DERIVATIVES

9 Months Ended

Sep. 30, 2012

DERIVATIVES

DERIVATIVES

11. DERIVATIVES

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, natural gas and natural gas liquids production. The Company generally hedges a substantial, but varying, portion of anticipated oil and natural gas production for future periods. Currently the Company has hedges in place for periods through June 2014. During 2010, 2011 and 2012, the Company entered into numerous derivative contracts and did not designate these transactions as hedges for accounting purposes. Derivatives are carried at fair value on the unaudited condensed consolidated balance sheets as assets or liabilities, with the changes in the fair value included in the unaudited condensed 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.

During February 2012, pursuant to the February 2012 senior secured revolving credit agreement, the Company novated its oil and natural gas derivative instruments to counterparties that are lenders within the new senior secured revolving 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.

It is the Company’s policy to enter into derivative contracts 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 in the Company’s senior revolving credit agreement. The Company did not post collateral under any of these contracts as they are secured under the Company’s senior secured revolving credit agreement.

The Company’s crude oil and natural gas derivative positions at September 30, 2012 consist of swaps, 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 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 following table summarizes the location and fair value amounts of all derivative contracts in the unaudited condensed consolidated balance sheets as of September 30, 2012 and December 31, 2011 (in thousands):

Derivatives not designated		Asset derivative contracts				Liability derivative contracts						Netted derivative contracts
as hedging contracts	Balance sheet location	Sept. 30,2012		Dec. 31, 2011		Sept. 30,2012			Dec. 31, 2011			Sept. 30,2012			Dec. 31, 2011
Commodity contracts	Current assets - receivables from derivative contracts	$	5,050	$	1,850	$	(726	)	$	(1,590	)	$	4,324		$	260
Commodity contracts	Other noncurrent assets - receivables from derivative contracts	1,047		—		(24		)	—			1,023			—
Commodity contracts	Current liabilities - liabilities from derivative contracts	1,960		—		(3,614		)	—			(1,654		)	—
Commodity contracts	Other noncurrent liabilities - liabilities from derivative contracts	863		2,050		(1,117		)	(2,602		)	(254		)	(552		)
Interest rate swaps	Current liabilities - liabilities from derivative contracts	—		—		—			(265		)	—			(265		)
Interest rate swaps	Other noncurrent liabilities - liabilities from derivative contracts	—		—		—			(253		)	—			(253		)
Total derivatives not designated as hedging contracts		$	8,920	$	3,900	$	(5,481	)	$	(4,710	)	$	3,439		$	(810	)

The types of derivative contracts and related realized and unrealized gains and losses illustrated in the following table are located in “Other income (expenses) — Net gain (loss) on derivative contracts” in the Company’s unaudited condensed consolidated statements of operations (in thousands):

	Amount of gain (loss) recognized on derivative contracts for the:
	Three months endedSeptember 30,						Nine months endedSeptember 30,
Derivatives not designated as hedging contracts	2012			2011			2012			2011
Unrealized gain (loss) on commodity contracts	$	(11,817	)	$	22,744		$	(4,641	)	$	18,519
Realized gain (loss) on commodity contracts	2,242			76			3,850			(1,186		)
Unrealized gain (loss) on interest rate swaps	—			(138		)	518			(556		)
Realized loss on interest rate swaps	—			(65		)	(576		)	(142		)
Total net gain (loss) on derivative contracts	$	(9,575	)	$	22,617		$	(849	)	$	16,635

At September 30, 2012, the Company had the following open derivatives contracts:

			September 30, 2012
				Floors			Ceilings			Put Options Sold
					Weighted			Weighted				Weighted
			Volume in	Price/Price	Average		Price/Price	Average		Price/Price		Average
Period	Instrument	Commodity	Mmbtu’s/Bbl’s	Range	Price		Range	Price		Range		Price
October 2012 - December 2012	3 Way-collars	Crude oil	103,500	$90.00 - $95.00	$	92.78	$101.70 - $107.00	$	104.13	$	70.00	$	70.00
October 2012 - December 2012	Collars	Crude oil	409,500	85.00 - 95.00	89.49		98.00 - 110.00	100.91
October 2012 - December 2012	Fixed Swap	Crude oil	165,000				86.85 - 108.45	98.62
October 2012 - December 2012	Fixed Swap	Natural gas	435,000				2.925 - 6.415	5.12
October 2012 - December 2012	Basis Swap	Natural gas	375,000
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	2,267,125	80.00 - 95.00	87.35		92.70 - 101.50	96.59
January 2013 - December 2013	Fixed Swap	Crude oil	360,000				97.60 - 105.55	102.18
January 2013 - December 2013	Fixed Swap	Natural gas	465,000				3.56 - 4.85	4.18
January 2013 - March 2013	Basis Swap	Natural gas	225,000
January 2014 - June 2014	3 Way-collars	Crude oil	280,500	95.00	95.00		98.20 - 109.50	99.59		70.00		70.00

At December 31, 2011, the Company had the following open derivatives contracts (including interest rate swaps):

			December 31, 2011
				Floors			Ceilings			Put Options Sold
					Weighted			Weighted				Weighted
			Volume in	Price/Price	Average		Price/Price	Average		Price/Price		Average
Period	Instrument	Commodity	Mmbtu’s/Bbl’s	Range	Price		Range	Price		Range		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 - June 2014	3 Way-collars	Crude oil	280,500	95.00	95.00		98.20 - 109.50	99.59		70.00		70.00

Interest Rate Swaps (1) (3)
	Notional Amount		Fixed		Counterparty
Year	(in thousands)		Rate		Floating Rate (2)	Months Covered
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.