Derivative Instruments

9 Months Ended

Sep. 30, 2011

Derivative Instruments

5.Derivative Instruments

We utilize derivative instruments to mitigate our financial exposure to natural gas and crude oil price volatility as well as interest rates attributable to our debt instruments. We are not engaged in the trading of derivative instruments for speculative purposes. The derivative instruments, which are placed with financial institutions that we believe are acceptable credit risks, generally take the form of costless collars and swaps. Our derivative instruments are not formally designated as hedges and, therefore, we recognize the changes in fair value in earnings currently as a component of the Derivatives caption on our Condensed Consolidated Statements of Income.

Commodity Derivatives

We determine the fair values of our oil and gas derivative instruments using third-party quoted forward prices for NYMEX Henry Hub natural gas and West Texas Intermediate crude oil as of the end of the reporting period and 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, 2011:

		Average
		Volume Per		Weighted Average Price				Fair Value
	Instrument	Day		Floor/Swap		Ceiling		Asset		Liability
Natural Gas:		(in MMBtu)		($/MMBtu)
Fourth quarter 2011	Costless collars		20,000	$	6.00	$	8.50	$	4,047	$	-
First quarter 2012	Costless collars		20,000	$	6.00	$	8.50		3,405		-
Fourth quarter 2011	Swaps		10,000	$	5.01				1,114		-
First quarter 2012	Swaps		10,000	$	5.10				881		-
Second quarter 2012	Swaps		20,000	$	5.31				2,117		-
Third quarter 2012	Swaps		20,000	$	5.31				1,952		-
Fourth quarter 2012	Swaps		10,000	$	5.10				557		-
Crude Oil:		(barrels)		($/barrel)
Fourth quarter 2011	Costless collars		360	$	80.00	$	103.30		168		-
First quarter 2012	Costless collars		500	$	100.00	$	120.00		983		-
Second quarter 2012	Costless collars		500	$	100.00	$	120.00		986		-
Third quarter 2012	Costless collars		500	$	100.00	$	120.00		974		-
Fourth quarter 2012	Costless collars		500	$	100.00	$	120.00		951		-
Fourth quarter 2011	Swaps		500	$	109.00				1,709		-
								$	19,844	$	-

Interest Rate Swaps

In December 2009, we entered into an interest rate swap agreement to establish variable rates on approximately one-third of the face amount of the outstanding obligation under the 10.375% Senior Notes due 2016 (“2016 Senior Notes”). During August 2011, we terminated this agreement and received $2.9 million in cash proceeds.

The following table sets forth the terms and positions of our interest rate swap assets as of the periods presented:

	Notional		Swap Interest Rates1				September 30,		December 31,
Term	Amount		Pay	Receive			2011		2010
Through June 2013	$	100,000	LIBOR + 8.175%		10.375	%	$	-	$	2,590

1 References to LIBOR represent the 3-month rate.

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 Income. The following table summarizes the effects of our derivative activities for the periods presented:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Impact by contract type:
Commodity contracts	$	11,293		$	13,381		$	18,598		$	38,733
Interest rate contracts		205			1,732			1,229			5,677
	$	11,498		$	15,113		$	19,827		$	44,410
Realized and unrealized impact:
Cash received (paid) for:
Commodity contract settlements	$	5,607		$	7,433		$	16,484		$	25,257
Interest rate contract settlements		2,920			(630	)		3,818			(970	)
		8,527			6,803			20,302			24,287
Unrealized gains (losses) attributable to:
Commodity contracts		5,686			5,948			2,114			13,476
Interest rate contracts		(2,715	)		2,362			(2,589	)		6,647
		2,971			8,310			(475	)		20,123
	$	11,498		$	15,113		$	19,827		$	44,410

The effects of derivative gains (losses) and cash settlements of our commodity and interest rate derivatives are reported as adjustments to reconcile net income to net cash provided by operating activities from continuing operations. 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 periods presented:

		Fair Values as of
		September 30, 2011				December 31, 2010
Derivative		Derivative		Derivative		Derivative		Derivative
Instrument	Balance Sheet Location	Assets		Liabilities		Assets		Liabilities
Interest rate contracts	Derivative assets/liabilities - current	$	-	$	-	$	1,743	$	-
Commodity contracts	Derivative assets/liabilities - current		18,336		-		15,075		388
			18,336		-		16,818		388
Interest rate contracts	Derivative assets/liabilities - noncurrent		-		-		847		-
Commodity contracts	Derivative assets/liabilities - noncurrent		1,508		-		3,042		-
			1,508		-		3,889		-
		$	19,844	$	-	$	20,707	$	388

As of September 30, 2011, we reported a commodity derivative asset of $19.8 million.  The contracts associated with this position are with five 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 neither paid nor received collateral with respect to our derivative positions.  No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.