Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT

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DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
6 Months Ended
Jun. 30, 2011
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT [Abstract]  
DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
NOTE 13     DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT
 
The Company utilizes commodity swap contracts and costless collars (purchased put options and written call options) to (i) reduce the effects of volatility in price changes on the crude oil commodities it produces and sells, (ii) reduce commodity price risk and (iii) provide a base level of cash flow in order to assure it can execute at least a portion of its capital spending.
 
Crude Oil Derivative Contracts Cash-flow Hedges
 
Historically, all derivative positions that qualified for hedge accounting were designated on the date the Company entered into the contract as a hedge against the variability in cash flows associated with the forecasted sale of future crude oil production. The cash flow hedges were valued at the end of each period and adjustments to the fair value of the contract prior to settlement were recorded on the statement of stockholders' equity as other comprehensive income. Upon settlement, the gain (loss) on the cash flow hedge was recorded as an increase or decrease in revenue on the condensed statement of operations. The Company reports average crude oil and natural gas prices and revenues including the net results of hedging activities.
 
On November 1, 2009, due to the volatility of price differentials in the Williston Basin, the Company de-designated all derivates that were previously classified as cash flow hedges and, in addition, the Company has elected not to designate any subsequent derivative contracts as cash flow hedges under FASB ASC 815-20-25.  Beginning on November 1, 2009, all derivative positions are carried at their fair value on the balance sheet and are marked-to-market at the end of each period. Any realized gains and losses are recorded to Gain (Loss) on Settled Derivatives and unrealized gains or losses are recorded to Mark-to-Market of Derivative Instruments on the Condensed Statement of Operations rather than as a component of other comprehensive income (loss) or other income (expense).
 
Derivative instruments are presented on a gross basis, even when those instruments are subject to a master netting arrangement and qualify for net presentations on the balance sheet.  The Company has a master netting agreement on each of the individual crude oil contracts and therefore the current asset and liability are netted on the condensed balance sheet and the non-current asset and liability are netted on the condensed balance sheet.
 
The net mark-to-market loss on the Company's remaining swaps that qualified for cash flow hedge accounting at the date the decision was made to discontinue hedge accounting totals $705,135 and $1,259,085 as of June 30, 2011 and December 31, 2010, respectively.  The Company has recorded that amount as accumulated other comprehensive income in stockholders' equity and the entire amount will be amortized into revenues as the original forecasted hedged crude oil production occurs in the following periods.
 
 
For the Quarter Ended
 
  
Commodity
Derivatives
  
September 30, 2011
  
295,950
 
December 31, 2011
  
 
307,875
 
March 31, 2012
  
 
101,310
 
Total
  
$
705,135
 
 
Crude-Oil Derivative Contracts Cash-flow Not Designated as Hedges
 
The Company realized a loss on settled derivatives of $8,870,287 and $5,608,231 and a mark-to-market of derivative loss of $430,397 and a mark-to-market of derivative gain of $20,848,232 on derivative instruments for the six and three months ended June 30, 2011, respectively.  The Company realized a gain on settled derivatives of $126,936 and $303,919 and a mark-to-market of derivatives gain of $3,260,383 and $4,251,199 on derivative instruments for the six and three months ended June 30, 2010, respectively.
 
The following table reflects open commodity swap contracts as of June 30, 2011, the associated volumes and the corresponding weighted average NYMEX reference price.
Settlement Period
 
Oil (Barrels)
   
Fixed Price
   
Weighted Avg
NYMEX Reference Price
 
Oil Swaps
                 
07/01/11 – 02/29/12
    15,000       51.25       97.19  
07/01/11 – 12/31/11
    9,000       66.15       96.86  
07/01/11 ­ 12/31/11
    24,000       82.60       96.88  
07/01/11 ­ 12/31/11
    9,000       84.25       96.88  
07/01/11 ­ 12/31/11
    27,498       80.90       96.88  
07/01/11 ­ 12/31/11
    46,000       88.00       96.87  
07/01/11 ­ 06/30/12
    170,502       80.00       98.85  
07/01/11 ­ 06/30/12
    398,000       81.50       98.13  
07/01/11 ­ 06/30/12
    132,000       85.50       97.89  
01/01/12  12/31/12
    376,000       95.15       100.32  
01/01/12  12/31/12
    240,000       100.00       100.04  

As of June 30, 2011, the Company had a total volume on open commodity swaps of 1,447,000 barrels at a weighted average price of approximately $88.13.

The following table reflects the weighted average price of open commodity swap contracts as of June 30, 2011, by year with associated volumes.

Weighted Average Price
Of Open Commodity Swap Contracts
 
Year
 
Volumes (Bbl)
   
Weighted
Average Price
 
2011
    432,000     $ 81.67  
2012
    1,015,000       90.87  

In addition to the open commodity swap contracts the Company has entered into a costless collar.  The costless collars are used to establish floor and ceiling prices on anticipated crude oil and natural gas production.  There were no premiums paid or received by the Company related to the costless collar agreement.  The Company purchased put options at $85.00 per barrel and sold call options at $101.75 per barrel.  At June 30, 2011 the Company has 243,000 barrels of crude oil collared between $85.00 and $101.75.  The costless collar amounts settle between July 2011 and December 2011.

At June 30, 2011 and December 31, 2010, the Company had derivative financial instruments under FASB ASC 815-20-25 recorded on the balance sheet as set forth below:

Type of Contract
Balance Sheet Location
 
June 30, 2011
Estimated Fair Value
   
December 31, 2010 Estimated Fair Value
 
Derivative Assets:
             
Oil Contracts
Other current assets
 
$
450,971
   
$
-
 
Oil Contracts
Other non-current assets
   
-
     
-
 
Total Derivative Assets
   
$
450,971
   
$
-
 
                   
Derivative Liabilities:
                 
Oil Contracts
Other current liabilities
 
$
(14,730,949
)
 
$
(11,145,318
)
Oil Contracts
Other non-current liabilities
   
(1,764,445
)
   
(5,022,657
)
Total Derivative Liabilities
   
$
(16,495,394
)
 
$
(16,167,975
)

 
 
 
21

 
 
The following disclosures are applicable to the Company's financial statements, as of June 30, 2011 and December 31, 2010:
 


 
Location of Loss
Amount of Loss Reclassified from
 
for Effective and
AOCI into Income
 
Ineffective
Three Months Ended
 
Six Months Ended
 
Portion of Derivative
June 30,
 
June 30,
Derivative Type
In Income
2011
 
2010
 
2011
 
2010
Commodity - Cash Flow
Loss on Settled Derivatives
 $ 283,800
 
 $ 273,950
 
 $ 553,950
 
 $ 503,050


The use of derivative transactions involves the risk that the counterparties will be unable to meet the financial terms of such transactions. The Company has netting arrangements with Macquarie Bank Limited that provide for offsetting payables against receivables from separate derivative instruments.