|9 Months Ended|
Sep. 30, 2011
|Hedging Activities [Abstract]|
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. 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 are tied to the commodity prices on the New York Mercantile Exchange ("NYMEX"). 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 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"). 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 Brent Crude. However, due to the geographic location of the Company's assets and the cost of transporting oil to another market, the amount that the Company receives when it actually sells its oil differs from the index price. At September 30, 2011, the Company had the following fixed price swaps in place:
At September 30, 2011, the fair value of derivative assets related to the fixed price swaps is as follows:
All fixed price swaps 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, 2011 and 2010 are presented below.
The Company expects to reclassify $1,437,000 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, 2011 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 gain of $506,000 related to hedge ineffectiveness for the three months and nine months ended September 30, 2011, which is included in oil and condensate sales in the consolidated statements of operations. No amounts were recognized into earnings for the three months and nine months ended September 30, 2010.
The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.
Reference 1: http://www.xbrl.org/2003/role/presentationRef