(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, 2013 and December 31, 2012:


June 30, 2013	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, 2013
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	3,188		$	3,188
Interest rate derivative contracts		—		—		328			328

Total assets	$	—	$	—	$	3,516		$	3,516

Liabilities
Commodity derivative contracts	$	—	$	—	$	(814	)	$	(814	)
Interest rate derivative contracts		—		—		(66	)		(66	)

Total liabilities	$	—	$	—	$	(880	)	$	(880	)


December 31, 2012	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, 2012
(Thousands of dollars)
Assets
Commodity derivative contracts	$	—	$	—	$	1,347		$	1,347

Total assets	$	—	$	—	$	1,347		$	1,347

Liabilities
Commodity derivative contracts	$	—	$	—	$	(1,371	)	$	(1,371	)
Interest rate derivative contracts		—		—		(54	)		(54	)

Total liabilities	$	—	$	—	$	(1,425	)	$	(1,425	)

The derivative contracts were measured based on quotes from the Company’s counterparties. Such quotes have been derived using valuation models that consider various inputs including current market and contractual prices for the underlying instruments, quoted forward prices for natural gas and crude oil, volatility factors and interest rates, such as a LIBOR curve for a similar length of time as the derivative contract term as applicable. These estimates are verified using comparable NYMEX futures contracts or are compared to multiple quotes obtained from counterparties for reasonableness.

The significant unobservable inputs for Level 3 derivative contracts include basis differentials and volatility factors. An increase (decrease) in these unobservable inputs would result in an increase (decrease) in fair value, respectively. The Company does not have access to the specific assumptions used in its counterparties’ valuation models. Consequently, additional disclosures regarding significant Level 3 unobservable inputs were not provided.

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, 2013.


(Thousands of dollars)
Net liabilities – December 31, 2012	$	(78	)
Total realized and unrealized gains / losses:
Included in earnings (a)		2,471
Included in other comprehensive gain		316
Purchases, sales, issuances and settlements		(73	)

Net assets – June 30, 2013	$	2,636

(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.

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. Both realized and unrealized gains and losses associated with derivative instruments are recognized in earnings.

Interest rate swap derivatives are treated as cash-flow hedges and are used to fix or float interest rates on existing debt. The value of these interest rate swaps at June 30, 2013 and December 31, 2012 is located in accumulated other comprehensive income (loss), net of tax. Settlement of the swaps, currently scheduled to begin in January 2014, will be recorded within interest expense.

The following table sets forth the effect of derivative instruments on the condensed consolidated balance sheets at June 30, 2013 and December 31, 2012:


		Fair Value
(Thousands of dollars)	Balance Sheet Location	June 30, 2013			December 31, 2012
Asset Derivatives:
Derivatives designated as cash-flow hedging instruments:
Interest rate swap contracts	Other assets	$	329		$	—
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts	Other current assets		221			189
Natural gas commodity contracts	Other current assets		553			1,040
Crude oil commodity contracts	Other assets		2,363			118
Natural gas commodity contracts	Other assets		50			—

Total		$	3,516		$	1,347

Liability Derivatives:
Derivatives designated as cash-flow hedging instruments:
Interest rate swap contracts	Derivative liability short-term	$	(66	)	$	—
Interest rate swap contracts	Derivative liability long-term		—			(54	)
Derivatives not designated as cash-flow hedging instruments:
Crude oil commodity contracts	Derivative liability short-term		(814	)		(994	)
Crude oil commodity contracts	Derivative liability long-term		—			(377	)

Total		$	(880	)	$	(1,425	)

Total derivative instruments		$	2,636		$	(78	)

The following table sets forth the offsetting of asset and liability derivatives in the condensed consolidated balance sheets at June 30, 2013 and December 31, 2012:


(Thousands of dollars)	June 30, 2013			December 31, 2012
Asset Derivatives:
Gross amount of recognized assets	$	4,706		$	4,209
Gross amounts offset in the balance sheet		(1,190	)		(2,862	)

Net amount	$	3,516		$	1,347

Liability Derivatives:
Gross amount of recognized liabilities	$	(2,070	)	$	(4,287	)
Gross amounts offset in the balance sheet		1,190			2,862

Net amount	$	(880	)	$	(1,425	)

Total derivative instruments	$	2,636		$	(78	)

The following table sets forth the effect of derivative instruments on the condensed consolidated statement of operations for the six months ended June 30, 2013 and 2012:


	Location of gain/loss recognized in income	Amount of gain/loss recognized in income
(Thousands of dollars)	Location of gain/loss recognized in income	2013			2012
Derivatives not designated as cash-flow hedge instruments
Natural gas commodity contracts	Unrealized loss on derivative instruments, net	$	(437	)	$	—
Crude oil commodity contracts	Unrealized gain on derivative instruments, net		2,834			5,098
Natural gas commodity contracts	Realized gain on derivative instruments, net		331			—
Crude oil commodity contracts (a)	Realized gain (loss) on derivative instruments, net		(257	)		341

		$	2,471		$	5,439

(a)

During the six months ended June 30, 2012, the Company unwound and monetized crude oil swaps with original settlement dates from January 2012 through December 2013 for net proceeds of $1,030,000. The $1,030,000 gain associated with these early settlement transactions is included in realized gain on derivative instruments for the six months ended June 30, 2012.