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EXCEL - IDEA: XBRL DOCUMENT - WHITING PETROLEUM CORPFinancial_Report.xls
EX-32.2 - WRITTEN STATEMENT OF THE VICE PRESIDENT AND CFO - WHITING PETROLEUM CORPexhibit32-2.htm
EX-31.1 - CERTIFICATION OF THE CHAIRMAN AND CEO - WHITING PETROLEUM CORPexhibit31-1.htm
EX-31.2 - CERTIFICATION OF THE VICE PRESIDENT AND CFO - WHITING PETROLEUM CORPexhibit31-2.htm
EX-32.1 - WRITTEN STATEMENT OF THE CHAIRMAN AND CEO - WHITING PETROLEUM CORPexhibit32-1.htm
EX-4.1 - FIRST AMENDMENT TO THE FIFTH AMENDED AND RESTATED CREDIT AGREEMENT, DATED 04-15-11 - WHITING PETROLEUM CORPexhibit4-1.htm
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
 
FORM 10-Q
 
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2011
 
or
 
[  ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
 
Commission file number:  001-31899
WHITING PETROLEUM CORPORATION
 
 
(Exact name of registrant as specified in its charter)
 
     
Delaware
 
20-0098515
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
1700 Broadway, Suite 2300
Denver, Colorado
 
80290-2300
(Address of principal executive offices)
 
(Zip code)
     
 
(303) 837-1661
 
 
(Registrant’s telephone number, including area code)
 

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 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.  Yes T   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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  T   No  £
 
Indicate by 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.  (Check one):
 
Large accelerated filerT
Accelerated filer    £
Non-accelerated filer£
Smaller reporting company   £
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes£   No T
 
Number of shares of the registrant’s common stock outstanding at April 15, 2011:  117,368,706 shares.
 
 

 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
  First Amendment to Fifth Amended and Restated Credit Agreement, dated as of April 15, 2011  
  Certification by the Chairman and Chief Executive Officer  
  Certification by the Vice President and Chief Financial Officer  
  Written Statement of the Chairman and Chief Executive Officer  
  Written Statement of the Vice President and Chief Financial Officer  
 
 
GLOSSARY OF CERTAIN DEFINITIONS

Unless the context otherwise requires, the terms “we,” “us,” “our” or “ours” when used in this report refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries.  When the context requires, we refer to these entities separately.
 
We have included below the definitions for certain terms used in this report:
 
“Bbl” One stock tank barrel, or 42 U.S. gallons liquid volume, used in this report in reference to oil and other liquid hydrocarbons.
 
“Bcf” One billion cubic feet of natural gas.
 
“BOE” One stock tank barrel equivalent of oil, calculated by converting natural gas volumes to equivalent oil barrels at a ratio of six Mcf to one Bbl of oil.
 
“FASB ASC” The Financial Accounting Standards Board Accounting Standards Codification.
 
“GAAP” Generally accepted accounting principles in the United States of America.
 
“MBbl” One thousand barrels of oil or other liquid hydrocarbons.
 
“MBOE” - One thousand BOE.
 
“MBOE/d” One MBOE per day.
 
“Mcf” One thousand cubic feet of natural gas.
 
“MMBbl” One million Bbl.
 
“MMBOE” One million BOE.
 
“MMBtu” One million British Thermal Units.
 
“MMcf” One million cubic feet of natural gas.
 
“plugging and abandonment” Refers to the sealing off of fluids in the strata penetrated by a well so that the fluids from one stratum will not escape into another or to the surface.  Regulations of many states require plugging of abandoned wells.
 
“working interest” The interest in a crude oil and natural gas property (normally a leasehold interest) that gives the owner the right to drill, produce and conduct operations on the property and a share of production, subject to all royalties, overriding royalties and other burdens and to all costs of exploration, development and operations and all risks in connection therewith.
 
 
PART I – FINANCIAL INFORMATION
 
Item 1.
Consolidated Financial Statements

WHITING PETROLEUM CORPORATION
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except share and per share data)

   
March 31,
   
December 31,
 
ASSETS
 
2011
   
2010
 
Current assets:
           
Cash and cash equivalents
  $ 5,026     $ 18,952  
Accounts receivable trade, net
    244,016       199,713  
Prepaid expenses and other
    21,242       14,878  
Total current assets
    270,284       233,543  
Property and equipment:
               
Oil and gas properties, successful efforts method:
               
Proved properties
    5,955,020       5,661,619  
Unproved properties
    296,908       226,336  
Other property and equipment
    108,526       98,092  
Total property and equipment
    6,360,454       5,986,047  
Less accumulated depreciation, depletion and amortization
    (1,737,216 )     (1,630,824 )
Total property and equipment, net
    4,623,238       4,355,223  
Debt issuance costs
    32,623       34,226  
Other long-term assets
    52,413       25,785  
TOTAL ASSETS
  $ 4,978,558     $ 4,648,777  
                 
LIABILITIES AND EQUITY
 
Current liabilities:
               
Accounts payable trade
  $ 70,161     $ 35,016  
Accrued capital expenditures
    97,274       84,789  
Accrued liabilities and other
    113,770       153,062  
Revenues and royalties payable
    75,590       82,124  
Taxes payable
    26,683       30,291  
Derivative liabilities
    140,803       69,375  
Deferred income taxes
    4,001       4,548  
Total current liabilities
    528,282       459,205  
Long-term debt
    980,000       800,000  
Deferred income taxes
    549,248       539,071  
Derivative liabilities
    146,557       95,256  
Production Participation Plan liability
    81,081       81,524  
Asset retirement obligations
    77,967       76,994  
Deferred gain on sale
    39,679       41,460  
Other long-term liabilities
    24,666       23,952  
Total liabilities
    2,427,480       2,117,462  
Commitments and contingencies
               
Equity:
               
Preferred stock, $0.001 par value, 5,000,000 shares authorized; 6.25% convertible perpetual preferred stock, 172,400 shares issued and outstanding as of March 31, 2011 and 172,500 shares issued and outstanding as of December 31, 2010, aggregate liquidation preference of $17,240,000 at March 31, 2011
    -       -  
Common stock, $0.001 par value, 175,000,000 shares authorized; 118,112,568 issued and 117,368,706 outstanding as of March 31, 2011, 117,967,876 issued and 117,098,506  outstanding as of December 31, 2010 (1)
    118       59  
Additional paid-in capital
    1,543,983       1,549,822  
Accumulated other comprehensive income
    3,834       5,768  
Retained earnings
    994,810       975,666  
Total Whiting shareholders’ equity
    2,542,745       2,531,315  
Noncontrolling interest
    8,333       -  
Total equity
    2,551,078       2,531,315  
TOTAL LIABILITIES AND EQUITY
  $ 4,978,558     $ 4,648,777  
                 
(1) All common share amounts (except par value and par value per share amounts) have been retroactively restated as of December 31, 2010 to reflect the Company’s two-for-one stock split in February 2011, as described in Note 8 to these consolidated financial statements.
 
                 
See notes to consolidated financial statements.
               
 
 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share data)

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
REVENUES AND OTHER INCOME:
           
Oil and natural gas sales
  $ 425,683     $ 340,694  
Gain on hedging activities
    3,063       6,733  
Amortization of deferred gain on sale
    3,367       3,737  
Interest income and other
    108       106  
Total revenues and other income
    432,221       351,270  
 
COSTS AND EXPENSES:
               
Lease operating
    71,522       60,855  
Production taxes
    31,644       25,098  
Depreciation, depletion and amortization
    107,728       97,549  
Exploration and impairment
    22,237       12,906  
General and administrative
    18,413       13,634  
Interest expense
    14,458       15,692  
Change in Production Participation Plan liability
    (443 )     945  
Commodity derivative (gain) loss, net
    134,438       (14,923 )
Total costs and expenses
    399,997       211,756  
 
INCOME BEFORE INCOME TAXES
    32,224       139,514  
 
INCOME TAX EXPENSE:
               
Current
    2,050       1,330  
Deferred
    10,760       51,573  
Total income tax expense
    12,810       52,903  
 
NET INCOME
    19,414       86,611  
Preferred stock dividends
    (270 )     (5,391 )
 
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
  $ 19,144     $ 81,220  
 
EARNINGS PER COMMON SHARE (1):
               
Basic
  $ 0.16     $ 0.80  
Diluted
  $ 0.16     $ 0.73  
WEIGHTED AVERAGE SHARES OUTSTANDING (1):
               
Basic
    117,243       101,822  
Diluted
    117,834       118,306  
                 
(1) All share and per share amounts have been retroactively restated for the 2010 period to reflect the Company’s two-for-one stock split in February 2011, as described in Note 8 to these consolidated financial statements.
 
   
See notes to consolidated financial statements.
               

 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 19,414     $ 86,611  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation, depletion and amortization
    107,728       97,549  
Deferred income tax expense
    10,760       51,573  
Amortization of debt issuance costs and debt discount
    2,127       2,866  
Stock-based compensation
    3,164       2,244  
Amortization of deferred gain on sale
    (3,367 )     (3,737 )
Undeveloped leasehold and oil and gas property impairments
    7,638       3,843  
Exploratory dry hole costs
    2,902       2,010  
Change in Production Participation Plan liability
    (443 )     945  
Unrealized (gain) loss on derivative contracts
    123,545       (30,220 )
Other non-current
    (815 )     (792 )
Changes in current assets and liabilities:
               
Accounts receivable trade
    (44,303 )     (16,965 )
Prepaid expenses and other
    (7,861 )     (4,431 )
Accounts payable trade and accrued liabilities
    3,708       (3,028 )
Revenues and royalties payable
    (6,534 )     7,636  
Taxes payable
    (3,608 )     443  
Net cash provided by operating activities
    214,055       196,547  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Cash acquisition capital expenditures
    (91,525 )     (15,527 )
Drilling and development capital expenditures
    (284,752 )     (109,185 )
Proceeds from sale of oil and gas properties
    21       207  
Issuance of note receivable
    (25,000 )     -  
Net cash used in investing activities
    (401,256 )     (124,505 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Contributions from noncontrolling interest
    2,500       -  
Preferred stock dividends paid
    (270 )     (5,391 )
Long-term borrowings under credit agreement
    470,000       130,000  
Repayments of long-term borrowings under credit agreement
    (290,000 )     (190,000 )
Debt issuance costs
    (11 )     -  
Restricted stock used for tax withholdings
    (8,944 )     (5,558 )
Net cash provided by (used in) financing activities
    173,275       (70,949 )
 
NET CHANGE IN CASH AND CASH EQUIVALENTS
    (13,926 )     1,093  
CASH AND CASH EQUIVALENTS:
               
Beginning of period
    18,952       11,960  
End of period
  $ 5,026     $ 13,053  
                 
See notes to consolidated financial statements.
         
(Continued)
 
 
 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(In thousands)

   
Three Months Ended
March 31,
 
   
2011
   
2010
 
NONCASH INVESTING ACTIVITIES:
           
Accrued capital expenditures
  $ 97,274     $ 38,685  
                 
NONCASH FINANCING ACTIVITIES:
               
Contributions from noncontrolling interest
  $ 5,833     $ -  
                 
See notes to consolidated financial statements.
         
(Concluded)
 
 
 
WHITING PETROLEUM CORPORATION
CONSOLIDATED STATEMENTS OF EQUITY
AND COMPREHENSIVE INCOME (Unaudited)
(In thousands)

     Preferred Stock      Common Stock(1)      Additional Paid-      Accumulated Other Comprehensive      Retained      Total Whiting Shareholders’      Noncontrolling      Total      Comprehensive  
     Shares    
Amount
     Shares    
Amount
   
in Capital
   
Income (Loss)
   
Earnings
   
Equity
   
Interest
   
Equity
   
Income (Loss)
 
BALANCES-January 1, 2010
    3,450     $ 3       102,728     $ 51     $ 1,546,635     $ 20,413     $ 702,983     $ 2,270,085     $ -     $ 2,270,085        
Net income
    -       -       -       -       -       -       86,611       86,611       -       86,611     $ 86,611  
OCI amortization on de-designated hedges, net of taxes of $2,482
    -       -       -       -       -       (4,251 )     -       (4,251 )     -       (4,251 )     (4,251 )
Total comprehensive income
                                                                                  $ 82,360  
Restricted stock issued
    -       -       304       -       -       -       -       -       -       -          
Restricted stock forfeited
    -       -       (6 )     -       -       -       -       -       -       -          
Restricted stock used for tax withholdings
    -       -       (154 )     -       (5,558 )     -       -       (5,558 )     -       (5,558 )        
Stock-based compensation
    -       -       -       -       2,244       -       -       2,244       -       2,244          
Preferred dividends paid
    -       -       -       -       -       -       (5,391 )     (5,391 )     -       (5,391 )        
BALANCES-March 31, 2010
    3,450     $ 3       102,872     $ 51     $ 1,543,321     $ 16,162     $ 784,203     $ 2,343,740     $ -     $ 2,343,740          
                                                                                         
BALANCES-January 1, 2011
    173     $ -       117,968     $ 59     $ 1,549,822     $ 5,768     $ 975,666     $ 2,531,315     $ -     $ 2,531,315          
Net income
    -       -       -       -       -       -       19,414       19,414       -       19,414     $ 19,414  
OCI amortization on de-designated hedges, net of taxes of $1,130
    -       -       -       -       -       (1,934 )     -       (1,934 )     -       (1,934 )     (1,934 )
Total comprehensive income
                                                                                  $ 17,480  
Conversion of preferred stock to common
    (1 )     -       1       -       -       -       -       -       -       -          
Two-for-one stock split
    -       -       -       59       (59 )     -       -       -       -       -          
Contributions from noncontrolling interest
    -       -       -       -       -       -       -       -       8,333       8,333          
Restricted stock issued
    -       -       293       -       -       -       -       -       -       -          
Restricted stock forfeited
    -       -       (3 )     -       -       -       -       -       -       -          
Restricted stock used for tax withholdings
    -       -       (147 )     -       (8,944 )     -       -       (8,944 )     -       (8,944 )        
Stock-based compensation
    -       -       -       -       3,164       -       -       3,164       -       3,164          
Preferred dividends paid
    -       -       -       -       -       -       (270 )     (270 )     -       (270 )        
BALANCES-March 31, 2011
    172     $ -       118,112     $ 118     $ 1,543,983     $ 3,834     $ 994,810     $ 2,542,745     $ 8,333     $ 2,551,078          
                                                                                         
(1) All common share amounts (except par values) have been retroactively restated for all periods presented to reflect the Company’s two-for-one stock split in February 2011, as described in Note 8 to these consolidated financial statements.
 
                                   
See notes to consolidated financial statements.
                                 

 
WHITING PETROLEUM CORPORATION
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Unaudited)
 
1.  
BASIS OF PRESENTATION
 
Description of Operations—Whiting Petroleum Corporation, a Delaware corporation, is an independent oil and gas company that acquires, exploits, develops and explores for crude oil, natural gas and natural gas liquids primarily in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast and Michigan regions of the United States.  Unless otherwise specified or the context otherwise requires, all references in these notes to “Whiting” or the “Company” are to Whiting Petroleum Corporation and its consolidated subsidiaries.
 
Consolidated Financial Statements—The unaudited consolidated financial statements include the accounts of Whiting Petroleum Corporation, its consolidated subsidiaries and Whiting’s pro rata share of the accounts of Whiting USA Trust I pursuant to Whiting’s 15.8% ownership interest.  Investments in entities which give Whiting significant influence, but not control, over the investee are accounted for using the equity method.  Under the equity method, investments are stated at cost plus the Company’s equity in undistributed earnings and losses.  All intercompany balances and transactions have been eliminated upon consolidation.  These financial statements have been prepared in accordance with GAAP for interim financial reporting.  In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals and adjustments) necessary to present fairly, in all material respects, the Company’s interim results.  However, operating results for the periods presented are not necessarily indicative of the results that may be expected for the full year.  Whiting’s 2010 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q.  Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in Whiting’s 2010 Annual Report on Form 10-K.
 
Earnings Per Share—Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding during each period.  Diluted earnings per common share is calculated by dividing adjusted net income available to common shareholders by the weighted average number of diluted common shares outstanding, which includes the effect of potentially dilutive securities.  Potentially dilutive securities for the diluted earnings per share calculations consist of unvested restricted stock awards and outstanding stock options using the treasury method, as well as convertible perpetual preferred stock using the if-converted method.  In the computation of diluted earnings per share, excess tax benefits that would be created upon the assumed vesting of unvested restricted shares or the assumed exercise of stock options (i.e. hypothetical excess tax benefits) are included in the assumed proceeds component of the treasury share method to the extent that such excess tax benefits are more likely than not to be realized.  When a loss from continuing operations exists, all potentially dilutive securities are anti-dilutive and are therefore excluded from the computation of diluted earnings per share.
 
Reclassifications—In accordance with Regulation S-X Article 10, the Company has condensed certain line items within the current period financial statements, and certain prior period balances were reclassified to conform to the current year presentation accordingly.  Such reclassifications had no impact on net income, working capital or equity previously reported.
 
 
2.  
ACQUISITIONS
 
2011 Acquisitions
 
On March 18, 2011, Whiting and an unrelated third party formed Sustainable Water Resources, LLC (“SWR”) to develop a water project in the state of Colorado.  The Company contributed $25.0 million for a 75% interest in SWR, and the 25% noncontrolling interest in SWR was ascribed a fair value of $8.3 million, which consisted of $2.5 million in cash contributions, as well as $5.8 million in tangible and intangible assets contributed to the joint venture.
 
On February 15, 2011, the Company completed the acquisition of 6,000 net undeveloped acres and additional working interests in the Pronghorn field in Billings and Stark Counties, North Dakota, for an aggregate purchase price of $40.0 million and an effective date of February 1, 2011.
 
2010 Acquisitions
 
In September 2010, Whiting acquired operated interests in 19 producing oil and gas wells, undeveloped acreage, and gathering lines, all of which are located on approximately 20,400 gross (16,100 net) acres in Weld County, Colorado.  The aggregate purchase price was $19.2 million, and substantially all of it was allocated to the properties and acreage acquired.
 
In August 2010, Whiting acquired oil and gas leasehold interests covering approximately 112,000 gross (90,200 net) acres in the Montana portion of the Williston Basin for $26.0 million.  The undeveloped acreage is located in Roosevelt and Sheridan counties.
 
3.  
LONG-TERM DEBT
 
Long-term debt consisted of the following at March 31, 2011 and December 31, 2010 (in thousands):
 
   
March 31,
2011
   
December 31,
2010
 
Credit agreement
  $ 380,000     $ 200,000  
6.5% Senior Subordinated Notes due 2018
    350,000       350,000  
7% Senior Subordinated Notes due 2014
    250,000       250,000  
Total debt
  $ 980,000     $ 800,000  

Credit Agreement—As of March 31, 2011, Whiting Oil and Gas Corporation (“Whiting Oil and Gas”), the Company’s wholly-owned subsidiary, had a credit agreement with a syndicate of banks, and this credit facility had a borrowing base of $1.1 billion with $718.5 million of available borrowing capacity, which was net of $380.0 million in borrowings and $1.5 million in letters of credit outstanding.  The credit agreement provided for interest only payments until October 2015, when the agreement was to expire and all outstanding borrowings were due.  In April 2011, Whiting Oil and Gas entered into an amendment to its credit agreement that decreased the interest margins on outstanding borrowings and extended the principal repayment date to April 2016.  Further information on the terms of this amendment is discussed in the Subsequent Event footnote.  The following is a description of the credit agreement in place as of March 31, 2011.
 
The borrowing base under the credit agreement is determined at the discretion of the lenders, based on the collateral value of the Company’s proved reserves that have been mortgaged to its lenders, and is subject to regular redeterminations on May 1 and November 1 of each year, as well as special redeterminations described in the credit agreement, in each case which may reduce the amount of the borrowing base.  A portion of the revolving credit facility in an aggregate amount not to exceed $50.0 million may be used to issue letters of credit for the account of Whiting Oil and Gas or other designated subsidiaries of the Company.  As of March 31, 2011, $48.5 million was available for additional letters of credit under the agreement.
 
 
Interest accrues at the Company’s option at either (i) a base rate for a base rate loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% or an adjusted LIBOR rate plus 1.00%, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below.  The Company also incurs commitment fees of 0.50% on the unused portion of the lesser of the aggregate commitments of the lenders or the borrowing base, and are included as a component of interest expense.  At March 31, 2011, the weighted average interest rate on the outstanding principal balance under the credit agreement was 2.6%.
 
Ratio of Outstanding Borrowings to Borrowing Base
 
Applicable Margin for Base Rate Loans
 
Applicable Margin for Eurodollar Loans
Less than 0.25 to 1.0
  0.75%   1.75%
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0
  1.00%   2.00%
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0
  1.25%   2.25%
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0
  1.50%   2.50%
Greater than or equal to 0.90 to 1.0
  1.75%   2.75%

The credit agreement contains restrictive covenants that may limit the Company’s ability to, among other things, incur additional indebtedness, sell assets, make loans to others, make investments, enter into mergers, enter into hedging contracts, incur liens and engage in certain other transactions without the prior consent of its lenders.  Except for limited exceptions, which include the payment of dividends on the Company’s 6.25% convertible perpetual preferred stock, the credit agreement also restricts our ability to make any dividend payments or distributions on its common stock.  These restrictions apply to all of the net assets of the subsidiaries.  The credit agreement requires the Company, as of the last day of any quarter, (i) to not exceed a total debt to the last four quarters’ EBITDAX ratio (as defined in the credit agreement) of 4.25 to 1.0 for quarters ending prior to and on December 31, 2012 and 4.0 to 1.0 for quarters ending March 31, 2013 and thereafter and (ii) to have a consolidated current assets to consolidated current liabilities ratio (as defined in the credit agreement and which includes an add back of the available borrowing capacity under the credit agreement) of not less than 1.0 to 1.0.  The Company was in compliance with its covenants under the credit agreement as of March 31, 2011.
 
The obligations of Whiting Oil and Gas under the amended credit agreement are secured by a first lien on substantially all of Whiting Oil and Gas’ properties included in the borrowing base for the credit agreement.  The Company has guaranteed the obligations of Whiting Oil and Gas under the credit agreement and has pledged the stock of Whiting Oil and Gas as security for its guarantee.
 
Senior Subordinated Notes—In October 2005, the Company issued at par $250.0 million of 7% Senior Subordinated Notes due February 2014.  The estimated fair value of these notes was $266.3 million as of March 31, 2011, based on quoted market prices for these same debt securities.
 
In September 2010, the Company issued at par $350.0 million of 6.5% Senior Subordinated Notes due October 2018.  The estimated fair value of these notes was $362.3 million as of March 31, 2011, based on quoted market prices for these same debt securities.
 
 
The notes are unsecured obligations of Whiting Petroleum Corporation and are subordinated to all of the Company’s senior debt, which currently consists of Whiting Oil and Gas’ credit agreement.  The Company’s obligations under the 2014 notes are fully, unconditionally, jointly and severally guaranteed by the Company’s 100%-owned subsidiaries, Whiting Oil and Gas and Whiting Programs, Inc. (the “2014 Guarantors”).  Additionally, the Company’s obligations under the 2018 notes are fully, unconditionally, jointly and severally guaranteed by the Company’s 100%-owned subsidiary, Whiting Oil and Gas (collectively with the 2014 Guarantors, the “Guarantors”).  Any subsidiaries other than the Guarantors are minor subsidiaries as defined by Rule 3-10(h)(6) of Regulation S-X of the Securities and Exchange Commission.  Whiting Petroleum Corporation has no assets or operations independent of this debt and its investments in guarantor subsidiaries.
 
4.  
ASSET RETIREMENT OBLIGATIONS
 
The Company’s asset retirement obligations represent the estimated future costs associated with the plugging and abandonment of oil and gas wells, removal of equipment and facilities from leased acreage, and land restoration (including removal of certain onshore and offshore facilities in California) in accordance with applicable local, state and federal laws.  The Company follows FASB ASC Topic 410, Asset Retirement and Environmental Obligations, to determine its asset retirement obligation amounts by calculating the present value of the estimated future cash outflows associated with its plug and abandonment obligations.  The current portions at March 31, 2011 and December 31, 2010 were $6.4 million and $6.1 million, respectively, and are included in accrued liabilities and other.  Revisions to the liability could occur due to changes in estimated abandonment costs or well economic lives, or if federal or state regulators enact new requirements regarding the abandonment of wells.  The following table provides a reconciliation of the Company’s asset retirement obligations for the three months ended March 31, 2011 (in thousands):
 
Beginning asset retirement obligation at January 1, 2011
  $ 83,083  
Additional liability incurred
    720  
Revisions in estimated cash flows
    127  
Accretion expense
    1,946  
Obligations on sold properties
    -  
Liabilities settled
    (1,469 )
Ending asset retirement obligation at March 31, 2011
  $ 84,407  

5.  
DERIVATIVE FINANCIAL INSTRUMENTS
 
The Company is exposed to certain risks relating to its ongoing business operations, and Whiting uses derivative instruments to manage its commodity price risk.  Whiting follows FASB ASC Topic 815, Derivatives and Hedging, to account for its derivative financial instruments.
 
Commodity Derivative ContractsHistorically, prices received for crude oil and natural gas production have been volatile because of seasonal weather patterns, supply and demand factors, worldwide political factors and general economic conditions.  Whiting enters into derivative contracts, primarily costless collars, to achieve a more predictable cash flow by reducing its exposure to commodity price volatility.  Commodity derivative contracts are thereby used to ensure adequate cash flow to fund the Company’s capital programs and to manage returns on acquisitions and drilling programs.  Costless collars are designed to establish floor and ceiling prices on anticipated future oil and gas production.  While the use of these derivative instruments limits the downside risk of adverse price movements, they may also limit future revenues from favorable price movements.  The Company does not enter into derivative contracts for speculative or trading purposes.
 
Whiting Derivatives.  The table below details the Company’s costless collar derivatives, including its proportionate share of Whiting USA Trust I (the “Trust”) derivatives, entered into to hedge forecasted crude oil and natural gas production revenues, as of April 21, 2011.
 
 
   
Whiting Petroleum Corporation
 
   
Contracted Volumes
   
Weighted Average
NYMEX Price Collar Ranges
 
Period
 
Crude Oil
(Bbl)
   
Natural Gas
(Mcf)
   
Crude Oil
(per Bbl)
   
Natural Gas
(per Mcf)
 
Apr – Dec 2011
    8,140,289       322,092     $61.01 - $ 98.31     $6.32 - $13.64  
Jan – Dec 2012
    7,905,091       384,002     $59.97 - $106.27     $6.50 - $14.27  
Jan – Nov 2013
    3,090,000       -     $47.64 - $ 89.90     n/a  
Total
    19,135,380       706,094              

Derivatives Conveyed to Whiting USA Trust I.  In connection with the Company’s conveyance in April 2008 of a term net profits interest to the Trust and related sale of 11,677,500 Trust units to the public, the right to any future hedge payments made or received by Whiting on certain of its derivative contracts have been conveyed to the Trust, and therefore such payments will be included in the Trust’s calculation of net proceeds.  Under the terms of the aforementioned conveyance, Whiting retains 10% of the net proceeds from the underlying properties.  Whiting’s retention of 10% of these net proceeds, combined with its ownership of 2,186,389 Trust units, results in third-party public holders of Trust units receiving 75.8%, and Whiting retaining 24.2%, of the future economic results of commodity derivative contracts conveyed to the Trust.  The relative ownership of the future economic results of such commodity derivatives is reflected in the tables below.  No additional hedges are allowed to be placed on Trust assets.
 
The 24.2% portion of Trust derivatives that Whiting has retained the economic rights to (and which are also included in the table above) are as follows:
 
   
Whiting Petroleum Corporation
 
   
Contracted Volumes
   
Weighted Average
NYMEX Price Collar Ranges
 
Period
 
Crude Oil
(Bbl)
   
Natural Gas
(Mcf)
   
Crude Oil
(per Bbl)
   
Natural Gas
(per Mcf)
 
Apr – Dec 2011
    85,289       322,092     $74.00 - $140.32     $6.32 - $13.64  
Jan – Dec 2012
    105,091       384,002     $74.00 - $141.72     $6.50 - $14.27  
Total
    190,380       706,094              

The 75.8% portion of Trust derivative contracts of which Whiting has transferred the economic rights to third-party public holders of Trust units (and which have not been reflected in the above tables) are as follows:
 
   
Third-party Public Holders of Trust Units
 
   
Contracted Volumes
   
Weighted Average
NYMEX Price Collar Ranges
 
Period
 
Crude Oil
(Bbl)
   
Natural Gas
(Mcf)
   
Crude Oil
(per Bbl)
   
Natural Gas
(per Mcf)
 
Apr – Dec 2011
    267,145       1,008,867     $74.00 - $140.32     $6.32 - $13.64  
Jan – Dec 2012
    329,171       1,202,785     $74.00 - $141.72     $6.50 - $14.27  
Total
    596,316       2,211,652              

 
Discontinuance of Cash Flow Hedge Accounting—Prior to April 1, 2009, the Company designated a portion of its commodity derivative contracts as cash flow hedges, whose unrealized fair value gains and losses were recorded to other comprehensive income.  Effective April 1, 2009, however, the Company elected to de-designate all of its commodity derivative contracts that had been previously designated as cash flow hedges and elected to discontinue hedge accounting prospectively.  As a result, such mark-to-market values at March 31, 2009 were frozen in accumulated other comprehensive income as of the de-designation date and are being reclassified into earnings as the original hedged transactions affect income.  As of March 31, 2011, accumulated other comprehensive income amounted to $6.1 million ($3.8 million net of tax), which consisted entirely of unrealized deferred gains and losses on commodity derivative contracts that had been previously designated as cash flow hedges.  During the next twelve months, the Company expects to reclassify into earnings from accumulated other comprehensive income net after-tax gains of $4.3 million related to de-designated commodity hedges.  Currently, the Company recognizes all gains and losses from changes in commodity derivative fair values immediately in earnings rather than deferring any such amounts in accumulated other comprehensive income.
 
Embedded Commodity ContractsAs of March 31, 2011, Whiting had entered into nine contracts with drilling rig companies, whereby the rig day rates included price adjustment clauses that are linked to changes in NYMEX crude oil prices.  These drilling rig contracts have various termination dates ranging from June 2011 to May 2014.  The price adjustment formulas in the rig contracts stipulate that with every $10 increase or decrease in the price of NYMEX crude, the cost of drilling rig day rates to the Company will likewise increase or decrease by specific dollar amounts as set forth in each of the individual contracts.  The Company has determined that the portions of drilling rig day rates linked to NYMEX oil prices are not clearly and closely related to the host drilling contracts, and the Company has therefore bifurcated these embedded pricing features from their host contracts and reflected them at fair value in the consolidated financial statements.
 
As global crude oil prices increase or decrease, the demand for drilling rigs in North America similarly increases and decreases.  Because the supply of onshore drilling rigs in North America is fairly inelastic, these changes in rig demand cause drilling rig day rates to increase or decrease in tandem with crude oil price fluctuations.  When the Company enters into a long-term drilling rig contract that has a fixed rig day rate which does not increase or decrease with changes in oil prices, the Company is exposed to the risk of paying higher than the market day rate for drilling rigs in a climate of rapidly declining oil prices.  This in turn could have a negative impact on the Company’s oil and gas well economics.  As a result, the Company reduces its exposure to this risk by entering into drilling contracts which have rig day rates that fluctuate in tandem with changes in oil prices.
 
Derivative Instrument ReportingAll derivative instruments are recorded on the consolidated balance sheet at fair value, other than derivative instruments that meet the “normal purchase normal sales” exclusion.  The following tables summarize the location and fair value amounts of all derivative instruments in the consolidated balance sheets (in thousands).
 
       
Fair Value
 
Not Designated as ASC 815 Hedges
 
Balance Sheet Classification
 
March 31, 2011
   
December 31, 2010
 
Derivative assets:
               
Commodity contracts
 
Prepaid expenses and other
  $ 2,734     $ 4,231  
Commodity contracts
 
Other long-term assets
    1,579       3,961  
Total derivative assets
  $ 4,313     $ 8,192  
Derivative liabilities:
                   
Commodity contracts
 
Current derivative liabilities
  $ 138,232     $ 69,375  
Embedded commodity contracts
 
Current derivative liabilities
    2,571       -  
Commodity contracts
 
Non-current derivative liabilities
    146,047       95,256  
Embedded commodity contracts
 
Non-current derivative liabilities
    510       -  
Total derivative liabilities
  $ 287,360     $ 164,631  

The following tables summarize the effects of commodity derivatives instruments on the consolidated statements of income for the three months ended March 31, 2011 and 2010 (in thousands).

 
       
Gain (Loss) Reclassified from OCI into Income (Effective Portion)
 
 
     
Three Months Ended March 31,
 
ASC 815 Cash Flow Hedging Relationships
 
Income Statement Classification
 
2011
   
2010
 
Commodity contracts
 
Gain on hedging activities
  $ 3,063     $ 6,733  

       
(Gain) Loss Recognized in Income
 
 
     
Three Months Ended March 31,
 
Not Designated as ASC 815 Hedges
 
Income Statement Classification
 
2011
   
2010
 
Commodity contracts
 
Commodity derivative (gain) loss, net
  $ 131,357     $ (14,923 )
Embedded commodity contracts
 
Commodity derivative (gain) loss, net
    3,081       -  
Total
  $ 134,438     $ (14,923 )

Contingent Features in Derivative Instruments.  None of the Company’s derivative instruments contain credit-risk-related contingent features.  Counterparties to the Company’s commodity contracts are high credit-quality financial institutions that are lenders under Whiting’s credit agreement.  Whiting uses only credit agreement participants to hedge with, since these institutions are secured equally with the holders of Whiting’s bank debt, which eliminates the potential need to post collateral when Whiting is in a large derivative liability position.  As a result, the Company is not required to post letters of credit or corporate guarantees for its derivative counterparties in order to secure contract performance obligations.
 
6.  
FAIR VALUE MEASURMENTS
 
The Company follows FASB ASC Topic 820, Fair Value Measurement and Disclosure, which establishes a three-level valuation hierarchy for disclosure of fair value measurements.  The valuation hierarchy categorizes assets and liabilities measured at fair value into one of three different levels depending on the observability of the inputs employed in the measurement.  The three levels are defined as follows:
 
·  
Level 1:  Quoted Prices in Active Markets for Identical Assets – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
 
·  
Level 2:  Significant Other Observable Inputs – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
 
·  
Level 3:  Significant Unobservable Inputs – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
 
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.  The Company reflects transfers between the three levels at the end of the reporting period in which the availability of observable inputs no longer justifies classification in the original level.
 
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values (in thousands):
 
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
March 31, 2011
 
Financial Assets
                       
Commodity derivatives - current
  $ -     $ 2,734     $ -     $ 2,734  
Commodity derivatives - non-current
    -       1,579       -       1,579  
Total financial assets
  $ -     $ 4,313     $ -     $ 4,313  
Financial Liabilities
                               
Commodity derivatives - current
  $ -     $ 138,232     $ -     $ 138,232  
Embedded commodity derivatives - current
    -       2,571       -       2,571  
Commodity derivatives - non-current
    -       146,047       -       146,047  
Embedded commodity derivatives - non-current
    -       510       -       510  
Total financial liabilities
  $ -     $ 287,360     $ -     $ 287,360  


   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
December 31, 2010
 
Financial Assets
                       
Commodity derivatives - current
  $ -     $ 4,231     $ -     $ 4,231  
Commodity derivatives - non-current
    -       3,961       -       3,961  
Total financial assets
  $ -     $ 8,192     $ -     $ 8,192  
Financial Liabilities
                               
Commodity derivatives - current
  $ -     $ 69,375     $ -     $ 69,375  
Commodity derivatives - non-current
    -       95,256       -       95,256  
Total financial liabilities
  $ -     $ 164,631     $ -     $ 164,631  

The following methods and assumptions were used to estimate the fair values of the assets and liabilities in the tables above:
 
Commodity Derivatives.  Commodity derivative instruments consist primarily of costless collars for crude oil and natural gas.  The Company’s costless collars are valued using industry-standard models, which are based on a market approach.  These models consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy.  The discount rates used in the fair values of these instruments include a measure of either the Company’s or the counterparty’s nonperformance risk, as appropriate.  The Company utilizes counterparties’ valuations to assess the reasonableness of its own valuations.
 
Embedded Commodity Derivatives.  Embedded commodity derivatives relate to long and short-term contracts that Whiting has entered into with drilling rig companies, whereby the rig day rates include price adjustment clauses that are linked to changes in NYMEX crude oil prices.  Whiting has determined that the portion of drilling rig day rates linked to NYMEX oil prices are not clearly and closely related to the host drilling contracts, and the Company has therefore bifurcated these embedded pricing features from their host contracts and reflected them at fair value in its consolidated financial statements.  These embedded commodity derivatives are valued using industry-standard models, which are based on a market approach.  These models consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and contractual prices for the underlying instruments, as well as other relevant economic measures.  Substantially all of these assumptions are observable in the marketplace throughout the full term of the contract, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace, and are therefore designated as Level 2 within the valuation hierarchy.  The discount rates used in the fair values of these instruments include a measure of either the Company’s or the counterparty’s nonperformance risk, as appropriate.
 
 
Non-Recurring Fair Value Measurements.  The Company applies the provisions of the fair value measurement standard to its non-recurring, non-financial measurements including business combinations, proved oil and gas property impairments and asset retirement obligations.  These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances.  The following table presents information about the Company’s non-financial assets and liabilities measured at fair value on a non-recurring basis as of March 31, 2011, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair values (in thousands):
 
    Net Carrying Value as of     Fair Value Measurements Using     Pre-tax (Gain) Loss Three Months Ended  
    March 31, 2011     Level 1     Level 2     Level 3     March 31, 2011  
Noncontrolling interest
  $ 8,333     $ -     $ -     $ 8,333     $ -  
Asset retirement obligations
    720       -       -       720       -  
Total non-recurring assets at fair value
  $ 9,053     $ -     $ -     $ 9,053     $ -  

The following methods and assumptions were used to estimate the fair values of the non-financial assets and liabilities in the table above:
 
Noncontrolling Interest.  In connection with the Company’s formation of Sustainable Water Resources, LLC in March 2011, the noncontrolling interest was ascribed a fair value of $8.3 million in accordance with the provisions of the Identifiable Assets and Liabilities, and Any Noncontrolling Interest Subsections of FASB ASC Subtopic 805-20.  Given the unobservable nature of the fair value inputs, these valuations are deemed to use Level 3 inputs.
 
Asset Retirement Obligations.  The Company estimates the fair value of asset retirement obligations at the point they are incurred by calculating the present value of estimated future plug and abandonment costs.  Such present value calculations use internally developed cash flow models, which are based on an income approach, and include various assumptions such as estimated amounts and timing of abandonment cash flows, the Company’s credit-adjusted risk-free rate and future inflation rates.  Given the unobservable nature of most of these inputs, the initial measurement of asset retirement obligation liabilities is deemed to use Level 3 inputs.
 
7.  
DEFERRED COMPENSATION
 
Production Participation Plan—The Company has a Production Participation Plan (the “Plan”) in which all employees participate.  On an annual basis, interests in oil and gas properties acquired, developed or sold during the year are allocated to the Plan as determined annually by the Compensation Committee of the Company’s Board of Directors.  Once allocated, the interests (not legally conveyed) are fixed.  Interest allocations prior to 1995 consisted of 2%-3% overriding royalty interests.  Interest allocations since 1995 have been 2%-5% of oil and gas sales less lease operating expenses and production taxes.
 
Payments of 100% of the year’s Plan interests to employees and the vested percentages of former employees in the year’s Plan interests are made annually in cash after year-end.  Accrued compensation expense under the Plan for the three months ended March 31, 2011 and 2010 amounted to $8.0 million and $6.7 million, respectively, charged to general and administrative expense and $0.9 million and $1.0 million, respectively, charged to exploration expense.
 
 
Employees vest in the Plan ratably at 20% per year over a five year period.  Pursuant to the terms of the Plan, (i) employees who terminate their employment with the Company are entitled to receive their vested allocation of future Plan year payments on an annual basis; (ii) employees will become fully vested at age 62, regardless of when their interests would otherwise vest; and (iii) any forfeitures inure to the benefit of the Company.
 
The Company uses average historical prices to estimate the vested long-term Production Participation Plan liability.  At March 31, 2011, the Company used three-year average historical NYMEX prices of $80.74 for crude oil and $5.30 for natural gas to estimate this liability.  If the Company were to terminate the Plan or upon a change in control of the Company (as defined in the Plan), all employees fully vest, and the Company would distribute to each Plan participant an amount, based upon the valuation method set forth in the Plan, in a lump sum payment twelve months after the date of termination or within one month after a change in control event.  Based on current strip prices at March 31, 2011, if the Company elected to terminate the Plan or if a change of control event occurred, it is estimated that the fully vested lump sum cash payment to employees would approximate $163.8 million.  This amount includes $18.9 million attributable to proved undeveloped oil and gas properties and $8.9 million relating to the short-term portion of the Plan liability, which has been accrued as a current payable to be paid in February 2012.  The ultimate sharing contribution for proved undeveloped oil and gas properties will be awarded in the year of Plan termination or change of control.  However, the Company has no intention to terminate the Plan.
 
The following table presents changes in the estimated long-term liability related to the Plan (in thousands):
 
Beginning long-term Production Participation Plan liability
  $ 81,524  
Change in liability for accretion, vesting, change in estimates and new Plan year activity
    8,504  
Cash payments accrued as compensation expense and reflected as a current payable
    (8,947 )
Ending long-term Production Participation Plan liability
  $ 81,081  

8.  
SHAREHOLDERS’ EQUITY
 
Common Stock—In May 2010, Whiting’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to increase the number of authorized shares of common stock from 75,000,000 shares to 175,000,000 shares.
 
Stock Split.  On January 26, 2011, the Company’s Board of Directors approved a two-for-one split of the Company's shares of common stock to be effected in the form of a stock dividend.  As a result of the stock split, stockholders of record on February 7, 2011 received one additional share of common stock for each share of common stock held.  The additional shares of common stock were distributed on February 22, 2011.  Concurrently with the payment of such stock dividend in February 2011, there was a transfer from additional paid-in capital to common stock of $0.1 million, which amount represents $0.001 per share (being the par value thereof) for each share of common stock so issued.  All common share and per share amounts in these consolidated financial statements and related notes for periods prior to February 2011 have been retroactively adjusted to reflect the stock split.  The common stock dividend resulted in the conversion price for Whiting’s 6.25% Convertible Perpetual Preferred Stock being adjusted from $43.4163 to $21.70815.
 
6.25% Convertible Perpetual Preferred Stock—In June 2009, the Company completed a public offering of 6.25% convertible perpetual preferred stock (“preferred stock”), selling 3,450,000 shares at a price of $100.00 per share.
 
Each holder of the preferred stock is entitled to an annual dividend of $6.25 per share to be paid quarterly in cash, common stock or a combination thereof on March 15, June 15, September 15 and December 15, when and if such dividend has been declared by Whiting’s board of directors. Each share of preferred stock has a liquidation preference of $100.00 per share plus accumulated and unpaid dividends and is convertible, at a holder’s option, into shares of Whiting’s common stock based on an initial conversion price of $21.70815, subject to adjustment upon the occurrence of certain events.  The preferred stock is not redeemable by the Company.  At any time on or after June 15, 2013, the Company may cause all outstanding shares of this preferred stock to be converted into shares of common stock if the closing price of our common stock equals or exceeds 120% of the then-prevailing conversion price for at least 20 trading days in a period of 30 consecutive trading days.  The holders of preferred stock have no voting rights unless dividends payable on the preferred stock are in arrears for six or more quarterly periods.
 
 
Induced Conversion of 6.25% Convertible Perpetual Preferred Stock.  In August 2010, Whiting commenced an offer to exchange up to 3,277,500, or 95%, of its preferred stock for the following consideration per share of preferred stock: 4.6066 shares of its common stock and a cash premium of $14.50.  The exchange offer expired in September 2010 and resulted in the Company accepting 3,277,500 shares of preferred stock in exchange for the issuance of 15,098,020 shares of common stock and a cash premium payment of $47.5 million.  Following the exchange offer, the 3,277,500 shares of preferred stock accepted in the exchange were cancelled, and a total of 172,500 shares of preferred stock remained outstanding.
 
Equity Incentive Plan—The Company maintains the Whiting Petroleum Corporation 2003 Equity Incentive Plan (the “Equity Plan”), pursuant to which 2,978,323 shares of the Company’s common stock have been reserved for issuance.  No employee or officer participant may be granted options for more than 600,000 shares of common stock, stock appreciation rights relating to more than 600,000 shares of common stock, or more than 300,000 shares of restricted stock during any calendar year.  As of March 31, 2011, 1,564,641 shares of common stock remained available for grant under the Plan.
 
For the three months ended March 31, 2011 and 2010, total stock compensation expense recognized for restricted share awards and stock options was $3.2 million and $2.2 million, respectively.
 
Restricted Shares.  Restricted stock awards for executive officers, directors and employees generally vest ratably over a three-year service period.  The Company uses historical data and projections to estimate expected employee behaviors related to restricted stock forfeitures.  The expected forfeitures are then included as part of the grant date estimate of compensation cost.  For service-based restricted stock awards, the grant date fair value is determined based on the closing bid price of the Company’s common stock on the grant date.
 
In January 2011 and 2010, 201,420 shares and 180,898 shares, respectively, of restricted stock, subject to certain market-based vesting criteria in addition to the standard three-year service condition, were granted to executive officers under the Equity Plan.  Vesting each year is subject to the condition that Whiting’s stock price increases by a greater percentage, or decreases by a lesser percentage, than the average percentage increase or decrease, respectively, of the stock prices of a peer group of companies.  These market-based conditions must be met in order for the stock awards to vest, and it is therefore possible that no shares could vest in one or more of the three-year vesting periods.  However, the Company recognizes compensation expense for awards subject to market conditions regardless of whether it becomes probable that these conditions will be achieved or not, and compensation expense is not reversed if vesting does not actually occur.
 
 
For these awards subject to market conditions, the grant date fair value was estimated using a Monte Carlo valuation model.  The Monte Carlo model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment.  Expected volatility was calculated based on the historical volatility of Whiting’s common stock, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with the three-year vesting period.  The key assumptions used in valuing the market-based restricted shares were as follows:
 
   
2011
 
2010
Number of simulations
    65,000     65,000
Expected volatility
    75.8%     75.9%
Risk-free rate
    1.00%     1.40%
 
The grant date fair value of the market-based restricted stock as determined by the Monte Carlo valuation model was $42.20 per share in January 2011 and $22.99 per share in January 2010.
 
The following table shows a summary of the Company’s nonvested restricted stock as of March 31, 2011 as well as activity during the three months then ended (share and per share data, not presented in thousands):
 
   
Number
of Shares
   
Weighted Average
Grant Date
Fair Value
 
Restricted stock awards nonvested, January 1, 2011
    869,370     $ 16.27  
Granted
    292,888     $ 47.84  
Vested
    (415,382 )   $ 14.65  
Forfeited
    (3,014 )   $ 32.11  
Restricted stock awards nonvested, March 31, 2011
    743,862     $ 29.54  

As of March 31, 2011, there was $15.7 million of total unrecognized compensation cost related to unvested restricted stock granted under the stock incentive plans.  That cost is expected to be recognized over a weighted average period of 2.6 years.
 
Stock Options.  In January 2011 and 2010, 80,820 stock options and 55,302 stock options, respectively, were granted under the Equity Plan to certain executive officers of the Company with exercise prices equal to the closing market price of the Company’s common stock on the grant date.  These stock options vest ratably over a three-year service period from the grant date and are exercisable immediately upon vesting through the tenth anniversary of the grant date.
 
The Company uses a Black-Scholes option-pricing model to estimate the fair value of stock option awards.  Because the Company first granted stock options in 2009, it does not have historical exercise data upon which to estimate the expected term of the options.  As such, the Company has elected to estimate the expected term of the stock options granted using the “simplified” method for “plain vanilla” options.  The expected volatility at the grant date is based on the historical volatility of Whiting’s common stock, and the risk-free interest rate is determined based on the yield on U.S. Treasury strips with maturities similar to those of the expected term of the stock options.  The following table summarizes the assumptions used to estimate the grant date fair value of stock options awarded in each respective period:
 
 
2011
 
2010
Risk-free interest rate
2.47%   2.75%
Expected volatility
59.3%   58.8%
Expected term
6.0 yrs.
 
6.0 yrs.
Dividend yield
-   -

The grant date fair value of the stock options awarded, as determined by the Black-Scholes valuation model, was $34.15 per share in January 2011 and $19.44 per share in January 2010.
 
 
The following table shows a summary of the Company’s stock options outstanding as of March 31, 2011 as well as activity during the three months then ended (share and per share data, not presented in thousands):
 
   
Number of Options
   
Weighted Average Exercise Price per Share
   
Aggregate Intrinsic Value
   
Weighted Average Remaining Contractual Term
(in Years)
 
Options outstanding at January 1, 2011
  296,516     $ 16.78              
Granted
  80,820       60.28              
Exercised
  -       -     $ -        
Forfeited or expired
  -       -                
Options outstanding at March 31, 2011
  377,336     $ 26.09     $ 17,869     8.4  
Options vested and expected to vest at March 31, 2011    377,336      26.09      17,869      8.4  
Options exercisable at March 31, 2011
  179,243     $ 14.97     $ 10,482     8.0  

Unrecognized compensation cost as of March 31, 2011 related to unvested stock option awards was $3.0 million, which is expected to be recognized over a period of 2.6 years.
 
9.  
INCOME TAXES
 
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period.  The provision for income taxes for the three months ended March 31, 2011 and 2010 differs from the amount that would be provided by applying the statutory U.S. federal income tax rate of 35% to pre-tax income primarily because of state income taxes and estimated permanent differences.

The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year.  The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
 
10.  
EARNINGS PER SHARE
 
The reconciliations between basic and diluted earnings per share are as follows (in thousands, except per share data):

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Basic Earnings Per Share(1)
           
Numerator:
           
Net income
  $ 19,414     $ 86,611  
Preferred stock dividends
    (270 )     (5,391 )
Net income available to common shareholders, basic
  $ 19,144     $ 81,220  
Denominator:
               
Weighted average shares outstanding, basic
    117,243       101,822  
                 
Diluted Earnings Per Share(1)
               
Numerator:
               
Net income available to common shareholders, basic
  $ 19,144     $ 81,220  
Preferred stock dividends
    -       5,391  
Adjusted net income available to common shareholders, diluted
  $ 19,144     $ 86,611  
Denominator:
               
Weighted average shares outstanding, basic
    117,243       101,822  
Restricted stock and stock options
    591       592  
Convertible perpetual preferred stock
    -       15,892  
Weighted average shares outstanding, diluted
    117,834       118,306  
                 
Earnings per common share, basic
  $ 0.16     $ 0.80  
Earnings per common share, diluted
  $ 0.16     $ 0.73  
________
(1)      All share and per share amounts have been retroactively restated for the three months ended March 31, 2010 to reflect the Company’s February 2011 two-for-one stock split described in Note 8 to these consolidated financial statements.

 
For the three months ended March 31, 2011, the diluted earnings per share calculation excludes the effect of 794,330 incremental common shares, which were issuable upon the assumed conversion of perpetual preferred stock because their effect was anti-dilutive.
 
11.  
ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 
In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations: Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”), which provides amendments to FASB ASC Topic 805, Business Combinations.  The objective of ASU 2010-29 is to clarify and expand the pro forma revenue and earnings disclosure requirements for business combinations.  ASU 2010-29 is effective for fiscal years beginning after December 15, 2010.  The Company adopted ASU 2010-29 effective January 1, 2011, which did not have an impact on the Company’s consolidated financial statements.
 
12.  
SUBSEQUENT EVENT
 
In April 2011, Whiting Oil and Gas entered into an amendment to its credit agreement that decreased the interest margins on outstanding borrowings and extended the principal repayment date to April 2016.
 
The amended credit agreement provides for interest only payments until April 2016, when the entire amount borrowed is due.  Interest accrues at the Company’s option at either (i) a base rate for a base rate loan plus the margin in the table below, where the base rate is defined as the greatest of the prime rate, the federal funds rate plus 0.50% or an adjusted LIBOR rate plus 1.00%, or (ii) an adjusted LIBOR rate for a Eurodollar loan plus the margin in the table below.  Additionally, the Company also incurs commitment fees as set forth in the table below on the unused portion of the lesser of the aggregate commitments of the lenders or the borrowing base.
 
 
Ratio of Outstanding Borrowings to Borrowing Base
 
Applicable Margin for Base Rate Loans
 
Applicable Margin for Eurodollar Loans
 
Commitment Fee
Less than 0.25 to 1.0
  0.50%   1.50%   0.375%
Greater than or equal to 0.25 to 1.0 but less than 0.50 to 1.0
  0.75%   1.75%   0.375%
Greater than or equal to 0.50 to 1.0 but less than 0.75 to 1.0
  1.00%   2.00%   0.50%
Greater than or equal to 0.75 to 1.0 but less than 0.90 to 1.0
  1.25%   2.25%   0.50%
Greater than or equal to 0.90 to 1.0
  1.50%   2.50%   0.50%

All other terms of the credit agreement remain unchanged.
 
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Unless the context otherwise requires, the terms “Whiting,” “we,” “us,” “our” or “ours” when used in this Item refer to Whiting Petroleum Corporation, together with its consolidated subsidiaries, Whiting Oil and Gas Corporation, Sustainable Water Resources, LLC and Whiting Programs, Inc.  When the context requires, we refer to these entities separately.  This document contains forward-looking statements, which give our current expectations or forecasts of future events.  Please refer to “Forward-Looking Statements” at the end of this Item for an explanation of these types of statements.
 
Overview
 
We are an independent oil and gas company engaged in acquisition, development, exploitation, production and exploration activities primarily in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast and Michigan regions of the United States.  Prior to 2006, we generally emphasized the acquisition of properties that increased our production levels and provided upside potential through further development.  Since 2006, we have focused primarily on organic drilling activity and on the development of previously acquired properties, specifically on projects that we believe provide the opportunity for repeatable successes and production growth.  We believe the combination of acquisitions, subsequent development and organic drilling provides us a broad set of growth alternatives and allows us to direct our capital resources to what we believe to be the most advantageous investments.
 
As demonstrated by our recent capital expenditure programs, we are increasingly focused on a balanced exploration and development program, while continuing to selectively pursue acquisitions that complement our existing core properties.  We believe that our significant drilling inventory, combined with our operating experience and cost structure, provides us with meaningful organic growth opportunities.  Our growth plan is centered on the following activities:
 
 
pursuing the development of projects that we believe will generate attractive rates of return;
 
maintaining a balanced portfolio of lower risk, long-lived oil and gas properties that provide stable cash flows;
 
seeking property acquisitions that complement our core areas; and
 
allocating a portion of our capital budget to leasing and exploring prospect areas.

We have historically acquired operated and non-operated properties that exceed our rate of return criteria.  For acquisitions of properties with additional development, exploitation and exploration potential, our focus has been on acquiring operated properties so that we can better control the timing and implementation of capital spending.  In some instances, we have been able to acquire non-operated property interests at attractive rates of return that established a presence in a new area of interest or that have complemented our existing operations.  We intend to continue to acquire both operated and non-operated interests to the extent we believe they meet our return criteria.  In addition, our willingness to acquire non-operated properties in new geographic regions provides us with geophysical and geologic data in some cases that leads to further acquisitions in the same region, whether on an operated or non-operated basis.  We sell properties when we believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties we desire to own.
 
Our revenue, profitability and future growth rate depend on factors beyond our control, such as economic, political and regulatory developments and competition from other sources of energy.  Oil and gas prices historically have been volatile and may fluctuate widely in the future.  The following table highlights the quarterly average NYMEX price trends for crude oil and natural gas since the first quarter of 2010:
 
 
      Q1 2010       Q2 2010       Q3 2010       Q4 2010       Q1 2011  
Crude Oil
  $ 78.79     $ 77.99     $ 76.21     $ 85.18     $ 94.25  
Natural Gas
  $ 5.30     $ 4.09     $ 4.39     $ 3.81     $ 4.10  
 
Lower oil and natural gas prices may not only decrease our revenues, but may also reduce the amount of oil and natural gas that we can produce economically and therefore potentially lower our reserve bookings.  A substantial or extended decline in oil or natural gas prices may result in impairments of our proved oil and gas properties and may materially and adversely affect our future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital expenditures.  Lower oil and gas prices may also reduce the amount of our borrowing base under our credit agreement, which is determined at the discretion of the lenders based on the collateral value of our proved reserves that have been mortgaged to the lenders.  Alternatively, higher oil and natural gas prices may result in significant non-cash mark-to-market losses being recognized on our commodity derivatives, which may in turn cause us to experience net losses.
 
First Quarter 2011 Highlights and Future Considerations
 
Operational Highlights.  Our Sanish and Parshall fields in Mountrail County, North Dakota target the Bakken and Three Forks formations.  Net production in the Sanish field increased 43% from 15.2 MBOE/d in the first quarter of 2010 to 21.7 MBOE/d in the first quarter of 2011.  From January 1 through April 15, 2011, we completed 15 operated Bakken wells and seven operated Three Forks wells in the Sanish field, bringing to 158 the total number of operated wells in the field.  As of April 15, 2011, 17 operated wells were being completed or awaiting completion and nine operated wells were being drilled in the Sanish field.  In 2011, we intend to drill a total of 95 gross (54 net) operated wells in the Sanish field, of which 70 are planned Three Forks wells.  We plan to continue with our current nine operated drilling rig count in the Sanish field through 2013.
 
At our Robinson Lake gas plant in North Dakota, we recently completed Phase II of the expansion plan, which brought the plant’s inlet capacity to 60 MMcf/d, and we expect to continue expanding the plant’s capacity during the third quarter of 2011.  As of April 15, 2011, the plant was processing 34.8 MMcf/d.
 
Our Lewis & Clark prospect area is located primarily in Stark County, North Dakota and runs along the Bakken shale pinch-out in the southern Williston Basin.  In this area, the Upper Bakken shale is thermally mature, moderately over-pressured, and we believe that it has charged reservoir zones within the immediately underlying Three Forks formation.  We hold a working interest in 250 1,280-acre spacing units in Lewis & Clark, and we estimate two to four wells per 1,280-acre spacing unit to fully develop this area.  From January 28 to April 18, 2011, we completed eight wells at Lewis & Clark.  Due to mechanical difficulties experienced at two of these eight wells, we believe that not all of the wells’ total number of frac stages are contributing to the current production from these two wells.  The remaining six wells exhibited variations in initial production rates reflecting rock quality and pressure differences which vary across Lewis & Clark.  We continue to refine our completion procedures in this area in an effort to improve production rates.  We currently have five drilling rigs operating in this prospect, and we plan to increase this rig count to nine by the third quarter of 2011.  We recently broke ground on the construction of a gas processing plant at Lewis & Clark, which is expected to be completed by November 2011.
 
We continue to have significant development and related infrastructure activity in the Postle and North Ward Estes fields acquired in 2005, which have resulted in reserve additions and production increases at both fields.  Our expansion of the CO2 floods at these fields continues to generate positive results.
 
The North Ward Estes field is located in Ward and Winkler Counties, Texas and is responding positively to our water and CO2 floods, which we initiated in May 2007.  In the first quarter of 2011, production from North Ward Estes averaged 8.1 MBOE/d representing an 8% increase from first quarter 2010 levels.  As a result of additional compression and increased CO2 injection, production from the field has increased.  Whiting is currently injecting approximately 260 MMcf/d of CO2 into the field, of which about half is recycled.  In this field, we plan to install oil, gas and water processing facilities in eight phases.  The first two phases were largely completed by December 2009, and Phase III began in December 2010.  We plan to have all eight phases implemented by 2016.
 
 
Net production from the Postle field, which is located in Texas County, Oklahoma and produces from the Morrow sandstone, averaged 8.5 MBOE/d in the first quarter of 2011, representing a 5% decrease from the 8.9 MBOE/d rate in the fourth quarter of 2010, which decline was primarily the result of normal CO2 injection variations.  We recently increased CO2 injection in the Postle field and expect moderate production increases over the next several months.
 
Acquisition Highlights.  On February 15, 2011, we completed the acquisition of 6,000 net undeveloped acres and additional working interests in the Pronghorn field in Billings and Stark Counties, North Dakota, for an aggregate purchase price of $40.0 million and an effective date of February 1, 2011.
 
 Financing Highlights.  On January 26, 2011, our Board of Directors approved a two-for-one split of the Company's shares of common stock to be effected in the form of a stock dividend.  As a result of the stock split, stockholders of record on February 7, 2011 received one additional share of common stock for each share of common stock held.  The additional shares of common stock were distributed on February 22, 2011.  All common share and per share amounts in this Quarterly Report on Form 10-Q for periods prior to February 2011 have been retroactively adjusted to reflect the stock split.
 
 
Results of Operations
 
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 
Selected Operating Data:
 
Three Months Ended
March 31,
 
   
2011
   
2010
 
Net production:
           
Oil (MMBbls)
    4.8       4.3  
Natural gas (Bcf)
    7.0       6.6  
Total production (MMBOE)
    5.9       5.4  
                 
Net sales (in millions):
               
Oil (1) 
  $ 390.7     $ 303.7  
Natural gas (1) 
    35.0       37.0  
Total oil and natural gas sales
  $ 425.7     $ 340.7  
                 
Average sales prices:
               
Oil (per Bbl)
  $ 81.84     $ 70.72  
Effect of oil hedges on average price (per Bbl)
    (1.70 )     (2.04 )
Oil net of hedging (per Bbl)
  $ 80.14     $ 68.68  
Average NYMEX price (per Bbl)
  $ 94.25     $ 78.79  
                 
Natural gas (per Mcf)
  $ 5.00     $ 5.63  
Effect of natural gas hedges on average price (per Mcf)
    0.04       0.04  
Natural gas net of hedging (per Mcf)
  $ 5.04     $ 5.67  
Average NYMEX price (per Mcf)
  $ 4.10     $ 5.30  
                 
Cost and expense (per BOE):
               
Lease operating expenses
  $ 12.04     $ 11.30  
Production taxes
  $ 5.33     $ 4.66  
Depreciation, depletion and amortization expense
  $ 18.14     $ 18.11  
General and administrative expenses
  $ 3.10     $ 2.53  

(1)  Before consideration of hedging transactions.
 
Oil and Natural Gas Sales.  Our oil and natural gas sales revenue increased $85.0 million to $425.7 million in the first quarter of 2011 compared to the same period in 2010.  Sales are a function of oil and gas volumes sold and average sales prices.  Our oil sales volumes increased 11% between periods, while our natural gas sales volumes increased 7%.  The oil volume increase resulted primarily from drilling success in the North Dakota Bakken area and at our Lewis & Clark field.  Oil production from the Bakken in the first quarter of 2011 increased 400 MBbl compared to the first quarter of 2010, while Lewis & Clark oil production increased 95 MBbl over the same prior year period.  The gas volume increase between periods was primarily the result of gas production increases of 1,220 MMcf at our Flat Rock area.  This production increase was partially offset by normal field production decline, which led to production volume decreases of 155 MMcf at our Southwest Wyoming area, 115 MMcf at each of our Western Texas and North Dakota areas and 105 MMcf at our Boies Ranch area compared to the first quarter of 2010.  These increases in oil and gas production were partially offset by the negative impact of weather conditions on production volumes.   Inclement weather caused well completion delays in North Dakota, and weather issues in the Postle field and North Ward Estes field resulted in temporary oil and gas production down time.  Also contributing to the increase in oil sales revenue in 2011 was an increase in average sales price for oil.  Our average price for oil before the effects of hedging increased 16% between periods.  This increase was partially offset by an 11% decrease in our average price for natural gas before the effects of hedging.
 
 
Gain on Hedging Activities.  Our gain on hedging activities decreased $3.7 million in 2011 as compared to the first quarter of 2010, and it consisted of the following (in thousands):
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Gains reclassified from AOCI on de-designated hedges
  $ 3,063     $ 6,733  

Effective April 1, 2009, we elected to de-designate all of our commodity derivative contracts that had been previously designated as cash flow hedges, and we elected to discontinue all hedge accounting prospectively.  Accordingly, each period we reclassify from accumulated other comprehensive income (“AOCI”) into earnings unrealized gains (which were frozen in AOCI on the April 1, 2009 de-designation date) upon the expiration of these de-designated crude oil hedges, and we report such non-cash unrealized gains as gain on hedging activities.
 
See Item 3, “Qualitative and Quantitative Disclosures About Market Risk” for a list of our outstanding oil and natural gas derivatives as of April 21, 2011.
 
Lease Operating Expenses.  Our lease operating expenses (“LOE”) during the first quarter of 2011 were $71.5 million, a $10.7 million increase over the same period in 2010.  Our lease operating expenses on a BOE basis also increased from $11.30 during the first quarter of 2010 to $12.04 during the first quarter of 2011.  This rise in LOE in 2011 was related to a higher level of workover activity, as well as increases of $0.9 million in transportation charges and $0.9 million in gathering costs between periods.  Workovers increased to $22.0 million in the first quarter of 2011, as compared to $12.6 million in the first quarter of 2010, primarily due to a higher number of well workovers being conducted on our two CO2 projects.  The increase in transportation charges was primarily due to higher transportation fees on non-operated properties in the Bakken.
 
Production Taxes.  Our production taxes during the first quarter of 2011 were $31.6 million, a $6.5 million increase over the same period in 2010, which increase was primarily due to higher oil and natural gas sales between periods.  However, our production taxes are generally calculated as a percentage of oil and natural gas sales revenue before the effects of hedging, and we take advantage of credits and exemptions allowed in our various taxing jurisdictions.  As a percentage of oil and gas sales before the effects of hedging, our company-wide production tax rates for the first quarter of 2011 and 2010 remained constant at 7.4%.
 
Depreciation, Depletion and Amortization.  Our depreciation, depletion and amortization (“DD&A”) expense increased $10.2 million in 2011 as compared to the first quarter of 2010.  The components of our DD&A expense were as follows (in thousands):
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Depletion
  $ 105,211     $ 95,324  
Depreciation
    571       492  
Accretion of asset retirement obligations
    1,946       1,733  
Total
  $ 107,728     $ 97,549  

DD&A increased in the first quarter of 2011 primarily due to $9.9 million in higher depletion expense between periods.  This increase was the result of $9.8 million in higher depletion due to a rise in overall production volumes during the first quarter of 2011 and $0.1 million in higher depletion due to an increase in our depletion rate between periods.  On a BOE basis, our DD&A rate of $18.14 for the first quarter of 2011 was up from the rate of $18.11 for the same period in 2010.  The higher DD&A rate was mainly due to $909.9 million in drilling and development expenditures incurred during the past twelve months, which was partially offset by a net increase in our estimated proved reserves of 29.8 MMBOE as of December 31, 2010.
 
 
Exploration and Impairment Costs.  Our exploration and impairment costs increased $9.3 million in the first quarter of 2011, as compared to the first quarter of 2010.  The components of our exploration and impairment costs were as follows (in thousands):
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Exploration
  $ 14,599     $ 9,063  
Impairment
    7,638       3,843  
Total
  $ 22,237     $ 12,906  

Exploration costs increased $5.5 million during the first quarter of 2011 as compared to the same period in 2010 primarily due to an increase in geological and geophysical (“G&G”) activity and higher exploratory dry hole costs.  G&G costs, such as seismic studies, amounted to $6.6 million during the first quarter of 2011 as compared to $3.3 million during the same period in 2010.  During the three months ended March 31, 2011, we drilled three exploratory dry holes in the Rocky Mountains, Permian Basin and Gulf Coast regions totaling $2.9 million, while we drilled one exploratory dry hole in the Gulf Coast region totaling $2.0 million during the first three months of 2010.  Impairment expense in the first quarter of 2011 and 2010 primarily related to the amortization of leasehold costs associated with individually insignificant unproved properties, and a higher number of insignificant undeveloped leaseholds that were subject to amortization as of March 31, 2011 compared to March 31, 2010.
 
General and Administrative Expenses.  We report general and administrative expenses net of third party reimbursements and internal allocations.  The components of our general and administrative expenses were as follows (in thousands):
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
General and administrative expenses
  $ 33,988     $ 26,952  
Reimbursements and allocations
    (15,575 )     (13,318 )
General and administrative expense, net
  $ 18,413     $ 13,634  

General and administrative expenses before reimbursements and allocations increased $7.0 million during the first quarter of 2011 as compared to the same period in 2010 primarily due to higher employee compensation and an increase in accrued Production Participation Plan (“Plan”) distributions.  Employee compensation increased $5.3 million in the first quarter of 2011 due to personnel hired during the past twelve months, general pay increases and higher stock compensation between periods.  Accrued distributions under the Plan increased $1.3 million between periods.  The increase in reimbursements and allocations in the first quarter of 2011 was primarily caused by higher salary costs and a greater number of field workers on operated properties.  Our general and administrative expenses as a percentage of oil and natural gas sales remained constant at 4% for the first quarters of 2010 and 2011.
 
 
Interest Expense.  The components of our interest expense were as follows (in thousands):
 
   
Three Months Ended
March 31,
 
   
2011
   
2010
 
Senior Subordinated Notes
  $ 10,062     $ 11,081  
Credit agreement
    3,193       2,144  
Amortization of debt issue costs and debt discount
    2,127       2,516  
Other
    18       376  
Capitalized interest
    (942 )