Derivative Instruments

6 Months Ended

Jun. 30, 2013

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, future financial commitments, and other considerations. The Company periodically enters into interest rate derivative agreements to protect against changes in interest rates on its floating rate debt. The Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings. For further discussion related to the fair value of the Company's derivatives, see Note 9 to the Condensed Financial Statements.

As of June 30, 2013, the Company had commodity derivatives associated with the following volumes:

	2013	2014	2015
Oil sales, Bbl/D	19,800	21,000	3,000
Natural gas purchases, MMBtu/D	10,000	—	—

The Company entered into the following derivative instruments during the six months ended June 30, 2013:

Crude Oil Sales Three-Way Collars
Term	Index	Average Barrels Per Day	Sold Put / Purchased Put / Sold Call
Full year 2013 and 2014	ICE Brent	1,000	$80.00 / $100.00 / $114.05
Full year 2014	NYMEX WTI	1,000	$70.00 / $90.00 / $102.00

Crude Oil Sales (NYMEX WTI) Swaps
Term	Average Barrels Per Day	Weighted Average Price
Full year 2014	11,500	$90.14

Crude Oil Sales (NYMEX WTI to ICE Brent) Basis Swaps
Term	Average Barrels Per Day	Weighted Average Price
Full year 2014	10,000	$11.60
Full year 2015	8,000	$11.60

Crude Oil Sales (NYMEX WTI to Midland) Basis Swaps
Term	Average Barrels Per Day	Weighted Average Price
April 2013 - December 2013	4,000	$1.48

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 gain on derivatives, net.

The Company routinely enters into derivative contracts with a variety of counterparties, typically resulting in individual derivative instruments with both fair value asset and liability positions. The Company nets the fair values of derivative instruments executed with the same counterparty pursuant to ISDA master agreements, which mitigate the credit risk of the Company's derivative instruments by providing for net settlement over the term of the contract and in the event of default or termination of the contract. The tables below summarize the fair value of derivative assets and liabilities and the effect of netting on the Condensed Balance Sheets:

(in millions)		June 30, 2013
Description	Balance Sheet Classification	Gross Amounts of Recognized Assets or Liabilities		Gross Amounts Offset in the Condensed Balance Sheets			Net Amounts of Assets or Liabilities Presented in the Condensed Balance Sheets
Assets
Commodity derivative instruments	Current	$	23.8	$	(5.5	)	$	18.3
Commodity derivative instruments	Long-term	35.0		(0.1		)	34.9
Total assets		$	58.8	$	(5.6	)	$	53.2
Liabilities
Commodity derivative instruments	Current	$	5.4	$	(5.4	)	$	—
Commodity derivative instruments	Long-term	0.2		(0.2		)	—
Total liabilities		$	5.6	$	(5.6	)	$	—

(in millions)		December 31, 2012
Description	Balance Sheet Classification	Gross Amounts of Recognized Assets or Liabilities		Gross Amounts Offset in the Condensed Balance Sheets			Net Amounts of Assets or Liabilities Presented in the Condensed Balance Sheets
Assets
Commodity derivative instruments	Current	$	16.4	$	(1.7	)	$	14.7
Commodity derivative instruments	Long-term	10.9		—			10.9
Total assets		$	27.3	$	(1.7	)	$	25.6
Liabilities
Commodity derivative instruments	Current	$	2.8	$	(1.7	)	$	1.1
Commodity derivative instruments	Long-term	1.2		—			1.2
Total liabilities		$	4.0	$	(1.7	)	$	2.3

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						Six Months Ended
(in millions)	Location of Loss (Gain) Recognized in Earnings	June 30,						June 30,
Description of Loss (Gain)		2013			2012			2013			2012
Commodity
Loss reclassified from AOCL into earnings (amortization of frozen amounts)	Oil and natural gas sales	$	—		$	2.5		$	—		$	5.2
Gain recognized in earnings (cash settlements and mark-to-market movements)	Realized and unrealized gain on derivatives, net	(35.6		)	(113.1		)	(34.9		)	(84.6		)
Interest rate
Gain reclassified from AOCL into earnings (amortization of frozen amounts)	Interest	$	—		$	(0.9	)	$	—		$	(1.5	)

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 June 30, 2013 was $53.2 million.

As of June 30, 2013, 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 June 30, 2013, the Company was not in a net liability position with any of the counterparties to the Company's derivative instruments. As of June 30, 2013, the Company's largest three counterparties accounted for 52% of the value of its total net derivative positions.