Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 8 - DERIVATIVE FINANCIAL INSTRUMENTS

From time to time, the Company uses derivative financial instruments to mitigate its exposure to commodity price risk associated with oil and natural gas prices. These instruments consist of put and call options in the form of costless collars. The Company records derivative financial instruments on its balance sheet as either an asset or a liability measured at fair value. The Company has elected not to apply hedge accounting for its existing derivative financial instruments. As a result, the Company recognizes the change in derivative fair value between reporting periods currently in its consolidated statement of operations as an unrealized gain or loss. The fair value of the Company’s derivative financial instruments is determined using purchase and sale information available for similarly traded securities. The Company has evaluated the credit standing of its single counterparty, Comerica Bank, in determining the fair value of these derivative financial instruments.

The Company has entered into various costless collar contracts to mitigate its exposure to fluctuations in oil prices on a portion of its future expected oil production, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss to the Company pursuant to any of these transactions is the arithmetic average of the settlement prices for the NYMEX West Texas Intermediate oil futures contract for the first nearby month corresponding to the calculation period’s calendar month. When the settlement price is below the price floor established by these collars, the Company receives from Comerica Bank, as counterparty, an amount equal to the difference between the settlement price and the price floor multiplied by the contract oil volume. When the settlement price is above the price ceiling established by these collars, the Company pays to Comerica, as counterparty, an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract oil volume.

The Company has entered into various costless collar transactions to mitigate its exposure to fluctuations in natural gas prices on a portion of its future expected natural gas production, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss to the Company pursuant to any of these transactions is the settlement price for the NYMEX Henry Hub natural gas futures contract for the delivery month corresponding to the calculation period’s calendar month for the last day of that contract period. When the settlement price is below the price floor established by these collars, the Company receives from Comerica Bank, as counterparty, an amount equal to the difference between the settlement price and the price floor multiplied by the contract natural gas volume. When the settlement price is above the price ceiling established by these collars, the Company pays to Comerica, as counterparty, an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract natural gas volume.

At June 30, 2012, the Company had multiple costless collar contracts open and in place to mitigate its exposure to oil and natural gas price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and price floor and ceiling. Each contract is set to expire at varying times during 2012, 2013 and 2014.

The following is a summary of the Company’s open costless collar contracts for oil and natural gas at June 30, 2012.

Commodity	Calculation Period	Notional Quantity (Bbl/month)		Price Floor ($/Bbl)		Price Ceiling ($/Bbl)		Fair Value  of Asset (thousands)
Oil	07/01/2012 - 12/31/2012		20,000		90.00		104.20	$	784
Oil	07/01/2012 - 12/31/2012		10,000		90.00		108.00		407
Oil	07/01/2012 - 12/31/2012		10,000		90.00		109.50		411
Oil	07/01/2012 - 12/31/2012		20,000		90.00		111.00		829
Oil	07/01/2012 - 12/31/2012		20,000		90.00		111.90		832
Oil	07/01/2012 - 12/31/2012		20,000		95.00		116.00		1,274
Oil	07/01/2012 - 03/31/2013		20,000		90.00		110.00		1,294
Oil	01/01/2013 - 12/31/2013		20,000		85.00		102.25		938
Oil	01/01/2013 - 12/31/2013		20,000		90.00		115.00		2,065
Oil	01/01/2013 - 12/31/2013		20,000		85.00		110.40		1,356
Oil	01/01/2013 - 12/31/2013		20,000		85.00		108.80		1,292
Oil	01/01/2013 - 06/30/2014		8,000		90.00		114.00		1,258
Oil	01/01/2013 - 06/30/2014		12,000		90.00		115.50		1,930
Total Oil								$	14,670
Commodity	Calculation Period	Notional Quantity (MMBtu/month)		Price Floor ($/MMBtu)		Price Ceiling ($/MMBtu)		Fair Value of Asset (Liability) (thousands)
Natural Gas	07/01/2012 - 12/31/2012		300,000		4.50		5.60	$	2,801
Natural Gas	07/01/2012 - 12/31/2012		150,000		4.25		6.17		1,187
Natural Gas	07/01/2012 - 12/31/2012		70,000		2.50		3.34		(26	)
Natural Gas	07/01/2012 - 07/31/2013		150,000		4.50		5.75		2,557
Natural Gas	07/01/2012 - 12/31/2013		100,000		3.00		3.83		(63	)
Total Natural Gas									6,456
Total open costless collar contracts								$	21,126

The following table summarizes the location and aggregate fair value of all derivative financial instruments recorded in the consolidated balance sheets for the periods presented (in thousands). These derivative financial instruments are not designated as hedging instruments.

Type of Instrument	Location in Balance Sheet	June 30, 2012		December 31, 2011
Derivative Instrument
Oil	Current assets: Derivative instruments	$	9,595	$	—
Oil	Other assets: Derivative instruments		5,075		—
Oil	Current liabilities: Derivative instruments		—		(171	)
Oil	Long-term liabilities: Derivative instruments		—		(383	)
Natural Gas	Current assets: Derivative instruments		6,438		8,989
Natural Gas	Other assets: Derivative instruments		18		847
Total		$	21,126	$	9,282

The following table summarizes the location and aggregate fair value of all derivative financial instruments recorded in the consolidated statements of operations for the periods presented (in thousands). These derivative financial instruments are not designated as hedging instruments.

		Three Months Ended June  30,					Six Months Ended June 30,
Type of Instrument	Location in Statement of Operations	2012			2011		2012			2011
Derivative Instrument
Oil	Revenue: Realized gain on derivatives	$	719		$	—	$	719		$	—
Natural Gas	Revenues: Realized gain on derivatives		3,994			952		7,057			2,802
Realized gain on derivatives			4,713			952		7,776			2,802
Oil	Revenues: Unrealized gain on derivatives		20,483			—		15,223			—
Natural Gas	Revenues: Unrealized (loss) gain on derivatives		(5,369	)		332		(3,379	)		(1,336	)
Unrealized gain (loss) on derivatives			15,114			332		11,844			(1,336	)
Total		$	19,827		$	1,284	$	19,620		$	1,466