Derivative Instruments

12 Months Ended

Dec. 31, 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 and natural gas 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 Company periodically enters into interest rate derivative contracts to protect against changes in interest rates on its floating rate debt. The amount of commodity derivatives that the Company enters into depend on various factors, including its view of future crude oil and natural gas prices, the Company's future financial commitments, as well as considerations of other factors.

For further discussion related to the fair value of the Company's derivatives see Note 8 to the Financial Statements.

As of December 31, 2012, the Company had commodity derivatives associated with the following volumes:

	2013	2014	2015
Oil Sales (Bbl/D):	18,800	7,500	3,000
Natural Gas Purchases (MMBtu/D):	10,000	—	—

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 Statements of Operations under the caption realized and unrealized (gain) loss on derivatives, net.

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 net loss of $1.9 million, including cash settlements and non-cash fair value gains, and was recorded in the Statement of Operations under the caption realized and unrealized (gain) loss on derivatives, net.

Based on future strip pricing as of December 31, 2012, the Company would receive payments under existing derivative contracts of $11.8 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 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, 2012, the entire balance of AOCL had been reclassified into earnings. 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. During the years ended December 31, 2012 and December 31, 2011, $8.9 million ($5.5 million, net of income tax) and $61.8 million ($38.3 million, net of income tax), respectively, of non-cash amortization of AOCL related to discontinuing hedge accounting was reclassified from AOCL into earnings.

The following tables detail the location and the fair value amounts of derivatives recorded on the Company's Balance Sheets:

	December 31, 2012
	Derivative Assets			Derivative Liabilities
(in millions)	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Current:
Commodity	Derivative assets	$	16.4	Derivative liabilities	$	2.8
Long-term:
Commodity	Derivative assets	10.9		Derivative liabilities	1.2
Total derivatives		$	27.3		$	4.0

	December 31, 2011
	Derivative Assets			Derivative Liabilities
(in millions)	Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Current:
Commodity	Derivative assets	$	23.4	Derivative liabilities	$	37.7
Long-term:
Commodity	Derivative assets	10.5		Derivative liabilities	19.0
Total derivatives		$	33.9		$	56.7

The table below summarizes 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,
Description of (Gain) Loss	Location of (Gain) Loss Recognized in Earnings	2012			2011			2010
Commodity
Loss reclassified from AOCL into earnings (amortization of frozen amounts)	Oil and natural gas sales	$	10.7		$	60.9		$	18.4
(Gain) loss recognized in earnings (cash settlements and mark-to-market movements)	Realized and unrealized (gain) loss on derivatives, net	(64.6		)	(13.9		)	23.2
Interest rate
(Gain) loss reclassified from AOCL into earnings (amortization of frozen amounts)	Interest	$	(1.8	)	$	0.8		$	8.3
Loss recognized in earnings (cash settlements and mark-to-market movements)	Realized and unrealized (gain) loss on derivatives, net	—			—			8.6

Contingent Features in Derivative Instruments

None of the Company’s derivative instruments contain credit-risk-related contingent features. Counterparties to the Company’s derivative contracts are high credit-quality financial institutions that 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 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, 2012, the Company was in a net asset position with all of its counterparties. As of December 31, 2012, the Company's largest two counterparties accounted for 74% of the value of its total derivative positions.