Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments

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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2012
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. All of the derivative counterparties are also lenders or affiliates of lenders participating in our revolving bank credit facility. We are exposed to credit loss in the event of nonperformance by the derivative counterparties; however, we do not currently anticipate that any of our derivative counterparties will be unable to fulfill their contractual obligations. Additional collateral is not required by us due to the derivative counterparties’ collateral rights as lenders and we do not require collateral from our derivative counterparties. Our derivative agreements allow for netting of derivative gains and losses upon settlement. If an event of default were to occur causing an acceleration of payment under our revolving bank credit facility, that event may also trigger an acceleration of settlement of our derivative instruments.

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. We have elected not to designate our commodity derivatives as hedging instruments, therefore, all changes in the fair value of derivative contracts are recognized currently in earnings. For additional information about fair value measurements, refer to Note 7.

 

Commodity Derivatives. 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 nine months ended September 30, 2012 and 2011, our derivative contracts consisted entirely of crude oil contracts. The zero cost collars are priced off the West Texas Intermediate (“WTI”) 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. Although our Gulf of Mexico crude oil is based off the WTI crude oil price plus a premium, the realized prices received for the types of crude oil have been closer to the Brent crude oil price because of competition with foreign supplied crude oil, which is based off the Brent crude oil price. Therefore, we entered into swap oil contracts priced off the Brent crude oil price to mitigate a portion of the price risk associated with our Gulf of Mexico crude oil production.

 

As of September 30, 2012, our open commodity derivative contracts were as follows:

 

Zero Cost Collars – Oil (NYMEX)  
Termination Period   Notional
Quantity (Bbls)		     Weighted Average
Contract Price		     Fair Value
Liability
(in thousands) 		 
    Floor     Ceiling    
2012:   4th quarter     251,000      $ 75.00      $ 98.99      $ 345   

 

Swaps – Oil (ICE)  
Termination Period   Notional
Quantity  (Bbls) 		    Weighted
Average
Contract  Price 		    Fair Value
Liability
(in thousands)		  
2012:   4th quarter     257,600      $ 107.28      $ 977   
2013:   1st quarter     351,000        101.97        2,501   
  2nd quarter     336,700        101.97        1,862   
  3rd quarter     312,800        101.98        1,265   
  4th quarter     294,400        101.98        805   
2014:   1st quarter     180,000        97.38        1,073   
  2nd quarter     172,900        97.38        807   
  3rd quarter     165,600        97.38        573   
  4th quarter     156,400        97.37        365   
   

 

 

      

 

 

  
      2,227,400      $ 101.19      $ 10,228   
   

 

 

      

 

 

  

The following balance sheet line items included amounts related to the estimated fair value of our open derivative contracts as indicated in the following table (in thousands):

 

     September 30,
2012		      December 31,
2011		  

Prepaid and other assets

    $ —         $ 2,341   

Other assets

      —           1,746   

Accrued liabilities

      6,950         7,199   

Other liabilities

      3,623         —     

 

Changes in the fair value of our derivative contracts are recognized currently in earnings and were as follows (in thousands):

 

     Three Months Ended
September 30,		     Nine Months Ended
September 30,		  
     2012      2011     2012      2011  

Derivative (gain) loss:

           

Realized

    $ 875       $ 917      $ 6,960       $ 9,239   

Unrealized

      23,784         (18,240 )      7,461         (20,054 ) 
  

 

 

     

 

 

    

 

 

     

 

 

  

Total

    $ 24,659       $ (17,323 )    $ 14,421       $ (10,815 )