Fair Value Measurements

6 Months Ended

Jun. 30, 2012

Fair Value Measurements [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 9 - FAIR VALUE MEASUREMENTS

The Company measures and reports certain financial and non-financial assets and liabilities on a fair value basis. Fair value is 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 (exit price). Fair value measurements are classified and disclosed in one of the following categories.

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Active markets are considered to be those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 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. This category includes those derivative instruments that are valued using observable market data. Substantially all of these inputs are observable in the marketplace throughout the full term of the derivative instrument, can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.

Level 3 Unobservable inputs that are not corroborated by market data. This category is comprised of financial and non-financial assets and liabilities whose fair value is estimated based on internally developed models or methodologies using significant inputs that are generally less readily observable from objective sources.

Financial and non-financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment, which may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

At June 30, 2012 and December 31, 2011, the carrying values reported on the consolidated balance sheets for cash and cash equivalents, accounts receivable, prepaid expenses, accounts payable, accrued liabilities, royalties payable and other current liabilities approximate their fair values due to their short-term maturities and are classified at Level 1.

At June 30, 2012 and December 31, 2011, the carrying value of borrowings under the Credit Agreement approximates fair value as it is subject to short-term floating interest rates that reflect market rates available to the Company at the time and is classified at Level 2.

The following tables summarize the valuation of the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis in accordance with the classifications provided above as of June 30, 2012 and December 31, 2011 (in thousands).

Description	Fair Value Measurements at June 30, 2012 using
	Level 1		Level 2			Level 3		Total
Assets (Liabilities)
Certificates of deposit	$	—	$	266		$	—	$	266
Oil and natural gas derivatives		—		21,126			—		21,126
Total	$	—	$	21,392		$	—	$	21,392
Description	Fair Value Measurements at December 31, 2011 using
	Level 1		Level 2			Level 3		Total
Assets (Liabilities)
Certificates of deposit	$	—	$	1,335		$	—	$	1,335
Oil and natural gas derivatives		—		9,836			—		9,836
Oil and natural gas derivatives		—		(554	)		—		(554	)
Total	$	—	$	10,617		$	—	$	10,617

Additional disclosures related to derivative financial instruments are provided in Note 8. For purposes of fair value measurement, the Company determined that certificates of deposit and derivative financial instruments (e.g., oil and natural gas derivatives) should be classified at Level 2.

The Company accounts for additions to asset retirement obligations and lease and well equipment inventory at fair value on a non-recurring basis. The following tables summarize the valuation of the Company’s assets and liabilities that were accounted for at fair value on a non-recurring basis for the periods ended June 30, 2012 and December 31, 2011 (in thousands).

Description	Fair Value Measurements for the period ended June 30, 2012 using
	Level 1		Level 2		Level 3			Total
Assets (Liabilities)
Asset retirement obligations	$	—	$	—	$	(326	)	$	(326	)
Total	$	—	$	—	$	(326	)	$	(326	)
Description	Fair Value Measurements for the period ended December 31, 2011 using
	Level 1		Level 2		Level 3			Total
Assets (Liabilities)
Asset retirement obligations	$	—	$	—	$	(187	)	$	(187	)
Lease and well equipment inventory		—		—		1,343			1,343
Total	$	—	$	—	$	1,156		$	1,156

For purposes of fair value measurement, the Company determined that the additions to asset retirement obligations should be classified at Level 3. The Company recorded additions to asset retirement obligations of $325,643 for the six months ended June 30, 2012 and $186,873 for the year ended December 31, 2011.

For purposes of fair value measurement, the Company determined that lease and well equipment inventory should be classified as Level 3. In 2011, the Company recorded an impairment to some of its equipment held in inventory consisting primarily of drilling rig parts of $17,500 and pipe and other equipment of $22,276; no impairment to any equipment was recorded for the three and six months ended June 30, 2012. The Company periodically obtains estimates of the market value of its equipment held in inventory from an independent third-party contractor or seller of similar equipment and uses these estimates as a basis for its measurement of the fair value of this equipment.