Derivative Instruments and Risk Management Activities

6 Months Ended

Jun. 30, 2011

Derivative Instruments and Risk Management Activities

Derivative Instruments and Risk Management Activities

(7) Derivative Instruments and Risk Management Activities

(a) Commodity Derivatives

The Company periodically enters into natural gas derivative contracts with counterparties to hedge the price risk associated with a portion of its production. These derivatives are not held for trading purposes. To the extent that changes occur in the market prices of natural gas, the Company is exposed to market risk on these open contracts. This market risk exposure is generally offset by the change in market prices of natural gas recognized upon the ultimate sale of the natural gas produced.

For the six months ended June 30, 2010 and 2011, the Company was party to natural gas fixed price swaps. When actual commodity prices exceed the fixed price provided by the swap contracts, the Company pays the excess to the counterparty, and when actual commodity prices are below the contractually provided fixed price, the Company receives the difference from the counterparty. The Company’s natural gas swaps have not been designated as hedges for accounting purposes; therefore, all gains and losses were recognized in income currently.

As of June 30, 2011, derivative positions with JP Morgan, BNP Paribas, Wells Fargo, Dominion Field Services, Barclays, Credit Suisse, Union Bank, and KeyBank accounted for approximately 42%, 23%, 11%, 8%, 8%, 6%, 1%, and 1%, respectively, of the net fair value of our commodity derivative assets position. The Company has no collateral from any counterparties. All but one of our commodity and interest rate derivative positions are with institutions that have a position in our Credit Facility and are secured by the collateral pledged on the Credit Facility and cross default provisions between the Credit Facility and the derivative instruments. At June 30, 2011, there are no past due receivables from or payables to any of our counterparties.

As of June 30, 2011, the Company has entered into fixed price natural gas swaps in order to hedge a portion of its natural gas production from July 1, 2011 through December 31, 2016 as summarized in the following table. Hedge agreements referenced to the Centerpoint and Transco Zone 4 indices are for production in the Arkoma Basin. Hedge agreements referenced to the CIG and NYMEX-WTI indices are for production in the Piceance Basin. Hedge agreements referenced to the CGTAP and Dominion indices are for production from the Appalachian Basin.

			Weighted
			average
	Natural gas	Oil	index
	MMbtu/day	Bbls/day	price
Six months ending December 31, 2011:
CIG	45,000		$	5.51
Transco zone 4	55,000		6.11
CGTAP	95,526		5.51
Dominion	4,260		8.16
NYMEX-WTI		300	88.75

Year ending December 31, 2012:
CIG	55,000		$	5.51
Transco zone 4	45,000		6.60
CGTAP	115,556		5.64
Dominion	53,318		5.34
NYMEX-WTI		300	90.20

Year ending December 31, 2013:
CIG	60,000		$	5.54
Transco zone 4	40,000		6.51
CGTAP	72,631		5.94
Dominion	81,702		5.36
NYMEX-WTI		300	90.30

Year ending December 31, 2014:
CIG	50,000		$	5.84
Transco zone 4	20,000		6.51
CGTAP	120,000		5.96
Dominion	100,000		5.51
Centerpoint	10,000		6.20

Year ending December 31, 2015:
CIG	60,000		$	5.29
Transco zone 4	20,000		5.58
CGTAP	60,000		5.89
Dominion	190,000		5.81

Year ending December 31, 2016:
CGTAP	10,000		$	5.95

(b) Interest Rate Derivatives

The Company has entered into various floating-to-fixed interest rate swap derivative contracts to manage exposures to changes in interest rates from variable rate obligations under the Credit Facility. Under the swaps, the Company made payments to the swap counterparty when the variable LIBOR three-month rate fell below the fixed rate or receives payments from the swap counterparty when the variable LIBOR three-month rate increased above the fixed rate. The Company has no outstanding swap agreements at June 30, 2011.

(c) Summary

The following is a summary of the fair values of our derivative instruments, which are not designated as hedges for accounting purposes and where such values are recorded in the consolidated balance sheets as of December 31, 2010 and June 30, 2011.

		December 31,
	Balance sheet	2010		June 30, 2011
	location	Fair value		Fair value
		(In thousands)		(In thousands)
Asset derivatives not designated as hedges for accounting purposes:
Commodity contracts	Current assets	$	82,960	$	91,295
Commodity contracts	Long-term assets	147,417		159,632
Total asset derivatives		$	230,377	$	250,927

Liability derivatives not designated as hedges for accounting purposes:
Interest rate contracts	Current liabilities	$	4,212	$	—

The following is a summary of realized and unrealized gains (losses) on derivative instruments and where such values are recorded in the consolidated statements of operations for the three months and six months ended June 30, 2010 and 2011:

	Statement of operations location	Three Months Ended June 30, 2009			Six Months Ended June 30, 2010		Three Months Ended June 30, 2011		Six Months Ended June 30, 2011
Realized gains on commodity contracts	Revenue	$	16,176		28,447		19,320		48,558
Unrealized gains on commodity contracts	Revenue	10,148			108,960		97,815		20,549
Total gains on commodity contracts		26,324			137,407		117,135		69,107
Realized losses on interest rate contracts	Other income (expense)	(2,172		)	(5,299	)	(2,165	)	(4,306	)
Unrealized gains on interest rate contracts	Other income (expense)	1,949			3,474		2,165		4,212
Total losses on rate contracts		(223		)	(1,825	)	—		(94	)
Net gains on derivative contracts		$	26,101		135,582		117,135		69,013

The following table summarizes the valuation of investments and financial instruments by the fair value hierarchy described in note 1 at June 30, 2011:

	Fair value measurements using
	Quoted
	prices
	in active		Significant
	markets for		other	Significant
	identical		observable	unobservable
	assets		inputs	inputs
Description	(Level 1)		(Level 2)	(Level 3)	Total

Derivatives asset:
Fixed price commodity swaps	$	—	250,927	—	250,927

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

+ References

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-Name Statement of Financial Accounting Standard (FAS)
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+ Details

Antero Resources Finance Corp 10-Q