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 December 31, 2011 and 2010:


December 31, 2011 (Thousands of dollars)	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, 2011
Assets
Commodity derivative contracts	$	—	$	—	$	—		$	—

Total assets	$	—	$	—	$	—		$	—

Liabilities
Commodity derivative contracts	$	—	$	—	$	(3,507	)	$	(3,507	)

Total liability	$	—	$	—	$	(3,507	)	$	(3,507	)


December 31, 2010 (Thousands of dollars)	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
Assets
Commodity derivative contracts	$	—	$	—	$	3,042		$	3,042

Total assets	$	—	$	—	$	3,042		$	3,042

Liabilities
Commodity derivative contracts	$	—	$	—	$	(5,635	)	$	(5,635	)

Total liability	$	—	$	—	$	(5,635	)	$	(5,635	)

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 years ended December 31, 2011 and 2010.


	Year Ended December 31,
(Thousands of dollars)	2011			2010
Net assets (liabilities) at beginning of period	$	(2,593	)	$	(4,301	)
Total realized and unrealized (gains) losses:
Included in earnings (a)		6,687			5,286
Purchases, sales, issuances and settlements		(7,601	)		(3,578	)

Net assets (liabilities) at end of period	$	(3,507	)	$	(2,593	)

(a)	Derivative instruments are reported in revenues as realized gain/loss and on a separately reported line item captioned unrealized gain/loss on derivative instruments and interest rate swap instruments are reported as a reduction to interest expense.

The interest rate swap agreements expired in April 2010, and they have not been replaced.

Derivative Instruments:

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.

Interest rate swap derivatives continue to be treated as cash-flow hedges and are used to fix or float interest rates on existing debt. Settlement of the swaps is recorded within interest expense. All interest swap agreements expired in April 2010, and they have not been replaced.

The following table sets forth the effect of derivative instruments on the consolidated balance sheets as of December 31, 2011 and 2010:


		Fair Value at December 31,
(Thousands of dollars)	Balance Sheet Location	2011			2010
Asset Derivatives:
Derivatives not designated as hedging instruments:
Natural gas commodity contracts	Other current assets	$	—		$	3,038
Crude oil commodity contracts	Other assets		—			4

Total		$	—		$	3,042

Liability Derivatives:
Derivatives not designated as hedging instruments:
Crude oil commodity contracts	Derivative liability short-term	$	(2,046	)	$	(3,048	)
Crude oil commodity contracts	Derivative liability long-term		(1,461	)		(2,587	)

Total		$	(3,507	)	$	(5,635	)

Total derivative instruments		$	(3,507	)	$	(2,593	)

The following table sets forth the effect of derivative instruments on the consolidated statements of operations for the years ended December 31, 2011 and 2010:


(Thousands of dollars)	Location of gain/loss reclassified from OCI into income	Amount of gain/loss reclassified from accumulated OCI into income
(Thousands of dollars)	Location of gain/loss reclassified from OCI into income	2011			2010
Derivatives designated as cash-flow hedges:
Interest rate swap derivatives	Interest expense	$	—		$	(347	)

		$	—		$	(347	)


(Thousands of dollars)	Location of gain/loss recognized in income	Amount of gain/loss recognized in income
(Thousands of dollars)	Location 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, net	$	(3,037	)	$	2,158
Crude oil commodity contracts	Unrealized gain (loss) on derivative instruments, net		2,123			(785	)
Natural gas commodity contracts (a)	Realized gain (loss) on derivative instruments, net		6,289			4,020
Crude oil commodity contracts (a)	Realized gain (loss) on derivative instruments, net		1,312			(442	)

		$	6,687		$	4,951

(a)

In August 2011 and October 2011, the Company unwound and monetized natural gas and crude oil swaps and collars with original settlement dates from September 2011 through December 2014 for aggregated net proceeds of $6.3 million. The $6.3 million gain associated with these early settlement transactions is included in realized gain on derivative instruments for the year ended December 31, 2011.