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FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2019

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 the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

The fair value hierarchy is based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. The Company uses appropriate valuation techniques based on available inputs to measure the fair values of its assets and liabilities.

Level 1 - Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date.

Level 2 - Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.

Level 3 - Unobservable inputs that are not corroborated by market data and may be used with internally developed methodologies that result in management’s best estimate of fair value.

Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.

The Company estimates the fair values of proved oil and natural gas properties assumed in business combinations using discounted cash flow techniques and based on market assumptions as to the future commodity prices, internal estimates of future quantities of oil and natural gas reserves, future estimated rates of production, expected recovery rates and risk-adjustment discounts. The estimated fair values of unevaluated oil and natural gas properties were based on the location, engineering and geological studies, historical well performance, and applicable mineral lease terms. Given the unobservable nature of the inputs, the estimated fair values of oil and natural gas properties assumed is deemed to use Level 3 inputs. The asset retirement obligations assumed as part of business combinations are estimated using the same assumptions and methodology as described below.

The Company estimates asset retirement obligations pursuant to the provisions of the Financial Accounting Standards Board issued Accounting Standards Codification Topic 410, “Asset Retirement and Environmental Obligations”. The initial measurement of asset retirement obligations at fair value is calculated using discounted cash flow techniques and based on internal estimates of future retirement costs associated with the future plugging and abandonment of wells and related facilities. Given the unobservable nature of the inputs, including plugging costs and useful lives, the initial measurement of the asset retirement obligation liability is deemed to use Level 3 inputs. See Note 8—Asset Retirement Obligations for further discussion of the Company’s asset retirement obligations.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are reported at fair value on a recurring basis, including the Company’s derivative instruments and Viper’s cost method investment. The fair value of Viper’s investment is determined using quoted market prices. These valuations are Level 1 inputs. The fair values of the Company’s fixed price swaps, fixed price basis swaps and costless collars are measured internally using established commodity futures price strips for the underlying commodity provided by a reputable third party, the contracted notional volumes, and time to maturity. These valuations are Level 2 inputs.

The following table provides fair value measurement information for financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2019 and 2018:



	December 31, 2019						December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(in millions)
Assets:
Investment	$	19	$	—	$	—	$	14	$	—	$	—
Fixed price swaps	$	—	$	26	$	—	$	—	$	216	$	—
Liabilities:
Fixed price swaps	$	—	$	—	$	—	$	—	$	—	$	—

The following table summarizes the changes in fair value of Viper’s cost method investment during the periods presented:



	(in millions)
Value at December 31, 2018	$	14
Gain on investment	5
Value at December 31, 2019	$	19

Value at December 31, 2017	$	34
Impact of adoption of Accounting Standards Update 2016-01	(19		)
Loss on investment	(1		)
Value at December 31, 2018	$	14

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table provides the fair value of financial instruments that are not recorded at fair value in the consolidated balance sheets:



	December 31, 2019				December 31, 2018
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
	(in thousands)
Debt:
Revolving credit facility	$	13	$	13	$	1,490	$	1,490
4.625% Notes due 2021	399		411		400		393
7.320% Medium-term Notes, Series A, due 2022	21		22		20		21
2.875% Senior Notes due 2024⁽¹⁾	992		1,012		—		—
4.750% Senior Notes due 2024⁽¹⁾	—		—		1,236		1,204
5.375% Senior Notes due 2025⁽¹⁾	799		840		799		782
3.250% Senior Notes due 2026⁽¹⁾	792		812		—		—
7.350% Medium-term Notes, Series A, due 2027	11		12		10		11
7.125% Medium-term Notes, Series B, due 2028	108		116		100		102
3.500% Senior Notes due 2029⁽¹⁾	1,186		1,226		—		—
Viper revolving credit facility	97		97		411		411
Viper's 5.375% Senior Notes due 2027	490		521		—		—
Rattler revolving credit facility	424		424		—		—
DrillCo Agreement	$	39	$	39	$	—	$	—


(1)	The carrying value includes associated deferred loan costs and any discount.

The fair value of the revolving credit facility, the Viper credit agreement and the Rattler credit agreement approximates their carrying value based on borrowing rates available to the Company for bank loans with similar terms and maturities and is classified as Level 2 in the fair value hierarchy. The fair value of the Senior Notes and the Energen Notes was determined using the December 31, 2019 quoted market price, a Level 1 classification in the fair value hierarchy.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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