Fair value measurements

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

Fair value measurements

Note 8—Fair value measurements

See Note 10 in the 2018 Annual Report for discussion of the Company's accounting policies for fair value measurements.

a.    Fair value measurement on a recurring basis

The following tables summarize the Company's derivatives' fair value hierarchy by commodity and current and noncurrent assets and liabilities on a gross basis and the net presentation included in "Derivatives" on the unaudited consolidated balance sheets as of the dates presented:

(in thousands)	Level 1		Level 2			Level 3			Total gross fair value			Amounts offset			Net fair value presented on the unaudited consolidated balance sheets
As of June 30, 2019:
Assets:
Current:
Oil derivatives	$	—	$	27,192		$	—		$	27,192		$	(9,821	)	$	17,371
NGL derivatives	—		17,134			—			17,134			(1,019		)	16,115
Natural gas derivatives	—		26,229			—			26,229			(9,278		)	16,951
Oil derivative deferred premiums	—		—			—			—			(3,270		)	(3,270		)
Noncurrent:
Oil derivatives	$	—	$	18,217		$	—		$	18,217		$	(1,036	)	$	17,181
NGL derivatives	—		4,050			—			4,050			(566		)	3,484
Natural gas derivatives	—		6,049			—			6,049			(916		)	5,133
Liabilities:
Current:
Oil derivatives	$	—	$	(11,618	)	$	—		$	(11,618	)	$	9,821		$	(1,797	)
NGL derivatives	—		(1,019		)	—			(1,019		)	1,019			—
Natural gas derivatives	—		(8,954		)	—			(8,954		)	9,278			324
Oil derivative deferred premiums	—		—			(3,270		)	(3,270		)	3,270			—
Noncurrent:
Oil derivatives	$	—	$	(1,036	)	$	—		$	(1,036	)	$	1,036		$	—
NGL derivatives	—		(566		)	—			(566		)	566			—
Natural gas derivatives	—		(916		)	—			(916		)	916			—
Net derivative asset (liability) positions	$	—	$	74,762		$	(3,270	)	$	71,492		$	—		$	71,492

(in thousands)	Level 1		Level 2			Level 3			Total gross fair value			Amounts offset			Net fair value presented on the unaudited consolidated balance sheets
As of December 31, 2018:
Assets:
Current:
Oil derivatives	$	—	$	44,425		$	—		$	44,425		$	(7,907	)	$	36,518
NGL derivatives	—		1,974			—			1,974			—			1,974
Natural gas derivatives	—		18,991			—			18,991			(3,267		)	15,724
Oil derivative deferred premiums	—		—			—			—			(14,381		)	(14,381		)
Noncurrent:
Oil derivatives	$	—	$	10,626		$	—		$	10,626		$	—		$	10,626
NGL derivatives	—		1,024			—			1,024			—			1,024
Natural gas derivatives	—		108			—			108			(728		)	(620		)
Liabilities:
Current:
Oil derivatives	$	—	$	(9,059	)	$	—		$	(9,059	)	$	7,907		$	(1,152	)
NGL derivatives	—		—			—			—			—			—
Natural gas derivatives	—		(7,290		)	—			(7,290		)	3,267			(4,023		)
Oil derivative deferred premiums	—		—			(16,565		)	(16,565		)	14,381			(2,184		)
Noncurrent:
Oil derivatives	$	—	$	—		$	—		$	—		$	—		$	—
NGL derivatives	—		—			—			—			—			—
Natural gas derivatives	—		(728		)	—			(728		)	728			—
Net derivative asset (liability) positions	$	—	$	60,071		$	(16,565	)	$	43,506		$	—		$	43,506

Significant Level 2 inputs associated with the calculation of discounted cash flows used in the fair value mark-to-market analysis of derivatives include each derivative contract's corresponding commodity index price(s), appropriate risk-adjusted discount rates and forward price curve models for substantially similar instruments generated from a compilation of data gathered from third parties.

The Company's deferred premiums associated with its derivative contracts are categorized as Level 3, as the Company utilizes a net present value calculation to determine the valuation. They are considered to be measured on a recurring basis as the derivative contracts they derive from are measured on a recurring basis. As derivative contracts containing deferred premiums are entered into, the Company discounts the associated deferred premium to its net present value at the contract trade date, using the Senior Secured Credit Facility rate at the trade date (input rate), and then records the change in net present value to interest expense over the period from trade until the final settlement date at the end of the contract. After this initial valuation, the input rate of each deferred premium is not adjusted; therefore, significant increases (decreases) in the Senior Secured Credit Facility rate would result in a significantly lower (higher) fair value measurement for each new contract entered into that contained a deferred premium; however, the initial valuation for the deferred premiums already recorded would remain unaffected. While the Company believes the sources utilized to arrive at the fair value estimates are reliable, different sources or methods could have yielded different fair value estimates. The deferred premiums are included in "Derivatives" on the unaudited consolidated balance sheets, and as of June 30, 2019, each of their input rates is 2.31%.

The following table presents payments required for derivative deferred premiums as of June 30, 2019 for the periods presented:

(in thousands)	June 30, 2019
Remaining 2019	$	2,813
2020	477
Total	$	3,290

A summary of the changes in net assets and liabilities classified as Level 3 measurements for the periods presented are as follows:

	Three months ended June 30,						Six months ended June 30,
(in thousands)	2019			2018			2019			2018
Balance of Level 3 at beginning of period	$	(12,644	)	$	(30,292	)	$	(16,565	)	$	(28,683	)
Change in net present value of derivative deferred premiums(1)	(24		)	(185		)	(119		)	(396		)
Total purchases and settlements of derivative deferred premiums:
Purchases	—			—			—			(5,422		)
Settlements(2)	9,398			5,451			13,414			9,475
Balance of Level 3 at end of period	$	(3,270	)	$	(25,026	)	$	(3,270	)	$	(25,026	)

____________________________________________________________________________

(1) These amounts are included in "Interest expense" in the unaudited consolidated statements of operations.

(2) The amounts for the three and six months ended June 30, 2019 include $7.2 million that represents the present value of deferred premiums settled upon their early termination.

See Note 2.f in the 2018 Annual Report for discussion of the Company's accounting policies for derivatives.

b.    Items not accounted for at fair value

The carrying amounts reported in the unaudited consolidated balance sheets for cash and cash equivalents, accounts receivable, accounts payable, accrued capital expenditures, undistributed revenue and royalties and other accrued assets and liabilities approximate their fair values.

The Company has not elected to account for its debt instruments at fair value. The following table presents the carrying amounts and fair values of the Company's debt as of the dates presented:

	June 30, 2019				December 31, 2018
(in thousands)	Long-term debt		Fair value(1)		Long-term debt		Fair value(1)
January 2022 Notes	$	450,000	$	420,750	$	450,000	$	402,885
March 2023 Notes	350,000		327,355		350,000		316,624
Senior Secured Credit Facility	235,000		235,004		190,000		190,054
Total	$	1,035,000	$	983,109	$	990,000	$	909,563

______________________________________________________________________________

(1)

The fair values of the debt outstanding on the January 2022 Notes and the March 2023 Notes were determined using the June 30, 2019 and December 31, 2018 Level 1 fair value hierarchy quoted market price for each respective instrument. The fair value of the outstanding debt on the Senior Secured Credit Facility as of June 30, 2019 and December 31, 2018 was estimated utilizing the Level 2 fair value hierarchy pricing model for similar instruments. See Note 10 in the 2018 Annual Report for information about the fair value hierarchy levels.