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 June 30, 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, except for purity ethane, as stated on the “Mont Belvieu Spot Gas Liquids Prices: NON-TET prop” on the pricing date. The settlement price for purity ethane is the arithmetic average of any current month for delivery on the nearby month futures contracts as stated on the “Mont Belvieu Spot Gas Liquids Prices” 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 June 30, 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 June 30, 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 June 30, 2013.



Commodity	Calculation Period	Notional Quantity (Bbl/month)	Price Floor ($/Bbl)	Price Ceiling ($/Bbl)	Fair Value of Asset (Liability) (thousands)
Oil	07/01/2013 - 12/31/2013	20,000	85.00	102.25	$	(9	)
Oil	07/01/2013 - 12/31/2013	20,000	85.00	108.80	84
Oil	07/01/2013 - 12/31/2013	20,000	85.00	110.40	94
Oil	07/01/2013 - 12/31/2013	20,000	90.00	102.80	126
Oil	07/01/2013 - 12/31/2013	20,000	90.00	115.00	224
Oil	07/01/2013 - 06/30/2014	8,000	90.00	114.00	336
Oil	07/01/2013 - 06/30/2014	12,000	90.00	115.50	513
Oil	01/01/2014 - 12/31/2014	15,000	85.00	97.50	248
Oil	01/01/2014 - 12/31/2014	30,000	85.00	98.00	546
Oil	01/01/2014 - 12/31/2014	15,000	87.00	97.00	349
Oil	01/01/2014 - 12/31/2014	20,000	88.00	95.60	444
Oil	01/01/2014 - 12/31/2014	20,000	90.00	97.00	763
Oil	01/01/2014 - 12/31/2014	15,000	90.00	97.90	642
Oil	01/01/2014 - 12/31/2014	15,000	90.00	98.00	637
Total open oil costless collar contracts					4,997



Commodity	Calculation Period	Notional Quantity (MMBtu/month)	Price Floor ($/MMBtu)	Price Ceiling ($/MMBtu)	Fair Value of Asset (Liability) (thousands)
Natural Gas	07/01/2013 - 07/31/2013	150,000	4.50	5.75	119
Natural Gas	07/01/2013 - 12/31/2013	100,000	3.00	3.83	(57	)
Natural Gas	07/01/2013 - 12/31/2013	100,000	3.00	4.95	9
Natural Gas	07/01/2013 - 12/31/2013	100,000	3.00	4.96	10
Natural Gas	07/01/2013 - 12/31/2013	150,000	3.00	4.24	(25	)
Natural Gas	07/01/2013 - 12/31/2013	100,000	3.25	4.41	14
Natural Gas	07/01/2013 - 12/31/2013	100,000	3.25	4.44	16
Natural Gas	07/01/2013 - 12/31/2013	100,000	3.50	4.37	55
Natural Gas	08/01/2013 - 12/31/2013	80,000	3.75	4.57	104
Natural Gas	01/01/2014 - 12/31/2014	100,000	3.00	5.15	(26	)
Natural Gas	01/01/2014 - 12/31/2014	100,000	3.25	5.21	45
Natural Gas	01/01/2014 - 12/31/2014	100,000	3.25	5.22	45
Natural Gas	01/01/2014 - 12/31/2014	100,000	3.25	5.37	64
Natural Gas	01/01/2014 - 12/31/2014	100,000	3.25	5.42	68
Natural Gas	01/01/2014 - 12/31/2014	100,000	3.50	4.90	98
Natural Gas	01/01/2014 - 12/31/2014	100,000	3.75	4.77	200
Natural Gas	01/01/2015 - 12/31/2015	200,000	3.75	5.04	207
Total open natural gas costless collar contracts					946



Commodity	Calculation Period	Notional Quantity (Bbl/month)	Fixed Price ($/Bbl)	Fair Value of Liability (thousands)
Oil	07/01/2013 - 12/31/2013	10,000	90.20	(295	)
Oil	07/01/2013 - 12/31/2013	10,000	90.65	(269	)
Total open oil swap contracts				(564	)



Commodity	Calculation Period	Notional Quantity (Gal/month)	Fixed Price ($/Gal)	Fair Value of Asset (thousands)
Purity Ethane	07/01/2013 - 12/31/2013	110,000	0.335	57
Purity Ethane	07/01/2013 - 12/31/2013	110,000	0.355	71
Propane	07/01/2013 - 12/31/2013	53,000	0.953	30
Propane	07/01/2013 - 12/31/2013	106,000	0.960	65
Propane	07/01/2013 - 12/31/2013	53,000	1.001	45
Propane	01/01/2014 - 12/31/2014	116,000	0.950	141
Normal Butane	07/01/2013 - 12/31/2013	14,700	1.455	22
Normal Butane	07/01/2013 - 12/31/2013	14,700	1.560	32
Normal Butane	07/01/2013 - 12/31/2013	21,000	1.575	47
Normal Butane	07/01/2013 - 12/31/2013	117,000	1.575	268
Normal Butane	01/01/2014 - 12/31/2014	17,500	1.540	75
Normal Butane	01/01/2014 - 12/31/2014	45,500	1.550	211
Isobutane	07/01/2013 - 12/31/2013	7,000	1.515	11
Isobutane	07/01/2013 - 12/31/2013	7,000	1.625	16
Isobutane	07/01/2013 - 12/31/2013	43,500	1.675	110
Isobutane	07/01/2013 - 12/31/2013	23,000	1.675	62
Isobutane	01/01/2014 - 12/31/2014	22,000	1.640	114
Isobutane	01/01/2014 - 12/31/2014	37,000	1.640	184
Natural Gasoline	07/01/2013 - 12/31/2013	12,000	2.025	4
Natural Gasoline	07/01/2013 - 12/31/2013	12,000	2.085	8
Natural Gasoline	07/01/2013 - 12/31/2013	12,000	2.102	9
Natural Gasoline	07/01/2013 - 12/31/2013	36,000	2.105	29
Natural Gasoline	07/01/2013 - 12/31/2013	90,500	2.148	98
Natural Gasoline	01/01/2014 - 12/31/2014	30,000	1.970	32
Natural Gasoline	01/01/2014 - 12/31/2014	41,000	2.000	60
Total open NGL swap contracts				1,801
Total open derivative financial instruments				$	7,180

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 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, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of June 30, 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		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current assets	$	3,682	$	(1,823	)	$	1,859	$	—
Other assets	2,858		(1,467		)	1,391		—
Counterparty B
Current assets	2,239		(1,264		)	975		257
Other assets	2,859		(1,510		)	1,349		—
Counterparty C
Current assets	2,231		(1,087		)	1,144		—
Other assets	1,699		(980		)	719		—
Total	$	15,568	$	(8,131	)	$	7,437	$	257

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, the amounts subject to master netting across different commodity types that were presented on a gross basis and the location of these balances in its unaudited condensed consolidated balance sheet as of June 30, 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		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current liabilities	$	1,823	$	(1,823	)	$	—	$	—
Long-term liabilities	1,467		(1,467		)	—		—
Counterparty B
Current liabilities	1,521		(1,264		)	257		257
Long-term liabilities	1,510		(1,510		)	—		—
Counterparty C
Current liabilities	1,087		(1,087		)	—		—
Long-term liabilities	980		(980		)	—		—
Total	$	8,388	$	(8,131	)	$	257	$	257

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, the amounts subject to master netting across different commodity types that were presented on a gross 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 consolidated balance sheet		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current assets	$	6,445	$	(2,373	)	$	4,072	$	—
Other assets	1,096		(370		)	726		—
Counterparty B
Current assets	530		(224		)	306		82
Other assets	384		(339		)	45		—
Total	$	8,455	$	(3,306	)	$	5,149	$	82



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		Amounts subject to master netting arrangements presented on a gross basis
Counterparty A
Current liabilities	$	2,373	$	(2,373	)	$	—	$	—
Long-term liabilities	370		(370		)	—		—
Counterparty B
Current liabilities	894		(224		)	670		82
Long-term liabilities	339		(339		)	—		—
Total	$	3,976	$	(3,306	)	$	670	$	82

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 June 30,						Six Months Ended June 30,
Type of Instrument	Location in Condensed Consolidated Statement of Operations	2013			2012			2013			2012
Derivative Instrument
Oil	Revenues: Realized (loss) gain on derivatives	$	(228	)	$	719		$	(465	)	$	719
Natural Gas	Revenues: Realized gain on derivatives	105			3,994			629			7,057
NGL’s	Revenues: Realized gain on derivatives	377			—			482			—
Realized gain on derivatives		254			4,713			646			7,776
Oil	Revenues: Unrealized gain on derivatives	4,042			20,483			1,314			15,223
Natural Gas	Revenues: Unrealized gain (loss) on derivatives	2,323			(5,369		)	(189		)	(3,379		)
NGL’s	Revenues: Unrealized gain on derivatives	1,161			—			1,576			—
Unrealized gain on derivatives		7,526			15,114			2,701			11,844
Total		$	7,780		$	19,827		$	3,347		$	19,620