Derivative Instruments

9 Months Ended

Sep. 30, 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, natural gas or natural gas liquids (Ngl) 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 September 30, 2013, the Company designated all but three of its derivative instruments 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 $767,000 and $1,482,000, Ngl hedges of $5,000 and $312,000 and oil hedges of ($538,000) and $491,000 for the three months endedSeptember 30, 2013 and 2012, respectively. For the nine month periods ended September 30, 2013 and 2012, oil and gas sales include additions (reductions) related to the settlement of gas hedges of $422,000 and $6,867,000, Ngl hedges of $5,000 and $544,000 and oil hedges of ($684,000) and $853,000, respectively.

As of September 30, 2013, the Company had entered into the following commodity derivative instruments:

Production Period	Instrument Type	Daily Volumes		Weighted Average Price
Natural Gas:
October - December 2013	Three-Way Collar	10,000 Mmbtu		$2.00-$3.00-$4.09
October - December 2013	Swap	30,000 Mmbtu		$3.78
October - December 2013	Collar	5,000 Mmbtu		$4.00 - $4.75
2014	Swap	20,000 Mmbtu		$4.04
Crude Oil:
October - December 2013	Swap	1,350 Bbls	(1)	$102.45
January - June 2014	Swap	200 Bbls	(3)	$101.30
2014	Swap	750 Bbls	(2)	$97.47
Natural Gas Liquids:
October - December 2013	Swap	150 Bbls		$92.42

(1) 500 Bbls per day tied to LLS index.

(2) 400 Bbls per day tied to LLS index.

(3) 200 Bbls per day tied to LLS index.

At September 30, 2013, the Company had accumulated other comprehensive income of approximately $1.3 million related to the estimated fair value of its effective cash flow hedges. Based on estimated future commodity prices as of September 30, 2013, the Company would realize a $1.1 milliongain, net of taxes, during the next 12 months. This gain is expected to be reclassified based on the schedule of volumes stipulated in the derivative contracts.

Derivatives designated as hedging instruments:

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 September 30, 2013 and December 31, 2012:

	Commodity Derivatives
Period	Balance Sheet Location	Fair Value
September 30, 2013	Derivative asset (short-term)	$	2,274
September 30, 2013	Derivative asset (long-term)	$	305
September 30, 2013	Derivative liability (short-term)	$	(445	)
December 31, 2012	Derivative asset (short-term)	$	830

Effect of Cash Flow Hedges on the Consolidated Statement of Operations for the three months ended September 30, 2013 and 2012:

Instrument	Amount of Loss Recognized in Other Comprehensive Income			Location of Gain Reclassified into Income	Amount of Gain Reclassified into Income
Commodity Derivatives at September 30, 2013	$	(78	)	Oil and gas sales	$	436
Commodity Derivatives at September 30, 2012	$	(2,423	)	Oil and gas sales	$	2,285

Effect of Cash Flow Hedges on the Consolidated Statement of Operations for the nine months ended September 30, 2013 and 2012 :

Instrument	Amount of Gain (Loss) Recognized in Other Comprehensive Income			Location of Gain (Loss) Reclassified into Income	Amount of Gain (Loss) Reclassified into Income
Commodity Derivatives at September 30, 2013	$	819		Oil and gas sales	$	(18	)
Commodity Derivatives at September 30, 2012	$	(3,431	)	Oil and gas sales	$	8,264

Derivatives not designated as hedging instruments:

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 September 30, 2013 and December 31, 2012:

	Commodity Derivatives
Period	Balance Sheet Location	Fair Value
September 30, 2013	Derivative asset (short-term)	$	49
September 30, 2013	Derivative liability (short-term)	$	(80	)
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 September 30, 2013 and 2012:

Instrument	Amount of Unrealized Gain (Loss) Recognized in Derivative Expense
Commodity Derivatives at September 30, 2013	$	45
Commodity Derivatives at September 30, 2012	$	(340	)

Effect of Non-designated Derivative Instruments on the Consolidated Statement of Operations for the nine months ended September 30, 2013 and 2012:

Instrument	Amount of Unrealized Gain (Loss) Recognized in Derivative Expense
Commodity Derivatives at September 30, 2013	$	202
Commodity Derivatives at September 30, 2012	$	(715	)