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Derivative Instruments and Hedging Activities | 6 Months Ended
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Jun. 30, 2011
Derivative Instruments and Hedging Activities |
Derivative Instruments and Hedging Activities | Note 16 – Derivative Instruments and Hedging Activities We are currently exposed to market risk in three major areas: commodity prices, interest rates and foreign currency exchange rates. Our risk management activities involve the use of derivative financial instruments to hedge the impact of market risk exposures primarily related to our oil and gas production, variable interest rate exposure and foreign exchange currency fluctuations. All derivatives are reflected in the accompanying condensed consolidated balance sheets at fair value unless otherwise noted. We engage solely in cash flow hedges. Hedges of cash flow exposure are entered into to hedge a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability. Changes in the derivative fair values that are designated as cash flow hedges are deferred to the extent that they are effective and are recorded as a component of accumulated other comprehensive income (loss), a component of shareholders' equity, until the hedged transactions occur and are recognized in earnings. The ineffective portion of a cash flow hedge's change in fair value is recognized immediately in earnings. In addition, any change in the fair value of a derivative that does not qualify for hedge accounting is recorded in earnings in the period in which the change occurs. For additional information regarding our accounting for derivatives see Notes 2 and 20 of our 2010 Form 10-K. Commodity Price Risks We currently manage commodity price risk through various financial costless collars and swap instruments covering a portion of our anticipated oil and natural gas production for 2011 and 2012. All of our current commodity derivative contracts qualify for hedge accounting. In June 2010 some of our oil contracts for 480 MBbl covering portions of our anticipated production during the third quarter of 2010 ceased to qualify for hedge accounting as a result of our decision to contract the HP I to BP to assist in the oil spill containment response rather than commencing production from our Phoenix field. As of June 30, 2011, we have the following volumes under derivative contracts related to our oil and gas producing activities totaling approximately 3.5 MMBbl of oil and 9.4 Bcf of natural gas:
Production Period |  | Instrument Type |  | Average Monthly Volumes |  | Weighted Average Price
Crude Oil: |  |  |  |  |  | (per barrel)
July 2011 — December 2011 |  | Swap |  | 175.8 MBbl |  | $82.49
July 2011 — December 2011 |  | Collar |  | 53.3 MBbl |  | $ 95.00 — $124.70
October 2011 — December 2011 |  | Collar |  | 12.5 MBbl |  | $100.00 — $122.80a
January 2012 — December 2012 |  | Collar |  | 75.0 MBbl |  | $ 96.67 — $118.57
January 2012 — December 2012 |  | Collar |  | 91.7 MBbl |  | $100.00 — $120.25a
Natural Gas: |  |  |  |  |  | (per Mcf)
July 2011 — December 2011 |  | Swap |  | 725.8 Mmcf |  | $4.97
January 2012 — December 2012 |  | Swap |  | 250.0 Mmcf |  | $4.77
January 2012 — December 2012 |  | Collar |  | 166.7 Mmcf |  | $4.75 — $5.09
a.The prices quoted in the table above are primarily NYMEX Henry Hub for natural gas or NYMEX West Texas Intermediate for crude oil. As footnoted above these costless collar contracts are priced as Brent crude oil. Changes in quoted oil and gas strip market prices would, assuming all other things being equal, cause the fair value of these instruments to increase or decrease inversely to the change in the quoted market prices. Variable Interest Rate Risks As some of our long-term debt is subject to market influences and has variable interest rates, in January 2010 we entered into various interest rate swaps to stabilize cash flows relating to interest payments for $200 million of our Term Loan debt under our Credit Agreement (Note 7). These monthly contracts will mature in January 2012. Changes in the interest rate swap fair value are deferred to the extent the swap is effective and are recorded as a component of accumulated other comprehensive income (loss) until the anticipated interest payments occur and are recognized in interest expense. The ineffective portion of the interest rate swap, if any, will be recognized immediately in earnings within the line titled net interest expense. Foreign Currency Exchange Risks Because we operate in various regions in the world, we conduct a portion of our business in currencies other than the U.S. dollar. We entered into various foreign currency forwards to stabilize expected cash outflows relating to certain vessel charters denominated in British pounds. The last of our existing monthly foreign currency swap contracts will settle in June 2012. Quantitative Disclosures Related to Derivative Instruments The following tables present the fair value and balance sheet classification of our derivative instruments as of June 30, 2011 and December 31, 2010. The fair value amounts below are presented on a gross basis and do not reflect the netting of asset and liability positions permitted under the terms of our master netting arrangements. Derivatives designated as hedging instruments are as follows:
|  |  | As of June 30, 2011 |  |  |  | As of December 31, 2010 |
|  |  | Balance Sheet Location |  |  |  | Fair Value |  |  |  | Balance Sheet Location |  |  |  | Fair Value |
|  |  | (in thousands) |
Asset Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil contracts |  |  | Other current assets |  |  | $ | 3,381 |  |  |  | Other current assets |  |  | $ | 0 |
Natural gas contracts |  |  | Other current assets |  |  |  | 2,302 |  |  |  | Other current assets |  |  |  | 5,324 |
Natural gas contracts |  |  | Other assets, net |  |  |  | 32 |  |  |  | Other assets, net |  |  |  | 0 |
Oil contracts |  |  | Other assets, net |  |  |  | 1,816 |  |  |  | Other assets, net |  |  |  | 0 |
Interest rate swaps |  |  | Other assets, net |  |  |  | 0 |  |  |  | Other assets, net |  |  |  | 0 |
|  |  |  |  |  | $ | 7,531 |  |  |  |  |  |  | $ | 5,324 |
|  |  | As of June 30, 2011 |  |  |  | As of December 31, 2010 |
|  |  | Balance Sheet Location |  |  |  | Fair Value |  |  |  | Balance Sheet Location |  |  |  | Fair Value |
|  |  | (in thousands) |
Liability Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Oil contracts |  |  | Accrued liabilities |  |  | $ | 16,055 |  |  |  | Accrued liabilities |  |  | $ | 28,855 |
Interest rate swaps |  |  | Accrued liabilities |  |  |  | 1,157 |  |  |  | Accrued liabilities |  |  |  | 1,751 |
Oil contracts |  |  | Other long-term liabilities |  |  |  | 399 |  |  |  | Other long-term liabilities |  |  |  | 0 |
Natural gas contracts |  |  | Other long-term liabilities |  |  |  | 226 |  |  |  | Other long-term liabilities |  |  |  | 913 |
Interest rate swaps |  |  | Other long-term liabilities |  |  |  | 0 |  |  |  | Other long-term liabilities |  |  |  | 115 |
|  |  |  |  |  | $ | 17,837 |  |  |  |  |  |  | $ | 31,634 |
Derivatives that were not designated as hedging instruments (in thousands):
|  |  | As of June 30, 2011 |  |  |  | As of December 31, 2010 |
|  |  | Balance Sheet Location |  |  |  | Fair Value |  |  |  | Balance Sheet Location |  |  |  | Fair Value |
|  |  | (in thousands) |
Asset Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forwards |  |  | Other current assets |  |  | $ | 305 |  |  |  | Other current assets |  |  | $ | 148 |
Foreign exchange forwards |  |  | Other assets, net |  |  |  | 0 |  |  |  | Other assets, net |  |  |  | 42 |
|  |  |  |  |  | $ | 305 |  |  |  |  |  |  | $ | 190 |
Liability Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
|  |  |  |  |  | $ | 0 |  |  |  |  |  |  | $ | 0 |
The following tables present the impact that derivative instruments designated as cash flow hedges had on our accumulated comprehensive loss and our condensed consolidated statements of operations for the three and six month periods ended June 30, 2011 and 2010.
|  |  | Gain (Loss) Recognized in OCI on Derivatives (Effective Portion) |
|  |  | Three Months Ended June 30, |  |  |  | Six Months Ended June 30, |
|  |  | 2011(1) |  |  |  | 2010(1) |  |  |  | 2011(1) |  |  |  | 2010(1) |
|  |  | (in thousands) |
Oil and natural gas commodity contracts |  | $ | 20,720 |  |  | $ | 2,575 |  |  | $ | 9,942 |  |  | $ | 17,205 |
Interest rate swaps |  |  | 250 |  |  |  | (512 | ) |  |  | 461 |  |  |  | (1,102 | )
|  | $ | 20,970 |  |  | $ | 2,063 |  |  | $ | 10,403 |  |  | $ | 16,103 |
(1) All unrealized gains (losses) related to our derivatives are expected to be reclassified into earnings by no later than December 31, 2012. The last of our interest swaps will mature in January 2012 and we have foreign exchange forwards and oil and natural gas commodity contracts that have maturities through June and December 2012, respectively.
|  |  | Location of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |  |  |  | Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) |
|  |  |  |  | Three Months Ended June 30, |  |  |  | Six Months Ended June 30, |
|  |  |  |  | 2011 |  |  |  | 2010 |  |  |  | 2011 |  |  |  | 2010 |
Oil and natural gas commodity contracts |  |  | Oil and gas revenue |  |  | $ | (11,860 | ) |  | $ | 9,663 |  |  | $ | (18,185 | ) |  | $ | 10,464 |
Interest rate swaps |  |  | Net interest expense |  |  |  | (591 | ) |  |  | (469 | ) |  |  | (1,071 | ) |  |  | (887 | )
|  |  |  |  |  | $ | (12,451 | ) |  | $ | 9,194 |  |  | $ | (19,256 | ) |  | $ | 9,577 |
The following table presents the impact of derivative instruments that no longer qualify for hedge accounting or were not designated as hedges on our condensed consolidated income statement for the three and six month periods ended June 30, 2011 and 2010:
|  |  | Location of Gain (Loss) Recognized in Income on Derivatives |  |  |  | Gain (Loss) Recognized in Income on Derivatives |
|  |  |  |  | Three Months Ended June 30, |  |  |  | Six Months Ended June 30, |
|  |  |  |  | 2011 |  |  |  | 2010 |  |  |  | 2011 |  |  |  | 2010 |
|  |  |  |  |  |  | (in thousands) |
Natural gas contracts |  |  | Gain on oil and gas derivative contracts |  |  | $ | 0 |  |  | $ | 2,482 |  |  | $ | 0 |  |  | $ | 2,482 |
Foreign exchange forwards |  |  | Other income (expense) |  |  |  | 6 |  |  |  | (398 | ) |  |  | 614 |  |  |  | (3,305 | )
|  |  |  |  |  | $ | 6 |  |  | $ | 2,084 |  |  | $ | 614 |  |  | $ | (823 | )

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1B -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5580258-113959 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08.(n)) -URI http://asc.fasb.org/extlink&oid=6881521&loc=d3e23780-122690 Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4A -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5618551-113959 Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4B -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624163-113959 Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4J -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5708773-113959 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41638-113959 Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4C -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624171-113959 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41620-113959 Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 5 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41641-113959 Reference 11: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6887037&loc=d3e80748-113994 Reference 12: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 45 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993 Reference 13: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 30 -Section 50 -Paragraph 2 -URI http://asc.fasb.org/extlink&oid=6887037&loc=d3e80784-113994 Reference 14: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5579240-113959 Reference 15: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6935481&loc=d3e41635-113959 Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4E -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624181-113959 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 4H -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5624258-113959 Reference 18: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 10 -Section 50 -Paragraph 1A -URI http://asc.fasb.org/extlink&oid=6935481&loc=SL5579245-113959 Reference 19: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -SubTopic 25 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986 Reference 20: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 45 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. 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