Derivative Financial Instruments

9 Months Ended

Sep. 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, natural gas and natural gas liquids prices. These instruments consist of put and call options in the form of costless collars and swap contracts. 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. Comerica Bank and RBC (or affiliates thereof) are the counterparties for our commodity derivatives. We have considered the credit standings of the counterparties in determining the fair value of our 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 anticipated 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 its 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 its 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 anticipated 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 its 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 its counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract natural gas volume.

In August 2012, the Company entered into various swap contracts to mitigate its exposure to fluctuations in natural gas liquids (“NGL”) prices on a portion of its future anticipated NGL production, each with an established fixed price. For each calculation period, the settlement price for determining the realized gain or loss to the Company pursuant to any of these transactions is the arithmetic average of any current month for delivery on the nearby month futures contracts of the underlying commodity as stated on the “Mont Belvieu Spot Gas Liquids Prices: NON-TET prop” on the pricing date. When the settlement price is below the fixed price established by these swaps, the Company receives from its counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract NGL volume. When the settlement price is above the fixed price established by these swaps the Company pays to its counterparty an amount equal to the difference between the settlement and the fixed price multiplied by the contract NGL volume.

At September 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.

At September 30, 2012, the Company had multiple swap contracts open and in place to mitigate its exposure to NGL price volatility, each with a specific term (calculation period), notional quantity (volume hedged) and fixed price. Each contract is set to expire at varying times during 2012 and 2013.

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

Commodity	Calculation Period	Notional Quantity (Bbl/month)		Price Floor ($/Bbl)		Price Ceiling ($/Bbl)		Fair Value  of Asset (thousands)
Oil	10/01/2012 - 12/31/2012		20,000		90.00		104.20	$	113
Oil	10/01/2012 - 12/31/2012		10,000		90.00		108.00		65
Oil	10/01/2012 - 12/31/2012		10,000		90.00		109.50		68
Oil	10/01/2012 - 12/31/2012		20,000		90.00		111.00		139
Oil	10/01/2012 - 12/31/2012		20,000		90.00		111.90		141
Oil	10/01/2012 - 12/31/2012		20,000		95.00		116.00		291
Oil	10/01/2012 - 03/31/2013		20,000		90.00		110.00		356
Oil	01/01/2013 - 12/31/2013		20,000		85.00		102.25		61
Oil	01/01/2013 - 12/31/2013		20,000		90.00		115.00		1,233
Oil	01/01/2013 - 12/31/2013		20,000		85.00		110.40		598
Oil	01/01/2013 - 12/31/2013		20,000		85.00		108.80		515
Oil	01/01/2013 - 06/30/2014		8,000		90.00		114.00		794
Oil	01/01/2013 - 06/30/2014		12,000		90.00		115.50		1,242
Total Oil (open costless collar contracts)								$	5,616
Commodity	Calculation Period	Notional Quantity (MMBtu/month)		Price Floor ($/MMBtu)		Price Ceiling ($/MMBtu)		Fair Value of Asset (Liability) (thousands)
Natural Gas	10/01/2012 - 12/31/2012		300,000		4.50		5.60	$	1,067
Natural Gas	10/01/2012 - 12/31/2012		150,000		4.25		6.17		424
Natural Gas	10/01/2012 - 12/31/2012		70,000		2.50		3.34		(36	)
Natural Gas	10/01/2012 - 07/31/2013		150,000		4.50		5.75		1,398
Natural Gas	10/01/2012 - 12/31/2013		100,000		3.00		3.83		(381	)
Total Natural Gas (open costless collar contracts)								$	2,472

Commodity	Calculation Period	Notional  Quantity (Gal/month)		Fixed Price ($/Gal)		Fair Value  of Asset (Liability) (thousands)
Purity Ethane	10/01/2012 - 12/31/2012		55,700		0.333	$	—
Purity Ethane	10/01/2012 - 12/31/2012		55,700		0.337		—
Propane	10/01/2012 - 12/31/2012		27,000		0.945		1
Propane	10/01/2012 - 12/31/2012		27,000		0.992		5
Normal Butane	10/01/2012 - 12/31/2012		7,500		1.465		—
Normal Butane	10/01/2012 - 12/31/2012		7,500		1.580		3
Isobutane	10/01/2012 - 12/31/2012		4,000		1.535		(2	)
Isobutane	10/01/2012 - 12/31/2012		4,000		1.675		(1	)
Natural Gasoline	10/01/2012 - 12/31/2012		6,000		2.095		2
Natural Gasoline	10/01/2012 - 12/31/2012		6,000		2.150		3
Purity Ethane	01/01/2013 - 12/31/2013		110,000		0.335		(41	)
Purity Ethane	01/01/2013 - 12/31/2013		110,000		0.355		(15	)
Propane	01/01/2013 - 12/31/2013		53,000		0.953		7
Propane	01/01/2013 - 12/31/2013		53,000		1.001		38
Normal Butane	01/01/2013 - 12/31/2013		14,700		1.455		(3	)
Normal Butane	01/01/2013 - 12/31/2013		14,700		1.560		16
Isobutane	01/01/2013 - 12/31/2013		7,000		1.515		(7	)
Isobutane	01/01/2013 - 12/31/2013		7,000		1.625		3
Natural Gasoline	01/01/2013 - 12/31/2013		12,000		2.085		17
Natural Gasoline	01/01/2013 - 12/31/2013		12,000		2.102		19
Total NGL’s (open swap contracts)						$	45
Total open derivative financial instruments						$	8,133

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	September 30, 2012			December 31, 2011
Derivative Instrument
Oil	Current assets: Derivative instruments	$	3,736		$	—
Oil	Other assets: Derivative instruments		1,880			—
Oil	Current liabilities: Derivative instruments		—			(171	)
Oil	Long-term liabilities: Derivative instruments		—			(383	)
Natural Gas	Current assets: Derivative instruments		2,610			8,989
Natural Gas	Other assets: Derivative instruments		—			847
Natural Gas	Long-term liabilities: Derivative instruments		(138	)		—
NGL’s	Current assets: Derivative instruments		49			—
NGL’s	Long-term liabilities: Derivative instruments		(4	)		—
Total		$	8,133		$	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 September 30,					Nine Months Ended September 30,
Type of Instrument	Location in Statement of Operations	2012			2011		2012			2011
Derivative Instrument
Oil	Revenues: Realized gain on derivatives	$	374		$	—	$	1,093		$	—
Natural Gas	Revenues: Realized gain on derivatives		2,996			1,435		10,053			4,237
NGL’s	Revenues: Realized gain on derivatives		1			—		1			—
Realized gain on derivatives			3,371			1,435		11,147			4,237
Oil	Revenues: Unrealized (loss) gain on derivatives		(9,053	)		—		(7,364	)		—
Natural Gas	Revenues: Unrealized (loss) gain on derivatives		(3,985	)		2,870		6,170			1,534
NGL’s	Revenues: Unrealized gain (loss) on derivatives		45			—		45			—
Unrealized (loss) gain on derivatives			(12,993	)		2,870		(1,149	)		1,534
Total		$	(9,622	)	$	4,305	$	9,998		$	5,771