BAYTEX ENERGY USA, INC. - Quarter Report: 2012 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2012

or

For the transition period from              to             

Commission File Number: 1-13283

PENN VIRGINIA CORPORATION

(Exact name of registrant as specified in its charter)

FOUR RADNOR CORPORATE CENTER, SUITE 200

100 MATSONFORD ROAD

RADNOR, PA 19087

(Address of principal executive offices) (Zip Code)

(610) 687-8900

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 (“Exchange Act”) during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x  No  ¨

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). £ Yes x No

As of April 27, 2012, 45,827,010 shares of common stock of the registrant were outstanding.

PENN VIRGINIA CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

Table of Contents

PART I.     FINANCIAL INFORMATION

Item 1    Financial Statements

PENN VIRGINIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS – unaudited

(in thousands, except per share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PENN VIRGINIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME – unaudited

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PENN VIRGINIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS – unaudited

(in thousands, except share data)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PENN VIRGINIA CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – unaudited

(in thousands)

The accompanying notes are an integral part of these condensed consolidated financial statements.

PENN VIRGINIA CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – unaudited

For the Quarterly Period Ended March 31, 2012

(in thousands, except per share amounts)

1.    Organization

Penn Virginia Corporation (“Penn Virginia,” the “Company,” “we,” “us” or “our”) is an independent oil and gas company engaged in the exploration, development and production of oil and natural gas in various domestic onshore regions including Texas, Appalachia, the Mid-Continent and Mississippi.

2.    Basis of Presentation

Our Condensed Consolidated Financial Statements include the accounts of Penn Virginia and all of its subsidiaries. Intercompany balances and transactions have been eliminated. Our Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparation of these statements involves the use of estimates and judgments where appropriate. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation of our Condensed Consolidated Financial Statements have been included. Our Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2011. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. Certain amounts for the 2011 period have been reclassified to conform to the current year presentation.

During the quarter ended March 31, 2012, no new accounting standards were adopted or were pending adoption that would have a significant impact on our Condensed Consolidated Financial Statements and Notes.

Management has evaluated all activities of the Company through the date upon which the Condensed Consolidated Financial Statements were issued. Except for the redetermination of the borrowing base for our revolving credit facility (“Revolver”) described in Note 7, no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.

3.    Acquisitions and Divestitures

Property Acquisitions

Eagle Ford Property Acquisitions

In December 2011, we entered into an agreement with an industry partner to jointly explore an area of mutual interest in Lavaca County, Texas. Depending upon the future participation of other parties included in the joint venture, our minimum working interest is expected to be approximately 57%. Under the terms of the agreement, we must commence drilling on six wells by September 1, 2012 to earn our entire interest in the acreage and must carry our partner on its working interest share of the costs of the first three wells. We drilled two successful exploratory wells on the acreage in the three months ended March 31, 2012.

Divestitures

Oil and Gas Properties

In January 2012, we sold our remaining undeveloped acreage in Butler and Armstrong counties in Pennsylvania for proceeds of $1.0 million, net of transaction costs. We recognized a gain of $0.6 million in connection with this transaction.

4.    Accounts Receivable and Major Customers

The following table summarizes our accounts receivable by type as of the dates presented:

For the three months ended March 31, 2012 and 2011, five customers accounted for $55.7 million and $31.8 million, or approximately 67% and 47%, of our total consolidated product revenues. As of March 31, 2012 and December 31, 2011, $29.4 million and $36.0 million, or approximately 41% and 50%, of our consolidated accounts receivable, including joint interest billings, related to these customers. No significant uncertainties exist related to the collectability of amounts owed to us by these customers.

5.    Derivative Instruments

We utilize derivative instruments to mitigate our financial exposure to natural gas and crude oil price volatility as well as the volatility in interest rates attributable to our debt instruments. We are not engaged in the trading of derivative instruments for speculative purposes. The derivative instruments, which are placed with financial institutions that we believe are acceptable credit risks, generally take the form of costless collars, swaps and swaptions. Our derivative instruments are not formally designated as hedges.

Commodity Derivatives

We determine the fair values of our commodity derivative instruments based on discounted cash flows derived from third-party quoted forward prices for NYMEX Henry Hub gas and West Texas Intermediate crude oil closing prices as of the end of the reporting period. The discounted cash flows utilize discount rates adjusted for the credit risk of our counterparties if the derivative is in an asset position, and our own credit risk if the derivative is in a liability position.

The following table sets forth our commodity derivative positions as of March 31, 2012:

Interest Rate Swaps

In February 2012, we entered into an interest rate swap agreement to establish variable rates on approximately one-third of the outstanding obligation under our 7.25% Senior Notes due 2019 (“2019 Senior Notes”).

The following table sets forth the terms and liability position of our interest rate swap as of the dates presented:

¹ References to LIBOR represent the one-month rate.

During the three months ended March 31, 2011, we had an interest rate swap agreement in effect that established variable rates on approximately one-third of the face amount of the outstanding obligation under our 10.375% Senior Notes due 2016 (“2016 Senior Notes). During August 2011, we terminated this agreement and received $2.9 million in cash proceeds.

Financial Statement Impact of Derivatives

The impact of our derivative activities on income is included in the Derivatives caption on our Condensed Consolidated Statements of Operations. The following table summarizes the effects of our derivative activities for the periods presented:

The effects of derivative gains (losses) and cash settlements of our commodity and interest rate derivatives are reported as adjustments to reconcile net income (loss) to net cash provided by operating activities. These items are recorded in the Derivative contracts: Net gains and Derivative contracts: Cash settlements captions on our Condensed Consolidated Statements of Cash Flows.

The following table summarizes the fair value of our derivative instruments, as well as the locations of these instruments, on our Condensed Consolidated Balance Sheets as of the dates presented:

As of March 31, 2012, we reported a commodity derivative asset of $15.7 million. The contracts associated with this position are with four counterparties, all of which are investment grade financial institutions, and are substantially concentrated with three of those counterparties. This concentration may impact our overall credit risk, either positively or negatively, in that these counterparties may be similarly affected by changes in economic or other conditions. We neither paid nor received collateral with respect to our derivative positions. No significant uncertainties exist related to the collectability of amounts that may be owed to us by these counterparties.

6.     Property and Equipment

The following table summarizes our property and equipment as of the dates presented:

7.    Long-Term Debt

The following table summarizes our long-term debt as of the dates presented:

Revolving Credit Facility

In August 2011, we entered into the Revolver which matures in August 2016. The Revolver provides for a $300 million revolving commitment, including a $20 million sublimit for the issuance of letters of credit. The Revolver has an accordion feature that allows us to increase the commitment up to the lower of the borrowing base or $600 million upon receiving additional commitments from one or more lenders. The Revolver has a borrowing base that is redetermined semi-annually. In April 2012, the bank syndicate supporting the Revolver completed its redetermination and established a borrowing base of $300 million. Accordingly, the minimum revolving commitment remained unchanged. The Revolver is available to us for general purposes including working capital, capital expenditures and acquisitions. We had letters of credit of $1.4 million outstanding as of March 31, 2012. As of March 31, 2012, our available borrowing capacity under the Revolver, as reduced by outstanding borrowings and letters of credit, was $179.6 million.

Borrowings under the Revolver bear interest, at our option, at either (i) a rate derived from the London Interbank Offered Rate, as adjusted for statutory reserve requirements for Eurocurrency liabilities (the “Adjusted LIBOR”), plus an applicable margin ranging from 1.500% to 2.500% or (ii) the greater of (a) the prime rate, (b) the federal funds effective rate plus 0.5% or (c) the one-month Adjusted LIBOR plus 1.0%, and, in each case, plus an applicable margin (ranging from 0.500% to 1.500%). The applicable margin is determined based on the ratio of our outstanding borrowings to the available Revolver capacity. Commitment fees are charged at 0.375% increasing to 0.500% on the undrawn portion of the Revolver as determined by our ratio of outstanding borrowings to the available Revolver capacity. As of March 31, 2012, the effective interest rate on the borrowings under the Revolver was 2.034%.

The Revolver includes both current ratio and leverage ratio financial covenants. The current ratio is defined in the Revolver to include, among other things, adjustments for undrawn availability and may not be less than 1.0 to 1.0. The ratio of total net debt to EBITDAX, a non-GAAP financial measure defined in the Revolver, may not exceed 4.5 to 1.0 reducing to 4.0 to 1.0 for periods ending after June 30, 2013.

The Revolver is guaranteed by Penn Virginia and all of our material subsidiaries (“Guarantor Subsidiaries”). The obligations under the Revolver are secured by a first priority lien on substantially all of our proved oil and gas reserves and a pledge of the equity interests in the Guarantor Subsidiaries.

The guarantees provided by the Guarantor Subsidiaries under the Revolver as well as those provided for the senior indebtedness described below are full and unconditional and joint and several. Substantially all of our consolidated assets are held by the Guarantor Subsidiaries. The parent company and its non-guarantor subsidiaries have no material independent assets or operations. There are no significant restrictions on the ability of the parent company or any of the Guarantor Subsidiaries to obtain funds through dividends or other means, including advances and intercompany notes, among others.

2016 Senior Notes

The 2016 Senior Notes were originally sold at 97% of par equating to an effective yield to maturity of approximately 11%. The 2016 Senior Notes bear interest at an annual rate of 10.375% payable on June 15 and December 15 of each year. Beginning in June 2013, we may redeem all or part of the 2016 Senior Notes at a redemption price beginning at 105.188% of the principal amount and reducing to 100% in June 2015 and thereafter. The 2016 Senior Notes are senior to our existing and future subordinated indebtedness and are effectively subordinated to all of our secured indebtedness, including the Revolver, to the extent of the collateral securing that indebtedness. The obligations under the 2016 Senior Notes are fully and unconditionally guaranteed by the Guarantor Subsidiaries.

2019 Senior Notes

The 2019 Senior Notes, which were issued at par in April 2011, bear interest at an annual rate of 7.25% payable on April 15 and October 15 of each year. Beginning in April 2015, we may redeem all or part of the 2019 Senior Notes at a redemption price beginning at 103.625% of the principal amount and reducing to 100% in June 2017 and thereafter. The 2019 Senior Notes are senior to our existing and future subordinated indebtedness and are effectively subordinated to all of our secured indebtedness, including the Revolver, to the extent of the collateral securing that indebtedness. The obligations under the 2019 Senior Notes are fully and unconditionally guaranteed by the Guarantor Subsidiaries.

Convertible Notes

The 4.50% Convertible Senior Subordinated Notes due 2012 (“Convertible Notes”) bear interest at an annual rate of 4.50% payable on May 15 and November 15 of each year. The Convertible Notes are convertible into cash up to the principal amount thereof and shares of our common stock, if any, in respect of the excess conversion value, based on an initial conversion rate of 17.3160 shares of common stock per $1,000 principal amount of the Convertible Notes (which is equal to an initial conversion price of approximately $57.75 per share of common stock), subject to adjustment. The Convertible Notes are unsecured senior subordinated obligations, ranking junior in right of payment to any of our senior indebtedness and to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and equal in right of payment to any of our future unsecured senior subordinated indebtedness. The Convertible Notes rank senior in right of payment to any of our future junior subordinated indebtedness and structurally rank junior to all existing and future indebtedness of our Guarantor Subsidiaries.

The Convertible Notes are represented by a liability component which is included in long-term debt, net of discount, and an equity component representing the convertible feature which is included in additional paid-in capital in shareholders’ equity. The effective interest rate on the liability component of the Convertible Notes for all periods presented was 8.5%.

In connection with a tender offer completed in April 2011, the Company repurchased $225.1 million aggregate principal amount of the Convertible Notes for $233.0 million, including a premium of $35 per $1,000 principal amount. The tender offer resulted in the extinguishment of approximately 98% of the outstanding Convertible Notes. The tender offer was funded from the net proceeds of the 2019 Senior Notes offering.

The following table summarizes the carrying amount of the components of the Convertible Notes as of the dates presented:

The following table summarizes the amounts recognized as components of interest expense attributable to the Convertible Notes for the periods presented:

8.    Additional Balance Sheet Detail

The following table summarizes components of selected balance sheet accounts as of the dates presented:

9.    Fair Value Measurements

We apply the authoritative accounting provisions for measuring the fair values of both our financial and nonfinancial assets and liabilities. Fair value is an exit price representing the expected amount we would receive upon the sale of an asset or that we would expect to pay to transfer a liability in an orderly transaction with market participants at the measurement date. We have followed consistent methods and assumptions to estimate the fair values as more fully described in our Annual Report on Form 10-K for the year ended December 31, 2011.

Our financial instruments that are subject to fair value disclosure consist of cash and cash equivalents, accounts receivable, accounts payable, derivatives and long-term debt. As of March 31, 2012, the carrying values of all of these financial instruments, except the portion of long-term debt with fixed interest rates, approximated fair value.

The following table summarizes the fair value of our long-term debt with fixed interest rates, which is estimated based on the published market prices for these debt obligations as of the dates presented:

Recurring Fair Value Measurements

Certain financial assets and liabilities are measured at fair value on a recurring basis in our Condensed Consolidated Balance Sheets. The following tables summarize the fair values of those assets and liabilities as of the dates presented:

Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one level of the fair value hierarchy to another level. In such instances, the transfer is deemed to have occurred at the beginning of the quarterly period in which the event or change in circumstances that caused the transfer occurred. There were no transfers during the three months ended March 31, 2012 and 2011.

We used the following methods and assumptions to estimate fair values for the financial assets and liabilities described below:

Non-Recurring Fair Value Measurements

The most significant non-recurring fair value measurements include the fair value of proved properties, tubular inventory and well materials for purposes of impairment testing and the initial determination of asset retirement obligations (“AROs”). The factors used to determine fair value for purposes of impairment testing include, but are not limited to, estimates of proved and probable reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and gas properties. Because these significant fair value inputs are typically not observable, we have categorized the amounts as level 3 inputs.

The determination of the fair value of AROs is based upon regional market and facility specific information. The amount of an ARO and the costs capitalized represent the estimated future cost to satisfy the abandonment obligation using current prices that are escalated by an assumed inflation factor after discounting the future cost back to the date that the abandonment obligation was incurred using a rate commensurate with the risk, which approximates our cost of funds. Because these significant fair value inputs are typically not observable, we have categorized the initial fair value estimates as level 3 inputs.

10.    Commitments and Contingencies

Commitments

Our most significant commitments consist of the purchase of oil and gas well drilling services, capacity utilization under firm transportation service agreements and operating leases for field and office equipment and office space, as more fully described in our Annual Report on Form 10-K for the year ended December 31, 2011.

Contingencies - Legal and Regulatory

We are involved, from time to time, in various legal proceedings arising in the ordinary course of business. While the ultimate results of these proceedings cannot be predicted with certainty, our management believes that these claims will not have a material effect on our financial position, results of operations or cash flows. During 2010, we established a $0.9 million reserve for a litigation matter pertaining to certain properties that remains outstanding as of March 31, 2012. In addition, as of March 31, 2012, we have an ARO liability of approximately $6.4 million attributable to the plugging of abandoned wells.

11.    Shareholders’ Equity

The following table summarizes the components of our shareholders’ equity and the changes therein as of and for the three months ended March 31, 2012 and 2011:

12.    Share-Based Compensation

Our stock compensation plans permit the grant of incentive and nonqualified stock options, common stock, deferred common stock units, restricted stock and restricted stock units to our employees and directors. Generally, stock options granted under our stock compensation plans vest over a three-year period, with one-third vesting in each year. Common stock and deferred common stock units granted under our stock compensation plans vest immediately, and we recognize compensation expense related to those grants on the grant date. Restricted stock and restricted stock units granted under our stock compensation plans vest over a three-year period, either at the end of the three years or with one-third vesting in each year. We recognize compensation expense related to our stock compensation plans in the General and administrative expenses caption on our Condensed Consolidated Statements of Operations.

Equity-Classified Awards

Most of the awards issued under our stock compensation plans are classified as equity instruments because they result in the issuance of common stock on the date of grant, upon exercise or are otherwise payable in common stock upon vesting, as applicable. The recognition of compensation cost attributable to these awards is a non-cash item of expense.

Liability-Classified Awards

In February 2012, we granted performance-based restricted stock units (“PBRSUs”) to certain executive employees. Vested PBRSUs are payable in cash on the third anniversary of the date of grant based upon the achievement of certain market-based performance metrics with respect to each of a one-year, two-year and three-year performance period, in each case commencing on the date of grant. The number of PBRSUs vested can range from 0% to 200% of the initial grant. The PBRSUs do not have voting rights and do not participate in dividends.

Because the PBRSUs are payable in cash, they are considered liability-classified awards and are included in the Other liabilities caption on our Condensed Consolidated Balance Sheets. Compensation cost associated with the PBRSUs is measured at the end of each reporting period based on the fair value derived from a Monte Carlo model and recognized based on the period of time that has elapsed during each of the individual performance periods.

The following table summarizes share-based compensation expense recognized for the periods presented:

13.    Restructuring Activities

During 2011, we completed an organizational restructuring due primarily to our decision to exit the Arkoma Basin and to consolidate certain operations functions to our Houston, Texas location. We terminated approximately 40 employees and closed our regional office in Tulsa, Oklahoma. Accordingly, we recorded a charge and recognized an obligation in connection with the long-term lease of that office. Activities recorded during the three months ended March 31, 2012 that were attributable to this restructuring included cash payments and accretion of the long-term lease obligation and the cash payment of termination benefits accrued during 2011. Activities recorded during the three months ended March 31, 2011 are attributable to restructuring actions taken during periods prior to 2011. Restructuring charges, including the accretion of the lease obligation, are included in the General and administrative expenses caption on our Condensed Consolidated Statements of Operations.

The following table summarizes our restructuring-related obligations as of and for the three months ended March 31:

14.    Interest Expense

The following table summarizes the components of interest expense for the periods presented:

15.    Earnings per Share

The following table provides a reconciliation of the components used in the calculation of basic and diluted earnings per share for the periods presented:

¹ For the three months ended March 31, 2012 and 2011, an amount less than 0.1 million and 0.1 million potentially dilutive securities, including the Convertible Notes, stock options, restricted stock and restricted stock units had the effect of being anti-dilutive and were excluded from the calculation of diluted earnings per common share.

Forward-Looking Statements

Certain statements contained herein that are not descriptions of historical facts are “forward-looking” statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Because such statements include risks, uncertainties and contingencies, actual results may differ materially from those expressed or implied by such forward-looking statements. These risks, uncertainties and contingencies include, but are not limited to, the following:

Additional information concerning these and other factors can be found in our press releases and public periodic filings with the Securities and Exchange Commission. Many of the factors that will determine our future results are beyond the ability of management to control or predict. Readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. We undertake no obligation to revise or update any forward-looking statements, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.

Item 2    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of operations of Penn Virginia Corporation and its subsidiaries (“Penn Virginia,” the “Company,” “we,” “us” or “our”) should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included in Item 1. All dollar amounts presented in the tables that follow are in thousands unless otherwise indicated.

Overview of Business

We are an independent oil and gas company engaged in the exploration, development and production of oil and natural gas in various domestic onshore regions. We have a geographically diverse asset base with areas of operations in Texas, Appalachia, the Mid-Continent and Mississippi regions of the United States. As of December 31, 2011, we had proved natural gas and oil reserves of approximately 883 billion cubic feet equivalent, or Bcfe. Our current operations include primarily the drilling of unconventional development wells and exploring for primarily unconventional reserves.

We are currently focused primarily on the Eagle Ford Shale in South Texas. We also pursue selected drilling opportunities in the horizontal Granite Wash play in our Mid-Continent region through participation in wells drilled by our joint venture partner.

The following table sets forth certain summary operating and financial statistics for the periods presented:

¹ As reduced by outstanding borrowings and letters of credit and limited by financial covenants, if applicable.

Key Developments

Through the date of filing this Quarterly Report on Form 10-Q, the following general business developments and corporate actions had an impact on the financial reporting and disclosure of our results of operations and financial position: (i) drilling results in the Eagle Ford Shale and other plays, (ii) shifting the focus of our production from natural gas to crude oil and natural gas liquids, or NGLs, and (iii) hedging a portion of our crude oil production for the calendar years 2012 through 2014 to the levels permitted by the revolving credit agreement, or Revolver, and our internal policies.

Drilling Results and Future Development

During the three months ended March 31, 2012, we drilled a total of 11 gross (9.4 net) wells, including nine gross (7.5 net) development wells and two gross (1.9 net) exploratory wells in the Eagle Ford Shale.

We currently have two rigs drilling in the Eagle Ford Shale. We have drilled a total of 47 wells since we began drilling operations in this play during the first half of 2011. Of the total wells drilled, 44 (36.6 net) wells are producing, one is waiting on completion and two are in progress as of April 30, 2012. The average peak gross production rate per well for 40 of these wells which had full-length laterals was approximately 1,000 barrels of oil equivalent per day, or BOEPD. Our Eagle Ford Shale production was approximately 9,200 (5,800 net) BOEPD at the end of April 2012, with oil comprising 88 percent, NGLs comprising six percent and natural gas comprising approximately six percent. We have allocated approximately 89 percent of our capital expenditures during 2012 for activities in the Eagle Ford Shale.

Included in the totals presented above for the Eagle Ford Shale are our first two (1.9 net) exploratory wells in Lavaca County, Texas drilled in connection with a joint exploration agreement with an industry partner that we entered into in December 2011. Depending upon the future participation of other parties included in the joint venture, our minimum working interest is expected to be approximately 57%. Under the terms of the agreement, we must commence drilling on six wells by September 1, 2012 to earn our entire interest in the acreage and must carry our partner on its working interest share of the costs of the first three wells.

Production Focus

During the past two years, we have made significant investments in higher rate-of-return projects in economically attractive oil and NGL-rich areas, primarily in the Eagle Ford Shale in South Texas. Accordingly, our production profile continues to experience a transformational shift from natural gas to oil and liquids. Approximately 42% of total production on an equivalent basis in the three months ended March 31, 2012 was attributable to oil and NGLs, an increase of approximately 87% over the prior year period. This also represents a sequential increase of approximately 15% over the three months ended December 31, 2011.

The proportion of total product revenues attributable to oil and NGLs was 82% for the three months ended March 31, 2012. This represents an increase of approximately 156% from the corresponding prior year period and approximately 26% from the three months ended December 31, 2011.

Commodity Hedging Activities

In January 2012, we amended our Revolver to expand the potential volume available for hedging to certain percentages of reasonably anticipated production from proved undeveloped reserves as well as proved developed reserves. As of March 31, 2012, we have hedged the maximum volume of oil production as permitted under the terms of the Revolver and by our internal policies for calendar years 2012 through 2014. For the remainder of 2012, we have hedged approximately 70% of our estimated crude oil production at weighted-average floor/swap and ceiling prices of between $100.46 and $102.21 per barrel. For 2013, we have approximately 40% of our estimated production hedged at weighted-average floor/swap and ceiling prices of between $98.61 and $102.09 per barrel. For 2014, we have approximately 20% of our estimated production hedged at a weighted-average swap price of $100.33 per barrel. Our natural gas hedges represent approximately 25% of our estimated production for the balance of the year at a weighted-average swap price of $5.26 per MMBtu. At this time, we have no hedges in place for our estimated natural gas production beyond 2012.

Results of Operations

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

The following table sets forth a summary of certain operating and financial performance for the periods presented:

NM - Not meaningful

Production

The following tables set forth a summary of our total and daily production volumes by product and geographical region for the periods presented: