Fair value measurements

12 Months Ended

Dec. 31, 2019

Fair Value Disclosures [Abstract]

Fair value measurements

Note 10 Fair value measurements

The Company has categorized its assets and liabilities measured at fair value, based on the priority of inputs to the valuation techniques, into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

Assets and liabilities recorded at fair value on the consolidated balance sheets are categorized based on inputs to the valuation techniques as follows: 

Level 1—	Assets and liabilities recorded at fair value for which values are based on unadjusted quoted prices for identical assets or liabilities in an active market that management has the ability to access. 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—	Assets and liabilities recorded at fair value for which values are based on quoted prices in markets that are not active or model inputs that are observable either directly or indirectly for substantially the full term of the assets or liabilities. Substantially all of these inputs are observable in the marketplace throughout the full term of the price risk management instrument and can be derived from observable data or supported by observable levels at which transactions are executed in the marketplace.
Level 3—	Assets and liabilities recorded at fair value for which values are based on prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. Unobservable inputs are not corroborated by market data. These inputs reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability.

a. Fair value measurement on a recurring basis

For further discussion of the Company's derivatives, see Notes (i) 2.f for the Company's significant accounting policies for derivatives, (ii) 9 for derivatives and (iii) 19.d for derivatives subsequent events.

Balance sheet presentation

The following tables summarize the Company's derivatives' three-level fair value hierarchy by (i) assets and liabilities, (ii) current and noncurrent, (iii) commodity derivatives or contingent consideration derivative and (iv) oil, NGL, natural gas and/or deferred premiums, on a gross basis and the net presentation included in "Derivatives" on the consolidated balance sheets as of the dates presented:

	December 31, 2019
(in thousands)	Level 1		Level 2			Level 3			Total gross fair value			Amounts offset			Net fair value presented on the consolidated balance sheets
Assets:
Current:
Commodity - Oil	$	—	$	11,723		$	—		$	11,723		$	(5,301	)	$	6,422
Commodity - NGL	—		13,787			—			13,787			(1,297		)	12,490
Commodity - Natural gas	—		33,494			—			33,494			—			33,494
Commodity - Oil deferred premiums	—		—			—			—			(477		)	(477		)
Noncurrent:
Commodity - Oil	$	—	$	1,577		$	—		$	1,577		$	—		$	1,577
Commodity - NGL	—		9,547			—			9,547			—			9,547
Commodity - Natural gas	—		12,263			—			12,263			—			12,263
Liabilities:
Current:
Commodity - Oil	$	—	$	(5,649	)	$	—		$	(5,649	)	$	5,301		$	(348	)
Commodity - NGL	—		(1,297		)	—			(1,297		)	1,297			—
Commodity - Natural gas	—		—			—			—			—			—
Commodity - Oil deferred premiums	—		—			(477		)	(477		)	477			—
Contingent consideration - Oil	—		(7,350		)	—			(7,350		)	—			(7,350		)
Noncurrent:
Commodity - Natural gas	$	—	$	—		$	—		$	—		$	—		$	—
Net derivative asset (liability) positions	$	—	$	68,095		$	(477	)	$	67,618		$	—		$	67,618

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

Commodity

Significant Level 2 inputs associated with the calculation of discounted cash flows used in the fair value mark-to-market analysis of commodity derivatives include each commodity derivative contract's corresponding commodity index price(s), forward price curve models for substantially similar instruments and counterparty risk-adjusted discount rates generated from a compilation of data gathered by a third-party valuation specialist. The Company reviewed the valuations, including the related inputs, and analyzed changes in fair values between reporting dates.

The Company's deferred premiums associated with its commodity 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 commodity derivative contracts they derive from are measured on a recurring basis. As commodity 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 consolidated balance sheets and, as of December 31, 2019, each of their input rates is 2.31%.

The following table presents payments required for commodity derivative deferred premiums as of December 31, 2019 for the calendar year presented:

(in thousands)	December 31, 2019
2020	$	477

The following table summarizes the changes in net assets and liabilities classified as Level 3 measurements for the periods presented:

	Years ended December 31,
(in thousands)	2019			2018			2017
Balance of Level 3 at beginning of year	$	(16,565	)	$	(28,683	)	$	(8,998	)
Change in net present value of commodity derivative deferred premiums(1)	(139		)	(694		)	(394		)
Total purchases and settlements of commodity derivative deferred premiums:
Purchases	—			(7,523		)	(25,733		)
Settlements(2)	16,227			20,335			6,442
Balance of Level 3 at end of year	$	(477	)	$	(16,565	)	$	(28,683	)

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

(2) The amount for the year ended December 31, 2019 includes $7.2 million that represents the present value of deferred premiums settled upon their early termination.

Contingent consideration

Significant Level 2 inputs for the option pricing model used in the fair value mark-to-market analysis of the contingent consideration include WTI NYMEX Futures price curves, implied volatility of futures contracts and the Company's credit risk-adjusted discount rate generated from a compilation of data gathered by a third-party valuation specialist. The Company reviewed the valuations, including the related inputs, and analyzed changes in fair values between the acquisition closing and the reporting dates.

The fair values of the contingent consideration were $6.2 million as of the acquisition date, which is recorded as part of the basis in the oil and natural gas properties acquired in the associated acquisition, and $7.4 million as of December 31, 2019, respectively, and the Company has recorded a $7.4 million derivative liability as of December 31, 2019. The Company recognized a loss of $1.2 million during the year ended December 31, 2019, which is included in "Gain on derivatives, net" under "Non-operating income (expense)" on the consolidated statements of operations. At each subsequent quarterly reporting period, the Company will remeasure the contingent consideration with the changes in fair value recognized in earnings. See Notes 4.a and 9.b for additional discussion of this contingent consideration.

b. Fair value measurement on a nonrecurring basis

See Note 2.j for the Level 2 fair value hierarchy input assumptions used in estimating the NRV of line-fill inventory used to account for the impairment of line-fill inventory recorded during the year ended December 31, 2019. There were no impairments of line-fill inventory recorded during the years ended December 31, 2018 or 2017.

See Note 4.a for the Level 3 fair value hierarchy input assumptions used in estimating the fair values of assets acquired and liabilities assumed for acquisitions of evaluated and unevaluated oil and natural gas properties accounted for as a business combination for the year ended December 31, 2019. There were no acquisitions of evaluated and unevaluated oil and natural gas properties accounted for as business combinations for the years ended December 31, 2018 or 2017.

Impairment losses are recorded on long-lived assets when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Impairment is measured based on the excess of the carrying amount over the fair value of the asset. For purposes of fair value measurement, it was determined that the impairment of long-lived assets is classified as Level 3, based on the use of internally developed cash flow models. There were no long-lived asset impairments recorded during the years ended December 31, 2019, 2018 or 2017.

c. Items not accounted for at fair value

The carrying amounts reported on the 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:

	December 31, 2019				December 31, 2018
(in thousands)	Long-term debt		Fair value(1)		Long-term debt		Fair value(1)
January 2022 Notes	$	450,000	$	439,875	$	450,000	$	402,885
March 2023 Notes	350,000		332,500		350,000		316,624
Senior Secured Credit Facility	375,000		375,275		190,000		190,054
Total	$	1,175,000	$	1,147,650	$	990,000	$	909,563

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(1)

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