Derivative Instruments And Hedging Activities

9 Months Ended

Sep. 30, 2012

Derivative Instruments And Hedging Activities [Abstract]

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 price risk exposures primarily related to our oil and gas production, variable interest rates and foreign exchange currency fluctuations.  All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value, unless otherwise noted. 

We engage primarily 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 fair value of derivatives that are designated as cash flow hedges are deferred to the extent that the hedges are effective. These fair value changes are recorded inaccumulated other comprehensive income (loss), a component of shareholders’ equity, until the hedged transactions occur and are recognized in earnings. The ineffective portion of changes in the fair value of cash flow hedges 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 2011 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 2012 and 2013.  All of our oil derivative contracts qualify for hedge accounting.  All of our natural gas derivative contracts for 2013 qualify for hedge accounting while some of our natural gas contracts for 2012 were recently de-designated as hedge contracts (as discussed below). 

As of September 30, 2012, we had the following volumes under derivative contracts related to our oil and gas producing activities totaling approximately  3.4 million barrels of oil and 8.7 Bcf of natural gas:

Production Period	Instrument Type	Average Monthly Volumes	Weighted Average Price (1)
Crude Oil:			(per barrel)
October 2012 — December 2012...................................................	Collar	75.0 MBbl	$  96.67 — $118.57(2)
October 2012 — December 2012...................................................	Collar	80.3 MBbl	$  99.77 — $118.71
October 2012 — December 2012...................................................	Swap	103.7 MBbl	$92.15
January 2013 — December 2013...................................................	Swap	88.9 MBbl	$95.28
January 2013 — December 2013...................................................	Collar	133.3 MBbl	$  98.44 — $115.85
Natural Gas:			(per Mcf)
October 2012 — December 2012...................................................	Swap	776.7 Mmcf	$4.31
October 2012 — December 2012...................................................	Collar	130.0 Mmcf	$4.75 — $5.13
January 2013 — December 2013...................................................	Swap	500.0 Mmcf	$4.09

(1) The prices quoted in the table above are NYMEX Henry Hub for natural gas.  Our oil contracts are indexed to the Brent crude oil price unless otherwise indicated.

(2) This contract is priced using NYMEX West Texas Intermediate for crude oil.

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

Variable Interest Rate Risks

As some of our long-term debthas variable interest rates and therefore is subject to market influences, 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).  The last of these monthly contracts matured in January 2012.  In August 2011, we entered into additional interest rate swap contracts to fix the interest rate on $200 million of our Term Loan debt.  These monthly contracts began in January 2012 and extend through January 2014.  Changes in the fair value of an interest rate swap are deferred to the extent the swap is effective.  These changes 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”.  The amount of ineffectiveness associated with our interest rate swap contracts was immaterial for all periods presented in this Quarterly Report on Form 10-Q. 

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.  We did not designate any of our existing foreign exchange contracts as hedge contracts at their inception.  The last of our existing monthly foreign currency swap contracts will settle in November 2012. 

Quantitative Disclosures Related to Derivative Instruments 

The following tables present the fair value and balance sheet classification of our derivative instruments as of September 30, 2012 and December 31, 2011. 

Derivatives designated as hedging instruments are as follows (in thousands): 

	As of September 30, 2012			As of December 31, 2011
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Asset Derivatives:
Natural gas contracts	Other current assets	$	2,824	Other current assets	$	12,957
Oil contracts	Other current assets		3,184	Other current assets		8,567
Oil contracts	Other assets		1,227	Other assets		-
Natural gas contracts	Other assets		115	Other assets		857
Interest rate swaps	Other assets		-	Other assets		327
		$	7,350		$	22,708
	As of September 30, 2012			As of December 31, 2011
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Liability Derivatives:
Oil contracts	Accrued liabilities	$	19,840	Accrued liabilities	$	886
Interest rate swaps	Accrued liabilities		493	Accrued liabilities		202
Oil contracts	Other long-term liabilities		3,234	Other long-term liabilities		1,711
Interest rate swaps	Other long-term liabilities		141	Other long-term liabilities		-
		$	23,708		$	2,799

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

	As of September 30, 2012			As of December 31, 2011
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Asset Derivatives:
Natural gas contracts	Other current assets	$	1,386	Other current assets	$	-
Foreign exchange forwards	Other current assets		116	Other current assets		55
		$	1,502		$	55
	As of September 30, 2012			As of December 31, 2011
	Balance Sheet		Fair	Balance Sheet		Fair
	Location		Value	Location		Value
Liability Derivatives:
Foreign exchange forwards	Accrued liabilities	$	-	Accrued liabilities	$	159
		$	-		$	159

As a result of recent natural gas production declines for our properties, including the effects Hurricane Isaac had on our properties in August 2012, sales of certain of our natural gas producing properties and the continued deferral of initiating production from our Nancy well in the Bushwood field, we de-designated four of our natural gas derivative contracts as hedging instruments.  We concluded that these contracts no longer qualified for hedge accounting treatment because we could no longer forecast that we would have the necessary production volumes to cover the contractual volumes in these contracts.  All four of these contracts will have final settlements by December 31, 2012.  The mark to market adjustments associated with these contracts are recorded as a component of “Hedge ineffectiveness and non-hedge gain on commodity derivative contracts” in the accompanying condensed consolidated statements of operations and comprehensive income.

The following tables present the impact that derivative instruments designated as cash flow hedges had on our accumulated comprehensive income (loss) and our consolidated condensed statements of operations and comprehensive income for the three- and nine-month periods ended September 30, 2012 and 2011 (in thousands).  The hedge ineffectiveness related to some of our crude oil contracts totaled $10.0 million and $2.3 million for the three- and nine-month periods ended September 30, 2012.  The amount of any ineffectiveness associated with our oil contracts was immaterial for the three- and nine-month periods ended September 30, 2011.  These amounts are reflected as a separate line item titled “Hedge ineffectivenessand non-hedge gain on commodity derivative contracts” in the accompanying condensed consolidated statements of operations and comprehensive income.  Ineffectiveness associated with our interest rate swaps was immaterial for all periods presented.  At September 30, 2012, most of our remaining unrealized gains (losses) related to our derivative contracts are expected to be reclassified into earnings within the next 12 months, including $(6.6) million for our oil and natural gas contracts and $(0.3) million related to our interest rate swap contracts.  All unrealized gains (losses) related to our derivative contracts are expected to be reclassified to earnings by no later than December 31, 2013.  The last of our interest rate swaps will be settled in January 2014.

		Gain (Loss) Recognized in OCI on Derivatives
		(Effective Portion)
		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		2012		2011		2012		2011
Oil and natural gas commodity contracts	$	(19,868)	$	33,432	$	(20,664)	$	43,373
Interest rate swaps		(168)		456		(494)		918
	$	(20,036)	$	33,888	$	(21,158)	$	44,291

			Gain (Loss) Reclassified from Accumulated OCI
			into Income
	Location of Gain (Loss)		(Effective Portion)
	Reclassified from		Three Months Ended				Nine Months Ended
	Accumulated OCI into Income		September 30,				September 30,
	(Effective Portion)		2012		2011		2012		2011
Oil and natural gas commodity contracts	Oil and gas revenue	$	414	$	(1,287)	$	8,546	$	(19,473)
Interest rate swaps	Net interest expense		(121)		(522)		(434)		(1,513)
		$	293	$	(1,809)	$	8,112	$	(20,986)

The following table presents the impact that derivative instruments not designated as hedges had on our condensed consolidated statement of operations and comprehensive income for the three- and nine-month periods ended September 30, 2012 and 2011 (in thousands): 

			Gain (Loss) Recognized in Income on Derivatives
	Location of Gain (Loss)		Three Months Ended				Nine Months Ended
	Recognized in Income on		September 30,				September 30,
	Derivatives		2012		2011		2012		2011
Natural gas commodity contracts	Hedge ineffectiveness and non-hedge gain on commodity derivative contracts	$	633	$	-	$	633	$	-
Foreign exchange forwards	Other income (expense)		217		(381)		381		(234)
		$	850	$	(381)	$	1,014	$	(234)