)		(2,602	)
Interest rate contracts	Current assets—receivables from derivative contracts		—		—	Current liabilities—liabilities from derivative contracts		—			(265	)
Interest rate contracts	Other noncurrent assets—receivables from derivative contracts		—		—	Other noncurrent liabilities—liabilities from derivative contracts		—			(253	)
Total derivatives not designated as hedging contracts under ASC 815		$	7,799	$	3,900		$	(12,890	)	$	(4,710	)

        The following table summarizes the location and amounts of the Company's realized and unrealized gains and losses on derivative contracts in the Company's consolidated statements of operations:

		Amount of gain or (loss) recognized in income on derivative contracts for the year ended December 31,
	Location of gain or (loss) recognized in income on derivative contracts
Derivatives not designated as hedging contracts under ASC 815		2012			2011			2010
		(In thousands)
Commodity contracts:
Unrealized gain (loss) on commodity contracts	Other income (expenses)—net gain (loss) on derivative contracts	$	(13,723	)	$	5,269		$	6,386
Realized gain (loss) on commodity contracts	Other income (expenses)—net gain (loss) on derivative contracts		7,655			(1,078	)		(5,193	)
Total net gain (loss) on commodity contracts		$	(6,068	)	$	4,191		$	1,193
Interest rate swaps:
Unrealized gain (loss) on interest rate swaps	Other income (expenses)—net gain (loss) on derivative contracts	$	518		$	(506	)	$	—
Realized loss on interest rate swaps	Other income (expenses)—net gain (loss) on derivative contracts		(576	)		(206	)		—
Total net loss on interest rate swaps		$	(58	)	$	(712	)	$	—
Total net gain (loss) on derivative contracts	Other income (expenses)—net gain (loss) on derivative contracts	$	(6,126	)	$	3,479		$	1,193

        At December 31, 2012 and 2011, the Company had the following open oil and natural gas derivative contracts:

			December 31, 2012
					Floors			Ceilings			Put Options Sold
Period	Instrument	Commodity	Volume in Mmbtu's/ Bbl's		Price / Price Range	Weighted Average Price		Price / Price Range	Weighted Average Price		Price / Price Range		Weighted Average Price
January 2013 - March 2013	3-Way Collars	Crude Oil		130,500	$95.00 - 100.00	$	95.34	$105.50 - 109.50	$	101.36	$	70.00	$	70.00
January 2013 - March 2013	Basis Swap	Natural Gas		225,000
January 2013 - March 2013	Collars	Crude Oil		31,500	95.00		95.00	101.50		101.50
January 2013 - March 2013	Fixed swap	Natural Gas		225,000	4.85		4.85
April 2013 - June 2013	3-Way Collars	Crude Oil		120,575	95.00		95.00	99.50 - 100.60		99.77		70.00		70.00
April 2013 - June 2013	Collars	Crude Oil		29,575	95.00		95.00	100.60		100.60
July 2013 - September 2013	Collars	Crude Oil		147,200	95.00		95.00	99.00 - 101.50		99.94
October 2013 - December 2013	Collars	Crude Oil		142,600	95.00		95.00	99.00 - 101.00		99.71
January 2013 - December 2013	Collars	Crude Oil		5,201,250	80.00 - 100.00		89.04	91.65 - 107.25		98.06
January 2013 - December 2013	Collars	Natural Gas		1,825,000	3.75		3.75	4.26		4.26
January 2013 - December 2013	Fixed swap	Natural Gas		240,000	3.56		3.56
January 2013 - December 2013	Fixed swap	Crude Oil		360,000	97.60 - 105.55		102.18
February 2013 - December 2013	Collars	Crude Oil		250,500	100.00		100.00	104.15		104.15
April 2014 - June 2014	3-Way Collars	Crude Oil		136,500	95.00		95.00	98.20 - 101.00		99.13		70.00		70.00
January 2014 - March 2014	3-Way Collars	Crude Oil		144,000	95.00		95.00	98.60 - 109.50		100.03		70.00		70.00
January 2014 - December 2014	Collars	Crude Oil		2,190,000	85.00		85.00	95.10 - 96.35		95.92
January 2014 - December 2014	Collars	Natural Gas		1,825,000	3.75		3.75	4.26		4.26

			December 31, 2011
					Floors			Ceilings			Put Options Sold
Period	Instrument	Commodity	Volume in Mmbtu's/ Bbl's		Price / Price Range	Weighted Average Price		Price / Price Range	Weighted Average Price		Price / Price Range		Weighted Average Price
January 2012 - December 2012	3-Way Collars	Crude Oil		400,500	$80.00 - 100.00	$	87.15	$101.70 - 113.25	$	104.89	$	70.00	$	70.00
January 2012 - December 2012	Collars	Crude Oil		299,300	80.00 - 95.00		84.34	102.40 - 107.00		105.43
January 2012 - March 2012	Put Options	Natural gas		609,700	4.00 - 4.50		4.35
April 2012 - September 2012	Collars	Natural gas		915,000	4.00		4.00	6.00		6.00
January 2013 - June 2013	3-Way Collars	Crude Oil		251,075	95.00 - 100.00		95.18	99.50 - 109.50		100.60		70.00		70.00
January 2013 - December 2013	Collars	Crude Oil		350,875	95.00		95.00	99.00 - 101.50		100.04
January 2014 - December 2014	3-Way Collars	Crude Oil		280,500	95.00		95.00	98.20 - 109.50		99.59		70.00		70.00

        The Company's interest rate derivative positions at December 31, 2011, consisting of interest rate swaps, are shown in the following table.

Interest Rate Swaps(1)(3)
Year	Notional Amount (in thousands)		Fixed Rate			Counterparty Floating Rate(2)	Months Covered
2012	$	50,000		2.51	%	3—Month LIBOR	January - December
2013		50,000		2.51	%	3—Month LIBOR	January - December
2014		50,000		2.51	%	3—Month LIBOR	January - March

(1)

Settlement is paid to the Company if the counterparty floating exceeds the fixed rate and settlement is paid by the Company if the counterparty floating rate is below the fixed rate. Settlement is calculated as the difference in the fixed rate and the counterparty rate.

(2)

Subject to minimum rate of 2%

(3)

All outstanding interest rate swaps were terminated in conjunction with the recapitalization during February 2012.