Derivatives

The Company has not designated any of its derivative contracts as hedges for accounting purposes. The Company records all derivative contracts, which include commodity derivatives and an interest rate swap, at fair value. Changes in derivative contract fair values are recognized in earnings. Cash settlements and valuation gains and losses are included in (gain) loss on derivative contracts for commodity derivative contracts and in interest expense for interest rate swaps in the consolidated statement of operations. Commodity derivative contracts are settled on a monthly or quarterly basis. Settlements on interest rate swaps occur quarterly. Derivative assets and liabilities arising from the Company’s derivative contracts with the same counterparty that provide for net settlement are reported on a net basis in the consolidated balance sheet.

Commodity Derivatives. The Company is exposed to commodity price risk, which impacts the predictability of its cash flows from the sale of oil and natural gas. The Company seeks to manage this risk through the use of commodity derivative contracts. These derivative contracts allow the Company to limit its exposure to commodity price volatility on a portion of its forecasted oil and natural gas sales. None of the Company’s derivative contracts may be terminated early solely as a result of a downgrade in the credit rating of a party to the contract. At December 31, 2012, the Company’s commodity derivative contracts consisted of fixed price swaps, collars and basis swaps, which are described below:



Fixed price swaps	The Company receives a fixed price for the contract and pays a floating market price to the counterparty over a specified period for a contracted volume.

Collars	Two-way collars contain a fixed floor price (put) and a fixed ceiling price (call). If the market price exceeds the call strike price or falls below the put strike price, the Company receives the fixed price and pays the market price. If the market price is between the call and the put strike price, no payments are due from either party.
	Three-way collars have two fixed floor prices (a purchased put and a sold put) and a fixed ceiling price (call). The purchased put establishes a minimum price unless the market price falls below the sold put, at which point the minimum price would be New York Mercantile Exchange plus the difference between the purchased put and the sold put strike price. The call establishes a maximum price (ceiling) the Company will receive for the volumes under the contract.

Basis swaps	The Company receives a payment from the counterparty if the settled price differential is greater than the stated terms of the contract and pays the counterparty if the settled price differential is less than the stated terms of the contract, which guarantees the Company a price differential for oil and natural gas from a specified delivery point.

Interest Rate Swaps. The Company is exposed to interest rate risk on long-term fixed and variable interest rate borrowings. Fixed rate debt, where the interest rate is fixed over the life of the instrument, exposes the Company to (i) changes in market interest rates reflected in the fair value of the debt and (ii) the risk that the Company may need to refinance maturing debt with new debt at a higher rate. Variable rate debt, where the interest rate fluctuates, exposes the Company to short-term changes in market interest rates as the Company’s interest obligations on these instruments are periodically redetermined based on prevailing market interest rates, primarily LIBOR and the federal funds rate.

The Company has a $350.0 million notional interest rate swap agreement, which effectively fixed the variable interest rate on the Senior Floating Rate Notes at an annual rate of 6.69% for periods prior to the Company’s purchase of the Senior Floating Rate Notes in the third quarter of 2012. The interest rate swap terminates April 1, 2013 and has not been designated as a hedge.

Derivatives Agreements with Royalty Trusts. Effective April 1, 2011, August 1, 2011 and April 1, 2012, the Company entered into derivatives agreements with the Mississippian Trust I, Permian Trust and Mississippian Trust II, respectively, to provide each Royalty Trust with the economic effect of certain oil and natural gas derivative contracts entered into by the Company with third parties. The underlying commodity derivative contracts cover volumes of oil and natural gas production through December 31, 2015, March 31, 2015 and December 31, 2014 for the Mississippian Trust I, Permian Trust and Mississippian Trust II, respectively. Under these arrangements, the Company will pay the Royalty Trusts amounts it receives from its counterparties in accordance with the underlying contracts, and the Royalty Trusts will pay the Company any amounts that the Company is required to pay its counterparties under such contracts.

Substantially concurrent with the execution of the respective derivatives agreements, the Company novated certain of the derivatives contracts underlying the derivatives agreements to each of the Permian Trust and Mississippian Trust II. As a party to these contracts, the Permian Trust and Mississippian Trust II will receive payment directly from the counterparty and pay any amounts owed directly to the counterparty. To secure its obligations under the respective derivatives contracts novated to it, each of the Permian Trust and Mississippian Trust II granted the counterparties liens on the royalty interests held by each respective trust. Under the derivatives agreements, as development wells are drilled for the benefit of the Permian Trust and Mississippian Trust II, the Company will have the right, under certain circumstances, to assign or novate to the Permian Trust and Mississippian Trust II additional derivative contracts. In April 2012, the Company novated to the Permian Trust additional derivative contracts underlying the derivatives agreement.

All contracts underlying the derivatives agreements with the Royalty Trusts, including those novated to the Permian Trust and Mississippian Trust II, have been included in the Company’s consolidated derivative disclosures. See Note 4 for additional discussion of the Royalty Trusts.

Fair Value of Derivatives. The following table presents the fair value of the Company’s derivative contracts as of December 31, 2012 and 2011 on a gross basis without regard to same-counterparty netting (in thousands):



		December 31,
Type of Contract	Balance Sheet Classification	2012			2011
Derivative assets
Oil price swaps	Derivative contracts—current	$	88,052		$	6,095
Natural gas price swaps	Derivative contracts—current	—			6,585
Oil basis swaps	Derivative contracts—current	183			—
Natural gas collars	Derivative contracts—current	3,111			313
Diesel price swaps	Derivative contracts—current	—			397
Oil price swaps	Derivative contracts—noncurrent	37,983			48,718
Oil collars—three way	Derivative contracts—noncurrent	190			—
Natural gas collars	Derivative contracts—noncurrent	884			1,035
Derivative liabilities
Oil price swaps	Derivative contracts—current	(31,991		)	(116,243		)
Oil basis swaps	Derivative contracts—current	(695		)	—
Oil collars—two way	Derivative contracts—current	(103		)	—
Diesel price swaps	Derivative contracts—current	—			(41		)
Interest rate swap	Derivative contracts—current	(2,395		)	(8,475		)
Oil price swaps	Derivative contracts—noncurrent	(67,900		)	(66,451		)
Natural gas basis swaps	Derivative contracts—noncurrent	—			(4,609		)
Oil collars—three way	Derivative contracts—noncurrent	(7,327		)	—
Interest rate swap	Derivative contracts—noncurrent	—			(1,973		)
Total net derivative contracts		$	19,992		$	(134,649	)

Refer to Note 5 for additional discussion of the fair value measurement of the Company’s derivative contracts.

The following table summarizes the cash settlements and valuation gain and loss on the Company’s commodity derivative contracts and interest rate swaps, which are included in (gain) loss on derivative contracts and interest expense, respectively, in the accompanying consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010 (in thousands):



	Year Ended December 31,
	2012			2011			2010
Commodity Derivatives
Realized (gain) loss(1)	$	(31,718	)	$	50,713		$	(224,337	)
Unrealized (gain) loss	$	(209,701	)	$	(94,788	)	$	275,209
(Gain) loss on commodity derivative contracts	$	(241,419	)	$	(44,075	)	$	50,872
Interest Rate Swaps
Realized loss	$	9,243		$	9,414		$	8,145
Unrealized (gain) loss	(8,054		)	(6,246		)	8,395
Loss on interest rate swaps	$	1,189		$	3,168		$	16,540

____________________

(1)

The year ended December 31, 2012 includes $59.5 million of net realized gain related to settlements of commodity derivative contracts with contractual maturities after the quarterly period in which they were settled (“early settlements”) and a $117.1 million non-cash realized loss on derivative contracts amended in January 2012. The years ended December 31, 2011 and 2010 include $48.1 million ($111.0 million realized gain and $62.9 million realized loss) and $114.5 million of realized gain, respectively, related to early settlements.

At December 31, 2012, the Company’s open commodity derivative contracts consisted of the following:

Oil Price Swaps



	Notional (MBbls)	Weighted Average Fixed Price
January 2013 — December 2013	18,515	$	96.24
January 2014 — December 2014	7,511	$	92.43
January 2015 — December 2015	5,076	$	83.69

Oil Basis Swaps

Oil Collars - Two-way

Oil Collars - Three-way



	Notional (MBbls)	Sold Put	Purchased Put	Sold Call
January 2014 — December 2014	8,213	$70.00	$90.20	$100.00
January 2015 — December 2015	2,920	$73.13	$90.82	$103.13

Natural Gas Collars



	Notional (MMcf)	Collar Range
January 2013 — December 2013	6,858	$3.78	—	$6.71
January 2014 — December 2014	937	$4.00	—	$7.78
January 2015 — December 2015	1,010	$4.00	—	$8.55

Notional (MBbls)

Weighted Average
Fixed Price

January 2013 — December 2013