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Derivative Instruments
 6 Months Ended
Jun. 30, 2012
Derivative Instruments

6. Derivative Instruments

The Company utilizes derivative financial instruments to manage risks related to changes in oil prices. As of June 30, 2012, the Company utilized put spreads, two-way collar options and three-way collar options to reduce the volatility of oil prices on a significant portion of the Company’s future expected oil production. All derivative instruments are recorded on the balance sheet as either assets or liabilities measured at fair value (see Note 5 – Fair Value Measurements). Derivative assets and liabilities arising from the Company’s derivative contracts with the same counterparty are also reported on a net basis, as all counterparty contracts provide for net settlement. The Company has not designated any derivative instruments as hedges for accounting purposes and does not enter into such instruments for speculative trading purposes. If a derivative does not qualify as a hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized, are recognized in the Other Income (Expense) section of the Condensed Consolidated Statement of Operations as a gain or loss on derivative instruments. The Company’s cash flow is only impacted when the actual settlements under the derivative contracts result in making or receiving a payment to or from the counterparty. These cash settlements are reflected as investing activities in the Company’s Condensed Consolidated Statement of Cash Flows.

 

As of June 30, 2012, the Company had the following outstanding commodity derivative instruments, all of which settle monthly based on the average West Texas Intermediate crude oil index price:

 

Settlement

Period

   

Derivative
Instrument

    Total
Notional
Amount of
Oil (Barrels)		      Average Sub-Floor Price      Average
Floor Price		      Average
Ceiling Price		      Fair Value
Asset
(Liability)		  
                                      (In thousands)  

2012

    Two-Way Collars      1,189,500          $ 89.23       $ 108.76       $ 7,906   

2012

    Three-Way Collars      1,860,000       $ 66.39       $ 90.33       $ 109.70         12,093   

2013

    Two-Way Collars      201,500          $ 89.23       $ 108.76         1,533   

2013

    Three-Way Collars      2,023,420       $ 65.30       $ 92.51       $ 112.63         13,978   

2013

    Put Spreads      1,717,080       $ 70.71       $ 91.24            12,853   

2014

    Three-Way Collars      827,030       $ 71.08       $ 92.58       $ 114.15         3,714   

2014

    Put Spreads      150,970       $ 71.03       $ 91.03            1,104   

2015

    Three-Way Collars      62,000       $ 72.50       $ 92.50       $ 114.40         243   
                 

 

 

  
                  $ 53,424   
                 

 

 

  

The following table summarizes the location and fair value of all outstanding commodity derivative instruments recorded in the balance sheet for the periods presented:

 

Fair Value of Derivative Instrument Assets (Liabilities)

  
          Fair Value  

Instrument Type

    Balance Sheet Location    June 30,
2012		      December 31,
2011		  
          (In thousands)  

Crude oil collar

    Derivative instruments — current assets    $ 35,257       $ —     

Crude oil collar

    Derivative instruments — non-current assets      18,167         4,362   

Crude oil collar

    Derivative instruments — current liabilities      —           (5,907 ) 

Crude oil collar

    Derivative instruments — non-current liabilities      —           (3,505 ) 
     

 

 

     

 

 

  

Total derivative instruments

       $ 53,424       $ (5,050 ) 
     

 

 

     

 

 

  

The following table summarizes the location and amounts of realized and unrealized gains and losses from the Company’s commodity derivative instruments for the periods presented:

 

          Three Months Ended June 30,     Six Months Ended June 30,  
     

Income Statement Location

    2012     2011     2012     2011  
          (In thousands)     (In thousands)  

Change in unrealized gain/loss on derivative instruments

    Net gain (loss) on derivative instruments    $ 75,769      $ 31,687      $ 58,474      $ 533   

Realized loss on derivative instruments

    Net gain (loss) on derivative instruments      (1,174 )      (4,140 )      (2,465 )      (4,652 ) 
     

 

 

    

 

 

    

 

 

    

 

 

  

Total net gain (loss) on derivative instruments

       $ 74,595      $ 27,547      $ 56,009      $ (4,119 )