Note 4 - Fair Value Measurements

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Fair Value Disclosures [Text Block]

NOTE 4. Fair Value Measurements

The Company determines fair value based on the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect the company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.

The three input levels of the fair value hierarchy are as follows:

● Level 1 – quoted prices for identical assets or liabilities in active markets.

● Level 2 – quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates) and inputs derived principally from or corroborated by observable market data by correlation or other means.

● Level 3 – unobservable inputs for the asset or liability, typically reflecting management’s estimate of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore, determined using model-based techniques, including discounted cash flow models.

Assets and liabilities measured at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis as of September 30, 2022 and December 31, 2021 are as follows (in thousands):

	As of September 30, 2022
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Assets:
Commodity price derivatives	$	—	$	17,261	$	—	$	17,261
Liabilities:
Commodity price derivatives		—		11,071		—		11,071
Total recurring fair value measurements	$	—	$	6,190	$	—	$	6,190

	As of December 31, 2021
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
Assets:
Commodity price derivatives	$	—	$	2,199		$	—	$	2,199
Liabilities:
Commodity price derivatives – current		—		13,591			—		13,591
Commodity price derivatives – noncurrent		—		4,075			—		4,075
Total liabilities		—		17,666			—		17,666
Total recurring fair value measurements	$	—	$	(15,467	)	$	—	$	(15,467	)

Commodity price derivatives. The Company’s commodity price derivatives are currently made up of crude oil and natural gas swap contracts. The Company measures derivatives using an industry-standard pricing model that is provided by a third party. The inputs utilized in the third-party discounted cash flow and option-pricing models for valuing commodity price derivatives include forward prices for crude oil, contracted volumes, volatility factors and time to maturity, which are considered Level 2 inputs.

Assets and liabilities measured at fair value on a nonrecurring basis. Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. Specifically, (i) stock-based compensation is measured at fair value on the date of grant based on Level 1 inputs for restricted stock awards or Level 2 inputs for stock option awards based upon market data, and (ii) the estimates and fair value measurements used for the evaluation of proved property for potential impairment using Level 3 inputs based upon market conditions in the area. The Company assesses the recoverability of the carrying amount of certain assets and liabilities whenever events or changes in circumstances indicate the carrying amount of an asset or liability may not be recoverable. These assets and liabilities can include inventories, proved and unproved crude oil and natural gas properties and other long-lived assets that are written down to fair value when they are impaired or held for sale. The Company did not record any impairments to proved or unproved crude oil and natural gas properties for the periods presented in the accompanying consolidated financial statements.

Financial instruments not carried at fair value. Carrying values and fair values of financial instruments that are not carried at fair value in the consolidating balance sheets are as follows (in thousands):

	As of September 30, 2022				As of December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets:
Cash and cash equivalents	$	34,348	$	34,348	$	34,869	$	34,869
Liabilities:
Long-term debt:
10.000% Senior Notes (a)	$	225,000	$	225,000	$	—	$	—

(a) Fair value is determined using Level 2 inputs. The Company’s senior unsecured notes are quoted, but not actively traded on major exchanges; therefore, fair value is based on periodic values as quoted on major exchanges. See Note 7 for additional information.

The Company has other financial instruments consisting primarily of accounts receivable, accounts payable, long-term debt, specifically the revolving credit facility, and other current assets and liabilities that approximate fair value due to the nature of the instrument and their relatively short maturities.