We intend to continue to enter into derivative contracts for a portion of our oil and gas
production, which exposes us to the risk of financial loss, may result in us making cash
payments or prevent us from receiving the full benefit of increases in prices for oil and gas and
may cause volatility in our reported earnings.
We use derivative instruments to manage our commodity price risk for a portion of our oil and gas
production. This practice may prevent us from receiving the full advantage of increases in oil and gas
prices above the maximum fixed amount specified in the derivative agreement. The derivative
instruments also expose us to the risks of financial loss in a variety of circumstances, including when:
• a counterparty to the derivative contract is unable to satisfy its obligations;
• production is delayed or less than expected; or
• there is an adverse change in the expected differential between the underlying price in the
derivative instrument and actual prices received for our production.
The level of derivative activity depends on our view of market conditions, available derivative
prices and our operating strategy.
See Item 7A – Quantitative and Qualitative Disclosures About Market Risk – Commodity Price
Risk for a summary of our current derivative positions. Since all of our derivative contracts are
accounted for using mark-to-market accounting, we expect continued volatility in derivative gains or
losses on our income statement as changes occur in the NYMEX and ICE price indices.
Potential regulations regarding derivatives could adversely impact our ability to engage in
commodity price risk management activities.
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and
Consumer Protection Act, or Dodd-Frank Act. The Dodd-Frank Act creates a new regulatory framework
for oversight of derivatives transactions by the Commodity Futures Trading Commission, or CFTC, and
the SEC. Among other things, the Dodd-Frank Act subjects certain swap participants to new capital,
margin and business conduct standards. In addition, the Dodd-Frank Act contemplates that where
appropriate in light of outstanding exposures, trading liquidity and other factors, swaps (broadly defined
to include most hedging instruments other than futures) will be required to be cleared through a
registered clearing facility and traded on a designated exchange or swap execution facility. There are
some exceptions to these requirements for entities that use swaps to hedge or mitigate commercial
risk. While we may qualify for one or more of such exceptions, the scope of these exceptions is
uncertain and will be further defined through rulemaking proceedings at the CFTC and SEC in the
coming months. Further, although we may qualify for exceptions, our derivatives counterparties may be
subject to new capital, margin and business conduct requirements imposed as a result of the new
legislation, which may increase our transaction costs or make it more difficult for us to enter into
hedging transactions on favorable terms. Our inability to enter into hedging transactions on favorable
terms, or at all, could increase our operating expenses and put us at increased exposure to the risk of
adverse changes in oil and natural gas prices, which could adversely affect the predictability of cash
flows from sales of oil and natural gas.
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