Derivative Instruments

3 Months Ended

Mar. 31, 2012

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. 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, swaps and swaptions. Our derivative instruments are not formally designated as hedges.

Commodity Derivatives

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 March 31, 2012:

			Average
			Volume Per		Weighted Average Price				Fair Value
	Instrument		Day		Floor/Swap		Ceiling		Asset		Liability
Natural Gas:				(in MMBtu)		($/MMBtu)
Second quarter 2012		Swaps		20,000	$	5.31			$	5,667	$	-
Third quarter 2012		Swaps		20,000	$	5.31				5,234		-
Fourth quarter 2012		Swaps		10,000	$	5.10				2,042		-
Crude Oil:				(barrels)		($/barrel)
Second quarter 2012		Collars		1,000	$	90.00	$	97.00		-		677
Third quarter 2012		Collars		1,000	$	90.00	$	97.00		-		842
Fourth quarter 2012		Collars		1,000	$	90.00	$	97.00		-		904
First quarter 2013		Collars		1,000	$	90.00	$	100.00		-		710
Second quarter 2013		Collars		1,000	$	90.00	$	100.00		-		647
Third quarter 2013		Collars		1,000	$	90.00	$	100.00		-		573
Fourth quarter 2013		Collars		1,000	$	90.00	$	100.00		-		491
Second quarter 2012		Swaps		3,000	$	103.05				307		472
Third quarter 2012		Swaps		3,000	$	104.40				423		504
Fourth quarter 2012		Swaps		3,000	$	104.40				349		569
First Quarter 2013		Swaps		2,250	$	103.51				81		381
Second Quarter 2013		Swaps		2,250	$	103.51				123		239
Third Quarter 2013		Swaps		1,500	$	102.77				84		118
Fourth Quarter 2013		Swaps		1,500	$	102.77				175		73
First Quarter 2014		Swaps		2,000	$	100.44				22		53
Second Quarter 2014		Swaps		2,000	$	100.44				189		-
Third Quarter 2014		Swaps		1,500	$	100.20				265		-
Fourth Quarter 2014		Swaps		1,500	$	100.20				378		-
First quarter 2013		Swaption		1,100	$	100.00				-		1,195
Second quarter 2013		Swaption		1,000	$	100.00				-		1,013
Third quarter 2013		Swaption		900	$	100.00				-		831
Fourth quarter 2013		Swaption		750	$	100.00				-		620
First Quarter 2014		Swaption		812	$	100.00				-		725
Second Quarter 2014		Swaption		812	$	100.00				-		725
Third Quarter 2014		Swaption		812	$	100.00				-		725
Fourth Quarter 2014		Swaption		812	$	100.00				-		725
Settlements to be paid in subsequent period										-		624

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”).

The following table sets forth the terms and liability position of our interest rate swap as of the dates presented:

	Notional		Swap Interest Rates 1					March 31,			December 31,
Term	Amount		Pay		Receive			2012			2011
Through April 15, 2019	$	100,000		LIBOR + 5.68%		7.250	%	$	(599	)	$	-

¹ References to LIBOR represent the one-month rate.

During the three months ended March 31, 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). During August 2011, we terminated this agreement and received $2.9 million in cash proceeds.

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 March 31,
	2012			2011
Impact by contract type:
Commodity contracts	$	294		$	1,308
Interest rate contracts		(599	)		20
	$	(305	)	$	1,328
Realized and unrealized impact:
Cash received (paid) for:
Commodity contract settlements	$	7,981		$	6,744
Interest rate contract settlements		-			-
		7,981			6,744
Unrealized gains (losses) attributable to:
Commodity contracts		(7,687	)		(5,436	)
Interest rate contracts		(599	)		20
		(8,286	)		(5,416	)
	$	(305	)	$	1,328

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
		March 31, 2012				December 31, 2011
			Derivative		Derivative		Derivative		Derivative
Type	Balance Sheet Location		Assets		Liabilities		Assets		Liabilities
Commodity contracts	Derivative assets/liabilities - current	$	14,492	$	7,262	$	18,987	$	3,549
Interest rate contracts	Derivative assets/liabilities - current		344		-		-		-
			14,836		7,262		18,987		3,549
Commodity contracts	Derivative assets/liabilities - noncurrent		1,167		7,494		-		6,850
Interest rate contracts	Derivative assets/liabilities - noncurrent		-		943		-		-
			1,167		8,437		-		6,850
		$	16,003	$	15,699	$	18,987	$	10,399

As of March 31, 2012, we reported a commodity derivative asset of $15.7 million. The contracts associated with this position are with four 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.