Derivative Financial Instruments

12 Months Ended

Dec. 31, 2012

Derivative Financial Instruments [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 11 — 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) were the counterparties for our commodity derivatives at December 31, 2012. We have considered the credit standings of the counterparties in determining the fair value of our derivative financial instruments.

During 2012 and 2011, the Company entered into various costless collar contracts to mitigate its exposure to fluctuations in oil prices, each with an established price floor and ceiling. For each calculation period, the specified price for determining the realized gain or loss 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 counterparties 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 counterparties an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract oil volume.

During 2012, the Company entered into various swap contracts to mitigate its exposure to fluctuations in oil prices, each with an established fixed price. For each calculation period, the specified price for determining the realized gain or loss pursuant to any of these transactions is the arithmetic average of the settlement prices for 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 fixed price established by these swaps, the Company receives from its counterparties an amount equal to the difference between the settlement price and the fixed price multiplied by the contract oil volume. When the settlement price is above the fixed price established by these swaps the Company pays to its counterparties an amount equal to the difference between the settlement and the fixed price multiplied by the contract oil volume.

During 2012, 2011, and 2010, the Company entered into various costless collar transactions for natural gas, 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 counterparties 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 counterparties an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract natural gas volume.

During 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 counterparties 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 counterparties an amount equal to the difference between the settlement price and the fixed price multiplied by the contract NGL volume.

At December 31, 2012, the Company had various 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 2013 and 2014.

At December 31, 2012, the Company had various swap contracts open and in place to mitigate its exposure to oil and 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 2013.

The following is a summary of the Company’s open costless collar contracts for oil and natural gas and open swap contracts for oil and natural gas liquids at December 31, 2012.

Commodity	Calculation Period		Notional Quantity (Bbl/month)		Price Floor ($/Bbl)		Price Ceiling ($/Bbl)		Fair Value of Asset (thousands)
Oil		01/01/2013 - 03/31/2013		20,000		90.00		110.00	$	122
Oil		01/01/2013 - 12/31/2013		20,000		85.00		102.25		96
Oil		01/01/2013 - 12/31/2013		20,000		90.00		115.00		980
Oil		01/01/2013 - 12/31/2013		20,000		85.00		110.40		471
Oil		01/01/2013 - 12/31/2013		20,000		85.00		108.80		418
Oil		01/01/2013 - 06/30/2014		8,000		90.00		114.00		666
Oil		01/01/2013 - 06/30/2014		12,000		90.00		115.50		1,036
Total open oil costless collar contracts										3,789
Commodity	Calculation Period		Notional Quantity (MMBtu/month)		Price Floor ($/MMBtu)		Price Ceiling ($/MMBtu)		Fair Value of Asset (Liability) (thousands)
Natural Gas		01/01/2013 - 07/31/2013		150,000		4.50		5.75		1,154
Natural Gas		01/01/2013 - 12/31/2013		100,000		3.00		3.83		(146	)
Natural Gas		01/01/2013 - 12/31/2013		100,000		3.00		4.95		40
Natural Gas		01/01/2013 - 12/31/2013		100,000		3.00		4.96		41
Natural Gas		01/01/2014 - 12/31/2014		100,000		3.25		5.37		19
Natural Gas		01/01/2014 - 12/31/2014		100,000		3.25		5.42		27
Total open natural gas costless collar contracts										1,135

Commodity	Calculation Period		Notional Quantity (Bbl/month)		Fixed Price ($/Bbl)		Fair Value of  Liability (thousands)
Oil		01/01/2013 - 12/31/2013		10,000		90.20		(362	)
Oil		01/01/2013 - 12/31/2013		10,000		90.65		(308	)
Total open oil swap contracts								(670	)

Commodity	Calculation Period		Notional Quantity (Gal/month)		Fixed Price ($/Gal)		Fair Value of  Asset (Liability) (thousands)
Purity Ethane		01/01/2013 - 12/31/2013		110,000		0.335		106
Purity Ethane		01/01/2013 - 12/31/2013		110,000		0.355		133
Propane		01/01/2013 - 12/31/2013		53,000		0.953		13
Propane		01/01/2013 - 12/31/2013		53,000		1.001		43
Normal Butane		01/01/2013 - 12/31/2013		14,700		1.455		(29	)
Normal Butane		01/01/2013 - 12/31/2013		14,700		1.560		(10	)
Isobutane		01/01/2013 - 12/31/2013		7,000		1.515		(18	)
Isobutane		01/01/2013 - 12/31/2013		7,000		1.625		(9	)
Natural Gasoline		01/01/2013 - 12/31/2013		12,000		2.025		(8	)
Natural Gasoline		01/01/2013 - 12/31/2013		12,000		2.085		1
Natural Gasoline		01/01/2013 - 12/31/2013		12,000		2.102		3
Total open NGL swap contracts							$	225
Total open derivative financial instruments							$	4,479

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	December 31, 2012			December 31, 2011
Derivative Instrument
Oil	Current assets: Derivative instruments	$	3,064		$	–
Oil	Other assets: Derivative instruments		725			–
Oil	Current liabilities: Derivative instruments		(670	)		(171	)
Oil	Long-term liabilities: Derivative instruments		–			(383	)
Natural Gas	Current assets: Derivative instruments		1,089			8,989
Natural Gas	Other assets: Derivative instruments		46			847
Natural Gas	Long-term liabilities: Derivative instruments		–			–
NGL’s	Current assets: Derivative instruments		225			–
NGL’s	Long-term liabilities: Derivative instruments		–			–
Total		$	4,479		$	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.

Type of Instrument	Location in Statement of Operations	Year Ended December 31,
		2012			2011			2010
Derivative Instrument
Oil	Revenues: Realized gain on derivatives	$	2,047		$	–		$	–
Natural Gas	Revenues: Realized gain on derivatives		11,892			7,106			5,299
NGL’s	Revenues: Realized gain on derivatives		21			–			–
Realized gain on derivatives			13,960			7,106			5,299
Oil	Revenues: Unrealized gain (loss) on derivatives		3,673			(554	)		–
Natural Gas	Revenues: Unrealized (loss) gain on derivatives		(8,700	)		5,692			3,139
NGL’s	Revenues: Unrealized gain on derivatives		225			–			–
Unrealized (loss) gain on derivatives			(4,802	)		5,138			3,139
Total		$	9,158		$	12,244		$	8,438