Derivatives

12 Months Ended

Dec. 31, 2011

Derivatives [Abstract]

Derivatives

Note 8—Derivatives

As of December 31, 2011, the Company had entered into the following natural gas contract accounted for as a cash flow hedge:

	Instrument			Weighted
Production Period	Type	Daily Volumes		Average Price
Natural Gas:
2012	Costless Collar		10,000 Mmbtu		$5.00—5.29

At December 31, 2011, the Company had an asset of $6.4 million related to the estimated fair value of this derivative instrument. Based on estimated future commodity prices as of December 31, 2011, the Company would realize a $4 million gain, net of taxes, as an increase to gas sales during the next 12 months. This gain is expected to be reclassified based on the schedule of oil and gas volumes stipulated in the derivative contract.

Oil and gas sales include additions (reductions) related to the settlement of gas hedges of $2,609,000, $17,538,000 and $74,333,000 and oil hedges of ($192,000), zero and $5,559,000 for the years ended December 31, 2011, 2010 and 2009, respectively.

During January 2012, the Company entered into the following additional oil and gas hedge contracts accounted for as cash flow hedges:

		September 30,		September 30,		September 30,
	Instrument				Weighted
Production Period	Type		Daily Volumes		Average Price
Natural Gas:
March—October 2012		Swap		20,000 Mmbtu	$	2.60
Crude Oil:
February—December 2012		Swap		250 Bbl	$	100.77

All of the Company’s derivative instruments at December 31, 2011 and 2010 were designated as hedging instruments under ASC Topic 815. The following tables reflect the fair value of the Company’s derivative instruments in the consolidated financial statements as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009 (in thousands):

Effect of Derivative Instruments on the Consolidated Balance Sheet at December 31, 2011 and 2010:

	September 30,		September 30,
	Commodity Derivatives
	Balance Sheet
Period	Location	Fair Value
December 31, 2011	Hedging asset	$	6,418
December 31, 2010	Hedging liability	$	(1,089	)

Effect of Derivative Instruments on the Consolidated Statement of Operations for the twelve months ended December 31, 2011, 2010 and 2009:

		September 30,		September 30,		September 30,
	Commodity Derivatives
	Amount of Gain (Loss)			Location of	Amount of Gain
	Recognized in Other			Gain Reclassified	Reclassified into
Period	Comprehensive Income (Loss)			into Income	Income
December 31, 2011	$	5,120		Oil and gas sales	$	2,417
December 31, 2010	$	(2,857	)	Oil and gas sales	$	17,538
December 31, 2009	$	(23,792	)	Oil and gas sales	$	79,892

As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. As presented in the tables below, this hierarchy consists of three broad levels:

• Level 1: valuations consist of unadjusted quoted prices in active markets for identical assets and liabilities and has the highest priority;

• Level 2: valuations rely on quoted prices in markets that are not active or observable inputs over the full term of the asset or liability;

• Level 3: valuations are based on prices or third party or internal valuation models that require inputs that are significant to the fair value measurement and are less observable and thus have the lowest priority.

The Company classifies its commodity derivatives based upon the data used to determine fair value. The Company’s derivative instrument at December 31, 2011 is in the form of a costless collar based on NYMEX pricing. The fair value of this derivative is derived using an independent third-party’s valuation model that utilizes market-corroborated inputs that are observable over the term of the derivative contract. The Company’s fair value calculations also incorporate an estimate of the counterparties’ default risk for derivative assets and an estimate of the Company’s default risk for derivative liabilities. As a result, the Company designates its commodity derivatives as Level 2 in the fair value hierarchy.

The following table summarizes the valuation of the Company’s derivatives subject to fair value measurement on a recurring basis as of December 31, 2011 and 2010 (in thousands):

		September 30,		September 30,			September 30,
	Fair Value Measurements Using
	Quoted Prices		Significant Other			Significant
	in Active		Observable			Unobservable
Instrument	Markets (Level 1)		Inputs (Level 2)			Inputs (Level 3)
Commodity Derivatives—2011		—	$	6,418			—
Commodity Derivatives—2010		—	$	(1,089	)		—