NOTE D. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The three input levels of the fair value hierarchy are as follows:


•	Level 1 – quoted prices for identical assets or liabilities in active markets.


•	Level 2 – quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g. interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3 – unobservable inputs for the asset or liability.

Assets and liabilities measured at fair value on a recurring basis. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The following tables present the Company's assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 and 2012 for each of the fair value hierarchy levels:



	Fair Value Measurements at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value at December 31, 2013
	(in thousands)
Assets:
Trading securities	$	136	$	146	$	—	$	282
Commodity derivatives	—		156,561		—		156,561
Interest rate derivatives	—		9,530		—		9,530
Deferred compensation plan assets	63,971		—		—		63,971
Total assets	64,107		166,237		—		230,344
Liabilities:
Commodity derivatives	—		11,626		—		11,626
Interest rate derivatives	—		9,933		—		9,933
Total liabilities	—		21,559		—		21,559
Total recurring fair value measurements	$	64,107	$	144,678	$	—	$	208,785



	Fair Value Measurements at the End of the Reporting Period Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value at December 31, 2012
	(in thousands)
Assets:
Trading securities	$	124	$	154	$	—	$	278
Commodity derivatives	—		334,376		—		334,376
Deferred compensation plan assets	49,685		—		—		49,685
Total assets	49,809		334,530		—		384,339
Liabilities:
Commodity derivatives	—		15,999		—		15,999
Interest rate derivatives	—		9,724		—		9,724
Total liabilities	—		25,723		—		25,723
Total recurring fair value measurements	$	49,809	$	308,807	$	—	$	358,616

Trading securities and deferred compensation plan assets. The Company's trading securities are comprised of securities that are both actively traded and not actively traded on major exchanges. The Company's deferred compensation plan assets represent investments in equity and mutual fund securities that are actively traded on major exchanges. These investments are measured based on observable prices on major exchanges. As of December 31, 2013 and 2012, substantially all of the significant inputs to these asset exchange values represented Level 1 independent active exchange market price inputs. Inputs for certain trading securities that are not actively traded on major exchanges were classified as Level 2 inputs.

Commodity derivatives. The Company's commodity derivatives represent oil, NGL and gas swap contracts, collar contracts and collar contracts with short puts. The Company's asset and liability measurements for its oil, NGL and gas swap, collar and collar contracts with short puts represent Level 2 inputs in the hierarchy priority. The Company utilizes discounted cash flow and option-pricing models for valuing its commodity derivatives.

The asset and liability values attributable to the Company's commodity derivatives were determined based on inputs which include (i) the contracted notional volumes, (ii) independent active market price quotes, (iii) the applicable estimated credit-adjusted risk-free rate yield curve and (iv) the implied rate of volatility inherent in the collar and collar contracts with short puts, which is based on active and independent market-quoted volatility factors.

Interest rate derivatives. The Company's interest rate derivative assets and liabilities as of December 31, 2013 and 2012 represent interest rate swap contracts. The Company utilizes discounted cash flow models for valuing its interest rate derivatives. The net derivative values attributable to the Company's interest rate derivative contracts as of December 31, 2013 and 2012 are based on (i) the contracted notional amounts, (ii) LIBOR rate yield curves provided by counterparties and corroborated with forward active market-quoted LIBOR yield curves and (iii) the applicable credit-adjusted risk-free rate yield curve. The Company's interest rate derivative liability measurements represent Level 2 inputs in the hierarchy priority.

Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets are measured at fair value on a nonrecurring basis. These assets are not measured at fair value on any ongoing basis, but are subject to fair value adjustments in certain circumstances. These assets can include long-lived assets that have been reduced to fair value when they are held for sale, inventory and proved and unproved oil and gas properties that are written down to fair value when they are impaired.

Proved oil and gas properties. During 2013, 2012 and 2011, reductions in management's longer-term commodity price outlooks ("Management's Price Outlooks") provided indications of possible impairment of the Company's predominately dry gas properties in the Raton field in southeastern Colorado, the Barnett Shale field in North Texas and the Edwards Trend and Austin Chalk fields in South Texas. As a result of management's assessments, during the years ended December 31, 2013, 2012 and 2011, the Company recognized impairment charges to reduce the carrying values of the Raton field, the Barnett Shale field and the Edwards Trend/Austin Chalk fields, respectively, to their estimated fair values. The impairment charge associated with the Barnett Shale field is reported in income (loss) from discontinued operations, net of tax in the accompanying consolidated statements of operations.

The Company calculated the fair values of the Raton field, the Barnett Shale field and the Edwards Trend/Austin Chalk fields proved properties using a discounted cash flow model. Significant Level 3 assumptions associated with the calculation of discounted future cash flows included Management's Price Outlooks and management's outlooks for (i) production costs, (ii) capital expenditures, (iii) production and (iv) estimated proved reserves and risk-adjusted probable reserves. Management's Price Outlooks are developed based on third-party longer-term commodity futures price outlooks as of each measurement date. The expected future net cash flows were discounted using an annual rate of 10 percent to determine fair value.

The following table presents the fair value and fair value adjustments (in millions) for the Company's 2013, 2012 and 2011 proved property impairments, as well as the average oil price per barrel ("BBL") and gas price per British thermal unit ("MMBTU") utilized in respective Management's Price Outlooks:



	Year ended	Fair		Fair Value			Management's Price Outlooks
	December 31,	Value		Adjustment			Oil		Gas
Edwards Trend/Austin Chalk	2011	$	189.9	$	(354.4	)	$	92.69	$	5.14
Barnett Shale	2012	$	184.8	$	(532.6	)	$	87.09	$	4.78
Raton	2013	$	533.6	$	(1,495.2	)	$	80.40	$	4.43

It is reasonably possible that the estimate of undiscounted future net cash flows attributable to these or other properties may change in the future resulting in the need to impair their carrying values. The primary factors that may affect estimates of future cash flows are (i) future adjustments, both positive and negative, to proved and appropriate risk-adjusted probable and possible oil and gas reserves, (ii) results of future drilling activities, (iii) Management's Price Outlooks and (iv) increases or decreases in production and capital costs associated with these fields.

Assets classified as held for sale. The Company records assets classified as held for sale at the lower of the asset's carrying amount or estimated fair value less costs to sell. The fair value of Pioneer Alaska is based on an estimated sale price based on ongoing negotiations, less costs to sell, and is further supported by the Company's discounted cash flow model for the Alaska proved properties using Level 3 inputs as discussed in the proved oil and gas properties section above. The fair value of the Barnett Shale field assets is based upon a weighted average calculation that uses management inputs including an estimated sales price and a discounted cash flow model for the proved properties using Level 3 assumptions as discussed in the proved oil and gas properties section above. The fair value of the Sendero assets are based upon anticipated sales proceeds less costs to sell, which represent a Level 3 input in the hierarchy priority. See Note C for additional information regarding the Company's planned divestitures.

The following table presents the estimated fair value less costs to sell and fair value adjustments for the Company's assets classified as held for sale as of December 31, 2013:



	Estimated Fair Value Less Costs to Sell		Fair Value Adjustment
	(in millions)
Discontinued operations held for sale - Alaska	$	350.6	$	(539.8	)
Discontinued operations held for sale - Barnett Shale field	$	180.4	$	(189.5	)
Other long-lived assets held for sale - Sendero	$	31.4	$	(25.5	)

Unproved oil and gas properties. During December 2012, the Company recorded an impairment charge to reduce the carrying value of unproved properties in the Barnett Shale field of $71.8 million (reported in income (loss) from discontinued operations, net of tax in the accompanying consolidated statements of operations). The Company calculated the estimated fair value of the Barnett Shale unproved properties using significant Level 3 assumptions based on average lease bonuses per acre for its Barnett liquid-rich acreage, allocating no value to dry gas acreage as the Company does not intend to develop that acreage.

Inventories. During December 2013, the Company recorded an impairment charge of $23.2 million to reduce the carrying value of its excess vertical well pipe inventory. The Company calculated the estimated fair value of the inventory using significant Level 2 assumptions based on third-party price quotes for the asset in an active market. The impairment charge is included in other expense on the Company's accompanying consolidated statements of operations.

Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidated balance sheet as of December 31, 2013 and 2012 are as follows:



	December 31, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in thousands)
Long-term debt	$	2,653,059	$	3,018,830	$	3,721,193	$	4,555,770

Long-term debt includes the Company's credit facility and the Company's senior notes. At December 31, 2012, long-term debt also included Pioneer Southwest's credit facility and the Company's 2.875% Convertible Senior Notes due 2038 ("Convertible Senior Notes"), which were both fully extinguished during 2013. The fair value of debt is determined utilizing inputs that are Level 2 measurements in the fair value hierarchy.

Credit facilities. The fair values of the Company's and, through the date of the merger, Pioneer Southwest's credit facilities are calculated using a discounted cash flow model based on (i) forecasted contractual interest and fee payments, (ii) forward active market-quoted United States Treasury Bill rate (in the case of the Company's credit facility) or LIBOR (in the case of Pioneer Southwest's credit facility) yield curves and (iii) the applicable credit-adjustments.

Senior notes. The Company's senior notes represent debt securities that are not actively traded on major exchanges. The fair values of the Company's senior notes are based on their periodic values as quoted on the major exchanges.

The Company has other financial instruments consisting primarily of cash equivalents, receivables, prepaid expenses, payables and other current assets and liabilities that approximate fair value due to the nature of the instrument and relatively short maturities. Non-financial assets and liabilities initially measured at fair value include certain assets acquired and liabilities assumed in a business combination, goodwill and asset retirement obligations.

Concentrations of credit risk. As of December 31, 2013, the Company's primary concentration of credit risks are the risks of collecting accounts receivable – trade and the risk of counterparties' failure to perform under derivative obligations. See Note L for information regarding the Company's major customers.

The Company has entered into International Swap Dealers Association Master Agreements ("ISDA Agreements") with each of its derivative counterparties. The terms of the ISDA Agreements provide the Company and the counterparties with rights of set off upon the occurrence of defined acts of default by either the Company or a counterparty to a derivative, whereby the party not in default may set off all derivative liabilities owed to the defaulting party against all derivative asset receivables from the defaulting party. See Note E for additional information regarding the Company's derivative activities and information regarding derivative net assets and liabilities by counterparty.