Derivative Instruments and Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 16 – Derivative Instruments and Hedging Activities

We are currently exposed to market risk in three major areas: commodity prices, interest rates and foreign currency exchange rates. Our risk management activities involve the use of derivative financial instruments to hedge the impact of market risk exposures primarily related to our oil and gas production, variable interest rate exposure and foreign exchange currency fluctuations. All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value unless otherwise noted.

We engage solely in cash flow hedges. Hedges of cash flow exposure are entered into to hedge a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. Changes in the derivative fair values that are designated as cash flow hedges are deferred to the extent that they are effective and are recorded as a component of accumulated other comprehensive income (loss), a component of shareholders' equity, until the hedged transactions occur and are recognized in earnings. The ineffective portion of a cash flow hedge's change in fair value is recognized immediately in earnings. In addition, any change in the fair value of a derivative that does not qualify for hedge accounting is recorded in earnings in the period in which the change occurs. 

For additional information regarding our accounting for derivatives see Notes 2 and 20 of our 2010 Form 10-K.

Commodity Price Risks

We currently manage commodity price risk through various financial costless collars and swap instruments covering a portion of our anticipated oil and natural gas production for 2011 and 2012.  All of our current commodity derivative contracts qualify for hedge accounting.  In June 2010 some of our oil contracts for 480 MBbl covering portions of our anticipated production during the third quarter of 2010 ceased to qualify for hedge accounting as a result of our decision to contract the HP I  to BP to assist in the oil spill containment response rather than commencing production from our Phoenix field.

As of June 30, 2011, we have the following volumes under derivative contracts related to our oil and gas producing activities totaling approximately 3.5 MMBbl of oil and 9.4 Bcf of natural gas:

Production Period	Instrument Type	Average Monthly Volumes	Weighted Average Price
Crude Oil:			(per barrel)
July 2011 — December 2011	Swap	175.8 MBbl	$82.49
July 2011 — December 2011	Collar	53.3 MBbl	$  95.00 — $124.70
October 2011 — December 2011	Collar	12.5 MBbl	$100.00 — $122.80a
January 2012 — December 2012	Collar	75.0 MBbl	$  96.67 — $118.57
January 2012 — December 2012	Collar	91.7 MBbl	$100.00 — $120.25a
Natural Gas:			(per Mcf)
July 2011 — December 2011	Swap	725.8 Mmcf	$4.97
January 2012 — December 2012	Swap	250.0 Mmcf	$4.77
January 2012 — December 2012	Collar	166.7 Mmcf	$4.75 —  $5.09

a.The prices quoted in the table above are primarily NYMEX Henry Hub for natural gas or NYMEX West Texas Intermediate for crude oil.   As footnoted above these costless collar contracts are priced as Brent crude oil.

Changes in quoted oil and gas strip market prices would, assuming all other things being equal, cause the fair value of these instruments to increase or decrease inversely to the change in the quoted market prices.

Variable Interest Rate Risks

As some of our long-term debt is subject to market influences and has variable interest rates, in January 2010 we entered into various interest rate swaps to stabilize cash flows relating to interest payments for $200 million of our Term Loan debt under our Credit Agreement (Note 7).  These monthly contracts will mature in January 2012.  Changes in the interest rate swap fair value are deferred to the extent the swap is effective and are recorded as a component of accumulated other comprehensive income (loss) until the anticipated interest payments occur and are recognized in interest expense.  The ineffective portion of the interest rate swap, if any, will be recognized immediately in earnings within the line titled net interest expense.

Foreign Currency Exchange Risks

Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar.  We entered into various foreign currency forwards to stabilize expected cash outflows relating to certain vessel charters denominated in British pounds.  The last of our existing monthly foreign currency swap contracts will settle in June 2012.

Quantitative Disclosures Related to Derivative Instruments

The following tables present the fair value and balance sheet classification of our derivative instruments as of June 30, 2011 and December 31, 2010.  The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements.  

Derivatives designated as hedging instruments are as follows:

	As of June 30, 2011			As of December 31, 2010
	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
	(in thousands)
Asset Derivatives:
Oil contracts	Other current assets	$	3,381	Other current assets	$	0
Natural gas contracts	Other current assets		2,302	Other current assets		5,324
Natural gas contracts	Other assets, net		32	Other assets, net		0
Oil contracts	Other assets, net		1,816	Other assets, net		0
Interest rate swaps	Other assets, net		0	Other assets, net		0
		$	7,531		$	5,324

	As of June 30, 2011			As of December 31, 2010
	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
	(in thousands)
Liability Derivatives:
Oil contracts	Accrued liabilities	$	16,055	Accrued liabilities	$	28,855
Interest rate swaps	Accrued liabilities		1,157	Accrued liabilities		1,751
Oil contracts	Other long-term liabilities		399	Other long-term liabilities		0
Natural gas contracts	Other long-term liabilities		226	Other long-term liabilities		913
Interest rate swaps	Other long-term liabilities		0	Other long-term liabilities		115
		$	17,837		$	31,634

Derivatives that were not designated as hedging instruments (in thousands):

	As of June 30, 2011			As of December 31, 2010
	Balance Sheet Location		Fair Value	Balance Sheet Location		Fair Value
	(in thousands)
Asset Derivatives:
Foreign exchange forwards	Other current assets	$	305	Other current assets	$	148
Foreign exchange forwards	Other assets, net		0	Other assets, net		42
		$	305		$	190
Liability Derivatives:
		$	0		$	0

The following tables present the impact that derivative instruments designated as cash flow hedges had on our accumulated comprehensive loss and our condensed consolidated statements of operations for the three and six month periods ended June 30, 2011 and 2010.

		Gain (Loss) Recognized in OCI on Derivatives (Effective Portion)
		Three Months Ended June 30,					Six Months Ended June 30,
		2011(1)		2010(1)			2011(1)		2010(1)
		(in thousands)
Oil and natural gas commodity contracts	$	20,720	$	2,575		$	9,942	$	17,205
Interest rate swaps		250		(512	)		461		(1,102	)
	$	20,970	$	2,063		$	10,403	$	16,103

(1)      All unrealized gains (losses) related to our derivatives are expected to be reclassified into earnings by no later than December 31, 2012. The last of our interest swaps will mature in January 2012 and we have foreign exchange forwards and oil and natural gas commodity contracts that have maturities through June and December 2012, respectively.

	Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
			Three Months Ended June 30,						Six Months Ended June 30,
			2011			2010			2011			2010
Oil and natural gas commodity contracts	Oil and gas revenue	$	(11,860	)	$	9,663		$	(18,185	)	$	10,464
Interest rate swaps	Net interest expense		(591	)		(469	)		(1,071	)		(887	)
		$	(12,451	)	$	9,194		$	(19,256	)	$	9,577

The following table presents the impact of derivative instruments that no longer qualify for hedge accounting or were not designated as hedges on our condensed consolidated income statement for the three and six month periods ended June 30, 2011 and 2010:

	Location of Gain (Loss) Recognized in Income on Derivatives		Gain (Loss) Recognized in Income on Derivatives
			Three Months Ended June 30,					Six Months Ended June 30,
			2011		2010			2011		2010
			(in thousands)
Natural gas contracts	Gain on oil and gas derivative contracts	$	0	$	2,482		$	0	$	2,482
Foreign exchange forwards	Other income (expense)		6		(398	)		614		(3,305	)
		$	6	$	2,084		$	614	$	(823	)