v2.3.0.11
Derivatives
 6 Months Ended
Jun. 30, 2011
Derivatives [Abstract]  
Derivatives
7. Derivatives
     The following table sets forth our commodity derivative volumes and prices as of June 30, 2011.
                 
Period   Contract Type   Volume Transacted   Contract Price
Natural Gas
               
2011
  Swap   230,000 MMBtu/month   $4.86
June 2011 — December 2011
  Swap   200,000 MMBtu/month   $4.74
2012
  Call   230,000 MMBtu/month   $6.00
 
               
Natural Gas — Basis Differential
               
2011
  Swap   300,000 MMBtu/month   $(0.53)
 
               
Crude Oil
               
May 2011 — December 2011
  Collar   1,000 Bbls/day   $100.00 - $127.00
     The following table summarizes the fair value of our open commodity derivatives as of June 30, 2011, and December 31, 2010 (in thousands).
                                                 
    Asset Derivatives   Liability Derivatives
            Fair Value           Fair Value
    Balance Sheet   June 30,   December 31,   Balance Sheet   June 30,   December 31,
    Location   2011   2010   Location   2011   2010
Derivatives not designated as hedging instruments
                                               
Commodity derivatives
 
Unrealized gain on commodity derivatives
    $1,278       $862    
Unrealized loss on commodity derivatives
    $289       $1,956  
     The following table summarizes the change in the fair value of our commodity derivatives (in thousands).
                                         
            Three Months Ended     Six Months Ended  
    Income Statement     June 30,     June 30,  
    Location     2011     2010     2011     2010  
Derivatives not designated as hedging instruments
                                       
Commodity derivatives
 
Realized gain on commodity derivatives
  $ 66     $ 1,768     $ 262     $ 1,998  
 
 
Unrealized gain (loss) on commodity derivatives
    2,231       (1,901 )     2,082       3,194  
 
                               
 
          $ 2,297     $ (133 )   $ 2,344     $ 5,192  
 
                               
     Unrealized gains and losses, at fair value, are included on our consolidated balance sheets as current or non-current assets or liabilities based on the anticipated timing of cash settlements under the related contracts. Changes in the fair value of our commodity derivative contracts are recorded in earnings as they occur and included in other income (expense) on our consolidated statements of operations. We estimate the fair values of swap contracts based on the present value of the difference in exchange-quoted forward price curves and contractual settlement prices multiplied by notional quantities. We internally valued the option contracts using industry-standard option pricing models and observable market inputs. We use our internal valuations to determine the fair values of the contracts that are reflected on our consolidated balance sheets. Realized gains and losses are also included in other income (expense) on our consolidated statements of operations.
     We are exposed to credit losses in the event of nonperformance by the counterparties on our commodity derivatives positions and have considered the exposure in our internal valuations. However, we do not anticipate nonperformance by the counterparties over the term of the commodity derivatives positions.
     To estimate the fair value of our commodity derivatives positions, we use market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. We primarily apply the market approach for recurring fair value measurements and attempt to use the best available information. We determine the fair value based upon the hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and lowest priority to unobservable inputs (Level 3 measurement). The three levels of fair value hierarchy are as follows:
  •   Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. At June 30, 2011, we had no Level 1 measurements.
 
  •   Level 2 — Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Our derivatives, which consist primarily of commodity swaps and collars, are valued using commodity market data which is derived by combining raw inputs and quantitative models and processes to generate forward curves. Where observable inputs are available, directly or indirectly, for substantially the full term of the asset or liability, the instrument is categorized in Level 2. At June 30, 2011, all of our commodity derivatives were valued using Level 2 measurements.
 
  •   Level 3 — Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value. At June 30, 2011, our Level 3 measurements were limited to our asset retirement obligation.