11. Fair Value Measurements

Accounting guidelines for measuring fair value establish 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 – Observable inputs such as quoted prices in active markets at the measurement date for identical, unrestricted assets or liabilities.

Level 2 – Other inputs that are observable directly or indirectly such as quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 – Unobservable inputs for which there is little or no market data and which the Company makes its own assumptions about how market participants would price the assets and liabilities.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize the Company’s commodity derivative instrument and contingent consideration arrangement assets and liabilities measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:



	June 30, 2018
	Level 1		Level 2			Level 3
	(In thousands)
Assets
Commodity derivative instruments		$—		$1,163			$—
Contingent Niobrara Consideration	—		—			9,970
Contingent Marcellus Consideration	—		—			1,530
Contingent Utica Consideration	—		—			10,545

Liabilities
Commodity derivative instruments		$—		($131,398	)		$—
Contingent ExL Consideration	—		—			(102,055		)



	December 31, 2017
	Level 1		Level 2			Level 3
	(In thousands)
Assets
Commodity derivative instruments		$—		$—			$—
Contingent Niobrara Consideration	—		—			—
Contingent Marcellus Consideration	—		—			2,205
Contingent Utica Consideration	—		—			7,985

Liabilities
Commodity derivative instruments		$—		($83,828	)		$—
Contingent ExL Consideration	—		—			(85,625		)

The commodity derivative and contingent consideration arrangement asset and liability fair values reported in the consolidated balance sheets are as of the balance sheet date and subsequently change as a result of changes in commodity prices, market conditions and other factors.

Commodity derivative instruments. The fair value of the Company’s commodity derivative instruments is based on a third-party industry-standard pricing model which uses contract terms and prices and assumptions and inputs that are substantially observable in active markets throughout the full term of the instruments including forward oil and gas price curves, discount rates and volatility factors, and are therefore designated as Level 2 within the valuation hierarchy. The fair values are also compared to the values provided by the counterparties for reasonableness and are adjusted for the counterparties’ credit quality for commodity derivative assets and the Company’s credit quality for commodity derivative liabilities.

The Company typically has numerous hedge positions that span several time periods and often result in both commodity derivative asset and liability positions held with that counterparty. Deferred premium obligations are netted with the commodity derivative asset and liability positions, which are all offset to a single asset or liability, at the end of each reporting period. The Company nets the fair values of its assets and liabilities associated with commodity derivative instruments executed with the same counterparty, along with deferred premium obligations, pursuant to ISDA master agreements, which provide for net settlement over the term of the contract and in the event of default or termination of the contract. The Company had no transfers into Level 1 and no transfers into or out of Level 2 for the six months ended June 30, 2018 and 2017.

Contingent consideration arrangements. The fair values of the contingent consideration arrangements were determined by a third-party valuation specialist using Monte Carlo simulations including significant inputs such as forward oil and gas price curves, discount rates and volatility factors. As some of these assumptions are not observable throughout the full term of the contingent consideration arrangements, the contingent consideration arrangements were designated as Level 3 within the valuation hierarchy. The Company reviewed the valuations, including the related inputs, and analyzed changes in fair value measurements between periods.

The following table presents the reconciliation of changes in the fair values of the contingent consideration arrangements, which were designated as Level 3 within the valuation hierarchy, for the six months ended June 30, 2018:



	Contingent Consideration Arrangements
	Assets		Liability
For the Six Months Ended June 30, 2018	(In thousands)
Beginning of period		$10,190		($85,625	)
Recognition of divestiture date fair value	7,880		—
Gain (loss) on changes in fair value, net⁽¹⁾	3,975		(16,430		)
Transfers into (out of) Level 3	—		—
End of period		$22,045		($102,055	)


(1)	Included in “(Gain) loss on derivatives, net” in the consolidated statements of income.

See “Note 10. Derivative Instruments” for additional information regarding the contingent consideration arrangements.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The fair value measurements of asset retirement obligations are measured as of the date a well is drilled or when production equipment and facilities are installed using a discounted cash flow model based on inputs that are not observable in the market and therefore are designated as Level 3 inputs. Significant inputs to the fair value measurement of asset retirement obligations include estimates of the costs of plugging and abandoning oil and gas wells, removing production equipment and facilities and restoring the surface of the land as well as estimates of the economic lives of the oil and gas wells and future inflation rates.

Fair Value of Other Financial Instruments

The Company’s other financial instruments consist of cash and cash equivalents, receivables, payables, and long-term debt. The carrying amounts of cash and cash equivalents, receivables, and payables approximate fair value due to the highly liquid or short-term nature of these instruments. The carrying amount of long-term debt associated with borrowings outstanding under the Company’s revolving credit facility approximates fair value as borrowings bear interest at variable rates. The following table presents the carrying amounts of the Company’s senior notes and other long-term debt, which are designated as Level 1 under the fair value hierarchy, net of unamortized premiums and debt issuance costs, with the fair values measured using quoted secondary market trading prices.



	June 30, 2018				December 31, 2017
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
7.50% Senior Notes due 2020		$129,044		$130,325		$446,087		$459,518
6.25% Senior Notes due 2023	642,446		656,500		641,792		674,375
8.25% Senior Notes due 2025	245,817		266,250		245,605		274,375
Other long-term debt due 2028	—		—		4,425		4,445