Derivative Instruments

12 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

The Company uses financial derivative instruments as part of its price risk management program to achieve a more predictable, economic cash flow from its oil and natural gas production by reducing its exposure to price fluctuations. The Company has entered into financial commodity swap and collar contracts to fix the floor and ceiling prices received for a portion of the Company's oil and natural gas production. The terms of the contracts depend on various factors, including management's view of future crude oil and natural gas prices, acquisition economics on purchased assets and future financial commitments. The Company periodically enters into interest rate derivative contracts to protect against changes in interest rates on its floating rate debt. For further discussion related to the fair value of the Company's derivatives see Note 9 to the Financial Statements.

As of December 31, 2011, the Company had commodity derivatives associated with the following volumes:

	2012	2013	2014
Oil Bbl/D:	21,000	15,000	2,000
Natural Gas MMBtu/D:	15,000	—	—

Based on NYMEX strip pricing as of December 31, 2011, the Company would receive payments under existing derivative contracts of $5.3 million during the next twelve months.

Discontinuance of Hedge Accounting

Effective January 1, 2010, the Company elected to de-designate all of its commodity and interest rate derivative contracts that had been previously designated as cash flow hedges as of December 31, 2009. As a result, subsequent to December 31, 2009, the Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in AOCL. As a result of discontinuing hedge accounting on January 1, 2010, the fair values of the Company's open derivative instruments designated as cash flow hedges as of December 31, 2009, less any ineffectiveness recognized, were frozen in AOCL and are reclassified into earnings as the original hedge transactions settle.

At December 31, 2011, AOCL consisted of $8.9 million ($5.5 million net of income tax) of unrealized losses on commodity and interest rate contracts that had been previously designated as cash flow hedges. At December 31, 2010, AOCL consisted of $70.7 million ($43.8 million net of income tax) of unrealized losses on commodity and interest rate contracts that had been previously designated as cash flow hedges. During the years ended December 31, 2011 and December 31, 2010, $61.8 million ($38.3 million, net of income tax) and $26.7 million ($16.6 million, net of income tax), respectively, of non-cash amortization of AOCL related to discontinuing hedge accounting was reclassified from AOCL into earnings. The Company expects to reclassify into earnings from AOCL pre-tax net losses of $8.9 million related to de-designated commodity and interest rate derivative contracts during the next 12 months.

In the fourth quarter of 2010, the Company terminated interest rate derivative instruments that were previously designated as cash flow hedges. The termination resulted in a cash settlement of $10.8 million, offset by a fair value gain of $8.9 million. The net loss of $1.9 million is included in realized and unrealized (gain) loss on derivatives, net.

The following tables detail the fair value of derivatives recorded on the Company's Balance Sheets, by category:

	December 31, 2011
	Derivative Assets			Derivative Liabilities
(in millions)	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Current:
Commodity	Derivative assets	$	6.1	Derivative liabilities	$	20.4
Long-term:
Commodity	Derivative assets	7.0		Derivative liabilities	15.5
Total derivatives		$	13.1		$	35.9

	December 31, 2010
	Derivative Assets			Derivative Liabilities
(in millions)	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Current:
Commodity	Derivative assets	$	2.7	Derivative liabilities	$	84.9
Long-term:
Commodity	Derivative assets	2.1		Derivative liabilities	33.5
Total derivatives		$	4.8		$	118.4

The tables below summarize the location and the amount of derivative instrument (gains) losses before income taxes reported in the Statements of Operations for the periods indicated:

(in millions)		Year Ended December 31,
Derivatives cash flow hedging relationships	Location of (Gain) Loss Recognized in Earnings	2011	2010	2009
Commodity
Loss recognized in AOCL (effective portion)	Accumulated other comprehensive loss	—	—	206.4
(Gain) reclassified from AOCL into earnings (effective portion)	Sales of oil and natural gas	—	—	(58.8	)
(Gain) reclassified from AOCL into earnings (effective portion)	Earnings from discontinued operations	—	—	(20.5	)
Loss recognized in earnings (ineffective portion)	Realized and unrealized (gain) loss on derivatives, net	—	—	0.6
Loss reclassified from AOCL into earnings (amortization of frozen amounts)	Sales of oil and natural gas	60.9	18.4	—
Interest rate
Loss recognized in AOCL (effective portion)	Accumulated other comprehensive loss	—	—	2.7
Loss reclassified from AOCL into earnings (effective portion)	Interest	—	—	7.0
Loss reclassified from AOCL into earnings (amortization of frozen amounts)	Interest	0.8	8.3	—

(in millions)		Year Ended December 31,
Derivatives not designated as hedging instruments under authoritative guidance	Location of (Gain) Loss Recognized in Earnings	2011		2010	2009
Commodity
(Gain) loss recognized in earnings (cash settlements and mark-to-market movements)	Realized and unrealized (gain) loss on derivatives, net	(13.9	)	23.2	7.2
(Gain) loss recognized in earnings (cash settlements and mark-to-market movements)	Earnings from discontinued operations	—		—	0.5
Interest rate
(Gain) loss reclassified from AOCL into earnings (amortization of frozen amounts)	Realized and unrealized (gain) loss on derivatives, net	—		8.6	—

Credit Risk

The Company does not require collateral or other security from counterparties to support derivative instruments. However, the contracts with those counterparties typically contain netting provisions such that if a default occurs, the non-defaulting party can offset the amount payable to the defaulting party under the derivative contract with the amount due from the defaulting party. As a result of the netting provisions, the Company's maximum amount of loss due to credit risk is limited to the net amounts due to and from the counterparties under the derivative contracts. The maximum amount of loss due to credit risk that the Company would have incurred if all counterparties to its derivative contracts failed to perform at December 31, 2011 was $7.5 million.

As of December 31, 2011, the counterparties to the Company's commodity derivative contracts consist of seven financial institutions. The Company's counterparties or their affiliates are generally lenders, or affiliates of lenders, under the Company's credit facility. As a result, the counterparties to the Company's derivative contracts share in the collateral supporting the Company's credit facility. The Company is not generally required to post additional collateral under derivative contracts.

Certain of the Company's derivative contracts contain cross default provisions that accelerate of amounts due under such contract if the Company defaults on its obligations under its material debt agreements. In addition, if the Company defaults on certain of its material debt agreements, including, potentially, its derivative contracts, the Company would be in default under the credit facility. As of December 31, 2011, the Company was in a net liability position with four of its counterparties, the fair value of which was $30.2 million. As of December 31, 2011, the Company's largest two counterparties accounted for 84% of the value of its total derivative positions.