FAIR VALUE MEASUREMENTS

The Company follows fair value measurement authoritative guidance, which defines fair value, establishes a framework for using fair value to measure assets and liabilities, and expands disclosures about fair value measurements. The authoritative accounting guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The statement establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions of what market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of the inputs as follows:

Level 1: Quoted prices are available in active markets for identical assets or liabilities

Level 2: Quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable

Level 3: Significant inputs to the valuation model are unobservable

Financial and non-financial assets and liabilities are to be classified based on 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 requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The following tables present the Company’s financial and non-financial assets and liabilities that were accounted for at fair value as of December 31, 2018 and 2017 and their classification within the fair value hierarchy:



	Successor
	As of December 31, 2018
	Level 1		Level 2		Level 3
	(in thousands)
Derivative assets⁽¹⁾	$	—	$	38,272	$	—
Derivative liabilities⁽¹⁾	$	—	$	183	$	—
Asset retirement obligations⁽²⁾	$	—	$	—	$	1,490



	Successor
	As of December 31, 2017
	Level 1		Level 2		Level 3
	(in thousands)
Derivative assets⁽¹⁾	$	—	$	494	$	—
Derivative liabilities⁽¹⁾	$	—	$	14,395	$	—
Asset retirement obligations⁽²⁾	$	—	$	—	$	8,481

_______________________________


(1)	This represents a financial asset or liability that is measured at fair value on a recurring basis.


(2)	This represents the revision to estimates of the asset retirement obligation, which is a non-financial liability that is measured at fair value on a nonrecurring basis. Please refer to the Asset Retirement Obligation section below for additional discussion.

Derivatives

Fair value of all derivative instruments are estimated with industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value of money, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. All valuations were compared against counterparty statements to verify the reasonableness of the estimate. The Company’s commodity swaps and collars were validated by observable transactions for the same or similar commodity options using the NYMEX futures index, and were designated as Level 2 within the valuation hierarchy.

Proved Oil and Gas Properties

Proved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs exceed the sum of the undiscounted cash flows. Depending on the availability of data, the Company uses Level 3 inputs and either the income valuation technique, which converts future amounts to a single present value amount, to measure the fair value of proved properties through an application of risk-adjusted discount rates and price forecasts selected by the Company’s management, or the market valuation approach. The calculation of the risk-adjusted discount rate is a significant management estimate based on the best information available. Management believes that the risk-adjusted discount rate is representative of current market conditions and reflects the following factors: estimates of future cash payments, expectations of possible variations in the amount and/or timing of cash flows, the risk premium, and nonperformance risk. The price forecast is based on the Company's internal budgeting model derived from the NYMEX strip pricing, adjusted for management estimates and basis differentials. Future operating costs are also adjusted as deemed appropriate for these estimates. Proved properties classified as held for sale are valued using a market approach, based on an estimated selling price, as evidenced by the most current bid prices received from third parties. If a relevant estimated selling price is not available, the Company utilizes the income valuation technique discussed above. There were no oil and gas property impairments during the years ended December 31, 2018 and 2017. For the year ended December 31, 2016, the Company impaired its oil and gas properties in the Mid-Continent region by $10.0 million, reflecting the difference between their $110.0 million carrying value and their $100.0 million fair value. For additional discussion on impairments, please refer to Note 3 - Impairments.

Unproved Oil and Gas Properties

Unproved oil and gas property costs are evaluated for impairment and reduced to fair value when there is an indication that the carrying costs may not be fully recoverable. To measure the fair value of unproved properties, the Company uses Level 3 inputs and the income valuation technique, which takes into account the following significant assumptions: future development plans, risk weighted potential resource recovery, remaining lease life, and estimated reserve values. Unproved properties classified as held for sale are valued using a market approach, based on an estimated selling price, as evidenced by the most current bid prices received from third parties. If a relevant estimated selling price is not available, the Company uses the price received for similar acreage in recent transactions by the Company or other market participants in the principal market. During 2018, the Company incurred its standard annual amortization of $5.3 million on its emergence leases that were not held by production as disclosed in the abandonment and impairment of unproved properties line item in the accompanying statements of operations. There were no unproved oil and gas property impairments during the year ended December 31, 2017. During the year ended December 31, 2016, the Company impaired non-core acreage in the Wattenberg Field due to lease expirations, which had a carrying value of $187.4 million, to its fair value of $162.7 million, and recognized an impairment of unproved properties of $24.7 million.

Asset Retirement Obligation

The Company utilizes the income valuation technique to determine the fair value of the asset retirement obligation liability at the point of inception by applying a credit-adjusted risk-free rate, which takes into account the Company’s credit risk, the time value of money, and the current economic state, to the undiscounted expected abandonment cash flows. Upon completion of wells and natural gas plants, the Company records an asset retirement obligation at fair value using Level 3 assumptions. Given the unobservable nature of the inputs, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. The Company had $1.5 million and $8.5 million of asset retirement obligations recorded at fair value as of December 31, 2018 and 2017, respectively.

Long-term Debt

Upon emergence from bankruptcy, the Company's Senior Notes were canceled and the predecessor credit facility was paid in full. The Company's credit facility approximates fair value as the applicable interest rates are floating. The Company had $50.0 million outstanding under the credit facility as of December 31, 2018. There were no long-term debt amounts outstanding as of December 31, 2017.