Derivative Instruments

3 Months Ended

Mar. 31, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

The Company seeks to reduce its exposure to commodity price volatility by hedging a portion of its production through commodity derivative instruments. When the conditions for hedge accounting are met, the Company may designate its commodity derivatives as cash flow hedges. The changes in fair value of derivative instruments that qualify for hedge accounting treatment are recorded in other comprehensive income (loss) until the hedged oil or natural gas quantities are produced. If a hedge becomes ineffective because the hedged production does not occur, or the hedge otherwise does not qualify for hedge accounting treatment, the changes in the fair value of the derivative are recorded in the income statement as derivative income (expense). At March 31, 2013, the Company designated all but one derivative instrument as effective cash flow hedges. The Company does not have master netting arrangements with any of its counterparties. Accordingly, derivative assets and liabilities are recorded on a gross basis in the consolidated balance sheet.

Oil and gas sales include additions (reductions) related to the settlement of gas hedges of $532,000 and $2,155,000 and oil hedges of ($145,000) and ($53,000) for the three months endedMarch 31, 2013 and 2012, respectively.

As of March 31, 2013, the Company had entered into the following oil and gas contracts:

Production Period	Instrument Type	Daily Volumes	Weighted Average Price
Natural Gas:
April - December 2013	Three-Way Collar	10,000 Mmbtu	$2.00-$3.00-$4.09
April - December 2013	Swap	30,000 Mmbtu	$3.78
2014	Swap	10,000 Mmbtu	$4.08
Crude Oil:
April - December 2013	Swap	250 Bbls	$104.75

At March 31, 2013, the Company had an accumulated other comprehensive loss of approximately $3.4 million related to the estimated fair value of its effective cash flow hedges. Based on estimated future commodity prices as of March 31, 2013, the Company would realize a $2.0 millionloss, net of taxes, during the next 12 months. These losses are expected to be reclassified based on the schedule of oil and gas volumes stipulated in the derivative contracts.

Derivatives designated as hedging instruments:

All of the Company’s swap contracts are designated as effective cash flow hedges under ASC Topic 815-20-25. The following tables reflect the fair value of the Company’s effective cash flow hedges in the consolidated financial statements (in thousands):

Effect of Cash Flow Hedges on the Consolidated Balance Sheet at March 31, 2013 and December 31, 2012:

	Commodity Derivatives
Period	Balance Sheet Location	Fair Value
March 31, 2013	Derivative liability (short-term)	$	(3,137	)
March 31, 2013	Derivative liablity (long-term)	$	(251	)
December 31, 2012	Derivative asset	$	830

Effect of Cash Flow Hedges on the Consolidated Statement of Operations for the three months ended March 31, 2013 and 2012:

Instrument	Amount of Gain (Loss) Recognized in Other Comprehensive Income			Location of Gain Reclassified into Income	Amount of Gain Reclassified into Income
Commodity Derivatives at March 31, 2013	$	(3,910	)	Oil and gas sales	$	387
Commodity Derivatives at March 31, 2012	$	764		Oil and gas sales	$	2,102

Derivatives not designated as hedging instruments:

The Company’s three-way collar derivative contract has not been designated as an effective cash flow hedge and therefore both realized and unrealized (mark-to-market) gains or losses on this derivative are recorded as derivative expense (income) in the statement of operations. The following tables reflect the fair value of the Company’s non-designated derivative instruments in the consolidated financial statements (in thousands):

Effect of Non-designated Derivative Instruments on the Consolidated Balance Sheet at March 31, 2013 and December 31, 2012:

	Commodity Derivatives
Period	Balance Sheet Location	Fair Value
March 31, 2013	Derivative liability (short-term)	$	(670	)
December 31, 2012	Derivative liability (short-term)	$	(233	)

Effect of Non-designated Derivative Instruments on the Consolidated Statement of Operations for the three months ended March 31, 2013 and 2012:

Instrument	Amount of Unrealized Loss Recognized in Derivative Expense
Commodity Derivatives at March 31, 2013	$	437
Commodity Derivatives at March 31, 2012	$	—