Fair Value Measurements of Financial Instruments

3 Months Ended

Mar. 31, 2022

Fair Value Measurements of Financial Instruments

Fair Value Measurements of Financial Instruments

Note 4. Fair Value Measurements of Financial Instruments

Fair value is defined 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 a specified measurement date. Fair value estimates are based on either (i) actual market data or (ii) assumptions that other market participants would use in pricing an asset or liability, including estimates of risk. A three-tier hierarchy has been established that classifies fair value amounts recognized or disclosed in the financial statements. The hierarchy considers fair value amounts based on observable inputs (Levels 1 and 2) to be more reliable and predictable than those based primarily on unobservable inputs (Level 3). All the derivative instruments reflected on the accompanying Unaudited Condensed Consolidated Balance Sheets were considered Level 2.

The carrying values of accounts receivables, accounts payables (including accrued liabilities), restricted investments and amounts outstanding under long-term debt agreements with variable rates included in the accompanying Unaudited Condensed Consolidated Balance Sheets approximated fair value at March 31, 2022 and December 31, 2021. The fair value estimates are based upon observable market data and are classified within Level 2 of the fair value hierarchy. These assets and liabilities are not presented in the following tables.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair market values of the derivative financial instruments reflected on the accompanying Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 were based on estimated forward commodity prices. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement in its entirety. 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 gross derivative assets and liabilities that are measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021 for each of the fair value hierarchy levels:

	Fair Value Measurements at March 31, 2022
					Significant
	Quoted Prices in		Significant Other		Unobservable
	Active Market		Observable Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Value
	(In thousands)
Assets:
Commodity derivatives	$	—	$	11,819	$	—	$	11,819
Interest rate derivatives		—		234		—		234
Total assets	$	—	$	12,053	$	—	$	12,053
Liabilities:
Commodity derivatives	$	—	$	136,465	$	—	$	136,465
Interest rate derivatives		—		87		—		87
Total liabilities	$	—	$	136,552	$	—	$	136,552

	Fair Value Measurements at December 31, 2021
					Significant
	Quoted Prices in		Significant Other		Unobservable
	Active Market		Observable Inputs		Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Value
	(In thousands)
Assets:
Commodity derivatives	$	—	$	7,967	$	—	$	7,967
Interest rate derivatives		—		—		—		—
Total assets	$	—	$	7,967	$	—	$	7,967
Liabilities:
Commodity derivatives	$	—	$	70,152	$	—	$	70,152
Interest rate derivatives		—		623		—		623
Total liabilities	$	—	$	70,775	$	—	$	70,775

See Note 5 for additional information regarding the Company’s derivative instruments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are reported at fair value on a nonrecurring basis, as reflected on the accompanying Unaudited Condensed Consolidated Balance Sheets. The following methods and assumptions are used to estimate the fair values:

● The fair value of asset retirement obligations (“AROs”) is based on discounted cash flow projections using numerous estimates, assumptions and judgments regarding factors such as the existence of a legal obligation for an ARO; amounts and timing of settlements; the credit-adjusted risk-free rate; and inflation rates. The initial fair value estimates are based on unobservable market data and are classified within Level 3 of the fair value hierarchy. See Note 6 for a summary of changes in AROs.

● Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate a possible decline in the recoverability of the carrying value of such properties. The Company uses an income approach based on the discounted cash flow method, whereby the present value of expected future net cash flows is discounted by applying an appropriate discount rate, for purposes of placing a fair value on the assets. The future cash flows are based on management’s estimates for the future. The unobservable inputs used to determine fair value include, but are not limited to, estimates of proved reserves, estimates of probable reserves, future commodity prices, the timing of future production and capital expenditures and a discount rate commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties (some of which are Level 3 inputs within the fair value hierarchy).

● No impairment expense recorded on proved oil and natural gas properties during the three months ended March 31, 2022 and 2021.