Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2012
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments

5. Derivative Financial Instruments

Our market risk exposure relates primarily to commodity prices and interest rates. From time to time, we use various derivative instruments to manage our exposure to commodity price risk from sales of oil and natural gas and interest rate risk from floating interest rates on our revolving bank credit facility. We do not enter into derivative instruments for speculative trading purposes. Our derivative instruments currently consist of crude oil swap and option contracts. We are exposed to credit loss in the event of nonperformance by the counterparties (Natixis; ING Capital Markets, LLC-EDP; the Toronto Dominion Bank; and BNP Paribas Corporate and Investment Banking); however, we do not currently anticipate any of our counterparties being unable to fulfill their contractual obligations.

We account for derivative contracts in accordance with GAAP, which requires each derivative to be recorded on the balance sheet as an asset or a liability at its fair value. Changes in a derivative's fair value are required to be recognized currently in earnings unless specific hedge accounting criteria are met at the time we enter into a derivative contract. We have elected not to designate our commodity derivatives as hedging instruments. For additional information about fair value measurements, refer to Note 7.

Commodity Derivative: We have entered into commodity option contracts to manage a portion of our exposure to commodity price risk from sales of oil through December 2014. While these contracts are intended to reduce the effects of price volatility, they may also limit future income from favorable price movements. During the three months ended March 31, 2012 and 2011, our derivative contracts consisted entirely of crude oil contracts. The zero cost collars are priced off the West Texas Intermediate crude oil price quoted on the New York Mercantile Exchange, known as NYMEX, and the swaps are priced off the Brent crude oil price quoted on the IntercontinentalExchange, known as ICE.

As of March 31, 2012, our open commodity derivatives were as follows:

 

Zero Cost Collars – Oil (NYMEX)

  
                 Weighted Average
Contract Price		      Fair Value  

Termination Period

    Notional
Quantity  (Bbls) 		     Floor      Ceiling      Liability
(in thousands)		  

2012:

   2nd quarter      364,000       $ 75.00       $ 97.88       $ 2,603   
  3rd quarter      124,000         75.00         97.88         1,185   
  4th quarter      251,000         75.00         98.99         2,808   
    

 

 

           

 

 

  
       739,000       $ 75.00       $ 98.25       $ 6,596   
    

 

 

           

 

 

  

 

Swaps – Oil (Brent)

  

Termination Period

    Notional
Quantity (Bbls)		      Weighted Average
Contract  Price 		     Fair Value
Liability
(in thousands)		  

2012:

   2nd quarter      401,310       $ 109.81       $ 4,619   
  3rd quarter      414,000         107.28         4,884   
  4th quarter      257,600         107.28         2,543   

2013:

   1st quarter      351,000         101.97         4,563   
  2nd quarter      336,700         101.97         3,714   
  3rd quarter      312,800         101.98         2,860   
  4th quarter      294,400         101.98         2,149   

2014:

   1st quarter      180,000         97.38         1,793   
  2nd quarter      172,900         97.38         1,405   
  3rd quarter      165,600         97.38         1,066   
  4th quarter      156,400         97.37         754   
    

 

 

        

 

 

  
       3,042,710       $ 103.16       $ 30,350   
    

 

 

        

 

 

  

At March 31, 2012, $23.2 million was included in Accrued liabilities and $13.7 million was included in Other long-term liabilities related to the fair value of our derivative contracts. At December 31, 2011, $7.2 million was included in Accrued liabilities, $2.3 million was included in Prepaid and other assets and $1.8 million was included in Other assets related to the fair value of our derivative contracts. Changes in the fair value of our derivative contracts are recognized currently in earnings. Our derivative loss for the three months ended March 31, 2012 includes realized and unrealized losses of $5.8 million and $33.8 million, respectively. Our derivative loss for the three months ended March 31, 2011 includes realized and unrealized losses of $2.2 million and $21.6 million, respectively.