Derivative Instruments

12 Months Ended

Dec. 31, 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 the volatility in interest rates attributable to our debt instruments. The derivative instruments, which are placed with financial institutions that we believe are acceptable credit risks, generally take the form of collars, swaps and swaptions. Our derivative instruments are not 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.

The counterparty to a collar or swap contract is required to make a payment to us if the settlement price for any settlement period is below the floor or swap price for such contract. We are required to make a payment to the counterparty if the settlement price for any settlement period is above the ceiling or swap price for such contract. Neither party is required to make a payment to the other party if the settlement price for any settlement period is equal to or greater than the floor price and equal to or less than the ceiling price for such contract. A swaption contract gives our counterparties the option to enter into a fixed price swap with us at a future date. If the forward commodity price for the term of the swaption is higher than or equal to the swaption strike price on the exercise date, the counterparty will exercise its option to enter into a fixed price swap at the swaption strike price for the term of the swaption, at which point the contract functions as a fixed price swap. If the forward commodity price for the term of the swaption is lower than the swaption strike price on the exercise date, the option expires and no fixed price swap is in effect.

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 December 31, 2011:

			Average
			Volume Per		Weighted Average Price				Fair Value
	Instrument		Day		Floor/Swap		Ceiling		Asset		Liability
Natural Gas:			(in MMBtu)		($/MMBtu)
First quarter 2012		Collars		20,000	$	6.00	$	8.50		5,394		-
First quarter 2012		Swaps		10,000	$	5.10				1,880		-
Second quarter 2012		Swaps		20,000	$	5.31				3,935		-
Third quarter 2012		Swaps		20,000	$	5.31				3,706		-
Fourth quarter 2012		Swaps		10,000	$	5.10				1,424		-
Crude Oil:				(barrels)		($/barrel)
First quarter 2012		Collars		1,000	$	90.00	$	97.00		-		361
Second quarter 2012		Collars		1,000	$	90.00	$	97.00		-		447
Third quarter 2012		Collars		1,000	$	90.00	$	97.00		-		412
Fourth quarter 2012		Collars		1,000	$	90.00	$	97.00		-		350
First quarter 2013		Collars		1,000	$	90.00	$	100.00		-		146
Second quarter 2013		Collars		1,000	$	90.00	$	100.00		-		80
Third quarter 2013		Collars		1,000	$	90.00	$	100.00		-		14
Fourth quarter 2013		Collars		1,000	$	90.00	$	100.00		29		-
First quarter 2012		Swaps		1,400	$	101.16				261		-
Second quarter 2012		Swaps		1,000	$	100.61				106		-
Third quarter 2012		Swaps		500	$	100.00				52		-
Fourth quarter 2012		Swaps		500	$	100.00				88		-
First quarter 2013		Swaption		1,100	$	100.00				-		1,049
Second quarter 2013		Swaption		1,000	$	100.00				-		849
Third quarter 2013		Swaption		900	$	100.00				-		674
Fourth quarter 2013		Swaption		750	$	100.00				-		497
Premiums – Deferred 1										-		3,570
Settlements to be paid in subsequent period										162		-

¹  Premiums are attributable to the crude oil collars for 2013 and are included in noncurrent derivative liabilities.

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 swaps as of the periods presented:

	Notional		Swap Interest Rates 1					Fair Value as of 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 derivatives activities on income is included in the Derivatives caption on our Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities, for the periods presented: 

	Year Ended December 31,
	2011			2010			2009
Impact by contract type:
Commodity contracts	$	14,422		$	36,693		$	33,218
Interest rate contracts		1,229			5,213			(1,650	)
	$	15,651		$	41,906		$	31,568
Realized and unrealized impact:
Cash received (paid) for:
Commodity contract settlements	$	23,562		$	33,480		$	59,908
Interest rate contract settlements		3,818			(662	)		(1,761	)
		27,380			32,818			58,147
Unrealized gains (losses) attributable to:
Commodity contracts		(9,140	)		3,213			(26,690	)
Interest rate contracts		(2,589	)		5,875			111
		(11,729	)		9,088			(26,579	)
	$	15,651		$	41,906		$	31,568

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 from continuing operations. These items are recorded in the “Derivative contracts: Net gains” and “Derivative contracts: Cash settlements” captions on our 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 Consolidated Balance Sheets as of the dates presented:

		Fair Values as of
		December 31, 2011				December 31, 2010
		Derivative			Derivative	Derivative		Derivative
Type	Balance Sheet Location	Assets			Liabilities	Assets		Liabilities
Commodity contracts	Derivative assets/liabilities - current	$	18,987	$	3,549	$	15,075	$	388
Interest rate contracts	Derivative assets/liabilities - current		-		-		1,743		-
			18,987		3,549		16,818		388
Commodity contracts	Derivative assets/liabilities - noncurrent		-		6,850		3,042		-
Interest rate contracts	Derivative assets/liabilities - noncurrent		-		-		847		-
			-		6,850		3,889		-
		$	18,987	$	10,399	$	20,707	$	388

As of December 31, 2011, we reported a commodity derivative asset of $19.0 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 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.