ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
Commodity Price Risk
Our primary market risk is oil and gas commodity prices. The markets for oil and gas have
historically been volatile and are likely to continue to be volatile in the future. We use various derivative
instruments to manage our exposure to commodity price risk on sales of oil and gas production. All
derivative instruments are recorded on the balance sheet at fair value. If a derivative does not qualify
as a hedge or is not designated as a hedge, the changes in fair value, both realized and unrealized,
are recognized currently in our income statement as a gain or loss on mark-to-market derivative
contracts. Cash flows are only impacted to the extent the actual settlements under the contracts result
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. See Note 6 – Commodity
Derivative Contracts and Note 8 – Fair Value Measurements of Assets and Liabilities in the
accompanying financial statements for a discussion of our derivative activities and fair value
measurements.
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. 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. 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. 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.
During the period from January 1, 2012 through February 22, 2012, we converted 5,000 of the
22,000 BOPD of Brent crude oil put option contracts in 2013 to three-way collars. These modified
three-way collars have a floor price of $90 per barrel with a limit of $70 per barrel and a weighted
average ceiling price of $126.08 and eliminates approximately $11 million of deferred premiums.
Additionally, we entered into the following Brent oil derivatives for 2013 and 2014:
• Brent crude oil put option spread contracts on 13,000 BPOD for 2013 with a floor price of $100 per
barrel and a limit of $80 per barrel.
• Brent three-way collars on 25,000 BOPD for 2013 that have a floor price of $100 per barrel with a
limit of $80 per barrel and a weighted average ceiling price of $124.29 per barrel.
• Brent crude oil put option spread contracts on 20,000 BOPD for 2014 with a floor price of $90 per
barrel and a limit of $70 per barrel.
In February 2012, we entered into natural gas swap contracts, at an average price of $4.16 per
MMBtu, on 70,000 MMBtu per day for 2014.
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