Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2013

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Note 5. Derivative Instruments

Oil and Natural Gas Derivative Contracts

We do not apply hedge accounting treatment to our oil and natural gas derivative contracts; therefore, the changes in the fair values of these instruments are recognized in income in the period of change.  These fair value changes, along with the cash settlements of expired contracts, are shown under “Derivatives expense (income)” in our Unaudited Condensed Consolidated Statements of Operations.

From time to time, we enter into various oil and natural gas derivative contracts to provide an economic hedge of our exposure to commodity price risk associated with anticipated future oil and natural gas production. We do not hold or issue derivative financial instruments for trading purposes. These contracts have consisted of price floors, collars and fixed price swaps. The production that we hedge has varied from year to year depending on our levels of debt and financial strength and expectation of future commodity prices. We currently employ a strategy to hedge a portion of our forecasted production approximately two years in the future from the current quarter, as we believe it is important to protect our future cash flow to provide a level of assurance for our capital spending in those future periods in light of current worldwide economic uncertainties and commodity price volatility. We do not have any natural gas derivative contracts for 2013 or beyond. Because our current and forecasted production is primarily oil, we currently use only oil derivative contracts in our commodity market risk management program.

The following is a summary of “Derivatives expense (income)” included in our Unaudited Condensed Consolidated Statements of Operations for the periods indicated:

	Three Months Ended
	March 31,
In thousands	2013		2012
Oil
Cash payment on settlements of derivative contracts	$	—	$	8,230
Noncash fair value adjustments to derivative contracts – expense	11,929		42,445
Total derivatives expense – oil	11,929		50,675
Natural Gas
Cash receipt on settlements of derivative contracts	—		(7,040		)
Noncash fair value adjustments to derivative contracts – expense	—		1,640
Total derivatives income – natural gas	—		(5,400		)
Derivatives expense (income)	$	11,929	$	45,275

Commodity Derivative Contracts Not Classified as Hedging Instruments

The following tables present outstanding commodity derivative contracts with respect to future production as of March 31, 2013:

				Contract Prices per Barrel
		Type of	Volume					Weighted Average Price
Year	Months	Contract	(Barrels per day)	Range				Floor		Ceiling
Oil contracts:
2013	Apr – June	Collar	56,000	$	75.00	–	121.50	$	79.64	$	108.61
	July – Sept	Collar	56,000		75.00	–	133.10	79.64		109.15
	Oct – Dec	Collar	54,000		80.00	–	127.50	80.00		117.53
2014	Jan – Mar	Collar	52,000	$	80.00	–	104.50	$	80.00	$	102.44
	Apr – June	Collar	52,000		80.00	–	104.50	80.00		102.44
	July – Sept	Collar	48,000		80.00	–	98.80	80.00		97.46
	Oct – Dec	Collar	48,000		80.00	–	98.80	80.00		97.46
2015	Jan – Mar	Collar	9,000	$	80.00	–	100.90	$	80.00	$	100.59

Additional Disclosures about Derivative Instruments

At March 31, 2013 and December 31, 2012, we had derivative financial instruments recorded in our Unaudited Condensed Consolidated Balance Sheets as follows:

		Estimated Fair Value Asset (Liability)
		March 31,			December 31,
Type of Contract	Balance Sheet Location	2013			2012
		In thousands
Derivatives not designated as hedging instruments:
Derivative assets
Crude oil contracts	Derivative assets – current	$	3,981		$	19,477
Crude oil contracts	Derivative assets – long-term	395			36
Derivative liabilities
Crude oil contracts	Derivative liabilities – current	(7,672		)	(2,659		)
Deferred premiums	Derivative liabilities – current	—			(183		)
Crude oil contracts	Derivative liabilities – long-term	(15,560		)	(23,781		)
Total derivatives not designated as hedging instruments		$	(18,856	)	$	(7,110	)

We manage and control market and counterparty credit risk through established internal control procedures that are reviewed on an ongoing basis.  We attempt to minimize credit risk exposure to counterparties through formal credit policies, monitoring procedures, and diversification, and all of our commodity derivative contracts are with parties that are lenders under our Bank Credit Agreement. The majority of those derivative contracts are subject to enforceable master netting arrangements whereby payables on those contracts can be offset against receivables from separate derivative contracts with the same counterparty. It is our policy to classify derivative assets and liabilities on a gross basis on our balance sheets, even if the contracts are subject to enforceable master netting arrangements. The following table details the March 31, 2013 and December 31, 2012 asset and liability positions of those derivative contracts which are subject to enforceable master netting arrangements:

	March 31,		December 31,
In thousands	2013		2012
Derivatives subject to enforceable master netting arrangements:
Assets	$	3,009	$	14,059
Liabilities	17,273		19,964