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Derivative Instruments
6 Months Ended
Jun. 30, 2012
Derivative Instruments [Abstract]  
Derivative Instruments

Note 8—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 other income (expense). At June 30, 2012, the Company designated all but one derivative instrument as effective cash flow hedges.

Oil and gas sales include additions (reductions) related to the settlement of gas hedges of $3,230,000 and $186,000, Ngl hedges of $232,000 and zero, and oil hedges of $415,000 and ($289,000), for the three months ended June 30, 2012 and 2011, respectively. For the six month periods ended June 30, 2012 and 2011, oil and gas sales include additions (reductions) related to the settlement of gas hedges of $5,385,000 and $386,000, Ngl hedges of $232,000 and zero, and oil hedges of $362,000 and ($389,000), respectively.

As of June 30, 2012, the Company had entered into the following oil and gas contracts:

 

                     
    Instrument         Weighted  

Production Period

 

Type

  Daily Volumes     Average Price  

Natural Gas:

                   

July—December 2012

  Costless Collar     10,000 Mmbtu     $ 5.00 - 5.29  

July—October 2012

  Swap     20,000 Mmbtu     $ 2.60  

July—December 2012

  Swap     20,000 Mmbtu     $ 2.73  

January—December 2013

  Three-Way Collar     10,000 Mmbtu     $ 2.00-$3.00-$4.09  
       

Crude Oil:

                   

July—December 2012

  Swap     250 Bbls     $ 100.77  

July—December 2012

  Swap     250 Bbls     $ 105.00  
       

Natural Gasoline:

                   

July—December 2012

  Swap     100 Bbls     $ 100.13  
       

Iso-Butane:

                   

July—December 2012

  Swap     50 Bbls     $ 84.27  
       

Normal Butane:

                   

July—December 2012

  Swap     50 Bbls     $ 80.49  

At June 30, 2012, the Company recognized a net asset of approximately $4.4 million related to the estimated fair value of these derivative instruments. Based on estimated future commodity prices as of June 30, 2012, the Company would realize a $3.0 million gain, net of taxes, during the next 12 months. These gains are expected to be reclassified based on the schedule of oil, gas and Ngl volumes stipulated in the derivative contracts.

Derivatives designated as hedging instruments:

All of the Company’s 2012 derivative contracts are accounted for 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 June 30, 2012 and December 31, 2011:

 

             
    Commodity Derivatives  
    Balance Sheet      
Period   Location   Fair Value  

June 30, 2012

  Hedge asset   $ 4,814  

December 31, 2011

  Hedge asset   $ 6,418  

 

Effect of Cash flow hedges on the Consolidated Statement of Operations for the three months ended June 30, 2012 and 2011:

 

                     

Instrument

  Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
   

Location of
Gain Reclassified
into Income

  Amount of Gain (Loss)
Reclassified into
Income
 

Commodity Derivatives at June 30, 2012

  $ (1,772   Oil and gas sales   $ 3,877  

Commodity Derivatives at June 30, 2011

  $ 2,374     Oil and gas sales   $ (103

Effect of Cash flow hedges on the Consolidated Statement of Operations for the six months ended June 30, 2012 and 2011:

 

                         

Instrument

  Amount of Gain (Loss)
Recognized in Other
Comprehensive Income
    Location of
Gain Reclassified
into Income
    Amount of Gain (Loss)
Reclassified into
Income
 

Commodity Derivatives at June 30, 2012

  $ (1,008     Oil and gas sales     $ 5,979  

Commodity Derivatives at June 30, 2011

  $ 1,646       Oil and gas sales     $ (3

Derivatives not designated as hedging instruments:

The Company’s 2013 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 on 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 June 30, 2012 and December 31, 2011:

 

             
   

Commodity Derivatives

 

Period

 

Balance Sheet Location

  Fair Value  

June 30, 2012

  Other accrued liabilities   $ 58  

June 30, 2012

  Hedge liability   $ 317  

December 31, 2011

      $ —    

Effect of Non-designated Derivative Instruments on the Consolidated Statement of Operations for the three and six months ended June 30, 2012 and 2011:

 

         

Instrument

  Amount of Unrealized Loss
Recognized in Other
Income (expense)
 

Commodity Derivatives at June 30, 2012

  $ (375

Commodity Derivatives at June 30, 2011

  $ -