(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 March 31, 2012 and December 31, 2011:


	Quoted Prices in Active Markets For Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance as of March 31, 2012
March 31, 2012			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance as of March 31, 2012
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	—		$	—

Total assets	$	—	$	—	$	—		$	—


Liabilities
Commodity derivative contracts	$	—	$	—	$	(7,286	)	$	(7,286	)

Total liability	$	—	$	—	$	(7,286	)	$	(7,286	)


	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
December 31, 2011			Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)			Balance as of December 31, 2011
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	—		$	—

Total assets	$	—	$	—	$	—		$	—


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

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

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 three months ended March 31, 2012.


(Thousands of dollars)
Net liabilities – December 31, 2011	$	(3,507	)
Total realized and unrealized gains or losses:
Unrealized losses included in earnings, net (a)		(3,660	)
Realized gains from purchases, sales, issuances and settlements, net		(119	)

Net liabilities – March 31, 2012	$	(7,286	)

(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.

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.

The following table sets forth the effect of derivative instruments on the condensed consolidated balance sheets as of March 31, 2012 and December 31, 2011:


		Fair Value
(Thousands of dollars)	Balance Sheet Location	March 31, 2012			December 31, 2011
Liability Derivatives:
Derivatives not designated as hedging instruments:
Crude oil commodity contracts	Derivative liability short term	$	(3,503	)	$	(2,046	)
Crude oil commodity contracts	Derivative liability long term		(3,783	)		(1,461	)

Total		$	(7,286	)	$	(3,507	)

Total derivative instruments		$	(7,286	)	$	(3,507	)

The following table sets forth the effect of derivative instruments on the condensed consolidated statement of operations for the three-month periods ended March 31, 2012 and 2011:


	Location of gain/loss recognized in income	Amount of gain/loss recognized in income
(Thousands of dollars)	Location of gain/loss recognized in income	2012			2011
Derivatives not designated as cash-flow hedge instruments
Natural gas commodity contracts	Unrealized loss on derivative instruments, net	$	—		$	(918	)
Crude oil commodity contracts	Unrealized loss on derivative instruments, net		(3,779	)		(8,591	)
Natural gas commodity contracts	Realized gain on derivative instruments, net		—			1,054
Crude oil commodity contracts	Realized gain (loss) on derivative instruments, net		119			(732	)

		$	(3,660	)	$	(9,187	)