Derivative Instruments

6 Months Ended

Jun. 30, 2011

Derivative Instruments

Derivative Instruments

8. 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 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 June 30, 2011, the Company had commodity derivatives associated with the following volumes:

	2011		2012		2013		2014
Oil Bbl/D:		20,020		19,000		13,000		2,000
Natural Gas MMBtu/D:		15,000		15,000		—		—

        The Company entered into the following crude oil three-way collars during the six months ended June 30, 2011:

Term	Average Barrels Per Day		Floor/Swap/Ceiling Prices
February 2011 - December 2013		1,000	$70.00 / $90.00 / $116.50
Full year 2012 and 2013		1,000	$70.00 / $90.00 / $120.00
Full year 2012 and 2013		1,000	$70.00 / $95.00 / $120.10
June 2011 - December 2014		1,000	$77.95 / $105.00 / $115.00
Full year 2012, 2013, and 2014		1,000	$80.00 / $107.00 / $119.60

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 on January 1, 2010, the fair values of the Company's open derivative contract 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, 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. At June 30, 2011, AOCL consisted of $39.9 million ($24.8 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 three and six months ended June 30, 2011, $15.3 million ($9.5 million, net of income tax) and $30.7 million ($19.0 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 into earnings from AOCL after-tax net losses of $21.5 million related to de-designated commodity and interest rate derivative contracts during the next 12 months.

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

		June 30, 2011
		Derivative Assets			Derivative Liabilities
(in millions)		Balance Sheet Classification	Fair Value		Balance Sheet Classification	Fair Value
Current:
	Commodity	Derivative assets	$	3.1	Derivative liabilities	$	60.4
Long term:
	Commodity	Derivative assets		1.4	Derivative liabilities		46.5
Total derivatives			$	4.5		$	106.9

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

		Three months ended June 30,						Six months ended June 30,
	Location of (Gain) Loss Recognized in Earnings
Description of (Gain) Loss		2011			2010			2011		2010
Commodity
(Gain) loss reclassified from AOCL into earnings (amortization of frozen amounts)	Sales of oil and gas	$	14.9		$	4.1		$	29.5	$	6.9
(Gain) loss recognized in earnings (cash settlements and mark-to-market movements)	Realized and unrealized (gain) loss on derivatives, net		(91.8	)		(58.8	)		35.7		(63.7	)
Interest rate
(Gain) loss reclassified from AOCL into earnings (amortization of frozen amounts)	Interest	$	0.4		$	2.4		$	1.2	$	5.1
(Gain) loss recognized in earnings (cash settlements and mark-to-market movements)	Realized and unrealized (gain) loss on derivatives, net		—			2.7			—		6.0

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, 2011 was $4.5 million.

        As of June 30, 2011, 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 Agreement. As a result, the counterparties to the Company's derivative agreements share in the collateral supporting the Company's Credit Agreement. The Company is not generally required to post additional collateral under derivative agreements.

        Certain of the Company's derivative agreements contain provisions that require cross defaults and acceleration of those instruments to any material debt. If the Company were to default on any of its material debt agreements, it would be a violation of these provisions, and the counterparties to the derivative instruments could request immediate payment on derivative instruments that are in a net liability position at that time. As of June 30, 2011, the Company was in a net liability position with seven of the counterparties to the Company's derivative instruments, totaling $107 million. As of June 30, 2011, the Company's largest three counterparties accounted for 59% of the value of its total net derivative positions.