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Derivative Instruments
 6 Months Ended
Jun. 30, 2013
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
The Company utilizes derivative financial instruments to manage risks related to changes in oil prices. As of June 30, 2013, the Company utilized two-way and three-way costless collar options, put spreads, swaps and swaps with sub-floors to reduce the volatility of oil prices on a significant portion of its 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). A swap with a sub-floor is a swap coupled with a sold put (sub-floor) at which point the minimum price would be WTI crude oil index price plus the difference between the swap and the sold put strike price.
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 net 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, 2013, the Company had the following outstanding commodity derivative instruments, all of which settle monthly based on the average WTI crude oil index price:
 
Settlement
Period
 
Derivative
Instrument
 
Total Notional
Amount of Oil
 
Weighted Average Prices
 
Fair Value
Asset
(Liability)
 
 
 
Swap
 
Sub-Floor
 
Floor
 
Ceiling
 
 
 
 
 
(Barrels)
 
($/Barrel)
 
(In thousands)
2013
 
Two-way collars
 
1,006,500

 
 
 
 
 
$
86.82

 
$
97.75

 
$
(985
)
2013
 
Three-way collars
 
1,121,790

 
 
 
$
65.92

 
92.45

 
111.45

 
1,898

2013
 
Put spreads
 
906,210

 
 
 
70.93

 
91.09

 
 
 
1,364

2013
 
Swaps
 
1,464,000

 
$
95.40

 
 
 
 
 
 
 
(255
)
2014
 
Two-way collars
 
504,500

 
 
 
 
 
88.92

 
95.86

 
682

2014
 
Three-way collars
 
2,695,030

 
 
 
70.33

 
90.79

 
106.21

 
9,870

2014
 
Put spreads
 
150,970

 
 
 
71.03

 
91.03

 
 
 
576

2014
 
Swaps
 
1,083,000

 
93.04

 
 
 
 
 
 
 
2,290

2014
 
Swaps with sub-floors
 
1,336,000

 
92.03

 
70.00

 


 


 
318

2015
 
Two-way collars
 
31,000

 


 
 
 
90.00

 
94.90

 
137

2015
 
Three-way collars
 
232,500

 
 
 
70.67

 
90.67

 
105.81

 
1,114

2015
 
Swaps
 
77,500

 
92.34

 
 
 
 
 
 
 
363

2015
 
Swaps with sub-floors
 
124,000

 
92.03

 
70.00

 
 
 
 
 
244

 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
17,616


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
Commodity
Balance Sheet Location
 
June 30,
2013
 
December 31, 2012
 
 
 
(In thousands)
Crude oil
Derivative instruments — current assets
 
$
7,353

 
$
19,016

Crude oil
Derivative instruments — non-current assets
 
10,554

 
4,981

Crude oil
Derivative instruments — current liabilities
 
—

 
(1,048
)
Crude oil
Derivative instruments — non-current liabilities
 
(291
)
 
(380
)
Total derivative instruments
 
 
$
17,616

 
$
22,569


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
 
2013
 
2012
 
2013
 
2012
 
 
 
(In thousands)
Change in unrealized gain (loss) on derivative instruments
Net gain (loss) on derivative instruments
 
$
11,345

 
$
75,769

 
$
(4,953
)
 
$
58,474

Derivative settlements
Net gain (loss) on derivative instruments
 
1,246

 
(1,174
)
 
2,932

 
(2,465
)
Total net gain (loss) on derivative instruments
 
 
$
12,591

 
$
74,595

 
$
(2,021
)
 
$
56,009


The Company has adopted the FASB’s authoritative guidance on disclosures about offsetting assets and liabilities, which requires entities to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position as well as instruments and transactions subject to an agreement similar to a master netting agreement. The Company’s derivative instruments are presented as assets and liabilities on a net basis by counterparty, as all counterparty contracts provide for net settlement. No margin or collateral balances are deposited with counterparties, and as such, gross amounts are offset to determine the net amounts presented in the Company’s Condensed Consolidated Balance Sheet. The following tables summarize gross and net information about the Company’s commodity derivative instruments for the periods presented:
 
Offsetting of Derivative Assets
 
 
 
 
 
 
Derivative Instruments
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Assets Presented
in the Balance Sheet
 
 
(In thousands)
As of June 30, 2013
 
$
44,565

 
$
(26,658
)
 
$
17,907

As of December 31, 2012
 
68,970

 
(44,973
)
 
23,997

Offsetting of Derivative Liabilities
 
 
 
 
 
 
Derivative Instruments
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset
in the Balance Sheet
 
Net Amounts of Liabilities Presented
in the Balance Sheet
 
 
(In thousands)
As of June 30, 2013
 
$
26,949

 
$
(26,658
)
 
$
291

As of December 31, 2012
 
46,401

 
(44,973
)
 
1,428