DERIVATIVES

Commodity Derivatives

We have entered into various types of derivative transactions covering some of our projected natural gas, NGLs, and oil production. These transactions are intended to reduce our exposure to market price volatility by setting the price(s) we will receive for that production. Our decisions on the price(s), type, and quantity of our production hedged is based, in part, on our view of current and future market conditions. As of June 30, 2013, our derivative transactions consisted of the following types of hedges:


•	Swaps. We receive or pay a fixed price for the hedged commodity and pay or receive a floating market price to the counterparty. The fixed-price payment and the floating-price payment are netted, resulting in a net amount due to or from the counterparty.


•	Collars. A collar contains a fixed floor price (put) and a ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, we receive the fixed price and pay the market price. If the market price is between the call and the put strike price, no payments are due from either party.

We have documented policies and procedures to monitor and control the use of derivative transactions. We do not engage in derivative transactions for speculative purposes. In August 2012, we determined–on a prospective basis–that we would no longer elect to use cash flow hedge accounting for our economic hedges. Therefore, the change in fair value, on all commodity derivatives entered into after that determination, will be reflected in the income statement and not in accumulated other comprehensive income (OCI).

At June 30, 2013, the following cash flow hedges were outstanding:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Jul’13 – Dec’13	Crude oil – swap	5,500 Bbl/day	$99.71	WTI – NYMEX
Jul’13 – Dec’13	Natural gas – swap	60,000 MMBtu/day	$3.56	IF – NYMEX (HH)
Jul’13 – Dec’13	Natural gas – collar	20,000 MMBtu/day	$3.25-3.72	IF – NYMEX (HH)

At June 30, 2013, the following non-designated hedges were outstanding:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Jul’13 – Dec’13	Crude oil – swap	3,000 Bbl/day	$94.59	WTI – NYMEX
Jan’14 – Dec’14	Crude oil – swap	3,000 Bbl/day	$91.77	WTI – NYMEX
Jan’14 – Dec’14	Crude oil – collar	2,000 Bbl/day	$90.00-95.00	WTI – NYMEX
Jul’13 – Dec’13	Natural gas – swap	20,000 MMBtu/day	$3.94	IF – NYMEX (HH)
Jan’14 – Dec’14	Natural gas – swap	50,000 MMBtu/day	$4.24	IF – NYMEX (HH)

After June 30, 2013, we entered into following non-designated hedges:



Term	Commodity	Hedged Volume	Weighted Average Fixed Price for Swaps	Hedged Market
Jan’14 – Dec’14	Crude oil – collar	2,000 Bbl/day	$90.00-97.15	WTI – NYMEX

The following tables present the fair values and locations of the derivative transactions recorded in our Unaudited Condensed Consolidated Balance Sheets:



		Derivative Assets
		Fair Value
	Balance Sheet Location	June 30, 2013		December 31, 2012
		(In thousands)
Derivatives designated as hedging instruments
Commodity derivatives:
Current	Current derivative asset	$	4,215	$	13,674
Long-term	Non-current derivative asset	—		—
Total derivatives designated as hedging instruments		4,215		13,674



Derivatives not designated as hedging instruments
Commodity derivatives:
Current	Current derivative asset	$	5,680	$	2,878
Long-term	Non-current derivative asset	4,887		—
Total derivatives not designated as hedging instruments		10,567		2,878
Total derivative assets		$	14,782	$	16,552



		Derivative Liabilities
		Fair Value
	Balance Sheet Location	June 30, 2013		December 31, 2012
		(In thousands)
Derivatives designated as hedging instruments
Commodity derivatives:
Current	Current derivative liabilities	$	879	$	1,005
Long-term	Non-current derivative liabilities	—		—
Total derivatives designated as hedging instruments		879		1,005



Derivatives not designated as hedging instruments
Commodity derivatives:
Current	Current derivative liabilities	$	—	$	943
Long-term	Non-current derivative liabilities	—		562
Total derivatives not designated as hedging instruments		—		1,505
Total derivative liabilities		$	879	$	2,510

If a legal right of set-off exists, we net the value of the derivative transactions we have with the same counterparty in our Unaudited Condensed Consolidated Balance Sheets.

We recognize in accumulated OCI the effective portion of any changes in fair value and reclassify the recognized gains (losses) on the sales to oil and natural gas revenue as the underlying transactions are settled. As of June 30, 2013 and 2012, we had recognized a gain of $1.7 million and a gain of $30.3 million, net of tax, respectively, in accumulated OCI.

Based on market prices at June 30, 2013, we expect to transfer over the next 12 months (in the related month of settlement) a gain of approximately $1.7 million, net of tax, into revenue. The cash flow derivative instruments existing as of June 30, 2013 are expected to mature by December 2013.

For our economic hedges that we did not apply cash flow accounting to, any changes in their fair value occurring before their maturity (i.e., temporary fluctuations in value) are reported in gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net in our Unaudited Condensed Consolidated Statements of Operations. Changes in the fair value of derivatives designated as cash flow hedges, to the extent they are effective in offsetting cash flows attributable to the hedged risk, are recorded in OCI until the hedged item is recognized into earnings. When the hedged item is recognized into earnings, it is reported in oil and natural gas revenues. Any change in fair value resulting from ineffectiveness is recognized in gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net. Prior to October 2012, we reported all realized and unrealized gains (losses) in oil and natural gas revenues. We reflect gains (losses) on non-designated hedges and ineffectiveness from cash flow hedges along with other revenue items in other income (expense) below income from operations. Prior year amounts have been reclassified to conform to current year presentation. These gains (losses) at June 30 are as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013		2012
	(In thousands)
Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net:
Realized gains (losses) on derivatives not designated as hedges	$	(181	)	$	—	$	859	$	—
Unrealized gains on derivatives not designated as hedges	14,808			—		9,193		—
Unrealized gains (losses) on ineffectiveness of cash flow hedges	1,717			1,387		368		(606		)
	$	16,344		$	1,387	$	10,420	$	(606	)

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations (cash flow hedges) for the six months ended June 30:



Derivatives in Cash Flow Hedging Relationships	Amount of Gain Recognized in Accumulated OCI on Derivative (Effective Portion) ⁽¹⁾
	2013		2012
	(In thousands)
Commodity derivatives	$	1,709	$	30,314

(1) Net of taxes.

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations (cash flow hedges) for the three months ended June 30:



Derivative Instrument	Location of Gain or (Loss) Reclassified from Accumulated OCI into Income & Location of Gain or (Loss) Recognized in Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income ⁽¹⁾					Amount of Gain Recognized in Income ⁽²⁾
		2013			2012		2013		2012
		(In thousands)
Commodity derivatives	Oil and natural gas revenue	$	(823	)	$	15,670	$	—	$	—
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net	—			—		1,717		1,387
Total		$	(823	)	$	15,670	$	1,717	$	1,387


(1)	Effective portion of gain (loss).


(2)	Ineffective portion of gain (loss).

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations (derivatives not designated as hedging instruments) for the three months ended June 30:



Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain Recognized in Income on Derivative
		2013		2012
		(In thousands)
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net	$	14,627	$	—
Total		$	14,627	$	—

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations (cash flow hedges) for the six months ended June 30:



Derivative Instrument	Location of Gain or (Loss) Reclassified from Accumulated OCI into Income & Location of Gain or (Loss) Recognized in Income	Amount of Gain Reclassified from Accumulated OCI into Income ⁽¹⁾				Amount of Gain or (Loss) Recognized in Income ⁽²⁾
		2013		2012		2013		2012
		(In thousands)
Commodity derivatives	Oil and natural gas revenue	$	3,008	$	23,846	$	—	$	—
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net	—		—		368		(606		)
Total		$	3,008	$	23,846	$	368	$	(606	)


(1)	Effective portion of gain (loss).


(2)	Ineffective portion of gain (loss).

Effect of derivative instruments on the Unaudited Condensed Consolidated Statements of Operations (derivatives not designated as hedging instruments) for the six months ended June 30:



Derivatives Not Designated as Hedging Instruments	Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain Recognized in Income on Derivative
		2013		2012
		(In thousands)
Commodity derivatives	Gain (loss) on derivatives not designated as hedges and hedge ineffectiveness, net	$	10,052	$	—
Total		$	10,052	$	—