Derivative Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments

5. Derivative Instruments

We utilize derivative instruments to mitigate our financial exposure to oil and gas price volatility as well as the volatility in interest rates attributable to our debt instruments. We are not engaged in the trading of derivative instruments for speculative purposes. The derivative instruments are placed with financial institutions that we believe are acceptable credit risks. Our derivative instruments are not formally designated as hedges.

Commodity Derivatives

We utilize collars, swaps and swaptions to hedge against the variability in cash flows associated with anticipated sales of our future oil and gas production. While the use of derivative instruments limits the risk of adverse price movements, such use may also limit future revenues from favorable price movements. As of September 30, 2012, we have hedged our future crude oil production through 2014 to the greatest extent permitted by our revolving credit agreement (“Revolver”) and our internal policies.

We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for NYMEX Henry Hub gas and West Texas Intermediate crude oil closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position.

 The following table sets forth our commodity derivative positions as of September 30, 2012:

		Average Volume Per Day	Weighted Average Price				Fair Value
	Instrument		Floor/Swap		Ceiling		Asset		Liability
Natural Gas:		(in MMBtu)	($/MMBtu)
Fourth quarter 2012	Swaps	10,000	$	5.10			$	1,636	$	—
Crude Oil:		(barrels)	($/barrel)
Fourth quarter 2012	Collars	1,000	$	90.00	$	97.00	52		—
First quarter 2013	Collars	1,000	$	90.00	$	100.00	105		—
Second quarter 2013	Collars	1,000	$	90.00	$	100.00	93		—
Third quarter 2013	Collars	1,000	$	90.00	$	100.00	124		—
Fourth quarter 2013	Collars	1,000	$	90.00	$	100.00	161		—
Fourth quarter 2012	Swaps	3,000	$	104.40			3,211		—
First quarter 2013	Swaps	2,250	$	103.51			1,954		—
Second quarter 2013	Swaps	2,250	$	103.51			1,912		—
Third quarter 2013	Swaps	1,500	$	102.77			1,230		—
Fourth quarter 2013	Swaps	1,500	$	102.77			1,294		—
First quarter 2014	Swaps	2,000	$	100.44			1,406		—
Second quarter 2014	Swaps	2,000	$	100.44			1,540		—
Third quarter 2014	Swaps	1,500	$	100.20			1,218		—
Fourth quarter 2014	Swaps	1,500	$	100.20			1,274		—
First quarter 2013	Swaption	1,100	$	100.00			—		299
Second quarter 2013	Swaption	1,000	$	100.00			—		267
Third quarter 2013	Swaption	900	$	100.00			—		203
Fourth quarter 2013	Swaption	750	$	100.00			—		133
First quarter 2014	Swaption	812	$	100.00			—		386
Second quarter 2014	Swaption	812	$	100.00			—		386
Third quarter 2014	Swaption	812	$	100.00			—		386
Fourth quarter 2014	Swaption	812	$	100.00			—		386
Settlements to be received in subsequent period							886		—

Interest Rate Swaps

In February 2012, we entered into an interest rate swap agreement to establish variable rates on approximately one-third of the outstanding obligation under our 7.25% Senior Notes due 2019 (“2019 Senior Notes”). In May 2012, we terminated this agreement and received $1.2 million in cash proceeds.

During the nine months endedSeptember 30, 2011, we had an interest rate swap agreement in effect that established variable rates on approximately one-third of the face amount of the outstanding obligation under our 10.375% Senior Notes due 2016 (“2016 Senior Notes”). In August 2011, we terminated this agreement and received $2.9 million in cash proceeds.

As of September 30, 2012, we had no interest rate derivative instruments outstanding.

Financial Statement Impact of Derivatives

The impact of our derivative activities on income is included in the Derivatives caption on our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012		2011
Impact by contract type:
Commodity contracts	$	(12,271	)	$	11,293		$	29,844	$	18,598
Interest rate contracts	—			205			1,406		1,229
	$	(12,271	)	$	11,498		$	31,250	$	19,827
Realized and unrealized impact:
Cash received for:
Commodity contract settlements	$	9,238		$	5,607		$	22,783	$	16,484
Interest rate contract settlements	—			2,920			1,406		3,818
	9,238			8,527			24,189		20,302
Unrealized gains (losses) attributable to:
Commodity contracts	(21,509		)	5,686			7,061		2,114
Interest rate contracts	—			(2,715		)	—		(2,589		)
	(21,509		)	2,971			7,061		(475		)
	$	(12,271	)	$	11,498		$	31,250	$	19,827

The effects of derivative gains (losses) and cash settlements of our commodity and interest rate derivatives are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in the Derivative contracts: Net gains and Derivative contracts: Cash settlements captions on our Condensed Consolidated Statements of Cash Flows.

The following table summarizes the fair value of our derivative instruments, as well as the locations of these instruments, on our Condensed Consolidated Balance Sheets as of the dates presented:

		Fair Values as of
		September 30, 2012				December 31, 2011
Type	Balance Sheet Location	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Commodity contracts	Derivative assets/liabilities - current	$	11,252	$	817	$	18,987	$	3,549
Interest rate contracts	Derivative assets/liabilities - current	—		—		—		—
		11,252		817		18,987		3,549
Commodity contracts	Derivative assets/liabilities - noncurrent	6,892		1,677		—		6,850
Interest rate contracts	Derivative assets/liabilities - noncurrent	—		—		—		—
		6,892		1,677		—		6,850
		$	18,144	$	2,494	$	18,987	$	10,399

As of September 30, 2012, we reported a commodity derivative asset of $18.1 million. The contracts associated with this position are with six counterparties, all of which are investment grade financial institutions, and are substantially concentrated with three of those counterparties. This concentration may impact our overall credit risk, either positively or negatively, in that these counterparties may be similarly affected by changes in economic or other conditions. We have not received any cash collateral from our counterparties with respect to our derivative asset positions. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.