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Hedging Activities
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12 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Dec. 31, 2011
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| Hedging Activities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Hedging Activities |
Oil Price 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 fourth quarter of 2010, the Company entered into fixed price swap contracts for 2011 with the purchaser of the Company's WCBB oil and with a financial institution. The Company's 2011 fixed price swap contracts were tied to the commodity prices on the New York Mercantile Exchange ("NYMEX"). The Company received the fixed price amount stated in the contract and paid to its counterparty the current market price for oil as listed on the NYMEX West Texas Index ("WTI"). During the third quarter of 2011, the Company entered into fixed price swap contracts for 2012 with the purchaser of the Company's WCBB oil. The Company's 2012 fixed price swap contracts are tied to the commodity prices on the International Petroleum Exchange ("IPE"). For the Company's 2012 fixed price swap contracts, 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 December 31, 2011, the Company had the following fixed price swaps in place:
At December 31, 2011 the fair value of derivative assets related to the fixed price swaps was as follows:
At December 31, 2010, the fair value of derivative liabilities related to the fixed price swaps was as follows:
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 years ended December 31, 2011 and 2010 are presented below.
The Company expects to reclassify $1,576,000 out of accumulated other comprehensive income into earnings as a component of oil and condensate sales during the year ended December 31, 2012 related to fixed price swaps. The following table presents the balances of the Company's cumulative hedging activities included in other comprehensive income.
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 gain of $25,000 related to hedge ineffectiveness for the year ended December 31, 2011, 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 years ended December 31, 2010 and 2009. In 2009, the Company was party to forward sales contracts for the sale of 3,000 barrels of WCBB production per day at a weighted average daily price of $55.17 per barrel, before transportation costs and differentials, for the period April 2009 to August 2009. The Company also was party to forward sales contracts for the sale of 3,000 barrels of WCBB production per day at a weighted average daily price of $54.81 per barrel, before transportation costs and differentials, for the period September 2009 to December 2009. For the period January 2010 through February 2010, the Company was party to forward sales contracts for the sale of 3,000 barrels of WCBB production per day at a weighted average daily price of $54.81 per barrel, before transportation costs and differentials. For the period March 2010 through December 2010, the Company was party to forward sales contracts for the sale of 2,300 barrels of WCBB production per day at a weighted average daily price of $58.24 per barrel, before transportation costs and differentials. In the first quarter of 2009, the Company terminated forward sales contracts for 3,000 barrels per day of March 2009 production for approximately $1.5 million and terminated forward sales contracts for 3,000 barrels per day in the second quarter of 2009 for $476,000. For the year ended December 31, 2009, approximately $2.0 million related to such terminations is included in oil and condensate sales on the accompanying consolidated statements of operations. The Company delivered approximately 31% of its 2011 production under fixed price swaps. |
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