Quarterly report pursuant to Section 13 or 15(d)

Hedging Activities

v2.4.0.6
Hedging Activities
 9 Months Ended
Sep. 30, 2012
General Discussion of Derivative Instruments and Hedging Activities [Abstract]  
Hedging Activities
HEDGING ACTIVITIES

The Company seeks to reduce its exposure to unfavorable changes in oil prices, which are subject to significant and often volatile fluctuation, by entering into fixed price swaps and forward sales contracts. These contracts allow the Company to predict with greater certainty the effective oil prices to be received for hedged production and benefit operating cash flows and earnings when market prices are less than the fixed prices provided in the contracts. However, the Company will not benefit from market prices that are higher than the fixed prices in the contracts for hedged production.

The Company accounts for its oil derivative instruments as cash flow hedges for accounting purposes under FASB ASC 815 and related pronouncements. All derivative contracts are marked to market each quarter end and are included in the accompanying consolidated balance sheets as derivative assets and liabilities.

During the third quarter of 2011 and the first and third quarters of 2012, the Company entered into fixed price swap contracts for 2012 and 2013 with the purchaser of the Company’s WCBB oil and four financial institutions. The Company’s fixed price swap contracts are tied to the commodity prices on the International Petroleum Exchange (“IPE”). The Company will receive the fixed price amount stated in the contract and pay to its counterparty the current market price for oil as listed on the IPE for Brent Crude. At September 30, 2012, the Company had the following fixed price swaps in place:
 
 
Daily Volume
(Bbls/day)
 
Weighted
Average Price
October - December 2012
4,000

 
$
107.29

January - June 2013
4,000

 
$
103.33

July - December 2013
3,000

 
$
100.04



At September 30, 2012 the fair value of derivative assets related to the fixed price swaps was as follows:
 
Short-term derivative instruments – asset
$
808,000

Short-term derivative instruments - liability
$
8,816,000

Long-term derivative instruments - liability
$
1,523,000



All fixed price swaps and forward sales contracts have been executed in connection with the Company’s oil price hedging program. For fixed price swaps qualifying as cash flow hedges pursuant to FASB ASC 815, the realized contract price is included in oil sales in the period for which the underlying production was hedged.

For derivatives designated as cash flow hedges and meeting the effectiveness guidelines of FASB ASC 815, changes in fair value are recognized in accumulated other comprehensive income until the hedged item is recognized in earnings. Amounts reclassified out of accumulated other comprehensive income into earnings as a component of oil and condensate sales for the nine months ended September 30, 2012 and 2011 are presented below.
 
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2012
 
2011
2012
 
2011
Reduction to oil and condensate sales
(185,000
)
 
(1,331,000
)
$
(646,000
)
 
$
(3,342,000
)


The Company expects to reclassify $1,647,000 out of accumulated other comprehensive income into earnings as a component of oil and condensate sales during the remainder of the year ended December 31, 2012 related to fixed price swaps.

Hedge effectiveness is measured at least quarterly based on the relative changes in fair value between the derivative contract and the hedged item over time. Any change in fair value resulting from ineffectiveness is recognized immediately in earnings. The Company recognized a loss of $179,000 and $100,000 related to hedge ineffectiveness for the three months and nine months ended September 30, 2012, respectively, which is included in oil and condensate sales in the consolidated statements of operations. The Company did not recognize into earnings any amount related to hedge ineffectiveness for the nine months ended September 30, 2011.