Derivatives

6 Months Ended

Mar. 31, 2012

Derivatives [Abstract]

Derivatives

NOTE 10: Derivatives

The Company has entered into fixed swap contracts, basis protection swaps and costless collar contracts. These derivative instruments are intended to reduce the Company’s exposure to short-term fluctuations in the price of oil and natural gas. Fixed swap contracts set a fixed price and provide payments to the Company if the index price is below the fixed price, or require payments by the Company if the index price is above the fixed price. Basis protection swaps guarantee a price differential to NYMEX for natural gas from a specified delivery point (CEGT and PEPL currently). The Company receives a payment from the counterparty if the price differential is greater than the agreed terms of the contract and pays the counterparty if the price differential is less than the agreed terms of the contract. Collar contracts set a fixed floor price and a fixed ceiling price and provide for payments to the Company if the basis adjusted price falls below the floor or require payments by the Company if the basis adjusted price rises above the ceiling. These contracts cover only a portion of the Company’s natural gas and oil production and provide only partial price protection against declines in natural gas and oil prices. These derivative instruments may expose the Company to risk of financial loss and limit the benefit of future increases in prices. All of the Company’s derivative contracts are with Bank of Oklahoma and are unsecured. The derivative instruments have settled or will settle based on the prices below which are adjusted for location differentials and tied to certain pipelines in Oklahoma.

Derivative contracts in place as of March 31, 2012

(prices below reflect the Company’s net price from the listed Oklahoma pipelines)

	Production volume	Indexed (1)
Contract period	covered per month	pipeline	Fixed price
Natural gas basis protection swaps
January—December 2012	50,000 Mmbtu	CEGT	NYMEX -$.29
January—December 2012	40,000 Mmbtu	CEGT	NYMEX -$.30
January—December 2012	50,000 Mmbtu	PEPL	NYMEX -$.29
January—December 2012	50,000 Mmbtu	PEPL	NYMEX -$.30
Natural gas costless collars
March—October 2012	50,000 Mmbtu	NYMEX Henry Hub	$2.50 floor/$3.25 ceiling
April—October 2012	120,000 Mmbtu	NYMEX Henry Hub	$2.50 floor/$3.10 ceiling
April—October 2012	60,000 Mmbtu	NYMEX Henry Hub	$2.50 floor/$3.20 ceiling
April—October 2012	50,000 Mmbtu	NYMEX Henry Hub	$2.50 floor/$3.20 ceiling
April—October 2012	50,000 Mmbtu	NYMEX Henry Hub	$2.50 floor/$3.45 ceiling
April—October 2012	50,000 Mmbtu	NYMEX Henry Hub	$2.50 floor/$3.30 ceiling
Oil costless collars
January—December 2012	2,000 Bbls	NYMEX WTI	$90 floor/$105 ceiling
February—December 2012	3,000 Bbls	NYMEX WTI	$90 floor/$110 ceiling

(1) CEGT—Centerpoint Energy Gas Transmission’s East pipeline in Oklahoma

PEPL—Panhandle Eastern Pipeline Company’s Texas/Oklahoma mainline

Derivative contracts in place as of September 30, 2011

(prices below reflect the Company’s net price from the listed Oklahoma pipelines)

	Production volume	Indexed (1)
Contract period	covered per month	pipeline	Fixed price
Natural gas fixed price swaps
April—October 2011	50,000 Mmbtu	NYMEX Henry Hub	$4.65
April—October 2011	50,000 Mmbtu	NYMEX Henry Hub	$4.65
April—October 2011	50,000 Mmbtu	NYMEX Henry Hub	$4.70
April—October 2011	50,000 Mmbtu	NYMEX Henry Hub	$4.75
May—October 2011	50,000 Mmbtu	NYMEX Henry Hub	$4.50
May—October 2011	50,000 Mmbtu	NYMEX Henry Hub	$4.60
June—October 2011	50,000 Mmbtu	NYMEX Henry Hub	$4.63
Natural gas basis protection swaps
January—December 2011	50,000 Mmbtu	CEGT	NYMEX -$.27
January—December 2011	50,000 Mmbtu	CEGT	NYMEX -$.27
January—December 2011	50,000 Mmbtu	PEPL	NYMEX -$.26
January—December 2011	50,000 Mmbtu	PEPL	NYMEX -$.27
January—December 2011	70,000 Mmbtu	PEPL	NYMEX -$.36
January—December 2012	50,000 Mmbtu	CEGT	NYMEX -$.29
January—December 2012	40,000 Mmbtu	CEGT	NYMEX -$.30
January—December 2012	50,000 Mmbtu	PEPL	NYMEX -$.29
January—December 2012	50,000 Mmbtu	PEPL	NYMEX -$.30
Oil costless collars
April—December 2011	5,000 Bbls	NYMEX WTI	$100 floor/$112 ceiling

(1) CEGT—Centerpoint Energy Gas Transmission’s East pipeline in Oklahoma

PEPL—Panhandle Eastern Pipeline Company’s Texas/Oklahoma mainline

While the Company believes that its derivative contracts are effective in achieving the risk management objective for which they were intended, the Company has elected not to complete all of the documentation requirements necessary to permit these derivative contracts to be accounted for as cash flow hedges. The Company’s fair value of derivative contracts was an asset of $309,658 as of March 31, 2012, and a net asset of $215,940 as of September 30, 2011. Realized and unrealized gains and (losses) for the periods ended March 31, 2012, and March 31, 2011, are scheduled below:

Gains (losses) on	Three months ended						Six months ended
derivative contracts	3/31/2012			3/31/2011			3/31/2012		3/31/2011
Realized	$	(38,820	)	$	(90,650	)	$	275,115	$	1,485,850
Increase (decrease) in fair value		629,732			99,416			93,718		(1,498,523	)
Total	$	590,912		$	8,766		$	368,833	$	(12,673	)

To the extent that a legal right of offset exists, the Company nets the fair value of its derivative contracts with the same counterparty in the accompanying balance sheets. The following table summarizes the Company’s derivative contracts as of March 31, 2012, and September 30, 2011:

	Balance Sheet	3/31/2012		9/30/2011
	Location	Fair Value		Fair Value
Asset Derivatives:
Derivatives not designated as Hedging Instruments:
Commodity contracts	Short-term derivative contracts	$	309,658	$	269,329
Commodity contracts	Long-term derivative contracts		—		—
Total Asset Derivatives (a)		$	309,658	$	269,329
Liability Derivatives:
Derivatives not designated as Hedging Instruments:
Commodity contracts	Short-term derivative contracts	$	—	$	—
Commodity contracts	Long-term derivative contracts		—		53,389
Total Liability Derivatives (a)		$	—	$	53,389

(a) See Fair Value Measurements section for further disclosures regarding fair value of financial instruments.

The fair value of derivative assets and derivative liabilities is adjusted for credit risk. The impact of credit risk was immaterial for all periods presented.