Derivative Instruments

9 Months Ended

Sep. 30, 2012

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 production by reducing its exposure to price fluctuations. The Company has historically 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. During the second quarter of 2012, the Company began entering into derivative contracts to fix the floor and ceiling prices paid for a portion of its natural gas consumption. The terms of the Company's derivative 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 agreements 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 Condensed Financial Statements.

As of September 30, 2012, the Company had commodity derivatives associated with the following volumes:

	2012	2013	2014	2015
Oil sales, Bbl/D:	21,000	16,800	7,500	3,000
Natural gas purchases, MMBtu/D:	—	10,000	—	—

The Company entered into the following derivative instruments during the nine months ended September 30, 2012:

Crude Oil Sales (NYMEX WTI) Three-Way Collars
Term	Average Barrels Per Day	Sold Put / Purchased Put / Sold Call
Full year 2013	800	$75.00 / $95.00 / $101.70
Full year 2013 and 2014	1,000	$70.00 / $90.00 / $100.00
Full year 2014	1,000	$70.00 / $90.00 / $120.00
Full year 2014	1,000	$70.00 / $90.00 / $121.80
Full year 2014	1,500	$70.00 / $90.00 / $100.00
Full year 2014 and 2015	1,000	$70.00 / $90.00 / $104.85
Full year 2015	2,000	$70.00 / $90.00 / $100.00

Natural Gas Purchases (NYMEX SoCal Border) Three-Way Collars
Term	Average MMBtus Per Day	Sold Put / Purchased Call / Sold Call
Full year 2013	1,000	$2.90 / $4.00 / $5.00
Full year 2013	1,000	$2.96 / $4.25 / $5.25
Full year 2013	1,000	$2.70 / $4.00 / $5.00
Full year 2013	2,000	$3.03 / $4.25 / $5.25

Natural Gas Purchases (NYMEX SoCal Border) Purchased Calls
Term	Average MMBtus Per Day	Strike Price	Deferred Premium per MMBtu
Full year 2013	1,000	$3.50	$0.43
Full year 2013	1,000	$3.50	$0.46
Full year 2013	1,000	$3.50	$0.4975
Full year 2013	2,000	$3.50	$0.5325

In March 2012, the Company terminated certain of its natural gas derivative instruments, which were associated with a total of 15,000 MMBtu/D for the remainder of 2012. The termination resulted in a net loss of $1.9 million, including cash settlements and non-cash fair value losses, and was recorded in the Condensed Statements of Operations under the caption realized and unrealized loss (gain) on derivatives, net.

Discontinuance of Cash Flow 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 accumulated other comprehensive loss (AOCL). As a result of discontinuing hedge accounting, the changes in fair values of the Company's derivative contracts designated as cash flow hedges as of December 31, 2009 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 net unrealized losses on commodity and interest rate contracts that had been previously designated as cash flow hedges. At September 30, 2012, AOCL consisted of $2.8 million ($1.7 million net of income tax) of net unrealized losses on commodity and interest rate contracts that had been previously designated as cash flow hedges. During the three and nine months ended September 30, 2012, $2.4 million ($1.5 million, net of income tax) and $6.1 million ($3.8 million, net of income tax), respectively, of non-cash amortization of AOCL related to de-designated hedges was reclassified from AOCL into earnings. The Company expects to reclassify the remaining after-tax net losses of $1.7 million related to de-designated commodity and interest rate derivative contracts during the remainder of 2012.

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

	September 30, 2012
	Derivative Assets			Derivative Liabilities
(in millions)	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Current:
Commodity	Derivative assets	$	10.6	Derivative liabilities	$	1.3
Long term:
Commodity	Derivative assets	11.1		Derivative liabilities	1.4
Total derivatives		$	21.7		$	2.7

	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

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

		Three Months Ended						Nine Months Ended
(in millions)	Location of Loss (Gain) Recognized in Earnings	September 30,						September 30,
Description of Loss (Gain)		2012			2011			2012			2011
Commodity
Loss reclassified from AOCL into earnings (amortization of frozen amounts)	Oil and natural gas sales	$	2.7		$	15.5		$	7.9		$	45.0
Loss (gain) recognized in earnings (cash settlements and mark-to-market movements)	Realized and unrealized loss (gain) on derivatives, net	28.3			(162.1		)	(56.3		)	(126.4		)
Interest rate
(Gain) loss reclassified from AOCL into earnings (amortization of frozen amounts)	Interest	$	(0.3	)	$	—		$	(1.8	)	$	1.2

Credit Risk

The Company does not require collateral or other security from counterparties to support derivative instruments. However, the agreements 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 September 30, 2012 was $19.8 million.

As of September 30, 2012, the counterparties to the Company's commodity derivative contracts consist of nine financial institutions. The Company's counterparties or their affiliates are also lenders under the Company's credit facility. As a result, the counterparties to the Company's derivative agreements share in the collateral supporting the Company's credit facility. The Company is not generally required to post additional collateral under derivative agreements.

Certain of the Company's derivative agreements contain cross default provisions that require acceleration of amounts due under such agreements if the Company were to default on its obligations under its material debt agreements. In addition, if the Company were to default on certain of its material debt agreements, including its derivative agreements, the Company would be in default under the credit facility. As of September 30, 2012, the Company was in a net liability position with three of the counterparties to the Company's derivative instruments. As of September 30, 2012, the Company's largest two counterparties accounted for 80% of the value of its total net derivative positions.