Note 4 – Derivative Instruments and Hedging Activities

Our hedging strategy is designed to protect our near and intermediate term cash flows from future declines in oil and natural gas prices. This protection is essential to capital budget planning, which is sensitive to expenditures that must be committed to in advance, such as rig contracts and the purchase of tubular goods. We enter into derivative transactions to secure a commodity price for a portion of future production that is acceptable at the time of the transaction. These derivatives are generally designated as cash flow hedges upon entering into the contracts. We do not enter into derivative transactions for trading purposes. We have no fair value hedges.

The nature of a derivative instrument must be evaluated to determine if it qualifies as a hedging instrument. If the instrument qualifies as a hedging instrument, it is recorded as either an asset or liability measured at fair value and subsequent changes in the derivative’s fair value are recognized in stockholders’ equity through other comprehensive income (loss), net of related taxes, to the extent the hedge is considered effective. Monthly settlements of effective hedges are reflected in revenue from oil and gas production and cash flows from operating activities. Instruments not qualifying as hedging instruments are recorded in our balance sheet at fair value, and changes in fair value are recognized in earnings through derivative expense (income). Monthly settlements of ineffective hedges and derivative instruments not qualifying as hedging instruments are recognized in earnings through derivative expense (income) and cash flows from operating activities.

We have entered into fixed-price swaps with various counterparties for a portion of our expected 2014, 2015 and 2016 oil and natural gas production from the Gulf Coast Basin. Some of our fixed-price oil swap settlements are based on an average of the New York Mercantile Exchange (“NYMEX”) closing price for West Texas Intermediate crude oil during the entire calendar month, and some are based on the average of the Intercontinental Exchange closing price for Brent crude oil during the entire calendar month. Our fixed-price gas swap settlements are based on the NYMEX price for the last day of a respective contract month. Swaps typically provide for monthly payments by us if prices rise above the swap price or monthly payments to us if prices fall below the swap price. Our fixed-price swap contracts are with The Toronto-Dominion Bank, Barclays Bank PLC, BNP Paribas, The Bank of Nova Scotia, Bank of America, Natixis and Regions Bank.

The following table illustrates our derivative positions for calendar years 2014, 2015 and 2016 as of November 3, 2014:


	Fixed-Price Swaps (NYMEX, except where noted)
	Natural Gas					Oil
	Daily Volume (MMBtus/d)			Swap Price ($)		Daily Volume (Bbls/d)			Swap Price ($)
2014		10,000			4.000		1,000			90.06
2014		10,000			4.040		1,000	(a)		90.25
2014		10,000			4.105		1,000			92.25
2014		10,000			4.190		1,000			93.55
2014		10,000	(b)		4.250		1,000			94.00
2014		10,000			4.250		1,000			98.00
2014		10,000			4.350		1,000			98.30
2014							2,000	(c)		98.85
2014							1,000			99.65
2014							1,000	(d)		103.30
2015		10,000			4.005		1,000			89.00
2015		10,000			4.120		1,000			90.00
2015		10,000			4.150		1,000			90.25
2015		10,000			4.165		1,000			90.40
2015		10,000			4.220		1,000			91.05
2015		10,000			4.255		1,000			93.28
2015							1,000			93.37
2015							1,000			94.85
2015							1,000			95.00
2016		10,000			4.110		1,000			90.00
2016		10,000			4.120

(a)	October through December

(b)	February through December

(c)	January through June

(d)	Brent crude oil contract

All of our derivative instruments at December 31, 2013 were designated as effective cash flow hedges. At June 30, 2014, certain of our natural gas derivative instruments no longer qualified as cash flow hedges, as it was no longer probable, subsequent to the sale of our non-core Gulf of Mexico (“GOM”) conventional shelf properties (see Note 7 – Divestitures), that GOM natural gas production would be sufficient to cover the GOM volumes hedged. We discontinued hedge accounting for such contracts as of June 30, 2014. Contracts no longer qualifying as cash flow hedges were comprised of three natural gas contracts for the months of August through December 2014 and two natural gas contracts for the months of January through December 2015. Additionally, a small portion of our cash flow hedges are typically determined to be ineffective because oil and natural gas price changes in the markets in which we sell our products are not 100% correlative to changes in the underlying price basis indicative in the derivative contract. At September 30, 2014, we had accumulated other comprehensive income of $13.2 million, net of tax, related to the fair value of our effective cash flow hedges that were outstanding as of September 30, 2014. We believe that approximately $9.3 million, net of tax, of accumulated other comprehensive income will be reclassified into earnings in the next 12 months.

Derivatives qualifying as hedging instruments:

The following tables disclose the location and fair value amounts of derivatives qualifying as hedging instruments, as reported in our balance sheet, at September 30, 2014 and December 31, 2013:


Fair Value of Derivatives Qualifying as Hedging Instruments at September 30, 2014
(In millions)
	Asset Derivatives			Liability Derivatives
Description	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Current assets: Fair value of derivative contracts	$	15.4	Current liabilities: Fair value of derivative contracts	$	0.2
	Long-term assets: Fair value of derivative contracts		6.3	Long-term liabilities: Fair value of derivative contracts		—

		$	21.7		$	0.2


Fair Value of Derivatives Qualifying as Hedging Instruments at December 31, 2013
(In millions)
	Asset Derivatives			Liability Derivatives
Description	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Commodity contracts	Current assets: Fair value of derivative contracts	$	4.5	Current liabilities: Fair value of derivative contracts	$	7.8
	Long-term assets: Fair value of derivative contracts		1.4	Long-term liabilities: Fair value of derivative contracts		0.5

		$	5.9		$	8.3

The following tables disclose the before tax effect of derivatives qualifying as hedging instruments, as reported in the statement of operations, for the three and nine month periods ended September 30, 2014 and 2013:


Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Operations for the Three Months Ended September 30, 2014 and 2013 (In millions)
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives					Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) (a)							Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	2014		2013			Location	2014			2013			Location	2014		2013
Commodity contracts	$	47.1	($	30.8	)	Operating revenue—oil/gas production	($	1.3	)	($	2.1	)	Derivative (expense) income, net	$	2.1	($	1.7	)

Total	$	47.1	($	30.8	)		($	1.3	)	($	2.1	)		$	2.1	($	1.7	)

(a)

For the three months ended September 30, 2014, effective hedging contracts decreased oil revenue by $1.3 million and had a minimal effect on gas revenue. For the three months ended September 30, 2013, effective hedging contracts decreased oil revenue by $7.5 million and increased gas revenue by $5.4 million.


Effect of Derivatives Qualifying as Hedging Instruments on the Statement of Operations for the Nine Months Ended September 30, 2014 and 2013 (In millions)
Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives					Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) (a)						Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion)
	2014		2013			Location	2014			2013		Location	2014		2013
Commodity contracts	$	3.7	($	20.9	)	Operating revenue—oil/gas production	($	17.6	)	$	13.8	Derivative (expense) income, net	$	0.5	($	1.5	)

Total	$	3.7	($	20.9	)		($	17.6	)	$	13.8		$	0.5	($	1.5	)

(a)

For the nine months ended September 30, 2014, effective hedging contracts decreased oil revenue by $10.0 million and decreased gas revenue by $7.6 million. For the nine months ended September 30, 2013, effective hedging contracts increased oil revenue by $2.4 million and increased gas revenue by $11.4 million.

Derivatives not qualifying as hedging instruments:

The following table discloses the location and fair value amounts of our derivatives not qualifying as hedging instruments, as reported in our balance sheet, at September 30, 2014. All of our derivatives at December 31, 2013 qualified as hedging instruments.


Fair Value of Derivatives Not Qualifying as Hedging Instruments at September 30, 2014 (In millions)
Description	Balance Sheet Location	Fair Value
Commodity contracts	Current assets: Fair value of derivative contracts	$	1.2
	Long-term assets: Fair value of derivative contracts		0.2

		$	1.4

Gains or losses related to changes in fair value and cash settlements for derivatives not qualifying as hedging instruments are recorded as derivative income (expense) in the statement of operations. The following table discloses the before tax effect of our derivatives not qualifying as hedging instruments on the statement of operations for the three and nine month periods ended September 30, 2014:


Amount of Gain Recognized in Derivative Income (In millions)
Description	Three Months Ended September 30, 2014		Nine Months Ended September 30, 2014
Commodity contracts:
Cash settlements	$	0.7	$	0.7
Change in fair value		3.0		1.5

Total gains on non-qualifying hedges	$	3.7	$	2.2

Offsetting of derivative assets and liabilities:

Our derivative contracts are subject to netting arrangements. It is our policy to not offset our derivative contracts in presenting the fair value of these contracts as assets and liabilities in our balance sheet. The following presents the potential impact of the rights of offset associated with our recognized assets and liabilities at September 30, 2014 (in millions):


	As Presented Without Netting			Effects of Netting			With Effects of Netting
Current assets: Fair value of derivative contracts	$	16.6		($	0.2	)	$	16.4
Long-term assets: Fair value of derivative contracts		6.5			—			6.5
Current liabilities: Fair value of derivative contracts		(0.2	)		0.2			—
Long-term liabilities: Fair value of derivative contracts		—			—			—