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Financial Instruments
 6 Months Ended
Jun. 30, 2011
Financial Instruments  
Financial Instruments

(11) Financial Instruments

Fair Value measurements:

Authoritative guidance on fair value measurements defines fair value, establishes a framework for measuring fair value and stipulates the related disclosure requirements. The Company follows a three-level hierarchy, prioritizing and defining the types of inputs used to measure fair value. The fair values of the Company's interest rate swaps, natural gas and crude oil price collars and swaps are designated as Level 3. The following fair value hierarchy table presents information about the Company's assets and liabilities measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010:

 

     Quoted Prices in
Active Markets
For Identical
Assets (Level 1)		      Significant
Other
Observable
Inputs (Level 2)		      Significant
Unobservable
Inputs (Level 3)		     Balance as of
June 30,
2011		  

June 30, 2011

           

Assets

           

Commodity derivative contracts

      —        —      $ 2,040,000      $ 2,040,000   
        

 

 

    

 

 

  

Total assets

      —        —      $ 2,040,000      $ 2,040,000   
        

 

 

    

 

 

  

Liabilities

           

Commodity derivative contracts

      —        —      $ (8,128,000 )    $ (8,128,000 ) 
        

 

 

    

 

 

  

Total liability

      —        —      $ (8,128,000 )    $ (8,128,000 ) 
        

 

 

    

 

 

  
     Quoted Prices in
Active Markets
For Identical
Assets (Level 1)		      Significant
Other
Observable
Inputs (Level 2)		      Significant
Unobservable
Inputs (Level 3)		     Balance as of
December 31,
2010		  

December 31, 2010

           

Assets

           

Commodity derivative contracts

      —         —       $ 3,042,000      $ 3,042,000   
        

 

 

    

 

 

  

Total assets

      —         —       $ 3,042,000      $ 3,042,000   
        

 

 

    

 

 

  

Liabilities

           

Commodity derivative contracts

      —         —       $ (5,635,000 )    $ (5,635,000 ) 
        

 

 

    

 

 

  

Total liability

      —         —       $ (5,635,000 )    $ (5,635,000 ) 
        

 

 

    

 

 

  

 

The following table sets forth a reconciliation of changes in the fair value of financial assets and liabilities classified as level 3 in the fair value hierarchy for the six months ended June 30, 2011.

 

Net liabilities – December 31, 2010

    $ (2,593,000 ) 

Total realized and unrealized gains or losses:

   

Included in earnings (a)

      (3,360,000 ) 

Purchases, sales, issuances and settlements,

      (135,000 ) 
  

 

 

  

Net liabilities – June 30, 2011

    $ (6,088,000 ) 
  

 

 

  

(a) Derivative instruments are reported in oil and gas sales as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments.

Derivative Instrument:

The Company is exposed to commodity price and interest rate risk, and management considers periodically the Company's exposure to cash flow variability resulting from the commodity price changes and interest rate fluctuations. Futures, swaps and options are used to manage the Company's exposure to commodity price risk inherent in the Company's oil and gas production operations. The Company does not apply hedge accounting to any of its commodity based derivatives. Both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings.

Effect of derivative instruments on the consolidated balance sheet:

 

          Fair Value  
    

Balance Sheet Location

    June 30, 2011     December 31, 2010  

Asset Derivatives:

        

Derivatives not designated as hedging instruments:

        

Natural gas commodity contracts

    Current derivative contracts    $ 1,832,000      $ 3,038,000   

Natural gas commodity contracts

    Other assets      208,000        0   

Crude oil commodity contracts

    Other assets      0        4,000   
     

 

 

    

 

 

  

Total

       $ 2,040,000      $ 3,042,000   
     

 

 

    

 

 

  

Liability Derivatives:

        

Derivatives not designated as hedging instruments:

        

Crude oil commodity contracts

    Derivative liability short term    $ (2,796,000 )    $ (3,048,000 ) 

Crude oil commodity contracts

    Derivative liability long term      (5,332,000 )      (2,587,000 ) 
     

 

 

    

 

 

  

Total

       $ (8,128,000 )    $ (5,635,000 ) 
     

 

 

    

 

 

  

Total derivative instruments

       $ (6,088,000 )    $ (2,593,000 ) 
     

 

 

    

 

 

  

Effect of derivative instruments on the consolidated statement of operations for the six-month periods ended June 30, 2011 and 2010:

 

    

Location of gain/loss reclassified
from OCI into income

    Amount of gain/loss
reclassified from accumulated
OCI into income		  
        2011     2010  

Derivatives designated as cash-flow hedges

        

Interest rate swap derivatives

    Interest expense    $ 0      $ (347,000 ) 
     

 

 

    

 

 

  
      $ 0      $ (347,000 ) 
     

 

 

    

 

 

  
    

Location of gain/loss recognized
in income

    Amount of gain/loss
recognized in income		  
        2011     2010  

Derivatives not designated as cash-flow hedge instruments

        

Natural gas commodity contracts

    Unrealized gain(loss) on derivative instruments    $ (998,000 )    $ 1,570,000  

Crude oil commodity contracts

    Unrealized gain(loss) on derivative instruments      (2,498,000 )      7,673,000  

Natural gas commodity contracts

    Oil and gas sales      1,972,000        1,646,000  

Crude oil commodity contracts

    Oil and gas sales      (1,836,000 )      (96,000 )
     

 

 

    

 

 

  
      $ (3,360,000 )    $ 10,793,000