Derivative Financial Instruments

3 Months Ended

Mar. 31, 2013

Derivative Financial Instruments [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 7 - 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 in its consolidated balance sheet as either assets or liabilities 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, The Bank of Nova Scotia and RBC (or affiliates thereof) were the counterparties for our commodity derivatives at March 31, 2013. The Company has considered the credit standings of the counterparties in determining the fair value of its derivative financial instruments.

The Company has 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 one or more of these collars, the Company receives from the 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 one or more of these collars, the Company pays to the counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract oil volume.

The Company has also 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 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 fixed price established by one or more of these swaps, the Company receives from the counterparty 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 one or more of these swaps, the Company pays to the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract oil volume.

The Company has 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 one or more of these collars, the Company receives from the 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 one or more of these collars, the Company pays to the counterparty an amount equal to the difference between the settlement price and the price ceiling multiplied by the contract natural gas volume.

The Company has entered into various swap contracts to mitigate its exposure to fluctuations in natural gas liquids (“NGL”) prices, 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 one or more of these swaps, the Company receives from the 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 one or more of these swaps, the Company pays to the counterparty an amount equal to the difference between the settlement price and the fixed price multiplied by the contract NGL volume.

At March 31, 2013, 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, 2014 and 2015.

At March 31, 2013, 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 and 2014.

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 March 31, 2013.

Commodity	Calculation Period	Notional Quantity (Bbl/month)		Price  Floor ($/Bbl)		Price Ceiling ($/Bbl)		Fair Value of Asset (Liability) (thousands)
Oil	04/01/2013 - 12/31/2013		20,000		85.00		102.25	$	(140	)
Oil	04/01/2013 - 12/31/2013		20,000		90.00		115.00		292
Oil	04/01/2013 - 12/31/2013		20,000		85.00		110.40		96
Oil	04/01/2013 - 12/31/2013		20,000		85.00		108.80		71
Oil	04/01/2013 - 06/30/2014		8,000		90.00		114.00		324
Oil	04/01/2013 - 06/30/2014		12,000		90.00		115.50		502
Oil	07/01/2013 - 12/31/2013		20,000		90.00		102.80		49
Oil	01/01/2014 - 12/31/2014		15,000		85.00		97.50		(122	)
Oil	01/01/2014 - 12/31/2014		30,000		85.00		98.00		(179	)
Oil	01/01/2014 - 12/31/2014		15,000		87.00		97.00		(41	)
Oil	01/01/2014 - 12/31/2014		20,000		90.00		97.00		209
Oil	01/01/2014 - 12/31/2014		15,000		90.00		97.90		238
Oil	01/01/2014 - 12/31/2014		15,000		90.00		98.00		235
Total open oil costless collar contracts									1,534
Commodity	Calculation Period	Notional Quantity (MMBtu/month)		Price Floor ($/MMBtu)		Price Ceiling ($/MMBtu)		Fair Value of Asset (Liability) (thousands)
Natural Gas	04/01/2013 - 07/31/2013		150,000		4.50		5.75		297
Natural Gas	04/01/2013 - 12/31/2013		100,000		3.00		3.83		(359	)
Natural Gas	04/01/2013 - 12/31/2013		100,000		3.00		4.95		(46	)
Natural Gas	04/01/2013 - 12/31/2013		100,000		3.00		4.96		(45	)
Natural Gas	04/01/2013 - 12/31/2013		100,000		3.25		4.41		(114	)
Natural Gas	04/01/2013 - 12/31/2013		100,000		3.25		4.44		(107	)
Natural Gas	04/01/2013 - 12/31/2013		100,000		3.50		4.37		(100	)
Natural Gas	07/01/2013 - 12/31/2013		150,000		3.00		4.24		(238	)
Natural Gas	08/01/2013 - 12/31/2013		80,000		3.75		4.57		(15	)
Natural Gas	01/01/2014 - 12/31/2014		100,000		3.00		5.15		(153	)
Natural Gas	01/01/2014 - 12/31/2014		100,000		3.25		5.21		(89	)
Natural Gas	01/01/2014 - 12/31/2014		100,000		3.25		5.22		(88	)
Natural Gas	01/01/2014 - 12/31/2014		100,000		3.25		5.37		(68	)
Natural Gas	01/01/2014 - 12/31/2014		100,000		3.25		5.42		(60	)
Natural Gas	01/01/2014 - 12/31/2014		100,000		3.50		4.90		(94	)
Natural Gas	01/01/2014 - 12/31/2014		100,000		3.75		4.77		(48	)
Natural Gas	01/01/2015 - 12/31/2015		200,000		3.75		5.04		(51	)
Total open natural gas costless collar contracts									(1,378	)

Commodity	Calculation Period		Notional Quantity (Bbl/month)		Fixed Price ($/Bbl)		Fair Value  of Liability (thousands)
Oil		04/01/2013 - 12/31/2013		10,000		90.20		(591	)
Oil		04/01/2013 - 12/31/2013		10,000		90.65		(551	)
Total open oil swap contracts								(1,142	)

Commodity	Calculation Period	Notional Quantity (Gal/month)		Fixed Price ($/Gal)		Fair Value  of Asset (Liability) (thousands)
Purity Ethane	04/01/2013 - 12/31/2013		110,000		0.335		29
Purity Ethane	04/01/2013 - 12/31/2013		110,000		0.355		49
Propane	04/01/2013 - 12/31/2013		53,000		0.953		(5	)
Propane	04/01/2013 - 12/31/2013		106,000		0.960		(5	)
Propane	04/01/2013 - 12/31/2013		53,000		1.001		17
Propane	01/01/2014 - 12/31/2014		116,000		0.950		(4	)
Normal Butane	04/01/2013 - 12/31/2013		14,700		1.455		2
Normal Butane	04/01/2013 - 12/31/2013		14,700		1.560		16
Normal Butane	04/01/2013 - 12/31/2013		21,000		1.575		26
Normal Butane	04/01/2013 - 12/31/2013		117,000		1.575		146
Normal Butane	01/01/2014 - 12/31/2014		17,500		1.540		25
Normal Butane	01/01/2014 - 12/31/2014		45,500		1.550		70
Isobutane	04/01/2013 - 12/31/2013		7,000		1.515		1
Isobutane	04/01/2013 - 12/31/2013		7,000		1.625		8
Isobutane	04/01/2013 - 12/31/2013		43,500		1.675		71
Isobutane	04/01/2013 - 12/31/2013		23,000		1.675		35
Isobutane	01/01/2014 - 12/31/2014		22,000		1.640		35
Isobutane	01/01/2014 - 12/31/2014		37,000		1.640		62
Natural Gasoline	04/01/2013 - 12/31/2013		12,000		2.025		(6	)
Natural Gasoline	04/01/2013 - 12/31/2013		12,000		2.085		-
Natural Gasoline	04/01/2013 - 12/31/2013		12,000		2.102		2
Natural Gasoline	04/01/2013 - 12/31/2013		36,000		2.105		6
Natural Gasoline	04/01/2013 - 12/31/2013		90,500		2.148		45
Natural Gasoline	01/01/2014 - 12/31/2014		30,000		1.970		1
Natural Gasoline	01/01/2014 - 12/31/2014		41,000		2.000		14
Total open NGL swap contracts							640
Total open derivative financial instruments						$	(346	)

These derivative financial instruments are subject to master netting arrangements within specific commodity types, i.e., oil, natural gas and natural gas liquids, by counterparty. Derivative financial instruments with Counterparty A are not subject to master netting across commodity types, while derivative financial instruments with Counterparties B and C do allow for cross-commodity master netting provided the settlement dates for the commodities are the same. The Company does not present different types of commodities with the same counterparty on a net basis in its consolidated balance sheet.

The following table presents the gross asset balances of the Company’s derivative financial instruments, the amounts subject to master netting arrangements, the amounts that the Company has presented on a net basis and the location of these balances in its unaudited condensed consolidated balance sheet as of March 31, 2013 (in thousands).

Derivative Instruments	Gross amounts of recognized assets		Gross amounts netted in the consolidated balance sheet			Net amounts of assets presented in the consolidated balance sheet
Counterparty A
Current assets	$	2,677	$	(1,992	)	$	685
Other assets		3,990		(3,265	)		725
Counterparty B
Current assets		615		(402	)		213
Other assets		2,132		(1,815	)		317
Counterparty C
Current assets		1,172		(928	)		244
Other assets		1,999		(1,898	)		101
Total	$	12,585	$	(10,300	)	$	2,285

The following table presents the gross liability balances of the Company’s derivative financial instruments, the amounts subject to master netting, the amounts that the Company has presented on a net basis and the location of these balances in its unaudited condensed consolidated balance sheet as of March 31, 2013 (in thousands).

Derivative Instruments	Gross amounts of recognized liabilities		Gross amounts netted in the consolidated balance sheet			Net amounts of liabilities presented in the consolidated balance sheet
Counterparty A
Current liabilities	$	2,055	$	(1,992	)	$	63
Long-term liabilities		3,265		(3,265	)		-
Counterparty B
Current liabilities		1,724		(402	)		1,322
Long-term liabilities		1,952		(1,815	)		137
Counterparty C
Current liabilities		1,758		(928	)		830
Long-term liabilities		2,177		(1,898	)		279
Total	$	12,931	$	(10,300	)	$	2,631

The following table presents the gross asset balances of the Company’s derivative financial instruments, the amounts subject to master netting, the amounts that the Company has presented on a net basis and the location of these balances in its unaudited condensed consolidated balance sheet as of December 31, 2012 (in thousands).

Derivative Instruments	Gross amounts  of recognized assets		Gross amounts netted in the condensed consolidated balance sheet			Net amounts of assets presented in the condensed consolidated balance sheet
Counterparty A
Current assets	$	6,445	$	(2,373	)	$	4,072
Other assets		1,096		(370	)		726
Counterparty B
Current assets		530		(224	)		306
Other assets		384		(339	)		45
Total	$	8,455	$	(3,306	)	$	5,149

The following table presents the gross liability balances of the Company’s derivative financial instruments, the amounts subject to master netting, the amounts that the Company has presented on a net basis and the location of these balances in its unaudited condensed consolidated balance sheet as of December 31, 2012 (in thousands).

Derivative Instruments	Gross amounts of recognized liabilities		Gross amounts netted in the condensed consolidated balance sheet			Net amounts of liabilities presented in the condensed consolidated balance sheet
Counterparty A
Current liabilities	$	2,373	$	(2,373	)	$	-
Long-term liabilities		370		(370	)		-
Counterparty B
Current liabilities		894		(224	)		670
Long-term liabilities		339		(339	)		-
Total	$	3,976	$	(3,306	)	$	670

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).

		Three Months Ended March  31,
Type of Instrument	Location in Condensed Consolidated Statement of Operations	2013			2012
Derivative Instrument
Oil	Revenues: Realized loss of derivatives	$	(237	)	$	-
Natural Gas	Revenues: Realized gain on derivatives		524			3,063
NGL’s	Revenues: Realized gain on derivatives		105			-
Realized gain on derivatives			392			3,063
Oil	Revenues: Unrealized loss on derivatives		(2,728	)		(5,260	)
Natural Gas	Revenues: Unrealized (loss) gain on derivatives		(2,511	)		1,990
NGL’s	Revenues: Unrealized gain on derivatives		414			-
Unrealized loss on derivatives			(4,825	)		(3,270	)
Total		$	(4,433	)	$	(207	)