We recognized a $60.7 million loss on mark-to-market derivative contracts in 2010, which was
primarily associated with a decrease in the fair value of our 2011 and 2012 crude oil and natural gas
contracts due to higher forward commodity prices partially offset by a gain on our 2010 natural gas
collars. We recognized a $7.0 million loss on mark-to-market derivative contracts in 2009, which was
primarily attributed to a decrease in the fair value of our crude oil puts attributable to higher crude oil
prices, partially offset by an increase in the fair value on our natural gas collars as a result of lower
natural gas commodity prices.
Other income (expense).
Other income for 2010 primarily consisted of interest on royalty refunds
related to production in prior years. Other income for 2009 primarily consisted of net royalty refunds
related to properties sold by Pogo prior to our acquisition.
Income tax benefit (expense).
Our 2010 income tax expense was $100.7 million, reflecting an
annual effective tax rate of 49%, as compared with an income tax expense of $80.9 million and an
effective tax rate of 37% for 2009. Variances in our annual effective tax rate from the 35% federal
statutory rate for these years resulted primarily from the tax effects of permanent differences including
expenses that are not deductible because of IRS limitations, the special deduction related to domestic
production, state income taxes, foreign operations, tax and financial reporting differences related to
non-cash compensation and changes to our balance of unrecognized tax positions.
Liquidity and Capital Resources
Our liquidity may be affected by declines in oil and gas prices, an inability to access the capital
and credit markets and the success of our commodity price risk management activities, which may
subject us to the credit risk of the counterparties to these agreements. These situations may arise due
to circumstances beyond our control, such as a general disruption of the financial markets and adverse
economic conditions that cause substantial or extended declines in oil and gas prices. Volatility and
disruption in the financial and credit markets may adversely affect the financial condition of lenders in
our senior revolving credit facility, the counterparties to our commodity price risk management
agreements, our insurers and our oil and natural gas purchasers, including those counterparties who
may have exposure to certain European sovereign debt. These market conditions may adversely affect
our liquidity by limiting our ability to access the capital and credit markets.
Our primary sources of liquidity are cash generated from our operations, our senior revolving
credit facility and periodic public offerings of debt and equity. At December 31, 2011, we had
approximately $663.8 million available for future secured borrowings under our senior revolving credit
facility, which had commitments and a borrowing base of $1.4 billion and $1.8 billion, respectively. In
February 2012, our borrowing base was increased from $1.8 billion to $2.3 billion until the next
scheduled redetermination date on or before May 1, 2013. The commitments remained unchanged at
$1.4 billion.
Under the terms of our senior revolving credit facility, the borrowing base will be redetermined on
an annual basis, with us and the lenders each having the right to one annual interim unscheduled
redetermination and adjusted based on our oil and gas properties, reserves, other indebtedness and
other relevant factors. Declines in oil and gas prices may adversely affect our liquidity by lowering the
amount of the borrowing base that lenders are willing to extend.
The commitments of each lender to make loans to us are several and not joint under our senior
revolving credit facility. Accordingly, if any lender fails to make loans to us, our available liquidity could
be reduced by an amount up to the aggregate amount of such lender’s commitments under the credit
facility. At December 31, 2011, the commitments are from a diverse syndicate of 21 lenders and no
single lender’s commitment represented more than 7% of the total commitments.
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