Derivative Financial Instruments

3 Months Ended

Mar. 31, 2012

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

6. Derivative financial instruments

Our primary objective in entering into derivative financial instruments is to manage our exposure to commodity price fluctuations, protect our returns on investments and achieve a more predictable cash flow in connection with our operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits we would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of our derivative financial instrument management activities consists of non-cash income or expense due to changes in the fair value of our derivative financial instrument contracts. Cash charges or gains only arise from payments made or received on monthly settlements of contracts or if we terminate a contract prior to its expiration.

We account for our derivative financial instruments in accordance with FASB ASC Topic 815, Derivatives and Hedging, or ASC 815, which requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. ASC 815 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met, or exemptions for normal purchases and normal sales as permitted by ASC 815 exist. We do not designate our derivative financial instruments as hedging instruments for financial accounting purposes and, as a result, we recognize the change in the respective instruments' fair value currently in earnings. The table below outlines the classification of our derivative financial instruments on our Condensed Consolidated Balance Sheets and their financial impact in our Condensed Consolidated Statements of Operations.

Fair Value of Derivative Financial Instruments

(in thousands)	Balance Sheet location	March 31, 2012			December 31, 2011
Commodity contracts	Derivative financial instruments - Current assets	$	171,182		$	164,002
Commodity contracts	Derivative financial instruments - Long-term assets		10,073			11,034
Commodity contracts	Derivative financial instruments - Current liabilities		(3,447	)		(1,800	)
Commodity contracts	Derivative financial instruments - Long-term liabilities		(852	)		0
Net derivatives		$	176,956		$	173,236

The Effect of Derivative Financial Instruments

Three months ended March 31,
(in thousands)	Statement of Operations location	2012		2011
Commodity contracts (1)	Gain on derivative financial instruments	$	53,865	$	3,421

(1) Included in these amounts are net cash receipts of $50,145 and $26,935 for the three months ended March 31, 2012 and 2011, respectively.

Settlements in the normal course of maturities of our derivative financial instrument contracts result in cash receipts from, or cash disbursements to, our derivative contract counterparties. Changes in the fair value of our derivative financial instrument contracts are included in income with a corresponding increase or decrease in the Condensed Consolidated Balance Sheet fair value amounts. Unrealized fair value adjustments included in "Gain on derivative financial instruments," which do not impact cash flows, were gains of $3.7 million and losses of $23.5 million for the three months ended March 31, 2012 and 2011, respectively.

We place our derivative financial instruments with the financial institutions that are lenders under our credit agreement that we believe have high quality credit ratings. To mitigate our risk of loss due to default, we have entered into master netting agreements with our counterparties on our derivative financial instruments that allow us to offset our asset position with our liability position in the event of a default by the counterparty.

The following table presents the volume and fair value of our oil and natural gas derivative financial instruments as of March 31, 2012:

(in thousands, except prices)	Volume Mmbtus/Bbls		Weighted average strike price per Mmbtu/Bbl		Fair value at March 31, 2012
Natural gas:
Swaps:
Remainder of 2012		60,500	$	5.27	$	167,304
2013		5,475		5.99		13,626
Total natural gas		65,975				180,930
Oil:
Swaps:
Remainder of 2012		413		98.05		(2,666	)
2013		365		99.96		(1,308	)
Total oil		778				(3,974	)
Total oil and natural gas derivatives					$	176,956

At December 31, 2011, we had outstanding derivative contracts to mitigate price volatility covering 85,995 Mmcf of natural gas and 275 Mbbls of oil. At March 31, 2012, the average forward NYMEX oil prices per Bbl for the remainder of 2012 and for 2013 were $104.54 and $103.59, respectively, and the average forward NYMEX natural gas prices per Mmbtu for the remainder of 2012 and for 2013 were $2.50 and $3.47, respectively.

Our derivative financial instruments used to mitigate price volatility covered approximately 42.4% and 54.7% of production volumes for the three months ended March 31, 2012 and 2011, respectively.