in making a payment to or receiving a payment from the counterparty. The derivative instruments we
have in place are not classified as hedges for accounting purposes.
Cash settlements with respect to derivatives that are not accounted for under hedge accounting
and do not have a significant financing element are reflected as investing activities in the statement of
cash flows. Cash settlements with respect to derivatives that contain a significant financing element are
reflected as financing activities in the statement of cash flows.
For put options, we typically pay a premium to the counterparty in exchange for the sale of the
instrument. If the index price is below the floor price of the put option, we receive the difference
between the floor price and the index price multiplied by the contract volumes less the option premium.
If the index price settles at or above the floor price of the put option, we pay only the option premium.
In a typical collar transaction, if the floating price based on a market index is below the floor price
in the derivative contract, we receive from the counterparty an amount equal to this difference
multiplied by the specified volume. If the floating price exceeds the ceiling price, we must pay the
counterparty an amount equal to the difference multiplied by the specified volume. We may pay a
premium to the counterparty in exchange for a certain floor or ceiling. Any premium reduces amounts
we would receive under the floor or increases amounts we would pay above the ceiling. If the floating
price exceeds the floor price and is less than the ceiling price, then no payment, other than the
premium, is required. If we have less production than the volumes specified under the collar
transaction when the floating price exceeds the ceiling price, we must make payments against which
there are no offsetting revenues from production.
Under a swap contract, the counterparty is required to make a payment to us if the index price for
any settlement period is less than the fixed price, and we are required to make a payment to the
counterparty if the index price for any settlement period is greater than the fixed price. The amount we
receive or pay is the difference between the index price and the fixed price multiplied by the contract
volumes. If we have less production than the volumes specified under the swap transaction when the
index price exceeds the fixed price, we must make payments against which there are no offsetting
revenues from production.
In December 2011, we entered into natural gas swap contracts at a weighted average price of
$4.27 per MMBtu on 110,000 MMBtu per day for 2013.
In September 2011, and in response to our higher priced marketing contracts, we realigned our
existing 2012 WTI crude oil put option spread contracts that had an $80 per barrel floor price with a
$60 per barrel limit on 40,000 BOPD by acquiring 2012 Brent crude oil three-way collars that have a
$100 per barrel floor price with an $80 per barrel limit and a weighted average ceiling price of $120 per
barrel. The realignment eliminated $89.1 million of deferred premiums and interest associated with the
previous 2012 WTI crude oil put option spread contracts. We also paid net upfront premiums of
approximately $2.6 million to enter into the 2012 Brent three-way collars. Additionally, we converted
40,000 of the 160,000 MMBtu per day 2012 natural gas put option spread contracts that had a $4.30
per MMBtu floor price with a $3.00 per MMBtu limit to natural gas three-way collars that have a $4.30
per MMBtu floor price with a $3.00 per MMBtu limit and a weighted average ceiling price of $4.86 per
MMBtu and reduced 2012 deferred premiums and interest by approximately $4.1 million. We also
acquired 2013 Brent crude oil put option spread contracts that have a $90 per barrel floor price with a
$70 per barrel limit and weighted average deferred premium and interest of $6.237 per barrel on
22,000 BOPD.
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