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Derivative Instruments
 12 Months Ended
Dec. 31, 2012
Derivative Instruments

4. Derivative Instruments

The Company utilizes derivative financial instruments to manage risks related to changes in oil prices. As of December 31, 2012, the Company utilized two-way and three-way collar options, swaps, and put spreads to reduce the volatility of oil prices on a significant portion of the Company’s future expected oil production. A two-way collar is a combination of options: a sold call and a purchased put. The purchased put establishes a minimum price (floor) and the sold call establishes a maximum price (ceiling) the Company will receive for the volumes under contract. A three-way collar is a combination of options: a sold call, a purchased put and a sold put. The purchased put establishes a minimum price (floor), unless the market price falls below the sold put (sub-floor), at which point the minimum price would be NYMEX West Texas Intermediate (“WTI”) crude oil index price plus the difference between the purchased put and the sold put strike price. The sold call establishes a maximum price (ceiling) the Company will receive for the volumes under contract. A put spread is a combination of a purchased put and a sold put, and in this case does not include a sold call, allowing the volumes under this contract to have no established maximum price (ceiling). A swap is a sold call and a purchased put established at the same price (both ceiling and floor).

All derivative instruments are recorded on the Consolidated Balance Sheet as either assets or liabilities measured at their fair value (see Note 3 — 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 the fair value, both realized and unrealized, are recognized in the other income (expense) section of the Company’s 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 Consolidated Statement of Cash Flows.

As of December 31, 2012, the Company had the following outstanding commodity derivative contracts, all of which settle monthly based on the WTI crude oil index price:

 

Settlement

Period

   

Derivative
Instrument

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

2013

    Two-way collar      2,116,000             $ 87.05       $ 98.78         56   

2013

    Three-way collar      2,357,420          $ 65.96       $ 92.16       $ 111.26         8,603   

2013

    Put Spreads      1,717,080          $ 70.71       $ 91.24            7,567   

2013

    Swaps      1,033,000       $ 94.76                  1,742   

2014

    Two-way collar      170,500             $ 86.82       $ 97.75         (69 ) 

2014

    Three-way collar      2,361,030          $ 70.38       $ 90.90       $ 106.88         3,453   

2014

    Put Spreads      150,970          $ 71.03       $ 91.03            889   

2014

    Swaps      93,000       $ 94.76                  154   

2015

    Three-way collar      201,500          $ 70.77       $ 90.77       $ 106.48         174   
                    

 

 

  
                     $ 22,569   
                    

 

 

  

The following table summarizes the location and fair value of all outstanding commodity derivative contracts recorded in the Consolidated Balance Sheet for the periods presented:

 

Fair Value of Derivative Instrument Assets (Liabilities)

  
        Fair Value
December 31,		  

Instrument Type

  

Balance Sheet Location

   2012     2011  
        (In thousands)  

Crude oil collar

   Derivative instruments — current assets   $ 19,016      $ —     

Crude oil collar

   Derivative instruments — non-current assets     4,981        4,362  

Crude oil collar

   Derivative instruments — current liabilities     (1,048 )      (5,907 ) 

Crude oil collar

   Derivative instruments — non-current liabilities     (380 )      (3,505 ) 
   

 

 

    

 

 

  

Total derivative instruments

     $  22,569      $ (5,050 ) 
   

 

 

    

 

 

  

 

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

 

          December 31,  
    

Statement of Operations Location

    2012      2011     2010  
          (In thousands)  

Change in unrealized gain (loss) on derivative instruments

    Net gain (loss) on derivative instruments    $ 27,619       $ 5,436      $ (7,533 ) 

Realized gain (loss) on derivative instruments

    Net gain (loss) on derivative instruments      6,545         (3,841 )      (120 ) 
     

 

 

     

 

 

    

 

 

  

Total net gain (loss) on derivative instruments

       $ 34,164       $ 1,595      $ (7,653 )